Use these links to rapidly review the document
TABLE OF CONTENTS
Index to Consolidated Financial Statements
TABLE OF CONTENTS

Table of Contents

As filed with the Securities and Exchange Commission on October 14, 2014

Registration No. 333-196367


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



Amendment No. 5
to
Form S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933



Hilltop Holdings Inc.
(Exact name of registrant as specified in its charter)



Maryland
(State or other jurisdiction of
incorporation)

  6331
(Primary Standard Industrial
Classification Code Number)
  84-1477939
(I.R.S. Employer
Identification Number)

200 Crescent Court, Suite 1330
Dallas, Texas 75201
(214) 855-2177

(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)



Corey G. Prestidge
General Counsel and Secretary
200 Crescent Court, Suite 1330
Dallas, Texas 75201
(214) 855-2177

(Name, address, including zip code, and telephone number, including
area code, of agent for service)



With copies to:

David E. Shapiro
Gordon S. Moodie
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, NY 10019
(212) 403-1000

 

Allen R. Tubb
Executive Vice President,
General Counsel and Secretary
SWS Group, Inc.
1201 Elm Street, Suite 3500
Dallas, TX 75270
(214) 859-1800

 

George R. Bason, Jr.
H. Oliver Smith
William L. Taylor
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, NY 10017
(212) 450-4000



Approximate date of commencement of the proposed sale of the securities to the public:
As soon as practicable after this Registration Statement becomes effective and upon consummation of the transactions described herein.

         If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.    o

         If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, as amended, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

         If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    o

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

         The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such dates as the Commission, acting pursuant to said Section 8(a), may determine.

   


Table of Contents

Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the SEC. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This document shall not constitute an offer to sell or the solicitation of any offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

LOGO

MERGER PROPOSED—YOUR VOTE IS VERY IMPORTANT

Dear Stockholder,

         On March 31, 2014, SWS Group, Inc. ("SWS") agreed to merge with and into Peruna LLC, a wholly owned subsidiary of Hilltop Holdings Inc. ("Hilltop") with Peruna LLC surviving the merger as a wholly owned subsidiary of Hilltop. We are sending you this proxy statement/prospectus to invite you to attend a special meeting of SWS stockholders being held to vote on the merger agreement and to ask you to vote at the special meeting in favor of the merger agreement.

         In the merger, each share of SWS common stock will be converted into the right to receive (i) 0.2496 shares of Hilltop common stock, par value $0.01 per share, and (ii) $1.94 in cash. The value of the merger consideration will fluctuate with the market price of Hilltop common stock, and will not be known at the time you vote on the merger. Hilltop common stock is currently quoted on the New York Stock Exchange under the symbol "HTH." On October 13, 2014, the last practicable trading day before the date of this proxy statement/prospectus, the merger consideration of $1.94 in cash and 0.2496 Hilltop shares represented approximately $6.87 in value for each share of SWS common stock. We urge you to obtain current market quotations for Hilltop common stock.

         Based on the current number of shares of SWS common stock outstanding and reserved for issuance under employee benefit plans, Hilltop expects to issue approximately 10.3 million shares of common stock, par value $0.01 per share, to SWS stockholders in the aggregate upon completion of the merger. Based on these numbers, upon completion of the merger, current SWS stockholders would own approximately 10% of the common stock of Hilltop immediately following the merger. However, any increase or decrease in the number of shares of SWS common stock outstanding that occurs for any reason prior to the completion of the merger would cause the actual number of shares issued upon completion of the merger to change.

         SWS will hold a special meeting of its stockholders in connection with the merger. SWS stockholders will be asked to vote to approve the merger agreement and related matters as described in this proxy statement/prospectus. We cannot complete the merger unless the stockholders of SWS approve the proposal. An affirmative vote of a majority of the outstanding shares of SWS common stock entitled to vote as of the record date is required to adopt the merger agreement.

         The special meeting of the stockholders of SWS will be held at Renaissance Tower, 1201 Elm Street, Suite 4200, Dallas, Texas 75270, at 9:00 a.m., local time, on November 21, 2014.

         The SWS board of directors (other than Messrs. Gerald J. Ford and J. Taylor Crandall, who recused themselves), upon the unanimous recommendation of the special committee of the SWS board of directors, has determined that the merger agreement and the transactions contemplated thereby, including the merger, are advisable and fair to and in the best interests of the SWS stockholders (other than Hilltop), and recommends that the SWS stockholders adopt the merger agreement.

         The obligations of Hilltop and SWS to complete the merger are subject to the satisfaction or waiver of several conditions set forth in the merger agreement. More information about Hilltop, SWS, the special meeting, the merger agreement and the merger is contained in this proxy statement/prospectus. SWS encourages you to read the entire proxy statement/prospectus carefully, including the section entitled "Risk Factors" beginning on page 32. You can also obtain information about SWS and Hilltop from documents that each has filed with the Securities and Exchange Commission (see the section entitled "Where You Can Find More Information").



James H. Ross
President and Chief Executive Officer
SWS Group, Inc.

         Neither the Securities and Exchange Commission nor any state securities commission or bank regulatory agency has approved or disapproved of the merger or the Hilltop common stock to be issued under this proxy statement/prospectus or the other transactions described in this proxy statement/prospectus or passed upon the accuracy or adequacy of this proxy statement/prospectus. Any representation to the contrary is a criminal offense.

         The securities to be issued in the merger are not savings and deposit accounts and are not insured by the Federal Deposit Insurance Corporation, or any other governmental agency.

         The date of this proxy statement/prospectus is                , 2014, and it is first being mailed or otherwise delivered to SWS stockholders on or about                , 2014.


Table of Contents

LOGO

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 21, 2014

To the stockholders of SWS Group, Inc.:

         On November 21, 2014, SWS Group, Inc. ("SWS") will hold a special meeting of stockholders in Dallas, Texas at 9:00 a.m., local time, at Renaissance Tower, 1201 Elm Street, Suite 4200, Dallas, Texas 75270, to consider and vote upon the following matters:

         The approval by SWS stockholders of the merger proposal is required for the completion of the merger described in this proxy statement/prospectus.

         SWS will transact no other business at the SWS special meeting except such business as may properly be brought before the SWS special meeting or any adjournment or postponement thereof. Please refer to elsewhere in this proxy statement/prospectus for further information with respect to the business to be transacted at the SWS special meeting.

         The SWS board of directors has fixed the close of business on October 3, 2014, as the record date for the SWS special meeting. Only SWS stockholders of record at that time are entitled to notice of, and to vote at, the special meeting, or any adjournment or postponement of the special meeting.

         Approval of the merger proposal requires the affirmative vote of a majority of the shares of SWS common stock outstanding on the record date for the SWS special meeting. Approval of the compensation proposal and the adjournment proposal require, in each case, the affirmative vote of a majority of the shares of SWS common stock represented in person or by proxy at the SWS special meeting and entitled to vote on such proposal.

         Your vote is important. Whether or not you plan to attend the SWS special meeting, we urge you to vote your shares as promptly as possible by (1) accessing the internet site listed on your proxy card, (2) calling the toll-free number listed on your proxy card, or (3) signing and returning the enclosed proxy card in the postage-paid envelope provided, so that your shares may be represented and voted at the SWS special meeting. You may revoke your proxy at any time before the vote at the special meeting by following the procedures outlined in this proxy statement/prospectus. If your shares are held in the name of a bank, broker or other nominee, please follow the voting instructions furnished by the record holder.

         The SWS board of directors (other than Messrs. Gerald J. Ford and J. Taylor Crandall, who recused themselves), upon the unanimous recommendation of the special committee of the SWS board of directors, has approved and adopted the merger agreement, has determined that the merger agreement and the transactions contemplated thereby, including the merger, are advisable and fair to and in the best interests of the SWS stockholders, and recommends that SWS stockholders vote "FOR" the merger proposal, "FOR" the compensation proposal and "FOR" the adjournment proposal.

         This proxy statement/prospectus provides a detailed description of the special meeting, the merger, the documents related to the merger and other related matters. We urge you to read this proxy statement/prospectus and its annexes carefully and in their entirety.

By Order of the Board of Directors



Allen R. Tubb
Executive Vice President, General Counsel and Secretary

Dallas, Texas
                  , 2014


Table of Contents


REFERENCES TO ADDITIONAL INFORMATION

        This proxy statement/prospectus incorporates by reference important business and financial information about SWS from documents that are not included in or delivered with this proxy statement/prospectus. You can obtain documents incorporated by reference in this proxy statement/prospectus, other than certain exhibits to those documents, free of charge through the Securities and Exchange Commission website (http://www.sec.gov) or by requesting them in writing or by telephone from SWS at the following address:

SWS Group, Inc.
1201 Elm Street, Suite 3500
Dallas, Texas 75270
Attention: Investor Relations
Telephone: (214) 859-1800

        You will not be charged for any of these documents that you request. SWS stockholders requesting documents should do so by November 14, 2014, in order to receive them before the special meeting.

        Hilltop is not currently eligible under the SEC's rules to incorporate by reference documents into this proxy statement/prospectus. Accordingly, much of the information that SWS has incorporated by reference, such as the description of its business, management's discussion and analysis of financial condition and results of operations, and its consolidated financial statements, is, with respect to Hilltop, fully set forth in this proxy statement/prospectus, principally in the section entitled "Information About the Companies—Hilltop" beginning on page 69 and the Hilltop consolidated financial statements beginning on page F-1.

        You should rely only on the information contained in or incorporated by reference into this proxy statement/prospectus. No one has been authorized to provide you with information that is different from that contained in, or incorporated by reference into, this proxy statement/prospectus. This proxy statement/prospectus is dated                , 2014, and you should assume that the information in this proxy statement/prospectus is accurate only as of such date. Neither the mailing of this proxy statement/prospectus to SWS stockholders nor the issuance by Hilltop of shares of Hilltop common stock in connection with the merger will create any implication to the contrary.

        This proxy statement/prospectus does not constitute an offer to sell, or a solicitation of an offer to buy any securities, or the solicitation of a proxy, in any jurisdiction to or from any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction. Except where the context otherwise indicates, information contained in this proxy statement/prospectus regarding SWS has been provided by SWS and information contained in this proxy statement/prospectus regarding Hilltop has been provided by Hilltop.

        See "Where You Can Find More Information" included elsewhere in this proxy statement/prospectus.


Table of Contents


TABLE OF CONTENTS

 
  Page

QUESTIONS AND ANSWERS

  iv

SUMMARY

  1

The Companies

  1

Risk Factors

  1

The Merger

  2

Recommendation of the SWS Board of Directors

  2

Opinion of Financial Advisor to the Special Committee

  2

What Holders of SWS Equity-Based Awards Will Receive

  3

SWS Will Hold Its Special Meeting on November 21, 2014

  3

Hilltop's Relationship with SWS

  4

The Oak Hill Letter Agreement

  5

The Merger is Intended to Be Tax-Free to Holders of SWS Common Stock as to the Shares of Hilltop Common Stock They Receive

  5

Interests of SWS Directors and Executive Officers in the Merger

  6

Appraisal/Dissenters' Rights

  7

Regulatory Approvals Required for the Merger

  8

No Solicitation

  8

Conditions that Must be Satisfied or Waived for the Merger to Occur

  8

Termination of the Merger Agreement

  9

Expenses and Termination Fees

  9

The Rights of SWS Stockholders Will Change as a Result of the Merger

  10

Litigation Relating to the Merger

  10

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA FOR HILLTOP

  11

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA FOR SWS

  14

HILLTOP HOLDINGS INC. UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

  15

UNAUDITED COMPARATIVE PER SHARE DATA

  30

COMPARATIVE MARKET PRICES AND DIVIDENDS

  31

RISK FACTORS

  32

Risk Factors Relating to the Merger

  32

Risk Factors Relating to Hilltop's Business

  39

Risks Related to Hilltop's Substantial Cash Position and Related Strategies for its Use

  55

Risks Related to Hilltop's Common Stock

  56

FORWARD LOOKING STATEMENTS

  60

THE SWS SPECIAL MEETING

  62

Matters to be Considered

  62

Proxies

  62

Participants in the SWS 401(k) Plan

  63

Solicitation of Proxies

  63

Record Date

  63

Quorum

  63

Vote Required

  63

Shares Held by Officers and Directors

  64

Shares Held by Hilltop

  64

Recommendation of the SWS Board of Directors

  64

Attending the Special Meeting

  65

Delivery of Proxy Materials

  65

Appraisal/Dissenter's Rights

  65

i


Table of Contents

 
  Page

PROPOSALS SUBMITTED TO SWS STOCKHOLDERS

  67

Adoption and Approval of the Merger Agreement (Proposal 1)

  67

Non-Binding Advisory Vote Approving Compensation (Proposal 2)

  67

Approval of the Adjournment or Postponement of the SWS Special Meeting (Proposal 3)

  68

INFORMATION ABOUT THE COMPANIES—HILLTOP

  69

Business

  69

Properties

  106

Legal Proceedings

  107

Market for Hilltop's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 

  107

Selected Financial Data

  109

Management's Discussion and Analysis of Financial Condition and Results of Operations. 

  109

Quantitative and Qualitative Disclosures About Market Risk. 

  179

Financial Statements and Supplementary Data. 

  183

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. 

  183

Directors, Executive Officers and Corporate Governance. 

  183

Compensation Discussion and Analysis

  201

Executive Compensation

  214

Certain Relationships and Related Party Transactions

  229

Principal Stockholders of Hilltop

  233

Security Ownership of Hilltop Management

  233

INFORMATION ABOUT THE COMPANIES—SWS

  236

INFORMATION ABOUT THE COMPANIES—PERUNA LLC

  236

THE MERGER

  237

Terms of the Merger

  237

Background of the Merger

  237

SWS's Reasons for the Merger

  251

Hilltop's Reasons for the Merger

  256

Opinion of Sandler O'Neill & Partners,  L.P. 

  256

Certain SWS Prospective Financial Information

  267

Public Trading Markets

  270

Appraisal / Dissenters' Rights

  270

Regulatory Approvals Required for the Merger

  273

Interests of SWS Directors and Executive Officers in the Merger

  275

Indemnification of SWS Directors and Officers and Continuation of Directors' and Officers' Insurance

  281

Hilltop's Relationship with SWS

  281

Oak Hill Letter Agreement

  282

Litigation Relating to the Merger

  283

THE MERGER AGREEMENT

  284

Structure of the Merger

  284

Treatment of SWS Restricted Shares and Deferred Shares

  285

Treatment of Warrants

  285

Closing of the Merger

  286

Hilltop Board of Directors Following Completion of the Merger

  286

Conversion of Shares; Exchange of Certificates

  286

Representations and Warranties

  287

Covenants and Agreements

  289

No Solicitation

  293

Change in Recommendation

  294

ii


Table of Contents

 
  Page

Conditions to Completion of the Merger

  295

Termination of the Merger Agreement

  296

Termination Fee

  296

Effect of Termination

  297

Expenses and Fees

  297

Amendment, Waiver and Extension of the Merger Agreement

  297

ACCOUNTING TREATMENT OF THE MERGER

  297

UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

  298

DESCRIPTION OF HILLTOP CAPITAL STOCK

  302

Authorized Capital Stock

  302

Common Stock

  302

Preferred Stock

  303

Listing

  304

COMPARISON OF STOCKHOLDERS' RIGHTS

  305

LEGAL MATTERS

  317

EXPERTS

  317

OTHER MATTERS

  317

DEADLINE FOR SUBMITTING STOCKHOLDER PROPOSALS

  317

STOCKHOLDERS SHARING AN ADDRESS

  318

WHERE YOU CAN FIND MORE INFORMATION

  319

Financial Statements

 
F-1

Annex A—Agreement and Plan of Merger, Dated as of March 31, 2014, by and among SWS Group, Inc., Hilltop Holdings Inc. and Peruna LLC

 
A-1

Annex B—Opinion of Sandler O'Neill & Partners, L.P. 

  B-1

Annex C—Section 262 of the General Corporation Law of the State of Delaware

  C-1

Annex D—Verified Consolidated Amended Class Action Complaint Filed in the Court of Chancery of the State of Delaware

  D-1

Part II—Information Not Required in Prospectus

  II-1

Exhibit Index

  i

iii


Table of Contents


QUESTIONS AND ANSWERS

        The following are answers to certain questions that you may have regarding the SWS special meeting. We urge you to read carefully the remainder of this proxy statement/prospectus because the information in this section may not provide all the information that might be important to you in determining how to vote. Additional important information is also contained in the annexes to, and the documents incorporated by reference into, this proxy statement/prospectus. See "Where You Can Find More Information" included elsewhere in this proxy statement/prospectus.

Q:
What is the merger?

A:
Hilltop and SWS have entered into an Agreement and Plan of Merger, dated as of March 31, 2014 (which we refer to as the "merger agreement"). Under the merger agreement, SWS will be merged with and into Hilltop's wholly owned subsidiary, Peruna LLC (which we refer to as the "merger"). Peruna LLC will be the surviving entity in the merger. Immediately following the completion of the merger, SWS's wholly owned bank subsidiary, Southwest Securities, FSB, will merge with and into Hilltop's wholly owned bank subsidiary, PlainsCapital Bank (which we refer to as the "bank merger"). PlainsCapital Bank will be the surviving bank in the bank merger. A copy of the merger agreement is included as Annex A to this proxy statement/prospectus. The merger cannot be completed unless, among other things, SWS stockholders approve the merger proposal to approve the merger agreement.

Q:
Why am I receiving this document?

A:
This document is a proxy statement of SWS to solicit proxies from its stockholders in connection with their vote to approve and adopt the merger agreement, and certain related matters. In addition, this document constitutes a prospectus for SWS stockholders because Hilltop is offering shares of its common stock to be issued in partial exchange for shares of SWS common stock in the merger.

Q:
What are holders of SWS common stock being asked to vote on?

A:
SWS stockholders are being asked to vote on a proposal to approve and adopt the merger agreement (the "merger proposal"), a proposal to approve, on a non-binding, advisory basis, compensation that may be paid or would be payable to SWS's named executive officers in connection with the merger (the "compensation proposal"), and a proposal to approve the adjournment of the SWS special meeting, if necessary or appropriate, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the merger proposal (the "adjournment proposal").

Q:
What will holders of SWS common stock receive in the merger?

A:
If the merger is completed, holders of SWS common stock will receive (i) 0.2496 shares of Hilltop common stock and (ii) $1.94 in cash for each share of SWS common stock that they hold immediately prior to the merger. No fractional shares of Hilltop common stock will be issued in connection with the merger. A holder of SWS common stock who otherwise would have received a fraction of a share of Hilltop common stock will instead receive an amount in cash reflecting the market value of the fractional share of Hilltop common stock based upon the average of the high and low sales prices of Hilltop common stock on the New York Stock Exchange on each of the five consecutive trading days ending on the trading day that is two trading days prior to the closing date of the merger.

iv


Table of Contents

Q:
Will the value of the merger consideration change between the date of this proxy statement/prospectus and the time the merger is completed?

A:
Because the number of shares of Hilltop common stock that SWS stockholders will receive for each share of SWS common stock as the stock component of the merger consideration is fixed, the value of the merger consideration may fluctuate between the date of this proxy statement/prospectus and the SWS special meeting, and between the special meeting and the completion of the merger, based upon the market value for Hilltop common stock. In the merger, SWS stockholders will receive cash and a fraction of a share of Hilltop common stock for each share of SWS common stock they hold. Any fluctuation in the market price of Hilltop stock will change the value of the shares of Hilltop common stock that SWS stockholders will receive.

Q:
How will the merger affect outstanding SWS restricted shares and deferred shares?

A:
Restricted Shares.    Each restricted share of SWS common stock granted prior to the date of the merger agreement will vest in full at the effective time of the merger, and the holders of such restricted shares will be entitled to receive the merger consideration for each such share on the same basis as SWS stockholders generally, less applicable withholding taxes, which will be withheld first from the cash portion of the merger consideration payable in respect of each such share. As of September 30, 2014, 370,388 unvested restricted shares of SWS common stock that were granted prior to the date of the merger agreement were outstanding.

v


Table of Contents

Q:
What interests do SWS's directors and executive officers have in the merger that are different from, or in addition to, those of SWS stockholders generally?

A:
SWS stockholders should be aware that SWS's directors and executive officers have interests in the merger that are different from, or in addition to, those of SWS stockholders generally. These interests may create potential conflicts of interest. SWS's board of directors was aware of these interests and considered these interests, among other matters, when making its decision to approve the merger agreement, and in recommending that SWS stockholders vote in favor of approving the merger proposal and the compensation proposal. For purposes of the SWS agreements and plans described below, the completion of the transactions contemplated by the merger agreement will constitute a change of control. These interests include the following:

    All outstanding restricted shares of SWS common stock granted prior to the date of the merger agreement will vest in full in connection with the merger and each holder will receive the merger consideration in exchange for each such restricted share. In addition, the vesting of outstanding deferred shares of SWS common stock will accelerate in full on termination of employment by the employer without "cause" (as defined in the merger agreement) following the effective time of the merger. The estimated value of such accelerated vesting of the restricted and deferred shares currently held by the executive officers in aggregate is $2,488,460. For the estimated value of such accelerated vesting for each individual executive officer and the methodology used to calculate such value, see footnote 2 to the table under "The Merger—Interests of SWS Directors and Executive Officers in the Merger—Golden Parachute Compensation";

    As permitted under the terms of the merger agreement, on August 20, 2014, SWS granted an aggregate of 181,814 restricted shares of SWS common stock, with an aggregate grant date value of $1,325,434, to certain executive officers and key employees of SWS in satisfaction of their fiscal 2014 annual bonuses in the ordinary course of business and consistent with past practice, which will be converted into restricted shares of Hilltop as of the effective time of the merger, and will be subject to accelerated vesting (i) as to all of such restricted shares on termination of employment by the employer without "cause" (as defined in the merger agreement) following the effective time of the merger, (ii) as to all of such restricted shares upon a change of control event (other than the merger) and (iii) as to a prorated portion of such restricted shares on termination of employment due to an employee's death or disability. For the estimated value of such accelerated vesting for each individual executive officer, see footnote 2 to the table under "The Merger—Interests of SWS Directors and Executive Officers in the Merger—Golden Parachute Compensation";

    Between the date of the merger agreement and the effective time of the merger, SWS may grant non-employee directors of SWS restricted shares of SWS common stock in the ordinary course of business consistent with past practice, with a grant date value not to exceed $35,000 per non-employee director;

    Executive officers and other employees of SWS are entitled to cash severance in accordance with SWS's severance practice on termination of employment by the employer without "cause" (as defined in the merger agreement) at any time on or prior to December 31, 2015, contingent on the executive's or other employee's execution and non-revocation of a release of claims. The estimated value of such cash severance for the executive officers in aggregate is $816,154. For the formula used to calculate this estimated value, see "The Merger—Interests of SWS Directors and Executive Officers in the Merger—Severance and Retention Payments—Severance practice". For the estimated value of such cash severance for

vi


Table of Contents


Messrs. Gerald J. Ford and J. Taylor Crandall are members of the SWS board of directors appointed by Hilltop and Oak Hill, respectively. Messrs. Ford and Crandall recused themselves from the vote of the SWS board of directors with respect to the approval and adoption of the merger agreement and the transactions contemplated thereby, including the merger. The decisions by the SWS Board that are described in this proxy statement/prospectus were all taken by unanimous vote of those directors who voted.


For more information about the interests that SWS's directors and executive officers have in the merger, see "The Merger—Interests of SWS Directors and Executive Officers in the Merger".

Q:
When do you expect to complete the merger?

A:
We expect to complete the merger prior to the end of 2014. However, we cannot assure you when or if the merger will occur. We must, among other things, first obtain the required approval of SWS stockholders at the SWS special meeting and the required regulatory approvals described below in "The Merger—Regulatory Approvals Required for the Merger" and satisfy certain other closing conditions.

Q:
What happens if the merger is not completed?

A:
If the merger is not completed, shares of Hilltop common stock will not be issued, and holders of SWS common stock will not receive any consideration for their shares, in connection with the merger. Instead, SWS will remain an independent company and its common stock will continue to be listed and traded on the New York Stock Exchange. Under specified circumstances in connection with the termination of the merger agreement, including circumstances involving a

vii


Table of Contents

Q:
When and where is the SWS special meeting?

A:
The SWS special meeting will be held at Renaissance Tower, 1201 Elm Street, Suite 4200, Dallas, Texas 75270, on November 21, 2014 at 9:00 a.m. local time.

Q:
How do I vote?

A:
If you are a stockholder of record of SWS as of the record date for the SWS special meeting you may vote by:

accessing the Internet website specified on your proxy card;

calling the toll-free number specified on your proxy card; or

signing the enclosed proxy card and returning it in the postage-paid envelope provided.
Q:
How do I vote if I own shares through the SWS Group, Inc. 401(k) Profit Sharing Plan (the "SWS 401(k) Plan")?

A:
You will be given the opportunity to instruct the trustee of the SWS 401(k) Plan how to vote the shares that you hold in your account. In accordance with the terms of the plan, if you fail to instruct the plan trustee how to vote your plan shares, the trustee will generally vote your plan shares in the same proportion as the shares voted pursuant to the instructions of participants who timely give such instructions.

Q:
Why is my vote important?

A:
If you do not vote, it will be more difficult to obtain the necessary quorum to hold the SWS special meeting. In addition, we cannot complete the merger without obtaining the necessary vote of SWS stockholders in favor of the merger proposal.

Q:
How does the SWS board of directors recommend that I vote?

A:
The SWS board of directors (other than Messrs. Gerald J. Ford and J. Taylor Crandall, who recused themselves), upon the unanimous recommendation of the special committee of the SWS board of directors (the "Special Committee"), recommends that you vote "FOR" the merger proposal, "FOR" the compensation proposal and "FOR" the adjournment proposal.

Q:
What constitutes a quorum for the SWS special meeting?

A:
The presence at the special meeting, in person or by proxy, of holders of a majority of the outstanding shares of SWS common stock entitled to vote at the SWS special meeting will constitute a quorum for the transaction of business. Abstentions and broker non-votes will be included in determining the number of shares present at the meeting for the purpose of determining the presence of a quorum. A broker non-vote occurs under stock exchange rules when

viii


Table of Contents

Q:
What is the vote required to approve each proposal at the SWS special meeting?

A:
Approval of the merger proposal requires the affirmative vote of a majority of the shares of SWS common stock outstanding on the record date for the SWS special meeting. Approval of the compensation proposal and the adjournment proposal require, in each case, the affirmative vote of a majority of the shares of SWS common stock represented in person or by proxy at the SWS special meeting and entitled to vote on such proposal. As of the date of this proxy statement/prospectus, Hilltop owns 10,171,039 shares of SWS common stock, or approximately 21.0% of the currently outstanding SWS common shares.

Q:
What impact will my vote on the compensation proposal have on the compensation payable to SWS's named executive officers in connection with the merger?

A:
The vote on the compensation proposal is a vote separate and apart from the vote to approve the merger agreement. You may vote for the compensation proposal and against the merger proposal, and vice versa. Because the vote on the compensation proposal is advisory only, it will not be binding on SWS or Hilltop. Accordingly, because SWS is contractually obligated to pay the compensation, if the merger is completed, the compensation is payable to the named executive officers of SWS, subject only to the conditions applicable thereto, regardless of the outcome of the advisory (non-binding) vote. SWS is seeking your approval of the compensation, on an advisory (non-binding) basis, in order to comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and related SEC rules.

Q:
If my shares are held in "street name" by my broker, will my broker automatically vote my shares for me?

A:
No. Your broker cannot vote your shares without instructions from you. You should instruct your broker as to how to vote your shares, following the directions your broker provides to you. Please check the voting form used by your broker. Without instructions, your shares will not be voted, which will have the effect described below.

Q:
What should I do if I hold my shares of SWS common stock in book-entry form?

A:
You are not required to take any special additional action to receive the merger consideration if your shares of SWS common stock are held in book-entry form. Book-entry shares will be treated the same way as stock certificates.

Q:
What if I abstain from voting or fail to instruct my broker?

A:
If you are a holder of SWS common stock and you abstain from voting or fail to instruct your broker to vote your shares, it will have the same effect as a vote against the merger proposal. An abstention or broker non-vote will have no effect on the compensation proposal or the adjournment proposal.

Q:
Can I attend the SWS special meeting and vote my shares in person?

A:
Yes. All SWS stockholders, including stockholders of record and stockholders who hold their shares through banks, brokers, nominees or any other holder of record, are invited to attend the SWS special meeting. Holders of record of SWS common stock can vote in person at the SWS special meeting. If you are not a stockholder of record, you must obtain a proxy, executed in your favor, from the record holder of your shares, such as a broker, bank or other nominee, to be able to vote in person at the special meeting. If you plan to attend the SWS special meeting, you must

ix


Table of Contents

Q:
What do I do if I want to change or revoke my vote?

A:
You may revoke your proxy and change your vote at any time before the SWS special meeting, or earlier deadline specified in the proxy card, by voting again via the Internet or by telephone (only your latest Internet or telephone proxy submitted prior to the special meeting will be counted), by signing and returning a new proxy card or voting instruction form with a later date, or by attending the special meeting and voting in person. Your attendance at the special meeting, however, will not automatically revoke your proxy unless you vote again at the special meeting. We provide additional information on changing your vote under the headings "The SWS Special Meeting—Proxies" included elsewhere in this proxy statement/prospectus.

Q:
Am I entitled to exercise appraisal / dissenters' rights as an SWS stockholder?

A:
Yes. Section 262 of the Delaware General Corporation Law ("DGCL") provides holders of shares of SWS common stock with the right to dissent from the merger and seek appraisal of their shares of SWS common stock in accordance with Delaware law. A holder of shares of SWS common stock who properly seeks appraisal and complies with the applicable requirements under Delaware law, referred to as a dissenting stockholder, will forego the merger consideration and instead receive a cash payment equal to the fair value of such stockholder's shares of SWS common stock in connection with the merger. Fair value will be determined by the Delaware Court of Chancery following an appraisal proceeding. Dissenting stockholders will not know the appraised fair value at the time such holders must elect whether to seek appraisal. The ultimate amount dissenting stockholders receive in an appraisal proceeding may be more or less than, or the same as, the amount such holders would have received under the merger agreement.

x


Table of Contents

Q:
Should I send in my SWS stock certificates now?

A:
No. SWS stockholders with shares represented by stock certificates should not send SWS stock certificates with their proxy cards. After the merger is completed, holders of SWS common stock certificates or shares of SWS common stock held in book-entry form will be mailed a transmittal form with instructions on how to exchange their SWS stock certificates or book-entry shares for the merger consideration.

Q:
Will SWS be required to submit the proposal to approve the merger agreement to its stockholders even if SWS's board of directors has withdrawn, modified or qualified its recommendation?

A:
Yes. Unless the merger agreement is terminated before the SWS special meeting, SWS is required to submit the proposal to approve the merger agreement to its stockholders even if SWS's board of directors has withdrawn, modified or qualified its recommendation.

Q:
What if I cannot find my stock certificates?

A:
There will be a procedure for you to receive the merger consideration in the merger, even if you have lost one or more of your SWS stock certificates. This procedure, however, may take time to complete. In order to ensure that you will be able to receive the merger consideration promptly after the merger is completed, if you cannot locate your SWS stock certificates after looking for them carefully, we urge you to contact the SWS transfer agent, Computershare Trust Company, as soon as possible and follow the procedure they explain to you for replacing your SWS stock certificates. Computershare Trust Company can be reached at (303) 262-0600, or you can write to them at the following address:
Q:
What should I do if I receive more than one set of voting materials?

A:
SWS stockholders may receive more than one set of voting materials, including multiple copies of this proxy statement/prospectus and multiple proxy cards or voting instruction cards. For example, if you hold shares of SWS common stock in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold such shares. If you are a holder of record of SWS common stock and your shares are registered in more than one

xi


Table of Contents

Q:
Will U.S. taxpayers be taxed on the Hilltop common stock and/or cash received in the merger?

A:
The merger is intended to qualify as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and it is a condition to the respective obligations of Hilltop and SWS to complete the merger that each of Hilltop and SWS receives a legal opinion to that effect. Accordingly, an SWS common stockholder generally will recognize gain, but not loss, in an amount equal to the lesser of (1) the amount of gain realized (i.e., the excess of the sum of the amount of cash and the fair market value of the shares of Hilltop common stock received pursuant to the merger over that holder's adjusted tax basis in its shares of SWS common stock surrendered) and (2) the amount of cash received pursuant to the merger. Further, a holder of shares of SWS common stock generally will recognize gain or loss with respect to cash received instead of fractional shares of Hilltop common stock that the SWS common stockholder would otherwise be entitled to receive. For further information, please refer to "United States Federal Income Tax Consequences of the Merger." The U.S. federal income tax consequences described above may not apply to all holders of SWS common stock. Your tax consequences will depend on your individual situation. Accordingly, we strongly urge you to consult your independent tax advisor for a full understanding of the particular tax consequences of the merger to you.

Q:
What is Hilltop's current relationship with SWS?

A:
In March 2011, Hilltop, Oak Hill Capital Partners III, L.P. ("OHCP") and Oak Hill Capital Management Partners III, L.P. (collectively with OHCP, "Oak Hill") entered into a Funding Agreement (the "Funding Agreement") with SWS. On July 29, 2011, after receipt of regulatory and SWS stockholder approval, SWS completed the following transactions contemplated by the Funding Agreement:

entered into a $100,000,000, five-year, unsecured loan comprised of equal commitments from each of Hilltop and Oak Hill under the terms of a credit agreement (the "Credit Agreement");

issued warrants to each of Hilltop and Oak Hill for the purchase of up to 8,695,652 shares of SWS's common stock exercisable for five years from the date of issuance at a fixed exercise price of $5.75 per share, subject to anti-dilution adjustments; and

granted each of Hilltop and Oak Hill certain rights, including registration rights, preemptive rights, and the right for each to appoint one person to the board of directors of SWS for so long as it owns 9.9% or more of all of the outstanding shares of SWS's common stock or securities convertible into at least 9.9% of SWS's outstanding common stock.

xii


Table of Contents

Q:
What rights does Oak Hill have in relation to the merger?

A:
On September 26, 2014, Oak Hill partially exercised its warrants, acquiring a total of 6,521,739 shares of SWS common stock for the warrant exercise price of $5.75 per share. Pursuant to the terms of the warrant and Credit Agreement, the exercise price was paid by an automatic reduction by $37,499,999.25 of the $50,000,000 amount which had previously been due to Oak Hill under the Credit Agreement. Accordingly, as of the date of this proxy statement/prospectus, Oak Hill (i) owns and is entitled to vote 6,521,739 shares of SWS common stock, representing approximately 13.5% of the outstanding shares of SWS common stock, (ii) beneficially owns an additional 2,173,913 shares of SWS common stock pursuant to the unexercised portion of Oak Hill's warrants, equivalent to total beneficial ownership of approximately 17.2% if Oak Hill's warrants were fully exercised and (iii) remains a lender under the Credit Agreement with an outstanding loan balance of $12,500,000.75, which is the entire amount currently outstanding under the Credit Agreement. In addition, Oak Hill Capital Management, LLC and OHCM Management LLC, which are affiliates of Oak Hill, beneficially own an additional 19,925 shares of SWS common stock, equivalent to approximately 0.04% of the currently outstanding SWS common shares.
Q:
Are there any voting agreements in relation to the merger?

A:
Hilltop has agreed in the merger agreement to vote any shares of SWS that it owns as of the record date for the SWS special meeting in favor of approval and adoption of the merger agreement. As of the date of this proxy statement/prospectus, Hilltop owns 10,171,039 shares of SWS common stock, or approximately 21.0% of the currently outstanding SWS common shares, excluding the 2,173,913 shares of SWS common stock that are issuable to Oak Hill upon exercise

xiii


Table of Contents

Q:
Where can I find more information on Hilltop and SWS?

A:
You can find more information about Hilltop and SWS from various sources described in the section of this proxy statement/prospectus entitled "Where You Can Find More Information."

Q:
Whom can I talk to if I have questions?

A:
SWS stockholders should contact SWS by telephone at (214) 859-1800 or MacKenzie Partners, Inc., SWS's proxy solicitor, collect at (212) 929-5500 or toll-free at (800) 322-2885.

xiv


Table of Contents

 


SUMMARY

        This summary highlights selected information from this proxy statement/prospectus and may not contain all of the information that is important to you. To obtain a better understanding of the merger, we urge you to read this entire proxy statement/prospectus carefully, including the annexes, as well as those additional documents to which we refer you. You may obtain the information incorporated by reference into this proxy statement/prospectus by following the instructions in the section of this proxy statement/prospectus entitled "Where You Can Find More Information." Each item in this summary refers to the page of this proxy statement/prospectus beginning on which that subject is described in more detail.


The Companies (page 69)

Hilltop

        Hilltop, a Maryland corporation, is a Dallas-based financial holding company with principal executive offices at 200 Crescent Court, Suite 1330, Dallas, Texas 75201. The telephone number of Hilltop's executive offices is (214) 855-2177, and its Internet website address is www.hilltop-holdings.com. Through its wholly owned subsidiary, PlainsCapital Corporation, a regional commercial banking franchise, Hilltop has three operating subsidiaries: PlainsCapital Bank, PrimeLending, and First Southwest. Through Hilltop's other wholly owned subsidiary, National Lloyds Corporation, Hilltop provides property and casualty insurance through two insurance companies, National Lloyds Insurance Company and American Summit Insurance Company.

        Hilltop's common stock is listed on the New York Stock Exchange under the symbol "HTH."

SWS

        SWS, a Delaware corporation, is a savings and loan holding company with principal executive offices at 1201 Elm Street, Suite 3500, Dallas, Texas 75270. The telephone number of SWS's executive offices is (214) 859-1800, and its Internet website address is www.swsgroupinc.com. SWS is focused on delivering a broad range of investment banking, commercial banking and related financial services to corporate, individual and institutional investors, broker/dealers, governmental entities and financial intermediaries. SWS is the largest full-service brokerage firm headquartered in the Southwestern United States (based on the number of financial advisors). SWS conducts its banking business through its wholly owned subsidiary, Southwest Securities, FSB, a federally chartered savings bank.

        SWS's common stock is listed on the New York Stock Exchange under the symbol "SWS."

Peruna LLC

        Peruna LLC, a Delaware limited liability company, is a wholly owned subsidiary of Hilltop. Peruna LLC is newly formed, and was organized for the purpose of effecting the merger. Other than those incident to its formation and the matters contemplated by the merger agreement, Peruna LLC has engaged in no business activities to date and it has no material assets or liabilities of any kind.


Risk Factors (page 32)

        An investment in shares of Hilltop common stock involves risks, some of which are related to the merger. In considering the merger, you should carefully consider the information about these risks set forth under "Risk Factors," together with the other information included or incorporated by reference or in this proxy statement/prospectus.

 

1


Table of Contents


The Merger (page 237)

        If the merger is completed, each share of SWS common stock, par value $0.10 per share, issued and outstanding immediately prior to the completion of the merger will be converted into the right to receive $1.94 in cash and 0.2496 of a share of Hilltop common stock. We refer to this mix of cash and stock consideration as the merger consideration. No fractional shares of Hilltop common stock will be issued in connection with the merger. A holder of SWS common stock who otherwise would have received a fraction of a share of Hilltop common stock will instead receive an amount in cash rounded to the nearest cent. For example, if you hold 100 shares of SWS common stock, you will receive (i) $194, (ii) 24 shares of Hilltop common stock and (iii) a cash payment instead of the 0.96 shares of Hilltop common stock that you otherwise would have received.

        The value of the merger consideration may fluctuate between the date of the SWS special meeting and the completion of the merger based upon the market value for Hilltop common stock. For information about the historical prices of Hilltop common stock, see "Market Prices and Dividends of Hilltop Common Stock."

        The merger agreement governs the merger. The merger agreement is included in this proxy statement/prospectus as Annex A. Please read the merger agreement carefully. All descriptions in this summary and elsewhere in this prospectus of the terms and conditions of the merger are qualified by reference to the merger agreement.


Recommendation of the SWS Board of Directors (page 251)

        The SWS board of directors (other than Messrs. Gerald J. Ford and J. Taylor Crandall, who recused themselves), upon the unanimous recommendation of the Special Committee, has determined that the merger agreement and the transactions contemplated thereby, including the merger, are advisable and fair to and in the best interests of the SWS stockholders and has approved the merger and the merger agreement. SWS's board of directors recommends that SWS stockholders vote "FOR" the merger proposal, "FOR" the compensation proposal and "FOR" the adjournment proposal. For the factors considered by SWS's board of directors in reaching its decision to approve the merger agreement, see "The Merger—Reasons for the Merger" and "The Merger—Recommendation of the SWS Board of Directors."


Opinion of Financial Advisor to the Special Committee (page 256)

        On March 31, 2014, Sandler O'Neill & Partners, L.P. ("Sandler O'Neill"), financial advisor to the Special Committee in connection with the merger, rendered its oral opinion to the Special Committee, which was subsequently confirmed in a written opinion dated the same date, that, as of such date and based upon and subject to the various factors, assumptions and any limitations set forth in its written opinion, the merger consideration to be paid to the holders of SWS common stock in the proposed merger was fair, from a financial point of view, to such holders (other than Hilltop).

        The full text of Sandler O'Neill's opinion, dated March 31, 2014, is attached as Annex B to this prospectus. You should read the opinion in its entirety for a discussion of, among other things, the assumptions made, procedures followed, matters considered and any limitations on the review undertaken by Sandler O'Neill in rendering its opinion.

        Sandler O'Neill's written opinion is addressed to the Special Committee, is directed only to the merger consideration to be paid in the merger, and does not constitute a recommendation to any SWS stockholder as to how such stockholder should vote with respect to the merger or any other matter.

        For further information, see "The Merger—Opinion of SWS's Financial Advisor."

 

2


Table of Contents


What Holders of SWS Equity-Based Awards Will Receive (page 285)

        Each restricted share of SWS common stock granted prior to the date of the merger agreement will vest in full at the effective time of the merger, and the holders of such restricted shares will be entitled to receive the merger consideration for each such share on the same basis as SWS stockholders generally, less applicable withholding taxes, which will be withheld first from the cash portion of the merger consideration payable in respect of each such share. As of September 30, 2014, 370,388 unvested restricted shares of SWS common stock that were granted prior to the date of the merger agreement were outstanding. As permitted under the terms of the merger agreement, on August 20, 2014, SWS granted an aggregate of 181,814 restricted shares of SWS common stock to certain executive officers and key employees in satisfaction of their fiscal 2014 annual bonuses, which will be converted into restricted shares of Hilltop as of the effective time of the merger (with the number of Hilltop shares determined based on the value of the merger consideration), and will be subject to accelerated vesting (i) as to all of such restricted shares on termination of employment by the employer without "cause" (as defined in the merger agreement) following the effective time of the merger, (ii) as to all of such restricted shares upon a change of control event (other than the merger) and (iii) as to a prorated portion of such restricted shares on termination of employment due to an employee's death or disability. The merger agreement also permits SWS to grant to non-employee directors, prior to the effective time of the merger, restricted shares of SWS common stock in the ordinary course of business consistent with past practice, with a grant date value not to exceed $35,000 per non-employee director.

        As of the effective time of the merger, each deferred share of SWS common stock reflected in a participant account under SWS deferred compensation plans will be converted into 0.3328 of a deferred share of Hilltop common stock, which is equal to the sum of the portion of the merger consideration paid in Hilltop common stock and a number of shares of Hilltop common stock with a value as of immediately prior to the date of the merger agreement that is equal to the portion of the merger consideration paid in cash. Following the effective time of the merger, any such deferred shares that are not vested will continue to vest in accordance with the original terms of the SWS deferred shares and will vest in full on termination of employment by the employer without "cause" (as defined in the merger agreement) following the effective time of the merger. Hilltop deferred shares will be distributed in accordance with the terms of the applicable plan and the participants' individual elections. As of September 30, 2014, 339,989 deferred shares of SWS common stock were outstanding.

        For more information about these restricted and deferred shares, see "The Merger—Interests of SWS Directors and Executive Officers in the Merger".


SWS Will Hold Its Special Meeting on November 21, 2014 (page 62)

        The SWS special meeting will be held on November 21, 2014, at 9:00 a.m., local time, at Renaissance Tower, 1201 Elm Street, Suite 4200, Dallas, Texas 75270. The purpose of the SWS special meeting is to vote on:

        Only holders of record of SWS common stock at the close of business on October 3, 2014 will be entitled to vote at the SWS special meeting. Each share of SWS common stock is entitled to one vote on each proposal to be considered at the SWS special meeting.

 

3


Table of Contents

        As of the record date for the SWS special meeting, there were 48,456,850 shares of SWS common stock outstanding and entitled to vote at the SWS special meeting. As of the record date for the SWS special meeting, to the knowledge of SWS, directors and executive officers of SWS had the right to vote approximately 2,425,026 shares of SWS common stock (not including the shares held by Hilltop described below), or approximately 5% of the outstanding shares of SWS common stock entitled to vote at the SWS special meeting. We currently expect that each of these individuals will vote their shares of SWS common stock in favor of the proposals to be presented at the SWS special meeting. In addition, Hilltop holds 10,171,039 shares of SWS common stock as of the date of this proxy statement/prospectus, or approximately 21.0% of the currently outstanding SWS common shares. Hilltop has agreed in the merger agreement to vote any shares of SWS that it owns as of the record date for the SWS special meeting in favor of adoption of the merger agreement.

        Approval of the merger proposal requires the affirmative vote of a majority of the shares of SWS common stock outstanding on the record date for the SWS special meeting. Approval of the compensation proposal and the adjournment proposal require, in each case, the affirmative vote of a majority of the shares of SWS common stock represented in person or by proxy at the SWS special meeting and entitled to vote on such proposal.


Hilltop's Relationship with SWS (page 281)

        In March 2011, Hilltop, Oak Hill Capital Partners III, L.P. ("OHCP") and Oak Hill Capital Management Partners III, L.P. (collectively with OHCP, "Oak Hill") entered into a Funding Agreement (the "Funding Agreement") with SWS. On July 29, 2011, after receipt of regulatory and SWS stockholder approval, SWS completed the following transactions contemplated by the Funding Agreement:

        On October 2, 2014, Hilltop exercised its warrant in full, acquiring 8,695,652 shares of SWS common stock for the warrant exercise price of $5.75 per share. Pursuant to the terms of the warrant and Credit Agreement, the exercise price was paid by an automatic elimination of the $50,000,000 amount outstanding due to Hilltop under the Credit Agreement. Accordingly, as of the date of this proxy statement/prospectus, Hilltop (i) owns 10,171,039 shares of SWS common stock, representing approximately 21.0% of the outstanding shares of SWS common stock and (ii) is no longer a lender under the Credit Agreement. Mr. Gerald J. Ford, who is Chairman of Hilltop's board of directors, currently serves as Hilltop's designee on SWS's board of directors.

        In connection with its acquisition of PlainsCapital Corporation in 2012, Hilltop provided certain passivity commitments to the Federal Reserve Board related to SWS. These passivity commitments provide that Hilltop cannot take certain actions, namely exercising any controlling influence over management or policies of SWS, without the prior approval of the Federal Reserve Bank.

        The terms of the Credit Agreement include a covenant prohibiting SWS from undergoing a "Fundamental Change," which includes any merger, amalgamation or consolidation, and which SWS would breach by engaging in a merger, amalgamation or consolidation unless compliance were waived

 

4


Table of Contents

by each lender thereunder. During the parties' negotiations with respect to the merger, Hilltop indicated to SWS that it would not be willing to grant a waiver of this covenant to permit a third party transaction (see "The Merger—Background of the Merger"). The Credit Agreement also prohibits SWS from prepaying the loan other than following a period during which the closing price for SWS common stock exceeds 150% of the exercise price of the warrants (or $8.625) for twenty out of any thirty consecutive trading days.


The Oak Hill Letter Agreement (page 282)

        On September 26, 2014, Oak Hill partially exercised its warrants, acquiring a total of 6,521,739 shares of SWS common stock for the warrant exercise price of $5.75 per share. Pursuant to the terms of the warrant and Credit Agreement, the exercise price was paid by an automatic reduction by $37,499,999.25 of the $50,000,000 amount which had previously been due to Oak Hill under the Credit Agreement. Accordingly, as of the date of this proxy statement/prospectus, Oak Hill (i) owns and is entitled to vote 6,521,739 shares of SWS common stock, representing approximately 13.5% of the outstanding shares of SWS common stock, (ii) beneficially owns an additional 2,173,913 shares of SWS common stock pursuant to the unexercised portion of Oak Hill's warrants, equivalent to total beneficial ownership of approximately 17.2% if Oak Hill's warrants were fully exercised and (iii) remains a lender under the Credit Agreement with an outstanding loan balance of $12,500,000.75, which is the entire amount currently outstanding under the Credit Agreement. In addition, Oak Hill Capital Management, LLC and OHCM Management LLC, which are affiliates of Oak Hill, beneficially own an additional 19,925 shares of SWS common stock, equivalent to approximately 0.04% of the currently outstanding SWS common shares.

        Pursuant to a Letter Agreement dated March 31, 2014 between Oak Hill and SWS (the "Oak Hill Letter Agreement"), Oak Hill has agreed with SWS, subject to the terms and conditions of the Oak Hill Letter Agreement, to waive any terms of the Credit Agreement that would cause the merger to result in any default or event of default by SWS under the Credit Agreement.

        Pursuant to the Oak Hill Letter Agreement and the merger agreement, at the closing of the merger, Oak Hill will deliver to SWS the certificates evidencing any outstanding warrants and any loans of Oak Hill to SWS then outstanding under the Credit Agreement, and SWS will issue and deliver to Oak Hill, in exchange for its outstanding warrants and loans, the following consideration: (i) the merger consideration that Oak Hill would have been entitled to receive upon consummation of the merger if its outstanding warrants had been exercised immediately prior to the effective time of the merger and (ii) an amount equal to the Applicable Premium (as defined in the Credit Agreement, being a calculation of the present value of all required interest payments due on a loan through its maturity date on the date the loan is repaid) calculated as if the outstanding loans held by Oak Hill were prepaid in full as of the closing date of the merger.

The Merger is Intended to Be Tax-Free to Holders of SWS Common Stock, Except to the Extent of any Cash They Receive (page 298)

        The merger is intended to qualify as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and it is a condition to the respective obligations of Hilltop and SWS to complete the merger that each of Hilltop and SWS receives a legal opinion to that effect. Accordingly, an SWS common stockholder generally will recognize gain, but not loss, in an amount equal to the lesser of (1) the amount of gain realized (i.e., the excess of the sum of the amount of cash and the fair market value of the shares of Hilltop common stock received pursuant to the merger over that holder's adjusted tax basis in its shares of SWS common stock surrendered) and (2) the amount of cash received pursuant to the merger. Further, a holder of shares of SWS common stock generally will recognize gain or loss with respect to cash received instead of fractional shares of Hilltop common stock that the SWS common stockholder would otherwise be entitled to

 

5


Table of Contents

receive. For further information, please refer to "United States Federal Income Tax Consequences of the Merger."

        The United States federal income tax consequences described above may not apply to all holders of SWS common stock. Your tax consequences will depend on your individual situation. Accordingly, we strongly urge you to consult your tax advisor for a full understanding of the particular tax consequences of the merger to you.

Interests of SWS Directors and Executive Officers in the Merger (page 275)

        SWS stockholders should be aware that SWS's directors and executive officers have interests in the merger that are different from, or in addition to, those of SWS stockholders generally. These interests and arrangements may create potential conflicts of interest. SWS's board of directors was aware of these interests and considered these interests, among other matters, when making its decision to approve the merger agreement, and in recommending that SWS stockholders vote in favor of approving the merger proposal and the compensation proposal. For purposes of the SWS agreements and plans described below, the completion of the transactions contemplated by the merger agreement will constitute a change of control. These interests include the following:

 

6


Table of Contents

        Messrs. Gerald J. Ford and J. Taylor Crandall are members of the SWS board of directors appointed by Hilltop and Oak Hill, respectively. Messrs. Ford and Crandall recused themselves from the vote of the SWS board of directors with respect to the approval and adoption of the merger agreement and the transactions contemplated thereby, including the merger. The decisions by the SWS Board that are described in this proxy statement/prospectus were all taken by unanimous vote of those directors who voted.

Appraisal/Dissenters' Rights (page 270)

        Section 262 of the DGCL provides holders of shares of SWS common stock with the right to dissent from the merger and seek appraisal of their shares of SWS common stock in accordance with Delaware law. A holder of shares of SWS common stock who properly seeks appraisal and complies with the applicable requirements under Delaware law, referred to as a dissenting stockholder, will forego the merger consideration and instead receive a cash payment equal to the fair value of such stockholder's shares of SWS common stock in connection with the merger. Fair value will be determined by the Delaware Court of Chancery following an appraisal proceeding. Dissenting stockholders will not know the appraised fair value at the time such holders must elect whether to seek appraisal. The ultimate amount dissenting stockholders receive in an appraisal proceeding may be more or less than, or the same as, the amount such holders would have received under the merger agreement.

        To seek appraisal, a stockholder of SWS must strictly comply with all of the procedures required under Delaware law, including:

        In connection with the foregoing, SWS stockholders who wish to seek appraisal should note that:

 

7


Table of Contents

        Failure to follow exactly the procedures specified under Delaware law will result in the loss of appraisal rights.

        For a further description of the appraisal rights available to SWS stockholders and procedures required to exercise appraisal rights, see the section entitled "The Merger—Appraisal/Dissenters' Rights" included elsewhere in this joint proxy statement/prospectus and the provisions of the DGCL that grant appraisal rights and govern such procedures which are attached as Annex C to this document. If a stockholder of SWS holds shares of SWS common stock through a bank, brokerage firm or other nominee and the SWS stockholder wishes to exercise appraisal rights, such stockholder should consult with such stockholder's bank, brokerage firm or nominee. In view of the complexity of Delaware law, SWS stockholders who may wish to pursue appraisal rights should consult their legal and financial advisors promptly.

Regulatory Approvals Required for the Merger (page 273)

        Hilltop and SWS have agreed to use their reasonable best efforts to obtain all regulatory approvals necessary or advisable to complete the transactions contemplated by the merger agreement, including the merger and the bank merger. These approvals include approvals from the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and the Texas Department of Banking and the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), among others. Hilltop and SWS have filed, or are in the process of filing, applications and notifications to obtain the required regulatory approvals.

        We are not aware of any material governmental approvals or actions that are required for completion of the merger other than those described above. It is presently contemplated that if any such additional governmental approvals or actions are required, those approvals or actions will be sought.

        Although neither SWS nor Hilltop knows of any reason why these regulatory approvals cannot be obtained in a timely manner, SWS and Hilltop cannot be certain when or if they will be obtained.

No Solicitation (page 293)

        The merger agreement contains restrictions on SWS's ability to solicit or engage in discussions or negotiations with any third party regarding a proposal to acquire a significant interest in SWS. Notwithstanding these restrictions, under certain limited circumstances, the board of directors of SWS may respond to an unsolicited proposal and may change or withdraw its recommendation with respect to a "superior proposal" (as defined in the section entitled "The Merger Agreement—No Solicitation").

Conditions that Must be Satisfied or Waived for the Merger to Occur (page 295)

        Currently, we expect to complete the merger by the end of 2014. As more fully described in this proxy statement/prospectus and in the merger agreement, the completion of the merger depends on a number of conditions being satisfied or, where legally permissible, waived. These conditions include (1) approval of the merger proposal by SWS stockholders, (2) authorization for listing on the NYSE of the shares of Hilltop common stock to be issued in the merger, (3) the receipt of required regulatory approvals (including approvals of the Federal Reserve Board and the Texas Department of Banking and the expiration or termination of the waiting period under the HSR Act), (4) effectiveness of the registration statement of which this proxy statement/prospectus is a part and the absence of any stop

 

8


Table of Contents

order or threat of any stop order by the SEC, (5) the absence of any order, injunction or other legal restraint preventing the completion of the merger or making the completion of the merger illegal, (6) subject to the materiality standards provided in the merger agreement, the accuracy of the representations and warranties of Hilltop and SWS, (7) performance in all material respects by each of Hilltop and SWS of its obligations under the merger agreement and (8) receipt by each of Hilltop and SWS of an opinion from its counsel as to certain tax matters. In addition, Hilltop's obligation to complete the merger is further conditioned on the fact that there shall not be any regulatory changes, in connection with the grant of a requisite regulatory approval, which impose or would result in the imposition of a materially burdensome regulatory condition.

        We cannot be certain when, or if, the conditions to the merger will be satisfied or waived, or that the merger will be completed. For a further discussion of the conditions to the completion of the merger, see "The Merger Agreement—Conditions to Completion of the Merger."

Termination of the Merger Agreement (page 296)

        Either party may terminate the merger agreement prior to completion of the merger in the following circumstances:

        In addition, Hilltop may terminate the merger agreement in the following circumstances:

Expenses and Termination Fees (page 296)

        In general, each of Hilltop and SWS will be responsible for all expenses incurred by it in connection with the negotiation and completion of the transactions contemplated by the merger agreement.

 

9


Table of Contents

        Upon termination of the merger agreement under specified circumstances, SWS may be required to pay Hilltop a termination fee of $8 million. SWS will be required to pay the termination fee to Hilltop if:

The Rights of SWS Stockholders Will Change as a Result of the Merger (page 305)

        The rights of SWS stockholders will change as a result of the merger due to differences in Hilltop's and SWS's governing documents and states of incorporation. The rights of SWS stockholders are governed by Delaware law and by SWS's certificate of incorporation and bylaws, each as amended to date. Upon the completion of the merger, SWS stockholders will become stockholders of Hilltop and the rights of former SWS stockholders will therefore be governed by Maryland law and Hilltop's charter and bylaws as then in effect.

        See "Comparison of Stockholders' Rights" included elsewhere in this proxy statement/prospectus for a description of the material differences in stockholders rights under each of the Hilltop and SWS governing documents and under Maryland and Delaware law.

Litigation Relating to the Merger (page 283)

        Each of Hilltop, Peruna LLC, SWS and the individual members of the board of directors of SWS have been named as defendants in two purported shareholder class action lawsuits arising out of the merger. Both lawsuits were filed in Delaware Chancery Court (Joseph Arceri v. SWS Group, Inc. et al and Chaile Steinberg v. SWS Group, Inc. et al filed April 8, 2014 and April 11, 2014, respectively). On May 13, 2014, the court consolidated the actions. On June 10, 2014, plaintiffs filed a consolidated amended complaint, a copy of which is attached to this proxy statement/prospectus as Annex D. The complaint alleges claims for breach of fiduciary duty by the individual directors of SWS, and claims against Hilltop for aiding and abetting that breach of fiduciary duty. The complaint further alleges that the proxy statement/prospectus filed by Hilltop on May 29, 2014 omits or misstates certain material information. Plaintiffs seek, among other things, to enjoin the merger. Hilltop and SWS believe that the claims are without merit and each intends to vigorously defend against these actions.

 

10


Table of Contents

 

SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA FOR HILLTOP

        Set forth below is certain consolidated financial data of Hilltop as of and for the years ended December 31, 2009 through December 31, 2013 and as of and for the six months ended June 30, 2014 and 2013. The results of operations for the six months ended June 30, 2014 and 2013 are not necessarily indicative of the results of operations for the full year or any other interim period. Hilltop management prepared the unaudited consolidated information as of and for the three months ended June 30, 2014 and 2013 on the same basis as it prepared Hilltop's audited consolidated financial statements as of and for the year ended December 31, 2013. In the opinion of Hilltop management, this information reflects all adjustments, consisting of only normal recurring adjustments, necessary for a fair statement of this data for those dates. You should read Hilltop's selected historical financial data, together with the notes thereto, in conjunction with the more detailed information contained in Hilltop's consolidated financial statements and related notes and "Information About the Companies—Hilltop—Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this proxy statement/prospectus. Hilltop's operating results for 2012 include the results from the operations acquired in Hilltop's acquisition of PlainsCapital Corporation for the month of December 2012 and the operations acquired in Hilltop's acquisition of First National bank are included

 

11


Table of Contents

in Hilltop's operating results beginning September 14, 2013 (dollars in thousands, except per share data and weighted average shares outstanding).

 
  Six Months Ended June 30,   Year Ended December 31,  
 
  2014   2013   2013   2012   2011   2010   2009  
 
  (Unaudited)
   
   
   
   
   
 

Statement of Operations Data:

                                           

Total interest income

  $ 196,236   $ 150,772   $ 329,075   $ 39,038   $ 11,049   $ 8,154   $ 6,866  

Total interest expense

    12,369     15,086     32,874     10,196     8,985     8,971     9,668  
                               

Net interest income (loss)

    183,867     135,686     296,201     28,842     2,064     (817 )   (2,802 )

Provision for loan losses

    8,775     24,294     37,158     3,800              
                               

Net interest income (loss) after provision for loan losses

    175,092     111,392     259,043     25,042     2,064     (817 )   (2,802 )

Total noninterest income

    373,381     452,511     850,085     224,232     141,650     124,073     122,377  

Total noninterest expense

    463,841     475,391     911,735     255,517     155,254     124,811     123,036  
                               

Income (loss) before income taxes

    84,632     88,512     197,393     (6,243 )   (11,540 )   (1,555 )   (3,461 )

Income tax expense (benefit)

    30,648     32,479     70,684     (1,145 )   (5,009 )   (1,007 )   (1,349 )
                               

Net income (loss)

    53,984     56,033     126,709     (5,098 )   (6,531 )   (548 )   (2,112 )

Less: Net income attributable to noncontrolling interest

    287     868     1,367     494              
                               

Income (loss) attributable to Hilltop

    53,697     55,165     125,342     (5,592 )   (6,531 )   (548 )   (2,112 )

Dividends on preferred stock and other(1)

    2,852     1,852     4,327     259         12,939     10,313  
                               

Income (loss) applicable to Hilltop common stockholders

  $ 50,845   $ 53,313   $ 121,015   $ (5,851 ) $ (6,531 ) $ (13,487 ) $ (12,425 )
                               
                               

Per Share Data:

                                           

Net income (loss)—basic

  $ 0.56   $ 0.64   $ 1.43   $ (0.10 ) $ (0.12 ) $ (0.24 ) $ (0.22 )

Weighted average shares outstanding—basic

    89,708     83,489     84,382     58,754     56,499     56,492     56,474  

Net income (loss)—diluted

  $ 0.56   $ 0.61   $ 1.40   $ (0.10 ) $ (0.12 ) $ (0.24 ) $ (0.22 )

Weighted average shares outstanding—diluted

    90,576     90,125     90,331     58,754     56,499     56,492     56,474  

Book value per common share

  $ 14.22   $ 12.59   $ 13.27   $ 12.34   $ 11.60   $ 11.56   $ 11.77  

Tangible book value per common share

  $ 10.70   $ 8.73   $ 9.70   $ 8.37   $ 11.01   $ 10.95   $ 11.13  

Balance Sheet Data:

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

Total assets

  $ 9,396,448   $ 7,402,803   $ 8,904,122   $ 7,286,865   $ 925,425   $ 939,641   $ 1,040,752  

Cash and due from banks

    673,972     596,351     713,099     722,039     578,520     649,439     790,013  

Securities

    1,328,716     1,106,379     1,261,989     1,081,066     224,200     148,965     129,968  

Loans held for sale

    1,410,873     1,412,960     1,089,039     1,401,507              

Non-covered loans, net of unearned income

    3,714,837     3,253,001     3,514,646     3,152,396              

Covered loans

    845,013         1,006,369                  

Allowance for loan losses

    (40,546 )   (26,237 )   (34,302 )   (3,409 )            

Goodwill and other intangible assets, net

    317,113     324,153     322,729     331,508     33,062     34,587     36,229  

Total deposits

    6,155,310     4,496,469     6,722,918     4,700,461              

Notes payable

    55,584     139,938     56,327     141,539     131,450     138,350     138,350  

Junior subordinated debentures

    67,012     67,012     67,012     67,012              

Total stockholders' equity

    1,397,162     1,171,800     1,311,922     1,146,550     655,383     653,055     783,777  

Performance Ratios(2):

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

Return on average stockholders' equity

    7.82 %   9.46 %   10.48 %   -0.62 %                  

Return on average assets

    1.19 %   1.58 %   1.66 %   -0.08 %                  

Net interest margin (taxable equivalent)(3)

    4.90 %   4.34 %   4.47 %   4.64 %                  

Efficiency ratio(4)(5)(6)

    59.56 %   39.03 %   42.58 %   NM                    

Asset Quality Ratios(2):

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

Total nonperforming assets to total loans and other real estate(5)

    3.97 %   0.98 %   3.70 %   NM                    

Allowance for loan losses to nonperforming loans(5)

    105.16 %   111.49 %   136.39 %   NM                    

Allowance for loan losses to total loans(5)

    0.89 %   0.81 %   0.76 %   NM                    

Net charge-offs to average loans outstanding(5)

    0.11 %   0.09 %   0.18 %   NM                    

Capital Ratios:

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

Equity to assets ratio

    14.86 %   15.82 %   14.73 %   15.71 %   70.82 %   69.50 %   75.31 %

Tangible common equity to tangible assets

    10.63 %   10.35 %   10.19 %   10.05 %   69.74 %   68.33 %   62.56 %

Regulatory Capital Ratios(2):

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

Hilltop—Leverage ratio(7)

    13.51 %   13.66 %   12.81 %   13.08 %                  

Hilltop—Tier 1 risk-based capital ratio

    18.11 %   18.35 %   18.53 %   17.72 %                  

Hilltop—Total risk-based capital ratio

    18.79 %   18.90 %   19.13 %   17.81 %                  

Bank—Leverage ratio(7)

    9.97 %   9.74 %   9.29 %   8.84 %                  

Bank—Tier 1 risk-based capital ratio

    13.22 %   12.77 %   13.38 %   11.83 %                  

Bank—Total risk-based capital ratio

    13.90 %   13.35 %   14.00 %   11.93 %                  

Other Data(8):

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

Net loss and LAE ratio

    66.1 %   91.2 %   70.3 %   74.4 %   72.2 %   60.5 %   61.0 %

Expense ratio

    31.8 %   32.8 %   32.3 %   34.4 %   34.0 %   36.0 %   35.7 %

GAAP combined ratio

    97.9 %   124.0 %   102.6 %   108.8 %   106.2 %   96.5 %   96.8 %

Statutory surplus(9)

  $ 128,483   $ 109,793   $ 125,054   $ 120,319   $ 118,708   $ 119,297   $ 117,063  

Statutory premiums to surplus ratio

    135.7 %   152.8 %   130.7 %   125.0 %   119.4 %   102.0 %   98.0 %

(1)
Series A preferred stock was redeemed in September 2010.

(2)
Noted measures are typically used for measuring the performance of banking and financial institutions. Our operations prior to the PlainsCapital Merger are limited to our insurance operations. Therefore, noted measures for periods prior to 2012 are not a useful measure and have been excluded.

 

12


Table of Contents

(3)
Taxable equivalent net interest income divided by average interest-earning assets. Our operations prior to the PlainsCapital Merger are limited to our insurance operations. Therefore, noted measure for 2012 reflects the ratio for the month ended December 31, 2012.

(4)
Noninterest expenses divided by the sum of total noninterest income and net interest income for the year.

(5)
Noted measures are typically used for measuring the performance of banking and financial institutions. Our operations prior to the PlainsCapital Merger are limited to our insurance operations. Additionally, noted measure is not meaningful ("NM") in 2012.

(6)
Only considers operations of banking segment.

(7)
Ratio for 2012 was calculated using the average assets for the month of December.

(8)
Only considers operations of insurance segment.

(9)
Statutory surplus includes combined surplus of NLIC and ASIC.


Hilltop Non-GAAP to GAAP Reconciliation and Management's Explanation of Non-GAAP Financial Measures

        Hilltop presents two measures in its selected financial data that are not measures of financial performance recognized by GAAP.

        "Tangible book value per common share" is defined as total stockholders' equity, excluding preferred stock, reduced by goodwill and other intangible assets, divided by total common shares outstanding. "Tangible common stockholders' equity to tangible assets" is defined as 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 Hilltop 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 this disclosure is not necessarily comparable to that of other companies that use non-GAAP measures. The following table reconciles these Hilltop non-GAAP financial measures to the most comparable GAAP financial measures, "book value per common share" and "Hilltop stockholders' equity to total assets" (dollars in thousands, except per share data).

 
  June 30,   December 31,  
 
  2014   2013   2013   2012   2011   2010   2009  

Book value per common share

  $ 14.22   $ 12.59   $ 13.27   $ 12.34   $ 11.60   $ 11.56   $ 11.77  

Effect of goodwill and intangible assets per share

  $ (3.52 ) $ (3.86 ) $ (3.57 ) $ (3.97 ) $ (0.59 ) $ (0.61 ) $ (0.64 )

Tangible book value per common share

  $ 10.70   $ 8.73   $ 9.70   $ 8.37   $ 11.01   $ 10.95   $ 11.13  

Hilltop stockholders' equity

 
$

1,396,442
 
$

1,170,895
 
$

1,311,141
 
$

1,144,496
 
$

655,383
 
$

653,055
 
$

783,777
 

Less: preferred stock

    114,068     114,068     114,068     114,068             119,108  

Less: goodwill and intangible assets, net

    317,113     324,153     322,729     331,508     33,062     34,587     36,229  
                               

Tangible common equity

    965,261     732,674     874,344     698,920     622,321     618,468     628,440  

Total assets

   
9,396,448
   
7,402,803
   
8,904,122
   
7,286,865
   
925,425
   
939,641
   
1,040,752
 

Less: goodwill and intangible assets, net

    317,113     324,153     322,729     331,508     33,062     34,587     36,229  
                               

Tangible assets

    9,079,335     7,078,650     8,581,393     6,955,357     892,363     905,054     1,004,523  

Equity to assets

   
14.86

%
 
15.82

%
 
14.73

%
 
15.71

%
 
70.82

%
 
69.50

%
 
75.31

%

Tangible common equity to tangible assets

    10.63 %   10.35 %   10.19 %   10.05 %   69.74 %   68.33 %   62.56 %

 

13


Table of Contents


SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA FOR SWS

        The following table sets forth the selected historical consolidated financial data for SWS. The selected consolidated financial data as of and for the fiscal years ended June 30, 2014, June 30, 2013, June 29, 2012, June 24, 2011 and June 25, 2010 have been derived from the audited financial statements of SWS for the fiscal years 2010-2014. You should not assume the historical results for any past periods indicate results for any future period.

        You should read this selected consolidated financial data in conjunction with the audited consolidated financial statements and related notes thereto included in SWS's Annual Report on Form 10-K for the fiscal year ended June 30, 2014. Please see the section of this proxy statement/prospectus entitled "Where You Can Find More Information."

 
  Fiscal Year Ended  
 
  June 30,
2014
  June 30,
2013
  June 29,
2012
  June 24,
2011
  June 25,
2010
 
 
  (In thousands, except ratios and per share amounts)
 

Consolidated Operating Results:

                               

Total revenue

  $ 311,288   $ 318,114   $ 353,741   $ 389,819   $ 422,227  

Net revenue(1)

    266,362     271,653     293,423     342,064     366,971  

Net loss

    (7,078 )   (33,445 )   (4,729 )   (23,203 )   (2,893 )

Loss per share—basic(2)

  $ (0.21 ) $ (1.02 ) $ (0.14 ) $ (0.71 ) $ (0.10 )

Loss per share—diluted(2)

  $ (0.21 ) $ (1.02 ) $ (0.14 ) $ (0.71 ) $ (0.10 )

Weighted average shares outstanding—basic(2)

    32,997     32,870     32,650     32,515     30,253  

Weighted average shares outstanding—diluted(2)

    32,997     32,870     32,650     32,515     30,253  

Cash dividends declared per common share

  $   $   $   $ 0.12   $ 0.36  

Consolidated Financial Condition:

   
 
   
 
   
 
   
 
   
 
 

Total assets

  $ 4,075,906   $ 3,780,373   $ 3,546,843   $ 3,802,157   $ 4,530,691  

Long-term debt(3)

    163,348     165,181     138,450     86,247     99,107  

Stockholders' equity

    309,872     315,286     355,702     357,469     383,394  

Shares outstanding

    32,757     32,629     32,576     32,285     32,342  

Book value per common share

  $ 9.46   $ 9.66   $ 10.92   $ 11.07   $ 11.85  

Bank Performance Ratios:

   
 
   
 
   
 
   
 
   
 
 

Return on assets

    0.4 %   0.5 %   0.2 %   (2.1 )%   (0.8 )%

Return on equity

    3.0 %   3.5 %   1.5 %   (21.4 )%   (9.1 )%

Equity to assets ratio

    13.8 %   13.1 %   12.0 %   9.7 %   9.2 %

(1)
Net revenue is equal to total revenues less interest expense.

(2)
Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (paid or unpaid) are treated as participating securities and are factored into the calculation of earnings per share ("EPS"), except in periods with a net loss, when they are excluded.

(3)
Includes FHLB advances with maturities in excess of one year. For fiscal years 2014, 2013 and 2012, includes the $100.0 million Credit Agreement with Hilltop and Oak Hill net of a $12.2 million, $16.9 million and $20.9 million discount at June 30, 2014, June 30, 2013 and June 29, 2012, respectively.

 

14


Table of Contents

HILLTOP HOLDINGS INC. UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION

        The following unaudited pro forma condensed combined financial statements show the impact on the separate historical financial statements of Hilltop and SWS after giving effect to the merger and the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements. The following unaudited pro forma condensed combined statements of income and accompanying notes exclude the impact on Hilltop's historical statements of income of the assumption of substantially all of the liabilities, including all of the deposits, and acquisition of substantially all of the assets by PlainsCapital Bank (the "Bank"), a wholly owned subsidiary of Hilltop, of Edinburg, Texas-based First National Bank ("FNB") from the Federal Deposit Insurance Corporation (the "FDIC"), as receiver, on September 13, 2013 (the "FNB Transaction"). Pursuant to the Purchase and Assumption Agreement (the "P&A Agreement"), the Bank and the FDIC entered into loss-share agreements whereby the FDIC agreed to share in the losses of certain covered loans and covered other real estate owned that the Bank acquired. Due to the nature and magnitude of the FNB Transaction, coupled with the federal assistance and protection resulting from the FDIC loss-share agreements, historical financial information of FNB is not relevant to future operations. Hilltop has omitted certain historical financial information and the related pro forma financial information of FNB pursuant to the guidance provided in Staff Accounting Bulletin Topic 1.K, Financial Statements of Acquired Troubled Financial Institutions ("SAB 1:K"), and a request for relief granted by the SEC. SAB 1:K provides relief from the requirements of Rule 3-05 of Regulation S-X in certain instances, such as the FNB Transaction, where a registrant engages in an acquisition of a significant amount of assets of a troubled financial institution for which audited financial statements are not reasonably available and in which federal assistance is so persuasive as to substantially reduce the relevance of such information to an assessment of future operations.

        The unaudited pro forma condensed combined balance sheet of Hilltop combines the historical balance sheets of Hilltop and SWS as of June 30, 2014 as if the merger of SWS with and into Hilltop's wholly owned subsidiary, Peruna LLC (the "SWS Merger") had occurred on June 30, 2014. The unaudited pro forma condensed combined statements of income for the year ended December 31, 2013 and the six months ended June 30, 2014 are presented as if the SWS Merger had occurred on January 1, 2013. Hilltop and SWS have different fiscal year-ends. Therefore, the unaudited pro forma condensed combined statement of income for the year ended December 31, 2013 combines the audited results of Hilltop for the year ended December 31, 2013 with the unaudited results of SWS for the six months ended June 30, 2013 and the six months ended December 31, 2013. The historical consolidated financial information has been adjusted to reflect factually supportable items that are directly attributable to the SWS Merger, and with respect to the statements of income only, expected to have a continuing impact on consolidated results of operations.

        The unaudited pro forma condensed combined financial information has been prepared using the acquisition method of accounting for business combinations under accounting principles generally accepted in the United States. Hilltop is the acquirer for accounting purposes. Hilltop has not had sufficient time to completely evaluate the significant assets and liabilities to be acquired in the SWS Merger. Accordingly, the unaudited pro forma adjustments related to SWS, including the allocations of the purchase price, are preliminary and have been made solely for the purpose of providing unaudited pro forma combined financial information.

        A final determination of the merger consideration and fair values of SWS's assets and liabilities, which cannot be made prior to the completion of the merger, will be based on the actual tangible and intangible assets and liabilities of SWS that exist as of the date of completion of the transaction. Consequently, amounts preliminarily allocated to bargain purchase gain and identifiable intangibles could change significantly from those allocations used in the unaudited pro forma condensed combined

 

15


Table of Contents

financial statements presented below and could result in a material change in amortization of acquired intangible assets.

        In connection with the plan to integrate the operations of Hilltop and SWS following the completion of the SWS Merger, Hilltop anticipates that nonrecurring charges, such as costs associated with systems implementation, employee retention and severance agreements, and other costs related to exit or disposal activities, could be incurred. Hilltop is not able to determine the timing, nature, and amount of these charges as of the date of this proxy statement/prospectus. However, these charges could affect the results of operations of Hilltop and SWS, as well as those of the combined company as a result of the transaction, in the period in which they are recorded. Therefore, the unaudited pro forma condensed combined financial statements do not include the effects of the costs associated with any restructuring or integration activities resulting from the transactions, as they are nonrecurring in nature and not factually supportable at the time that the unaudited pro forma condensed combined financial statements were prepared. We estimate transaction-related expenses aggregating approximately $21.0 million will be incurred by Hilltop and SWS as a part of the SWS Merger for employees, advisors, counsel and other third-parties. These transaction-related expenses are not included in the unaudited pro forma condensed combined statements of income.

        Pursuant to the Funding Agreement, SWS entered into a $50.0 million unsecured loan with Oak Hill and warrants to purchase up to 8,695,652 shares of SWS common stock. The unaudited pro forma condensed combined financial statements include the effects of Oak Hill exercising its warrants prior to the closing of the SWS Merger, the effect of which is provided for in the Oak Hill Letter Agreement. The Credit Agreement governing the unsecured loan provides that upon prepayment of the unsecured loan, Oak Hill is entitled to a make-whole interest payment equal to the present value of all required interest payments due on the loan from the date the loan is repaid through its maturity date. Therefore, the unaudited pro forma condensed combined balance sheet includes the effects of an estimated make-whole interest payment by SWS of $8.0 million to Oak Hill prior to the closing of the SWS Merger. This make-whole interest payment has been excluded from the unaudited pro forma condensed combined statements of income, as it represents a nonrecurring item that does not have a continuing impact on results of operations.

        The actual amounts recorded as of the completion of the SWS Merger may differ materially from the information presented in these unaudited pro forma condensed combined financial statements as a result of:

        The unaudited pro forma condensed combined financial statements are provided for informational purposes only. The unaudited pro forma condensed combined financial statements are not necessarily, and should not be assumed to be, an indication of the results that would have been achieved had the transaction been completed as of the dates indicated or that may be achieved in the future. The preparation of the unaudited pro forma condensed combined financial statements and related

 

16


Table of Contents

adjustments require management to make certain assumptions and estimates. The unaudited pro forma condensed combined financial statements should be read together with:

 

17


Table of Contents


HILLTOP HOLDINGS INC. UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET AS OF JUNE 30, 2014

 
  Historical    
   
   
 
  Pro Forma
Adjustments
  Pro Forma
Combined
   
 
  Hilltop   SWS   Notes
 
  (in thousands)
   

Assets:

                           

Cash and due from banks

  $ 673,972   $ 99,620   $ (94,159 ) $ 679,433   A

Federal funds sold and securities purchased under agreements to resell

    14,813     72,582         87,395    

Assets segregated for regulatory purposes

        190,240         190,240    

Securities:

                           

Trading

    61,663     235,625         297,288    

Available for sale

    1,201,778     494,848     (74,559 )   1,622,067   B

Held to maturity

    65,275     12,549     403     78,227   C
                     

Total securities

    1,328,716     743,022     (74,156 )   1,997,582    

Loans held for sale

    1,410,873             1,410,873    

Non-covered loans, net of unearned income and allowance for non-covered loan losses

    3,678,406     867,935     (19,466 )   4,526,875   D

Covered loans, net

    840,898             840,898    

Broker-dealer and clearing organization receivables

    190,764     1,992,941         2,183,705    

Insurance premiums receivable

    27,957             27,957    

Deferred policy acquisition costs

    22,027             22,027    

Premises and equipment, net

    201,545     15,864     (3,000 )   214,409   E

FDIC indemnification asset

    175,114             175,114    

Covered other real estate owned

    142,174             142,174    

Mortgage servicing rights

    35,877             35,877    

Other assets

    336,199     86,150     5,681     428,030   F

Goodwill

    251,808     7,552     (7,552 )   251,808   G

Other intangible assets, net

    65,305         10,000     75,305   H
                     

Total assets

  $ 9,396,448   $ 4,075,906   $ (182,652 ) $ 13,289,702    
                     
                     

Liabilities:

                           

Deposits

  $ 6,155,310   $ 1,354,633   $ (4,931 ) $ 7,505,012   I

Broker-dealer and clearing organization payables

    227,891     1,913,976         2,141,867    

Reserve for losses and loss adjustment expenses

    35,146             35,146    

Unearned insurance premiums

    94,611             94,611    

Short-term borrowings

    437,193     98,343         535,536    

Advances from Federal Home Loan Bank

    750,000     77,130     1,761     828,891   J

Notes payable

    55,584     87,769     (87,769 )   55,584   K

Junior subordinated debentures

    67,012             67,012    

Stock purchase warrants

        27,796     (27,796 )     L

Other liabilities

    176,539     206,387     4,700     387,626   M
                     

Total liabilities

    7,999,286     3,766,034     (114,035 )   11,651,285    
                     

Stockholders' Equity:

                           

Preferred stock

    114,068             114,068    

Common stock

    902     3,331     (3,230 )   1,003   N

Additional paid-in capital

    1,387,883     324,480     (110,816 )   1,601,547   O

Accumulated other comprehensive loss

    (2,501 )   (4,519 )   (2,576 )   (9,596 ) P

Accumulated deficit

    (103,910 )   (10,439 )   45,024     (69,325 ) Q

Deferred compensation, net

        3,189     (3,189 )     R

Treasury stock

        (6,170 )   6,170       S
                     

Total stockholders' equity before noncontrolling interest

    1,396,442     309,872     (68,617 )   1,637,697    

Noncontrolling interest

    720             720    
                     

Total stockholders' equity

    1,397,162     309,872     (68,617 )   1,638,417    
                     

Total liabilities and stockholders' equity

  $ 9,396,448   $ 4,075,906   $ (182,652 ) $ 13,289,702    
                     
                     

 

   

See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements

18


Table of Contents


HILLTOP HOLDINGS INC. UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2014

 
  Historical    
   
   
 
  Pro Forma
Adjustments
  Pro Forma
Combined
   
 
  Hilltop   SWS   Notes
 
  (in thousands, except per share data)
   

Interest income:

                           

Loans, including fees

  $ 171,948   $ 12,974   $ 1,364   $ 186,286   T

Investment and other interest income           

    24,288     30,865     (3,247 )   51,906   U
                     

Total interest income

    196,236     43,839     (1,883 )   238,192    

Interest expense:

   
 
   
 
   
 
   
 
 

 

Deposits

    6,855     223         7,078    

Short-term borrowings

    934     1,109         2,043    

Notes payable

    1,280     6,665     (6,665 )   1,280   V

Junior subordinated debentures

    1,171             1,171    

Other

    2,129     14,432         16,561    
                     

Total interest expense

    12,369     22,429     (6,665 )   28,133    

Net interest income

   
183,867
   
21,410
   
4,782
   
210,059
   

Provision for (recapture of) loan losses

    8,775     (2,070 )       6,705    
                     

Net interest income after provision for (recapture of) loan losses

    175,092     23,480     4,782     203,354    

Noninterest income:

   
 
   
 
   
 
   
 
 

 

Net gains from sale of loans and other mortgage production income

    185,165             185,165    

Mortgage loan origination fees

    29,327             29,327    

Net insurance premiums earned

    81,096             81,096    

Investment and securities advisory fees and commissions

    43,599     82,178         125,777    

Other

    34,194     25,293         59,487    
                     

Total noninterest income

    373,381     107,471         480,852    

Noninterest expense:

   
 
   
 
   
 
   
 
 

 

Employees' compensation and benefits

    230,874     95,141         326,015    

Loss and loss adjustment expenses

    53,612             53,612    

Policy acquisition and other underwriting expenses

    23,339             23,339    

Occupancy & equipment

    52,100     15,133     (300 )   66,933   Y

Other

    103,916     28,211     (2,704 )   129,423   Z
                     

Total noninterest expense

    463,841     138,485     (3,004 )   599,322    

Income (loss) before income taxes

   
84,632
   
(7,534

)
 
7,786
   
84,884
   

Income tax expense

    30,648     1,527     2,725     34,900   AA
                     

Net income (loss)

    53,984     (9,061 )   5,061     49,984    

Less: Net income attributable to noncontrolling interest

    287             287    

Less: Dividends on preferred stock

    2,852             2,852    
                     

Income (loss) applicable to common stockholders

  $ 50,845   $ (9,061 ) $ 5,061   $ 46,845    
                     
                     

Earnings (loss) per common share:

                           

Basic

  $ 0.56   $ (0.28 )       $ 0.47    

Diluted

  $ 0.56   $ (0.28 )       $ 0.47    

Weighted average share information:

   
 
   
 
   
 
   
 
 

 

Basic

    89,708     32,912     (22,857 )   99,763    

Diluted

    90,576     32,912     (22,857 )   100,631    

   

See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements

 

19


Table of Contents


HILLTOP HOLDINGS INC. UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2013

 
  Historical    
   
   
 
  Pro Forma
Adjustments
  Pro Forma
Combined
   
 
  Hilltop   SWS   Notes
 
  (in thousands, except per share data)
   

Interest income:

                           

Loans, including fees

  $ 284,782   $ 30,298   $ 3,234   $ 318,314   T

Investment and other interest income

    44,293     60,384     (6,263 )   98,414   U
                     

Total interest income

    329,075     90,682     (3,029 )   416,728    

Interest expense:

   
 
   
 
   
 
   
 
 

 

Deposits

    14,877     569         15,446    

Short-term borrowings

    1,814     2,605         4,419    

Notes payable

    10,512     12,827     (12,827 )   10,512   V

Junior subordinated debentures

    2,409             2,409    

Other

    3,262     30,930         34,192    
                     

Total interest expense

    32,874     46,931     (12,827 )   66,978    

Net interest income

   
296,201
   
43,751
   
9,798
   
349,750
   

Provision for (recapture of) loan losses

    37,158     (9,559 )       27,599    
                     

Net interest income after provision for (recapture of) loan losses

    259,043     53,310     9,798     322,151    

Noninterest income:

   
 
   
 
   
 
   
 
 

 

Net realized gains on securities

    4,937             4,937    

Net gains from sale of loans and other mortgage production income

    457,531             457,531    

Mortgage loan origination fees

    79,736             79,736    

Net insurance premiums earned

    157,533             157,533    

Investment and securities advisory fees and commissions

    93,093     175,639     (2,259 )   266,473   W

Bargain purchase gain

    12,585             12,585    

Other

    44,670     40,290         84,960    
                     

Total noninterest income

    850,085     215,929     (2,259 )   1,063,755    

Noninterest expense:

   
 
   
 
   
 
   
 
 

 

Employees' compensation and benefits

    480,496     202,314     (1,627 )   681,183   X

Loss and loss adjustment expenses

    110,755             110,755    

Policy acquisition and other underwriting expenses

    46,289             46,289    

Occupancy & equipment

    86,248     31,499     (727 )   117,020   Y

Other

    187,947     47,270     1,331     236,548   Z
                     

Total noninterest expense

    911,735     281,083     (1,023 )   1,191,795    

Income (loss) before income taxes

   
197,393
   
(11,844

)
 
8,562
   
194,111
   

Income tax expense

    70,684     24,343     (10,460 )   84,567   AA
                     

Net income (loss)

    126,709     (36,187 )   19,022     109,544    

Less: Net income attributable to noncontrolling interest

    1,367             1,367    

Less: Dividends on preferred stock

    4,327             4,327    
                     

Income (loss) applicable to common stockholders

  $ 121,015   $ (36,187 ) $ 19,022   $ 103,850    
                     
                     

Earnings (loss) per common share:

                           

Basic

  $ 1.43   $ (1.10 )       $ 1.09    

Diluted

  $ 1.40   $ (1.10 )       $ 1.08    

Weighted average share information:

   
 
   
 
   
 
   
 
 

 

Basic

    84,382     33,023     (22,968 )   94,437    

Diluted

    90,331     33,023     (22,968 )   100,386    

   

See accompanying Notes to Unaudited Pro Forma Condensed Combined Financial Statements

 

20


Table of Contents


NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

1. Basis of Pro Forma Presentation

        The unaudited pro forma condensed combined balance sheet as of June 30, 2014 and the unaudited pro forma condensed combined statements of income for the six months ended June 30, 2014 and the year ended December 31, 2013 are based on the historical financial statements of Hilltop Holdings Inc. ("Hilltop") and SWS Group, Inc. ("SWS") after giving effect to the completion of the merger and the assumptions and adjustments described in the accompanying notes. Hilltop and SWS have different fiscal year-ends. Therefore, the unaudited pro forma condensed combined statement of income for the year ended December 31, 2013 combines the audited results of Hilltop for the year ended December 31, 2013 with the unaudited results of SWS for the six months ended June 30, 2013 and the six months ended December 31, 2013. The unaudited pro forma condensed combined financial statements do not reflect cost savings or operating synergies expected to result from the transactions, or the costs to achieve these cost savings or operating synergies, or any anticipated disposition of assets that may result from the integration of the operations of the two companies. The unaudited pro forma condensed combined statements of income do not give effect to the recent acquisition of First National Bank ("FNB") from the Federal Deposit Insurance Corporation (the "FDIC"), as receiver, as further described below.

        On September 13, 2013 (the "Bank Closing Date"), PlainsCapital Bank (the "Bank"), a wholly owned subsidiary of Hilltop, 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 FNB branches acquired from the FDIC under the "PlainsCapital Bank" name (the "FNB Transaction"). Pursuant to the Purchase and Assumption Agreement (the "P&A Agreement"), the Bank and the FDIC entered into loss-share agreements whereby the FDIC agreed to share in the losses of certain covered loans and covered other real estate owned ("OREO") that the Bank acquired. The fair market value of the assets acquired was $2.2 billion, including $1.1 billion in covered loans, $286.2 million in securities, $121.0 million in covered OREO and $45.9 million in non-covered loans. The Bank also assumed $2.2 billion in liabilities, consisting primarily of deposits. Due to the nature and magnitude of the FNB Transaction, coupled with the federal assistance and protection resulting from the FDIC loss-share agreements, historical financial information of FNB is not relevant to future operations. Hilltop has omitted certain historical financial information and the related pro forma financial information of FNB pursuant to the guidance provided in Staff Accounting Bulletin Topic 1.K, Financial Statements of Acquired Troubled Financial Institutions ("SAB 1:K"), and a request for relief granted by the SEC. SAB 1:K provides relief from the requirements of Rule 3-05 of Regulation S-X in certain instances, such as the FNB Transaction, where a registrant engages in an acquisition of a significant amount of assets of a troubled financial institution for which audited financial statements are not reasonably available and in which federal assistance is so persuasive as to substantially reduce the relevance of such information to an assessment of future operations.

        The SWS Merger will be accounted for under the acquisition method of accounting. In business combination transactions in which the consideration given is not in the form of cash (that is, in the form of non-cash assets, liabilities incurred, or equity interests issued), measurement of the merger consideration is based on the fair value of the consideration given or the fair value of the asset (or net assets) acquired, whichever is more clearly evident and, thus, more reliably measurable.

        All of the assets acquired and liabilities assumed in a business combination are recognized at their acquisition-date fair value, while transaction costs and restructuring costs associated with the business combination are expensed as incurred. The bargain purchase gain represents the excess of the preliminary estimated fair value of the underlying net tangible assets and intangible assets over the preliminary estimated merger consideration. Changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally affect income tax expense. Subsequent to

 

21


Table of Contents

the completion of the SWS Merger, Hilltop and SWS will finalize an integration plan, which may affect how the assets acquired, including intangible assets, will be utilized by the combined company. For those assets in the combined company that will be phased out or will no longer be used, additional amortization, depreciation and possibly impairment charges will be recorded after management completes the integration plan.

        The unaudited pro forma information is presented solely for informational purposes and is not necessarily indicative of the combined results of operations or financial position that might have been achieved for the periods or dates indicated, nor is it necessarily indicative of the future results of the combined company.


2. Preliminary Estimated Merger Consideration

        On March 31, 2014, Hilltop entered into a definitive merger agreement with SWS providing for the merger of SWS with and into Peruna LLC, a wholly owned subsidiary of Hilltop. The merger agreement provides for SWS common stockholders, excluding Hilltop, to receive a total of 10.1 million shares of Hilltop common stock and $78.2 million in cash for SWS common stock. The value of the per share purchase consideration would be approximately $7.25 based upon the closing price of Hilltop common stock on June 30, 2014 multiplied by the exchange ratio of 0.2496x and adding the cash portion of the merger consideration of $1.94 per share (collectively, the "Merger Consideration"). The value of the Merger Consideration will fluctuate with the market price of Hilltop common stock.

        Based on SWS's shares of common stock, equity awards and stock purchase warrants outstanding as of June 30, 2014, and assuming that, as of the closing of the SWS Merger, all equity awards are vested and exercised and all stock purchase warrants are exercised, the preliminary estimated merger consideration is as follows (in thousands).

Preliminary Estimated Merger Consideration

Number of shares of SWS common stock outstanding upon closing of merger

    50,459        

Less shares held by Hilltop upon closing of merger

    (10,171 )      
             

Number of shares of SWS common stock to be acquired upon closing of merger

    40,288        

Multiplied by per share exchange ratio

    0.2496x        
             

Number of shares of Hilltop common stock—as exchanged

    10,055        

Multiplied by Hilltop common stock price on June 30, 2014

  $ 21.26        
             

Estimated fair value of Hilltop common stock issued

        $ 213,765  

Estimated cash distribution to SWS common stockholders(1)

          78,159  

Estimated fair value of Hilltop existing investment in SWS

          74,639  
             

Total Preliminary Estimated Merger Consideration

        $ 366,563  
             
             

(1)
The estimated cash distribution to SWS common stockholders equals the cash portion of the Merger Consideration of $1.94, multiplied by 40,288,000 shares of SWS common stock exchanged upon closing of the merger.


3. Preliminary Estimated Merger Consideration Allocation

        Under the acquisition method of accounting, the total merger consideration is allocated to the acquired tangible and intangible assets and assumed liabilities of SWS based on their estimated fair values as of the closing of the SWS Merger. If the fair value of net assets purchased exceeds the merger consideration given, a "bargain purchase gain" is recognized. If the merger consideration given exceeds the fair value of the net assets received, goodwill is recognized.

 

22


Table of Contents

        The allocation of the estimated merger consideration is preliminary because the proposed merger has not yet been completed. The preliminary allocation is based on estimates, assumptions, valuations, and other studies which have not progressed to a stage where there is sufficient information to make a definitive allocation. Accordingly, the merger consideration allocation and unaudited pro forma adjustments will remain preliminary until Hilltop management determines the final merger consideration and the fair values of assets acquired and liabilities assumed. The final determination of the merger consideration allocation is anticipated to be completed as soon as practicable after the completion of the merger and will be based on the price of Hilltop's common stock immediately prior to the effective time of the SWS Merger. The final amounts allocated to assets acquired and liabilities assumed could differ significantly from the amounts presented in the unaudited pro forma condensed combined financial statements.

        The total preliminary estimated merger consideration as shown in the table above is allocated to SWS's tangible and intangible assets and liabilities as of June 30, 2014 based on their preliminary estimated fair values as follows (in thousands).

Preliminary Estimated Merger Consideration Allocation

Cash and due from banks

  $ 87,620  

Federal funds sold and securities purchased under agreements to resell

    72,582  

Assets segregated for regulatory purposes

    190,240  

Securities

    743,425  

Non-covered loans, net

    848,469  

Broker-dealer and clearing organization receivables

    1,992,941  

Premises and equipment, net

    12,864  

Other assets

    91,159  

Deposits

    (1,349,702 )

Broker-dealer and clearing organization payables

    (1,913,976 )

Short-term borrowings

    (98,343 )

Advances from Federal Home Loan Bank

    (78,891 )

Other liabilities

    (211,087 )

Intangible assets

    10,000  

Bargain purchase gain

    (30,738 )
       

Preliminary Estimated Merger Consideration

  $ 366,563  

Less Hilltop existing investment in SWS

    (74,639 )
       

Preliminary Estimated Merger Consideration, excluding Hilltop existing investment in SWS

  $ 291,924  
       
       

        Approximately $10.0 million has been preliminarily allocated to amortizable intangible assets acquired. The amortization related to the preliminary fair value of net amortizable intangible assets is reflected as a pro forma adjustment to the unaudited pro forma condensed combined financial statements.

        Identifiable intangible assets.    The preliminary fair values of intangible assets were determined based on the provisions of ASC 805, which defines fair value in accordance with ASC Topic 820, Fair Value Measurements and Disclosures ("ASC 820"). ASC 820 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 at the measurement date. Intangible assets were identified that met either the separability

 

23


Table of Contents

criterion or the contractual-legal criterion described in ASC 805. The preliminary allocation to intangible assets is as follows (dollars in thousands).

 
   
  Estimated
Useful Life
(Years)
  Amortization
Method

Customer contracts and relationships

  $ 8,000     10   accelerated

Core deposit intangible

    1,000     10   accelerated

Trademarks and trade names

    1,000     20   straight-line
               

Total intangible assets

  $ 10,000          
               
               

        Bargain Purchase Gain.    The bargain purchase gain represents the excess of the preliminary estimated fair value of the underlying net tangible and intangible assets over the preliminary estimated merger consideration. The bargain purchase gain resulting from the SWS Merger is a one-time, extraordinary gain that is not expected to be repeated in future periods. As noted above, the final amounts allocated to assets and liabilities could differ significantly from the amounts presented in the unaudited pro forma condensed combined financial statements. This may cause us to revise our estimates, which could result in the recognition of additional bargain purchase gain, or the recognition of less or no bargain purchase gain, in which case we may be required to record goodwill that would be subject to an ongoing impairment analysis.


4. Preliminary Unaudited Pro Forma and Merger Accounting Adjustments

        The unaudited pro forma financial information is not necessarily indicative of what the financial position or operating results actually would have been had the SWS Merger taken place on January 1, 2013, and includes adjustments which are preliminary and may be revised. Such revisions may result in material changes. The financial position shown herein is not necessarily indicative of what the past financial position of the combined companies would have been, nor necessarily indicative of the financial position of the post-merger periods. The unaudited pro forma financial information does not give consideration to the impact of possible expense efficiencies, synergies, strategy modifications, asset dispositions, or other actions that may result from the SWS Merger.

 

24


Table of Contents

 

        The following unaudited pro forma adjustments result from accounting for the merger, including the determination of fair value of the assets, liabilities and commitments which Hilltop, as the acquirer for accounting purposes, will acquire from SWS. The descriptions related to these preliminary adjustments are as follows (in thousands).

Balance Sheet

A

 

Adjustments to cash:

       

 

To reflect cash used to purchase outstanding shares of SWS

  $ (78,159 )

 

To reflect cash used to pay estimated transaction costs

    (8,000 )

 

To reflect cash used to pay make-whole interest on note payable by SWS to Oak Hill

    (8,000 )
           

      $ (94,159 )

B

 

Adjustments to available for sale investments:

       

 

To eliminate Hilltop historical investment in SWS

  $ (74,639 )

 

To reflect purchase fair value of Hilltop investment in SWS

    80  
           

      $ (74,559 )

C

 

Adjustment to held to maturity investments:

       

 

To reflect estimated fair value at acquisition date

  $ 403  

D

 

Adjustment to non-covered loans, net:

       

 

To reflect estimated fair value at acquisition date

  $ (19,466 )

E

 

Adjustment to premises and equipment, net:

       

 

To reflect estimated fair value at acquisition date

  $ (3,000 )

F

 

Adjustments to other assets:

       

 

To reflect deferred tax asset changes resulting from pro forma adjustments

  $ 12,728  

 

To reflect current tax recoverable from estimated transaction costs

    1,400  

 

To reflect deferred tax liability arising from identified intangible assets

    (3,500 )

 

To reflect estimated fair value of other assets at acquisition date

    (4,947 )
           

      $ 5,681  

G

 

Adjustment to goodwill:

       

 

To eliminate SWS historical acquired goodwill

  $ (7,552 )

H

 

Adjustment to other intangible assets, net:

       

 

To reflect the identified intangibles associated with the SWS Merger

  $ 10,000  

I

 

Adjustment to deposits:

       

 

To reflect estimated fair value at acquisition date

  $ (4,931 )

J

 

Adjustment to advances from Federal Home Loan Bank:

       

 

To reflect estimated fair value at acquisition date

  $ 1,761  

K

 

Adjustments to notes payable:

       

 

To reflect amortization of the remaining discount on notes payable held by SWS

  $ 12,231  

 

To reflect the issuance of SWS common stock in exchange for foregiveness of SWS notes payable held by Hilltop and Oak Hill

    (100,000 )
           

      $ (87,769 )

L

 

Adjustment to stock purchase warrants:

       

 

To reflect the issuance of SWS common stock in exchange for foregiveness of SWS notes payable held by Hilltop and Oak Hill

  $ (27,796 )

 

25


Table of Contents

M

 

Adjustment to other liabilities:

       

 

To reflect estimated fair value at acquisition date

  $ 4,700  

N

 

Adjustments to common stock:

       

 

To reflect the issuance of SWS common stock in exchange for SWS notes payable and warrants held by Hilltop and Oak Hill

  $ 1,739  

 

To eliminate SWS historical common stock, including common stock issued for SWS notes payable and warrants held by Hilltop and Oak Hill

    (5,070 )

 

To reflect the issuance of Hilltop common stock to SWS stockholders

    101  
           

      $ (3,230 )

O

 

Adjustments to additional paid-in capital:

       

 

To reflect the issuance of SWS common stock in exchange for SWS notes payable and warrants held by Hilltop and Oak Hill

  $ 126,057  

 

To eliminate SWS historical additional paid-in capital, including common stock issued for SWS notes payable and warrants held by Hilltop and Oak Hill

    (450,537 )

 

To reflect the issuance of Hilltop common stock to SWS stockholders

    213,664  
           

      $ (110,816 )

P

 

Adjustments to accumulated other comprehensive loss:

       

 

To eliminate SWS historical accumulated other comprehensive loss

  $ 4,519  

 

To reflect recognition of unrealized gains on prior investment interests

    (7,095 )
           

      $ (2,576 )

Q

 

Adjustments to accumulated deficit:

       

 

To eliminate SWS historical accumulated deficit

  $ 10,439  

 

To reflect increase in estimated fair value of Hilltop historical investment in SWS at acquisition date

    52  

 

To reflect the bargain purchase gain associated with the SWS Merger

    30,738  

 

To reflect estimated transactions costs, net of tax

    (3,300 )

 

To reflect recognition of unrealized gains on prior investment interests

    7,095  
           

      $ 45,024  

R

 

Adjustment to deferred compensation, net:

       

 

To eliminate SWS historical deferred compensation, net

  $ (3,189 )

S

 

Adjustment to treasury stock:

       

 

To eliminate SWS historical treasury stock

  $ 6,170  

        Pursuant to the acquisition method of accounting, the final Merger Consideration will be based on the price of Hilltop's common stock immediately prior to the effective time of the SWS Merger. A 20% difference in per share price at the closing of the SWS Merger compared to the amount used in these unaudited pro forma condensed combined financial statements would increase or decrease total Merger Consideration and the bargain purchase gain by approximately $42 million.

 

26


Table of Contents

Statements of Income

 
   
  Six Months
Ended June 30,
2014
  Year Ended
December 31,
2013
 

T

 

Adjustment to loan interest income:

             

 

To reflect accretion of loan discounts resulting from loan fair value pro forma adjustment

  $ 1,364   $ 3,234  

U

 

Adjustments to investment and other interest income:

             

 

To reflect elimination of historical interest income from Hilltop investment in SWS

  $ (3,209 ) $ (6,166 )

 

To reflect foregone interest resulting from pro forma cash adjustments, excluding make-whole provision

    (38 )   (97 )
               

      $ (3,247 ) $ (6,263 )

V

 

Adjustment to interest expense on notes payable:

             

 

To reflect elimination of historical interest expense from Hilltop and Oak Hill notes payable in SWS

  $ (6,665 ) $ (12,827 )

W

 

Adjustment to investment and securities advisory fees and commissions:

   
 
   
 
 

 

To reflect elimination of SWS discontinued operations from its historical operating results

  $   $ (2,259 )

X

 

Adjustment to employees' compensation and benefits:

             

 

To reflect elimination of SWS discontinued operations from its historical operating results

  $   $ (1,627 )

Y

 

Adjustments to occupancy and equipment expense:

             

 

To reflect reduction in deprecation expense resulting from premises and equipment pro forma adjustment

  $ (300 ) $ (600 )

 

To reflect elimination of SWS discontinued operations from its historical operating results

        (127 )
               

      $ (300 ) $ (727 )

Z

 

Adjustments to other noninterest expense:

             

 

To reflect elimination of historical unrealized losses from Hilltop and Oak Hill warrants in SWS

  $ (3,508 ) $ (54 )

 

To reflect intangible amortization expense resulting from identified intangibles associated with the SWS Merger

    804     1,740  

 

To reflect elimination of SWS discontinued operations from its historical operating results

        (355 )
               

      $ (2,704 ) $ 1,331  

AA

 

Adjustments to income tax expense:

             

 

To reflect the income tax effect of pro forma adjustments at Hilltop's estimated combined statutory tax rate of 35%, excluding historical SWS pro forma adjustments

  $ 2,725   $ (10,460 )

        Note that the estimated transaction costs included as part of the unaudited pro forma condensed combined balance sheet as of June 30, 2014 have not been included in the above unaudited pro forma adjustments. In addition, the unaudited pro forma condensed combined statements of income exclude nonrecurring items resulting directly from the SWS Merger and that do not have a continuing impact

 

27


Table of Contents

on results of operations. These items include estimated pre-tax income aggregating approximately $11.0 million as of June 30, 2014 associated with the recognition of gains on prior investment interests in SWS by Hilltop and the recognition of the remaining unrecognized discount on Hilltop's note receivable from SWS, and estimated pre-tax expense aggregating approximately $8.0 million as of June 30, 2014 associated with the estimated make-whole interest payment by SWS to Oak Hill.


5. Unaudited Preliminary Estimated Accretion/Amortization of Certain Purchase Accounting Adjustments

        The following table sets forth an estimate of the expected effects, if not using the straight-line method, of the projected aggregate purchase accounting adjustments reflected in the unaudited pro forma condensed combined financial statements on the future income before income tax expense of Hilltop after the SWS Merger (in thousands).

 
  Accretion (Amortization)  
 
  Year 1   Year 2   Year 3   Year 4   Year 5  

Loans, including fees

  $ 3,234   $ 2,651   $ 2,258   $ 1,882   $ 1,122  

Other intangibles

    (1,690 )   (1,515 )   (1,339 )   (1,163 )   (988 )
                       

Increase in income before income tax expense

  $ 1,544   $ 1,136   $ 919   $ 719   $ 134  
                       
                       

        The actual effect of purchase accounting adjustments on the future income before income tax expense of Hilltop may differ from these estimates based on the closing date estimates of fair values and the use of different amortization methods than assumed above.


6. Earnings per Common Share

        Unaudited pro forma earnings per common share for the six months ended June 30, 2014 and for the year ended December 31, 2013 have been calculated using Hilltop's historic weighted average common shares outstanding plus the common shares issued as a part of the SWS Merger.

 

28


Table of Contents

        The following table presents the computation of basic and diluted unaudited pro forma earnings per common share (in thousands, except per share data).

 
  Three Months
Ended
March 31,
2014
  Year Ended
December 31,
2013
 

Basic earnings per share:

             

Pro forma combined net income

  $ 46,845   $ 103,850  

Less: income applicable to participating shares

    (220 )   (515 )
           

Pro forma combined net earnings available to Hilltop common stockholders

  $ 46,625   $ 103,335  
           
           

Pro forma weighted average common shares outstanding—basic:

             

Historic Hilltop

    89,708     84,382  

Common shares issued to SWS common stockholders

    10,055     10,055  
           

Pro forma weighted average common shares outstanding—basic

    99,763     94,437  
           

Pro forma combined net earnings per common share—basic

  $ 0.47   $ 1.09  
           
           

Diluted earnings per share:

             

Pro forma combined net income

  $ 46,845   $ 103,850  

Add: interest expense on senior exchangeable notes (net of tax)

        5,059  
           

Pro forma combined net earnings available to Hilltop common stockholders

  $ 46,845   $ 108,909  
           
           

Pro forma weighted average common shares outstanding—basic

    99,763     94,437  

Effect of potentially dilutive securities

    868     5,949  
           

Pro forma weighted average common shares outstanding—diluted

    100,631     100,386  
           

Pro forma combined net earnings per common share—diluted

  $ 0.47   $ 1.08  
           
           

 

29


Table of Contents

UNAUDITED COMPARATIVE PER SHARE DATA

        The following tables present: (1) historical per share information for Hilltop; (2) pro forma per share information of the combined company after giving effect to the acquisition of SWS by Hilltop; and (3) historical and equivalent pro forma per share information for SWS.

        We derived the combined company pro forma per share information primarily by combining information from the historical consolidated financial statements of Hilltop and SWS. You should read these tables, together with the historical consolidated financial statements of Hilltop which are included in this proxy statement/prospectus and of SWS which are filed with the SEC and incorporated by reference into this proxy statement/prospectus. See "Where You Can Find More Information." You should not rely on the pro forma per share information as being necessarily indicative of actual results had the acquisition occurred on January 1, 2013 (for statement of earnings purposes) or June 30, 2014 (for book value per share data purposes). The unaudited pro forma information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the impact of possible business model changes as a result of current market conditions which may impact revenues, expense efficiencies, asset dispositions, share repurchases and other factors. It also does not necessarily reflect what the historical results of the combined company would have been had our companies been combined during these periods nor is it indicative of the results of operations in future periods or the future financial position of the combined company. The unaudited pro forma adjustments are based upon available information and certain assumptions that Hilltop management believes are reasonable. Upon completion of the merger, the operating results of SWS will be reflected in the consolidated financial statements of Hilltop on a prospective basis.

 
  Hilltop
Historical
  SWS
Historical
  Pro Forma
Combined
  Per
Equivalent
SWS Share(1)
 

Income (loss) from operations for the year ended December 31, 2013:

                         

Basic earnings (loss) per share

  $ 1.43   $ (1.10 ) $ 1.09   $ 0.27  

Diluted earnings (loss) per share

  $ 1.40   $ (1.10 ) $ 1.08   $ 0.27  

Dividends paid for the year ended December 31, 2013:

 
$

 
$

 
$

 
$

 

Book value per share as of December 31, 2013:

  $ 13.27   $ 9.57     N/A     N/A  

Income from operations for the six months ended June 30, 2014:

   
 
   
 
   
 
   
 
 

Basic earnings per share

  $ 0.56   $ (0.28 ) $ 0.47   $ 0.12  

Diluted earnings per share

  $ 0.56   $ (0.28 ) $ 0.47   $ 0.12  

Dividends paid for the six months ended June 30, 2014:

 
$

 
$

 
$

 
$

 

Book value per share as of June 30, 2014:

  $ 14.22   $ 9.46   $ 15.20   $ 3.79  

(1)
The per equivalent SWS share data is based only on the 0.2496 shares of Hilltop common stock to be issued to SWS stockholders as the stock portion of the merger consideration for each share of SWS common stock and does not give effect to the $1.94 in cash to be received by SWS stockholders as the cash portion of the merger consideration for each share of SWS common stock.

 

30


Table of Contents

COMPARATIVE MARKET PRICES AND DIVIDENDS

        Hilltop common stock is listed on the New York Stock Exchange under the trading symbol "HTH." and SWS common stock is listed on the New York Stock Exchange under the trading symbol "SWS." The following table sets forth the high and low reported sale prices per share of Hilltop common stock and SWS common stock, and the cash dividends declared per share for the periods indicated.

 
  Hilltop Common Stock
Market Price
  SWS Common Stock
Market Price
 
 
  High   Low   Dividend   High   Low   Dividend  

2011

                                     

First Quarter

  $ 10.13   $ 9.01   $   $ 6.49   $ 4.27   $ 0.01  

Second Quarter

    10.09     8.60         6.76     5.56     0.01  

Third Quarter

    9.01     7.12         6.31     3.67      

Fourth Quarter

    8.60     6.88         7.56     4.03      

2012

                                     

First Quarter

  $ 9.10   $ 7.87   $   $ 7.77   $ 4.79   $  

Second Quarter

    10.89     7.75         5.94     5.08      

Third Quarter

    12.80     10.21         6.58     5.23      

Fourth Quarter

    14.49     12.57         6.33     4.02      

2013

                                     

First Quarter

  $ 14.21   $ 12.34   $   $ 6.82   $ 5.32   $  

Second Quarter

    16.94     12.59         6.29     5.30      

Third Quarter

    18.71     15.46         6.28     5.19      

Fourth Quarter

    24.05     17.09         6.59     5.31      

2014

                                     

First Quarter

  $ 25.61   $ 22.42   $   $ 8.29   $ 6.01   $  

Second Quarter

    25.08     19.72         8.06     6.95      

Third Quarter

    22.39     19.32         7.60     6.89      

Fourth Quarter (through October 13, 2014)

    21.13     19.41         7.22     6.64      

        The following table sets forth the closing prices of Hilltop and SWS as reported on January 9, 2014, the last trading day prior to Hilltop publicly announcing its interest in a transaction with SWS and October 13, 2014, the last trading day prior to the date of this proxy statement/prospectus. The table also shows the implied value of one share of SWS common stock at each applicable date, which was calculated by multiplying the closing price for one share of Hilltop common stock by the exchange ratio of 0.2496 and adding the cash component of the merger consideration of $1.94 per SWS common share.

 
  Hilltop
Common Stock
Closing Price
  SWS Common
Stock Closing
Price
  Implied Value
of SWS
Common Stock
 

January 9, 2014

  $ 23.44   $ 6.06   $ 7.79  

October 13, 2014

  $ 19.76   $ 6.77   $ 6.87  

 

31


Table of Contents

RISK FACTORS

        In addition to general investment risks, the other information included and incorporated by reference in this proxy statement/prospectus (please see the section entitled "Where You Can Find More Information"), including the matters addressed in the section entitled "Forward-Looking Statements," you should carefully consider the following risks before deciding whether to adopt and approve the merger agreement.

Risk Factors Relating to the Merger

Because the market price of Hilltop common stock will fluctuate and the per share merger consideration may be adjusted, SWS stockholders cannot be sure of the value of the merger consideration they will receive.

        Upon completion of the merger, each share of SWS common stock will be converted into merger consideration consisting of $1.94 in cash and 0.2496 in Hilltop common stock. As of June 30, 2014, the book value per share of SWS common stock was $9.46 and the tangible book value per share of SWS common stock was $9.23. Giving effect to the merger as of June 30, 2014, the pro forma book value per equivalent SWS share is $3.79 (the per equivalent SWS share figure is based only on the 0.2496 shares of Hilltop common stock to be issued to SWS stockholders as the stock portion of the merger consideration for each share of SWS common stock and does not give effect to the $1.94 in cash to be received by SWS stockholders as the cash portion of the merger consideration for each share of SWS common stock). The market value of the merger consideration may vary from the closing price of Hilltop common stock on the date the merger was announced, on the date that this proxy statement/prospectus was mailed to SWS stockholders, on the date of the special meeting of the SWS stockholders and on the date the merger is completed and thereafter. Any change in the market price of Hilltop common stock prior to completion of the merger will affect the market value of the merger consideration that SWS stockholders will receive upon completion of the merger. Accordingly, at the time of the special meeting, SWS stockholders will not know, or be able to calculate, the value of the merger consideration they would receive upon completion of the merger. SWS is not permitted to terminate the merger agreement or resolicit the vote of its stockholders solely because of changes in the market price of Hilltop's common stock, and there will be no adjustment to the merger consideration for changes in such market price. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in our respective businesses, operations and prospects, and regulatory considerations. Many of these factors are beyond SWS's control.

        We urge you to obtain current market quotations for shares of Hilltop common stock before you vote your shares at the SWS special meeting.

The results of operations of Hilltop after the merger may be affected by factors different from those currently affecting the results of operations of Hilltop and SWS.

        The businesses of Hilltop and SWS differ in important respects and, accordingly, the results of operations of the combined company and the market price of the combined company's common stock may be affected by factors different from those currently affecting the independent results of operations of Hilltop and SWS. For a discussion of the business of Hilltop and of certain factors to consider in connection with Hilltop's business, see "Information About the Companies—Hilltop" included elsewhere in this proxy statement/prospectus and the consolidated financial statements of Hilltop beginning on page F-1 of this proxy statement/prospectus. For a discussion of the business of SWS and of certain factors to consider in connection with SWS's business, see "Information About the Companies—SWS" and the information included in this proxy statement/prospectus and referred to under "Where You Can Find More Information" included elsewhere in this proxy statement/prospectus.

32


Table of Contents

The fairness opinion that SWS has obtained from Sandler O'Neill, has not been, and is not expected to be, updated to reflect any changes in circumstances that may have occurred since the signing of the merger agreement.

        The fairness opinions issued to the Special Committee by Sandler O'Neill regarding the fairness, from a financial point of view, of the consideration to be received by stockholders of SWS other than Hilltop in connection with the merger, speaks only as of March 31, 2014. Changes in the operations and prospects of Hilltop or SWS, general market and economic conditions and other factors which may be beyond the control of Hilltop and SWS, and on which the fairness opinion was based, may have altered the value of Hilltop or SWS or the market price of shares of Hilltop common stock as of the date of this proxy statement/prospectus, or may alter such values and market price by the time the merger is completed. For example, the implied value of SWS common stock was $7.88 per share on the date of the fairness opinion and $6.87 per share as of October 13, 2014. Sandler O'Neill does not have any obligation to update, revise or reaffirm its opinion to reflect subsequent developments, and has not done so. For a description of the opinion that SWS received from its financial advisor, please refer to "The Merger—Opinion of SWS's Financial Advisor" included elsewhere in this proxy statement/prospectus. For a description of the other factors considered by SWS's board of directors in determining to approve the merger, please refer to "The Merger—Reasons for the Merger and "The Merger—Recommendation of the SWS Board of Directors" included elsewhere in this proxy statement/prospectus.

The merger is subject to the receipt of consents and approvals from government entities that may take longer than expected or may impose conditions that are not presently anticipated or that could have an adverse effect on the combined company following the merger.

        The merger is conditioned on the receipt of all requisite governmental and regulatory authorizations, consents, orders and approvals from the Federal Reserve Board and the Texas Department of Banking and the expiration or termination of the waiting period under the HSR Act. These government entities may impose conditions on the completion of the merger and bank merger or require changes to the terms of the merger or bank merger. Although Hilltop and SWS do not currently expect that any such material conditions or changes would be imposed, there can be no assurance that they will not be, and such conditions or changes could have the effect of delaying or preventing completion of the merger or imposing additional costs on or limiting the revenues of the combined company following the merger and the bank merger, any of which might have an adverse effect on the combined company following the merger and the bank merger. See "The Merger—Regulatory Approvals Required for the Merger."

Upon your receipt of shares of Hilltop common stock as merger consideration, you will become a stockholder in Hilltop, a Maryland corporation, which may change certain stockholder rights and privileges you hold as a stockholder of SWS, a Delaware corporation.

        Hilltop is a Maryland corporation and is governed by the laws of the State of Maryland and by its articles of incorporation and bylaws. Maryland corporation law extends to stockholders certain rights and privileges that may not exist under Delaware law and, conversely, does not extend certain rights and privileges that you may have as a stockholder of SWS, which is governed by Delaware law and SWS's certificate of incorporation and bylaws. For a detailed discussion of the rights of Hilltop stockholders versus the rights of SWS stockholders, please see the section of this proxy statement/prospectus entitled "Comparison of Stockholders' Rights."

33


Table of Contents

SWS will be subject to business uncertainties, and Hilltop and SWS are subject to contractual restrictions while the merger is pending.

        Uncertainty about the effect of the merger on employees and customers may have an adverse effect on SWS and consequently on Hilltop. These uncertainties may impair SWS's ability to attract, retain and motivate key personnel while the merger is pending, and could cause customers and others that deal with SWS to seek to change existing business relationships with SWS. Retention of certain employees may be challenging during the pendency of the merger, as certain employees may experience uncertainty about their future roles. If key employees depart because of issues relating to such uncertainty or a desire not to remain with the business, SWS's or Hilltop's respective business following the merger could be negatively impacted.

        In addition, the merger agreement restricts SWS and, to a lesser extent, Hilltop from taking certain specified actions until the merger occurs without the consent of the other party. These restrictions may prevent Hilltop and SWS from pursuing attractive business opportunities that may arise prior to the completion of the merger. See "The Merger Agreement—Covenants and Agreement" included elsewhere in this proxy statement/prospectus for a description of the restrictive covenants applicable to Hilltop and SWS. In addition, SWS's or Hilltop's businesses may be indirectly adversely affected by the failure to pursue other beneficial opportunities due to the focus of management on the merger.

The merger is subject to certain closing conditions that, if not satisfied or waived, will result in the merger not being completed, which may cause the price of Hilltop common stock and SWS common stock to decline.

        The merger is subject to customary conditions to closing, including the receipt of required regulatory approvals and approval of the SWS stockholders. If any condition to the merger is not satisfied or waived, the merger will not be completed. In addition, Hilltop and SWS may terminate the merger agreement under certain circumstances even if the merger is approved by SWS stockholders, including if the merger has not been consummated by March 31, 2015. If Hilltop and SWS do not complete the merger, the trading price of Hilltop and SWS common stock may decline to the extent that the current prices reflect a market assumption that the merger will be completed. In addition, neither company would realize any of the expected benefits of having completed the merger. If the merger is not completed, additional risks could materialize, which could materially and adversely affect the business, financial condition and results of Hilltop or SWS. For more information on closing conditions to the merger agreement, see "The Merger Agreement—Conditions to Completion of the Merger" included elsewhere in this proxy statement/prospectus.

The merger agreement limits SWS's ability to pursue an alternative transaction and requires SWS to pay a termination fee of $8 million under certain circumstances relating to alternative acquisition proposals.

        SWS agreed in the merger agreement that it will not, and will cause its subsidiaries not to, and will use its reasonable best efforts to cause its or their respective officers, directors, employees, representatives or agents not to, knowingly encourage, solicit, participate in, knowingly facilitate or initiate discussions, negotiations, inquiries, proposals or offers with or provide any non-public information to, any person relating to any third party acquisition (as defined below) or any inquiry, proposal or offer reasonably likely to lead to a third party acquisition, subject to exceptions set forth in the merger agreement. See "The Merger Agreement—No Solicitation" included elsewhere in this proxy statement/prospectus. The merger agreement also provides for the payment by SWS of a termination fee in the amount of $8 million in the event that Hilltop terminates the merger agreement for certain reasons including a change in the recommendation of SWS's board of directors or a termination of the merger agreement in certain circumstances followed by an acquisition of, or an agreement to acquire, SWS by a third party. These provisions may discourage a potential competing acquiror that might have an interest in acquiring all or a significant part of SWS from considering or proposing such an

34


Table of Contents

acquisition. Furthermore, if the merger agreement is terminated and SWS's board of directors seeks another party to acquire SWS, SWS stockholders cannot be certain that SWS will be able to find a party willing to engage in a transaction or to pay the equivalent or greater consideration than that which Hilltop has agreed to pay in the merger. See "The Merger Agreement—Termination Fee" included elsewhere in this proxy statement/prospectus.

SWS's Credit Agreement with Hilltop and Oak Hill contains a covenant restricting SWS's ability to enter into alternative transactions and Hilltop did not waive this covenant while Hilltop remained a lender thereunder.

        On July 29, 2011, SWS entered into a Credit Agreement in respect of a $100,000,000, five-year, unsecured loan comprised of a $50,000,000 commitment from Hilltop and a $50,000,000 commitment from Oak Hill Capital Partners III, L.P. and Oak Hill Capital Management Partners III, L.P. The terms of the Credit Agreement include a covenant prohibiting SWS from undergoing a "Fundamental Change," which includes any merger, amalgamation or consolidation, and which SWS would breach by engaging in a merger, amalgamation or consolidation unless compliance were waived by each of Hilltop and Oak Hill. During the parties' negotiations with respect to the merger, Hilltop indicated to SWS that it would not be willing to grant a waiver of this covenant to permit a third party transaction. As a result of its exercise in full of its warrant to purchase 8,695,652 shares of SWS common stock disclosed elsewhere in this proxy statement/prospectus, Hilltop's portion of the loan outstanding under the Credit Agreement was eliminated and Hilltop is accordingly no longer a lender under the Credit Agreement. Oak Hill remains a lender under the Credit Agreement with a current outstanding balance of $12,500,000.75. The existence of the Merger Covenant, and Hilltop's unwillingness to waive it while Hilltop remained a lender under the Credit Agreement, may have discouraged and may continue to discourage potential competing acquirors that might have an interest in acquiring all or a significant part of SWS from considering or proposing such an acquisition (see "The Merger—Background of the Merger" and "The Merger—Hilltop's Relationship with SWS").

Current Hilltop stockholders and SWS stockholders will have a reduced ownership and voting interest after the merger and will exercise less influence over management.

        Current Hilltop stockholders have the right to vote in the election of the Hilltop board of directors and on other matters affecting Hilltop. Current SWS stockholders have the right to vote in the election of the SWS board of directors and on other matters affecting SWS. Immediately after the merger is completed, it is expected that, on a fully diluted basis, current Hilltop stockholders will own approximately 90%, and current SWS stockholders will own approximately 10%, of the outstanding shares of Hilltop common stock. As a result of the merger, current Hilltop stockholders will have less influence on the management and policies of Hilltop post-merger than they currently have, and current SWS stockholders will have less influence on the management and policies of Hilltop post-merger than they currently have with respect to SWS.

The financial analyses and forecasts considered by Hilltop, SWS and SWS's financial advisor may not be realized, which may adversely affect the market price of Hilltop shares following the merger.

        In performing its financial analyses and rendering its opinion regarding the fairness, from a financial point of view, of the merger consideration set forth in the merger agreement, the financial advisor to SWS independently reviewed and relied on, among other things, internal standalone financial analyses and forecasts provided to it by SWS. Certain of these analyses and forecasts were also provided to Hilltop. See the section titled "The Merger—Certain SWS Prospective Financial Information" included elsewhere in this proxy statement/prospectus. SWS's financial advisor assumed, at the direction of the board of directors of SWS, that such financial information was reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of SWS as to the future performance of SWS and that such future financial results will be achieved at the times and in the amounts projected by management of SWS. These analyses and forecasts were

35


Table of Contents

prepared by, or as directed by, the management of SWS and were also considered by the SWS board of directors and the Special Committee. None of these analyses or forecasts was prepared with a view towards public disclosure or compliance with the published guidelines of the SEC, generally accepted accounting principles in the U.S. ("GAAP"), statutory accounting principles ("SAP") or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of financial forecasts. These projections are inherently based on various estimates and assumptions that are subject to the judgment of those preparing them. These projections are also subject to significant economic, competitive, industry and other uncertainties and contingencies, all of which are difficult or impossible to predict and many of which are beyond the control of SWS and Hilltop. Accordingly, SWS's and/or Hilltop's financial condition or results of operations may not be consistent with those set forth in such analyses and forecasts. Worse financial results could have a material adverse effect on the market price of Hilltop common stock following the merger.

The directors and executive officers of SWS have interests in the merger that are different from, or in addition to, those of other SWS stockholders generally. Therefore, the directors and executive officers of SWS may have a conflict of interest in recommending the proposals being voted on at the SWS special meeting.

        The directors and executive officers of SWS may have interests in the merger that are different from, or in addition to, those of SWS stockholders generally. These interests include, among others, the accelerated vesting of equity awards and other potential payments in connection with (or subsequent to) the merger. The SWS board of directors was aware of these interests and considered these interests, among other matters, when making its decision to approve the merger agreement and in recommending that SWS stockholders vote in favor of approving the merger agreement. These interests may influence the executive officers and directors of SWS to support or approve the proposals to be presented at the SWS special meeting.

        See "The Merger—Interests of SWS Directors and Executive Officers in the Merger" included elsewhere in this proxy statement/prospectus for a more detailed description of these interests.

The completion of the merger may trigger change in control provisions in certain agreements to which SWS is a party.

        The completion of the merger may trigger change in control provisions in certain agreements to which SWS is a party. If SWS and Hilltop are unable to negotiate waivers of those provisions, the counterparties may exercise their rights and remedies under the agreements (including terminating the agreements or seeking monetary penalties). Even if SWS or Hilltop is able to obtain waivers, the counterparties may demand a fee for such waivers or seek to renegotiate the agreements on materially less favorable terms than those currently in place.

Termination of the merger agreement could negatively impact SWS and/or Hilltop.

        If the merger agreement is terminated, there may be various consequences. For example, SWS's or Hilltop's businesses may have been impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. A termination of the merger agreement may also damage the reputations and franchise values of Hilltop and SWS. If the merger agreement is terminated and SWS's board of directors seeks another merger or business combination, SWS stockholders cannot be certain that SWS will be able to find a party willing to engage in a transaction or to pay the equivalent or greater consideration than that which Hilltop has agreed to pay in the merger. In addition, if the merger agreement is terminated under certain circumstances, SWS may be required to pay Hilltop a termination fee of $8 million.

36


Table of Contents

The combined company expects to incur substantial expenses related to the merger.

        The combined company expects to incur substantial expenses in connection with completing the merger and combining the business, operations, networks, systems, technologies, policies and procedures of the two companies. Although Hilltop and SWS have assumed that a certain level of transaction and combination expenses would be incurred, there are a number of factors beyond their control that could affect the total amount or the timing of their combination expenses. Many of the expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time. Due to these factors, the transaction and combination expenses associated with the merger could, particularly in the near term, exceed the savings that the combined company expects to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost savings related to the combination of the businesses following the completion of the merger. As a result of these expenses, both Hilltop and SWS expect to take charges against their earnings before and after the completion of the merger. The charges taken in connection with the merger are expected to be significant, although the aggregate amount and timing of such charges are uncertain at present. Further, if the merger is not completed, both SWS and Hilltop would have to recognize these expenses without realizing the expected benefits of the merger.

If completed, the merger may not produce its anticipated results, and Hilltop and SWS may be unable to combine their operations in the manner expected.

        Hilltop and SWS entered into the merger agreement with the expectation that the merger will result in various benefits. Achieving the anticipated benefits of the merger is subject to a number of uncertainties, including whether the Hilltop and SWS organizations can be combined in an efficient, effective and timely manner.

        It is possible that the transition process could take longer than anticipated and could result in the loss of valuable employees, the disruption of each company's ongoing businesses, controls, procedures, policies and compensation arrangements, any of which could adversely affect the combined company's ability to achieve the anticipated benefits of the merger. The combined company's results of operations could also be adversely affected by any issues attributable to either company's operations that arise or are based on events or actions that occur prior to the closing of the merger. The companies may have difficulty addressing possible differences in corporate cultures and management philosophies. The transition process is subject to a number of uncertainties, and no assurance can be given that the anticipated benefits will be realized or, if realized, the timing of their realization. Failure to achieve these anticipated benefits could result in increased costs or decreases in the amount of expected revenues and could adversely affect the combined company's future business, financial condition, operating results and prospects.

The merger may not be accretive to earnings and may cause dilution to Hilltop's earnings per share, which may negatively affect the market price of Hilltop's common stock.

        The merger may not be accretive to earnings, and Hilltop could encounter additional transaction and integration-related costs, may fail to realize all of the benefits anticipated in the merger or be subject to other factors that affect preliminary estimates. Any of these factors could cause a decrease in Hilltop's adjusted earnings per share or decrease or delay the expected accretive effect of the merger and contribute to a decrease in the price of Hilltop's common stock.

If the merger fails to qualify as a "reorganization" within the meaning of Section 368(a) of the Code, SWS stockholders may be required to recognize additional gain or loss on the exchange of their shares of SWS common stock in the merger for U.S. federal income tax purposes.

        Hilltop and SWS have structured the merger to qualify as a "reorganization" within the meaning of Section 368(a) of the Code. Neither Hilltop nor SWS intends to request any ruling from the Internal

37


Table of Contents

Revenue Service as to the tax consequences of the exchange of shares of SWS common stock for shares of Hilltop common stock in the merger. If the merger fails to qualify as a reorganization, an SWS stockholder would generally recognize gain or loss for U.S. federal income tax purposes on each share of SWS common stock exchanged in the merger in an amount equal to the difference between that stockholder's basis in such share and the sum of the amount of the cash and the fair market value of the shares of Hilltop common stock the SWS stockholder receives or may receive in exchange for each such share of SWS common stock. You are urged to consult with your own tax advisor regarding the proper reporting of the amount and timing of such gain or loss. See "United States Federal Income Tax Consequences of the Merger" elsewhere in this proxy statement/prospectus.

Pending litigation against SWS and Hilltop could result in an injunction preventing the completion of the merger or a judgment resulting in the payment of damages.

        In connection with the merger, purported SWS stockholders have filed putative shareholder class action lawsuits against SWS, the members of the SWS board of directors and Hilltop. Among other remedies, the plaintiffs seek to enjoin the merger. If the cases are not resolved, these lawsuits could prevent or delay completion of the merger and result in substantial costs to SWS and Hilltop, including any costs associated with the indemnification of directors and officers. Plaintiffs may file additional lawsuits against SWS, Hilltop and/or the directors and officers of either company in connection with the merger. The defense or settlement of any lawsuit or claim that remains unresolved at the time the merger is completed may adversely affect Hilltop's business, financial condition, results of operations and cash flows.

The unaudited pro forma condensed combined financial statements included in this proxy statement/prospectus are presented for illustrative purposes only and the actual financial condition and results of operations of the combined company following the merger may differ materially.

        The unaudited pro forma condensed combined financial statements contained in this proxy statement/prospectus are presented for illustrative purposes only, are based on various adjustments, assumptions and preliminary estimates and may not be an indication of the combined company's financial condition or results of operations following the merger for several reasons. The actual financial condition and results of operations of the combined company following the merger may not be consistent with, or evident from, these unaudited pro forma condensed combined financial statements. In addition, the assumptions used in preparing the unaudited pro forma financial information may not prove to be accurate, and other factors may affect the combined company's financial condition or results of operations following the merger. Any potential decline in the combined company's financial condition or results of operations may cause significant variations in the stock price of the combined company.

The market price of Hilltop common stock after the merger may be affected by factors different from those affecting the shares of SWS or Hilltop currently.

        Upon completion of the merger, holders of SWS common stock will become holders of Hilltop common stock. Hilltop's business differs in important respects from that of SWS, and, accordingly, the results of operations of the combined company and the market price of Hilltop common stock after the completion of the merger may be affected by factors different from those currently affecting the independent results of operations of each of SWS and Hilltop. For a discussion of the business of Hilltop and of certain factors to consider in connection with Hilltop's business, see "Information About the Companies—Hilltop" included elsewhere in this proxy statement/prospectus and the consolidated financial statements of Hilltop beginning on page F-1 of this proxy statement/prospectus. For a discussion of the business of SWS and of certain factors to consider in connection with SWS's business, see "Information About the Companies—SWS" and the information incorporated by reference in this proxy statement/prospectus and referred to under "Where You Can Find More Information."

38


Table of Contents

Risk Factors Relating to Hilltop's Business

Hilltop may fail to realize all of the anticipated benefits of its merger with PlainsCapital Corporation ("PlainsCapital") or the acquisition of the deposits and assets of First National Bank ("FNB").

        Achieving the anticipated cost savings and financial benefits of Hilltop's 2012 merger with PlainsCapital Corporation (the "PlainsCapital Merger") and 2013 acquisition of the deposits and substantially all of the assets of First National Bank (the "FNB Transaction") and any other acquisitions Hilltop may complete will depend, in part, on Hilltop's ability to successfully integrate the operations of the respective companies with its own in an efficient and effective manner. It is possible that the integration process could result in the loss of key employees, the disruption of ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect Hilltop's 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 Hilltop's day-to-day business. Any inability to realize the full extent, or any, of the anticipated cost savings and financial benefits of the PlainsCapital Merger, the FNB Transaction, as well as any delays encountered in the integration process, could have an adverse effect on Hilltop's business and results of operations, which could adversely affect Hilltop's financial condition and cause a decrease in its earnings per share or decrease or delay the expected accretive effect of the FNB Transaction and contribute to a decrease in the price of Hilltop's common stock.

If Hilltop's allowance for loan losses is insufficient to cover actual loan losses, Hilltop's banking segment earnings will be adversely affected.

        As a lender, Hilltop is exposed to the risk that Hilltop could sustain losses because Hilltop's borrowers may not repay their loans in accordance with the terms of their loans. Hilltop has historically accounted for this risk by maintaining an allowance for loan losses in an amount intended to cover Bank management's estimate of losses inherent in the loan portfolio. As a result of the PlainsCapital Merger and the FNB Transaction, Hilltop was required under GAAP to estimate the fair value of the loan portfolio after the consummation of the PlainsCapital Merger in 2012 and the FNB Transaction in 2013 and write-down the recorded value of the portfolio to that estimate. For most loans, this process was accomplished by computing the net present value of estimated cash flows to be received from borrowers of these loans. PlainsCapital's and FNB's respective allowance for loan losses that had been maintained prior to the PlainsCapital Merger and the FNB Transaction were eliminated in this accounting process. A new allowance for loan losses has been established for loans made by PlainsCapital Bank (the "Bank") subsequent to consummation of the PlainsCapital Merger and for any decrease from that originally estimated as of the acquisition date in the estimate of cash flows to be received from the loans acquired in the PlainsCapital Merger and the FNB Transaction.

        The estimates of fair value as of the consummation of the PlainsCapital Merger and the FNB Transaction were based on economic conditions at such time and on Bank management's projections concerning both future economic conditions and the ability of the borrowers to continue to repay their loans. If management's assumptions and projections prove to be incorrect, however, the estimate of fair value may be higher than the actual fair value and Hilltop may suffer losses in excess of those estimated. Further, the allowance for loan losses established for new loans or for revised estimates may prove to be inadequate to cover actual losses, especially if economic conditions worsen.

        While management will endeavor to estimate the allowance to cover anticipated losses, no underwriting and credit monitoring policies and procedures that Hilltop could adopt to address credit risk could provide complete assurance that Hilltop will not incur unexpected losses. These losses could have a material adverse effect on Hilltop's business, financial condition, results of operations and cash flows. In addition, federal regulators periodically evaluate the adequacy of the allowance for loan losses

39


Table of Contents

and may require Hilltop to increase its provision for loan losses or recognize further loan charge-offs based on judgments different from those of Hilltop's Bank management.

An adverse change in real estate market values may result in losses in Hilltop's banking segment and otherwise adversely affect Hilltop's profitability.

        At June 30, 2014, approximately 42% of the loan portfolio of Hilltop's banking segment was comprised of loans with real estate as the primary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. A decline in real estate values generally and in Texas specifically could impair the value of Hilltop's collateral and its ability to sell the collateral upon any foreclosure. In the event of a default with respect to any of these loans, the amounts Hilltop receives upon sale of the collateral may be insufficient to recover the outstanding principal and interest on the loan. As a result, Hilltop's profitability and financial condition may be adversely affected by a decrease in real estate market values.

Loans acquired in the FNB Transaction may not be covered by the loss-share agreements if the FDIC determines that Hilltop has not adequately managed these loans.

        Under the terms of the loss-share agreements Hilltop entered into with the FDIC in connection with the FNB Transaction, the FDIC is obligated to reimburse Hilltop for the following losses on covered loans: (i) 80% of losses on the first $240.4 million of losses incurred; (ii) 0% of losses in excess of $240.4 million up to and including $365.7 million of losses incurred; and (iii) 80% of losses in excess of $365.7 million of losses incurred. The loss-share agreements for commercial and single family residential loans are in effect for 5 years and 10 years, respectively, and the loss recovery provisions to the FDIC are in effect for 8 years and 10 years, respectively, from September 13, 2013 (the "Bank Closing Date"). Although the FDIC has agreed to reimburse Hilltop for the substantial portion of losses on covered loans, the FDIC has the right to refuse or delay payment for loan losses if Hilltop does not manage covered loans in accordance with the loss-share agreements. In addition, reimbursable losses are based on the book value of the relevant loans as determined by the FDIC as of the effective dates of the transactions. The amount that Hilltop realizes on these loans could differ materially from the carrying value that will be reflected in Hilltop's consolidated financial statements, based upon the timing and amount of collections on the covered loans in future periods. Any losses Hilltop experiences in the assets acquired in the FNB Transaction that are not covered under the loss-share agreements could have an adverse effect on Hilltop's results of operations and financial condition.

        In addition, in accordance with the loss-share agreements, the Bank may be required to make a "true-up" payment to the FDIC, approximately ten years following the Bank Closing Date, if the FDIC's initial estimate of losses on covered assets is greater than the actual realized losses. The "true-up" payment is calculated using a defined formula set forth in the purchase and assumption agreement Hilltop entered into with the FDIC in connection with the FNB Transaction.

Hilltop's business and results of operations may be adversely affected by unpredictable economic, market and business conditions.

        Hilltop's business and results of operations are affected by general economic, market and business conditions. The credit quality of Hilltop's loan portfolio necessarily reflects, among other things, the general economic conditions in the areas in which Hilltop's conducts its business. Hilltop's continued financial success depends to a degree on factors beyond Hilltop's control, including:

40


Table of Contents

        The deterioration of any of these conditions, as Hilltop has experienced with the past economic downturn and continuation of a weakened economy and employment growth, could adversely affect Hilltop's consumer and commercial businesses and securities portfolios, Hilltop's level of charge-offs and provision for credit losses, the carrying value of Hilltop's deferred tax assets, the investment portfolio of Hilltop's insurance segment, Hilltop's capital levels and liquidity, and Hilltop's results of operations.

        Continued elevated unemployment, under-employment and household debt, along with continued stress in the consumer real estate market and certain commercial real estate markets, pose challenges for economic performance and the financial services industry. The sustained high unemployment rate and the lengthy duration of unemployment have directly impaired consumer finances and pose risks to the financial services industry. Continued uncertainty in the housing markets and elevated levels of distressed and delinquent mortgages pose further risks to the housing market. The current environment of heightened scrutiny of financial institutions has resulted in increased public awareness of and sensitivity to banking fees and practices. Each of these factors may adversely affect Hilltop's fees and costs.

Hilltop's geographic concentration may magnify the adverse effects and consequences of any regional or local economic downturn.

        Hilltop conducts its banking operations primarily in Texas. Substantially all of the real estate loans in Hilltop's loan portfolio are secured by properties located in Texas, with more than 78% and 82% secured by properties located in the Dallas/Fort Worth and Austin/San Antonio markets at December 31, 2013 and 2012, respectively. Adverse economic conditions in Texas may result in a reduction in the value of the collateral securing these loans. Likewise, substantially all of the real estate loans in Hilltop's loan portfolio are made to borrowers who live and conduct business in Texas. In addition, mortgage origination fee income is dependent to a significant degree on economic conditions in Texas and California. During 2013, approximately 23% and 18% by dollar volume of Hilltop's mortgage loans originated were collateralized by properties located in Texas and California, respectively. Texas insureds accounted for approximately 69% and 70% of Hilltop's insurance segment's gross premiums written in 2013 and 2012, respectively. Any regional or local economic downturn that affects Texas or, to a lesser extent, California, may affect Hilltop and its profitability more significantly and more adversely than Hilltop's competitors that are less geographically concentrated.

Hilltop's geographic concentration may also exacerbate the adverse effects on Hilltop's insurance segment of inherently unpredictable catastrophic events.

        Hilltop's insurance segment expects to have large aggregate exposures to inherently unpredictable natural and man-made disasters of great severity, such as hurricanes, hail, tornados, windstorms, wildfires and acts of terrorism. Hurricanes Ike, Katrina and Rita highlighted the challenges inherent in predicting the impact of catastrophic events. The catastrophe models utilized by Hilltop's insurance segment to assess its probable maximum insurance losses generally failed to adequately project the financial impact of these hurricanes. Although Hilltop's insurance segment may attempt to exclude certain losses, such as terrorism and other similar risks, from some coverage that Hilltop's insurance segment writes, it may be prohibited from, or may not be successful in, doing so. The occurrence of

41


Table of Contents

losses from catastrophic events may have a material adverse effect on Hilltop's 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 Hilltop's insurance segment expects that these factors will increase the severity of losses in the future. Factors that may influence Hilltop's insurance segment's exposure to losses from these types of events, in addition to the routine adjustment of losses, include, among others:

        Hilltop's insurance segment writes insurance primarily in the states of Texas, Oklahoma, Arizona, Tennessee, Georgia and Louisiana. In 2013, Texas accounted for 69.1%, Oklahoma accounted for 9.1%, Arizona accounted for 8.7%, Tennessee accounted for 5.8% and Georgia accounted for 3.5% of Hilltop's premiums. As a result, a single catastrophe, destructive weather pattern, wildfire, terrorist attack, regulatory development or other condition or general economic trend affecting these regions or significant portions of these regions could adversely affect Hilltop's insurance segment's financial condition and results of operations more significantly than other insurance companies that conduct business across a broader geographic area. Although Hilltop's insurance segment purchases catastrophe reinsurance to limit its exposure to these types of catastrophes, in the event of one or more major catastrophes resulting in losses to it in excess of $140.0 million, Hilltop's insurance segment's losses would exceed the limits of its reinsurance coverage.

Hilltop's business is subject to interest rate risk, and fluctuations in interest rates may adversely affect Hilltop's earnings, capital levels and overall results.

        The majority of Hilltop's assets are monetary in nature and, as a result, Hilltop is subject to significant risk from changes in interest rates. Changes in interest rates may impact Hilltop's net interest income in Hilltop's banking segment as well as the valuation of Hilltop's assets and liabilities in each of Hilltop's segments. Earnings in Hilltop's banking segment are significantly dependent on Hilltop's 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. Hilltop expects to periodically experience "gaps" in the interest rate sensitivities of Hilltop's banking segment's assets and liabilities, meaning that either Hilltop's interest-bearing liabilities will be more sensitive to changes in market interest rates than Hilltop's interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to Hilltop's position, this "gap" may work against Hilltop, and Hilltop's earnings may be adversely affected.

        An increase in the general level of interest rates may also, among other things, adversely affect the demand for loans and Hilltop's 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 Hilltop's income generated from mortgage origination activities. Conversely, a decrease in the general level of interest rates, among other things, may lead to prepayments on Hilltop's loan and mortgage-backed securities portfolios and increased competition for deposits. Accordingly, changes in the general level of market interest rates may adversely affect Hilltop's net yield on interest-earning assets, loan origination volume and Hilltop's overall results.

42


Table of Contents

        Hilltop's insurance segment invested over 87% of its invested assets in fixed maturity assets such as bonds and mortgage-backed securities at June 30, 2014. Because bond trading prices decrease as interest rates rise, a significant increase in interest rates could have a material adverse effect on Hilltop's insurance segment's financial condition and results of operations. On the other hand, decreases in interest rates could have an adverse effect on Hilltop's insurance segment's investment income and results of operations. For example, if interest rates decline, investment of new premiums received and funds reinvested will earn less. Additionally, mortgage-backed securities typically are prepaid more quickly when interest rates fall and the holder must reinvest the proceeds at lower interest rates. In periods of increasing interest rates, mortgage-backed securities typically are prepaid more slowly, which may require Hilltop's insurance segment to receive interest payments that are below the then prevailing interest rates for longer time periods than expected. The volatility of Hilltop's insurance segment's claims may force it to liquidate securities, which may cause it to incur capital losses. If Hilltop's 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 Hilltop experiences market disruption and volatility, such as that experienced in 2009 and 2010, Hilltop may experience additional losses on Hilltop's investments and reductions in Hilltop's earnings. Investment losses could significantly decrease the asset base and statutory surplus of Hilltop's insurance segment, thereby adversely affecting its ability to conduct business and potentially its A.M. Best financial strength rating.

        Hilltop's financial advisory segment holds securities, principally fixed-income municipal bonds, to support sales, underwriting and other customer activities. If interest rates increase, the value of debt securities held in the financial advisory segment's inventory would decrease. Rapid or significant changes in interest rates could adversely affect the segment's bond sales, underwriting activities and financial advisory businesses.

        In addition, Hilltop holds securities that may be sold in response to changes in market interest rates, changes in securities' prepayment risk, increases in loan demand, general liquidity needs and other similar factors are classified as available for sale and are carried at estimated fair value, which may fluctuate with changes in market interest rates. The effects of an increase in market interest rates may result in a decrease in the value of Hilltop's available for sale investment portfolio.

        Market interest rates are affected by many factors outside of Hilltop's control, including inflation, recession, unemployment, money supply, international disorder and instability in domestic and foreign financial markets. Hilltop 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 Hilltop's business. Hilltop 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 Hilltop's earnings and capital levels and overall results of operations.

Hilltop's banking segment is subject to funding risks associated with its high deposit concentration and its potential reliance on brokered deposits.

        At June 30, 2014, the Bank's fifteen largest depositors, excluding Hilltop and First Southwest Holdings, LLC, a wholly owned subsidiary of PlainsCapital ("First Southwest"), accounted for 13.26% of the Bank's total deposits, and the Bank's five largest depositors, excluding First Southwest, accounted for 8.63% of the Bank's total deposits. Brokered deposits at June 30, 2014 accounted for 3.8% of the Bank's total deposits, and Hilltop may increase Hilltop's reliance on brokered deposits in the future. The loss of one or more of Hilltop's largest Bank customers, a significant decline in Hilltop's deposit balances due to ordinary course fluctuations related to these customers' businesses, or if Hilltop increases its reliance on brokered deposits, the loss of a significant amount of Hilltop's brokered deposits could adversely affect Hilltop's liquidity. Additionally, such circumstances could require Hilltop to raise deposit rates in an attempt to attract new deposits, or purchase federal funds or

43


Table of Contents

borrow funds on a short-term basis at higher rates, which would adversely affect Hilltop's results of operations. Under applicable regulations, if the Bank were no longer "well capitalized," the Bank would not be able to accept brokered deposits without the approval of the FDIC.

Hilltop is heavily dependent on dividends from its subsidiaries.

        Hilltop is a financial holding company engaged in the business of managing, controlling and operating its subsidiaries, including National Lloyds Corporation ("NLC") and its two insurance company subsidiaries, NLIC and ASIC, as well as the Bank and the Bank's subsidiaries, PrimeLending and First Southwest. Hilltop conducts no material business or other activity other than activities incidental to holding stock in NLC and the Bank. As a result, Hilltop relies substantially on the profitability of, and dividends from, these subsidiaries to pay its operating expenses, to satisfy its obligations and to pay dividends on its preferred stock. As with most financial institutions, the profitability of the Bank is subject to the fluctuating cost and availability of money, changes in interest rates and in economic conditions in general. PrimeLending and First Southwest contribute to the Bank's profitability and, in turn, on its ability to pay dividends to Hilltop. If the Bank, however, is unable to make cash distributions to Hilltop, then Hilltop may also be unable to obtain funds from PrimeLending and First Southwest, and Hilltop may be unable to satisfy its obligations or make distributions on its preferred stock.

        Likewise, Hilltop's insurance segment also operates as a holding company. Dividends and other permitted payments from its operating subsidiaries are expected to be its primary source of funds to meet ongoing cash requirements, including any future debt service payments and other expenses, and to pay dividends, if any, to Hilltop. NLIC and ASIC are subject to significant regulatory restrictions and limitations under debt agreements limiting their ability to declare and pay dividends, including the indenture governing NLIC's London Interbank Offered Rate ("LIBOR") plus 3.40% notes due 2035 and the surplus indentures governing NLIC's two LIBOR plus 4.10% and 4.05% notes due 2033 and ASIC's LIBOR plus 4.05% notes due 2034. Together these restrictions could, in turn, limit NLC's ability to pay dividends.

Hilltop is subject to extensive supervision and regulation that could restrict its activities and impose financial requirements or limitations on the conduct of its business and limit its ability to generate income.

        Hilltop is subject to extensive federal and state regulation and supervision, including that of the Federal Reserve Board, the Texas Department of Banking, the Texas Department of Insurance, the FDIC, the CFPB, the SEC and FINRA. Banking regulations are primarily intended to protect depositors' funds, federal deposit insurance funds and the banking system as a whole, not stockholders. Insurance regulations promulgated by state insurance departments are primarily intended to protect policyholders rather than stockholders. Likewise, regulations promulgated by FINRA are primarily intended to protect customers of broker-dealer businesses rather than stockholders.

        These regulations affect Hilltop's lending practices, capital structure, capital requirements, investment practices, dividend policy and growth, among other things. Failure to comply with laws, regulations or policies could result in damages, civil money penalties or reputational damage, as well as sanctions and supervisory actions by regulatory agencies that could subject Hilltop to significant restrictions on its business and its ability to expand through acquisitions or branching. While Hilltop has implemented policies and procedures designed to prevent any such violations of laws and regulations, such violations may occur from time to time, which could have a material adverse effect on its financial condition and results of operations.

        The U.S. Congress and federal regulatory agencies frequently revise banking and securities laws, regulations and policies. The Dodd-Frank Act, which became law in July 2010, has had, and will continue to have, a significant effect on the regulation of financial institutions and the financial services

44


Table of Contents

industry. The Dodd-Frank Act, among other things, established the CFPB and requires the CFPB and other federal agencies to implement many provisions of the Dodd-Frank Act. Hilltop expects that several aspects of the Dodd-Frank Act may affect its business, including, without limitation, increased capital requirements, increased mortgage regulation, restrictions on proprietary trading in securities, restrictions on investments in hedge funds and private equity funds, executive compensation restrictions and disclosure and reporting requirements. At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting rules and regulations will affect Hilltop's business. Compliance with these new laws and regulations likely will result in additional costs, which could be significant and may adversely impact Hilltop's results of operations, financial condition, and liquidity. For additional discussion of the Dodd-Frank Act, see "Information About the Companies—Hilltop—Government Supervision and Regulation" included elsewhere in this proxy statement/prospectus.

        During the second quarter of 2013, the Bank received a "satisfactory" CRA rating in connection with its most recent CRA performance evaluation. A CRA rating of less than "satisfactory" adversely affects a bank's ability to establish new branches and impairs a bank's ability to commence new activities that are "financial in nature" or acquire companies engaged in these activities. Other regulatory exam ratings or findings also may otherwise impact Hilltop's ability to branch, commence new activities or make acquisitions.

        Hilltop cannot predict whether or in what form any other proposed regulations or statutes will be adopted or the extent to which its business may be affected by any new regulation or statute. Such changes could subject Hilltop's business to additional costs, limit the types of financial services and products it may offer and increase the ability of non-banks to offer competing financial services and products, among other things.

The impact of the changing regulatory capital requirements and new capital rules are uncertain.

        In July 2013, the Federal Reserve Board approved a final rule that will substantially amend the risk-based capital rules applicable to Hilltop and the Bank. The final rule implements the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. The final rule includes new minimum risk-based capital and leverage ratios, which will be effective for Hilltop and the Bank on January 1, 2015, and refines the definition of what constitutes "capital" for purposes of calculating these ratios. The new minimum capital requirements will be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4%. The final rule also establishes a "capital conservation buffer" of 2.5% above the new regulatory minimum capital ratios and will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%; (ii) a Tier 1 to risk-based assets capital ratio of 8.5%; and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions. The application of more stringent capital requirements for Hilltop and the Bank could, among other things, adversely affect Hilltop's results of operations and growth, require the raising of additional capital, restrict its ability to pay dividends or repurchase shares and result in regulatory actions if Hilltop were to be unable to comply with such requirements.

        In addition, the Federal Reserve Board adopted a final rule in February 2014 that clarifies how companies should incorporate the Basel III regulatory capital reforms into their capital and business projections during the 2014 and subsequent cycles of capital plan submissions and stress tests required under the Dodd-Frank Act. For companies and their subsidiary banks with between $10.0 billion and $50.0 billion in total consolidated assets, the initial stress testing cycle began on October 1, 2013 and

45


Table of Contents

the initial nine-quarter planning horizon for stressed capital projections continues through the fourth quarter of 2015, which overlaps with the implementation of the Basel III capital reforms beginning on January 1, 2015. At June 30, 2014, Hilltop and the Bank had approximately $9.4 billion and $8.2 billion, respectively, in total consolidated assets and their average of total consolidated assets for the four most recent consecutive quarters was $9.1 billion and $8.1 billion, respectively. Accordingly, Hilltop and the Bank are not currently subject to capital planning and stress testing requirements. However, as a result of the proposed merger, Hilltop will have more than $10.0 billion in assets and will become subject to the stress testing requirements, which would likely increase Hilltop's cost of regulatory compliance. Management continues to study the implementation of Basel III regulatory capital reforms and stress testing requirements.

The CFPB recently issued "ability-to-repay" and "qualified mortgage" rules that may have a negative impact on Hilltop's loan origination process and foreclosure proceedings, which could adversely affect Hilltop's business, operating results, and financial condition.

        On January 10, 2013, the CFPB issued a final rule to implement the "qualified mortgage" provisions of the Dodd-Frank Act requiring mortgage lenders to consider consumers' ability to repay home loans before extending them credit. The CFPB's "qualified mortgage" rule took effect on January 10, 2014. The final rule describes certain minimum requirements for lenders making ability-to-repay determinations, but does not dictate that they follow particular underwriting models. Lenders will be presumed to have complied with the ability-to-repay rule if they issue "qualified mortgages," which are generally defined as mortgage loans prohibiting or limiting certain risky features. Loans that do not meet the ability-to-repay standard can be challenged in court by borrowers who default and the absence of ability-to-repay status can be used against a lender in foreclosure proceedings. Any loans that Hilltop makes outside of the "qualified mortgage" criteria could expose Hilltop to an increased risk of liability and reduce or delay Hilltop's ability to foreclose on the underlying property. It is difficult to predict how the CFPB's "qualified mortgage" rule will impact Hilltop when it takes effect, but any decreases in loan origination volume or increases in compliance and foreclosure costs caused by the rule could negatively affect Hilltop's business, operating results and financial condition.

Hilltop's mortgage origination segment is subject to investment risk on loans that it originates.

        Hilltop intends to sell, and not hold for investment, substantially all residential mortgage loans that it originates through PrimeLending. At times, however, Hilltop may originate a loan or execute an interest rate lock commitment ("IRLC") with a customer pursuant to which Hilltop agrees to originate a mortgage loan on a future date at an agreed-upon interest rate without having identified a purchaser for such loan or the loan underlying such IRLC. An identified purchaser may also decline to purchase a loan for a variety of reasons. In these instances, Hilltop will bear interest rate risk on an IRLC until, and unless, Hilltop is able to find a buyer for the loan underlying such IRLC and the risk of investment on a loan until, and unless, Hilltop is able to find a buyer for such loan. In addition, if a customer defaults on a mortgage payment shortly after the loan is originated, the purchaser of the loan may have a put right, whereby the purchaser can require Hilltop to repurchase the loan at the full amount that it paid. During periods of market downturn, Hilltop has at times chosen to hold mortgage loans when the identified purchasers have declined to purchase such loans because it could not obtain an acceptable substitute bid price for such loan. The failure of mortgage loans that Hilltop holds on its books to perform adequately could have a material adverse effect on Hilltop's financial condition, liquidity and results of operations.

46


Table of Contents

Changes in interest rates may change the value of Hilltop's mortgage servicing rights portfolio which may increase the volatility of Hilltop's earnings.

        Hilltop has recently expanded, and may continue to expand, its residential mortgage servicing operations within its mortgage origination segment. As a result of Hilltop's mortgage servicing business, Hilltop has a portfolio of mortgage servicing rights ("MSR"). A MSR is the right to service a mortgage loan—collect principal, interest and escrow amounts—for a fee. Hilltop measures and carries all of its residential MSRs using the fair value measurement method. Fair value is determined as the present value of estimated future net servicing income, calculated based on a number of variables, including assumptions about the likelihood of prepayment by borrowers.

        One of the principal risks associated with MSRs is that in a declining interest rate environment, they will likely lose a substantial portion of their value as a result of higher than anticipated prepayments. Moreover, if prepayments are greater than expected, the cash Hilltop receives over the life of the mortgage loans would be reduced. In the future, Hilltop may use various derivative financial instruments to provide a level of protection against such interest rate risk. However, no hedging strategy can protect Hilltop 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 Hilltop's risks and losses. The increasing size of Hilltop's MSR portfolio may increase its interest rate risk and correspondingly, the volatility of Hilltop's earnings, especially if Hilltop cannot adequately hedge the interest rate risk relating to its MSRs.

        At June 30, 2014, Hilltop's MSRs had a fair value of $35.9 million. Changes in fair value of Hilltop's MSRs are recorded to earnings in each period. Depending on the interest rate environment, it is possible that the fair value of Hilltop's MSRs may be reduced in the future. If such changes in fair value significantly reduce the carrying value of Hilltop's MSRs, Hilltop's financial condition and results of operations would be negatively affected.

Hilltop's financial advisory business is subject to various risks associated with the securities industry, particularly those impacting the public finance industry.

        Hilltop's financial advisory business is subject to uncertainties that are common in the securities industry. These uncertainties include:

        As a result, the revenues and operating results of Hilltop's financial advisory segment may vary significantly from quarter to quarter and from year to year. Unfavorable financial or economic conditions could reduce the number and size of transactions in which Hilltop provides financial advisory, underwriting and other services. Disruptions in fixed income and equity markets could lead to a decline in the volume of transactions executed for customers and, therefore, to declines in revenues from commissions and clearing services. First Southwest is much smaller and has much less capital than many competitors in the securities industry. In addition, First Southwest is an operating subsidiary of the Bank, which means that its activities are limited to those that are permissible for the Bank.

47


Table of Contents

Income that Hilltop recognized as a bargain purchase gain in connection with the FNB Transaction is subject to change.

        In September 2013, Hilltop assumed substantially all of the liabilities, including all of the deposits, and acquired substantially all of the assets, of FNB from the FDIC in the FNB Transaction. Hilltop acquired approximately $2.2 billion in assets and assumed $2.2 billion in liabilities in the FNB Transaction. The FNB Transaction was accounted for under the purchase method of accounting. Hilltop recorded a pre-tax bargain purchase gain totaling $12.6 million as a result of the FNB Transaction, which was included as a component of noninterest income in Hilltop's consolidated statement of operations for the year ended December 31, 2013. The amount of the gain was equal to the amount by which the estimated fair value of assets purchased exceeded the estimated fair value of liabilities assumed. The bargain purchase gain resulting from the FNB Transaction was a non-recurring gain that is not expected to be repeated in future periods. Hilltop used significant estimates and assumptions to value the identifiable assets acquired and liabilities assumed. Any revisions to its estimates could result in the recognition of additional bargain purchase gain, which would be recorded as noninterest income, or the recognition of less or no bargain purchase gain, in which case Hilltop would reduce noninterest income and may be required to record goodwill that would be subject to an ongoing impairment analysis.

Income that Hilltop recognizes in connection with the purchase discount of the credit-impaired loans acquired in the PlainsCapital Merger and the FNB Transaction and accounted for under Accounting Standards Codification 310-30 could be volatile in nature and have significant effects on reported net income.

        In connection with the PlainsCapital Merger and the FNB Transaction, Hilltop acquired loans at a discount of $146.6 million and $343.1 million, respectively. The PlainsCapital Merger and the FNB Transaction were each accounted for under the purchase method of accounting. Accordingly, these discounts are amortized and accreted to interest income on a monthly basis. The effective yield and related discount accretion on credit-impaired loans is initially determined at the acquisition date based upon estimates of the timing and amount of future cash flows as well as the amount of credit losses that will be incurred. These estimates are updated quarterly. In future periods, if actual historical results combined with future projections of these factors (amount, timing, or credit losses) differ from the initial projections, the effective yield and the amount of discount recognized will change. Volatility may increase as the variance of actual results from initial projections increases. As the acquired loans are removed from Hilltop's books, the related discount will no longer be available for accretion into income. Accretion of $28.6 million and $61.8 million on loans purchased at a discount in the PlainsCapital Merger was recorded as interest income during the six months ended June 30, 2014 and the year ended December 31, 2013, respectively, and accretion of $15.3 million and $7.5 million on loans purchased at a discount in the FNB Transaction was recorded as interest income during the six months ended June 30, 2014 and the period from September 14, 2013 to December 31, 2013, respectively. As of June 30, 2014, the balance of Hilltop's discount on loans in the aggregate was $349.6 million.

Hilltop ultimately may write-off goodwill and other intangible assets resulting from business combinations.

        As a result of purchase accounting in connection with Hilltop's acquisition of NLC, the PlainsCapital Merger and the FNB Transaction, Hilltop's consolidated balance sheet at June 30, 2014, contained goodwill of $251.8 million and other intangible assets of $65.3 million. On an ongoing basis, Hilltop evaluates whether facts and circumstances indicate any impairment of value of intangible assets. As circumstances change, the value of these intangible assets may not be realized by Hilltop. If Hilltop determines that a material impairment has occurred, Hilltop will be required to write-off the impaired portion of intangible assets, which could have a material adverse effect on its results of operations in the period in which the write-off occurs.

48


Table of Contents

The accuracy of Hilltop's financial statements and related disclosures could be affected if Hilltop is exposed to actual conditions different from the judgments, assumptions or estimates used in Hilltop's critical accounting policies.

        The preparation of financial statements and related disclosure in conformity with GAAP requires Hilltop to make judgments, assumptions and estimates that affect the amounts reported in Hilltop's consolidated financial statements and accompanying notes. Hilltop's critical accounting policies, which are included in this proxy statement/prospectus, describe those significant accounting policies and methods used in the preparation of Hilltop's consolidated financial statements that are considered "critical" by it because they require judgments, assumptions and estimates that materially impact Hilltop's consolidated financial statements and related disclosures. As a result, if future events differ significantly from the judgments, assumptions and estimates in Hilltop's critical accounting policies, such events or assumptions could have a material impact on Hilltop's audited consolidated financial statements and related disclosures.

Hilltop is dependent on its management team, and the loss of Hilltop's senior executive officers or other key employees could impair its relationship with customers and adversely affect Hilltop's business and financial results.

        Hilltop's success is dependent, to a large degree, upon the continued service and skills of its existing management team and other key employees with long-term customer relationships. Hilltop's business and growth strategies are built primarily upon its 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 Hilltop's business because of their skills, knowledge of the market, years of industry experience and the difficulty of finding qualified replacement personnel. In addition, Hilltop currently does 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 Hilltop, its business, financial condition, results of operations and growth could suffer.

A decline in the market for advisory services could adversely affect Hilltop's business and results of operations.

        Hilltop's financial advisory segment has historically earned a significant portion of its revenues from advisory fees paid to it by its clients, in large part upon the successful completion of the client's transaction. Financial advisory revenues from the public finance group of First Southwest represented the largest component of Hilltop's financial advisory segment's net revenues for the year ended December 31, 2013. Unlike other investment banks, First Southwest earns most of its revenues from its advisory fees and, to a lesser extent, from other business activities such as commissions and underwriting. New issuances in the municipal market by cities, counties, school districts, state and other governmental agencies, airports, healthcare institutions, institutions of higher education and other clients that First Southwest's public finance group serves can be subject to significant fluctuations based on by factors such as changes in interest rates, property tax bases, budget pressures on certain issuers caused by uncertain economic times and other factors. Hilltop expects that the reliance of its financial advisory segment on advisory fees will continue for the foreseeable future, and a decline in public finance advisory engagements or the market for advisory services generally would have an adverse effect on Hilltop's business and results of operations.

Negative publicity regarding Hilltop, or financial institutions in general, could damage Hilltop's reputation and adversely impact its business and results of operations.

        Hilltop's ability to attract and retain customers and conduct its business could be adversely affected to the extent Hilltop's reputation is damaged. Reputational risk, or the risk to its business, earnings and capital from negative public opinion regarding Hilltop, or financial institutions in general, is inherent in its business. Adverse perceptions concerning Hilltop's reputation could lead to difficulties in generating

49


Table of Contents

and maintaining accounts as well as in financing them. In particular, negative perceptions concerning Hilltop's reputation could lead to decreases in the level of deposits that consumer and commercial customers and potential customers choose to maintain with Hilltop. 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 Hilltop or the financial institutions industry generally; general company performance; or from actions taken by government regulators and community organizations in response to such activities or circumstances. Furthermore, Hilltop's failure to address, or the perception that it has failed to address, these issues appropriately could impact Hilltop's ability to keep and attract customers and/or employees and could expose Hilltop to litigation and/or regulatory action, which could have an adverse effect on Hilltop's business and results of operations.

Hilltop's 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 Hilltop's reputation or the disclosure of confidential information.

        Hilltop relies heavily on communications and information systems to conduct its business and maintain the security of confidential information and complex transactions, which subjects Hilltop to an increasing risk of cyber incidents from these activities due to a combination of new technologies and the increasing use of the Internet to conduct financial transactions, as well as a potential failure of interruption or breach in the security of these systems, including those that could result from attacks or planned changes, upgrades and maintenance of these systems. Such cyber incidents could result in failures or disruptions in Hilltop's customer relationship management, securities trading, general ledger, deposits, computer systems, electronic underwriting servicing or loan origination systems. Third parties with which Hilltop does business may also be sources of cybersecurity or other technological risks.

        Although Hilltop devotes significant resources to maintain and regularly upgrade its systems and networks with measures such as intrusion and detection prevention systems and monitoring firewalls to safeguard critical business applications, there is no guarantee that these measures or any other measures can provide absolute security. Hilltop's computer systems, software and networks may be adversely affected by cyber incidents such as unauthorized access; loss or destruction of data (including confidential client information); account takeovers; unavailability of service; computer viruses or other malicious code; cyber attacks; and other events. These threats may derive from human error, fraud or malice on the part of employees or third parties, or may result from accidental technological failure. Additional challenges are posed by external extremist parties, including foreign state actors, in some circumstances, as a means to promote political ends. If one or more of these events occurs, it could result in the disclosure of confidential client information, damage to Hilltop's reputation with its clients and the market, customer dissatisfaction, additional costs such as repairing systems or adding new personnel or protection technologies, regulatory penalties, exposure to litigation and other financial losses to both Hilltop and its clients and customers. Such events could also cause interruptions or malfunctions in Hilltop's operations.

        Hilltop has been the subject of denial of services attacks from external sources that have limited or interrupted the availability of its online banking services. Although to date Hilltop is are not aware of any material losses relating to cyber attacks or other information security breaches, it may suffer such losses in the future. Hilltop has taken steps to improve and upgrade the security of its systems in response to such threats, such incidents could occur again, but they could occur more frequently or on a more significant scale.

50


Table of Contents

Hilltop faces strong competition from other financial institutions and financial service and insurance companies, which may adversely affect its operations and financial condition.

        Hilltop's banking and mortgage origination businesses face vigorous competition from banks and other financial institutions, including savings and loan associations, savings banks, finance companies and credit unions. A number of these banks and other financial institutions have substantially greater resources and lending limits, larger branch systems and a wider array of banking services than Hilltop does. Hilltop also competes with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, insurance companies and governmental organizations, each of which may offer more favorable financing than Hilltop is able to provide. In addition, some of Hilltop's non-bank competitors are not subject to the same extensive regulations that govern Hilltop. The banking business in Texas has become increasingly competitive over the past several years, and Hilltop expects the level of competition it faces to further increase. Hilltop's profitability depends on its ability to compete effectively in these markets. This competition may reduce or limit Hilltop's margins on banking services, reduce Hilltop's market share and adversely affect Hilltop's results of operations and financial condition.

        The insurance industry also is highly competitive and has, historically, been characterized by periods of significant price competition, alternating with periods of greater pricing discipline during which competitors focus on other factors. In the current market environment, competition in Hilltop's insurance business' industry is based primarily on products offered, service, experience, the strength of agent and policyholder relationships, reputation, speed and accuracy of claims payment, perceived financial strength, ratings, scope of business, commissions paid and policy and contract terms and conditions. Hilltop's insurance business competes with many other insurers, including large national companies who have greater financial, marketing and management resources than Hilltop's insurance segment. Many of these competitors also have better ratings and market recognition than Hilltop's insurance business. Hilltop's insurance segment seeks to distinguish itself from its competitors by providing a broad product line and targeting those market segments that provide the best opportunity to earn an underwriting profit.

        In addition, a number of new, proposed or potential industry developments also could increase competition in Hilltop's insurance business' industry. These developments include changes in practices and other effects caused by the Internet (including direct marketing campaigns by Hilltop's 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 Hilltop's insurance business from expanding its book of business. Hilltop's 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 Hilltop's insurance business. New competition could reduce the demand for Hilltop's insurance segment's insurance products, which could have a material adverse effect on its financial condition and results of operations.

        The financial advisory and investment banking industries also are intensely competitive industries and will likely remain competitive. Hilltop's financial advisory business competes directly with numerous other financial advisory and investment banking firms, broker-dealers and banks, including large national and major regional firms and smaller niche companies, some of whom are not broker-dealers and, therefore, not subject to the broker-dealer regulatory framework. In addition to competition from firms currently in the industry, there has been increasing competition from others offering financial services, including automated trading and other services based on technological innovations. Hilltop's financial advisory business competes on the basis of a number of factors, including the quality of advice and service, innovation, reputation and price. Many of Hilltop's financial advisory segment's competitors in the investment banking industry have a greater range of products and services, greater financial and marketing resources, larger customer bases, greater name recognition, more managing

51


Table of Contents

directors to serve their clients' needs, greater global reach and more established relationships with their customers than Hilltop's financial advisory business. Additionally, certain competitors of Hilltop's financial advisory business have reorganized or plan to reorganize from investment banks into bank holding companies which may provide them with a competitive advantage. These larger and better capitalized competitors may be more capable of responding to changes in the investment banking market, to compete for skilled professionals, to finance acquisitions, to fund internal growth and to compete for market share generally. Increased pressure created by any current or future competitors, or by competitors of Hilltop's financial advisory business collectively, could materially and adversely affect Hilltop's 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, Hilltop's financial advisory business may from time to time make certain pricing, service or marketing decisions that also could materially and adversely affect Hilltop's business and results of operations.

Hilltop's mortgage origination and insurance businesses are subject to seasonal fluctuations and, as a result, Hilltop's results of operations for any given quarter may not be indicative of the results that may be achieved for the full fiscal year.

        Hilltop's mortgage origination business is subject to several variables that can impact loan origination volume, including seasonal and interest rate fluctuations. Hilltop typically experiences 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 Hilltop's 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 Hilltop's mortgage origination activities. Conversely, a decrease in the general level of interest rates, among other things, may lead to increased competition for mortgage loan origination business. As a result of these variables, Hilltop's results of operations for any single quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.

        Generally, Hilltop's insurance segment's insured risks exhibit higher losses in the second and third calendar quarters due to a seasonal concentration of weather-related events in its primary geographic markets. Although weather-related losses (including hail, high winds, tornadoes and hurricanes) can occur in any calendar quarter, the second calendar quarter, historically, has experienced the highest frequency of losses associated with these events. Hurricanes, however, are more likely to occur in the third calendar quarter of the year.

If the actual losses and loss adjustment expenses of Hilltop's 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 Hilltop's insurance segment depend upon its ability to assess accurately the potential losses associated with the risks that it insures. Hilltop's insurance segment establishes reserve liabilities to cover the payment of all losses and loss adjustment expenses incurred under the policies that it writes. These liability estimates include case estimates, which are established for specific claims that have been reported to Hilltop's insurance segment, and liabilities for claims that have been incurred but not reported ("IBNR"). Loss adjustment expenses represent expenses incurred to investigate and settle claims. To the extent that losses and loss adjustment expenses exceed estimates, NLIC and ASIC will be required to increase their reserve liabilities and reduce their income in the period in which the deficiency is identified. In addition, increasing reserves causes a reduction in policyholders' surplus and could cause a downgrade in the ratings of NLIC and ASIC. This, in turn, could diminish Hilltop's ability to sell insurance policies.

52


Table of Contents

        The liability estimation process for Hilltop's 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 Hilltop's insurance segment expects that these factors will increase the severity of losses in the future. As NLC observed in 2008, the severity of some catastrophic weather events, including the scope and extent of damage and the inability to gain access to damaged properties, and the ensuing shortages of labor and materials and resulting demand surge, provide additional challenges to estimating ultimate losses. Hilltop's insurance segment's liabilities for losses and loss adjustment expenses include assumptions about future payments for settlement of claims and claims handling expenses, such as medical treatments and litigation costs. To the extent inflation causes these costs to increase above liabilities established for these costs, Hilltop's insurance segment expects to be required to increase its liabilities, together with a corresponding reduction in its net income in the period in which the deficiency is identified.

        Estimating an appropriate level of liabilities for losses and loss adjustment expense is an inherently uncertain process. Accordingly, actual loss and loss adjustment expenses paid will likely deviate, perhaps substantially, from the liability estimates reflected in Hilltop's insurance segment's consolidated financial statements. Claims could exceed Hilltop's insurance segment's estimate for liabilities for losses and loss adjustment expenses, which could have a material adverse effect on its financial condition and results of operations.

If Hilltop's 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, Hilltop's 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.

        Hilltop's insurance segment purchases reinsurance to protect itself from certain risks and to share certain risks it underwrites. During 2013 and 2012, Hilltop's insurance segment's personal lines ceded 10.2% and 12.1%, respectively, of its direct insurance premiums written (primarily through excess of loss, quota share and catastrophe reinsurance treaties) and its commercial lines ceded 4.6% and 4.9%, respectively, of its direct insurance premiums written (primarily through excess of loss and catastrophe reinsurance treaties). The total cost of reinsurance, inclusive of per risk excess and catastrophe, decreased 9.3% in the year ended December 31, 2013, which is partially attributable to reduced limits, lower rates and lower reinstatement premiums in 2013 of $0.2 million. Reinsurance cost generally fluctuates as a result of storm costs or any changes in capacity within the reinsurance market.

53


Table of Contents

        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, Hilltop's insurance segment may not be able to obtain desired amounts of reinsurance. Even if Hilltop's insurance segment is able to obtain adequate reinsurance, it may not be able to obtain it from entities with satisfactory creditworthiness or negotiate terms that it deems appropriate or acceptable. Although the cost of reinsurance is, in some cases, reflected in Hilltop's insurance segment's premium rates, Hilltop's 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 Hilltop's insurance segment guaranteed the rates, Hilltop's insurance segment would be adversely affected. In addition, if Hilltop's 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 Hilltop's insurance segment's revenue and may have a material adverse effect on its results of operations and financial condition.

        At June 30, 2014, Hilltop's insurance segment had $4.1 million in reinsurance recoverables, including ceded paid loss recoverables, ceded losses and loss adjustment expense recoverables and ceded unearned insurance premiums. Hilltop's insurance segment expects to continue to purchase substantial reinsurance coverage in the foreseeable future. Because Hilltop's 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 Hilltop's insurance segment for losses paid, or delays in reimbursing Hilltop's insurance segment for losses paid, its liability for these claims could materially and adversely affect its financial condition and results of operations.

Hilltop is subject to legal claims and litigation that could have a material adverse effect on its business.

        Hilltop faces significant legal risks in each of the business segments in which Hilltop operates, 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 Hilltop or any of Hilltop's subsidiaries could have a material adverse effect on Hilltop's results of operations or cause significant reputational harm to Hilltop, which could seriously harm Hilltop's 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 Hilltop is 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 Hilltop's business, which, in turn, could have a material adverse effect on Hilltop's financial condition and results of operations.

Hilltop may be subject to environmental liabilities in connection with the foreclosure on real estate assets securing the loan portfolio of Hilltop's banking segment.

        Hazardous or toxic substances or other environmental hazards may be located on the real estate that secures Hilltop's loans. If Hilltop acquires such properties as a result of foreclosure, or otherwise, Hilltop could become subject to various environmental liabilities. For example, Hilltop could be held liable for the cost of cleaning up or otherwise addressing contamination at or from these properties. Hilltop 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, Hilltop could be held liable for costs relating to environmental contamination at or from Hilltop's current or former properties. Hilltop may not detect all environmental hazards associated with

54


Table of Contents

these properties. If Hilltop ever became subject to significant environmental liabilities, Hilltop's business, financial condition, liquidity and results of operations could be harmed.

If Hilltop fails to maintain an effective system of internal controls over financial reporting, the accuracy and timing of its financial reporting may be adversely affected.

        Effective internal controls are necessary for Hilltop to provide timely and reliable financial reports and effectively prevent fraud. Any inability to provide reliable financial reports or prevent fraud could harm Hilltop's business. If Hilltop fails to maintain the adequacy of its internal controls, Hilltop's financial statements may not accurately reflect Hilltop's financial condition. Inadequate internal controls over financial reporting could impact the reliability and timeliness of Hilltop's financial reports and could cause investors to lose confidence in Hilltop's reported financial information, which could have a negative effect on Hilltop's business and the value of its securities.

The debt agreements of Hilltop's insurance segment and its controlled affiliates contain financial covenants and impose restrictions on its business.

        The indenture governing NLC's LIBOR plus 3.40% notes due 2035 contains restrictions on its ability to, among other things, declare and pay dividends and merge or consolidate. In addition, this indenture contains a change of control provision, which provides that (i) if a person or group becomes the beneficial owner, directly or indirectly, of 50% or more of NLC's equity securities and (ii) if NLC's ratings are downgraded by a nationally recognized statistical rating organization (as defined in the Exchange Act), then each holder of the notes governed by such indenture has the right to require that NLC purchase such holder's notes, in whole or in part, at a price equal to 100% of the then outstanding principal amount. Likewise, the surplus indentures governing NLIC's two LIBOR plus 4.10% and 4.05% notes due 2033 and ASIC's LIBOR plus 4.05% notes due 2034 contain restrictions on dividends and mergers and consolidations. In addition, NLC has other credit arrangements with its affiliates and other third-parties.

        NLC's ability to comply with these covenants may be affected by events beyond its control, including prevailing economic, financial and industry conditions. The breach of any of these restrictions could result in a default under the loan agreements or indentures governing the notes or under its other debt agreements. An event of default under its debt agreements would permit some of its lenders to declare all amounts borrowed from them to be due and payable, together with accrued and unpaid interest. If NLC were unable to repay debt to its secured lenders, these lenders could proceed against the collateral securing that debt. In addition, acceleration of its other indebtedness may cause NLC to be unable to make interest payments on the notes. Other agreements that NLC or its insurance company subsidiaries may enter into in the future may contain covenants imposing significant restrictions on their respective businesses that are similar to, or in addition to, the covenants under their respective existing agreements. These restrictions may affect NLC's ability to operate its business and may limit its ability to take advantage of potential business opportunities as they arise.

Risks Related to Hilltop's Substantial Cash Position and Related Strategies for its Use

Because Hilltop intends to use a substantial portion of its remaining available cash to make acquisitions or effect a business combination, Hilltop may become subject to risks inherent in pursuing and completing any such acquisitions or business combination.

        Hilltop is endeavoring to make acquisitions or effect business combinations with a substantial portion of Hilltop's remaining available cash. Hilltop 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.

55


Table of Contents

        The success of any acquisition or business combination will depend upon, among other things, the ability of management and Hilltop's employees to integrate personnel, operations, products and technologies effectively, to retain and motivate key personnel and to retain customers and clients of targets. In addition, any acquisition or business combination Hilltop undertakes may consume available cash resources, result in potentially dilutive issuances of equity securities and divert management's attention from other business concerns. Even if Hilltop conducts extensive due diligence on a target business that Hilltop acquires or with which Hilltop merges, its diligence may not surface all material issues that may adversely affect a particular target business, and Hilltop may be forced to later write-down or write-off assets, restructure Hilltop's operations or incur impairment or other charges that could result in Hilltop's reporting losses. Consequently, Hilltop also may need to make further investments to support the acquired or combined company and may have difficulty identifying and acquiring the appropriate resources.

        Hilltop may enter, through acquisitions or a business combination, into new lines of business or initiate new service offerings subject to the restrictions imposed upon Hilltop 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 Hilltop may combine or that Hilltop may ultimately acquire.

Existing circumstances may result in several of Hilltop's directors having interests that may conflict with its interests.

        A director who has a conflict of interest with respect to an issue presented to Hilltop's board will have no inherent legal obligation to abstain from voting upon that issue. Hilltop does not have provisions in its bylaws or charter that require an interested director to abstain from voting upon an issue, and Hilltop does not expect to add provisions in Hilltop's 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 Hilltop's 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 Hilltop's best interests. In addition, even if an interested director abstains from voting, the director's participation in the meeting and discussion of an issue in which they have, or companies with which they are associated have, an interest could influence the votes of other directors regarding the issue.

Difficult market conditions have adversely affected the yield on Hilltop's available cash.

        Hilltop's primary objective is to preserve and maintain the liquidity of Hilltop's available cash, while at the same time maximizing yields without significantly increasing risk. The capital and credit markets have been experiencing volatility and disruption for a prolonged period. This volatility and disruption reached unprecedented levels, resulting in dramatic declines in interest rates and other yields relative to risk. This downward pressure has negatively affected the yields Hilltop receives on its available cash. If current levels of market disruption and volatility continue or worsen, there can be no assurance that Hilltop will receive any significant yield on its available cash. Further, given current market conditions, no assurance can be given that Hilltop will be able to preserve its available cash.

Risks Related to Hilltop's Common Stock

Hilltop may issue shares of preferred stock or additional shares of common stock to complete an acquisition or effect a combination or under an employee incentive plan after consummation of an acquisition or combination, which would dilute the interests of Hilltop's stockholders and likely present other risks.

        The issuance of shares of preferred stock or additional shares of common stock:

56


Table of Contents

        Hilltop's authorized capital stock includes ten million shares of preferred stock, and Hilltop currently has 114,068 shares of Series B Preferred Stock issued and outstanding, liquidation preference $1,000 per share, to the Secretary of the Treasury pursuant to the SBLF. Hilltop's board of directors, in its sole discretion, may designate and issue one or more additional series of preferred stock from the authorized and unissued shares of preferred stock. Subject to limitations imposed by law or Hilltop's charter, Hilltop's 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 Hilltop's 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.

Hilltop's common stock price may experience substantial volatility, which may affect your ability to sell Hilltop's common stock at an advantageous price.

        Price volatility of Hilltop's common stock may affect your ability to sell Hilltop's common stock at an advantageous price. Market price fluctuations in Hilltop's 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 Hilltop's common stock.

Hilltop's rights and the rights of Hilltop's stockholders to take action against Hilltop's directors and officers are limited.

        Hilltop is 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 Hilltop's best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. In addition, Hilltop's charter eliminates Hilltop's directors' and officers' liability to Hilltop and its 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. Hilltop's bylaws require Hilltop to indemnify Hilltop's 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, Hilltop's stockholders and Hilltop may have more limited rights against Hilltop's directors and officers than might otherwise exist under common law. In addition, Hilltop may be obligated to fund the defense costs incurred by Hilltop's directors and officers.

57


Table of Contents

The Treasury's investment in Hilltop imposes restrictions and obligations upon Hilltop that could adversely affect the rights of Hilltop's common stockholders.

        Hilltop's has sold 114,068 shares of Hilltop's Series B Preferred Stock, liquidation preference $1,000 per share, for $114.1 million, to the Secretary of the Treasury pursuant to the SBLF. The shares of Series B Preferred Stock are senior to shares of Hilltop's common stock with respect to dividends and liquidation preference. The terms of the Series B Preferred Stock provided for the payment of non-cumulative dividends on a quarterly basis. As long as shares of Series B Preferred Stock remain outstanding, Hilltop may not pay dividends to Hilltop's common stockholders (nor may Hilltop repurchase or redeem any shares of Hilltop's common stock) during any quarter in which Hilltop fails to declare and pay dividends on the Series B Preferred Stock and for the next three quarters following such failure. In addition, under the terms of the Series B Preferred Stock, Hilltop may only declare and pay dividends on Hilltop's common stock (or repurchase shares of Hilltop's common stock), if, after payment of such dividend, the dollar amount of Hilltop's Tier 1 capital would be at least ninety percent (90%) of Tier 1 capital as of September 27, 2011, excluding any charge-offs and redemptions of the Series B Preferred Stock.

Provisions in Hilltop's charter and bylaws, as well as applicable banking and insurance laws, could discourage acquisition bids or merger proposals, which may adversely affect the market price of Hilltop's common stock.

        Authority to Issue Additional Shares.    Under Hilltop's charter, its 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 Hilltop's board of directors that may delay or prevent a change in control of Hilltop, even if the change is in the best interests of the SWS stockholders. At June 30, 2014, 114,068 shares of preferred stock were designated or outstanding.

        Banking Laws.    Any change in control of Hilltop 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 Hilltop.

        Insurance Laws.    NLIC and ASIC are domiciled in the State of Texas. Before a person can acquire control of an insurance company domiciled in Texas, prior written approval must be obtained from the Texas Department of Insurance. Acquisition of control would be presumed on the acquisition, directly or indirectly, of ten percent or more of Hilltop's outstanding voting stock, unless the regulators determine otherwise. Prior to granting approval of an application to acquire control of a domestic insurer, the Texas Department of Insurance will consider several factors, such as:

58


Table of Contents

These laws may discourage potential acquisition proposals for Hilltop and may delay, deter or prevent a change of control of Hilltop, including transactions that some or all of Hilltop's stockholders might consider desirable.

        Restrictions on Calling Special Meeting, Cumulative Voting and Director Removal.    Hilltop's bylaws includes a provision prohibiting the holders of less than a majority of the voting power represented by all of Hilltop's shares issued, outstanding and entitled to be voted at a proposed meeting, from calling a special meeting of stockholders. Hilltop's charter does not provide for the cumulative voting in the election of directors. In addition, Hilltop's charter provides that Hilltop's directors may be removed only 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 Hilltop's 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 Hilltop's bylaws and charter may delay, discourage or prevent an attempted acquisition or change in control of Hilltop.

An investment in Hilltop's common stock is not an insured deposit.

        An investment in Hilltop's common stock is not a bank deposit and is not insured or guaranteed by the FDIC, SIPC, the Texas Department of Insurance or any other government agency. Accordingly, you should be capable of affording the loss of any investment in Hilltop's common stock.

59


Table of Contents

FORWARD LOOKING STATEMENTS

        This proxy statement/prospectus contains or incorporates by reference a number of "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about the financial conditions, results of operations, earnings outlook and prospects of Hilltop, SWS and the potential combined company and may include statements for the period following the completion of the merger. You can find many of these statements by looking for words such as "plan," "believe," "expect," "intend," "anticipate," "estimate," "budget," "indicate," "target," "project," "potential," "could," "should," "may," "possible" or other similar expressions which identify these forward-looking statements and appear in a number of places in this proxy statement/prospectus (and the documents to which we refer you in this proxy statement/prospectus) and include, but are not limited to, all statements relating directly or indirectly to the timing or likelihood of completing the merger, plans for future growth and other business development activities as well as capital expenditures, financing sources and the effects of regulation and competition and all other statements regarding our intent, plans, beliefs or expectations or those of our directors or officers.

        The forward-looking statements involve certain risks and uncertainties. The ability of either Hilltop or SWS to predict results or the actual effects of its plans and strategies, or those of the combined company, is subject to inherent uncertainty. Factors that may cause actual events or results to differ materially from such forward-looking statements include those set forth under "Risk Factors" included elsewhere in, or incorporated in, this proxy statement/prospectus, as well as, among others, the following:

60


Table of Contents

        Because these forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. You are cautioned not to place undue reliance on these statements, which speak only as of the date of this proxy statement/prospectus or the date of any document incorporated by reference in this proxy statement/prospectus. Any forward-looking statements made or incorporated in this proxy statement/prospectus are qualified in their entirety by these cautionary statements, and there can be no assurance that the actual results or developments anticipated by Hilltop or SWS will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us or our business or operations.

        All subsequent written and oral forward-looking statements concerning the merger or other matters addressed or incorporated in this proxy statement/prospectus and attributable to Hilltop or SWS or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this proxy statement/prospectus. Except to the extent required by applicable law or regulation, Hilltop and SWS undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this proxy statement/prospectus or to reflect new information or the occurrence of unanticipated events.

61


Table of Contents

THE SWS SPECIAL MEETING

        This section contains information about the special meeting of SWS stockholders that has been called to allow SWS stockholders to consider and vote on the merger agreement and other related matters.

        Together with this proxy statement/prospectus, SWS is also sending you a notice of the SWS special meeting and a form of proxy that is solicited by the SWS board of directors for use at the special meeting and at any adjournments or postponements of the special meeting. The SWS special meeting will be held on November 21, 2014, at 9:00 a.m., local time, at Renaissance Tower, 1201 Elm Street, Suite 4200, Dallas, Texas 75270.

Matters to be Considered

        At the SWS special meeting, holders of SWS common stock as of the record date will be asked to consider and vote on:

Proxies

        Each copy of this proxy statement/prospectus mailed to holders of SWS common stock is accompanied by a form of proxy with instructions for voting. If you hold stock in your name as a stockholder of record, you may complete, sign, date and mail your proxy card in the enclosed postage paid return envelope as soon as possible, vote by telephone by calling the toll-free number listed on the SWS proxy card, vote by accessing the internet site listed on the SWS proxy card or vote in person at the SWS special meeting. If you hold your stock in "street name" through a bank or broker, you must direct your bank or broker to vote in accordance with the instruction form included with these materials and forwarded to you by your bank or broker. This voting instruction form provides instructions for voting. To vote using the proxy card you must sign, date and return it in the enclosed postage-paid envelope. Instructions on how to vote by telephone or by the internet are included with your proxy card.

        If you are a holder of record, to change your vote, you must:

        If you wish to revoke rather than change your vote, you must send a written, signed revocation to SWS Group, Inc., 1201 Elm Street, Suite 3500, Dallas, Texas 75270, Attn: Corporate Secretary, which must be received prior to the exercise of the proxy. You must include your control number.

        If you hold shares in "street name" and wish to change or revoke your vote, please refer to the information on the voting instruction form included with these materials and forwarded to you by your bank, broker or other holder of record to see your voting options.

62


Table of Contents

        All shares represented by valid proxies that we receive through this solicitation, and that are not revoked, will be voted in accordance with your instructions on the proxy card. If you make no specification on your proxy card as to how you want your shares voted before signing and returning it, your proxy will be voted as recommended by the SWS board of directors.

        SWS stockholders with shares represented by stock certificates should not send SWS stock certificates with their proxy cards. After the merger is completed, holders of SWS common stock certificates or shares of SWS common stock held in book-entry form will be mailed a transmittal form with instructions on how to exchange their SWS stock certificates or book-entry shares for the merger consideration.

Participants in the SWS 401(k) Plan

        If you hold shares indirectly in the SWS 401(k) Plan, you have the right to direct the plan trustee how to vote the shares that you hold in your account. In accordance with the terms of the plan, if you fail to instruct the plan trustee how to vote your plan shares, the trustee will generally vote your plan shares in the same proportion as the shares voted pursuant to the instructions of participants who timely give such instructions.

Solicitation of Proxies

        SWS will bear the entire cost of soliciting proxies from its stockholders. In addition to solicitation of proxies by mail, SWS will request that banks, brokers, and other record holders send proxies and proxy material to the beneficial owners of SWS common stock and secure their voting instructions. SWS will reimburse the record holders for their reasonable expenses in taking those actions. If necessary, SWS may use several of its regular employees, who will not be specially compensated, to solicit proxies from SWS stockholders, either personally or by telephone, facsimile, letter or other electronic means. SWS has made arrangements with MacKenzie Partners, Inc. to assist SWS in soliciting proxies and has agreed to pay them $30,000, plus reasonable expenses for these services. In addition, Hilltop has made arrangements with Innisfree M&A Incorporated to provide advisory services in connection with the merger that may include the solicitation of proxies and has agreed to pay them $25,000 plus reasonable expenses for these services.

Record Date

        The close of business on October 3, 2014 has been fixed as the record date for determining the SWS stockholders entitled to receive notice of and to vote at the SWS special meeting. At that time, 48,456,850 shares of SWS common stock were outstanding, held by approximately 98 holders of record.

Quorum

        In order to conduct business at the SWS special meeting, there must be a quorum. A quorum is the number of shares that must be present at the meeting, either in person or by proxy. To have a quorum at the special meeting requires the presence of stockholders or their proxies who are entitled to cast at least a majority of the votes that all stockholders are entitled to cast. Abstentions and broker non-votes will be counted for the purpose of determining whether a quorum is present.

        You are entitled to one vote for each share of SWS common stock you held as of the record date.

Vote Required

        Approval of the merger proposal requires the affirmative vote of a majority of the shares of SWS common stock outstanding on the record date for the SWS special meeting. Because the affirmative vote of the holders of at least a majority of the shares of SWS common stock outstanding on the

63


Table of Contents

record date for the SWS special meeting is needed to approve the merger proposal, an abstention or a broker non-vote will have the effect of a vote against the merger proposal. Approval of the compensation proposal and the adjournment proposal require, in each case, the affirmative vote of a majority of the shares of SWS common stock represented in person or by proxy at the SWS special meeting and entitled to vote on such proposal. An abstention or broker non-vote will have no effect on the compensation proposal or the adjournment proposal. Each holder of SWS common stock will be entitled to one vote per share on each of the proposals presented at the SWS annual meeting. As of the date of this proxy statement/prospectus, Hilltop owns 10,171,039 shares of SWS common stock, or approximately 21.0% of the currently outstanding SWS common shares.

        Every SWS stockholder's vote is important. The SWS board of directors urges SWS stockholders to promptly vote by: (1) completing, signing, dating and mailing your proxy card in the enclosed postage paid return envelope as soon as possible; (2) calling the toll-free number listed on the SWS proxy card; or (3) accessing the internet site listed on the SWS proxy card. If you hold your stock in "street name" through a bank or broker, please direct your bank or broker to vote in accordance with the instruction form included with these materials and forwarded to you by your bank or broker.

Shares Held by Officers and Directors

        As of the record date, to the knowledge of SWS, directors and executive officers of SWS had the right to vote approximately 2,425,026 shares of SWS common stock (not including the shares held by Hilltop described below), or approximately 5% of the outstanding shares of SWS common stock entitled to vote at the special meeting. We currently expect that each of these individuals will vote their shares of SWS common stock in favor of the proposals to be presented at the special meeting.

Shares Held by Hilltop

        As of the date of this proxy statement/prospectus, Hilltop owns 10,171,039 shares of SWS common stock, or approximately 21.0% of the currently outstanding SWS common shares. Hilltop has agreed in the merger agreement to vote any shares of SWS that it owns as of the record date for the SWS special meeting in favor of approval and adoption of the merger agreement.

Recommendation of the SWS Board of Directors

        The SWS board of directors (other than Messrs. Gerald J. Ford and J. Taylor Crandall, who recused themselves), upon the unanimous recommendation of the Special Committee, has approved the merger agreement and the transactions contemplated thereby, including the merger. See "The Merger—Reasons for the Merger" and "The Merger—Recommendation of the SWS Board of Directors" included elsewhere in this proxy statement/prospectus for a more detailed discussion of the SWS board of directors' recommendation.

        The SWS board of directors (other than Messrs. Gerald J. Ford and J. Taylor Crandall, who recused themselves) recommends that you vote your shares as follows:

64


Table of Contents

Attending the Special Meeting

        All holders of SWS common stock, including holders of record and stockholders who hold their stock through banks, brokers, nominees or any other holder of record, are invited to attend the SWS special meeting. Only stockholders of record on the record date can vote in person at the SWS special meeting. If you are not a stockholder of record, you must obtain a proxy executed in your favor from the record holder of your shares, such as a broker, bank or other nominee, to be able to vote in person at the SWS special meeting. If you plan to attend the SWS special meeting, you must hold your shares in your own name or have a letter from the record holder of your shares confirming your ownership and you must bring a form of personal photo identification with you in order to be admitted. SWS reserves the right to refuse admittance to anyone without proper proof of share ownership and without proper photo identification.

Delivery of Proxy Materials

        As permitted by applicable law, only one copy of this joint proxy statement/prospectus is being delivered to stockholders residing at the same address, unless such stockholders have notified SWS of their desire to receive multiple copies of the joint proxy statement/prospectus.

        SWS will promptly deliver, upon oral or written request, a separate copy of the joint proxy statement/prospectus to any stockholder residing at an address to which only one copy of such document was mailed. Requests for additional copies should be directed to Investor Relations, at 1201 Elm Street, Suite 3500, Dallas, Texas 75270 or by telephone at (214) 859-1800.

Appraisal/Dissenter's Rights

        Section 262 of the DGCL provides holders of shares of SWS common stock with the right to dissent from the merger and seek appraisal of their shares of SWS common stock in accordance with Delaware law. A holder of shares of SWS common stock who properly seeks appraisal and complies with the applicable requirements under Delaware law, referred to as a dissenting stockholder, will forego the merger consideration and instead receive a cash payment equal to the fair value of such stockholder's shares of SWS common stock in connection with the merger. Fair value will be determined by the Delaware Court of Chancery following an appraisal proceeding. Dissenting stockholders will not know the appraised fair value at the time such holders must elect whether to seek appraisal. The ultimate amount dissenting stockholders receive in an appraisal proceeding may be more or less than, or the same as, the amount such holders would have received under the merger agreement.

        To seek appraisal, a stockholder of SWS must strictly comply with all of the procedures required under Delaware law, including:

        In connection with the foregoing, SWS stockholders who wish to seek appraisal should note that:

65


Table of Contents

        Failure to follow exactly the procedures specified under Delaware law will result in the loss of appraisal rights.

        For a further description of the appraisal rights available to SWS stockholders and procedures required to exercise appraisal rights, see the section entitled "The Merger—Appraisal/Dissenters' Rights" included elsewhere in this joint proxy statement/prospectus and the provisions of the DGCL that grant appraisal rights and govern such procedures which are attached as Annex C to this document. If a stockholder of SWS holds shares of SWS common stock through a bank, brokerage firm or other nominee and the SWS stockholder wishes to exercise appraisal rights, such stockholder should consult with such stockholder's bank, brokerage firm or nominee. In view of the complexity of Delaware law, SWS stockholders who may wish to pursue appraisal rights should consult their legal and financial advisors promptly.

66


Table of Contents


PROPOSALS SUBMITTED TO SWS STOCKHOLDERS

Adoption and Approval of the Merger Agreement (Proposal 1)

        This proxy statement/prospectus is being furnished to SWS stockholders as part of the solicitation of proxies by the SWS board of directors for use at the SWS special meeting to consider and vote on the proposal to adopt and approve the merger agreement. IF SWS STOCKHOLDERS FAIL TO ADOPT AND APPROVE THE MERGER AGREEMENT, THE MERGER CANNOT BE COMPLETED. Holders of SWS common stock should read this proxy statement/prospectus carefully and in its entirety, including the annexes, for more detailed information concerning the merger agreement and the merger. A copy of the merger agreement is attached to this proxy statement/prospectus as Annex A.

        After careful consideration, upon the unanimous recommendation of the Special Committee, the SWS board of directors (other than Messrs. Gerald J. Ford and J. Taylor Crandall, who recused themselves) determined that the merger agreement and the transactions contemplated thereby were advisable and fair to and in the best interests of the SWS stockholders and approved the merger agreement and the transactions contemplated by the merger agreement, including the merger. See "The Merger—Reasons for the Merger" and "The Merger—Recommendation of the SWS Board of Directors" included elsewhere in this proxy statement/prospectus for a more detailed discussion of the SWS board of directors' recommendation.

        Approval of the merger proposal requires the affirmative vote of a majority of the shares of SWS common stock outstanding on the record date for the SWS special meeting.

        The SWS board of directors (other than Messrs. Gerald J. Ford and J. Taylor Crandall, who recused themselves) recommends that its stockholders vote "FOR" the adoption and approval of the merger agreement. For a discussion of interests of SWS's directors and executive officers in the merger that may be different from, or in addition to, the interest of SWS stockholders generally, see "The Merger—Interests of SWS Certain Directors and Executive Officers in the Merger" included elsewhere in this proxy statement/prospectus.


Non-Binding Advisory Vote Approving Compensation (Proposal 2)

        The Dodd-Frank Act and Rule 14a-21(c) under the Exchange Act require SWS to provide its stockholders with the opportunity to vote to approve, on a non-binding, advisory basis, the compensation that may be paid or would be payable to the named executive officers of SWS that is based on or otherwise relates to the merger. Information required by Item 402(t) of Regulation S-K concerning this compensation, subject to certain assumptions described herein, is presented under the heading "The Merger—Interests of SWS Directors and Executive Officers in the Merger—Golden Parachute Compensation."

        Accordingly, SWS is requesting that holders of SWS common stock approve the following resolution:

        Approval of this proposal is not a condition to completion of the merger. While the SWS board of directors intends to consider the vote resulting from this proposal, the vote is advisory, and therefore not binding on SWS or on Hilltop or the board of directors or the compensation committees of SWS or Hilltop. Accordingly, such compensation, including amounts that SWS is contractually obligated to

67


Table of Contents

pay, would still be payable regardless of the outcome of this advisory vote, subject only to the conditions applicable thereto.

        Approval of the compensation proposal requires the affirmative vote of a majority of the shares of SWS common stock represented in person or by proxy at the special meeting and entitled to vote on the proposal.

        The SWS board of directors recommends (other than Messrs. Gerald J. Ford and J. Taylor Crandall, who recused themselves) that its stockholders vote "FOR" the approval, on a non-binding, advisory basis, of the compensation that may be paid or would be payable to SWS's named executive officers that is based on or otherwise relates to the merger.


Approval of the Adjournment or Postponement of the SWS Special Meeting (Proposal 3)

        The SWS special meeting may be adjourned to another time or place, if necessary or appropriate, to permit, among other things, further solicitation of proxies if necessary to obtain additional votes in favor of the merger proposal.

        If, at the SWS special meeting, the number of shares of SWS common stock present or represented and voting in favor of the merger proposal is insufficient to approve such proposal, SWS intends to move to adjourn the SWS special meeting in order to solicit additional proxies for the adoption and approval of the merger agreement. In accordance with the SWS bylaws, a vote to approve the proposal to adjourn the SWS special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the SWS special meeting to approve the merger proposal may be taken in the absence of a quorum. SWS does not intend to call a vote on this proposal if the merger proposal has been approved at the SWS special meeting.

        In this proposal, SWS is asking its stockholders to authorize the holder of any proxy solicited by the SWS board of directors to vote in favor of granting discretionary authority to proxy holders, and each of them individually, to adjourn the SWS special meeting to another time and place for the purpose of soliciting additional proxies. If SWS stockholders approve this adjournment proposal, SWS could adjourn the SWS special meeting and any adjourned session of the SWS special meeting and use the additional time to solicit additional proxies, including the solicitation of proxies from SWS stockholders who have previously voted.

        Approval of the adjournment proposal requires the affirmative vote of a majority of the shares of SWS common stock represented in person or by proxy at the SWS special meeting and entitled to vote on the proposal.

        The SWS board of directors (other than Messrs. Gerald J. Ford and J. Taylor Crandall, who recused themselves) recommends that holders of SWS common stock vote "FOR" the approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to adopt and approve the merger agreement.

68


Table of Contents


INFORMATION ABOUT THE COMPANIES—HILLTOP

        Unless the context otherwise indicates, all references in this "Information About the Companies—Hilltop" section to the "Company," "we," "us," "our" or "ours" or similar words are to Hilltop Holdings Inc. and its direct and indirect wholly owned subsidiaries (and, for avoidance of doubt, do not refer to SWS), references to "Hilltop" refer solely to Hilltop Holdings Inc., references to "PlainsCapital" refer to PlainsCapital Corporation (a wholly owned subsidiary of Hilltop), references to the "Bank" refer to PlainsCapital Bank (a wholly owned subsidiary of PlainsCapital), references to "FNB" refer to First National Bank, references to "First Southwest" refer to First Southwest Holdings, LLC (a wholly owned subsidiary of the Bank) and its subsidiaries as a whole, references to "FSC" refer to First Southwest Company (a wholly owned subsidiary of First Southwest), references to "PrimeLending" refer to PrimeLending, a PlainsCapital Company (a wholly owned subsidiary of the Bank) and its subsidiaries as a whole, and references to "NLC" refer to National Lloyds Corporation (a wholly owned subsidiary of Hilltop) and its subsidiaries as a whole.


Business

Company Background

        Beginning in 1995, we operated as several companies under the name "Affordable Residential Communities" or "ARC," a Maryland corporation. We engaged in the business of acquiring, renovating, repositioning and operating manufactured home communities, as well as certain related businesses.

        In January 2007, we acquired NLC, a property and casualty insurance holding company.

        On July 31, 2007, we sold substantially all of the operating assets used in our manufactured home communities business and our retail sales and financing business to American Residential Communities LLC. In conjunction with this transaction, we transferred to the buyer the rights to the "Affordable Residential Communities" name, changed our name to Hilltop Holdings Inc., and moved our headquarters to Dallas, Texas. As a result, our primary operations from August 2007 through November 2012 were limited to providing fire and homeowners insurance to low value dwellings and manufactured homes primarily in Texas and other areas of the southern United States through NLC. NLC operates through its wholly owned subsidiaries, National Lloyds Insurance Company ("NLIC") and American Summit Insurance Company ("ASIC").

        On November 30, 2012, we acquired PlainsCapital Corporation through a plan of merger (the "PlainsCapital Merger"), whereby PlainsCapital Corporation merged into our wholly owned subsidiary, which continued as the surviving entity under the name "PlainsCapital Corporation". Concurrent with the consummation of the PlainsCapital Merger, we became a financial holding company registered under the Bank Holding Company Act of 1956 (the "Bank Holding Company Act"), as amended by the Gramm-Leach-Bliley Act of 1999 (the "Gramm-Leach-Bliley Act").

        On September 13, 2013, the Bank assumed substantially all of the liabilities, including all of the deposits, and acquired substantially all of the assets, of FNB from the FDIC, as receiver, and reopened former FNB branches acquired from the FDIC under the "PlainsCapital Bank" name (the "FNB Transaction").

        We intend to make acquisitions with certain of the remaining proceeds from the American Residential Communities transaction and, if necessary or appropriate, from additional equity or debt financing sources.

        Following the PlainsCapital Merger, our primary line of business has been to provide business and consumer banking services from offices located throughout central, north and west Texas through the Bank. The acquisition of FNB's expansive branch network allows the Bank to further develop its Texas footprint through expansion into the Rio Grande Valley, Houston, Corpus Christi, Laredo and El Paso

69


Table of Contents

markets, among others. In addition to the Bank, our other subsidiaries have specialized areas of expertise that allow us to provide an array of financial products and services such as mortgage origination, insurance and financial advisory services.

        At June 30, 2014, on a consolidated basis, we had total assets of $9.4 billion, total deposits of $6.2 billion, total loans, including loans held for sale, of $6.0 billion and stockholders' equity of $1.4 billion. Our operating results beginning December 1, 2012 include the banking, mortgage origination and financial advisory operations acquired in the PlainsCapital Merger and the results of our banking operations include the operations acquired in the FNB Transaction since September 14, 2013.

        Our common stock is listed on the New York Stock Exchange, or NYSE, under the symbol "HTH."

        Our principal office is located at 200 Crescent Court, Suite 1330, Dallas, Texas 75201, and our telephone number at that location is (214) 855-2177. Our internet address is www.hilltop-holdings.com. Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available on our website at http://ir.hilltop-holdings.com/ under the tab "SEC Filings" as soon as reasonably practicable after we electronically file such reports with, or furnish them to, the Securities and Exchange Commission (the "SEC"). The references to our website in this proxy statement/prospectus are inactive textual references only. The information on our website is not incorporated by reference into this proxy statement/prospectus.


Organizational Structure

        Our organizational structure is comprised of two primary operating business units, NLC (insurance) and PlainsCapital (financial services and products). Within the PlainsCapital unit are three primary wholly owned operating subsidiaries: the Bank, PrimeLending and First Southwest. The following provides additional details regarding our updated organizational structure at June 30, 2014.

GRAPHIC


Geographic Dispersion of our Businesses

        The Bank provides traditional banking services, residential mortgage lending, wealth and investment management, treasury management and capital equipment leasing. Substantially all of our banking operations are in Texas, and as a result of the FNB Transaction, the Bank has a presence in every major market in Texas.

70


Table of Contents

        For the year ended December 31, 2013, approximately 66% of PrimeLending's origination volume was concentrated in nine states (none of the other states in which PrimeLending operated during 2013 had volume of 3% or more). The following table is a summary of the origination volume by state for the year ended December 31, 2013 (dollars in thousands).

 
  Volume   % of
Total
 

Texas

  $ 2,660,810     22.56 %

California

    2,082,184     17.66 %

North Carolina

    618,802     5.25 %

Virginia

    466,531     3.96 %

Florida

    456,643     3.87 %

Arizona

    392,006     3.32 %

Maryland

    385,215     3.27 %

Ohio

    383,518     3.25 %

Washington

    360,100     3.05 %

All other states

    3,986,753     33.81 %
           

  $ 11,792,562     100.00 %
           
           

        Our insurance products are distributed through a broad network of independent agents and a select number of managing general agents, referred to as MGAs, which are concentrated in five states (none of the other states in which we operated during 2013 had gross written premiums of 3% or more). The following table sets forth our total gross written premiums by state for the periods shown (dollars in thousands).

 
  Year Ended December 31,  
 
  2013   % of
Total
  2012   % of
Total
  2011   % of
Total
 

Texas

  $ 125,696     69.1 % $ 118,361     69.5 % $ 117,046     73.0 %

Oklahoma

    16,494     9.1 %   15,398     9.1 %   10,804     6.7 %

Arizona

    15,904     8.7 %   13,914     8.2 %   12,376     7.7 %

Tennessee

    10,589     5.8 %   10,527     6.2 %   9,489     5.9 %

Georgia

    6,393     3.5 %   5,454     3.2 %   4,380     2.7 %

All other states

    6,892     3.8 %   6,547     3.8 %   6,346     4.0 %
                           

Total

  $ 181,968     100.0 % $ 170,201     100.0 % $ 160,441     100.0 %
                           
                           

        FSC, a diversified investment banking firm and a registered broker-dealer, competes for business nationwide. Public finance financial advisory revenues, of which 76% are from entities located in Texas, represent a significant portion of total segment revenues.


Business Segments

        Under U.S. generally accepted accounting principles ("GAAP"), our two business units are comprised of four reportable business segments organized primarily by the core products offered to the segments' respective customers: banking, mortgage origination, insurance and financial advisory. These segments reflect the manner in which operations are managed and the criteria used by our chief operating decision maker function to evaluate segment performance, develop strategy and allocate resources. Our chief operating decision maker function consists of the President and Chief Executive Officer of Hilltop and the Chief Executive Officer of PlainsCapital.

71


Table of Contents

        For more financial information about each of our business segments, see "—Management's Discussion and Analysis of Financial Condition and Results of Operations," herein. See also Note 30 in the notes to our audited consolidated financial statements included herein.

        The banking segment includes the operations of the Bank and, since September 14, 2013, the operations acquired in the FNB Transaction. At June 30, 2014, our banking segment had $8.2 billion in assets and total deposits of $6.0 billion. The primary sources of our deposits are residents and businesses located in Texas.

        Business Banking.    Our business banking customers primarily consist of agribusiness, energy, health care, institutions of higher education, real estate (including construction and land development) and wholesale/retail trade companies. We provide these customers with extensive banking services, such as Internet banking, business check cards and other add-on services as determined on a customer-by-customer basis. Our treasury management services, which are designed to reduce the time, burden and expense of collecting, transferring, disbursing and reporting cash, are also available to our business customers. We offer these business customers lines of credit, equipment loans and leases, letters of credit, agricultural loans, commercial real estate loans and other loan products.

        The table below sets forth a distribution of the banking segment's non-covered and covered loans, classified by portfolio segment and segregated between those considered to be purchased credit impaired ("PCI") loans and all other originated or acquired loans at December 31, 2013 (dollars in thousands). PCI loans showed evidence of credit deterioration that makes it probable that all contractually required principal and interest payments will not be collected. The banking segment's loan portfolio includes "covered loans" acquired in the FNB Transaction that are subject to loss-share agreements with the FDIC, while all other loans held by the Bank are referred to as "non-covered loans." The commercial and industrial non-covered loans category includes a $1.3 billion warehouse line of credit extended to PrimeLending, of which $1.0 billion was drawn at December 31, 2013, as well as term loans at First Southwest that had an outstanding balance of $23.0 million at December 31, 2013. Amounts advanced against the warehouse line and the First Southwest term loans are included in the table below, but are eliminated from the consolidated balance sheets.

Non-covered loans
  Loans, excluding
PCI Loans
  PCI
Loans
  Total
Loans
  % of Total
Non-Covered
Loans
 

Commercial and industrial:

                         

Secured

  $ 2,229,778   $ 35,372   $ 2,265,150     53.3 %

Unsecured

    106,855     1,444     108,299     2.6 %

Real estate:

                         

Secured by commercial properties

    1,045,964     36,255     1,082,219     25.5 %

Secured by residential properties

    373,242     2,995     376,237     8.9 %

Construction and land development:

                         

Residential construction loans

    65,079         65,079     1.5 %

Commercial construction loans and land development

    279,655     19,817     299,472     7.0 %

Consumer

    51,067     4,509     55,576     1.3 %
                   

Total non-covered loans

  $ 4,151,640   $ 100,392   $ 4,252,032     100.0 %
                   
                   

72


Table of Contents


Covered loans
  Loans, excluding
PCI Loans
  PCI
Loans
  Total
Loans
  % of Total
Covered
Loans
 

Commercial and industrial:

                         

Secured

  $ 24,913   $ 28,520   $ 53,433     5.3 %

Unsecured

    3,620     9,890     13,510     1.4 %

Real estate:

                         

Secured by commercial properties

    64,819     365,306     430,125     42.7 %

Secured by residential properties

    158,485     199,372     357,857     35.6 %

Construction and land development:

                         

Residential construction loans

    7,463     4,705     12,168     1.2 %

Commercial construction loans and land development

    17,913     121,363     139,276     13.8 %
                   

Total covered loans

  $ 277,213   $ 729,156   $ 1,006,369     100.0 %
                   
                   

        Our lending policies seek to achieve the goal of establishing an asset portfolio that will provide a return on stockholders' equity sufficient to maintain capital to assets ratios that meet or exceed established regulations. In support of that goal, we have designed our underwriting standards to determine:

        We implement our underwriting standards according to the facts and circumstances of each particular loan request, as discussed below.

        Commercial and industrial loans are primarily made within Texas and are underwritten on the basis of the borrower's ability to service the debt from cash flow from an operating business. In general, commercial and industrial loans involve more credit risk than residential and commercial mortgage loans and, therefore, usually yield a higher return. The increased risk in commercial and industrial loans results primarily from the type of collateral securing these loans, which typically includes commercial real estate, accounts receivable, equipment and inventory. Additionally, increased risk arises from the expectation that commercial and industrial loans generally will be serviced principally from operating cash flow of the business, and such cash flows are dependent upon successful business operations. Historical trends have shown these types of loans to have higher delinquencies than mortgage loans. As a result of the additional risk and complexity associated with commercial and industrial loans, such loans require more thorough underwriting and servicing than loans to individuals. To manage these risks, our policy is to attempt to secure commercial and industrial loans with both the assets of the borrowing business and other additional collateral and guarantees that may be available. In addition, depending on the size of the credit, we actively monitor the financial condition of the borrower by analyzing the borrower's financial statements and assessing certain financial measures, including cash flow, collateral value and other appropriate credit factors. We also have processes in place to analyze and evaluate on a regular basis our exposure to industries, products, market changes and economic trends.

        The Bank also offers term financing on commercial real estate properties that include retail, office, multi-family, industrial, warehouse and non-owner occupied single family residences. Commercial mortgage lending can involve high principal loan amounts, and the repayment of these loans is dependent, in large part, on a borrower's on-going business operations or on income generated from

73


Table of Contents

the properties that are leased to third parties. Accordingly, we apply the measures described above for commercial and industrial loans to our commercial real estate lending, with increased emphasis on analysis of collateral values. As a general practice, the Bank requires its commercial mortgage loans to (i) be secured with first lien positions on the underlying property, (ii) generate adequate equity margins, (iii) be serviced by businesses operated by an established management team and (iv) be guaranteed by the principals of the borrower. The Bank seeks lending opportunities where cash flow from the collateral provides adequate debt service coverage and/or the guarantor's net worth is comprised of assets other than the project being financed.

        The Bank offers construction financing for (i) commercial, retail, office, industrial, warehouse and multi-family developments, (ii) residential developments and (iii) single family residential properties. Construction loans involve additional risks because loan funds are advanced upon the security of a project under construction, and the project is of uncertain value prior to its completion. If the Bank is forced to foreclose on a project prior to completion, it may not be able to recover the entire unpaid portion of the loan. Additionally, it may be required to fund additional amounts to complete a project and may have to hold the property for an indeterminate period of time. Because of uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate the total funds required to complete a project and the related loan-to-value ratio. As a result of these uncertainties, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of a borrower or guarantor to repay the loan. We generally require that the subject property of a construction loan for commercial real estate be pre-leased, since cash flows from the completed project provide the most reliable source of repayment for the loan. Loans to finance these transactions are generally secured by first liens on the underlying real property. The Bank conducts periodic completion inspections, either directly or through an agent, prior to approval of periodic draws on these loans.

        In addition to the real estate lending activities described above, a portion of the Bank's real estate portfolio consists of single family residential mortgage loans typically collateralized by owner occupied properties located in its market areas. These residential mortgage loans are generally secured by a first lien on the underlying property and have maturities up to thirty years. At December 31, 2013, the Bank had $582.6 million in one-to-four family residential loans, which represented 12.9% of its total loans held for investment.

        Personal Banking.    We offer a broad range of personal banking products and services for individuals. Similar to our business banking operations, we also provide our personal banking customers with a variety of add-on features such as check cards, safe deposit boxes, Internet banking, bill pay, overdraft privilege services, gift cards and access to automated teller machine (ATM) facilities throughout the United States. We offer a variety of deposit accounts to our personal banking customers including savings, checking, interest-bearing checking, money market and certificates of deposit.

        We loan to individuals for personal, family and household purposes, including lines of credit, home improvement loans, home equity loans, credit cards and loans for purchasing and carrying securities. At December 31, 2013, we had $55.6 million of loans for these purposes, which are shown in the non-covered loans table above as "Consumer."

        Wealth and Investment Management.    Our private banking team personally assists high net worth individuals and their families with their banking needs, including depository, credit, asset management, and trust and estate services. We offer trust and asset management services in order to assist these customers in managing, and ultimately transferring, their wealth. Our wealth management services provide personal trust, investment management and employee benefit plan administration services, including estate planning, management and administration, investment portfolio management, employee benefit accounts and individual retirement accounts.

74


Table of Contents

        Our mortgage origination segment operates through a wholly owned subsidiary of the Bank, PrimeLending. Founded in 1986, PrimeLending is a residential mortgage banker licensed to originate and close loans in all 50 states and the District of Columbia. At June 30, 2014, it operated from over 300 locations in 42 states. During 2013, PrimeLending originated approximately 23% of its mortgages from its Texas locations and approximately 18% of its mortgages from locations in California. The mortgage lending business is subject to seasonality, as we typically experience increased loan origination volume from purchases of homes during the spring and summer, when more people tend to move and buy or sell homes, and the overall demand for mortgage loans is driven largely by the applicable interest rates at any given time.

        PrimeLending handles loan processing, underwriting and closings in-house. Mortgage loans originated by PrimeLending are funded through a warehouse line of credit maintained with the Bank. PrimeLending sells substantially all mortgage loans it originates to various investors in the secondary market, the majority with servicing released. While PrimeLending's loan origination volume has decreased since the second quarter of 2013, PrimeLending increased the amount of loans on which it retained servicing. As mortgage loans are sold in the secondary market, PrimeLending pays down its warehouse line of credit with the Bank. Loans sold are subject to certain standard indemnification provisions with investors, including the repurchase of loans sold and the repayment of sales proceeds to investors under certain conditions.

        Our mortgage lending underwriting strategy, driven in large measure by secondary market investor standards, seeks primarily to originate conforming loans. Our underwriting practices include:

        Since its inception, PrimeLending has grown from a staff of 20 individuals producing approximately $80 million in annual closed mortgage loan volume to a staff of approximately 2,600 producing $11.8 billion in 2013. PrimeLending offers a variety of loan products catering to the specific needs of borrowers seeking purchase or refinancing options, including 30-year and 15-year fixed rate conventional mortgages, adjustable rate mortgages, jumbo loans, and Federal Housing Administration ("FHA") and Veteran Affairs ("VA") loans. Mortgage loans originated by PrimeLending are secured by a first lien on the underlying property. PrimeLending does not currently originate subprime loans (which we define to be loans to borrowers having a Fair Isaac Corporation (FICO) score lower than 620 on conventional mortgages and VA loans or 600 on FHA loans or loans that do not comply with applicable agency or investor-specific underwriting guidelines).

        The operations of NLC comprise our insurance segment. NLC specializes in providing fire and limited homeowners insurance for low value dwellings and manufactured homes primarily in Texas and other areas of the south, southeastern and southwestern United States. NLC's product lines also include enhanced homeowners products offering higher coverage limits with distribution restricted to select agents. NLC targets underserved markets through a broad network of independent agents currently operating in 14 states and a select number of MGAs, which require underwriting expertise that many larger carriers have been unwilling to develop given the relatively small volume of premiums produced by local agents.

75


Table of Contents

        Ratings.    Many insurance buyers, agents and brokers use the ratings assigned by A.M. Best and other rating agencies to assist them in assessing the financial strength and overall quality of the companies from which they purchase insurance. The ratings for NLIC and ASIC of "A" (Excellent) were affirmed by A.M. Best in April 2014. An "A" rating is the third highest of 16 rating categories used by A.M. Best. In evaluating a company's financial and operating performance, A.M. Best reviews a company's profitability, leverage and liquidity, as well as its book of business, the adequacy and soundness of its reinsurance, the quality and estimated market value of its assets, the adequacy of its liabilities for losses and loss adjustment expenses ("LAE"), the adequacy of its surplus, its capital structure, the experience and competence of its management and its market presence. This rating assignment is subject to the ability to meet A.M. Best's expectations as to performance and capitalization on an ongoing basis, and is subject to revocation or revision at any time at the sole discretion of A.M. Best. NLC cannot ensure that NLIC and ASIC will maintain their present ratings.

        Product Lines.    NLC's business is conducted in two product lines: personal lines and commercial lines. The personal lines include homeowners, dwelling fire, manufactured home, flood and vacant policies. The commercial lines include commercial multi-peril, builders risk, builders risk renovation, sports liability and inland marine policies.

        The NLC companies specialize in writing fire and homeowners insurance coverage for low value dwellings and manufactured homes. The vast majority of NLC's property coverage is written on policies that provide actual cash value payments, as opposed to replacement cost. Under actual cash value policies, the insured is entitled to receive only the cost of replacing or repairing damaged or destroyed property with comparable new property, less depreciation. Replacement cost does not include such a deduction for depreciation. In 2010, NLC expanded its homeowners insurance products to include replacement cost coverage, which also includes limited water coverage. These new products have been marketed and sold primarily in Texas. The development and implementation of these new products contributed to the premium growth at NLC since 2011. Rate increases and exposure management are expected to moderate future policy growth.

        Underwriting and Pricing.    NLC applies its regional expertise, underwriting discipline and a risk-adjusted, return-on-equity-based approach to capital allocation to primarily offer short-tail insurance products in its target markets. NLC's underwriting process involves securing an adequate level of underwriting information from its independent agents, identifying and evaluating risk exposures and then pricing the risks it chooses to accept. Management reviews pricing on an ongoing basis to monitor any emerging issues on a specific coverage or geographic territory.

        Catastrophe Exposure.    NLC maintains a comprehensive risk management strategy, which includes actively monitoring its catastrophe prone territories by zip code to ensure a diversified book of risks. NLC utilizes software and risk support from its reinsurance brokers to analyze its portfolio and catastrophe exposure. Biannually, NLC has its entire portfolio analyzed by its reinsurance broker who utilizes hurricane and severe storm models to predict risk.

        Reinsurance.    NLC purchases reinsurance to reduce its exposure to liability on individual risks and claims and to protect against catastrophe losses. NLC's management believes that less volatile, yet reasonable returns are in the long-term interest of NLC.

        Reinsurance involves an insurance company transferring, or ceding, a portion of its risk to another insurer, the reinsurer. The reinsurer assumes the exposure in return for a portion of the premium. The ceding of risk to a reinsurer does not legally discharge the primary insurer from its liability for the full amount of the policies on which it obtains reinsurance. Accordingly, the primary insurer remains liable for the entire loss if the reinsurer fails to meet its obligations under the reinsurance agreement, and as a result, the primary insurer is exposed to the risk of non-payment by its reinsurers. In formulating its reinsurance programs, NLC believes that it is selective in its choice of reinsurers and considers

76


Table of Contents

numerous factors, the most important of which are the financial stability of the reinsurer, its history of responding to claims and its overall reputation.

        NLC purchases catastrophe excess of loss reinsurance to a limit that exceeds the Hurricane 200-year return time as modeled by RMS Risk Link v.13.0 and equals the Hurricane 500-year return time as modeled by AIR Classic v.15.0.

        Liabilities for Unpaid Losses and Loss Adjustment Expenses.    NLC's liabilities for losses and loss adjustment expenses include liabilities for reported losses, liabilities for incurred but not reported, or IBNR, losses and liabilities for LAE, less a reduction for reinsurance recoverables related to those liabilities. The amount of liabilities for reported claims is based primarily on a claim-by-claim evaluation of coverage, liability, injury severity or scope of property damage, and any other information considered relevant to estimating exposure presented by the claim. The amounts of liabilities for IBNR losses and LAE are estimated on the basis of historical trends, adjusted for changes in loss costs, underwriting standards, policy provisions, product mix and other factors. Estimating the liability for unpaid losses and LAE is inherently judgmental and is influenced by factors that are subject to significant variation. Liabilities for LAE are intended to cover the ultimate cost of settling claims, including investigation and defense of lawsuits resulting from such claims. Based upon the contractual terms of the reinsurance agreements, reinsurance recoverables offset, in part, NLC's gross liabilities.

        Significant periods of time can elapse between the occurrence of an insured loss, the reporting of the loss to the insurer and the insurer's payment of that loss. NLC's liabilities for unpaid losses represent the best estimate at a given point in time of what it expects to pay claimants, based on facts, circumstances and historical trends then known. During the loss settlement period, additional facts regarding individual claims may become known and, consequently, it often becomes necessary to refine and adjust the estimates of liability.

        Loss Development.    The following tables set forth the annual calendar year-end reserves of NLIC and ASIC since 2004 and the subsequent development of these reserves through December 31, 2013. These tables present accident year development data. The first line of each table shows, for the years indicated, net liability, including IBNR, as originally estimated. The next section sets forth the re-estimates in later years of incurred losses, including payments, for the years indicated. The changes in the original estimate are caused by a combination of factors, including: (1) claims being settled for amounts different than originally estimated; (2) the net liability being increased or decreased for claims remaining open as more information becomes known about those individual claims; and (3) more or fewer claims being reported after December 31, 2004 than had occurred prior to that date. The bottom section of the table shows, by year, the cumulative amounts of net losses and LAE paid as of the end of each succeeding year.

        The "net cumulative redundancy (deficiency)" represents, as of December 31, 2013, the difference between the latest re-estimated net liability and the net liability as originally estimated for losses and LAE retained by us. A redundancy means the original estimate was higher than the current estimate; and a deficiency means that the original estimate was lower than the current estimate. The following loss development tables for NLIC and ASIC are presented net of reinsurance recoverable (in thousands).

77


Table of Contents


National Lloyds Insurance Company

 
  Year Ended December 31,  
 
  2004   2005   2006   2007   2008   2009   2010   2011   2012   2013  

Original Reserve*

  $ 33,951   $ 41,282   $ 47,684   $ 44,613   $ 65,592   $ 60,392   $ 55,482   $ 81,589   $ 87,943   $ 86,524  

1 year later

   
28,106
   
36,332
   
43,640
   
44,064
   
64,864
   
62,337
   
54,987
   
82,065
   
88,708
       

2 years later

    27,593     40,391     43,465     44,134     65,070     62,014     54,672     81,782              

3 years later

    25,747     41,231     43,394     43,950     64,702     61,759     54,554                    

4 years later

    25,712     39,735     43,387     43,788     64,569     61,328                          

5 years later

    25,579     39,699     43,366     43,649     64,547                                

6 years later

    25,582     39,675     43,365     43,679                                      

7 years later

    25,568     39,674     43,363                                            

8 years later

    25,565     39,677                                                  

9 years later

    25,565                                                        

Net cumulative redundancy (deficiency)

   
8,386
   
1,605
   
4,321
   
934
   
1,045
   
(936

)
 
928
   
(193

)
 
(765

)
     

Cumulative amount of net liability paid as of:

   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

1 year later

   
24,747
   
32,871
   
42,301
   
42,478
   
63,761
   
59,977
   
53,387
   
79,853
   
82,762
       

2 years later

    25,149     34,625     42,668     43,245     64,203     60,517     53,872     80,591              

3 years later

    25,388     36,157     43,140     43,495     64,391     61,081     54,161                    

4 years later

    25,462     39,533     43,361     43,563     64,477     61,233                          

5 years later

    25,521     39,646     43,365     43,648     64,538                                

6 years later

    25,538     37,674     43,365     43,650                                      

7 years later

    25,564     39,674     43,363                                            

8 years later

    25,565     39,677                                                  

9 years later

    25,565                                                        


American Summit Insurance Company

 
  Year Ended December 31,  
 
  2004   2005   2006   2007   2008   2009   2010   2011   2012   2013  

Original Reserve*

  $ 8,297   $ 11,041   $ 13,003   $ 9,351   $ 12,769   $ 9,773   $ 12,486   $ 14,829   $ 13,547   $ 15,152  

1 year later

   
7,388
   
9,932
   
13,014
   
9,154
   
12,009
   
9,423
   
13,153
   
14,126
   
13,235
       

2 years later

    6,999     9,918     12,998     9,335     11,943     9,088     12,974     14,044              

3 years later

    6,859     9,918     13,435     9,235     11,880     9,023     12,873                    

4 years later

    6,772     9,797     13,216     9,200     12,048     8,701                          

5 years later

    6,714     9,820     13,195     9,197     12,342                                

6 years later

    6,787     9,815     13,188     9,196                                      

7 years later

    6,743     9,812     13,187                                            

8 years later

    6,730     9,913                                                  

9 years later

    6,730                                                        

Net cumulative redundancy (deficiency)

   
1,567
   
1,128
   
(184

)
 
155
   
427
   
1,072
   
(387

)
 
785
   
312
       

Cumulative amount of net liability paid as of:

   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

1 year later

   
6,566
   
9,341
   
12,429
   
8,732
   
11,560
   
8,800
   
12,390
   
13,511
   
12,423
       

2 years later

    6,610     9,578     12,639     9,095     11,637     8,803     12,632     13,842              

3 years later

    6,682     9,679     13,326     9,193     11,726     8,917     12,792                    

4 years later

    6,699     9,740     13,161     9,196     12,040     8,672                          

5 years later

    6,714     9,813     13,188     9,196     12,341                                

6 years later

    6,720     9,813     13,188     9,196                                      

7 years later

    6,723     9,812     13,187                                            

8 years later

    6,730     9,813                                                  

9 years later

    6,730                                                        

*
Including amounts paid in respective year.

78


Table of Contents

        Please refer to Note 28 in the notes to Hilltop's audited consolidated financial statements included in this proxy statement/prospectus for a reconciliation of the reserves presented in the tables above to the reserves for losses and loss adjustment expenses set forth in the consolidated balance sheets at December 31, 2013 and 2012.

        Current loss reserve development has been generally favorable with the exception of accident year 2012. Accident years 2007 through 2011 have shown cumulative favorable loss development of $3.8 million through December 31, 2013. Accident year 2012 had net unfavorable loss development of $0.5 million, with unfavorable development of $0.8 million at NLIC, offset by favorable loss development of $0.3 million at ASIC. The unfavorable loss development at NLIC is significantly attributable to extraordinary increases in losses from wind and hail losses and storms that occurred in Texas during 2012.

        The following table is a reconciliation of the gross liability to net liability for losses and loss adjustment expenses (in thousands).

 
  December 31,*  
 
  2007   2008   2009   2010   2011   2012   2013  

Gross unpaid losses

  $ 18,091   $ 34,023   $ 33,780   $ 58,882   $ 44,835   $ 34,012   $ 27,468  

Reinsurance recoverable

    (2,692 )   (14,613 )   (21,102 )   (43,773 )   (25,083 )   (10,385 )   (4,508 )
                               

Net unpaid losses

  $ 15,399   $ 19,410   $ 12,678   $ 15,109   $ 19,752   $ 23,627   $ 22,960  
                               
                               

*
Information is not presented for the periods ended prior to January 31, 2007, as that is the date Hilltop Holdings Inc. acquired the insurance operations.

        The methods that our actuaries utilize to estimate ultimate loss and LAE amounts are the paid and reported loss development method and the paid and reported Bornhuetter-Ferguson method (the "BF method"). Insured losses for a given accident year change in value over time as additional information on claims is received, as claim conditions change and as new claims are reported. This process is commonly referred to as loss development. To project ultimate losses and LAE, our actuaries examine the paid and reported losses and LAE for each accident year and multiply these values by a loss development factor. The selected loss development factors are based upon a review of the loss development patterns indicated in the companies' historical loss triangles and applicable insurance industry loss development factors.

        The BF method is a procedure that weights an expected ultimate loss and LAE amount, and the result of the loss development method. This method is useful when loss data is immature or sparse because it is not as sensitive as the loss development method to unusual variations in the paid or reported amounts. The BF method requires an initial estimate of expected ultimate losses and LAE. For each year, the expected ultimate losses and LAE is based on a review of the ultimate loss ratios indicated in the companies' historical data and applicable insurance industry ultimate loss ratios. Each loss development factor, paid or reported, implies a certain percent of the ultimate losses and LAE is still unpaid or unreported. The amounts of unpaid or unreported losses and LAE by year are estimated as the percentage unpaid or unreported, times the expected ultimate loss and LAE amounts. To project ultimate losses and LAE, the actual paid or reported losses and LAE to date are added to the estimated unpaid or unreported amounts.

        The results of each actuarial method performed by year are reviewed to select an ultimate loss and LAE amount for each accident year. In general, more weight is given to the loss development projections for more mature accident periods and more weight is given to the BF methods for less mature accident periods.

79


Table of Contents

        The combination of the methodologies described above is used for all insurance lines of business, regardless of whether the line is a short-tailed or long-tailed line of business, though specific parameter selections within the methods vary to reflect the nature of the underlying line of business. ASIC and NLIC specialize in writing fire and extended coverage for low-value dwellings, mobile homes and homeowners, which generally are considered short-tailed coverages. In addition, ASIC and NLIC write a small amount of commercial risks, which are still predominantly property coverages, along with some low-limit liability coverages.

        The reserve analysis performed by our actuaries provides preliminary central estimates of the unpaid losses and LAE. At each quarter-end, the results of the reserve analysis are summarized and discussed with our senior management. The senior management group considers many factors in determining the amount of reserves to record for financial statement purposes. These factors include the extent and timing of any recent catastrophic events, historical pattern and volatility of the actuarial indications, the sensitivity of the actuarial indications to changes in paid and reported loss patterns, the consistency of claims handling processes, the consistency of case reserving practices, changes in our pricing and underwriting, and overall pricing and underwriting trends in the insurance market.

        In arriving at our best estimate of the unpaid losses and LAE, and based on management discussion with our actuaries, we would consider reasonably likely changes in the key assumptions, such as the underlying loss development pattern or the expected loss ratio, to have an impact on our best estimate by plus or minus 10%. At December 31, 2013, this equates to approximately plus or minus $2.3 million, or 1.8% of insurance segment equity, and 2.1% of calendar year 2013 insurance losses.

        Our financial advisory segment operates through First Southwest. FSC, a wholly owned subsidiary of First Southwest, is a diversified investment banking firm and a registered broker-dealer with the SEC and the Financial Industry Regulatory Authority ("FINRA") and a member of the New York Stock Exchange. First Southwest's primary focus is on providing public finance services.

        At June 30, 2014, First Southwest employed approximately 400 people and maintained 25 locations nationwide, nine of which are in Texas. At June 30, 2014, First Southwest had consolidated assets of $712.7 million, maintained $120.4 million in equity capital and had more than 1,600 public sector clients.

        First Southwest has four primary lines of business: (i) public finance, (ii) capital markets, (iii) correspondent clearing services, and (iv) asset management.

        Public Finance.    First Southwest's public finance group represents its largest department. This group advises cities, counties, school districts, utility districts, tax increment zones, special districts, state agencies and other governmental entities nationwide. In addition, the group provides specialized advisory and investment banking services for airports, convention centers, healthcare institutions, institutions of higher education, housing, industrial development agencies, toll road authorities, and public power and utility providers.

        Capital Markets.    Through its capital markets group, First Southwest trades fixed income securities to support sales and other customer activities, underwrites tax-exempt and taxable fixed income securities and trades equities on an agency basis on behalf of its retail and institutional clients. In addition, First Southwest provides asset and liability management advisory services to community banks.

        Correspondent Clearing Services.    The correspondent clearing services group offers omnibus and fully disclosed clearing services to FINRA member firms for trade executing, clearing and back office services. Services are provided to approximately 80 correspondent firms.

80


Table of Contents

        Asset Management.    First Southwest Asset Management is an investment advisor registered under the Investment Advisers Act of 1940 providing state and local governments with advice and assistance with respect to arbitrage rebate compliance, portfolio management and local government investment pool administration. In the area of arbitrage rebate, First Southwest Asset Management advises municipalities with respect to the emerging regulations relating to arbitrage rebates. Further, First Southwest Asset Management assists governmental entities with the complexities of investing public funds in the fixed income markets. As an investment adviser registered with the SEC, First Southwest Asset Management promotes cash management-based investment strategies that seek to adhere to the standards imposed by the fiduciary responsibilities of investment officers of public funds. At June 30, 2014, First Southwest Asset Management served as investment manager of $6.8 billion in short-term fixed income portfolios of municipal governments and investment adviser for $5.1 billion invested by municipal governments, and a group within FSC served as administrator for local government investment pools totaling $7.8 billion.


Competition

        We face significant competition with respect to the business segments in which we operate and the geographic markets we serve. Many of our competitors have substantially greater financial resources, lending limits and larger branch networks than we do, and offer a broader range of products and services.

        Our lending and mortgage origination competitors include commercial banks, savings banks, savings and loan associations, credit unions, finance companies, pension trusts, mutual funds, insurance companies, mortgage bankers and brokers, brokerage and investment banking firms, asset-based non-bank lenders, government agencies and certain other non-financial institutions. Competition for deposits and in providing lending and mortgage origination products and services to businesses in our market area is intense and pricing is important. Other factors encountered in competing for savings deposits are convenient office locations, interest rates and fee structures of products offered. Direct competition for savings deposits also comes from other commercial bank and thrift institutions, money market mutual funds and corporate and government securities that may offer more attractive rates than insured depository institutions are willing to pay. Competition for loans includes such additional factors as interest rates, loan origination fees and the range of services offered by the provider. We seek to distinguish ourselves from our competitors through our commitment to personalized customer service and responsiveness to customer needs while providing a range of competitive loan and deposit products and other services.

        Our insurance business competes with a large number of other companies in its selected lines of business, including major U.S. and non-U.S. insurers, regional companies, mutual companies, specialty insurance companies, underwriting agencies and diversified financial services companies. The personal lines market in Texas is dominated by a few large carriers and their subsidiaries and affiliates. We seek to distinguish ourselves from our competitors by targeting underserved market segments that provide us with the best opportunity to obtain favorable policy terms, conditions and pricing.

        We also face significant competition for financial advisory services on a number of factors, including price, perceived expertise, quality of advice, range of services, innovation and local presence. Our financial advisory business competes directly with numerous other financial advisory and investment banking firms, broker-dealers and banks, including large national and major regional firms and smaller niche companies, some of whom are not broker-dealers and, therefore, are not subject to the broker-dealer regulatory framework.

81


Table of Contents


Employees

        At June 30, 2014, we employed approximately 4,400 people, substantially all of which are full-time. None of our employees are represented by any collective bargaining unit or a party to any collective bargaining agreement.


Government Supervision and Regulation

        We are subject to extensive regulation under federal and state laws. The regulatory framework is intended primarily for the protection of customers and clients of our financial advisory services, depositors, borrowers, the insurance funds of the FDIC and the Securities Investment Protection Corporation (the "SIPC") and the banking system as a whole, and not for the protection of our stockholders or creditors. In many cases, the applicable regulatory authorities have broad enforcement power over bank holding companies, banks and their subsidiaries, including the power to impose substantial fines and other penalties for violations of laws and regulations. The following discussion describes the material elements of the regulatory framework that applies to us and our subsidiaries. References in this discussion to applicable statutes and regulations are brief summaries thereof, do not purport to be complete, and are qualified in their entirety by reference to such statutes and regulations.

        Recent Regulatory Developments.    New regulations and statutes are regularly proposed and/or adopted that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of financial institutions operating and doing business in the United States. Certain of these recent proposals and changes are described below.

        On July 21, 2010, President Obama signed into law the Dodd-Frank Act. The Dodd-Frank Act aims to restore responsibility and accountability to the financial system by significantly altering the regulation of financial institutions and the financial services industry. Most of the provisions contained in the Dodd-Frank Act have delayed effective dates. Full implementation of the Dodd-Frank Act will require many new rules to be issued by federal regulatory agencies over the next several years, which will profoundly affect how financial institutions will be regulated in the future. The ultimate effect of the Dodd-Frank Act and its implementing regulations on the financial services industry in general, and on us in particular, is uncertain at this time.

        The Dodd-Frank Act, among other things:

82


Table of Contents

        On June 21, 2010, the Federal Reserve Board, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the FDIC jointly issued comprehensive final guidance on incentive compensation policies (the "Incentive Compensation Guidance") intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The Incentive Compensation Guidance sets expectations for banking organizations concerning their incentive compensation arrangements and related risk-management, control and governance processes. The Incentive Compensation Guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon three primary principles: (i) balanced risk-taking incentives, (ii) compatibility with effective controls and risk management, and (iii) strong corporate governance. Any deficiencies in compensation practices that are identified may be incorporated into the organization's supervisory ratings, which can affect its ability to make acquisitions or perform other actions. In addition, under the Incentive Compensation Guidance, a banking organization's federal supervisor may initiate enforcement action if the organization's incentive compensation arrangements pose a risk to the safety and soundness of the organization.

        On April 14, 2011, the Federal Reserve Board and various other federal agencies published a notice of proposed rulemaking implementing provisions of the Dodd-Frank Act that would require reporting of incentive-based compensation arrangements by a covered financial institution and prohibit incentive-based compensation arrangements at a covered financial institution that provide excessive compensation or that could expose the institution to inappropriate risks that could lead to material financial loss. The Dodd-Frank Act defines "covered financial institution" to include, among other entities, a depository institution or depository institution holding company that has $1 billion or more in assets. There are enhanced requirements for institutions with more than $50 billion in assets. The proposed rule states that it is consistent with the Incentive Compensation Guidance.

        On January 10, 2013, the CFPB issued a final rule to implement the "qualified mortgage", or "QM" provisions of the Dodd-Frank Act requiring mortgage lenders to consider consumers' ability to repay home loans before extending them credit. The final rule describes certain minimum requirements for creditors making ability-to-repay determinations, but does not dictate that they follow particular underwriting models. Lenders will be presumed to have complied with the ability-to-repay rule if they issue "qualified mortgages", which are generally defined as mortgage loans prohibiting or limiting

83


Table of Contents

certain risky features. Loans that do not meet the ability-to-repay standard can be challenged in court by borrowers who default and the absence of ability-to-repay status can be used against a creditor in foreclosure proceedings. The CFPB's QM rule took effect on January 10, 2014.

        In December 2013, U.S. regulators issued final regulations to implement the Volcker Rule. The Volcker Rule will, over time, prohibit "banking entities," including Hilltop and its subsidiaries, from engaging in certain prohibited "proprietary trading" activities, as defined in the Volcker Rule regulations, subject to specified exemptions. The Volcker Rule will also require banking entities to either restructure or unwind certain investments and relationships with "covered funds," as defined in the Volcker Rule regulations. Banking entities have until July 21, 2015 to bring all of their activities and investments into conformance with the Volcker Rule, subject to possible extensions. The Volcker Rule requires banking entities to establish comprehensive compliance programs designed to help ensure and monitor compliance with restrictions under the Volcker Rule. We are continuing to evaluate the effects of the final regulations implementing the Volcker Rule, but we do not currently anticipate that the Volcker Rule will have a material effect on our operations.

        We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute.

        Hilltop is a legal entity separate and distinct from PlainsCapital and its other subsidiaries. On November 30, 2012, concurrent with the consummation of the PlainsCapital Merger, Hilltop became a financial holding company registered under the Bank Holding Company Act, as amended by the Gramm-Leach-Bliley Act. Accordingly, it is subject to supervision, regulation and examination by the Federal Reserve Board. The Dodd-Frank Act, Gramm-Leach-Bliley Act, the Bank Holding Company Act and other federal laws subject financial and bank holding companies to particular restrictions on the types of activities in which they may engage and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations.

        Changes of Control.    Federal and state laws impose additional notice, approval and ongoing regulatory requirements on any investor that seeks to acquire direct or indirect "control" of a regulated holding company, such as Hilltop. These laws include the Bank Holding Company Act, the Change in Bank Control Act and the Texas Insurance Code. Among other things, these laws require regulatory filings by an investor that seeks to acquire direct or indirect "control" of a regulated holding company. The determination whether an investor "controls" a regulated holding company is based on all of the facts and circumstances surrounding the investment. As a general matter, an investor is deemed to control a depository institution or other company if the investor owns or controls 25% or more of any class of voting stock. Subject to rebuttal, an investor may be presumed to control the regulated holding company if the investor owns or controls 10% or more of any class of voting stock. Accordingly, these laws would apply to a person acquiring 10% or more of Hilltop's common stock. Furthermore, these laws may discourage potential acquisition proposals and may delay, deter or prevent change of control transactions, including those that some or all of our stockholders might consider to be desirable.

        Regulatory Restrictions on Dividends; Source of Strength.    It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization's expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company's ability to serve as a source of strength to its banking subsidiaries. The Dodd-Frank Act requires the regulatory agencies to issue regulations requiring that all bank and savings and loan holding companies serve as a source of financial and managerial strength to their subsidiary depository institutions by

84


Table of Contents

providing capital, liquidity and other support in times of financial stress; however, no such proposals have yet been published.

        Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to each of its banking subsidiaries and commit resources to their support. Such support may be required at times when, absent this Federal Reserve Board policy, a holding company may not be inclined to provide it. As discussed herein, a bank holding company, in certain circumstances, could be required to guarantee the capital plan of an undercapitalized banking subsidiary.

        Scope of Permissible Activities.    Under the Bank Holding Company Act, Hilltop and PlainsCapital generally may not acquire a direct or indirect interest in, or control of more than 5% of, the voting shares of any company that is not a bank or bank holding company. Additionally, the Bank Holding Company Act prohibits 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

85


Table of Contents

circumstances, the Federal Reserve Board could take the position that paying a dividend would constitute an unsafe or unsound banking practice.

        The Federal Reserve Board has broad authority to prohibit activities of bank holding companies and their nonbanking subsidiaries that represent unsafe and unsound banking practices or that constitute violations of laws or regulations, and can assess civil money penalties for certain activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1.425 million for each day the activity continues. In addition, the Dodd-Frank Act authorizes the Federal Reserve Board to require reports from and examine bank holding companies and their subsidiaries, and to regulate functionally regulated subsidiaries of bank holding companies.

        Anti-tying Restrictions.    Subject to various exceptions, bank holding companies and their affiliates are generally prohibited from tying the provision of certain services, such as extensions of credit, to certain other services offered by a bank holding company or its affiliates.

        Capital Adequacy Requirements.    The Federal Reserve Board currently uses a system of risk-based capital guidelines to evaluate the capital adequacy of bank holding companies. Under the guidelines, a risk weight factor of 0% to 100% is assigned to each category of assets based generally on the perceived credit risk of the asset class. The risk weights are then multiplied by the corresponding asset balances to determine a "risk-weighted" asset base. Under the Federal Reserve Board's current regulatory capital standards, at least half of the risk-based capital must consist of core (Tier 1) capital, which is comprised of:

Under the Federal Reserve Board's current regulatory capital standards, the remainder, supplementary (Tier 2) capital, may consist of:

        Total capital is the sum of Tier 1 and Tier 2 capital. Under the Federal Reserve Board's current regulatory capital standards, the guidelines require a minimum ratio of total capital to total risk-weighted assets of 8.0% (of which at least 4.0% is required to consist of Tier 1 capital elements). At June 30, 2014, our ratio of Tier 1 capital to total risk-weighted assets was 18.11% and our ratio of total capital to total risk-weighted assets was 18.79%.

86


Table of Contents

        In addition to the risk-based capital guidelines, the Federal Reserve Board uses a leverage ratio as an additional tool to evaluate the capital adequacy of bank holding companies. The leverage ratio is a company's Tier 1 capital divided by its average total consolidated assets. We are required to maintain a leverage ratio of 4.0%, and, at June 30, 2014, our leverage ratio was 13.51%.

        The federal banking agencies' risk-based and leverage ratios are minimum supervisory ratios generally applicable to banking organizations that meet certain specified criteria, assuming that they have the highest regulatory rating. Banking organizations not meeting these criteria are expected to operate with capital positions well above the minimum ratios. The federal bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum ratios when circumstances warrant. Federal Reserve Board guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.

        The Dodd-Frank Act directs federal banking agencies to establish minimum leverage capital requirements and minimum risk-based capital requirements for insured depository institutions, depository institution holding companies, and nonbank financial companies supervised by the Federal Reserve Board. These minimum capital requirements may not be less than the "generally applicable leverage and risk-based capital requirements" applicable to insured depository institutions, in effect applying the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies. Beginning on January 1, 2015, Hilltop, PlainsCapital and the Bank will become subject to new capital rules based on Basel III requirements. These requirements are discussed below.

        Imposition of Liability for Undercapitalized Subsidiaries.    Bank regulators are required to take "prompt corrective action" to resolve problems associated with insured depository institutions whose capital declines below certain levels. In the event an institution becomes "undercapitalized," it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company having control of the undercapitalized institution guarantees the subsidiary's compliance with the capital restoration plan up to a certain specified amount. Any such guarantee from a depository institution's holding company is entitled to a priority of payment in bankruptcy.

        The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5% of the institution's assets at the time it became undercapitalized or the amount necessary to cause the institution to be "adequately capitalized." The bank regulators have greater power in situations where an institution becomes "significantly" or "critically" undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve Board approval of proposed dividends, or might be required to consent to a consolidation or to divest the troubled institution or other affiliates.

        Acquisitions by Bank Holding Companies.    The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire all or substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. In approving bank acquisitions by bank holding companies, the Federal Reserve Board is required to consider, among other things, the financial and managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served, and various competitive factors. In addition, the Dodd-Frank Act requires the Federal Reserve Board to consider "the risk to the stability of the U.S. banking or financial system" when evaluating acquisitions of banks and nonbanks under the Bank Holding Company Act. With respect to interstate acquisitions, the Dodd-Frank Act amends the Bank Holding Company Act by raising the standard by which interstate bank acquisitions are permitted from a standard that the acquiring bank holding company be "adequately capitalized" and "adequately managed", to the higher standard of being "well capitalized" and "well managed".

87


Table of Contents

        Control Acquisitions.    The Change in Bank Control Act prohibits a person or group of persons from acquiring "control" of a bank holding company unless the Federal Reserve Board has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act, would, under the circumstances set forth in the presumption, constitute acquisition of control of such company.

        In addition, an entity is required to obtain the approval of the Federal Reserve Board under the Bank Holding Company Act before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of any class of our outstanding common stock, or otherwise obtaining control or a "controlling influence" over us.

        Emergency Economic Stabilization Act of 2008 and the Small Business Jobs Act of 2010.    The U.S. Congress, the U.S. Department of the Treasury ("U.S. Treasury") and the federal banking regulators took broad action beginning in early September 2008 to address volatility in the U.S. banking system. The Emergency Economic Stabilization Act of 2008 authorized the U.S. Treasury to purchase from financial institutions and their holding companies certain mortgage loans, mortgage-backed securities and certain other financial instruments, including debt and equity securities issued by financial institutions and their holding companies in the Troubled Asset Relief Program ("TARP") Capital Purchase Program.

        On December 19, 2008, PlainsCapital sold 87,631 shares of its Fixed Rate Cumulative Perpetual Stock, Series A and a warrant to purchase, upon net exercise, 4,382 shares of its Fixed Rate Cumulative Perpetual Stock, Series B to the U.S. Treasury for $87.6 million pursuant to the TARP Capital Purchase Program. The U.S. Treasury immediately exercised its warrant on December 19, 2008, and PlainsCapital issued the underlying shares of its Series B Preferred Stock to the U.S. Treasury. On September 27, 2011, PlainsCapital entered into a Securities Purchase Agreement with the Secretary of the Treasury (the "Purchase Agreement") pursuant to which PlainsCapital issued 114,068 shares of its newly designated Non-Cumulative Perpetual Preferred Stock, Series C for a total purchase price of $114,068,000. The proceeds from the sale of PlainsCapital's Series C Preferred Stock were used to redeem and repurchase PlainsCapital's Series A and Series B Preferred Stock. PlainsCapital's Series C Preferred Stock was issued pursuant to the Small Business Lending Fund program, a $30 billion fund established under the Small Business Jobs Act of 2010 that was created to encourage lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion. In connection with the PlainsCapital Merger, Hilltop assumed PlainsCapital's obligations under the Purchase Agreement and redeemed PlainsCapital's outstanding Series C Preferred Stock in exchange for the Non-Cumulative Perpetual Preferred Stock, Series B of Hilltop (the "Hilltop Series B Preferred Stock").

        On November 29, 2012, Hilltop filed with the State Department of Assessments and Taxation of the State of Maryland articles supplementary for the Hilltop Series B Preferred Stock, setting forth its terms. Holders of the Hilltop Series B Preferred Stock are entitled to noncumulative cash dividends at a fluctuating dividend rate based on the Bank's level of qualified small business lending ("QSBL"). The Hilltop Series B Preferred Stock is non-voting, except in limited circumstances, and ranks senior to Hilltop's common stock with respect to the payment of dividends and distribution of assets upon any liquidation, dissolution or winding up of Hilltop.

        The terms of the Hilltop Series B Preferred Stock restrict Hilltop's ability to pay dividends on, make distributions with respect to, or redeem, purchase or acquire, or make a liquidation payment on its common stock and other Hilltop capital stock ranking junior to the Hilltop Series B Preferred Stock, and on other preferred stock and other stock ranking on a parity with the Hilltop Series B Preferred Stock, in the event that Hilltop does not declare dividends on the Hilltop Series B Preferred Stock during any dividend period.

88


Table of Contents

        The Hilltop Series B Preferred Stock qualifies as Tier 1 capital and is entitled to receive non-cumulative dividends, payable quarterly, on each January 1, April 1, July 1 and October 1. Until December 31, 2013, the dividend rate, as a percentage of the liquidation amount (being $1,000 per share of Series B Preferred Stock), fluctuated based upon changes in the level of QSBL by the Bank. From January 1, 2014 until March 26, 2016, the dividend rate is fixed at 5.0% based upon the Bank's level of QSBL at September 30, 2013. Beginning March 27, 2016, the dividend rate on any outstanding shares of Hilltop Series B Preferred Stock will be fixed at nine percent (9%) per annum.

        Except as noted in the next sentence, the Hilltop Series B Preferred Stock may be redeemed at any time at the Company's option, at a redemption price of 100 percent of the liquidation amount (being $1,000 per share of Series B Preferred Stock) plus accrued but unpaid dividends to the date of redemption for the current period, subject to approval of the Federal Reserve Board. In the agreement and plan of merger with PlainsCapital Corporation, the Company agreed not to redeem or otherwise acquire the Hilltop Series B Preferred Stock prior to the second anniversary of the closing date of the PlainsCapital Merger, or November 30, 2014. For more information, see "Risk Factors—Risks Relating to Hilltop's Business—The Treasury's investment in us imposes restrictions and obligations upon us that could adversely affect the rights of our common stockholders."

        Governmental Monetary Policies.    Our earnings are affected by domestic economic conditions and the monetary and fiscal policies of the U.S. government and its agencies. The monetary policies of the Federal Reserve Board have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve Board affect the levels of bank loans, investments and deposits through its influence over the issuance of U.S. government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies.

        The Bank is subject to various requirements and restrictions under the laws of the United States, and to regulation, supervision and regular examination by the Texas Department of Banking. The Bank, as a state member bank, is also subject to regulation and examination by the Federal Reserve Board. As a bank with less than $10 billion in assets, the Bank became subject to the regulations issued by the CFPB on July 21, 2011, although the Federal Reserve Board continued to examine the Bank for compliance with federal consumer protection laws. As of June 30, 2014, the Bank's total assets were $8.2 billion. If the Bank's total assets were to increase, either organically or through an acquisition, merger or combination, to over $10.0 billion (as measured on four consecutive quarterly call reports of the Bank and any institutions it acquires), the Bank would become subject to the CFPB's supervisory and enforcement authority with respect to federal consumer financial laws beginning in the following quarter. The Bank is also an insured depository institution and, therefore, subject to regulation by the FDIC, although the Federal Reserve Board is the Bank's primary federal regulator. The Federal Reserve Board, the Texas Department of Banking, the CFPB and the FDIC have the power to enforce compliance with applicable banking statutes and regulations. Such requirements and restrictions include requirements to maintain reserves against deposits, restrictions on the nature and amount of loans that may be made and the interest that may be charged thereon and restrictions relating to investments and other activities of the Bank. In July 2010, the FDIC voted to revise its Memorandum of Understanding with the primary federal regulators to enhance the FDIC's existing backup authorities over insured depository institutions that the FDIC does not directly supervise. As a result, the Bank may be subject to increased supervision by the FDIC.

        Restrictions on Transactions with Affiliates.    Transactions between the Bank and its nonbanking affiliates, including Hilltop and PlainsCapital, are subject to Section 23A of the Federal Reserve Act. In

89


Table of Contents

general, Section 23A imposes limits on the amount of such transactions, and also requires certain levels of collateral for loans to affiliated parties. It also limits the amount of advances to third parties that are collateralized by the securities or obligations of Hilltop or its subsidiaries. Among other changes, the Dodd-Frank Act expands the definition of "covered transactions" and clarifies the amount of time that the collateral requirements must be satisfied for covered transactions, and amends the definition of "affiliate" in Section 23A to include "any investment fund with respect to which a member bank or an affiliate thereof is an investment advisor."

        Affiliate transactions are also subject to Section 23B of the Federal Reserve Act, which generally requires that certain transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at the time for comparable transactions with or involving other nonaffiliated persons. The Federal Reserve has also issued Regulation W, which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretive guidance with respect to affiliate transactions.

        Loans to Insiders.    The restrictions on loans to directors, executive officers, principal stockholders and their related interests (collectively referred to herein as "insiders") contained in the Federal Reserve Act and Regulation O apply to all insured institutions and their subsidiaries and holding companies. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests. These loans cannot exceed the institution's total unimpaired capital and surplus, and the Federal Reserve Board may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions. The Dodd-Frank Act amends the statutes placing limitations on loans to insiders by including credit exposures to the person arising from a derivatives transaction, repurchase agreement, reverse repurchase agreement, securities lending transaction, or securities borrowing transaction between the member bank and the person within the definition of an extension of credit.

        Restrictions on Distribution of Subsidiary Bank Dividends and Assets.    Dividends paid by the Bank have provided a substantial part of PlainsCapital's operating funds and for the foreseeable future it is anticipated that dividends paid by the Bank to PlainsCapital will continue to be PlainsCapital's and Hilltop's principal source of operating funds. Capital adequacy requirements serve to limit the amount of dividends that may be paid by the Bank. Pursuant to the Texas Finance Code, a Texas banking association may not pay a dividend that would reduce its outstanding capital and surplus unless it obtains the prior approval of the Texas Banking Commissioner. Additionally, the FDIC and the Federal Reserve Board have the authority to prohibit Texas state banks from paying a dividend when they determine the dividend would be an unsafe or unsound banking practice. As a member of the Federal Reserve System, the Bank must also comply with the dividend restrictions with which a national bank would be required to comply. Those provisions are generally similar to those imposed by the state of Texas. Among other things, the federal restrictions require that if losses have at any time been sustained by a bank equal to or exceeding its undivided profits then on hand, no dividend may be paid.

        In the event of a liquidation or other resolution of an insured depository institution, the claims of depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of holders of any obligation of the institution to its stockholders, including any depository institution holding company (such as PlainsCapital and Hilltop) or any stockholder or creditor thereof.

        Branching.    The establishment of a branch must be approved by the Texas Department of Banking and the Federal Reserve Board, which consider a number of factors, including financial history, capital adequacy, earnings prospects, character of management, needs of the community and consistency with corporate powers. The regulators will also consider the applicant's CRA record.

90


Table of Contents

        Interstate Branching.    Effective June 1, 1997, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act") amended the Federal Deposit Insurance Act and certain other statutes to permit state and national banks with different home states to merge across state lines, with approval of the appropriate federal banking agency, unless the home state of a participating bank had passed legislation prior to May 31, 1997 expressly prohibiting interstate mergers. Under the Riegle-Neal Act amendments, once a state or national bank has established branches in a state, that bank may establish and acquire additional branches at any location in the state at which any bank involved in the interstate merger transaction could have established or acquired branches under applicable federal or state law. If a state opted out of interstate branching within the specified time period, no bank in any other state may establish a branch in the state which has opted out, whether through an acquisition or de novo. Under the Dodd-Frank Act, de novo interstate branching by national banks is permitted if, under the laws of the state where the branch is to be located, a state bank chartered in that state would have been permitted to establish a branch.

        Prompt Corrective Action.    The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories ("well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized" and "critically undercapitalized") in which all institutions are placed. Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category.

        An institution that is categorized as "undercapitalized", "significantly undercapitalized" or "critically undercapitalized" is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding company's obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary's assets at the time it became undercapitalized or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with FDIC approval. The regulations also establish procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital.

        FDIC Insurance Assessments.    The FDIC has adopted a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. The system assigns an institution to one of three capital categories: (1) "well capitalized;" (2) "adequately capitalized;" or (3) "undercapitalized." These three categories are substantially similar to the prompt corrective action categories described above, with the "undercapitalized" category including institutions that are undercapitalized, significantly undercapitalized and critically undercapitalized for prompt corrective action purposes. The FDIC also assigns an institution to one of three supervisory subgroups based on a supervisory evaluation that the institution's primary federal regulator provides to the FDIC and information that the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

91


Table of Contents

        In 2009, the FDIC adopted a final rule requiring a special assessment on insured institutions as part of its effort to rebuild the FDIC deposit insurance fund ("DIF"). The FDIC administers the DIF, and all insured depository institutions are required to pay assessments to the FDIC that fund the DIF. The Dodd-Frank Act broadens the base for FDIC insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution during the assessment period. On February 7, 2011, the FDIC issued a final rule implementing revisions to the assessment system mandated by the Dodd-Frank Act. The new regulation was effective April 1, 2011 and was reflected in the June 30, 2011 FDIC DIF balance and the invoices for assessments due September 30, 2011. Accruals for DIF assessments were $1.0 million for the year ended December 31, 2013.

        The FDIC is required to maintain a designated reserve ratio of the DIF to insured deposits in the United States. The Dodd-Frank Act requires the FDIC to assess insured depository institutions to achieve a DIF ratio of at least 1.35 percent by September 30, 2020. Pursuant to its authority in the Dodd-Frank Act, the FDIC on December 20, 2010, published a final rule establishing a higher long-term target DIF ratio of greater than 2%. Deposit insurance assessment rates are subject to change by the FDIC and will be impacted by the overall economy and the stability of the banking industry as a whole. The FDIC will notify the Bank concerning an assessment rate that we will be charged for the assessment period. As a result of the new regulations, we expect to incur higher annual deposit insurance assessments, which could have a significant adverse impact on our financial condition and results of operations.

        The Dodd-Frank Act permanently increased the standard maximum deposit insurance amount from $100,000 to $250,000. The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership category.

        The Dodd-Frank Act instituted, for all insured depository institutions, unlimited deposit insurance on noninterest-bearing transaction accounts for the period from December 31, 2010 through December 31, 2012 for all depositors, including consumers, businesses and government entities. This unlimited insurance coverage, which expired on December 31, 2012, was separate from, and in addition to, the insurance coverage provided to a depositor's other deposit accounts held at an FDIC-insured institution up to the permissible limit of $250,000.

        Community Reinvestment Act.    The CRA requires, in connection with examinations of financial institutions, that federal banking regulators (in the Bank's case, the Federal Reserve Board) evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate-income neighborhoods. These facts are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on the Bank. Additionally, the Bank must publicly disclose the terms of various CRA-related agreements.

        During the second quarter of 2013, the Bank received a "satisfactory" CRA rating in connection with its most recent CRA performance evaluation. A CRA rating of less than "satisfactory" adversely affects a bank's ability to establish new branches and impairs a bank's ability to commence new activities that are "financial in nature" or acquire companies engaged in these activities. See "Risk Factors—Risks Relating to Hilltop's Business—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

92


Table of Contents

third party. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers. The Bank and all of its subsidiaries have established policies and procedures to comply with the privacy provisions of the Gramm-Leach-Bliley Act.

        Federal Laws Applicable to Credit Transactions.    The loan operations of the Bank are also subject to federal laws applicable to credit transactions, such as the:

        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:

        Capital Requirements.    The Federal Reserve Board and the Texas Department of Banking monitor the capital adequacy of the Bank by using a combination of risk-based guidelines and leverage ratios. The agencies consider the Bank's capital levels when taking action on various types of applications and

93


Table of Contents

when conducting supervisory activities related to the safety and soundness of individual banks and the banking system.

        Under the regulatory capital guidelines (without giving effect to Basel III discussed below), the Bank must maintain a total risk-based capital to risk-weighted assets ratio of at least 8.0%, a Tier 1 capital to risk-weighted assets ratio of at least 4.0%, and a Tier 1 capital to average total assets ratio of at least 4.0% (3.0% for banks receiving the highest examination rating) to be considered "adequately capitalized." See the discussion herein under "The FDIC Improvement Act." At June 30, 2014, the Bank's ratio of total risk-based capital to risk-weighted assets was 13.90%, the Bank's ratio of Tier 1 capital to risk-weighted assets was 13.22% and the Bank's ratio of Tier 1 capital to average total assets was 9.97%.

        BASEL III.    In December 2010, the Basel Committee on Banking Supervision (the "Basel Committee") released revised frameworks for the regulation of capital and liquidity of internationally active banking organizations. These new frameworks are generally referred to as "Basel III." On July 2, 2013, the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency released final rules that substantially amend the regulatory risk-based capital rules applicable to the Company and the Bank. These final rules implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act. Hilltop, PlainsCapital and the Bank will begin transitioning to the new final rules on January 1, 2015 when new minimum capital requirements, as set forth in the table below, are effective. However, the new capital conservation buffer and certain deductions from common equity Tier 1 capital phase in over a time period from 2015 through 2019.

        The following table summarizes the Basel III transition schedule for new ratios and capital definitions beginning January 1, 2015.

Year (as of January 1)
  2015   2016   2017   2018   2019  

Minimum common equity Tier 1 capital ratio

    4.5 %   4.5 %   4.5 %   4.5 %   4.5 %

Common equity Tier 1 capital conservation buffer

    N/A     0.625 %   1.25 %   1.875 %   2.5 %

Minimum common equity Tier 1 capital ratio plus capital conservation buffer

    4.5 %   5.125 %   5.75 %   6.375 %   7.0 %

Phase-in of most deductions from common equity Tier 1 (including 10 percent & 15 percent common equity Tier 1 threshold deduction items that are over the limits)(1)

    40.0 %   60.0 %   80.0 %   100.0 %   100.0 %

Minimum Tier 1 capital ratio

    6.0 %   6.0 %   6.0 %   6.0 %   6.0 %

Minimum Tier 1 capital ratio plus capital conservation buffer

    N/A     6.625 %   7.25 %   7.875 %   8.5 %

Minimum total capital ratio

    8.0 %   8.0 %   8.0 %   8.0 %   8.0 %

Minimum total capital ratio plus conservation buffer

    N/A     8.625 %   9.25 %   9.875 %   10.5 %

*
N/A means not applicable.

(1)
Deductions from common equity Tier 1 capital include goodwill and other intangibles, deferred tax assets that arise from net operating loss and tax credit carryforwards (above certain levels), gains-on-sale in connection with a securitization, any defined benefit pension fund net asset (for banking organizations that are not insured depository institutions), investments in a banking organization's own capital instruments, mortgage servicing assets (above certain levels) and investments in the capital of unconsolidated financial institutions (above certain levels).

        The new rules take important steps toward improving the quality and increasing the quantity of capital for all banking organizations as well as setting higher standards for large, internationally active banking organizations. The regulatory agencies believe that the new rules will result in capital requirements that better reflect banking organizations' risk profiles, thereby improving the overall resilience of the banking system. The regulatory agencies carefully considered the potential impacts on

94


Table of Contents

all banking organizations, including community banking organizations such as Hilltop and the Bank, and sought to minimize the potential burden of these changes where consistent with applicable law and the agencies' goals of establishing a robust and comprehensive capital framework.

        The new rules treatment of one- to four-family residential mortgage exposures remains the same as under current general risk-based capital rules. This includes a 50 percent risk weight for prudently underwritten first lien mortgage loans that are not past due, reported as nonaccrual, or restructured, and a 100 percent risk weight for all other residential mortgages. Also in the new rules, non-advanced approaches banking organizations, such as Hilltop and the Bank, are given a one-time option to filter certain Accumulated Other Comprehensive Income ("AOCI") components, comparable to the treatment under the current general risk-based capital rule. The AOCI opt-out election must be made on the institution's first regulatory filing after January 1, 2015.

        The new rules also make certain major changes from the current general risk-based capital rules, including, but not limited to the following:

95


Table of Contents

        The following table summarizes how much a banking organization can pay out in the form of distributions or discretionary bonus payments in a quarter based on its capital conservation buffer. A banking organization with a buffer greater than 2.5 percent would not be subject to limits on capital distributions or discretionary bonus payments; however, a banking organization with a buffer of less than 2.5 percent would be subject to increasingly stringent limitations as the buffer approaches zero.

Capital Conservation Buffer
(as a percentage of risk-weighted assets)
  Maximum Payout
(as a percentage of eligible retained income)

Greater than 2.5 percent

  No payout limitation applies

Less than or equal to 2.5 percent and greater than 1.875 percent

  60 percent

Less than or equal to 1.875 percent and greater than 1.25 percent

  40 percent

Less than or equal to 1.25 percent and greater than 0.625 percent

  20 percent

Less than or equal to 0.625 percent

  0 percent

        The new rules also prohibit a banking organization from making distributions or discretionary bonus payments during any quarter if its eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5 percent at the beginning of the quarter. The eligible retained income of a banking organization is defined as its net income for the four calendar quarters preceding the current calendar quarter, based on the organization's quarterly regulatory reports, net of any distributions and associated tax effects not already reflected in net income. When the new rules are fully phased-in in 2019, the minimum capital requirements plus the capital conservation buffer will exceed the prompt corrective action well-capitalized thresholds.

        Although these new capital ratios do not become effective until 2015 and 2016, the banking regulators will expect bank holding companies and banks to meet these requirements well ahead of that date. The bank regulatory agencies may also set higher capital requirements for holding companies or banks whose circumstances warrant it. For example, holding companies experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. At this time, the bank regulatory agencies are more inclined to impose higher capital requirements in order to meet well-capitalized standards, and future regulatory change could impose higher capital standards as a routine matter.

        On January 6, 2013, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee, met and unanimously endorsed a four year delay in the Basel Committee's rules establishing a liquidity coverage ratio ("LCR"). Under the revised liquidity requirements, large, internationally active banks would be required to meet 60 percent of the LCR obligations by 2015, and the full rule would be phased in annually through 2019. The proposal would also apply a less stringent, modified LCR to bank holding companies and savings and loan holding companies that are not internally active but have more than $50 billion in total assets, such as the Company. The proposal would not apply to bank holding companies with less than $50 billion in total assets. We continue to monitor developments related to Basel III.

        FIRREA.    The Financial Institutions Reform, Recovery and Enforcement Act of 1989, or FIRREA, includes various provisions that affect or may affect the Bank. Among other matters, FIRREA generally permits bank holding companies to acquire healthy thrifts as well as failed or failing thrifts. FIRREA removed certain cross marketing prohibitions previously applicable to thrift and bank subsidiaries of a common holding company. Furthermore, a multi-bank holding company may now be required to indemnify the DIF against losses it incurs with respect to such company's affiliated banks, which in effect makes a bank holding company's equity investments in healthy bank subsidiaries available to the FDIC to assist such company's failing or failed bank subsidiaries.

        In addition, pursuant to FIRREA, any depository institution that has been chartered less than two years, is not in compliance with the minimum capital requirements of its primary federal banking regulator, or is otherwise in a troubled condition must notify its primary federal banking regulator of the proposed addition of any person to its board of directors or the employment of any person as a

96


Table of Contents

senior executive officer of the institution at least 30 days before such addition or employment becomes effective. During such 30 day period, the applicable federal banking regulatory agency may disapprove of the addition of or employment of such director or officer. The Bank is not subject to any such requirements. FIRREA also expanded and increased civil and criminal penalties available for use by the appropriate regulatory agency against certain "institution affiliated parties" primarily including: (i) management, employees and agents of a financial institution; (ii) independent contractors such as attorneys and accountants and others who participate in the conduct of the financial institution's affairs and who caused or are likely to cause more than minimum financial loss to or a significant adverse effect on the institution, who knowingly or recklessly violate a law or regulation, breach a fiduciary duty or engage in unsafe or unsound practices. Such practices can include the failure of an institution to timely file required reports or the submission of inaccurate reports. Furthermore, FIRREA authorizes the appropriate banking agency to issue cease and desist orders that may, among other things, require affirmative action to correct any harm resulting from a violation or practice, including restitution, reimbursement, indemnifications or guarantees against loss. A financial institution may also be ordered to restrict its growth, dispose of certain assets or take other action as determined by the ordering agency to be appropriate.

        The FDIC Improvement Act.    The Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA, made a number of reforms addressing the safety and soundness of the deposit insurance system, supervision of domestic and foreign depository institutions, and improvement of accounting standards. This statute also limited deposit insurance coverage, implemented changes in consumer protection laws and provided for least-cost resolution and prompt regulatory action with regard to troubled institutions.

        FDICIA requires every bank with total assets in excess of $500 million to have an annual independent audit made of the bank's financial statements by a certified public accountant to verify that the financial statements of the bank are presented in accordance with GAAP and comply with such other disclosure requirements as prescribed by the FDIC.

        FDICIA also places certain restrictions on activities of banks depending on their level of capital. FDICIA divides banks into five different categories, depending on their level of capital. Under current regulations:

        Under the new capital rules discussed above, banks will have to maintain a common equity Tier 1 capital ratio of 6.5%, a Tier 1 capital ratio of 8%, a total capital ratio of 10%, and a leverage ratio of 5% to be deemed "well capitalized" for purposes of certain rules and prompt corrective action requirements.

97


Table of Contents

        In addition, the FDIC has the ability to downgrade a bank's classification (but not to "critically undercapitalized") based on other considerations even if the bank meets the capital guidelines. According to these guidelines, the Bank was classified as "well capitalized" at June 30, 2014.

        In addition, if a bank is classified as "undercapitalized," the bank is required to submit a capital restoration plan to the federal banking regulators. Pursuant to FDICIA, an "undercapitalized" bank is prohibited from increasing its assets, engaging in a new line of business, acquiring any interest in any company or insured depository institution, or opening or acquiring a new branch office, except under certain circumstances, including the acceptance by the federal banking regulators of a capital restoration plan for the bank.

        Furthermore, if a bank is classified as "undercapitalized," the federal banking regulators may take certain actions to correct the capital position of the bank; if a bank is classified as "significantly undercapitalized" or "critically undercapitalized," the federal banking regulators would be required to take one or more prompt corrective actions. These actions would include, among other things, requiring: sales of new securities to bolster capital, improvements in management, limits on interest rates paid, prohibitions on transactions with affiliates, termination of certain risky activities and restrictions on compensation paid to executive officers. If a bank is classified as "critically undercapitalized," FDICIA requires the bank to be placed into conservatorship or receivership within 90 days, unless the federal banking regulators determines that other action would better achieve the purposes of FDICIA regarding prompt corrective action with respect to undercapitalized banks.

        The capital classification of a bank affects the frequency of examinations of the bank and impacts the ability of the bank to engage in certain activities and affects the deposit insurance premiums paid by such bank. Under FDICIA, the federal banking regulators are required to conduct a full-scope, on-site examination of every bank at least once every 12 months. An exception to this rule is made, however, that provides that banks (i) with assets of less than $100 million, (ii) that are categorized as "well capitalized," (iii) that were found to be well managed and composite rating was outstanding and (iv) have not been subject to a change in control during the last 12 months, need only be examined once every 18 months.

        Brokered Deposits.    Under FDICIA, banks may be restricted in their ability to accept brokered deposits, depending on their capital classification. "Well capitalized" banks are permitted to accept brokered deposits, but banks that are not "well capitalized" are not permitted to accept such deposits. The FDIC may, on a case-by-case basis, permit banks that are "adequately capitalized" to accept brokered deposits if the FDIC determines that acceptance of such deposits would not constitute an unsafe or unsound banking practice with respect to the bank. At June 30, 2014, the Bank was "well capitalized" and therefore not subject to any limitations with respect to its brokered deposits. Brokered deposits are the subject of a study under the Dodd-Frank Act.

        Federal limitations on activities and investments.    The equity investments and activities, as a principle of FDIC-insured state-chartered banks, are generally limited to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank.

        Check Clearing for the 21st Century Act.    The Check Clearing for the 21st Century Act gives "substitute checks," such as a digital image of a check and copies made from that image, the same legal standing as the original paper check.

        Federal Home Loan Bank System.    The Federal Home Loan Bank, or FHLB, system, of which the Bank is a member, consists of 12 regional FHLBs governed and regulated by the Federal Housing Finance Board. The FHLBs serve as reserve or credit facilities for member institutions within their assigned regions. The reserves are funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB system. The FHLBs make loans (i.e., advances) to members in

98


Table of Contents

accordance with policies and procedures established by the FHLB and the boards of directors of each regional FHLB.

        As a system member, according to currently existing policies and procedures, the Bank is entitled to borrow from the FHLB of its respective region and is required to own a certain amount of capital stock in the FHLB. The Bank is in compliance with the stock ownership rules with respect to such advances, commitments and letters of credit and home mortgage loans and similar obligations. All loans, advances and other extensions of credit made by the FHLB to the Bank are secured by a portion of the respective mortgage loan portfolio, certain other investments and the capital stock of the FHLB held by the Bank.

        Anti-terrorism and Money Laundering Legislation.    The Bank is subject to the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism of 2001 (the "USA PATRIOT Act"), the Bank Secrecy Act and rules and regulations of the Office of Foreign Assets Control. These statutes and related rules and regulations impose requirements and limitations on specific financial transactions and account relationships intended to guard against money laundering and terrorism financing. The Bank has established a customer identification program pursuant to Section 326 of the USA PATRIOT Act and the Bank Secrecy Act, and otherwise has implemented policies and procedures intended to comply with the foregoing rules.

        PrimeLending and the Bank are subject to the rules and regulations of the CFPB, FHA, VA, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and Government National Mortgage Association with respect to originating, processing, selling and servicing mortgage loans and the issuance and sale of mortgage-backed securities. Those rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines which include provisions for inspections and appraisals, require credit reports on prospective borrowers and fix maximum loan amounts, and, with respect to VA loans, fix maximum interest rates. Mortgage origination activities are subject to, among others, the Equal Credit Opportunity Act, Federal Truth-in-Lending Act, Secure and Fair Enforcement of Mortgage Licensing Act, Home Mortgage Disclosure Act, Fair Credit Reporting Act and the Real Estate Settlement Procedures Act and the regulations promulgated thereunder which, among other things, prohibit discrimination and require the disclosure of certain basic information to borrowers concerning credit terms and settlement costs. PrimeLending and the Bank are also subject to regulation by the Texas Department of Banking with respect to, among other things, the establishment of maximum origination fees on certain types of mortgage loan products. PrimeLending and the Bank are also subject to the provisions of the Dodd-Frank Act. Among other things, the Dodd-Frank Act established the CFPB and provides mortgage reform provisions regarding a customer's ability to repay, restrictions on variable-rate lending, loan officers' compensation, risk retention, and new disclosure requirements. The Dodd-Frank Act also clarifies that applicable state laws, rules and regulations related to the origination, processing, selling and servicing of mortgage loans continue to apply to PrimeLending. The additional regulatory requirements affecting our mortgage origination operations will result in increased compliance costs and may impact revenue.

        On August 16, 2010, the Federal Reserve Board published a final rule on loan broker compensation, pursuant to the Dodd-Frank Act, which prohibits certain compensation payments to loan brokers and the practice of steering consumers to loans not in their interest when it will result in greater compensation for a loan broker. This final rule became effective on April 1, 2011, however, the Federal Reserve Board noted in the final rule that the CFPB may clarify the rule in the future pursuant to the CFPB's authority granted under the Dodd-Frank Act. The CFPB's final rule addressing mortgage loan originator compensation is discussed in more detail below.

99


Table of Contents

        In addition, the Dodd-Frank Act directed the Federal Reserve Board to promulgate regulations requiring lenders and securitizers to retain an economic interest in the credit risk relating to loans the lender sells and other asset-backed securities that the securitizer issues if the loans have not complied with the ability to repay standards spelled out in the Dodd-Frank Act and its implementing regulations. The risk retention requirement has not become effective to date but is expected to be 5%, subject to increase or decrease by regulation. Final regulations have not yet been issued.

        On March 2, 2011, the Federal Reserve Board published a final rule implementing a provision in the Dodd-Frank Act that provides a separate, higher rate threshold for determining when the escrow requirements apply to higher-priced mortgage loans that exceed the maximum principal obligation eligible for purchase by Freddie Mac.

        In January 2013, the CFPB published final rules that will impact mortgage origination and servicing. Had these final rules not been published, many of the statutory requirements in Title XIV of the Dodd-Frank Act would have become effective on January 21, 2013 without any implementing regulations. Unless noted below, these final rules became effective in January 2014.

        The final rules concerning mortgage origination and servicing address the following topics:

        Ability to Repay.    This final rule implements the Dodd-Frank Act provisions requiring that for residential mortgages, creditors must make a reasonable and good faith determination based on verified and documented information that the consumer has a reasonable ability to repay the loan according to its terms. The final rule also establishes a presumption of compliance with the ability to repay determination for a certain category of mortgages called "qualified mortgages" meeting a series of detailed requirements. The final rule also provides a rebuttable presumption for higher-priced mortgage loans.

        High-Cost Mortgage.    This final rule strengthens consumer protections for high-cost mortgages (generally bans balloon payments and prepayment penalties, subject to exceptions and bans or limits certain fees and practices) and requires consumers to receive information about homeownership counseling prior to taking out a high-cost mortgage.

        Appraisals for High-Risk Mortgages.    The final rule permits a creditor to extend a higher-priced (subprime) mortgage loan ("HPML) only if the following conditions are met (subject to exceptions): (i) the creditor obtains a written appraisal; (ii) the appraisal is performed by a certified or licensed appraiser; and (iii) the appraiser conducts a physical property visit of the interior of the property. The rule also requires that during the application process, the applicant receives a notice regarding the appraisal process and their right to receive a free copy of the appraisal.

        Copies of Appraisals.    This final rule amends Regulation B that implements the Equal Credit Opportunity Act. It requires a creditor to provide a free copy of appraisal or valuation reports prepared in connection with any closed-end loan secured by a first lien on a dwelling. The final rule requires notice to applicants of the right to receive copies of any appraisal or valuation reports and creditors must send copies of the reports whether or not the loan transaction is consummated. Creditors must provide the copies of the appraisal or evaluation reports for free, however, the creditors may charge reasonable fees for the cost of the appraisal or valuation unless applicable law provides otherwise.

        Escrow Requirements.    This final rule implements Dodd-Frank Act changes that generally extend the required duration of an escrow account on certain higher-priced mortgage loans from a minimum of one year to a minimum of five years, subject to certain exemptions for loans made by certain creditors that operate predominantly in rural or underserved areas, as long as certain other criteria are met. This final rule became effective on June 1, 2013.

100


Table of Contents

        Servicing.    Two final rules were published to implement laws to protect consumers from detrimental actions by mortgage servicers and to provide consumers with better tools and information when dealing with mortgage servicers. One final rule amends Regulation Z, which implements the Truth in Lending Act, and a second final rule amends Regulation X, which implements the Real Estate Settlement Procedures Act. The rules cover nine major topics implementing the Dodd-Frank Act provisions related to mortgage servicing. The final rules include a number of exemptions and other adjustments for small servicers, defined as servicers that service 5,000 or fewer mortgage loans and service only mortgage loans that they or an affiliate originated or own.

        Mortgage Loan Originator Compensation.    This final rule implements Dodd-Frank Act requirements, as well as revises and clarifies existing regulations and commentary on loan originator compensation. The rule also prohibits, among other things: (i) certain arbitration agreements; (ii) financing certain credit insurance in connection with a mortgage loan; (iii) compensation based on a term of a transaction or a proxy for a term of a transaction; and (iv) dual compensation from a consumer and another person in connection with the transaction. The final rule also imposes a duty on individual loan officers, mortgage brokers and creditors to be "qualified" and, when applicable, registered or licensed to the extent required under applicable State and Federal law.

        Additional rules and regulations are expected including risk retention rules which would require lenders and securitizers to retain an economic interest in the credit risk relating to loans the lender sells and other asset-backed securities that the securitizer issues if the loans have not complied with the ability to repay standards spelled out in the Dodd-Frank Act and its implementing regulations. The risk retention requirement has not become effective to date but is expected to be 5%, subject to increase or decrease by regulation. Any additional regulatory requirements affecting PrimeLending mortgage origination operations will result in increased compliance costs and may impact revenue.

        NLC's insurance subsidiaries, NLIC and ASIC, are subject to regulation and supervision in each state where they are licensed to do business. This regulation and supervision is vested in state agencies having broad administrative power over the various aspects of the business of NLIC and ASIC.

        State insurance holding company regulation.    NLC controls two operating insurance companies, NLIC and ASIC, and is subject to the insurance holding company laws of Texas, the state in which those insurance companies are domiciled. These laws generally require NLC to register with the Texas Department of Insurance and periodically to furnish financial and other information about the operations of companies within its holding company structure. Generally under these laws, all transactions between an insurer and an affiliated company in its holding company structure, including sales, loans, reinsurance agreements and service agreements, must be fair and reasonable and, if satisfying a specified threshold amount or of a specified category, require prior notice and approval or non-objection by the Texas Department of Insurance.

        National Association of Insurance Commissioners.    The National Association of Insurance Commissioners, or NAIC, is a group consisting of state insurance commissioners that discuss issues and formulate policy with respect to regulation, reporting and accounting for insurance companies. Although the NAIC has no legislative authority and insurance companies are at all times subject to the laws of their respective domiciliary states and, to a lesser extent, other states in which they conduct business, the NAIC is influential in determining the form in which such laws are enacted. Certain Model Insurance Laws, Regulations and Guidelines, or Model Laws, have been promulgated by the NAIC as a minimum standard by which state regulatory systems and regulations are measured. Adoption of state laws that provide for substantially similar regulations to those described in the Model Laws is a requirement for accreditation by the NAIC.

        The NAIC provides authoritative guidance to insurance regulators on current statutory accounting issues by promulgating and updating a codified set of statutory accounting practices in its Accounting

101


Table of Contents

Practices and Procedures Manual. The Texas Department of Insurance has generally adopted these codified statutory accounting practices.

        Texas also has adopted laws substantially similar to the NAIC's risk based capital, or RBC laws, which require insurers to maintain minimum levels of capital based on their investments and operations. Domestic property and casualty insurers are required to report their RBC based on a formula that attempts to measure statutory capital and surplus needs based on the risks in the insurer's mix of products and investment portfolio. The formula is designed to allow the Texas Department of Insurance to identify potential inadequately capitalized companies. Under the formula, a company determines its RBC by taking into account certain risks related to its assets (including risks related to its investment portfolio and ceded reinsurance) and its liabilities (including underwriting risks related to the nature and experience of its insurance business). Among other requirements, an insurance company must maintain capital and surplus of at least 200% of the RBC computed by the NAIC's RBC model (known as the "Authorized Control Level" of RBC). At December 31, 2013, the most recent date for which the RBC calculation was performed, NLIC and ASIC capital and surplus levels exceeded the minimum RBC requirements that would trigger regulatory attention. In their 2013 statutory financial statements, both NLIC and ASIC complied with the NAIC's RBC reporting requirements. As of June 30, 2014, management was not aware of any changes in financial condition or structure that would cause NLIC or ASIC to not be in compliance with the required RBC ratio.

        The NAIC's Insurance Regulatory Information System, or IRIS, was developed to assist state insurance departments in executing their statutory mandates to oversee the financial condition of insurance companies. IRIS identifies twelve industry ratios and specifies a range of "usual values" for each ratio. Departure from the usual values on four or more of these ratios can lead to inquiries from state insurance commissioners as to certain aspects of an insurer's business. For 2013, all ratios for both NLIC and ASIC were within the usual values with two exceptions. Both companies fell below the indicated minimum investment yield range of 3%, with NLIC at 2.0% and ASIC at 1.4%, due to the concentration in cash at each company. We expect improvement in the yields at both companies as appropriate investment opportunities are identified. Additionally, NLIC's two-year operating ratio was calculated at 100%, which equals the threshold of 100%, primarily due to the significant weather events experienced over the past two year period.

        The NAIC adopted an amendment to its "Model Audit Rule" in response to the passage of the Sarbanes-Oxley Act of 2002, or SOX. The amendment is effective for financial statements for accounting periods after January 1, 2010. This amendment addresses auditor independence, corporate governance and, most notably, the application of certain provisions of Section 404 of SOX regarding internal control reporting. The rules relating to internal controls apply to insurers with gross direct and assumed written premiums of $500 million or more, measured at the legal entity level (rather than at the insurance holding company level), and to insurers that the domiciliary commissioner selects from among those identified as in hazardous condition, but exempts SOX compliant entities. Neither NLIC nor ASIC currently has direct and assumed written premiums of at least $500 million, but it is conceivable that this may change in the future; however, NLC must be SOX compliant because it is wholly owned by Hilltop, a public company subject to SOX compliance.

        Legislative changes.    From time to time, various regulatory and legislative changes have been, or are, proposed that would adversely affect the insurance industry. Among the proposals that have been, or are being, considered are the possible introduction of Federal regulation in addition to, or in lieu of, the current system of state regulation of insurers and proposals in various state legislatures (some of which proposals have been enacted) to conform portions of their insurance laws and regulations to various Model Laws adopted by the NAIC. NLC is unable to predict whether any of these laws and regulations will be adopted, the form in which any such laws and regulations would be adopted, or the effect, if any, these developments would have on its financial condition or results of operations.

102


Table of Contents

        In November 2002, in response to the tightening supply in certain insurance and reinsurance markets resulting from, among other things, the September 11, 2001 terrorist attacks, the Terrorism Risk Insurance Act, or TRIA, was enacted. TRIA was modified and extended by the Terrorism Risk Insurance Extension Act of 2005 and extended again by the Terrorism Risk Insurance Program Reauthorization Act of 2007. These Acts created a Federal Program designed to ensure the availability of commercial insurance coverage for terrorist acts in the United States. This Program helped the commercial property and casualty insurance industry cover claims related to terrorism-related losses and requires such companies to offer coverage for certain acts of terrorism. As a result, NLC is prohibited from adding certain terrorism exclusions to the policies written by its insurance company subsidiaries. The 2005 Act extended the Program through 2007, but eliminated commercial auto, farm-owners and certain other commercial coverages from its scope. The Reauthorization Act further extended the Program through December 31, 2014 and fixed the reimbursement percentage at 85% and the deductible at 20%. Although NLC is protected by federally funded terrorism reinsurance as provided for in the TRIA, there is a substantial deductible that must be met, the payment of which could have an adverse effect on its financial condition and results of operations. NLC's deductible under the Program was $1.7 million for 2013 and is estimated to be $1.2 million in 2014. Potential future changes to the TRIA could also adversely affect NLC by causing its reinsurers to increase prices or withdraw from certain markets where terrorism coverage is required. NLC had no terrorism-related losses in 2013.

        State insurance regulations.    State insurance authorities have broad powers to regulate U.S. insurance companies. The primary purposes of these powers are to promote insurer solvency and to protect individual policyholders. The extent of regulation varies, but generally has its source in statutes that delegate regulatory, supervisory and administrative power to state insurance departments. These powers relate to, among other things, licensing to transact business, accreditation of reinsurers, admittance of assets to statutory surplus, regulating unfair trade and claims practices, establishing actuarial requirements and solvency standards, regulating investments and dividends, and regulating policy forms, related materials and premium rates. State insurance laws and regulations require insurance companies to file financial statements prepared in accordance with accounting principles prescribed by insurance departments in states in which they conduct insurance business, and their operations are subject to examination by those departments.

        As part of the broad authority that state insurance commissioners hold, they may impose periodic rules or regulations related to local issues or events. An example is the State of Oklahoma's prohibition on the cancellation of policies for nonpayment of premium in the wake of severe tornadic activity. Due to the extent of damage and displacement of people, inability of mail to reach policyholders and inaccessibility of entire neighborhoods, the State of Oklahoma prohibited insurance companies from canceling or non-renewing policies for a period of time following the specific event.

        Periodic financial and market conduct examinations.    The insurance departments in every state in which NLC's insurance companies do business may conduct on-site visits and examinations of its insurance companies at any time to review the insurance companies' financial condition, market conduct and relationships and transactions with affiliates. In addition, the Texas Department of Insurance will conduct comprehensive examinations of insurance companies domiciled in Texas every three to five years. Examinations are generally carried out in cooperation with the insurance departments of other licensing states under guidelines promulgated by the NAIC.

        The Texas Department of Insurance completed their last examinations of NLIC and ASIC through December 31, 2010 in an examination report dated May 12, 2012. This examination report contained no information of any significant compliance issues and there is no indication of any significant changes to our financial statements as a result of the examination by the domiciliary state.

        State dividend limitations.    The Texas Department of Insurance must approve any dividend declared or paid by an insurance company domiciled in the state if the dividend, together with all

103


Table of Contents

dividends declared or distributed by that insurance company during the preceding twelve months, exceeds the greater of (1) 10% of its policyholders' surplus as of December 31 of the preceding year or (2) 100% of its net income for the preceding calendar year. The greater number is known as the insurer's extraordinary dividend limit. At December 31, 2013, the extraordinary dividend limit for NLIC and ASIC was $9.9 million and $2.6 million, respectively. In addition, NLC's insurance companies may only pay dividends out of their earned surplus.

        Statutory accounting principles.    Statutory accounting principles, or SAP, are a comprehensive basis of accounting developed to assist insurance regulators in monitoring and regulating the solvency of insurance companies. SAP rules are different from GAAP, and are intended to reflect a more conservative view of the insurer. SAP is primarily concerned with measuring an insurer's surplus to policyholders. Accordingly, SAP focuses on valuing assets and liabilities of insurers at financial reporting dates in accordance with insurance laws and regulatory provisions applicable in each insurer's domiciliary state.

        While GAAP is concerned with a company's solvency, it also stresses other financial measurements, such as income and cash flows. Accordingly, GAAP gives more consideration to appropriate matching of revenues and expenses and accounting for management's stewardship of assets than does SAP. As a direct result, different amounts of assets and liabilities will be reflected in financial statements prepared in accordance with GAAP as opposed to SAP. SAP, as established by the NAIC and adopted by Texas regulators, determines the statutory surplus and statutory net income of the NLC insurance companies and, thus, determines the amount they have available to pay dividends.

        Guaranty associations.    In Texas, and in all of the jurisdictions in which NLIC and ASIC are, or in the future may be, licensed to transact business, there is a requirement that property and casualty insurers doing business within the jurisdiction must participate in guaranty associations, which are organized to pay limited covered benefits owed pursuant to insurance policies issued by impaired, insolvent or failed insurers. These associations levy assessments, up to prescribed limits, on all member insurers in a particular state on the basis of the proportionate share of the premiums written by member insurers in the lines of business in which the impaired, insolvent or failed insurer was engaged. States generally permit member insurers to recover assessments paid through full or partial premium tax offsets.

        NLC did not incur any levies in 2013, 2012 or 2011. Property and casualty insurance company insolvencies or failures may, however, result in additional guaranty fund assessments at some future date. At this time NLC is unable to determine the impact, if any, that these assessments may have on its financial condition or results of operations. NLC has established liabilities for guaranty fund assessments with respect to insurers that are currently subject to insolvency proceedings.

        National Flood Insurance Program.    NLC's insurance subsidiaries voluntarily participate as Write Your Own carriers in the National Flood Insurance Program, or NFIP. The NFIP is administered and regulated by the Federal Emergency Management Agency (FEMA). NLIC and ASIC operates as a fiscal agent of the Federal government in the selling and administering of the Standard Flood Insurance Policy. This involves writing the policy, the collection of premiums and the paying of covered claims. All pricing is set by FEMA and all collections are made by NLIC and ASIC.

        NLIC and ASIC cede 100% of the policies written by NLIC and ASIC on the Standard Flood Insurance Policy to FEMA; however, if FEMA were unable to perform, NLIC and ASIC would have a legal obligation to the policyholders. The terms of the reinsurance agreement are standard terms, which require NLIC and ASIC to maintain its rating criteria, determine policyholder eligibility, issue policies on NLIC and ASIC's paper, endorse and cancel policies, collect from insureds and process claims. NLIC and ASIC receive ceding commissions from NFIP for underwriting administration, claims management, commission and adjuster fees.

104


Table of Contents

        Participation in involuntary risk plans.    NLC's insurance companies are required to participate in residual market or involuntary risk plans in various states where they are licensed that provide insurance to individuals or entities that otherwise would be unable to purchase coverage from private insurers. If these plans experience losses in excess of their capitalization, they may assess participating insurers for proportionate shares of their financial deficit. These plans include the Georgia Underwriting Association, Texas FAIR Plan Association, Texas Windstorm Insurance Agency, or TWIA, the Louisiana Citizens Property Insurance Corporation, the Mississippi Residential Property Insurance Underwriting Association and the Mississippi Windstorm Underwriting Association. For example in 2005, following Hurricanes Katrina and Rita, the above plans levied collective assessments totaling $10.4 million on NLC's insurance subsidiaries. Additional assessments, including emergency assessments, may follow. In some of these instances, NLC's insurance companies should be able to recover these assessments through policyholder surcharges, higher rates or reinsurance. The ultimate impact hurricanes have on the Texas and Louisiana facilities is currently uncertain and future assessments can occur whenever the involuntary facilities experience financial deficits.

        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.

        FSC is a broker-dealer registered with the SEC, FINRA, all 50 U.S. states, the District of Columbia and Puerto Rico. Much of the regulation of broker-dealers, however, has been delegated to self-regulatory organizations, principally FINRA, the Municipal Securities Rulemaking Board and national securities exchanges. These self-regulatory organizations adopt rules (which are subject to approval by the SEC) for governing its members and the industry. Broker-dealers are also subject to the laws and rules of the states in which a broker-dealer conducts business. FSC is a member of, and is primarily subject to regulation, supervision and regular examination by, FINRA.

        The regulations to which broker-dealers are subject cover all aspects of the securities business, including, but not limited to, sales and trade practices, capital structure, record keeping and reporting procedures, relationships and conflicts with customers, the handling of cash and margin accounts, and the conduct of registered persons, directors, officers and employees. Broker-dealers are also subject to the privacy and anti-money laundering laws and regulations discussed previously. Additional legislation, changes in rules promulgated by the SEC and by self-regulatory organizations or changes in the interpretation or enforcement of existing laws and rules often directly affects the method of operation and profitability of broker-dealers. The SEC, the self-regulatory organizations and states may conduct administrative and enforcement proceedings that can result in censure, fine, suspension or expulsion of a broker-dealer, its registered persons, officers or employees. The principal purpose of regulation and discipline of broker-dealers is the protection of customers and the securities markets rather than protection of creditors and stockholders of broker-dealers.

        Limitation on Businesses.    The businesses that FSC may conduct are limited by its agreements with, and its oversight by, FINRA and by federal and state law. Participation in new business lines, including trading of new products or participation on new exchanges or in new countries often requires governmental and/or exchange approvals, which may take significant time and resources. In addition, FSC is an operating subsidiary of the Bank, which means its activities are further limited by those that are permissible for the Bank. As a result, FSC may be prevented from entering new businesses that may be profitable in a timely manner, if at all.

105


Table of Contents

        Net Capital Requirements.    The SEC, FINRA and various other regulatory authorities have stringent rules and regulations with respect to the maintenance of specific levels of net capital by regulated entities. Rule 15c3-1 of the Exchange Act (the "Net Capital Rule") requires that a broker-dealer maintain minimum net capital. Generally, a broker-dealer's net capital is net worth plus qualified subordinated debt less deductions for non-allowable (or non-liquid) assets and other adjustments and operational charges. At December 31, 2013, FSC was in compliance with applicable net capital requirements.

        The SEC and FINRA impose rules that require notification when net capital falls below certain predefined criteria. These rules also dictate the ratio of debt-to-equity in the regulatory capital composition of a broker-dealer, and constrain the ability of a broker-dealer to expand its business under certain circumstances. If a broker-dealer fails to maintain the required net capital, it may be subject to suspension or revocation of registration by the SEC or applicable regulatory authorities, and suspension or expulsion by these regulators could ultimately lead to the broker-dealer's liquidation. Additionally, the Net Capital Rule and certain FINRA rules impose requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing capital and requiring prior notice to, and approval from, the SEC and FINRA for certain capital withdrawals.

        Securities Investor Protection Corporation.    FSC is required by federal law to belong to SIPC, whose primary function is to provide financial protection for the customers of failing brokerage firms. SIPC provides protection for customers up to $500,000, of which a maximum of $250,000 may be in cash.

        Changing Regulatory Environment.    The regulatory environment in which FSC operates is subject to frequent change. Its business, financial condition and operating results may be adversely affected as a result of new or revised legislation or regulations imposed by the U.S. Congress, the SEC or other U.S. and state governmental regulatory authorities, or FINRA. FSC's business, financial condition and operating results also may be adversely affected by changes in the interpretation and enforcement of existing laws and rules by these governmental and regulatory authorities. In the current era of heightened regulation of financial institutions, FSC can expect to incur increasing compliance costs, along with the industry as a whole.


Properties

        Hilltop leases office space for its principal executive offices in Dallas, Texas. In addition to its principal office, Hilltop's various business segments conduct business at various locations.

        Banking.    At June 30, 2014, Hilltop's banking segment conducted business at 86 locations throughout Texas, including seven support facilities. Hilltop's banking segment's principal executive offices are located in Dallas, Texas, in space leased by PlainsCapital. Hilltop leases 29 banking locations including its principal offices and owns the remaining 57 banking locations. Hilltop has options to renew leases at most locations.

        Mortgage Origination.    Hilltop's mortgage origination segment is headquartered in Dallas, Texas and at June 30, 2014 conducted business from approximately 300 locations in 42 states. Each of these locations is leased by PrimeLending.

        Insurance.    At June 30, 2014, Hilltop's insurance segment leases office space in Waco, Texas for all corporate, claims, customer service and data center operations.

        Financial Advisory.    Hilltop's financial advisory segment is headquartered in Dallas, Texas and at June 30, 2014 conducted business at 25 locations in 14 states. Each of these offices is leased by First Southwest.

106


Table of Contents


Legal Proceedings

        On August 20, 2014, PrimeLending received a Civil Investigative Demand from the United States Department of Justice (the "DOJ") related to the Inquiry being conducted by the Office of Inspector General of the U.S. Department of Housing and Urban Development regarding mortgage-related practices. According to the Civil Investigative Demand, the DOJ is conducting an investigation to determine whether PrimeLending has violated the False Claims Act in connection with originating and underwriting single-family residential mortgage loans insured by the Federal Housing Administration (FHA). PrimeLending is cooperating with this investigation and continues to respond to the Civil Investigative Demand.

        For a description of other material pending legal proceedings relating to Hilltop's business, see the discussion set forth under the heading "Legal Matters" in Note 18 to Hilltop's audited consolidated financial statements included in this proxy statement/prospectus and Note 11 to Hilltop's unaudited consolidated financial statements also included in this proxy statement/prospectus. See also "The Merger—Litigation Relating to the Merger."


Market for Hilltop's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

        Our common stock is listed on the New York Stock Exchange under the symbol "HTH". Our common stock has no public trading history prior to February 12, 2004. Our common stock closed at $19.76 per share on October 13, 2014 and at $23.79 per share on March 31, 2014, the date immediately prior to the public announcement of the merger. At October 13, 2014, there were 90,182,915 shares of our common stock outstanding with 526 stockholders of record.

        In connection with the PlainsCapital Merger, on November 29, 2012, we filed with the State Department of Assessments and Taxation of the State of Maryland articles supplementary for the Series B Preferred Stock, setting forth its terms. Holders of the Series B Preferred Stock are entitled to noncumulative cash dividends at a fluctuating dividend rate based on the Bank's level of qualified small business lending. The Series B Preferred Stock is non-voting, except in limited circumstances, and ranks senior to our common stock with respect to the payment of dividends and distribution of assets upon any liquidation, dissolution or winding up of Hilltop.

        Subject to the restrictions discussed below, our stockholders are entitled to receive dividends when, as, and if declared by our board of directors out of funds legally available for that purpose. Our board of directors exercises discretion with respect to whether we will pay dividends and the amount of such dividend, if any. Factors that affect our ability to pay dividends on our common stock in the future include, without limitation, our earnings and financial condition, liquidity and capital resources, the general economic and regulatory climate, our ability to service any equity or debt obligations senior to our common stock and other factors deemed relevant by our board of directors. We have not declared or paid any dividends over the past two completed fiscal years.

        As a holding company, we are ultimately dependent upon our subsidiaries to provide funding for our operating expenses, debt service and dividends. Various laws limit the payment of dividends and other distributions by our subsidiaries to us, and may therefore limit our ability to pay dividends on our common stock. In addition, as long as shares of Series B Preferred Stock remain outstanding, we may not pay dividends to our common stockholders (nor may we repurchase or redeem any shares of our common stock) during any quarter in which we fail to declare and pay dividends on the Series B Preferred Stock and for the next three quarters following such failure. In addition, under the terms of the Series B Preferred Stock, we may only declare and pay dividends on our common stock (or repurchase shares of our common stock), if, after payment of such dividend, the dollar amount of our Tier 1 capital would be at least ninety percent (90%) of Tier 1 capital as of September 27, 2011, excluding any charge-offs and redemptions of the Series B Preferred Stock.

107


Table of Contents

        If required payments on our outstanding junior subordinated debentures held by our unconsolidated subsidiary trusts are not made or suspended, we may be prohibited from paying dividends on our common stock. Regulatory authorities could impose administratively stricter limitations on the ability of our subsidiaries to pay dividends to us if such limits were deemed appropriate to preserve certain capital adequacy requirements. See "—Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Restrictions on Dividends and Distributions."

        The high and low sales prices per quarter for Hilltop's common stock during 2014, 2013 and 2012 are included in the section of this proxy statement/prospectus entitled "Comparative Market Prices and Dividends."

        The following table sets forth information at December 31, 2013 with respect to compensation plans under which shares of our common stock may be issued. Additional information concerning our stock-based compensation plans is presented in Note 20, Stock-Based Compensation, in the notes to our audited consolidated financial statements included in this proxy statement/prospectus.

Equity Compensation Plan Information  
Plan Category
  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)
 

Equity compensation plans approved by security holders*

    600,000   $ 7.70     3,519,657  
               

Total

    600,000   $ 7.70     3,519,657  
               
               

*
Excludes shares of restricted stock granted under the 2003 equity incentive plan (the "2003 Plan"), as all such shares are vested. No exercise price is required to be paid upon the vesting of the restricted shares of common stock granted. In September 2012, our stockholders approved the Hilltop Holdings Inc. 2012 Equity Incentive Plan (the "2012 Plan"), which allows for the granting of nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights and other awards to employees of Hilltop, its subsidiaries and outside directors of Hilltop. Upon the effectiveness of the 2012 Plan, no additional awards are permissible under the 2003 Plan. In the aggregate, 4,000,000 shares of common stock may be delivered pursuant to awards granted under the 2012 Plan. At December 31, 2013, 480,343 awards had been granted pursuant to the 2012 Plan. All shares outstanding under the 2003 Plan and the 2012 Plan, whether vested or unvested, are entitled to receive dividends and to vote, unless forfeited. No participant in our 2012 Plan may be granted awards in any fiscal year covering more than 1,250,000 shares of our common stock.

        There were no repurchases of shares of common stock by Hilltop during the six months ended June 30, 2014 or the twelve months ended December 31, 2013.

        On January 17, 2014, April 17, 2014 and July 14, 2014 Hilltop issued an aggregate of 2,303, 2,708 and 2,216 shares of common stock under the Hilltop Holdings 2012 Equity Incentive Plan to certain non-employee directors as compensation for their service on Hilltop's Board of Directors during the

108


Table of Contents

fourth quarter of 2013 and first and second quarters of 2014, respectively. The shares were issued pursuant to the exemption from registration under Section 4(a)(2) of the Securities Act.


Selected Financial Data

        See "Selected Historical Consolidated Financial Data for Hilltop" beginning on page 11 of this proxy statement/prospectus.


Management's Discussion and Analysis of Financial Condition and Results of Operations.

        The following discussion is intended to help the reader understand Hilltop's results of operations and financial condition and is provided as a supplement to, and should be read in conjunction with, Hilltop's unaudited and 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. Hilltop's 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 "Risk Factors" and elsewhere in this proxy statement/prospectus. See "Forward-Looking Statements." All dollar amounts in the following discussion are in thousands, except per share amounts.

        Beginning in 1995, we operated as several companies under the name "Affordable Residential Communities" or "ARC," now known as Hilltop Holdings Inc., a Maryland corporation. We engaged in the business of acquiring, renovating, repositioning and operating manufactured home communities, as well as certain related businesses.

        In January 2007, we acquired NLC. NLC owns National Lloyds Insurance Company, or NLIC, and American Summit Insurance Company, or ASIC, both of which are licensed property and casualty insurers operating in multiple states. In addition, NLC also owns NALICO GA, a general agency that operates in Texas. NLIC commenced business in 1949 and currently operates in 14 states, with its largest market being the state of Texas. NLIC carries a financial strength rating of "A" (Excellent) by A.M. Best. ASIC was formed in 1955 and currently operates in 13 states, its largest market being the state of Arizona. ASIC carries a financial strength rating of "A" (Excellent) by A.M. Best. Both of these companies are regulated by the Texas Department of Insurance.

        On July 31, 2007, we sold substantially all of the operating assets used in our manufactured home communities business and our retail sales and financing business to American Residential Communities LLC. We received gross proceeds of approximately $890 million in cash, which represents the aggregate purchase price of $1.8 billion, less the indebtedness assumed by the buyer. After giving effect to expenses, taxes and our preferred stock and senior notes that remained outstanding following the sale, our net cash balance was approximately $550 million. As a result of the sale, our primary operations through November 2012 were limited to providing fire and homeowners insurance to low value dwellings and manufactured homes primarily in Texas and other areas of the southern United States through NLC.

        On November 30, 2012, we acquired PlainsCapital Corporation in a stock and cash transaction, whereby PlainsCapital Corporation merged with and into our wholly owned subsidiary, which continued as the surviving entity under the name "PlainsCapital Corporation" (the "PlainsCapital Merger"). Based on Hilltop's closing stock price on November 30, 2012, the total purchase price was $813.5 million, consisting of 27.1 million shares of common stock, $311.8 million in cash and the issuance of 114,068 shares of Hilltop Non-Cumulative Perpetual Preferred Stock, Series B ("Hilltop Series B Preferred Stock"). The fair value of assets acquired, excluding goodwill, totaled $6.5 billion,

109


Table of Contents

including $3.2 billion of loans, $730.8 million of investment securities and $70.7 million of identifiable intangibles. The fair value of the liabilities assumed was $5.9 billion, including $4.5 billion of deposits.

        Concurrent with the consummation of the PlainsCapital Merger, we became a financial holding company registered under the Bank Holding Company Act of 1956, as amended by the Gramm-Leach-Bliley Act of 1999.

        On September 13, 2013 (the "Bank Closing Date"), the Bank assumed substantially all of the liabilities, including all of the deposits, and acquired substantially all of the assets of Edinburg, Texas-based FNB from the Federal Deposit Insurance Corporation (the "FDIC"), as receiver, and reopened former branches of FNB acquired from the FDIC under the "PlainsCapital Bank" name (the "FNB Transaction"). Pursuant to the Purchase and Assumption Agreement by and among the FDIC as receiver for FNB, the FDIC and the Bank (the "P&A Agreement"), the Bank and the FDIC entered into loss-share agreements whereby the FDIC agreed to share in the losses of certain covered loans and covered other real estate owned ("OREO") that the Bank acquired in the FNB Transaction. The fair value of the assets acquired was $2.2 billion, including $1.1 billion in covered loans, $286.2 million in securities, $135.2 million in covered OREO and $42.9 million in non-covered loans. The Bank also assumed $2.2 billion in liabilities, consisting primarily of deposits.

        Following the PlainsCapital Merger, our primary line of business has been to provide business and consumer banking services from offices located throughout central, north and west Texas through the Bank. Further, the acquisition of FNB's expansive branch network allows the Bank to further develop its Texas footprint through expansion into the Rio Grande Valley, Houston, Corpus Christi, Laredo and El Paso markets, among others. In addition to the Bank, our other subsidiaries have specialized areas of expertise that allow us to provide an array of financial products and services such as mortgage origination, insurance and financial advisory services.

        On March 31, 2014, we entered into a definitive merger agreement with SWS providing for the merger of SWS with and into a subsidiary of Hilltop formed for the purpose of facilitating this transaction (see "The Merger Agreement" included elsewhere in this proxy statement/prospectus). Under the terms of the merger agreement, SWS stockholders will receive per share consideration of 0.2496 shares of Hilltop common stock and $1.94 of cash, equating to $7.25 per share based on Hilltop's closing price on June 30, 2014. The value of the merger consideration will fluctuate with the market price of Hilltop common stock. We intend to fund the cash portion of the consideration through available cash. The merger is subject to customary closing conditions, including regulatory approvals and approval of the stockholders of SWS, and is expected to be completed prior to the end of 2014.

        At June 30, 2014, on a consolidated basis, we had total assets of $9.4 billion, total deposits of $6.2 billion, total loans, including loans held for sale, of $6.0 billion and stockholders' equity of $1.4 billion. At December 31, 2013, on a consolidated basis, we had total assets of $8.9 billion, total deposits of $6.7 billion, total loans, including loans held for sale, of $5.6 billion and stockholders' equity of $1.3 billion. Our operating results beginning December 1, 2012 include the banking, mortgage origination and financial advisory operations acquired in the PlainsCapital Merger. Accordingly, our operating results and financial condition for the year ended December 31, 2013 are not comparable to prior years. Additionally, the presentation of our historical consolidated financial statements for 2011 has been modified and certain items have been reclassified to conform to the 2012 and 2013 presentation, which is more consistent with that of a financial institution that provides an array of financial products and services. Our banking operations include the operations acquired in the FNB Transaction since September 14, 2013.

110


Table of Contents

        We have two primary operating business units, PlainsCapital (financial services and products) and NLC (insurance). Within the PlainsCapital unit are three primary wholly owned operating subsidiaries: the Bank, PrimeLending and First Southwest. Under accounting principles generally accepted in the United States ("GAAP"), our business units are comprised of four reportable business segments organized primarily by the core products offered to the segments' respective customers: banking, mortgage origination, insurance and financial advisory. During the fourth quarter of 2013, we began presenting certain amounts previously allocated to the four reportable business segments under the heading Corporate to better reflect our internal organizational structure. This change had no impact on our consolidated results of operations. Our historical segment disclosures and Management's Discussion and Analysis of Financial Condition and Results of Operations have been revised to conform to the current presentation. Consistent with the segment operating results during 2013, we anticipate that future revenues will be driven primarily from the banking segment, with the remainder being generated by our mortgage origination, insurance and financial advisory segments. Based on historical results of PlainsCapital Corporation, which we acquired on November 30, 2012, the relative share of total revenue provided by our banking and mortgage origination segments fluctuates depending on market conditions, and operating results for the mortgage origination segment tend to be more volatile than operating results for the banking segment.

        The banking segment includes the operations of the Bank and, since September 14, 2013, the operations acquired in the FNB Transaction. The banking segment primarily provides business and consumer banking products and services from offices located throughout Texas and generates revenue from its portfolio of earning assets. The Bank's results of operations are primarily dependent on net interest income, while also deriving revenue from other sources, including service charges on customer deposit accounts and trust fees.

        The mortgage origination segment includes the operations of PrimeLending, which offers a variety of loan products from offices in 42 states and generates revenue predominantly from fees charged on the origination of loans and from selling these loans in the secondary market.

        The insurance segment includes the operations of NLC, which operates through its wholly owned subsidiaries, NLIC and ASIC. Insurance segment income is primarily generated from revenue earned on net insurance premiums less loss and loss adjustment expenses ("LAE") and policy acquisition and other underwriting expenses in Texas and other areas of the southern United States.

        The financial advisory segment generates a majority of its revenues from fees and commissions earned from investment advisory and securities brokerage services at First Southwest. The principal subsidiaries of First Southwest are FSC, a broker-dealer registered with the SEC and Financial Industry Regulatory Authority, and a member of the New York Stock Exchange, and First Southwest Asset Management, Inc., a registered investment advisor under the Investment Advisors Act of 1940. FSC holds trading securities to support sales, underwriting and other customer activities. These securities are marked to market through other noninterest income. FSC uses derivatives to support mortgage origination programs of certain non-profit housing organization clients. FSC hedges its related exposure to interest rate risk from these programs with U.S. Agency to-be-announced, or TBA, mortgage-backed securities. These derivatives are marked to market through other noninterest income.

        Corporate includes certain activities not allocated to specific business segments. These activities include holding company financing and investing activities, and management and administrative services to support the overall operations of the Company including, but not limited to, certain executive management, corporate relations, legal, finance, and acquisition costs not allocated to business segments. Balance sheet amounts for remaining subsidiaries not discussed previously and the elimination of intercompany transactions are included in "All Other and Eliminations."

111


Table of Contents

        Additional information concerning our reportable segments is presented in Note 30, Segment and Related Information, in the notes to our audited consolidated financial statements included in this proxy statement/prospectus and Note 20 of our unaudited consolidated financial statements also included in this proxy statement/prospectus. The following tables present certain information about the operating results of Hilltop's reportable segments (in thousands).

Three Months Ended June 30, 2014
  Banking   Mortgage
Origination
  Insurance   Financial
Advisory
  Corporate   All Other and
Eliminations
  Hilltop
Consolidated
 

Net interest income (expense)

  $ 90,828   $ (2,389 ) $ 838   $ 3,178   $ 1,695   $ 4,296   $ 98,446  

Provision for loan losses

    5,516             17             5,533  

Noninterest income

    16,392     122,820     43,123     25,838         (4,892 )   203,281  

Noninterest expense

    60,240     111,224     49,420     28,359     2,565     (596 )   251,212  
                               

Income (loss) before income taxes

  $ 41,464   $ 9,207   $ (5,459 ) $ 640   $ (870 ) $   $ 44,982  
                               
                               

 

Six Months Ended June 30, 2014
  Banking   Mortgage
Origination
  Insurance   Financial
Advisory
  Corporate   All Other and
Eliminations
  Hilltop
Consolidated
 

Net interest income (expense)

  $ 170,401   $ (6,528 ) $ 1,817   $ 5,808   $ 3,387   $ 8,982   $ 183,867  

Provision for loan losses

    8,744             31             8,775  

Noninterest income

    32,621     214,583     85,896     50,435         (10,154 )   373,381  

Noninterest expense

    120,917     201,857     81,762     55,724     4,753     (1,172 )   463,841  
                               

Income (loss) before income taxes

  $ 73,361   $ 6,198   $ 5,951   $ 488   $ (1,366 ) $   $ 84,632  
                               
                               

 

Three Months Ended June 30, 2013
  Banking   Mortgage
Origination
  Insurance   Financial
Advisory
  Corporate   All Other and
Eliminations
  Hilltop
Consolidated
 

Net interest income (expense)

  $ 68,597   $ (11,847 ) $ 873   $ 3,511   $ (105 ) $ 7,396   $ 68,425  

Provision for loan losses

    11,300             (11 )           11,289  

Noninterest income

    11,928     165,257     40,777     28,863         (7,592 )   239,233  

Noninterest expense

    31,919     134,487     62,144     30,373     1,673     (196 )   260,400  
                               

Income (loss) before income taxes

  $ 37,306   $ 18,923   $ (20,494 ) $ 2,012   $ (1,778 ) $   $ 35,969  
                               
                               

 

Six Months Ended June 30, 2013
  Banking   Mortgage
Origination
  Insurance   Financial
Advisory
  Corporate   All Other and
Eliminations
  Hilltop
Consolidated
 

Net interest income (expense)

  $ 136,268   $ (23,850 ) $ 1,886   $ 6,754   $ (236 ) $ 14,864   $ 135,686  

Provision for loan losses

    24,266             28             24,294  

Noninterest income

    24,132     311,785     80,202     51,641         (15,249 )   452,511  

Noninterest expense

    62,599     256,758     96,410     56,099     3,910     (385 )   475,391  
                               

Income (loss) before income taxes

  $ 73,535   $ 31,177   $ (14,322 ) $ 2,268   $ (4,146 ) $   $ 88,512  
                               
                               

 

Year Ended December 31, 2013
  Banking   Mortgage
Origination
  Insurance   Financial
Advisory
  Corporate   All Other and
Eliminations
  Hilltop
Consolidated
 

Net interest income (expense)

  $ 293,254   $ (37,840 ) $ 7,442   $ 12,064   $ (1,597 ) $ 22,878   $ 296,201  

Provision for loan losses

    37,140             18             37,158  

Noninterest income

    71,045     537,497     166,163     102,714         (27,334 )   850,085  

Noninterest expense

    155,102     472,284     166,006     112,360     10,439     (4,456 )   911,735  
                               

Income (loss) before income taxes

  $ 172,057   $ 27,373   $ 7,599   $ 2,400   $ (12,036 ) $   $ 197,393  
                               
                               

 

Year Ended December 31, 2012
  Banking   Mortgage
Origination
  Insurance   Financial
Advisory
  Corporate   All Other and
Eliminations
  Hilltop
Consolidated
 

Net interest income (expense)

  $ 24,885   $ (4,987 ) $ 4,730   $ 1,191   $ 39   $ 2,984   $ 28,842  

Provision for loan losses

    3,670             130             3,800  

Noninterest income

    4,601     57,618     154,147     10,909         (3,043 )   224,232  

Noninterest expense

    16,130     50,296     163,585     11,078     14,487     (59 )   255,517  
                               

Income (loss) before income taxes

  $ 9,686   $ 2,335   $ (4,708 ) $ 892   $ (14,448 ) $   $ (6,243 )
                               
                               

112


Table of Contents


Year Ended December 31, 2011
  Banking   Mortgage
Origination
  Insurance   Financial
Advisory
  Corporate   All Other and
Eliminations
  Hilltop
Consolidated
 

Net interest income (expense)

  $   $   $ 4,915   $   $ (2,851 ) $   $ 2,064  

Provision for loan losses

                             

Noninterest income

            141,650                 141,650  

Noninterest expense

            146,386         8,868         155,254  
                               

Income (loss) before income taxes

  $   $   $ 179   $   $ (11,719 ) $   $ (11,540 )
                               
                               

        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 $183.9 million in net interest income during the six months ended June 30, 2014, compared with net interest income of $135.7 million during the same period in 2013. The year-over-year increase in net interest income was primarily due to the inclusion of those operations acquired as a part of the FNB Transaction within our banking segment. We generated $296.2 million in net interest income during the year ended December 31, 2013, compared with net interest income of $28.8 million in 2012 and net interest income of $2.1 million in 2011. The significant year-over-year increases in net interest income were primarily due to $267.5 million and $21.1 million in net interest income during the year ended December 31, 2013 and the month ended December 31, 2012, respectively, generated by those operations acquired as part of the PlainsCapital Merger.

        The other component of our revenue is noninterest income, which is primarily comprised of the following:

113


Table of Contents

        In the aggregate, we generated $373.4 million and $452.5 million in noninterest income during the six months ended June 30, 2014 and 2013, respectively. The significant year-over-year decrease in noninterest income was primarily due to the decrease in loan origination volume within our mortgage origination segment, partially offset by increases in noninterest income in our banking and insurance segments. In the aggregate, we generated $850.1 million, $224.2 million and $141.7 million in noninterest income during 2013, 2012 and 2011, respectively. The significant year-over-year increases in noninterest income during 2013 and 2012 were primarily due to the inclusion of the mortgage origination and financial advisory operations that we acquired as a part of the PlainsCapital Merger.

        We also incur noninterest expenses in the operation of our businesses. Our businesses engage in labor intensive activities and, consequently, employees' compensation and benefits represent the majority of our noninterest expenses.

        Net income applicable to common stockholders for the three months ended June 30, 2014 was $27.1 million, or $0.30 per diluted share, compared to net income applicable to common stockholders of $20.9 million, or $0.24 per diluted share, for the three months ended June 30, 2013. Net income applicable to common stockholders for the six months ended June 30, 2014 was $50.8 million, or $0.56 per diluted share, compared to net income applicable to common stockholders of $53.3 million, or $0.61 per diluted share, for the six months ended June 30, 2013.

        Certain items included in net income for 2013 and 2014 resulted from purchase accounting associated with the merger of PlainsCapital Corporation with and into a wholly owned subsidiary of Hilltop on November 30, 2012 (the "PlainsCapital Merger") and the FNB Transaction. Income before taxes for the three months ended June 30, 2014 includes net accretion of $17.0 million and $10.4 million on earning assets and liabilities acquired in the PlainsCapital Merger and FNB Transaction, respectively, offset by amortization of identifiable intangibles of $2.3 million and $0.3 million, respectively. During the three months ended June 30, 2013, income before taxes includes net accretion of $15.9 million on earning assets and liabilities acquired in the PlainsCapital Merger, offset by amortization of identifiable intangibles of $2.5 million. Income before taxes for the six months ended June 30, 2014 includes net accretion of $27.0 million and $19.9 million on earning assets and liabilities acquired in the PlainsCapital Merger and FNB Transaction, respectively, offset by amortization of identifiable intangibles of $4.6 million and $0.5 million, respectively. During the six months ended June 30, 2013, income before taxes includes net accretion of $31.9 million on earning assets and liabilities acquired in the PlainsCapital Merger, offset by amortization of identifiable intangibles of $4.9 million.

        We consider the ratios shown in the table below to be key indicators of our performance.

 
  Three Months Ended June 30,   Six Months Ended June 30,    
 
 
  Year Ended
December 31, 2013
 
 
  2014   2013   2014   2013  

Performance Ratios:

                               

Return on average stockholders' equity

    7.99 %   7.29 %   7.82 %   9.46 %   10.48 %

Return on average assets

    1.24 %   1.24 %   1.19 %   1.58 %   1.66 %

Net interest margin (taxable equivalent)(1)

    5.18 %   4.33 %   4.90 %   4.34 %   4.47 %

(1)
Taxable equivalent net interest income divided by average interest-earning assets.

114


Table of Contents

        During the three months ended June 30, 2014, the consolidated taxable equivalent net interest margin of 5.18% was impacted by PlainsCapital Merger related accretion of discount on loans of $17.8 million, amortization of premium on acquired securities of $1.0 million and amortization of premium on acquired time deposits of $0.2 million. Additionally, FNB Transaction related accretion of discount on loans of $8.1 million and amortization of premium on acquired time deposits of $2.3 million also impacted the consolidated taxable equivalent net interest margin during the three months ended June 30, 2014. These items increased the consolidated taxable equivalent net interest margin by 140 basis points for the three months ended June 30, 2014. The consolidated taxable equivalent net interest margin was 4.33% for the three months ended June 30, 2013. The taxable equivalent net interest margin for the second quarter of 2013 was impacted by PlainsCapital Merger related accretion of discount on loans of $16.7 million, amortization of premium on acquired securities of $1.4 million and amortization of premium on acquired time deposits of $0.6 million. These items increased the consolidated taxable equivalent interest margin by 98 basis points for the three months ended June 30, 2013.

        During the six months ended June 30, 2014, the consolidated taxable equivalent net interest margin of 4.90% was impacted by PlainsCapital Merger related accretion of discount on loans of $28.6 million, amortization of premium on acquired securities of $1.9 million and amortization of premium on acquired time deposits of $0.3 million. Additionally, FNB Transaction related accretion of discount on loans of $15.3 million and amortization of premium on acquired time deposits of $4.6 million also impacted the consolidated taxable equivalent net interest margin during the six months ended June 30, 2014. These items increased the consolidated taxable equivalent net interest margin by 121 basis points for the six months ended June 30, 2014. The consolidated taxable equivalent net interest margin was 4.34% for the six months ended June 30, 2013. The taxable equivalent net interest margin for the six months ended June 30, 2013 was impacted by PlainsCapital Merger related accretion of discount on loans of $33.6 million, amortization of premium on acquired securities of $3.4 million and amortization of premium on acquired time deposits of $1.7 million. These items increased the consolidated taxable equivalent interest margin by 97 basis points for the six months ended June 30, 2013.

115


Table of Contents

        The tables below provide additional details regarding our consolidated net interest income (dollars in thousands).

 
  Three Months Ended June 30,  
 
  2014   2013  
 
  Average
Outstanding
Balance
  Interest
Earned or
Paid
  Annualized
Yield or
Rate
  Average
Outstanding
Balance
  Interest
Earned or
Paid
  Annualized
Yield or
Rate
 

Assets

                                     

Interest-earning assets

                                     

Loans, gross(1)

  $ 5,526,869   $ 92,204     6.63 % $ 4,352,489   $ 65,213     5.95 %

Investment securities—taxable

    1,144,269     7,618     2.66 %   996,624     6,480     2.60 %

Investment securities—non-taxable(2)

    185,533     1,772     3.82 %   201,383     1,772     3.52 %

Federal funds sold and securities purchased under agreements to resell

    20,308     14     0.28 %   34,594     35     0.40 %

Interest-bearing deposits in other financial institutions          

    575,653     317     0.22 %   581,676     242     0.25 %

Other

    218,413     3,068     5.62 %   164,754     3,009     7.31 %
                               

Interest-earning assets, gross

    7,671,045     104,993     5.44 %   6,331,520     76,751     4.82 %

Allowance for loan losses

    (38,909 )               (20,588 )            
                                   

Interest-earning assets, net

    7,632,136                 6,310,932              

Noninterest-earning assets

    1,304,522                 818,914              
                                   

Total assets

  $ 8,936,658               $ 7,129,846              
                                   
                                   

Liabilities and Stockholders' Equity

                                     

Interest-bearing liabilities

                                     

Interest-bearing deposits

  $ 4,523,194   $ 3,096     0.27 % $ 3,379,302   $ 3,406     0.40 %

Notes payable and other borrowings

    966,143     2,866     1.18 %   1,044,784     4,337     1.66 %
                               

Total interest-bearing liabilities

    5,489,337     5,962     0.43 %   4,424,086     7,743     0.70 %

Noninterest-bearing liabilities

                                     

Noninterest-bearing deposits

    1,761,194                 1,179,264              

Other liabilities

    307,846                 341,929              
                                   

Total liabilities

    7,558,377                 5,945,279              

Stockholders' equity

    1,377,769                 1,183,830              

Noncontrolling interest

    512                 737              
                                   

Total liabilities and stockholders' equity

  $ 8,936,658               $ 7,129,846              
                                   
                                   

Net interest income(2)

        $ 99,031               $ 69,008        
                                   
                                   

Net interest spread(2)

                5.01 %               4.12 %

Net interest margin(2)

                5.18 %               4.33 %

116


Table of Contents


 
  Six Months Ended June 30,  
 
  2014   2013  
 
  Average
Outstanding
Balance
  Interest
Earned or
Paid
  Annualized
Yield or
Rate
  Average
Outstanding
Balance
  Interest
Earned or
Paid
  Annualized
Yield or
Rate
 

Assets

                                     

Interest-earning assets

                                     

Loans, gross(1)

  $ 5,299,145   $ 171,948     6.47 % $ 4,280,580   $ 130,099     6.06 %

Investment securities—taxable

    1,133,315     15,206     2.69 %   948,789     12,392     2.61 %

Investment securities—non-taxable(2)

    184,345     3,633     3.94 %   209,816     3,794     3.62 %

Federal funds sold and securities purchased under agreements to resell

    23,305     33     0.28 %   22,462     56     0.50 %

Interest-bearing deposits in other financial institutions          

    770,206     912     0.24 %   664,002     575     0.25 %

Other

    203,428     5,708     5.64 %   159,685     5,114     6.45 %
                               

Interest-earning assets, gross

    7,613,744     197,440     5.17 %   6,285,334     152,030     4.83 %

Allowance for loan losses

    (37,891 )               (13,720 )            
                                   

Interest-earning assets, net

    7,575,853                 6,271,614              

Noninterest-earning assets

    1,336,127                 845,500              
                                   

Total assets

  $ 8,911,980               $ 7,117,114              
                                   
                                   

Liabilities and Stockholders' Equity

                                     

Interest-bearing liabilities

                                     

Interest-bearing deposits

  $ 4,735,026   $ 6,855     0.29 % $ 3,468,202   $ 6,856     0.40 %

Notes payable and other borrowings

    815,942     5,514     1.35 %   948,138     8,230     1.74 %
                               

Total interest-bearing liabilities

    5,550,968     12,369     0.45 %   4,416,340     15,086     0.69 %

Noninterest-bearing liabilities

                                     

Noninterest-bearing deposits

    1,741,409                 1,184,990              

Other liabilities

    264,504                 343,915              
                                   

Total liabilities

    7,556,881                 5,945,245              

Stockholders' equity

    1,354,635                 1,171,132              

Noncontrolling interest

    464                 737              
                                   

Total liabilities and stockholders' equity

  $ 8,911,980               $ 7,117,114              
                                   
                                   

Net interest income(2)

        $ 185,071               $ 136,944        
                                   
                                   

Net interest spread(2)

                4.72 %               4.14 %

Net interest margin(2)

                4.90 %               4.34 %

(1)
Average balance includes non-accrual loans.

117


Table of Contents

(2)
Annualized taxable equivalent adjustments are based on a 35% tax rate. The adjustment to interest income was $0.6 million for each of the three months ended June 30, 2014 and 2013, respectively, and $1.2 million and $1.3 million for the six months ended June 30, 2014 and 2013, respectively.

        On a consolidated basis, net interest income increased $30.0 million and $48.2 million during the three and six months ended June 30, 2014, compared with the same periods in 2013. These increases were primarily due to the inclusion of those operations acquired as a part of the FNB Transaction within our banking segment.

        The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management's best estimate, is necessary to absorb probable losses within the existing loan portfolio. The consolidated provision for loan losses, primarily in the banking segment, was $5.5 million and $11.3 million during the three months ended June 30, 2014 and 2013, respectively. During the three months ended June 30, 2014 and 2013, the provision for loan losses was comprised of charges relating to newly originated loans and acquired loans without credit impairment at acquisition of $3.9 million and $11.0 million, respectively, and purchased credit impaired ("PCI") loans of $1.6 million and $0.3 million, respectively. During the six months ended June 30, 2014 and 2013, the consolidated provision for loan losses, primarily in the banking segment, was $8.8 million and $24.3 million, respectively. The provision for loan losses during the six months ended June 30, 2014 and 2013 was comprised of charges relating to newly originated loans and acquired loans without credit impairment at acquisition of $5.3 million and $23.6 million, respectively, and PCI loans of $3.5 million and $0.7 million, respectively.

        Consolidated noninterest income decreased $36.0 million and $79.1 million during the three and six months ended June 30, 2014, compared with the same periods in 2013. These year-over-year decreases were primarily related to the reduction in net gains from sale of loans, other mortgage production income and mortgage loan origination fees within our mortgage origination segment of $42.2 million and $97.2 million, respectively, slightly offset by increases in noninterest income in our banking and insurance segments.

        Our consolidated noninterest expense during the three and six months ended June 30, 2014 decreased $9.2 million and $11.6 million, respectively, compared with the same periods in 2013. These year-over-year decreases included significant increases in noninterest expenses within our banking segment of $28.3 million and $58.3 million, respectively, primarily due to the inclusion of those operations acquired as part of the FNB Transaction, which were offset by significant decreases in noninterest expenses within our mortgage origination segment of $23.3 million and $54.9 million, respectively, primarily due to reductions in variable compensation tied to mortgage loan originations. Changes between the six months ended June 30, 2014 and 2013 within the major components of noninterest expense included decreases of $18.0 million in employees' compensation and benefits and $15.7 million in loss and loss adjustment expenses, partially offset by increases of $12.5 million in occupancy and equipment and $8.8 million in other expenses.

        Consolidated income tax expense during the three months ended June 30, 2014 and 2013 was $16.3 million and $13.3 million, respectively, reflecting effective rates of 36.2% and 37.0%, respectively. During the six months ended June 30, 2014 and 2013, consolidated income tax expense was $30.6 million and $32.5 million, respectively, reflecting effective rates of 36.2% and 36.7%, respectively.

Segment Results

        Income before income taxes in our banking segment for the three months ended June 30, 2014 and 2013 was $41.5 million and $37.3 million, respectively. Income before income taxes increased in the

118


Table of Contents

three months ended June 30, 2014, compared with the same period in 2013, due to increases in net interest income and noninterest income, and a decrease in the provision for loan losses, all of which were partially offset by increases in noninterest expense. Income before income taxes in our banking segment for the six months ended June 30, 2014 and 2013 was $73.4 million and $73.5 million, respectively. Income before taxes in the six months ended June 30, 2014 was comparable to the same period in 2013. The operations acquired as a part of the FNB Transaction had a significant effect on each of the components of income before income taxes during both the three and six months ended June 30, 2014, compared to the same periods in 2013.

        At June 30, 2014, the Bank exceeded all regulatory capital requirements with a total capital to risk weighted assets ratio of 13.90%, Tier 1 capital to risk weighted assets ratio of 13.22% and a Tier 1 capital to average assets, or leverage, ratio of 9.97%. At June 30, 2014, the Bank was also considered to be "well-capitalized" under regulatory requirements without giving effect to the final capital rules adopted by the Federal Reserve Board on July 2, 2013 ("Basel III"). For additional discussion of the final Basel III capital rules and their impact on our Company, see the section entitled "Liquidity and Capital Resources—Regulatory Capital" below.

        We consider the ratios shown in the table below to be key indicators of the performance of our banking segment.

 
  Three Months
Ended
June 30,
  Six Months
Ended
June 30,
   
 
 
  Year Ended
December 31, 2013
 
 
  2014   2013   2014   2013  

Performance Ratios:

                               

Efficiency ratio(1)

    56.18 %   39.64 %   59.56 %   39.03 %   42.58 %

Return on average assets

    1.36 %   1.62 %   1.20 %   1.65 %   1.78 %

Net interest margin (taxable equivalent)(2)

    5.52 %   5.20 %   5.16 %   5.21 %   5.17 %

(1)
Noninterest expenses divided by the sum of total noninterest income and net interest income for the period.

(2)
Taxable equivalent net interest income divided by average interest-earning assets.

        During the three months ended June 30, 2014, the banking segment's taxable equivalent net interest margin of 5.52% was impacted by PlainsCapital Merger related accretion of discount on loans of $17.8 million, amortization of premium on acquired securities of $1.0 million and amortization of premium on acquired time deposits of $0.2 million. Additionally, FNB Transaction related accretion of discount on loans of $8.1 million and amortization of premium on acquired time deposits of $2.3 million also impacted the banking segment's taxable equivalent net interest margin during the three months ended June 30, 2014. These items increased the banking segment's taxable equivalent net interest margin by 162 basis points for the three months ended June 30, 2014. The banking segment's taxable equivalent net interest margin for the three months ended June 30, 2013 of 5.20% was impacted by PlainsCapital Merger related accretion of discount on loans of $16.7 million, amortization of premium on acquired securities of $1.4 million and amortization of premium on acquired time deposits of $0.6 million. These items increased the banking segment's taxable equivalent interest margin by 119 basis points for three months ended June 30, 2013.

        During the six months ended June 30, 2014, the banking segment's taxable equivalent net interest margin of 5.16% was impacted by PlainsCapital Merger related accretion of discount on loans of $28.6 million, amortization of premium on acquired securities of $1.9 million and amortization of premium on acquired time deposits of $0.3 million. Additionally, FNB Transaction related accretion of discount on loans of $15.3 million and amortization of premium on acquired time deposits of $4.6 million also impacted the banking segment's taxable equivalent net interest margin during the six months ended June 30, 2014.

119


Table of Contents

These items increased the banking segment's taxable equivalent net interest margin by 138 basis points for the six months ended June 30, 2014. The banking segment's taxable equivalent net interest margin for the six months ended June 30, 2013 of 5.21% was impacted by PlainsCapital Merger related accretion of discount on loans of $33.6 million, amortization of premium on acquired securities of $3.4 million and amortization of premium on acquired time deposits of $1.7 million. These items increased the banking segment's taxable equivalent interest margin by 120 basis points for six months ended June 30, 2013.

120


Table of Contents

        The tables below provide additional details regarding our banking segment's net interest income (dollars in thousands).

 
  Three Months Ended June 30,  
 
  2014   2013  
 
  Average
Outstanding
Balance
  Interest
Earned or
Paid
  Annualized
Yield or
Rate
  Average
Outstanding
Balance
  Interest
Earned or
Paid
  Annualized
Yield or
Rate
 

Assets

                                     

Interest-earning assets

                                     

Loans, gross(1)

  $ 4,216,648   $ 80,173     7.55 % $ 2,949,314   $ 53,435     7.18 %

Subsidiary warehouse lines of credit

    901,125     8,229     3.61 %   1,002,847     14,328     5.65 %

Investment securities—taxable

    913,494     4,561     2.00 %   797,472     3,461     1.74 %

Investment securities—non-taxable(2)

    152,042     1,476     3.88 %   158,075     1,383     3.50 %

Federal funds sold and securities purchased under agreements to resell

    20,308     14     0.28 %   31,348     22     0.28 %

Interest-bearing deposits in other financial institutions

    406,773     256     0.25 %   323,095     211     0.26 %

Other

    42,871     411     3.84 %   42,304     385     3.64 %
                               

Interest-earning assets, gross

    6,653,261     95,120     5.68 %   5,304,455     73,225     5.47 %

Allowance for loan losses

    (38,745 )               (20,421 )            
                                   

Interest-earning assets, net

    6,614,516                 5,284,034              

Noninterest-earning assets

    1,260,740                 783,049              
                                   

Total assets

  $ 7,875,256               $ 6,067,083              
                                   
                                   

Liabilities and Stockholders' Equity

                                     

Interest-bearing liabilities

                                     

Interest-bearing deposits

  $ 4,500,603   $ 3,112     0.28 % $ 3,354,713   $ 3,384     0.40 %

Notes payable and other borrowings

    597,977     392     0.26 %   537,821     376     0.28 %
                               

Total interest-bearing liabilities(3)

    5,098,580     3,504     0.28 %   3,892,534     3,760     0.39 %

Noninterest-bearing liabilities

                                     

Noninterest-bearing deposits

    1,706,187                 1,264,331              

Other liabilities

    31,748                 34,929              
                                   

Total liabilities

    6,836,515                 5,191,794              

Stockholders' equity

    1,038,741                 875,289              
                                   

Total liabilities and stockholders' equity

  $ 7,875,256               $ 6,067,083              
                                   
                                   

Net interest income(2)

        $ 91,616               $ 69,465        
                                   
                                   

Net interest spread(2)

                5.40 %               5.08 %

Net interest margin(2)

                5.52 %               5.20 %

121


Table of Contents


 
  Six Months Ended June 30,  
 
  2014   2013  
 
  Average
Outstanding
Balance
  Interest
Earned or
Paid
  Annualized
Yield or
Rate
  Average
Outstanding
Balance
  Interest
Earned or
Paid
  Annualized
Yield or
Rate
 

Assets

                                     

Interest-earning assets

                                     

Loans, gross(1)

  $ 4,231,309   $ 150,894     7.11 % $ 2,924,774   $ 107,244     7.30 %

Subsidiary warehouse lines of credit

    769,643     15,161     3.92 %   992,244     28,215     5.66 %

Investment securities—taxable

    905,127     8,956     1.98 %   742,512     6,178     1.66 %

Investment securities—non-taxable(2)

    153,048     2,971     3.88 %   162,290     2,812     3.47 %

Federal funds sold and securities purchased under agreements to resell

    23,305     33     0.28 %   20,020     28     0.28 %

Interest-bearing deposits in other financial institutions

    600,960     769     0.26 %   403,745     524     0.26 %

Other

    36,016     812     4.51 %   31,269     550     3.52 %
                               

Interest-earning assets, gross

    6,719,408     179,596     5.33 %   5,276,854     145,551     5.49 %

Allowance for loan losses

    (37,733 )               (13,568 )            
                                   

Interest-earning assets, net

    6,681,675                 5,263,286              

Noninterest-earning assets

    1,265,809                 798,492              
                                   

Total assets

  $ 7,947,484               $ 6,061,778              
                                   
                                   

Liabilities and Stockholders' Equity

                                     

Interest-bearing liabilities

                                     

Interest-bearing deposits

  $ 4,724,047   $ 6,897     0.29 % $ 3,425,592   $ 6,816     0.40 %

Notes payable and other borrowings

    474,797     717     0.30 %   452,542     729     0.32 %
                               

Total interest-bearing liabilities(3)

    5,198,844     7,614     0.30 %   3,878,134     7,545     0.39 %

Noninterest-bearing liabilities

                                     

Noninterest-bearing deposits

    1,703,019                 1,264,024              

Other liabilities

    25,169                 58,639              
                                   

Total liabilities

    6,927,032                 5,200,797              

Stockholders' equity

    1,020,452                 860,981              
                                   

Total liabilities and stockholders' equity

  $ 7,947,484               $ 6,061,778              
                                   
                                   

Net interest income(2)

        $ 171,982               $ 138,006        
                                   
                                   

Net interest spread(2)

                5.03 %               5.10 %

Net interest margin(2)

                5.16 %               5.21 %

(1)
Average balance includes non-accrual loans.

122


Table of Contents

(2)
Annualized taxable equivalent adjustments are based on a 35% tax rate. The adjustment to interest income was $0.5 million for each of the three months ended June 30, 2014 and 2013, respectively, and $1.0 million for each of the six months ended June 30, 2014 and 2013, respectively.

(3)
Excludes the allocation of interest expense on PlainsCapital debt of $0.3 million for each of the three months ended June 30, 2014 and 2013 and $0.6 million and $0.5 million for the six months ended June 30, 2014 and 2013.

        The banking segment's net interest margin shown above exceeds our consolidated net interest margin. Our consolidated net interest margin includes the yields and costs associated with certain items within interest-earning assets and interest-bearing liabilities in the financial advisory segment, as well as the borrowing costs of Hilltop and PlainsCapital, both of which reduce our consolidated net interest margin. In addition, the banking segment's interest earning assets include lines of credit extended to subsidiaries, the yields on which increase the banking segment's net interest margin. Such yields and costs are eliminated from the consolidated financial statements.

        The following tables summarize 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).

 
  Three Months Ended June 30,
2014 v. 2013
  Six Months Ended June 30,
2014 v. 2013
 
 
  Change Due To(1)    
  Change Due To(1)    
 
 
  Volume   Yield/Rate   Change   Volume   Yield/Rate   Change  

Interest income

                                     

Loans, gross

  $ 22,749   $ 3,989   $ 26,738   $ 47,692   $ (4,042 ) $ 43,650  

Subsidiary warehouse lines of credit

    (1,437 )   (4,662 )   (6,099 )   (6,295 )   (6,759 )   (13,054 )

Investment securities—taxable

    504     596     1,100     1,353     1,425     2,778  

Investment securities—non-taxable(2)

    (53 )   146     93     (160 )   319     159  

Federal funds sold and securities purchased under agreements to resell

    (8 )       (8 )   5         5  

Interest-bearing deposits in other financial institutions

    55     (10 )   45     258     (13 )   245  

Other

    5     21     26     83     179     262  
                           

Total interest income(2)

    21,815     80     21,895     42,936     (8,891 )   34,045  

Interest expense

                                     

Deposits

  $ 1,159   $ (1,431 ) $ (272 ) $ 2,605   $ (2,524 ) $ 81  

Notes payable and other borrowings

    42     (26 )   16     36     (48 )   (12 )
                           

Total interest expense

    1,201     (1,457 )   (256 )   2,641     (2,572 )   69  
                           

Net interest income(2)

  $ 20,614   $ 1,537   $ 22,151   $ 40,295   $ (6,319 ) $ 33,976  
                           
                           

(1)
Changes attributable to both volume and yield/rate are included in yield/rate column.

(2)
Annualized taxable equivalent.

        Taxable equivalent net interest income increased $22.2 million and $34.0 million during the three and six months ended June 30, 2014, respectively, compared with the same periods in 2013. Increases in the volume of interest-earning assets, primarily loans acquired in the FNB Transaction, increased taxable equivalent net interest income by $21.8 million and $42.9 million during the three and six months ended June 30, 2014, respectively, compared with the same periods in 2013, while increases in

123


Table of Contents

the volume of interest-bearing liabilities, primarily deposits assumed in the FNB Transaction, reduced taxable equivalent interest income by $1.2 million and $2.6 million during these same respective periods. Increases in accretable yields on loans, particularly accretable yield on loans acquired in the PlainsCapital Merger, as well as increased yields on the investment portfolio, were offset by a lower yield on subsidiary warehouse lines of credit, resulting in a net minimal effect on taxable equivalent net interest income due to yield on interest-earning assets for the three months ended June 30, 2014, compared to the same period in 2013. Changes in the yields earned on interest-earning assets decreased taxable equivalent net interest income by $8.9 million during the six months ended June 30, 2014, compared with the same period in 2013, primarily due to lower yields on the loan portfolio and the subsidiary warehouse lines of credit. Changes in rates paid on interest-bearing liabilities increased taxable equivalent interest income by $1.5 million and $2.6 million during the three and six months ended June 30, 2014, respectively, compared with the same periods in 2013, primarily due to the amortization of premiums on time deposits acquired in the FNB Transaction.

        The banking segment's noninterest income was $16.4 million and $11.9 million during the three months ended June 30, 2014 and 2013, respectively, and $32.6 million and $24.1 million during the six months ended June 30, 2014 and 2013, respectively. These year-over-year increases in noninterest income were primarily due to service charges and fees on deposits assumed in the FNB Transaction, as well as accretion on the amounts receivable under the loss-share agreements with the FDIC ("FDIC Indemnification Asset") associated with the FNB Transaction. Noninterest income was also negatively affected by decreases in intercompany financing charges associated with the lending commitment on the PrimeLending warehouse line of credit.

        The banking segment's noninterest expenses were $60.2 million and $31.9 million during the three months ended June 30, 2014 and 2013, respectively, and $120.9 million and $62.6 million during the six months ended June 30, 2014 and 2013, respectively. Noninterest expenses were primarily comprised of employees' compensation and benefits, and occupancy expenses. The significant year-over-year increase in noninterest expenses was primarily due to the inclusion of the operations acquired in the FNB Transaction.

        Income before income taxes in our mortgage origination segment for the three months ended June 30, 2014 and 2013 was $9.2 million and $18.9 million, respectively, while income before income taxes in our mortgage origination segment for the six months ended June 30, 2014 and 2013 was $6.2 million and $31.2 million, respectively. These decreases in income before income taxes for the three and six months ended June 30, 2014 compared to the same periods in 2013 were primarily due to the decreases in noninterest income driven by the reduction in loan origination volume, partially offset by the decreases in noninterest expense primarily due to the reductions in compensation expense that varies with the volume of mortgage loan originations, and to a lesser extent, reductions in segment operating costs made to address the reduction in loan origination volume. Additionally, net interest expense of $2.4 million and $11.8 million during the three months ended June 30, 2014 and 2013, respectively, and net interest expense of $6.5 million and $23.9 million during the six months ended June 30, 2014 and 2013, respectively, resulted from interest incurred on a warehouse line of credit held at the Bank as well as related intercompany financing costs, partially offset by interest income earned on loans held for sale.

124


Table of Contents

        The mortgage origination segment originates all of its mortgage loans through a retail channel. The following table provides certain details regarding our mortgage loan originations (dollars in thousands).

 
  Three Months Ended June 30,   Six Months Ended June 30,  
 
  2014   % of
Total
  2013   % of
Total
  2014   % of Total   2013   % of Total  

Mortgage Loan Originations—units

    13,373           16,508           22,525           30,954        

Mortgage Loan Originations—volume

 
$

2,838,731
       
$

3,549,670
       
$

4,704,884
       
$

6,595,933
       

Mortgage Loan Originations:

   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

Conventional

  $ 1,777,589     62.62 % $ 2,251,378     63.43 % $ 2,971,726     63.16 % $ 4,176,149     63.31 %

Government

    818,158     28.82 %   1,022,069     28.79 %   1,370,486     29.13 %   1,945,788     29.50 %

Jumbo

    238,991     8.42 %   267,063     7.52 %   355,725     7.56 %   452,451     6.86 %

Other

    3,993     0.14 %   9,160     0.26 %   6,947     0.15 %   21,545     0.33 %
                                   

  $ 2,838,731     100.00 % $ 3,549,670     100.00 % $ 4,704,884     100.00 % $ 6,595,933     100.00 %
                                   
                                   

Home purchases

  $ 2,396,094     84.41 % $ 2,377,871     66.99 % $ 3,864,805     82.14 % $ 3,987,732     60.46 %

Refinancings

    442,637     15.59 %   1,171,799     33.01 %   840,079     17.86 %   2,608,201     39.54 %
                                   

  $ 2,838,731     100.00 % $ 3,549,670     100.00 % $ 4,704,884     100.00 % $ 6,595,933     100.00 %
                                   
                                   

Texas

  $ 692,878     24.41 % $ 788,996     22.23 % $ 1,123,033     23.87 % $ 1,446,257     21.93 %

California

    387,445     13.65 %   673,388     18.97 %   679,017     14.43 %   1,225,206     18.57 %

Florida

    135,701     4.78 %   116,419     3.28 %   229,075     4.87 %   226,592     3.43 %

North Carolina

    123,930     4.37 %   181,365     5.11 %   215,662     4.58 %   356,206     5.40 %

Ohio

    117,026     4.12 %   121,378     3.42 %   184,106     3.91 %   230,734     3.50 %

Virginia

    93,538     3.29 %   149,027     4.20 %   144,417     3.07 %   281,514     4.27 %

Arizona

    85,268     3.00 %   123,473     3.48 %   164,753     3.50 %   230,734     3.50 %

Missouri

    84,962     2.99 %   56,728     1.60 %   137,209     2.92 %   102,343     1.55 %

South Carolina

    84,190     2.97 %   96,326     2.71 %   130,107     2.77 %   172,104     2.61 %

All other states

    1,033,793     36.42 %   1,242,570     35.00 %   1,697,505     36.08 %   2,324,243     35.24 %
                                   

  $ 2,838,731     100.00 % $ 3,549,670     100.00 % $ 4,704,884     100.00 % $ 6,595,933     100.00 %
                                   
                                   

        The mortgage lending business is subject to variables that can impact loan origination volume, including seasonal and interest rate fluctuations. Historically, we have typically experienced increased loan origination volume from purchases of homes during the spring and summer, when more people tend to move and buy or sell homes. An increase in mortgage interest rates tends to result in decreased loan origination volume from refinancings, while a decrease in mortgage interest rates tends to result in increased refinancings. Changes in interest rates have historically had a lesser impact on home purchases volume than on refinancing volume.

        Beginning in May 2013 and continuing through the fourth quarter of 2013, mortgage interest rates increased at a pace that, along with other factors, resulted in decreases of 20.0% and 28.7% in the mortgage origination segment's total loan origination volume during the three and six months ended June 30, 2014 when compared to the same periods in 2013. Home purchases volume of $2.4 billion during the three months ended June 30, 2014 was virtually unchanged from the three months ended June 30, 2013, while the mortgage origination segment experienced a $927.4 million increase, or 63.1%, in home purchases volume between the three months ended March 31, 2014 and three months ended June 30, 2014. Refinancing volume decreased from $1.2 billion during the three months ended June 30, 2013 (33% of total loan origination volume) to $442.6 million during the three months ended June 30, 2014 (16% of total loan origination volume). For each quarter subsequent to the second quarter of 2013, the mortgage origination segment's refinancing volume as a percentage of total loan origination volume has ranged between 16% and 21%. We anticipate that this trend will continue throughout the remainder of 2014, and total mortgage loan origination volumes in 2014 will more closely follow seasonal trends historically experienced by the mortgage origination segment.

125


Table of Contents

        While the mortgage origination segment's total loan origination volume decreased 20.0% during the three months ended June 30, 2014, compared to the same period in 2013, income before income taxes decreased 51.3% between the same periods ($9.2 million income compared to $18.9 million income). Income before income taxes decreased at a greater rate primarily because segment operating costs included in noninterest expenses, such as employee related (salaries and benefits), occupancy, and administrative expenses, decreased at a lesser rate, approximately 11%, than loan origination volume decreased between the two periods. To address negative trends in loan origination volume resulting from changes in interest rates that began in May 2013, the mortgage origination segment reduced its non-origination employee headcount approximately 22% during the third and fourth quarters of 2013. Salaries and benefits expenses for the three and six months ended June 30, 2014 decreased approximately 11% and 13% respectively, as compared to the same periods in 2013 as the benefits of the headcount reductions in the third and fourth quarters of 2013 were realized. We also engaged in other initiatives to reduce segment operating costs during the third and fourth quarters of 2013 that were primarily responsible for the decrease of approximately 11% in non-employee related expenses for both the three and six months ended June 30, 2014 as compared to the same periods in 2013. The benefits of the employee reductions and other cost savings initiatives include a decrease in recurring quarterly operating costs of approximately $8 million since the third quarter of 2013. Also impacting the trend in income before taxes, to a lesser extent, was a decrease in loan revenue margins resulting from increased pricing competition.

        The mortgage origination segment sells substantially all mortgage loans it originates to various investors in the secondary market, the majority servicing released. During the six months ended June 30, 2013, the mortgage origination segment retained servicing on approximately 8% of loans sold. This rate was increased to approximately 22% during the third and fourth quarters of 2013, and approximately 31% during the six months ended June 30, 2014. The related mortgage servicing rights ("MSR") asset was valued at $35.9 million on $3.3 billion of serviced loan volume at June 30, 2014, compared to a value of $20.1 million on $2.0 billion of serviced loan volume at December 31, 2013. All income related to retained servicing, including changes in the value of the MSR asset, is included in noninterest income. The mortgage origination segment's determination on whether to retain or release servicing on mortgage loans it sells is impacted by changes in mortgage interest rates, and refinancing and market activity. We may, from time to time, manage our MSR asset through different strategies, including varying the percentage of mortgage loans sold servicing released and opportunistically selling MSR assets. In July 2014, the mortgage origination segment sold MSR assets of $11.4 million, which represented approximately $1.0 billion of its serviced loan volume.

        Noninterest income was $122.8 million and $165.3 million for the three months ended June 30, 2014 and 2013, respectively, and $214.6 million and $311.8 million for the six months ended June 30, 2014 and 2013, respectively. Noninterest income was comprised of net gains on the sale of loans and other mortgage production income, and mortgage origination fees. Noninterest income decreased 25.7% and 31.2% during the three and six months ended June 30, 2014 when compared to the same periods in 2013, which were comparable to the decreases of 20.0% and 28.7% in loan origination volume experienced during the same respective periods.

        Gains and losses resulting from changes in the fair value of the mortgage origination segment's interest rate lock commitments ("IRLCs") and loans held for sale, and the related activity associated with forward commitments used by the mortgage origination segment to mitigate interest rate risk associated with its IRLCs and mortgage loans held for sale, are included in noninterest income. Related net gains totaled $25.7 million and $6.9 million during the three months ended June 30, 2014 and 2013, respectively, and net gains totaled $29.0 million and $3.4 million during the six months ended June 30, 2014 and 2013, respectively. During the three and six months ended June 30, 2014, the net gains were primarily the result of an increase in the volume of IRLCs and mortgage loans held during these respective periods.

126


Table of Contents

        Noninterest expenses were $111.2 million and $134.5 million for the three months ended June 30, 2014 and 2013, respectively, and $201.9 million and $256.8 million for the six months ended June 30, 2014 and 2013, respectively. Employees' compensation and benefits accounted for the majority of the noninterest expenses incurred. Compensation that varies with the volume of mortgage loan originations and overall segment profitability decreased $14.1 million and $31.4 million during the three and six months ended June 30, 2014, as compared to the same periods in 2013, and comprised approximately 60% and 64% of the total employees' compensation and benefits expenses during the three months ended June 30, 2014 and 2013, respectively, and 56% and 62% during the six months ended June 30, 2014 and 2013, respectively. In addition, employee salaries and benefits decreased $3.7 million and $8.5 million during the three and six months ended June 30, 2014, as compared to the same periods in 2013, primarily as a result of headcount reductions in the third and fourth quarters of 2013. The mortgage origination segment records unreimbursed closing costs as noninterest expense when it pays a customer's closing costs in return for the customer choosing to accept a higher interest rate on the customer's mortgage loan. Unreimbursed closing costs during the three months ended June 30, 2014 and 2013 were $8.7 million and $9.8 million, respectively, and $13.9 million and $20.3 million for the six months ended June 30, 2014 and 2013, respectively.

        Between January 1, 2005, and June 30, 2014, the mortgage origination segment sold mortgage loans totaling $59.9 billion. These loans were sold under sales contracts that generally include provisions which hold the mortgage origination segment responsible for errors or omissions relating to its representations and warranties that loans sold meet certain requirements, including representations as to underwriting standards and the validity of certain borrower representations in connection with the loan. In addition, the sales contracts typically require the refund of purchased servicing rights plus certain investor servicing costs if a loan experiences an early payment default. While the mortgage origination segment sold loans prior to 2005, it has not experienced, nor does it anticipate experiencing, significant losses on loans originated prior to 2005 as a result of investor claims under these provisions of its sales contracts.

        When an investor claim for indemnification of a loan sold is made, we evaluate the claim and determine if the claim can be satisfied through additional documentation or other deliverables. If the claim cannot be satisfied in that matter, we negotiate with the investor to reach a settlement of the claim. Settlements typically result in either the repurchase of a loan or reimbursement to the investor for losses incurred on the loan. Following is a summary of the mortgage origination segment's claims resolution activity relating to loans sold between January 1, 2005 and June 30, 2014 (dollars in thousands).

 
  Original Loan
Balance
  Loss Recognized  
 
  Amount   % of
Loans
Sold
  Amount   % of
Loans
Sold
 

Claims resolved with no payment

  $ 145,524     0.24 % $     0.00 %

Claims resolved as a result of a loan repurchase or payment to an investor for losses incurred(1)

    185,178     0.31 %   24,291     0.04 %
                   

  $ 330,702     0.55 % $ 24,291     0.04 %
                   
                   

(1)
Losses incurred include refunded purchased servicing rights.

        At June 30, 2014 and December 31, 2013, the mortgage origination segment's indemnification liability reserve totaled $19.7 million and $21.1 million, respectively. The related provision for indemnification losses was $0.9 million and $1.0 million for the three months ended June 30, 2014 and

127


Table of Contents

2013, respectively, and $1.4 million and $2.0 million for the six months ended June 30, 2014 and 2013, respectively.

        Losses before income taxes in our insurance segment were $5.5 million and $20.5 million during the three months ended June 30, 2014 and 2013. Income before income taxes in our insurance segment was $6.0 million during the six months ended June 30, 2014, compared with a loss before income taxes of $14.3 million during the same period in 2013. The insurance segment is subject to claims arising out of severe weather, the incidence and severity of which are inherently unpredictable. Generally, the insurance segment's insured risks exhibit higher losses in the second and third calendar quarters due to a seasonal concentration of weather-related events in its primary geographic markets. Although weather-related losses (including hail, high winds, tornadoes and hurricanes) can occur in any calendar quarter, the second calendar quarter, historically, has experienced the highest frequency of losses associated with these events. Hurricanes, however, are more likely to occur in the third calendar quarter of the year.

        The significant year-over-year improvements in operating results in our insurance segment were primarily a result of growth of earned premium and improved claims loss experience associated with the significant decline in the severity of severe weather-related events during 2014. Based on our estimates of the ultimate losses, claims associated with these storms totaled $14.3 million through June 30, 2014. The significant loss during the three months ended June 30, 2013 was primarily driven by the severity of three tornado, wind and hail storms during the second quarter of 2013. Based on estimates of the ultimate cost, two of these storms are considered catastrophic losses as they exceeded our $8 million reinsurance retention during the third quarter of 2013. The estimate of ultimate losses from these storms totaled $20.9 million through June 30, 2013 with a net loss, after reinsurance, of $20.7 million.

        During 2013, the insurance segment initiated a review of the pricing of its primary products in each state of operation utilizing a consulting actuarial firm to supplement normal review processes. Rate filings have been made for certain products in several states for increases effective in 2014, and the process will continue through the remainder of the insurance segment's products and states in which it operates. Concurrently, business concentrations were reviewed and actions initiated, including cancellation of agents, non-renewal of policies and cessation of new business writing on certain products in problematic geographic areas. These actions have reduced the rate of premium growth for the first six months of 2014 when compared with the patterns exhibited in prior years. However, we expect the reduced exposure to volatile weather through a lower number of insureds in these areas to improve our loss experience during 2014.

        The insurance segment's operations resulted in combined ratios of 118.2% and 158.2% during the three months ended June 30, 2014 and 2013, respectively, and 97.9% and 124.0% during the six months ended June 30, 2014 and 2013, respectively. The year-over-year improvement in the combined ratios was primarily driven by the increase in earned premiums and improvement in our claims loss experience. The combined ratio is a measure of overall insurance underwriting profitability, and represents the sum of the loss and LAE ratio and the underwriting expense ratio, which are discussed in more detail below.

        Noninterest income of $43.1 million during the three months ended June 30, 2014 included net insurance premiums earned of $40.8 million, compared to $38.6 million for the same period in 2013, while noninterest income of $85.9 million during the six months ended June 30, 2014 included net insurance premiums earned of $81.1 million, compared to $76.1 million for the same period in 2013. The increase in earned premiums during both periods is primarily attributable to rate and volume increases in homeowners and mobile home products.

128


Table of Contents

        Direct insurance premiums written by major product line are presented in the table below (in thousands).

 
  Three Months Ended
June 30,
  Variance   Six Months Ended
June 30,
  Variance  
 
  2014 vs 2013   2014 vs 2013  
 
  2014   2013   2014   2013  

Direct Insurance Premiums Written:

                                     

Homeowners

  $ 21,431   $ 21,980   $ (549 ) $ 40,016   $ 40,524   $ (508 )

Fire

    15,125     14,959     166     28,960     28,011     949  

Mobile Home

    10,280     9,646     634     20,499     18,729     1,770  

Commercial

    1,075     1,264     (189 )   2,161     2,398     (237 )

Other

    88     101     (13 )   134     145     (11 )
                           

  $ 47,999   $ 47,950   $ 49   $ 91,770   $ 89,807   $ 1,963  
                           
                           

        Total direct insurance premiums written for our three largest insurance product lines increased by $0.3 million and $2.2 million during the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013. These increases were due to growth in our core insurance products.

        Net insurance premiums earned by major product line are presented in the table below (in thousands).

 
  Three Months Ended
June 30,
  Variance   Six Months Ended
June 30,
  Variance  
 
  2014 vs 2013   2014 vs 2013  
 
  2014   2013   2014   2013  

Net Insurance Premiums Earned:

                                     

Homeowners

  $ 18,243   $ 17,721   $ 522   $ 35,361   $ 34,322   $ 1,039  

Fire

    12,847     12,039     808     25,592     23,724     1,868  

Mobile Home

    8,701     7,730     971     18,114     15,862     2,252  

Commercial

    909     1,015     (106 )   1,910     2,031     (121 )

Other

    77     85     (8 )   119     124     (5 )
                           

  $ 40,777   $ 38,590   $ 2,187   $ 81,096   $ 76,063   $ 5,033  
                           
                           

        Net insurance premiums earned for the three and six months ended June 30, 2014 increased compared to the same periods in 2013, primarily due to increases in net insurance premiums written of $0.5 million and $3.3 million, respectively.

        Noninterest expenses of $49.4 million and $62.1 million during the three months ended June 30, 2014 and 2013, respectively, and $81.8 million and $96.4 million during the six months ended June 30, 2014 and 2013, respectively, include both loss and LAE expenses and policy acquisition and other underwriting expenses, as well as other noninterest expenses. Loss and LAE are recognized based on formula and case basis estimates for losses reported with respect to direct business, estimates of unreported losses based on past experience and deduction of amounts for reinsurance placed with reinsurers. Loss and LAE during the three months ended June 30, 2014 was $35.3 million, compared to $48.2 million during the same period in 2013, resulting in loss and LAE ratios of 86.5% and 124.8% during the three months ended June 30, 2014 and 2013, respectively. Loss and LAE during the six months ended June 30, 2014 was $53.6 million, compared to $69.3 million during the same period in 2013. As a result, the loss and LAE ratios during the six months ended June 30, 2014 and 2013 were 66.1% and 91.2%, respectively. These year-over-year ratio improvements were primarily a result of growth of earned premium and improved claims loss experience associated with the significant decline in the severity of severe weather-related events during 2014.

129


Table of Contents

        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.

        Policy acquisition and other underwriting expenses were as follows (dollars in thousands).

 
  Three Months Ended
June 30,
  Variance   Six Months Ended
June 30,
  Variance  
 
  2014 vs 2013   2014 vs 2013  
 
  2014   2013   2014   2013  

Amortization of deferred policy acquisition costs

  $ 10,402   $ 10,273   $ 129   $ 20,599   $ 19,887   $ 712  

Other underwriting expenses

    3,325     3,273     52     6,705     6,304     401  
                           

Total

    13,727     13,546     181     27,304     26,191     1,113  

Agency expenses

    (813 )   (658 )   (155 )   (1,503 )   (1,226 )   (277 )
                           

Total less agency expenses

  $ 12,914   $ 12,888   $ 26   $ 25,801   $ 24,965   $ 836  
                           
                           

Net insurance premiums earned

  $ 40,777   $ 38,590   $ 2,187   $ 81,096   $ 76,063   $ 5,033  
                           
                           

Expense ratio

    31.7 %   33.4 %   -1.7 %   31.8 %   32.8 %   -1.0 %

        Income before income taxes in our financial advisory segment during the three months ended June 30, 2014 and 2013 was $0.6 million and $2.0 million, respectively, while income before income taxes in our financial advisory segment during the six months ended June 30, 2014 and 2013 was $0.5 million and $2.3 million, respectively. Continuing uncertainty in fixed income markets as a result of increased regulations, uncertainty in the direction of future interest rates and a lack of liquidity in the market have resulted in reduced sales of fixed income securities to institutional customers.

        The financial advisory segment had net interest income of $3.2 million and $3.5 million during the three months ended June 30, 2014 and 2013, respectively, and $5.8 million and $6.8 million during the six months ended June 30, 2014 and 2013, respectively, consisting of securities lending activity, customer margin loan balances and investment securities used to support sales, underwriting and other customer activities.

        Noninterest income was $25.8 million and $28.9 million during the three months ended June 30, 2014 and 2013, respectively, and $50.4 million and $51.6 million during the six months ended June 30, 2014 and 2013, respectively. The majority of the financial advisory segment's noninterest income was generated from fees and commissions earned from investment advisory and securities brokerage activities of $22.3 million and $26.0 million during the three months ended June 30, 2014 and 2013, respectively, and $43.6 million and $48.0 million during the six months ended June 30, 2014 and 2013, respectively. The financial advisory segment participates in programs in which it issues forward purchase commitments of mortgage-backed securities to certain clients and sells TBAs. Changes in the fair values of these derivative instruments produced net gains of $3.2 million and $3.8 million during the three months ended June 30, 2014 and 2013, respectively, and $6.1 million and $5.6 million during the six months ended June 30, 2014 and 2013, respectively. Changes in the fair value of the financial advisory segment's trading portfolio, which is used to support sales, underwriting and other customer activities, produced gains of $0.3 million and losses of $1.9 million during the three months ended June 30, 2014 and 2013, respectively, and gains of $0.7 million and losses of $0.9 million during the six months ended June 30, 2014 and 2013, respectively.

        Noninterest expenses were $28.4 million and $30.4 million during the three months ended June 30, 2014 and 2013, respectively, and $55.7 million and $56.1 million during the six months ended June 30, 2014 and 2013, respectively. Employees' compensation and benefits accounted for the majority of the

130


Table of Contents

decrease in noninterest expenses primarily due to decreases in compensation costs that vary with noninterest income.

        Corporate includes certain activities not allocated to specific business segments. These activities include holding company financing and investing activities, and management and administrative services to support the overall operations of the Company including, but not limited to, certain executive management, corporate relations, legal, finance, and acquisition costs not allocated to business segments.

        As a holding company, Hilltop's primary investment objectives are to preserve capital and have available cash resources to utilize in making acquisitions. Investment and interest income earned, primarily from available cash and available-for-sale securities, including our note receivable from SWS, was $1.7 million and $1.6 million during the three months ended June 30, 2014 and 2013, respectively, and $3.4 million and $3.3 million during the six months ended June 30, 2014 and 2013, respectively.

        Interest expense of $1.7 million and $3.5 million during the three and six months ended June 30, 2013, respectively, was due to interest costs associated with the 7.50% Senior Exchangeable Notes due 2025 of HTH Operating Partnership LP, a wholly owned subsidiary of Hilltop, which were called for redemption during the fourth quarter of 2013.

        Noninterest expenses were $2.6 million and $1.7 million during the three months ended June 30, 2014 and 2013, respectively, and $4.8 million and $3.9 million during the six months ended June 30, 2014 and 2013, respectively. Noninterest expenses were primarily comprised of employees' compensation and benefits and professional fees. The increases in noninterest expenses were primarily due to year-over-year increases in headcount and related costs.

Financial Condition

        The following discussion contains a more detailed analysis of our financial condition at June 30, 2014 as compared to December 31, 2013.

        At June 30, 2014, investment securities consisted of securities of the U.S. Treasury, U.S. government and its agencies, obligations of municipalities and other political subdivisions, primarily in the State of Texas, mortgage-backed, corporate debt, and equity securities, a note receivable and a warrant. We have the ability to categorize investments as trading, available for sale, and held to maturity.

        Trading securities are bought and held principally for the purpose of selling them in the near term and are carried at fair value, marked to market through operations and held at the Bank and First Southwest. Securities that may be sold in response to changes in market interest rates, changes in securities' prepayment risk, increases in loan demand, general liquidity needs and other similar factors are classified as available for sale and are carried at estimated fair value, with unrealized gains and losses recorded in accumulated other comprehensive income (loss). Securities are classified as held to maturity based on the intent and ability of our management, at the time of purchase, to hold such securities to maturity. These securities are carried at amortized cost.

131


        The table below summarizes our securities portfolio (in thousands).

 
  June 30,
2014
  December 31,
2013
 

Trading securities, at fair value

  $ 61,663   $ 58,846  

Securities available for sale, at fair value

   
 
   
 
 

U.S. Treasury securities

    63,822     43,528  

U.S. government agencies:

             

Bonds

    635,099     662,732  

Residential mortgage-backed securities

    57,504     60,087  

Collateralized mortgage obligations

    107,130     120,461  

Corporate debt securities

    101,255     76,608  

States and political subdivisions

    147,831     156,835  

Commercial mortgage-backed securities

    665     760  

Equity securities

    24,653     22,079  

Note receivable

    49,921     47,909  

Warrant

    13,898     12,144  
           

    1,201,778     1,203,143  

Securities held to maturity, at amortized cost

             

U.S. government agencies:

             

Residential mortgage-backed securities

    31,048      

Collateralized mortgage obligations

    29,821      

States and political subdivisions

    4,406      
           

    65,275      
           

Total securities portfolio

  $ 1,328,716   $ 1,261,989  
           
           

        We had net unrealized losses of $4.1 million and $53.7 million related to the available for sale investment portfolio at June 30, 2014 and December 31, 2013, respectively. The significant decrease in the net unrealized loss position of our available for sale investment portfolio during 2014 was due to the effects of a decrease in market interest rates since December 31, 2013 that resulted in an increase in the fair value of our debt securities.

        The market value of securities held to maturity at June 30, 2014 approximated book value.

        The banking segment's securities portfolio plays a role in the management of our interest rate sensitivity and generates additional interest income. In addition, the securities portfolio is used to meet collateral requirements for public and trust deposits, securities sold under agreements to repurchase and other purposes. The available for sale securities portfolio serves as a source of liquidity. Historically, the Bank's policy has been to invest primarily in securities of the U.S. government and its agencies, obligations of municipalities in the State of Texas and other high grade fixed income securities to minimize credit risk. At June 30, 2014, the banking segment's securities portfolio of $1.1 billion was comprised of trading securities of $21.1 million, available for sale securities of $974.1 million and held to maturity securities of $65.3 million.

        Our insurance segment's primary investment objective is to preserve capital and manage for a total rate of return. NLC's strategy is to purchase securities in sectors that represent the most attractive relative value. Our insurance segment invests the premiums it receives from policyholders until they are

132


needed to pay policyholder claims or other expenses. At June 30, 2014, the insurance segment's securities portfolio was comprised of $153.1 million in available for sale securities and $5.5 million of other investments included in other assets within the consolidated balance sheet.

        Our financial advisory segment holds securities to support sales, underwriting and other customer activities. Because FSC is a broker-dealer, it is required to carry its securities at fair value and record changes in the fair value of the portfolio in operations. Accordingly, FSC classifies its securities portfolio of $40.5 million at June 30, 2014 as trading.

        Available for sale securities of Hilltop at June 30, 2014 include the note receivable from, and warrant to purchase shares of SWS, of $63.8 million, and equity securities of $10.7 million representing those shares of SWS common stock held by Hilltop.

        Consolidated non-covered loans held for investment are detailed in the table below, classified by portfolio segment and segregated between those considered to be PCI loans and all other originated or acquired loans (in thousands). PCI loans showed evidence of credit deterioration that makes it probable that all contractually required principal and interest payments will not be collected.

June 30, 2014
  Loans, excluding
PCI Loans
  PCI
Loans
  Total
Loans
 

Commercial and industrial

  $ 1,660,181   $ 21,474   $ 1,681,655  

Real estate

    1,560,314     26,221     1,586,535  

Construction and land development

    381,608     10,003     391,611  

Consumer

    51,947     3,089     55,036  
               

Non-covered loans, gross

    3,654,050     60,787     3,714,837  

Allowance for loan losses

    (32,857 )   (3,574 )   (36,431 )
               

Non-covered loans, net of allowance

  $ 3,621,193   $ 57,213   $ 3,678,406  
               
               

 

December 31, 2013
  Loans, excluding
PCI Loans
  PCI
Loans
  Total
Loans
 

Commercial and industrial

  $ 1,600,450   $ 36,816   $ 1,637,266  

Real estate

    1,418,003     39,250     1,457,253  

Construction and land development

    344,734     19,817     364,551  

Consumer

    51,067     4,509     55,576  
               

Non-covered loans, gross

    3,414,254     100,392     3,514,646  

Allowance for loan losses

    (30,104 )   (3,137 )   (33,241 )
               

Non-covered loans, net of allowance

  $ 3,384,150   $ 97,255   $ 3,481,405  
               
               

        The loan portfolio constitutes the major earning asset of the banking segment and typically offers the best alternative for obtaining the maximum interest spread above the banking segment's cost of funds. The overall economic strength of the banking segment generally parallels the quality and yield of its loan portfolio. The banking segment's loan portfolio is presented below in two sections, "—Non-Covered Loan Portfolio" and "—Covered Loan Portfolio." The "Covered Loan Portfolio"

133


consists of loans acquired in the FNB Transaction that are subject to loss-share agreements with the FDIC and is discussed below. The "Non-Covered Loan Portfolio" includes all other loans held by the Bank, which we refer to as "non-covered loans," and is discussed herein.

        The banking segment's total non-covered loans, net of the allowance for non-covered loan losses, were $4.2 billion and $4.3 billion at June 30, 2014 and December 31, 2013, respectively. The banking segment's non-covered loan portfolio includes a $1.5 billion warehouse line of credit extended to PrimeLending, of which $1.3 billion and $1.0 billion was drawn at June 30, 2014 and December 31, 2013, respectively, as well as term loans to First Southwest that had an outstanding balance of $23.0 million at June 30, 2014 and December 31, 2013. Prior to June 2014, the warehouse line of credit had $1.3 billion of availability. Amounts advanced against the warehouse line of credit and the First Southwest term loans are eliminated from net loans on our consolidated balance sheets.

        The banking segment does not generally participate in syndicated loan transactions and has no foreign loans in its portfolio. The areas of concentration within our covered real estate portfolio were construction and land development loans, non-construction residential real estate loans, and non-construction commercial real estate loans. At June 30, 2014, the banking segment's non-covered loan concentrations (loans to borrowers engaged in similar activities) that exceeded 10% of its total non-covered loans included construction and land development loans and non-construction commercial real estate loans within the non-covered real estate portfolio. At June 30, 2014, construction and land development loans and non-construction commercial real estate loans were 10.39% and 29.40%, respectively, of the banking segment's total non-covered loans. The banking segment's non-covered loan concentrations were within regulatory guidelines at June 30, 2014.

        The loan portfolio of the mortgage origination segment consists of loans held for sale, primarily single-family residential mortgages funded through PrimeLending, and pipeline loans, which are loans in various stages of the application process, but not yet closed and funded. Pipeline loans may not close if potential borrowers elect in their sole discretion not to proceed with the loan application. Total loans held for sale were $1.4 billion and $1.1 billion at June 30, 2014 and December 31, 2013, respectively.

        The components of the mortgage origination segment's loans held for sale and pipeline loans are as follows (in thousands).

 
  June 30,
2014
  December 31,
2013
 

Loans held for sale:

             

Unpaid principal balance

  $ 1,348,551   $ 1,066,850  

Fair value adjustment

    61,723     21,555  
           

  $ 1,410,274   $ 1,088,405  
           
           

Pipeline loans:

             

Unpaid principal balance

  $ 981,330   $ 602,467  

Fair value adjustment

    28,584     12,151  
           

  $ 1,009,914   $ 614,618  
           
           

        The loan portfolio of the financial advisory segment consists primarily of margin loans to customers and correspondents. These loans are collateralized by the securities purchased or by other securities owned by the clients and, because of collateral coverage ratios, are believed to present minimal collectability exposure. Additionally, these loans are subject to a number of regulatory

134


requirements as well as FSC's internal policies. The financial advisory segment's total non-covered loans, net of the allowance for non-covered loan losses, were $356.7 million and $281.6 million at June 30, 2014 and December 31, 2013, respectively. This increase was primarily attributable to increased borrowings in margin accounts held by FSC customers and correspondents.

        Loans acquired in the FNB Transaction that are subject to loss-share agreements with the FDIC are referred to as "covered loans" and reported separately in our consolidated balance sheets. Under the terms of the loss-share agreements, the FDIC has agreed to reimburse the Bank the following amounts with respect to the covered assets (including covered loans): (i) 80% of losses on the first $240.4 million of losses incurred; (ii) 0% of losses in excess of $240.4 million up to and including $365.7 million of losses incurred; and (iii) 80% of losses in excess of $365.7 million of losses incurred. The Bank has also agreed to reimburse the FDIC for any subsequent recoveries. The loss-share agreements for commercial and single family residential loans are in effect for 5 years and 10 years, respectively, and the loss recovery provisions to the FDIC are in effect for 8 years and 10 years, respectively, from the Bank Closing Date. In accordance with the loss-share agreements, the Bank may be required to make a "true-up" payment to the FDIC approximately ten years following the Bank Closing Date if the FDIC's initial estimate of losses on covered assets is greater than the actual realized losses. The "true-up" payment is calculated using a defined formula set forth in the P&A Agreement.

        In connection with the FNB Transaction, the Bank acquired loans both with and without evidence of credit quality deterioration since origination. The banking segment's portfolio of acquired covered loans had a fair value of $1.1 billion as of the Bank Closing Date, with no carryover of any allowance for loan losses.

        Covered loans held for investment are detailed in the table below and classified by portfolio segment (in thousands).

June 30, 2014
  Loans, excluding
PCI Loans
  PCI
Loans
  Total
Loans
 

Commercial and industrial

  $ 23,892   $ 26,124   $ 50,016  

Real estate

    208,870     489,355     698,225  

Construction and land development

    17,033     79,739     96,772  

Consumer

             
               

Covered loans, gross

    249,795     595,218     845,013  

Allowance for loan losses

    (201 )   (3,914 )   (4,115  
               

Covered loans, net of allowance

  $ 249,594   $ 591,304   $ 840,898  
               
               

 

December 31, 2013
  Loans, excluding
PCI Loans
  PCI
Loans
  Total
Loans
 

Commercial and industrial

  $ 28,533   $ 38,410   $ 66,943  

Real estate

    223,304     564,678     787,982  

Construction and land development

    25,376     126,068     151,444  

Consumer

             
               

Covered loans, gross

    277,213     729,156     1,006,369  

Allowance for loan losses

    (179 )   (882 )   (1,061 )
               

Covered loans, net of allowance

  $ 277,034   $ 728,274   $ 1,005,308  
               
               

135


        At June 30, 2014, the banking segment had covered loan concentrations (loans to borrowers engaged in similar activities) that exceeded 10% of total covered loans in its real estate portfolio. The areas of concentration within our covered real estate portfolio were construction and land development loans, non-construction residential real estate loans, and non-construction commercial real estate loans. At June 30, 2014, construction and land development loans, non-construction residential real estate loans, and non-construction commercial real estate loans were 13.45%, 34.09% and 41.98%, respectively, of the banking segment's total covered loans. The banking segment's covered loan concentrations were within regulatory guidelines at June 30, 2014.

        The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management's best estimate of probable losses inherent in our existing non-covered and covered loan portfolios. Management has responsibility for determining the level of the allowance for loan losses, subject to review by the Audit Committee of our Board of Directors and the Loan Review Committee of the Bank's board of directors.

        It is management's responsibility at the end of each quarter, or more frequently as deemed necessary, to analyze the level of the allowance for loan losses to ensure that it is appropriate for the estimated credit losses in the portfolio consistent with the Interagency Policy Statement on the Allowance for Loan and Lease Losses and the Receivables and Contingencies Topics of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"). Estimated credit losses are the probable current amount of loans that we will be unable to collect given facts and circumstances as of the evaluation date. When management determines that a loan, or portion thereof, is uncollectible, the loan, or portion thereof, is charged-off against the allowance for loan losses, or for acquired loans accounted for in pools, charged against the pool discount. Recoveries on charge-offs that occurred prior to the PlainsCapital Merger represent contractual cash flows not expected to be collected and are recorded as accretion income. Recoveries on loans charged-off subsequent to the PlainsCapital Merger are credited to the allowance for loan loss, except for recoveries on loans accounted for in pools, which are credited to the pool discount.

        We have developed a methodology that seeks to determine an allowance within the scope of the Receivables and Contingencies Topics of the ASC. Each of the loans that has been determined to be impaired is within the scope of the Receivables Topic. Impaired loans that are equal to or greater than $0.5 million are individually evaluated for impairment using one of three impairment measurement methods as of the evaluation date: (1) the present value of expected future discounted cash flows on the loan, (2) the loan's observable market price, or (3) the fair value of the collateral if the loan is collateral dependent. Specific reserves are provided in our estimate of the allowance based on the measurement of impairment under these three methods, except for collateral dependent loans, which require the fair value method. All non-impaired loans are within the scope of the Contingencies Topic. Estimates of loss for the Contingencies Topic are calculated based on historical loss, adjusted for qualitative or environmental factors. The Bank uses a rolling three year average net loss rate to calculate historical loss factors. The analysis is conducted by call report category, and further disaggregates commercial and industrial loans by collateral type. The analysis considers charge-offs and recoveries in determining the loss rate; therefore net charge-off experience is used. The historical loss calculation for the quarter is calculated by dividing the current quarter net charge-offs for each loan category by the quarter ended loan category balance. The Bank utilizes a weighted average loss rate to better represent recent trends. The Bank weights the most recent four quarter average at 120% versus the oldest four quarters at 80%.

        While historical loss experience provides a reasonable starting point for the analysis, historical losses are not the sole basis upon which we determine the appropriate level for the allowance for loan losses. Management considers recent qualitative or environmental factors that are likely to cause

136


estimated credit losses associated with the existing portfolio to differ from historical loss experience, including but not limited to:

        Changes in the volume and severity of past due, nonaccrual and classified loans, as well as changes in the nature, volume and terms of loans in the portfolio are key indicators of changes that could indicate a necessary adjustment to the historical loss factors. The magnitude of the impact of these factors on our qualitative assessment of the allowance for loan loss changes from quarter to quarter.

        We design our loan review program to identify and monitor problem loans by maintaining a credit grading process, requiring that timely and appropriate changes are made to reviewed loans and coordinating the delivery of the information necessary to assess the appropriateness of the allowance for loan losses. Loans are evaluated for impaired status when: (i) payments on the loan are delayed, typically by 90 days or more (unless the loan is both well secured and in the process of collection), (ii) the loan becomes classified, (iii) the loan is being reviewed in the normal course of the loan review scope, or (iv) the loan is identified by the servicing officer as a problem. We review on an individual basis all loan relationships over $0.5 million that exhibit probable or observed credit weaknesses, the top 25 loan relationships by dollar amount in each market we serve, and additional relationships necessary to achieve adequate coverage of our various lending markets.

        Homogeneous loans, such as consumer installment loans, residential mortgage loans and home equity loans, are not individually reviewed and are generally risk graded at the same levels. The risk grade and reserves are established for each homogeneous pool of loans based on the expected net charge-offs from current trends in delinquencies, losses or historical experience and general economic conditions. At June 30, 2014, we had no material delinquencies in these types of loans.

        The allowance is subject to regulatory examination and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance. While we believe we have an appropriate allowance for our existing non-covered and covered portfolios at June 30, 2014, additional provisions for losses on existing loans may be necessary in the future. Within our non-covered portfolio, we recorded net charge-offs of $2.3 million and $1.7 million for the three months ended June 30, 2014 and 2013, respectively, and $2.3 million and $1.5 million for the six months ended June 30, 2014 and 2013, respectively. Our allowance for non-covered loan losses totaled $36.4 million and $33.2 million at June 30, 2014 and December 31, 2013, respectively. The ratio of the allowance for non-covered loan losses to total non-covered loans held for investment at June 30, 2014 and December 31, 2013 was 0.98% and 0.95%, respectively.

        In connection with the PlainsCapital Merger and the FNB Transaction, we acquired loans both with and without evidence of credit quality deterioration since origination. PCI loans acquired in the PlainsCapital Merger are accounted for on an individual loan basis, while PCI loans acquired in the FNB Transaction are accounted for in pools as well as on an individual loan basis. We have established under our PCI accounting policy a framework to aggregate certain acquired loans into various loan

137


pools based on a minimum of two layers of common risk characteristics for the purpose of determining their respective fair values as of their acquisition dates, and for applying the subsequent recognition and measurement provisions for income accretion and impairment testing. The common risk characteristics used for the pooling of the FNB PCI loans are risk grade and loan collateral type. The acquired loans were initially recorded at fair value with no carryover of any allowance for loan losses. Within our covered portfolio, we recorded net charge-offs of $0.3 million for the six months ended June 30, 2014. Our allowance for covered loan losses totaled $4.1 million and $1.1 million at June 30, 2014 and December 31, 2013, respectively. The ratio of the allowance for covered loan losses to total covered loans held for investment at June 30, 2014 and December 31, 2013 was 0.49% and 0.11%, respectively.

        Provisions for loan losses are charged to operations to record the total allowance for loan losses at a level deemed appropriate by the banking segment's management based on such factors as the volume and type of lending it conducted, the amount of non-performing loans and related collateral security, the present level of the allowance for loan losses, the results of recent regulatory examinations, generally accepted accounting principles, general economic conditions and other factors related to the ability to collect loans in its portfolio. The provision for loan losses, primarily in the banking segment, within our non-covered and covered portfolios was $5.5 million and $11.3 million for the three months ended June 30, 2014 and 2013, respectively, and $8.8 million and $24.3 million for the six months ended June 30, 2014 and 2013, respectively.

        The following tables present the activity in our allowance for loan losses within our non-covered and covered loan portfolios for the periods presented (in thousands). Substantially all of the activity shown below occurred within the banking segment.

 
  Three Months Ended June 30,   Six Months Ended June 30,  
Non-Covered Portfolio
  2014   2013   2014   2013  

Balance, beginning of period

  $ 34,645   $ 16,637   $ 33,241   $ 3,409  

Provisions charged to operating expenses

    4,083     11,289     5,471     24,294  

Recoveries of non-covered loans previously charged off:

                         

Commercial and industrial

    629     1,921     1,354     2,415  

Real estate

    82     62     114     201  

Construction and land development

    41     44     163     151  

Consumer

    32     20     50     28  
                   

Total recoveries

    784     2,047     1,681     2,795  
                   

Non-covered loans charged off:

                         

Commercial and industrial

    2,924     3,656     3,731     4,094  

Real estate

    72     65     72     96  

Construction and land development

                 

Consumer

    85     15     159     71  
                   

Total charge-offs

    3,081     3,736     3,962     4,261  
                   

Net charge-offs

    (2,297 )   (1,689 )   (2,281 )   (1,466 )
                   

Balance, end of period

  $ 36,431   $ 26,237   $ 36,431   $ 26,237  
                   
                   

138



Covered Portfolio
  Three Months
Ended
June 30, 2014
  Six Months
Ended
June 30, 2014
 

Balance, beginning of period

  $ 2,665   $ 1,061  

Provisions charged to operating expenses

    1,450     3,304  

Recoveries of covered loans previously charged off:

             

Commercial and industrial

         

Real estate

         

Construction and land development

         

Consumer

         
           

Total recoveries

         
           

Covered loans charged off:

             

Commercial and industrial

        91  

Real estate

        44  

Construction and land development

        115  

Consumer

         
           

Total charge-offs

        250  
           

Net charge-offs

        (250 )
           

Balance, end of period

  $ 4,115   $ 4,115  
           
           

        The distribution of the allowance for loan losses among loan types and the percentage of the loans for that type to gross loans, excluding unearned income, within our non-covered and covered loan portfolios are presented in the tables below (dollars in thousands).

 
  June 30, 2014   December 31, 2013  
Non-Covered Portfolio
  Reserve   % of
Gross
Non-Covered
Loans
  Reserve   % of
Gross
Non-Covered
Loans
 

Commercial and industrial

  $ 18,062     45.27 % $ 16,865     46.58 %

Real estate (including construction and land development)

    18,084     53.25 %   16,288     51.84 %

Consumer

    285     1.48 %   88     1.58 %
                   

Total

  $ 36,431     100.00 % $ 33,241     100.00 %
                   
                   

 

 
  June 30, 2014   December 31, 2013  
Covered Portfolio
  Reserve   % of
Gross
Covered
Loans
  Reserve   % of
Gross
Covered
Loans
 

Commercial and industrial

  $ 1,146     5.92 % $ 1,053     6.65 %

Real estate (including construction and land development)

    2,551     94.08 %   8     93.35 %

Consumer

    418     0.00 %       0.00 %
                   

Total

  $ 4,115     100.00 % $ 1,061     100.00 %
                   
                   

        Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor's potential operating or financial difficulties. Management

139


monitors these loans and reviews their performance on a regular basis. Potential problem loans contain potential weaknesses that could improve, persist or further deteriorate. If such potential weaknesses persist without improving, the loan is subject to downgrade, typically to substandard, in three to six months. Within our non-covered loan portfolio at June 30, 2014, we had nine credit relationships totaling $22.9 million of potential problem loans, which are assigned a grade of special mention within our risk grading matrix. At December 31, 2013, we had ten credit relationships totaling $24.7 million of non-covered potential problem loans. Within our covered loan portfolio at June 30, 2014, we had two credit relationship totaling $1.7 million of potential problem loans assigned a grade of special mention within our risk grading matrix, compared with two credit relationships totaling $3.3 million at December 31, 2013.

        The following table presents our components of non-covered non-performing assets (dollars in thousands).

 
  June 30,
2014
  December 31,
2013
 

Non-covered loans accounted for on a non-accrual basis:

             

Commercial and industrial

  $ 14,762   $ 16,730  

Real estate

    6,296     6,511  

Construction and land development

    863     112  

Consumer

         
           

  $ 21,921   $ 23,353  
           
           

Non-covered non-performing loans as a percentage of total non-covered loans

    0.43 %   0.51 %
           
           

Non-covered other real estate owned

  $ 4,353   $ 4,805  
           
           

Other repossessed assets

  $ 1,719   $ 13  
           
           

Non-covered non-performing assets

  $ 27,993   $ 28,171  
           
           

Non-covered non-performing assets as a percentage of total assets

    0.30 %   0.32 %
           
           

Non-covered loans past due 90 days or more and still accruing

  $ 1   $ 534  
           
           

Troubled debt restructurings included in accruing non-covered loans

  $ 406   $ 1,055  
           
           

        At June 30, 2014, total non-covered non-performing assets decreased $0.2 million to $28.0 million, compared with $28.2 million at December 31, 2013. Non-covered non-performing loans totaled $21.9 million at June 30, 2014 and $23.4 million at December 31, 2013. At June 30, 2014, non-covered non-accrual loans included 17 commercial and industrial relationships with loans of $12.0 million secured by accounts receivable, inventory, oil and gas properties, aircraft and life insurance, and a total of $1.5 million in lease financing receivables. Non-covered non-accrual loans at June 30, 2014 also included $6.3 million characterized as real estate loans, including two commercial real estate loan relationships of $0.5 million and loans secured by residential real estate of $5.8 million, $3.9 million of which were classified as loans held for sale, as well as construction and land development loans of $0.9 million. At December 31, 2013, non-covered non-accrual loans included five commercial and industrial relationships with loans of $14.0 million secured by accounts receivable, inventory, aircraft and life insurance, and a total of $1.0 million in lease financing receivables. Non-covered non-accrual loans at December 31, 2013 also included $6.5 million characterized as real estate loans, including three commercial real estate loan relationships of $2.5 million and loans secured by residential real estate of $3.5 million, substantially all of which were classified as loans held for sale, as well as construction and land development loans of $0.1 million.

140


        Non-covered OREO decreased $0.4 million to $4.4 million at June 30, 2014, compared with $4.8 million at December 31, 2013. Changes in non-covered OREO included the disposal of seven properties totaling $2.4 million and the addition of five properties totaling $2.4 million. At June 30, 2014, non-covered OREO included commercial properties of $0.4 million, commercial real estate property consisting of parcels of unimproved land of $2.1 million and residential lots under development of $1.9 million. At December 31, 2013, non-covered OREO included commercial properties of $4.2 million, commercial real estate property consisting of parcels of unimproved land of $0.5 million and residential lots under development of $0.1 million.

        At June 30, 2014, troubled debt restructurings ("TDRs") granted on non-covered loans totaled $10.3 million, of which $0.4 million relate to non-covered PCI loans that are considered to be performing due to the application of the accretion method and non-covered non-performing loans of $9.9 million for which discount accretion has been suspended. At December 31, 2013, TDRs granted on non-covered loans totaled $11.4 million. These TDRs were comprised of $1.1 million of non-covered PCI loans that are considered to be performing due to the application of the accretion method and non-covered non-performing loans of $10.3 million for which discount accretion has been suspended.

        Non-covered loans past due 90 days or more and still accruing were de minimis at June 30, 2014, compared to a total of $0.5 million at December 31, 2013 that included secured commercial and industrial loans, and a real estate loan.

        The following table presents components of our covered non-performing assets (dollars in thousands).

 
  June 30,
2014
  December 31,
2013
 

Covered loans accounted for on a non-accrual basis:

             

Commercial and industrial

  $ 2,095   $ 973  

Real estate

    12,620     249  

Construction and land development

    1,919     575  

Consumer

         
           

  $ 16,634   $ 1,797  
           
           

Covered non-performing loans as a percentage of total covered loans

    1.97 %   0.18 %
           
           

Covered other real estate owned

  $ 142,174   $ 142,833  
           
           

Other repossessed assets

  $   $  
           
           

Covered non-performing assets

  $ 158,808   $ 144,630  
           
           

Covered non-performing assets as a percentage of total assets

    1.69 %   1.62 %
           
           

Covered loans past due 90 days or more and still accruing

  $ 272   $  
           
           

Troubled debt restructurings included in accruing covered loans

  $   $  
           
           

        At June 30, 2014, covered non-performing assets increased by $14.2 million to $158.8 million, compared with $144.6 million at December 31, 2013, primarily due to an increase in covered non-accrual loans of $14.8 million. Covered non-performing loans totaled $16.6 million at June 30, 2014 and $1.8 million at December 31, 2013. At June 30, 2014, covered non-performing loans included seven commercial and industrial relationships with loans of $1.0 million secured by accounts receivable and inventory, two commercial real estate loan relationships of $10.9 million, eleven residential real estate loan relationships of $1.7 million, as well as construction and land development loans of $1.9 million. At December 31, 2013, covered non-performing loans of $1.8 million included one commercial and industrial relationship with loans of $1.0 million secured by accounts receivable, inventory and

141


equipment. Covered non-accrual loans at December 31, 2013 also included one commercial real estate loan relationship of $0.2 million, as well as construction and land development loans of $0.6 million.

        OREO acquired in the FNB Transaction that is subject to the FDIC loss-share agreements is referred to as "covered OREO" and reported separately in our consolidated balance sheets. Covered OREO decreased $0.6 million to $142.2 million at June 30, 2014, compared with $142.8 million at December 31, 2013. The decrease was primarily due to the disposal of 125 properties totaling $34.7 million, partially offset by the addition of 87 properties totaling $34.5 million. At June 30, 2014, covered OREO included commercial properties of $93.9 million, commercial real estate property consisting of parcels of unimproved land of $21.4 million and residential lots under development of $26.9 million. At December 31, 2013, covered OREO included commercial properties of $90.5 million, commercial real estate property consisting of parcels of unimproved land of $21.4 million and residential lots under development of $30.9 million.

        Covered loans past due 90 days or more and still accruing totaled $0.3 million at June 30, 2014 and included secured commercial and industrial loans, a construction and land development loan, and commercial and residential real estate loans.

        At June 30, 2014 and December 31, 2013, our reserves for unpaid losses and LAE were $35.1 million and $27.5 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. Separately for each of NLIC and ASIC and each line of business, our actuaries estimate the liability for unpaid losses and LAE by first estimating ultimate losses and LAE amounts for each year, prior to recognizing the impact of reinsurance.

        Insured losses for a given accident year change in value over time as additional information on claims is received, as claim conditions change and as new claims are reported. This process is commonly referred to as loss development. To project ultimate losses and LAE, our actuaries examine the paid and reported losses and LAE for each accident year and multiply these values by a loss development factor. The selected loss development factors are based upon a review of the loss development patterns indicated in the companies' historical loss triangles and applicable insurance industry loss development factors.

        The reserve analysis performed by our actuaries provides preliminary central estimates of the unpaid losses and LAE. At each quarter-end, the results of the reserve analysis are summarized and discussed with our senior management. The senior management group considers many factors in determining the amount of reserves to record for financial statement purposes. These factors include the extent and timing of any recent catastrophic events, historical pattern and volatility of the actuarial indications, the sensitivity of the actuarial indications to changes in paid and reported loss patterns, the consistency of claims handling processes, the consistency of case reserving practices, changes in our pricing and underwriting, and overall pricing and underwriting trends in the insurance market.

        The banking segment's major source of funds and liquidity is its deposit base. Deposits provide funding for its investment in loans and securities. Interest paid for deposits must be managed carefully to control the level of interest expense and overall net interest margin. The composition of the deposit base (time deposits versus interest-bearing demand deposits and savings), as discussed in more detail within the section entitled "Liquidity and Capital Resources—Banking Segment" below, is constantly changing due to the banking segment's needs and market conditions. Overall, average deposits totaled $6.5 billion for the six months ended June 30, 2014, an increase from average deposits of $4.7 billion for the six months ended June 30, 2013. The significant year-over-year increase in average deposits was

142


primarily due to those deposits assumed as a part of the FNB Transaction. The table below presents the average balance of deposits and the average rate paid on those deposits (dollars in thousands).

 
  Six Months Ended June 30,    
   
 
 
  Year Ended
December 31, 2013
 
 
  2014   2013  
 
  Average
Balance
  Average
Rate Paid
  Average
Balance
  Average
Rate Paid
  Average
Balance
  Average
Rate Paid
 

Noninterest-bearing demand deposits

  $ 1,741,409     0.00 % $ 1,184,990     0.00 % $ 1,370,029     0.00 %

Interest-bearing demand deposits

    2,310,167     0.22 %   1,813,333     0.25 %   1,930,622     0.24 %

Savings deposits

    286,734     0.21 %   179,302     0.36 %   247,789     0.32 %

Certificates of deposit

    2,138,125     0.38 %   1,475,567     0.59 %   1,745,483     0.54 %
                                 

  $ 6,476,435     0.21 % $ 4,653,192     0.30 % $ 5,293,923     0.28 %
                                 
                                 

        Our borrowings are shown in the table below (dollars in thousands).

 
  June 30, 2014   December 31, 2013  
 
  Balance   Average
Rate Paid
  Balance   Average
Rate Paid
 

Short-term borrowings

  $ 1,187,193     0.32 % $ 342,087     0.36 %

Notes payable

    55,584     4.62 %   56,327     6.33 %

Junior subordinated debentures

    67,012     3.52 %   67,012     3.59 %
                       

  $ 1,309,789     0.97 % $ 465,426     2.10 %
                       
                       

        Short-term borrowings consist of federal funds purchased, securities sold under agreements to repurchase and short-term bank loans. The $845.1 million increase in short-term borrowings at June 30, 2014 compared with December 31, 2013 included increases of $750.0 million in borrowings at the FHLB, $68.2 million in federal funds purchased and $22.3 million in securities sold under agreements to repurchase. These increases were the result of higher funding requirements associated with the increase in our mortgage origination segment's balance on its warehouse line of credit with the Bank, a decrease in deposits, and a slight increase in loans. Notes payable at June 30, 2014 of $55.6 million is comprised of insurance segment term notes and nonrecourse notes owed by First Southwest.


Twelve months ended December 31, 2013, 2012 and 2011

        The income applicable to common stockholders for the year ended December 31, 2013 was $121.0 million, or $1.40 per diluted share, compared to losses applicable to common stockholders of $5.9 million, or $0.10 per diluted share for the year ended December 31, 2012, and $6.5 million, or $0.12 per diluted share, for the year ended December 31, 2011.

        As a result of the PlainsCapital Merger on November 30, 2012, the net income of PlainsCapital is included in our operating results for the year ended December 31, 2013 and the month ended December 31, 2012. The operations acquired in the FNB Transaction are included in our operating results beginning September 14, 2013, and are therefore not fully reflected in our consolidated statement of operations for the year ended December 31, 2013. FNB's results of operations prior to September 14, 2013 are not included in our consolidated operating results. We expect the operations acquired in the FNB Transaction to have a significant effect on the Bank's operating results in future periods.

143


Table of Contents

        The FNB Transaction was accounted for using the purchase method of accounting, and accordingly, purchased assets, including identifiable intangible assets and assumed liabilities, were recorded at their respective Bank Closing Date fair values using significant estimates and assumptions to value certain identifiable assets acquired and liabilities assumed. During the quarter ended December 31, 2013, the estimated fair values of certain identifiable assets acquired and liabilities assumed as of the Bank Closing Date were adjusted as a result of additional information obtained primarily related to the fair values of loans, covered OREO, amounts receivable under the loss-share agreements with the FDIC ("FDIC Indemnification Asset"), premises and equipment and other intangible assets. These adjustments resulted in a preliminary bargain purchase gain associated with the FNB Transaction during 2013 of $12.6 million, before taxes of $4.5 million, which is included within noninterest income. Due to the short time period between the Bank Closing Date and December 31, 2013, the real estate appraisal validation exercise remains outstanding and the Bank Closing Date valuations related to covered OREO and FDIC Indemnification Asset are considered preliminary and could differ significantly when finalized.

        Certain items included in net income for 2012 and 2013 resulted from purchase accounting associated with the PlainsCapital Merger and FNB Transaction. Income before taxes for 2013 includes net accretion of $58.5 million and $10.2 million on earning assets and liabilities acquired in the PlainsCapital Merger and FNB Transaction, respectively, offset by amortization of identifiable intangibles of $9.8 million and $0.3 million, respectively. Loss before taxes for 2012 includes net accretion of $5.9 million on earning assets and liabilities acquired in the PlainsCapital Merger and amortization of identifiable intangibles of $0.8 million.

        We consider the ratios shown in the table below to be key indicators of our performance.

 
  Year ended
December 31, 2013
 

Performance Ratios(1):

       

Return on average stockholders' equity

    10.48 %

Return on average assets

    1.66 %

Net interest margin (taxable equivalent)(2)

    4.47 %

(1)
Noted measures are typically used for measuring the performance of banking and financial institutions. Our operations prior to the acquisition of PlainsCapital are limited to our insurance operations. Therefore, noted measures for periods prior to 2013 are not useful measures and have been excluded.

(2)
Taxable equivalent net interest income divided by average interest-earning assets.

        During the year ended December 31, 2013, the consolidated taxable equivalent net interest margin of 4.47% was impacted by PlainsCapital Merger related accretion of discount on loans of $61.8 million, amortization of premium on acquired securities of $5.7 million and amortization of premium on acquired time deposits of $2.4 million. Additionally, FNB Transaction related accretion of discount on loans of $7.5 million and amortization of premium on acquired time deposits of $2.7 million also impacted the consolidated taxable equivalent net interest margin during the year ended December 31, 2013. These items increased the consolidated taxable equivalent net interest margin by 103 basis points for the year ended December 31, 2013. The consolidated taxable equivalent net interest margin was 4.64% for the month ended December 31, 2012. The taxable equivalent net interest margin was impacted by PlainsCapital Merger related accretion of discount on loans of $6.3 million, amortization of premium on acquired securities of $0.7 million and amortization of premium on acquired time deposits of $0.4 million. These items increased the consolidated taxable equivalent interest margin by 110 basis points for the month ended December 31, 2012.

144


Table of Contents

        The table below provides additional details regarding our consolidated net interest income (dollars in thousands). Our operations prior to the PlainsCapital Merger were limited to our insurance operations. Therefore, the consolidated net interest income for 2012 reflects details for the month ended December 31, 2012.

 
  Year Ended
December 31, 2013
  Month Ended
December 31, 2012
 
 
  Average
Outstanding
Balance
  Interest
Earned or
Paid
  Annualized
Yield or
Rate
  Average
Outstanding
Balance
  Interest
Earned or
Paid
  Annualized
Yield or
Rate
 

Assets

                                     

Interest-earning assets

                                     

Loans, gross(1)

  $ 4,584,079   $ 284,782     6.21 % $ 4,513,214   $ 23,900     6.21 %

Investment securities—taxable

    993,389     27,078     2.72 %   719,910     1,604     2.63 %

Investment securities—non-taxable(2)

    192,933     7,150     3.71 %   230,733     698     2.51 %

Federal funds sold and securities purchased under agreements to resell

    27,996     113     0.40 %   54,017     106     2.35 %

Interest-bearing deposits in other financial institutions

    727,284     1,848     0.25 %   574,913     80     0.25 %

Other

    160,320     10,479     6.58 %   159,181     651     4.84 %
                               

Interest-earning assets, gross

    6,686,001     331,450     4.96 %   6,251,968     27,039     5.04 %

Allowance for loan losses

    (22,906 )               (159 )            
                                   

Interest-earning assets, net

    6,663,095                 6,251,809              

Noninterest-earning assets

    986,272                 747,284              
                                   

Total assets

  $ 7,649,367               $ 6,999,093              
                                   
                                   

Liabilities and Stockholders' Equity

                                     

Interest-bearing liabilities

                                     

Interest-bearing deposits

  $ 3,923,894   $ 14,877     0.38 % $ 3,233,503   $ 1,013     0.37 %

Notes payable and other borrowings

    823,477     17,997     2.19 %   1,048,114     1,351     1.51 %
                               

Total interest-bearing liabilities

    4,747,371     32,874     0.69 %   4,281,617     2,364     0.65 %

Noninterest-bearing liabilities

                                     

Noninterest-bearing deposits

    1,370,029                 1,321,011              

Other liabilities

    335,362                 498,375              
                                   

Total liabilities

    6,452,762                 6,101,003              

Stockholders' equity

    1,195,961                 896,567              

Noncontrolling interest

    644                 1,523              
                                   

Total liabilities and stockholders' equity

  $ 7,649,367               $ 6,999,093              
                               
                                   

Net interest income(2)

        $ 298,576               $ 24,675        
                                   
                                   

Net interest spread(2)

                4.27 %               4.39 %

Net interest margin(2)

                4.47 %               4.64 %

(1)
Average balance includes non-accrual loans.

(2)
Taxable equivalent adjustments are based on a 35% tax rate. The adjustment to interest income was $2.4 million and $0.2 million for the year ended December 31, 2013 and the month ended December 31, 2012, respectively.

        On a consolidated basis, net interest income increased $267.4 million during 2013, compared with 2012, while net interest income increased $26.8 million during 2012, compared with 2011. These increases were primarily due to the inclusion of the results of operations of the banking segment, which was acquired in the PlainsCapital Merger on November 30, 2012. Net interest income prior to December 2012 was limited to interest income on securities and interest expense on notes payable of the insurance segment.

        The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management's best estimate, is necessary to absorb probable losses within the existing loan portfolio. The consolidated provision for loan losses, primarily in the banking segment, was $37.2 million during 2013. During 2013, the provision for loan losses was comprised of charges relating

145


Table of Contents

to newly originated loans and acquired loans without credit impairment at acquisition of $33.1 million and purchased credit impaired ("PCI") loans of $4.1 million.

        Consolidated noninterest income increased $625.9 million during 2013, compared with 2012, while consolidated noninterest income increased $82.6 million during 2012, compared with 2011. These increases were primarily due to the inclusion of $640.2 million and $68.5 million during the year ended December 31, 2013 and the month ended December 31, 2012, respectively, of noninterest income generated from the operations of the mortgage origination and financial advisory segments acquired in the PlainsCapital Merger. Consolidated noninterest income during 2013 also included an increase in net insurance premiums earned of $10.8 million, compared with 2012, and an increase of $12.7 million during 2012, compared with 2011. In addition, as previously discussed, the FNB Transaction resulted in the recognition of a preliminary pre-tax bargain purchase gain of $12.6 million during 2013.

        Our consolidated noninterest expense during 2013 increased $656.2 million, compared with 2012, while consolidated noninterest expense during 2012 increased $100.3 million, compared with 2011. The increases primarily resulted from the inclusion of $739.7 million and $77.5 million during the year ended December 31, 2013 and month ended December 31, 2012, respectively, in employees' compensation and benefits, occupancy and equipment and other expenses specifically attributable to those segments acquired as a part of the PlainsCapital Merger. Included in employee's compensation and benefits expense during 2012 includes an $8.9 million expense related to the separate retention agreements between Hilltop and two executive officers of PlainsCapital entered into in connection with the PlainsCapital Merger. Other noninterest expenses during 2012 include PlainsCapital Merger related expenses of $6.6 million. The balance of increases in our consolidated noninterest expenses during 2013 and 2012 were primarily related to loss and LAE and policy acquisition and other underwriting expenses specific to our insurance segment.

        Consolidated income tax expense during 2013 was $70.7 million, reflecting an effective rate of 35.8%. During 2012 and 2011, we recorded income tax benefits, due to losses from operations, of $1.1 million and $5.0 million, respectively, reflecting effective rates of 18.3% and 43.4%, respectively. The increase in income tax expense during 2013 was due to the operating income generated by our business segments. The effective income tax rates for 2012 and 2011 are not indicative of future effective income tax rates as a result of the PlainsCapital Merger.

Segment Results

        Income before income taxes in our banking segment for the year ended December 31, 2013 and the month ended December 31, 2012 was $172.1 million and $9.7 million, respectively, and was primarily driven by net interest income of $293.3 million and $24.9 million, respectively, partially offset by noninterest expenses of $155.1 million and $16.1 million, respectively.

        At December 31, 2013, the Bank exceeded all regulatory capital requirements with a total capital to risk weighted assets ratio of 14.00%, Tier 1 capital to risk weighted assets ratio of 13.38% and a Tier 1 capital to average assets, or leverage, ratio of 9.29%. At December 31, 2013, the Bank was also considered to be "well-capitalized" under regulatory requirements without giving effect to the final Basel III capital rules adopted by the Federal Reserve Board on July 2, 2013. For additional discussion of the final Basel III capital rules, see "Information About the Companies—Hilltop—Business—Government Supervision and Regulation—PlainsCapital Bank—Basel III."

146


Table of Contents

        We consider the ratios shown in the table below to be key indicators of the performance of our banking segment.

 
  Year ended
December 31, 2013
 

Performance Ratios(1):

       

Efficiency ratio(2)

    42.58 %

Return on average assets

    1.78 %

Net interest margin (taxable equivalent)(3)

    5.17 %

(1)
The banking segment was acquired on November 30, 2012. Therefore, noted measures for periods prior to 2013 are not useful measures and have been excluded.

(2)
Noninterest expenses divided by the sum of total noninterest income and net interest income for the period.

(3)
Taxable equivalent net interest income divided by average interest-earning assets.

        During the year ended December 31, 2013, the banking segment's taxable equivalent net interest margin of 5.17% was impacted by PlainsCapital Merger related accretion of discount on loans of $61.8 million, amortization of premium on acquired securities of $5.7 million and amortization of premium on acquired time deposits of $2.4 million. Additionally, FNB Transaction related accretion of discount on loans of $7.5 million and amortization of premium on acquired time deposits of $2.7 million also impacted the banking segment's taxable equivalent net interest margin during the year ended December 31, 2013. These items increased the banking segment's taxable equivalent net interest margin by 120 basis points for the year ended December 31, 2013. The banking segment's taxable equivalent net interest margin for the month ended December 31, 2012 of 5.83% was impacted by PlainsCapital Merger related accretion of discount on loans of $6.3 million, amortization of premium on acquired securities of $0.7 million and amortization of premium on acquired time deposits of $0.4 million. These items increased the banking segment's taxable equivalent interest margin by 140 basis points for the month ended December 31, 2012.

147


Table of Contents

        The table below provides additional details regarding our banking segment's net interest income (dollars in thousands).

 
  Year Ended
December 31, 2013
  Month Ended
December 31, 2012
 
 
  Average
Outstanding
Balance
  Interest
Earned or
Paid
  Annualized
Yield or
Rate
  Average
Outstanding
Balance
  Interest
Earned or
Paid
  Annualized
Yield or
Rate
 

Assets

                                     

Interest-earning assets

                                     

Loans, gross(1)

  $ 3,279,228   $ 238,314     7.27 % $ 2,886,549   $ 19,228     7.99 %

Subsidiary warehouse lines of credit

    947,064     51,114     5.40 %   1,261,768     5,984     5.69 %

Investment securities—taxable

    792,860     14,625     1.84 %   494,285     444     1.08 %

Investment securities—non-taxable(2)

    158,739     5,715     3.60 %   175,850     479     3.27 %

Federal funds sold and securities purchased under agreements to resell

    26,373     75     0.28 %   33,180     48     1.74 %

Interest-bearing deposits in other financial institutions

    494,220     1,319     0.27 %   299,464     68     0.27 %

Other

    31,794     1,311     4.12 %   33,594     57     2.04 %
                               

Interest-earning assets, gross

    5,730,278     312,473     5.45 %   5,184,690     26,308     6.09 %

Allowance for loan losses

    (22,752 )               248              
                                   

Interest-earning assets, net

    5,707,526                 5,184,938              

Noninterest-earning assets

    940,880                 814,461              
                                   

Total assets

  $ 6,648,406               $ 5,999,399              
                                   
                                   

Liabilities and Stockholders' Equity

                                     

Interest-bearing liabilities

                                     

Interest-bearing deposits

  $ 3,900,867   $ 14,889     0.38 % $ 3,161,312   $ 1,009     0.38 %

Notes payable and other borrowings

    391,111     1,340     0.34 %   560,572     123     0.26 %
                               

Total interest-bearing liabilities(3)

    4,291,978     16,229     0.38 %   3,721,884     1,132     0.36 %

Noninterest-bearing liabilities

                                     

Noninterest-bearing deposits

    1,419,594                 1,396,295              

Other liabilities

    39,028                 58,492              
                                   

Total liabilities

    5,750,600                 5,176,671              

Stockholders' equity

    897,806                 822,728              
                                   

Total liabilities and stockholders' equity

  $ 6,648,406               $ 5,999,399              
                               
                                   

Net interest income(2)

        $ 296,244               $ 25,176        
                                   
                                   

Net interest spread(2)

                5.07 %               5.73 %

Net interest margin(2)

                5.17 %               5.83 %

(1)
Average balance includes non-accrual loans.

(2)
Taxable equivalent adjustments are based on a 35% tax rate. The adjustment to interest income was $2.0 million and $0.2 million for the year ended December 31, 2013 and the month ended December 31, 2012, respectively.

(3)
Excludes the allocation of interest expense on PlainsCapital debt of $1.0 million and $0.1 million for the year ended December 31, 2013 and the month ended December 31, 2012, respectively.

        The banking segment's net interest margin shown above exceeds our consolidated net interest margin. Our consolidated net interest margin includes the yields and costs associated with certain items within interest-earning assets and interest-bearing liabilities in the financial advisory segment, as well as the borrowing costs of Hilltop and PlainsCapital, both of which reduce our consolidated net interest margin. In addition, the banking segment's interest earning assets include lines of credit extended to subsidiaries, the yields on which increase the banking segment's net interest margin. Such yields and costs are eliminated from the consolidated financial statements.

        Because the operations of the banking segment acquired in the PlainsCapital Merger are not included in our results of operations for the full fiscal year ended December 31, 2012, the table summarizing the changes in our net interest income due to variances in the volume of our interest-earning assets and interest-bearing liabilities would not be meaningful and has therefore been omitted.

148


Table of Contents

        The banking segment's noninterest income was $71.0 million and $4.6 million during the year ended December 31, 2013 and the month ended December 31, 2012, respectively, and primarily related to intercompany financing charges associated with the lending commitment on the PrimeLending warehouse line of credit. Noninterest income during the year ended December 31, 2013 also included the recognition of a preliminary pre-tax bargain purchase gain of $12.6 million in connection with the FNB Transaction.

        The banking segment's noninterest expenses were $155.1 million and $16.1 million during the year ended December 31, 2013 and the month ended December 31, 2012, respectively, and were primarily comprised of employees' compensation and benefits, and occupancy expenses.

        Income before income taxes in our mortgage origination segment for the year ended December 31, 2013 and the month ended December 31, 2012 was $27.4 million and $2.3 million, respectively. Income before income taxes was primarily driven by noninterest income of $537.5 million and $57.6 million during the year ended December 31, 2013 and the month ended December 31, 2012, respectively, partially offset by noninterest expense of $472.3 million and $50.3 million during the year ended December 31, 2013 and the month ended December 31, 2012, respectively. Additionally, net interest expense of $37.8 million and $5.0 million during the year ended December 31, 2013 and the month ended December 31, 2012, respectively, resulted from interest incurred on a warehouse line of credit held at the Bank as well as related intercompany financing costs, partially offset by interest income earned on loans held for sale.

149


Table of Contents

        PrimeLending originates all of its mortgage loans through a retail channel. The following table provides certain details regarding our mortgage loan originations for the year ended December 31, 2013 (dollars in thousands).

 
  Volume   % of
Total
 

Mortgage Loan Originations—units

    55,781        

Mortgage Loan Originations—volume

  $ 11,792,562        

Mortgage Loan Originations:

             

Conventional

  $ 7,505,437     63.65 %

Government

    3,465,078     29.38 %

Jumbo

    780,604     6.62 %

Other

    41,443     0.35 %
           

  $ 11,792,562     100.00 %
           
           

Home purchases

  $ 8,178,970     69.36 %

Refinancings

    3,613,592     30.64 %
           

  $ 11,792,562     100.00 %
           
           

Texas

  $ 2,660,810     22.56 %

California

    2,082,184     17.66 %

North Carolina

    618,802     5.25 %

Virginia

    466,531     3.96 %

Florida

    456,643     3.87 %

Arizona

    392,006     3.32 %

Maryland

    385,215     3.27 %

Ohio

    383,518     3.25 %

Washington

    360,100     3.05 %

All other states

    3,986,753     33.81 %
           

  $ 11,792,562     100.00 %
           
           

        The mortgage lending business is subject to variables that can impact loan origination volume, including seasonal and interest rate fluctuations. Historically, we have typically experienced increased loan origination volume from purchases of homes during the spring and summer, when more people tend to move and buy or sell homes. An increase in mortgage interest rates tends to result in decreased loan origination volume from refinancings, while a decrease in mortgage interest rates tends to result in increased refinancings. Changes in interest rates have historically had a lesser impact on home purchases volume than on refinancing volume.

        Beginning in May 2013 and continuing through the fourth quarter of 2013, mortgage interest rates increased at a pace that, along with other factors, resulted in a 21.2% decrease in the mortgage origination segment's total loan origination volume during the third and fourth quarters of 2013 when compared to the first and second quarters of 2013. Home purchases volume during the six months ended June 30, 2013 and December 31, 2013 was $4.0 billion and $4.2 billion, respectively, reflecting a 5.1% increase, while refinancing volume decreased from $2.6 billion (39.5% of total loan origination volume) to $1.0 billion (19.3% of total loan origination volume) between the same periods. Due to recent volatility in mortgage interest rates and uncertain consumer confidence, 2014 mortgage loan origination volume may vary from origination trends historically experienced by the mortgage origination segment.

        While PrimeLending's total loan origination volume decreased 21.2% during the third and fourth quarters of 2013 compared to the first and second quarters of 2013, income before income taxes

150


Table of Contents

decreased 107.4% between the same periods ($29.6 million income compared to a $2.2 million loss). Income before income taxes decreased at a greater rate primarily because segment operating costs included in noninterest expenses, such as employee related (salaries and benefits), occupancy and administrative expenses, decreased at a lesser rate, approximately 4%, than loan origination volume decreased between the two periods. To address negative trends in loan origination volume resulting from changes in interest rates that began in May 2013, the mortgage origination segment reduced its non-origination employee headcount approximately 22% during the third and fourth quarters of 2013. Third quarter segment operating costs were not significantly impacted by the headcount reductions, because the decreases in employees' salaries and benefits resulting from the reductions were mostly offset by related severance expenses incurred during the quarter. Salaries and benefits expenses decreased approximately 9% between the third and fourth quarters, as the benefits of the headcount reductions in the third quarter of 2013 began to be realized. We are also engaged in other initiatives to reduce segment operating costs that were primarily responsible for the decrease of approximately 4% in non-employee related expenses between the third and fourth quarters noted above. We anticipate that we will begin to realize the full benefits of the employee reductions and the other cost savings initiatives during the first quarter of 2014. Also impacting the trend in income before taxes, to a lesser extent, was a decrease in loan revenue margins resulting from increased competition.

        PrimeLending sells substantially all mortgage loans it originates to various investors in the secondary market, the majority servicing released. During the first and second quarters of 2013, PrimeLending retained servicing on approximately 8% of loans sold. This rate was increased to approximately 22% during the third and fourth quarters of 2013. The related mortgage servicing rights asset was valued at $20.1 million on $2.0 billion of serviced loan volume as of December 31, 2013, compared to a value of $2.1 million at December 31, 2012. All income related to retained servicing, including changes in the value of the mortgage servicing rights asset, is included in noninterest income.

        Noninterest income of $537.5 million and $57.6 million for the year ended December 31, 2013 and the month ended December 31, 2012, respectively, was comprised of net gains on the sale of loans and other mortgage production income, and mortgage origination fees. As a result of increased competition, noninterest income decreased at a greater rate, 27.6%, during the third and fourth quarters of 2013 when compared to the first and second quarters of 2013 than the decrease in loan origination volume experienced during the same periods, which was 21.2%. Noninterest income during the year ended December 31, 2013 included $11.1 million of net losses resulting from changes in the fair value of the mortgage origination segment's interest rate lock commitments ("IRLCs") and loans held for sale, and the related activity associated with forward commitments used by PrimeLending to mitigate interest rate risk associated with its IRLCs and mortgage loans held for sale. The loss was primarily the result of a decrease in the volume of IRLCs and mortgage loans held for sale between December 31, 2012 and December 31, 2013.

        Noninterest expenses were $472.3 million and $50.3 million for the year ended December 31, 2013 and the month ended December 31, 2012, respectively. Employees' compensation and benefits accounted for the majority of the noninterest expenses incurred. Compensation that varies with the volume of mortgage loan originations and overall segment profitability comprised approximately 59% of the total employees' compensation and benefits expenses during the year ended December 31, 2013. PrimeLending records unreimbursed closing costs when it pays a customer's closing costs in return for the customer choosing to accept a higher interest rate on the customer's mortgage loan. Unreimbursed closing costs during the year ended December 31, 2013 and the month ended December 31, 2012 were $30.1 million and $5.9 million, respectively.

151


Table of Contents

        Between January 1, 2005, and December 31, 2013, the mortgage origination segment sold mortgage loans totaling $55.5 billion. These loans were sold under sales contracts that generally include provisions which hold the mortgage origination segment responsible for errors or omissions relating to its representations and warranties that loans sold meet certain requirements, including representations as to underwriting standards and the validity of certain borrower representations in connection with the loan. In addition, the sales contracts typically require the refund of purchased servicing rights plus certain investor servicing costs if a loan experiences an early payment default. While the mortgage origination segment sold loans prior to 2005, it has not experienced, nor does it anticipate experiencing, significant losses on loans originated prior to 2005 as a result of investor claims under these provisions of its sales contracts.

        When an investor claim for indemnification of a loan sold is made, we evaluate the claim and determine if the claim can be satisfied through additional documentation or other deliverables. If the claim cannot be satisfied in that manner, we negotiate with the investor to reach a settlement of the claim. Settlements typically result in either the repurchase of a loan or reimbursement to the investor for losses incurred on the loan. The following table summarizes the mortgage origination segment's claims resolution activity relating to loans sold between January 1, 2005, and December 31, 2013 (dollars in thousands).

 
  Original Loan
Balance
  Loss Recognized  
 
  Amount   % of
Loans
Sold
  Amount   % of
Loans
Sold
 

Claims resolved with no payment

  $ 130,917     0.24 % $     0.00 %

Claims resolved as a result of a loan repurchase or payment to an investor for losses incurred(1)

    172,006     0.31 %   21,929     0.04 %
                   

  $ 302,923     0.55 % $ 21,929     0.04 %
                   
                   

(1)
Losses incurred include refunded purchased servicing rights.

        At December 31, 2013 and 2012, the mortgage origination segment's indemnification liability reserve totaled $21.1 million and $19.0 million, respectively. The related provision for indemnification losses was $3.5 million and $0.4 million for the year ended December 31, 2013 and the month ended December 31, 2012, respectively.

        Income before income taxes in our insurance segment was $7.6 million during 2013, compared with a loss before income taxes of $4.7 million during 2012 and income before income taxes of $0.2 million during 2011. Included within noninterest income of the insurance segment during 2013 is the recognition of a non-recurring gain of $3.7 million. This non-recurring gain, which is eliminated upon consolidation, is due to our redemption during the fourth quarter of 2013 of $6.9 million in aggregate principal amount of 7.50% Senior Exchangeable Notes due 2025 (the "Notes") of HTH Operating Partnership LP ("OP"), a wholly owned subsidiary of Hilltop, which were held by our insurance subsidiaries. The insurance segment is subject to claims arising out of severe weather, the incidence and severity of which are inherently unpredictable. Generally, the insurance segment's insured risks exhibit higher losses in the second and third calendar quarters due to a seasonal concentration of weather-related events in its primary geographic markets. Although weather-related losses (including hail, high winds, tornadoes and hurricanes) can occur in any calendar quarter, the second calendar quarter,

152


Table of Contents

historically, has experienced the highest frequency of losses associated with these events. Hurricanes, however, are more likely to occur in the third calendar quarter of the year.

        The insurance segment had positive results during 2013, despite experiencing three tornado, wind and hail storms during the second quarter of 2013. Based on estimates of the ultimate cost, two of these storms are now considered catastrophic losses as they exceeded our $8.0 million reinsurance retention during the third quarter of 2013. The estimate of ultimate losses from these storms totaled $26.5 million at December 31, 2013 with a net loss, after reinsurance, of $22.1 million during 2013. These net costs compare favorably to the prior year given our improved containment of expected losses from the weather events in May 2013 at June 30, 2013 compared to prior year activity. This year-over-year improvement contributed to a combined ratio of 102.6% during 2013, compared with 108.8% and 106.2% during 2012 and 2011, respectively. The 6.2% decrease in the combined ratio in 2013 compared to 2012 was primarily driven by the increase in earned premiums and improved containment of expected losses as previously noted. The 2.6% increase in the combined ratio in 2012 compared to 2011 was primarily driven by higher incurred losses associated with wind and hail losses and storms that occurred in Texas during 2012 compared to the prior year, offset slightly by the increase in earned premiums. The combined ratio is a measure of overall insurance underwriting profitability, and represents the sum of the loss and LAE ratio and the underwriting expense ratio, which are discussed in more detail below.

        Noninterest income of $166.2 million, $154.1 million and $141.7 million during 2013, 2012 and 2011, respectively, included net insurance premiums earned of $157.5 million, $146.7 million and $134.0 million, respectively. The increases in earned premiums are primarily attributable to volume and, to a lesser extent, rate increases in homeowners and mobile home products.

        Direct insurance premiums written by major product line are presented in the table below (in thousands).

 
   
   
   
  Variance  
 
  Year Ended December 31,  
 
  2013 vs 2012   2012 vs 2011  
 
  2013   2012   2011  

Direct Insurance Premiums Written:

                               

Homeowners

  $ 79,711   $ 73,943   $ 70,177   $ 5,768   $ 3,766  

Fire

    54,566     51,345     49,812     3,221     1,533  

Mobile Home

    34,940     30,123     26,353     4,817     3,770  

Commercial

    4,489     8,043     8,380     (3,554 )   (337 )

Other

    276     326     332     (50 )   (6 )
                       

  $ 173,982   $ 163,780   $ 155,054   $ 10,202   $ 8,726  
                       
                       

        Total direct insurance premiums written for Hilltop's three largest insurance product lines increased by $13.8 million during 2013, compared to 2012, and by $9.1 million during 2012, compared to 2011. These increases were due to growth in Hilltop's core insurance products, partially offset by decreases of $3.5 million and $0.3 million in 2013 and 2012, respectively, related to a commercial product line that was non-renewed.

153


Table of Contents

        Net insurance premiums earned by major product line are presented in the table below (in thousands).

 
   
   
   
  Variance  
 
  Year Ended December 31,  
 
  2013 vs 2012   2012 vs 2011  
 
  2013   2012   2011  

Net Insurance Premiums Earned:

                               

Homeowners

  $ 72,175   $ 66,233   $ 60,671   $ 5,942   $ 5,562  

Fire

    49,407     45,990     43,063     3,417     2,927  

Mobile Home

    31,636     26,982     22,783     4,654     4,199  

Commercial

    4,065     7,204     7,244     (3,139 )   (40 )

Other

    250     292     287     (42 )   5  
                       

  $ 157,533   $ 146,701   $ 134,048   $ 10,832   $ 12,653  
                       
                       

        Net insurance premiums earned during 2013 and 2012 increased compared to 2012 and 2011, respectively, primarily due to the increases in net insurance premiums written of $13.0 million and $8.7 million in 2013 and 2012, respectively. These increases were offset by increases in unearned insurance premiums of $2.1 million and $3.9 million during 2013 and 2012, respectively, in each case as compared to the prior year.

        Noninterest expenses of $166.0 million, $163.6 million and $146.4 million during 2013, 2012 and 2011, respectively, include both loss and LAE expenses and policy acquisition and other underwriting expenses, as well as other noninterest expenses. Loss and LAE are recognized based on formula and case basis estimates for losses reported with respect to direct business, estimates of unreported losses based on past experience and deduction of amounts for reinsurance placed with reinsurers. Loss and LAE during 2013 was $110.8 million, as compared to $109.2 million and $96.7 million during 2012 and 2011, respectively. As a result, the loss and LAE ratio during 2013, 2012 and 2011 was 70.3%, 74.4% and 72.2%, respectively. The ratio improvement during 2013, compared to 2012, was primarily a result of growth of earned premium and the improved containment of expected losses from the prior year weather events as previously discussed. The increase in the loss and LAE ratio during 2012, compared to 2011, was primarily due to increased severity of wind and hail storms from April, May and June 2012 weather events, partially offset by earned premium growth.

        We seek to generate underwriting profitability through our insurance segment. Management evaluates NLC's loss and LAE ratio by bifurcating the losses to derive catastrophic and non-catastrophic loss ratios. The non-catastrophic loss ratio excludes Property Claims Services events that exceed $1.0 million of losses to NLC. Catastrophic events, including those that do not exceed our reinsurance retention, affect insurance segment loss ratios. During 2013, catastrophic events that did not exceed our reinsurance retention accounted for $22.3 million of the total loss and loss adjustment expense, as compared to $23.3 million and $20.3 million during 2012 and 2011, respectively. Excluding catastrophic events, our combined ratios during 2013, 2012 and 2011 would have improved by 14.3%, 15.8% and 15.2%, respectively.

        Policy acquisition and other underwriting expenses encompass all expenses incurred relative to NLC operations, and include elements of multiple categories of expense otherwise reported as noninterest expense in the consolidated statements of operations. Included in other underwriting expenses during 2012 is a $1.7 million write down of a policy administration system NLC was unable to successfully implement. Excluding this 2012 write down, the expense ratio during 2012 would have decreased by 1.1%.

154


Table of Contents

        The following table details the calculation of the underwriting expense ratio for the periods presented (dollars in thousands).

 
   
   
   
  Variance  
 
  Year Ended December 31,  
 
  2013 vs 2012   2012 vs 2011  
 
  2013   2012   2011  

Amortization of deferred policy acquisition costs

  $ 40,592   $ 38,757   $ 34,755   $ 1,835   $ 4,002  

Other underwriting expenses

    12,859     13,829     12,670     (970 )   1,159  
                       

Total

    53,451     52,586     47,425     865     5,161  

Agency expenses

    (2,571 )   (2,073 )   (1,789 )   (498 )   (284 )
                       

Total less agency expenses

  $ 50,880   $ 50,513   $ 45,636   $ 367   $ 4,877  
                       
                       

Net insurance premiums earned

  $ 157,533   $ 146,701   $ 134,048   $ 10,832   $ 12,653  
                       
                       

Expense ratio

    32.3 %   34.4 %   34.0 %   -2.1 %   0.4 %

        During 2013, the insurance segment initiated a review of the pricing of its primary products in each state of operation utilizing a consulting actuarial firm to supplement normal review processes. Rate filings have been made for certain products in several states for increases effective in 2014, and the process will continue through the remainder of its products and states in which it operates. Concurrently, business concentrations were reviewed and actions initiated, including cancellation of agents, non-renewal of policies and cessation of new business writing on certain products in problematic geographic areas. We expect that these actions will reduce the rate of premium growth for 2014 when compared with the patterns exhibited in prior years. However, we expect the reduced exposure to volatile weather to improve our loss experience during 2014.

        Income before income taxes in our financial advisory segment for the year ended December 31, 2013 and the month ended December 31, 2012 were $2.4 million and $0.9 million, respectively. Rising interest rates along with increased volatility in fixed income markets have resulted in reduced sales of fixed income securities to institutional customers, some trading losses on securities held to support those sales and reduction in financial advisory fee income.

        The financial advisory segment had net interest income of $12.1 million and $1.2 million during the year ended December 31, 2013 and the month ended December 31, 2012, respectively, consisting of securities lending activity, customer margin loan balances and investment securities used to support sales, underwriting and other customer activities.

        The majority of noninterest income for the year ended December 31, 2013 and the month ended December 31, 2012 of $102.7 million and $10.9 million, respectively, was generated from fees and commissions earned from investment advisory and securities brokerage activities of $93.1 million and $11.2 million, respectively. The financial advisory segment participates in programs in which it issues forward purchase commitments of mortgage-backed securities to certain clients and sells TBAs. Changes in the fair values of these derivative instruments during the year ended December 31, 2013 and the month ended December 31, 2012 produced net gains of $11.4 million and $0.2 million, respectively. Changes in the fair value of the financial advisory segment's trading portfolio, which is used to support sales, underwriting and other customer activities, produced losses of $1.8 million and $0.6 million during the year ended December 31, 2013 and the month ended December 31, 2012, respectively.

        Noninterest expenses were $112.4 million and $11.1 million for the year ended December 31, 2013 and the month ended December 31, 2012, respectively. Employees' compensation and benefits and occupancy and equipment accounted for the majority of the costs incurred.

155


Table of Contents

        Corporate includes certain activities not allocated to specific business segments. These activities include holding company financing and investing activities, and management and administrative services to support the overall operations of the Company including, but not limited to, certain executive management, corporate relations, legal, finance, and acquisition costs not allocated to business segments.

        As a holding company, Hilltop's primary investment objectives are to preserve capital and have available cash resources to utilize in making acquisitions. Investment and interest income earned, primarily from available cash and available-for-sale securities, including our note receivable from SWS, were $6.6 million, $7.0 million and $4.3 million during 2013, 2012 and 2011, respectively.

        Interest expense of $8.2 million, $7.0 million and $7.1 million during 2013, 2012 and 2011 was entirely due to interest costs associated with the Notes. During 2013, interest expense included the recognition of a non-recurring charge of $2.1 million due to the write-off of remaining unamortized loan origination fees associated with the Notes being called for redemption during the fourth quarter of 2013.

        Noninterest expenses of $10.4 million, $14.5 million and $8.9 million during 2013, 2012 and 2011, respectively, primarily include compensation and benefits, professional fees and transaction costs associated with acquisition efforts. During 2013, noninterest expenses included the recognition of a non-recurring loss of $3.7 million associated with the Notes held by our insurance segment being called for redemption during the fourth quarter of 2013. This loss was eliminated in consolidation. In addition, noninterest expenses included $0.1 million, $6.4 million and $2.6 million of transaction costs associated with acquisition efforts during 2013, 2012 and 2011, respectively.

Financial Condition

        The following discussion contains a more detailed analysis of our financial condition at December 31, 2013 as compared to 2012 and 2011.

        At December 31, 2013, investment securities consisted of securities of the U.S. Treasury, U.S. government and its agencies, obligations of municipalities and other political subdivisions, primarily in the State of Texas, mortgage-backed, corporate debt, and equity securities, a note receivable and a warrant. We have the ability to categorize investments as trading, available for sale, and held to maturity.

        Our securities portfolio consists of two major components: trading securities and securities available for sale. Trading securities are bought and held principally for the purpose of selling them in the near term and are carried at fair value, marked to market through operations and held at the Bank and First Southwest. Securities that may be sold in response to changes in market interest rates, changes in securities' prepayment risk, increases in loan demand, general liquidity needs and other similar factors are classified as available for sale and are carried at estimated fair value, with unrealized gains and losses recorded in accumulated other comprehensive income (loss).

156


Table of Contents

        The table below summarizes our securities portfolio (in thousands).

 
  December 31,  
 
  2013   2012   2011  

Trading securities, at fair value

  $ 58,846   $ 90,113   $  

Securities available for sale, at fair value

   
 
   
 
   
 
 

U.S. Treasury securities

    43,528     7,185      

U.S. government agencies:

                   

Bonds

    662,732     526,237     29,165  

Residential mortgage-backed securities

    60,087     18,893     12,652  

Collateralized mortgage obligations

    120,461     97,924      

Corporate debt securities

    76,608     87,177     100,681  

States and political subdivisions

    156,835     175,759      

Commercial mortgage-backed securities

    760     1,073     2,303  

Equity securities

    22,079     20,428     19,022  

Note receivable

    47,909     44,160     38,588  

Warrant

    12,144     12,117     21,789  
               

Total securities portfolio

  $ 1,261,989   $ 1,081,066   $ 224,200  
               
               

        We had a net unrealized loss of $53.7 million and net unrealized gains of $12.5 million and $21.5 million related to the available for sale investment portfolio at December 31, 2013, 2012 and 2011, respectively. The significant increase in the net unrealized loss position of our available for sale investment portfolio during 2013 was due to effects of an increase in market interest rates since May 2013 that resulted in a decrease in the fair value of our debt securities.

        The banking segment's securities portfolio plays a role in the management of our interest rate sensitivity and generates additional interest income. In addition, the securities portfolio is used to meet collateral requirements for public and trust deposits, securities sold under agreements to repurchase and other purposes. The available for sale securities portfolio serves as a source of liquidity. Historically, the Bank's policy has been to invest primarily in securities of the U.S. government and its agencies, obligations of municipalities in the State of Texas and other high grade fixed income securities to minimize credit risk. At December 31, 2013, the banking segment's securities portfolio of $1.0 billion was comprised of trading securities of $21.0 million and available for sale securities of $1.0 billion. The banking segment's portfolio at December 31, 2013 included available for sale securities acquired in connection with the FNB Transaction with a book value of $60.4 million, down from a book value of $286.3 million at the Bank Closing Date. Subsequent to the Bank Closing Date, securities acquired in the FNB Transaction with a book value of $223.5 million were either sold, matured or called. These additions to the Bank's balance sheet represent additional support for its liquidity needs.

        Our insurance segment's primary investment objective is to preserve capital and manage for a total rate of return. NLC's strategy is to purchase securities in sectors that represent the most attractive relative value. Our insurance segment invests the premiums it receives from policyholders until they are needed to pay policyholder claims or other expenses. At December 31, 2013, the insurance segment's securities portfolio was comprised of $131.6 million in available for sale securities and $5.3 million of other investments included in other assets within the consolidated balance sheet.

157


Table of Contents

        Our financial advisory segment holds securities to support sales, underwriting and other customer activities. Because FSC is a broker-dealer, it is required to carry its securities at fair value and record changes in the fair value of the portfolio in operations. Accordingly, FSC classifies its securities portfolio of $37.9 million at December 31, 2013 as trading.

        Available for sale securities of Hilltop at December 31, 2013 include the note receivable from, and warrant to purchase shares of SWS of $60.1 million, and equity securities of $9.0 million representing those shares of SWS common stock held by Hilltop.

158


Table of Contents

        The following table sets forth the estimated maturities of securities, excluding trading and available for sale equity securities. Contractual maturities may be different (dollars in thousands, yields are tax-equivalent).

 
  December 31, 2013  
 
  One Year
Or Less
  One Year to
Five Years
  Five Years to
Ten Years
  Greater Than
Ten Years
  Total  

U.S. government agencies:

                               

U.S. Treasury securities:

                               

Amortized cost

  $ 25,705   $ 13,041   $ 4,938   $   $ 43,684  

Fair value

    25,712     13,014     4,802         43,528  

Weighted average yield

    0.10 %   0.91 %   2.65 %       0.63 %

Bonds:

                               

Amortized cost

    89,697     12,249     26,524     589,439     717,909  

Fair value

    89,706     12,654     26,338     534,034     662,732  

Weighted average yield

    0.36 %   2.67 %   2.71 %   1.94 %   1.78 %

Residential mortgage-backed securities:

                               

Amortized cost

        24,415     14,145     21,376     59,936  

Fair value

        24,595     14,205     21,287     60,087  

Weighted average yield

        2.63 %   3.93 %   4.00 %   3.42 %

Collateralized mortgage obligations:

                               

Amortized cost

    7,344     76,382     26,852     13,924     124,502  

Fair value

    7,419     74,376     24,697     13,969     120,461  

Weighted average yield

    2.54 %   1.65 %   1.48 %   4.45 %   1.98 %

Corporate debt securities:

                               

Amortized cost

    4,248     40,201     27,011     916     72,376  

Fair value

    4,278     43,825     27,590     915     76,608  

Weighted average yield

    3.72 %   4.74 %   3.66 %   6.22 %   4.30 %

States and political subdivisions:

                               

Amortized cost

    700     5,303     13,309     143,643     162,955  

Fair value

    720     5,349     13,162     137,604     156,835  

Weighted average yield

    5.57 %   2.86 %   2.92 %   3.76 %   3.67 %

Commercial mortgage-backed securities:

                               

Amortized cost

                691     691  

Fair value

                760     760  

Weighted average yield

                6.08 %   6.08 %

Note receivable:

                               

Amortized cost

        42,674             42,674  

Fair value

        47,909             47,909  

Weighted average yield

        10.25 %           10.25 %

Warrant:

                               

Amortized cost

        12,068             12,068  

Fair value

        12,144             12,144  

Weighted average yield

        0.61 %           0.61 %

Total securities portfolio:

                               

Amortized cost

    127,694     226,333     112,779     769,989     1,236,795  

Fair value

    127,835     233,866     110,794     708,569     1,181,064  

Weighted average yield

    0.58 %   3.91 %   2.82 %   2.39 %   2.52 %

159


Table of Contents

        Consolidated non-covered loans held for investment are detailed in the table below, classified by portfolio segment and segregated between those considered to be purchased credit impaired ("PCI") loans and all other originated or acquired loans (in thousands). PCI loans showed evidence of credit deterioration that makes it probable that all contractually required principal and interest payments will not be collected.

December 31, 2013
  Loans, excluding
PCI Loans
  PCI
Loans
  Total
Loans
 

Commercial and industrial

  $ 1,600,450   $ 36,816   $ 1,637,266  

Real estate

    1,418,003     39,250     1,457,253  

Construction and land development

    344,734     19,817     364,551  

Consumer

    51,067     4,509     55,576  
               

Non-covered loans, gross

    3,414,254     100,392     3,514,646  

Allowance for loan losses

    (30,104 )   (3,137 )   (33,241 )
               

Non-covered loans, net of allowance

  $ 3,384,150   $ 97,255   $ 3,481,405  
               
               

 

December 31, 2012
  Loans, excluding
PCI Loans
  PCI
Loans
  Total
Loans
 

Commercial and industrial

  $ 1,588,907   $ 71,386   $ 1,660,293  

Real estate

    1,122,667     62,247     1,184,914  

Construction and land development

    247,413     33,070     280,483  

Consumer

    26,629     77     26,706  
               

Non-covered loans, gross

    2,985,616     166,780     3,152,396  

Allowance for loan losses

    (3,409 )       (3,409 )
               

Non-covered loans, net of allowance

  $ 2,982,207   $ 166,780   $ 3,148,987  
               
               

        The loan portfolio constitutes the major earning asset of the banking segment and typically offers the best alternative for obtaining the maximum interest spread above the banking segment's cost of funds. The overall economic strength of the banking segment generally parallels the quality and yield of its loan portfolio. The banking segment's loan portfolio is presented below in two sections, "—Non-Covered Loan Portfolio" and "—Covered Loan Portfolio." The "Covered Loan Portfolio" consists of loans acquired in the FNB Transaction that are subject to loss-share agreements with the FDIC and is discussed below. The "Non-Covered Loan Portfolio" includes all other loans held by the Bank, which we refer to as "non-covered loans," and is discussed herein.

        The banking segment's total non-covered loans, net of the allowance for non-covered loan losses, were $4.3 billion and $4.1 billion at December 31, 2013 and 2012, respectively. The banking segment's non-covered loan portfolio includes a $1.3 billion warehouse line of credit extended to PrimeLending, of which $1.0 billion was drawn at December 31, 2013, as well as term loans to First Southwest that had an outstanding balance of $23.0 million at December 31, 2013. Amounts advanced against the warehouse line of credit and the First Southwest term loans are eliminated from net loans on our consolidated balance sheets. Prior to September 2013, the warehouse line of credit extended to PrimeLending had $1.6 billion of availability, of which $1.3 billion was drawn at December 31, 2012, while the outstanding balance on a term loan to First Southwest was $4.0 million at December 31, 2012.

160


Table of Contents

        The banking segment does not generally participate in syndicated loan transactions and has no foreign loans in its portfolio. At December 31, 2013, the banking segment's only non-covered loan concentration (loans to borrowers engaged in similar activities) that exceeded 10% of its total non-covered loans was non-construction residential real estate loans within our non-covered real estate portfolio. At December 31, 2013, non-construction residential real estate loans were 41.27% of the banking segment's total non-covered loans. The banking segment's non-covered loan concentrations were within regulatory requirements at December 31, 2013.

        The loan portfolio of the mortgage origination segment consists of loans held for sale, primarily single-family residential mortgages funded through PrimeLending, and pipeline loans, which are loans in various stages of the application process, but not yet closed and funded. Pipeline loans may not close if potential borrowers elect in their sole discretion not to proceed with the loan application. Total loans held for sale were $1.1 billion and $1.4 billion at December 31, 2013 and 2012, respectively.

        The components of the mortgage origination segment's loans held for sale and pipeline loans are as follows (in thousands).

 
  December 31,  
 
  2013   2012  

Loans held for sale:

             

Unpaid principal balance

  $ 1,066,850   $ 1,359,829  

Fair value adjustment

    21,555     40,908  
           

  $ 1,088,405   $ 1,400,737  
           
           

Pipeline loans:

             

Unpaid principal balance

  $ 602,467   $ 968,083  

Fair value adjustment

    12,151     15,150  
           

  $ 614,618   $ 983,233  
           
           

        The loan portfolio of the financial advisory segment consists primarily of margin loans to customers and correspondents. These loans are collateralized by the securities purchased or by other securities owned by the clients and, because of collateral coverage ratios, are believed to present minimal collectability exposure. Additionally, these loans are subject to a number of regulatory requirements as well as FSC's internal policies. The financial advisory segment's total non-covered loans, net of the allowance for non-covered loan losses, were $281.6 million and $277.0 million at December 31, 2013 and 2012, respectively. This increase was primarily attributable to increased borrowings in margin accounts held by FSC customers and correspondents.

        Loans acquired in the FNB Transaction that are subject to loss-share agreements with the FDIC are referred to as "covered loans" and reported separately in our consolidated balance sheets. Under the terms of the loss-share agreements, the FDIC has agreed to reimburse the Bank for: (i) 80% of losses on the first $240.4 million of losses incurred; (ii) 0% of losses in excess of $240.4 million up to and including $365.7 million of losses incurred; and (iii) 80% of losses in excess of $365.7 million of losses incurred. The loss-share agreements for commercial and single family residential loans are in effect for 5 years and 10 years, respectively, and the loss recovery provisions to the FDIC are in effect

161


Table of Contents

for 8 years and 10 years, respectively, from the Bank Closing Date. In accordance with the loss-share agreements, the Bank may be required to make a "true-up" payment to the FDIC approximately ten years following the Bank Closing Date if the FDIC's initial estimate of losses on covered assets is greater than the actual realized losses. The "true-up" payment is calculated using a defined formula set forth in the P&A Agreement.

        In connection with the FNB Transaction, the Bank acquired loans both with and without evidence of credit quality deterioration since origination. Based on purchase date valuations, the banking segment's portfolio of acquired covered loans had a fair value of $1.1 billion as of the Bank Closing Date, with no carryover of any allowance for loan losses.

        Covered loans held for investment at December 31, 2013 are detailed in the table below and classified by portfolio segment (in thousands).

 
  Loans, excluding
PCI Loans
  PCI
Loans
  Total
Loans
 

Commercial and industrial

  $ 28,533   $ 38,410   $ 66,943  

Real estate

    223,304     564,678     787,982  

Construction and land development

    25,376     126,068     151,444  

Consumer

             
               

Covered loans, gross

    277,213     729,156     1,006,369  

Allowance for loan losses

    (179 )   (882 )   (1,061 )
               

Covered loans, net of allowance

  $ 277,034   $ 728,274   $ 1,005,308  
               
               

        At December 31, 2013, the banking segment had covered loan concentrations (loans to borrowers engaged in similar activities) that exceeded 10% of total covered loans in its real estate portfolio. The areas of concentration within our covered real estate portfolio were construction and land development loans, non-construction residential real estate loans, and non-construction commercial real estate loans. At December 31, 2013, construction and land development loans, non-construction residential real estate loans, and non-construction commercial real estate loans were 21.98%, 28.63% and 36.67%, respectively, of the banking segment's total covered loans. The banking segment's covered loan concentrations were within regulatory requirements at December 31, 2013.

        The following table provides information regarding the maturities of the banking segment's non-covered and covered commercial and real estate loans held for investment, net of unearned income (in thousands).

 
  December 31, 2013  
 
  Due Within
One Year
  Due From One
To Five Years
  Due After
Five Years
  Total  

Commercial and industrial

  $ 1,928,236   $ 413,160   $ 98,996   $ 2,440,392  

Real estate (including construction and land development)

    437,650     903,358     1,421,425     2,762,433  
                   

Total

  $ 2,365,886   $ 1,316,518   $ 1,520,421   $ 5,202,825  
                   
                   

Fixed rate loans

  $ 2,169,850   $ 1,243,462   $ 1,332,608   $ 4,745,920  

Floating rate loans

    196,036     73,056     187,813     456,905  
                   

Total

  $ 2,365,886   $ 1,316,518   $ 1,520,421   $ 5,202,825  
                   
                   

162


Table of Contents

        In the table above, floating rate loans that have reached their applicable rate floor or ceiling are classified as fixed rate loans rather than floating rate loans. The majority of floating rate loans carry an interest rate tied to The Wall Street Journal Prime Rate, as published in The Wall Street Journal.

        The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management's best estimate of probable losses inherent in our existing non-covered and covered loan portfolios. Our management has responsibility for determining the level of the allowance for loan losses, subject to review by the Audit Committee of our board of directors and the Loan Review Committee of the Bank's board of directors.

        It is our management's responsibility at the end of each quarter, or more frequently as deemed necessary, to analyze the level of the allowance for loan losses to ensure that it is appropriate for the estimated credit losses in the portfolio consistent with the Interagency Policy Statement on the Allowance for Loan and Lease Losses and the Receivables and Contingencies Topics of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"). Estimated credit losses are the probable current amount of loans that we will be unable to collect given facts and circumstances as of the evaluation date. When management determines that a loan, or portion thereof, is uncollectible, the loan, or portion thereof, is charged-off against the allowance for loan losses, or for acquired loans accounted for in pools, charged against the pool discount. Recoveries on charge-offs that occurred prior to the PlainsCapital Merger represent contractual cash flows not expected to be collected and are recorded as accretion income. Recoveries on loans charged-off subsequent to the PlainsCapital Merger are credited to the allowance for loan loss, except for recoveries on loans accounted for in pools, which are credited to the pool discount.

        We have developed a methodology that seeks to determine an allowance within the scope of the Receivables and Contingencies Topics of the ASC. Each of the loans that has been determined to be impaired is within the scope of the Receivables Topic. Impaired loans that are equal to or greater than $0.5 million are individually evaluated for impairment using one of three impairment measurement methods as of the evaluation date: (1) the present value of expected future discounted cash flows on the loan, (2) the loan's observable market price, or (3) the fair value of the collateral if the loan is collateral dependent. Specific reserves are provided in our estimate of the allowance based on the measurement of impairment under these three methods, except for collateral dependent loans, which require the fair value method. All non-impaired loans are within the scope of the Contingencies Topic. Estimates of loss for the Contingencies Topic are calculated based on historical loss experience by collateral type adjusted for changes in trends, conditions, and other relevant factors that affect repayment of loans as of the evaluation date. While historical loss experience provides a reasonable starting point for the analysis, historical losses, or recent trends in losses, are not the sole basis upon which to determine the appropriate level for the allowance for loan losses. Management considers recent qualitative or environmental factors that are likely to cause estimated credit losses associated with the existing portfolio to differ from historical loss experience, including but not limited to: changes in lending policies and procedures; changes in underwriting standards; changes in economic and business conditions and developments that affect the collectability of the portfolio; the condition of various market segments; changes in the nature and volume of the portfolio and in the terms of loans; changes in lending management and staff; changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans; changes in the loan review system; changes in the value of underlying collateral for collateral-dependent loans; and any concentrations of credit and changes in the level of such concentrations.

        We design our loan review program to identify and monitor problem loans by maintaining a credit grading process, requiring that timely and appropriate changes are made to reviewed loans and coordinating the delivery of the information necessary to assess the appropriateness of the allowance

163


Table of Contents

for loan losses. Loans are evaluated for impaired status when: (i) payments on the loan are delayed, typically by 90 days or more (unless the loan is both well secured and in the process of collection), (ii) the loan becomes classified, (iii) the loan is being reviewed in the normal course of the loan review scope, or (iv) the loan is identified by the servicing officer as a problem. We review on an individual basis all loan relationships over $0.5 million that exhibit probable or observed credit weaknesses, the top 25 loan relationships by dollar amount in each market we serve, and additional relationships necessary to achieve adequate coverage of our various lending markets.

        Homogeneous loans, such as consumer installment loans, residential mortgage loans and home equity loans, are not individually reviewed and are generally risk graded at the same levels. The risk grade and reserves are established for each homogeneous pool of loans based on the expected net charge-offs from current trends in delinquencies, losses or historical experience and general economic conditions. At December 31, 2013, we had no material delinquencies in these types of loans.

        The allowance is subject to regulatory examination and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance. While we believe we have an appropriate allowance for our existing non-covered and covered portfolios at December 31, 2013, additional provisions for losses on existing loans may be necessary in the future. Within our non-covered portfolio, we recorded net charge-offs in the amount of $6.3 million and $0.4 million for the year ended December 31, 2013 and the month ended December 31, 2012, respectively. Our allowance for non-covered loan losses totaled $33.2 million and $3.4 million at December 31, 2013 and 2012, respectively. The ratio of the allowance for non-covered loan losses to total non-covered loans held for investment at December 31, 2013 and 2012 was 0.95% and 0.11%, respectively.

        In connection with the PlainsCapital Merger and the FNB Transaction, we acquired loans both with and without evidence of credit quality deterioration since origination. PCI loans acquired in the PlainsCapital Merger are accounted for on an individual loan basis, while PCI loans acquired in the FNB Transaction are accounted for in pools as well as on an individual loan basis. We have established under our PCI accounting policy a framework to aggregate certain acquired loans into various loan pools based on a minimum of two layers of common risk characteristics for the purpose of determining their respective fair values as of their acquisition dates, and for applying the subsequent recognition and measurement provisions for income accretion and impairment testing. The common risk characteristics used for the pooling of the FNB PCI loans are risk grade and loan collateral type. The acquired loans were initially recorded at fair value with no carryover of any allowance for loan losses. Our allowance for covered loan losses totaled $1.1 million at December 31, 2013.

        Provisions for loan losses are charged to operations to record the total allowance for loan losses at a level deemed appropriate by the banking segment's management based on such factors as the volume and type of lending it conducted, the amount of non-performing loans and related collateral security, the present level of the allowance for loan losses, the results of recent regulatory examinations, generally accepted accounting principles, general economic conditions and other factors related to the ability to collect loans in its portfolio. The provision for loan losses, primarily in the banking segment, was $37.2 million and $3.8 million for the year ended December 31, 2013 and the month ended December 31, 2012, respectively.

        The following tables present the activity in our allowance for loan losses within our non-covered and covered loan portfolios for the periods presented (in thousands). Substantially all of the activity

164


Table of Contents

shown below occurred within the banking segment, which was acquired as a part of the PlainsCapital Merger.

Non-Covered Portfolio
  Year Ended
December 31,
2013
  Month Ended
December 31,
2012
 

Balance, beginning of period

  $ 3,409   $  

Provisions charged to operating expenses

    36,093     3,800  

Recoveries of non-covered loans previously charged off:

             

Commercial and industrial

    3,439      

Real estate

    282      

Construction and land development

    265      

Consumer

    61      
           

Total recoveries

    4,047      
           

Non-covered loans charged off:

             

Commercial and industrial

    9,359     391  

Real estate

    209      

Construction and land development

    524      

Consumer

    216      
           

Total charge-offs

    10,308     391  
           

Net charge-offs

    (6,261 )   (391 )
           

Balance, end of period

  $ 33,241   $ 3,409  
           
           

 

Covered Portfolio
  Year Ended
December 31,
2013
 

Balance, beginning of period

  $  

Provisions charged to operating expenses

    1,065  

Recoveries of covered loans previously charged off:

       

Commercial and industrial

     

Real estate

     

Construction and land development

     

Consumer

     
       

Total recoveries

     
       

Covered loans charged off:

       

Commercial and industrial

    4  

Real estate

     

Construction and land development

     

Consumer

     
       

Total charge-offs

    4  
       

Net charge-offs

    (4 )
       

Balance, end of period

  $ 1,061  
       
       

165


Table of Contents

        The distribution of the allowance for loan losses among loan types and the percentage of the loans for that type to gross loans, excluding unearned income, within our non-covered and covered loan portfolios are presented in the table below (dollars in thousands).

 
  December 31,  
 
  2013   2012  
Non-Covered Portfolio
  Reserve   % of
Gross
Non-Covered
Loans
  Reserve   % of
Gross
Non-Covered
Loans
 

Commercial and industrial

  $ 16,865     46.58 % $ 1,845     52.67 %

Real estate (including construction and land development)

    16,288     51.84 %   1,559     46.48 %

Consumer

    88     1.58 %   5     0.85 %
                   

Total

  $ 33,241     100.00 % $ 3,409     100.00 %
                   
                   

 

 
  December 31, 2013  
Covered Portfolio
  Reserve   % of
Gross
Covered
Loans
 

Commercial and industrial

  $ 1,053     6.65 %

Real estate (including construction and land development)

    8     93.35 %

Consumer

        0.00 %
           

Total

  $ 1,061     100.00 %
           
           

        Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor's potential operating or financial difficulties. Management monitors these loans and reviews their performance on a regular basis. Potential problem loans contain potential weaknesses that could improve, persist or further deteriorate. If such potential weaknesses persist without improving, the loan is subject to downgrade, typically to substandard, in three to six months. Within our non-covered loan portfolio at December 31, 2013, we had ten credit relationships totaling $24.7 million of potential problem loans, which are assigned a grade of special mention within our risk grading matrix. At December 31, 2012, we had four credit relationships totaling $2.7 million of non-covered potential problem loans.

166


Table of Contents

        The following table presents components of Hilltop's non-covered non-performing assets (dollars in thousands).

 
  December 31,  
 
  2013   2012  

Non-covered loans accounted for on a non-accrual basis:

             

Commercial and industrial

  $ 16,730   $  

Real estate

    6,511     1,756  

Construction and land development

    112      

Consumer

         
           

  $ 23,353   $ 1,756  
           
           

Non-covered non-performing loans as a percentage of total non-covered loans

    0.51 %   0.04 %
           
           

Non-covered other real estate owned

  $ 4,805   $ 11,098  
           
           

Other repossessed assets

  $ 13   $ 557  
           
           

Non-covered non-performing assets

  $ 28,171   $ 13,411  
           
           

Non-covered non-performing assets as a percentage of total assets

    0.32 %   0.18 %
           
           

Non-covered loans past due 90 days or more and still accruing

  $ 534   $ 2,000  
           
           

Troubled debt restructurings included in accruing non-covered loans

  $ 1,055   $  
           
           

        At December 31, 2013, total non-covered non-performing assets increased $14.8 million to $28.2 million, compared with $13.4 million at December 31, 2012, primarily due to an increase in non-covered non-accrual PCI loans of $15.8 million. Non-covered non-performing loans totaled $23.4 million at December 31, 2013 and $1.8 million at December 31, 2012. At December 31, 2013, non-covered non-accrual loans included five commercial and industrial relationships with loans totaling $14.0 million secured by accounts receivable, inventory, aircraft and life insurance, and a total of $1.0 million in lease financing receivables. Non-covered non-accrual loans at December 31, 2013 also included $6.5 million characterized as real estate loans, including three commercial real estate loan relationships totaling $2.5 million and loans secured by residential real estate totaling $3.5 million, substantially all of which were classified as loans held for sale, as well as construction and land development loans of $0.1 million. At December 31, 2012, non-covered non-accrual loans of $1.8 million included real estate loans secured by residential real estate and classified as loans held for sale.

        Non-covered OREO decreased $6.3 million to $4.8 million at December 31, 2013, compared with $11.1 million at December 31, 2012. The decrease was primarily due to the disposal of two properties totaling $5.7 million. At December 31, 2013, non-covered OREO included commercial properties of $4.2 million, commercial real estate property consisting of parcels of unimproved land of $0.5 million and residential lots under development of $0.1 million. At December 31, 2012, non-covered OREO included commercial properties of $6.8 million, commercial real estate property consisting of parcels of unimproved land of $3.1 million and residential lots under development of $1.2 million.

        At December 31, 2013, troubled debt restructurings ("TDRs") granted on non-covered loans totaled $11.4 million. These TDRs were comprised of $1.1 million of non-covered PCI loans that are considered to be performing due to the application of the accretion method and non-covered non-performing loans of $10.3 million for which discount accretion has been suspended. There were no troubled debt restructurings granted on non-covered loans at December 31, 2012.

167


Table of Contents

        Non-covered loans past due 90 days or more and still accruing totaled $0.5 million and $2.0 million at December 31, 2013 and 2012, respectively, and included secured commercial and industrial loans, and a real estate loan.

        The following table presents components of our covered non-performing assets (dollars in thousands).

Covered Portfolio
   
 

Covered loans accounted for on a non-accrual basis:

       

Commercial and industrial

  $ 973  

Real estate

    249  

Construction and land development

    575  

Consumer

     
       

  $ 1,797  
       
       

Covered non-performing loans as a percentage of total covered loans

    0.18 %
       
       

Covered other real estate owned

  $ 142,833  
       
       

Other repossessed assets

  $  
       
       

Covered non-performing assets

  $ 144,630  
       
       

Covered non-performing assets as a percentage of total assets

    1.62 %
       
       

Covered loans past due 90 days or more and still accruing

  $  
       
       

Troubled debt restructurings included in accruing covered loans

  $  
       
       

        At December 31, 2013, covered non-performing assets totaled $144.6 million. Covered non-performing loans of $1.8 million at December 31, 2013 included one commercial and industrial relationship with loans totaling $1.0 million secured by accounts receivable, inventory and equipment. Covered non-accrual loans at December 31, 2013 also included one commercial real estate loan relationship totaling $0.2 million, as well as construction and land development loans of $0.6 million.

        OREO acquired in the FNB Transaction that is subject to the FDIC loss-share agreements is referred to as "covered OREO" and reported separately in our consolidated balance sheets. At December 31, 2013, covered OREO was $142.8 million and included commercial properties of $90.5 million, commercial real estate property consisting of parcels of unimproved land of $21.4 million and residential lots under development of $30.9 million.

        At December 31, 2013 and 2012, our reserves for unpaid losses and LAE were $27.5 million and $34.0 million, respectively. The liability for insurance losses and LAE represents estimates of the ultimate unpaid cost of all losses incurred, including losses for claims that have not yet been reported. Separately for each of NLIC and ASIC and each line of business, our actuaries estimate the liability for unpaid losses and LAE by first estimating ultimate losses and LAE amounts for each year, prior to recognizing the impact of reinsurance.

        Insured losses for a given accident year change in value over time as additional information on claims is received, as claim conditions change and as new claims are reported. This process is commonly referred to as loss development. To project ultimate losses and LAE, our actuaries examine the paid and reported losses and LAE for each accident year and multiply these values by a loss development factor. The selected loss development factors are based upon a review of the loss development patterns indicated in the companies' historical loss triangles and applicable insurance industry loss development factors.

168


Table of Contents

        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.

        The banking segment's major source of funds and liquidity is its deposit base. Deposits provide funding for its investment in loans and securities. Interest paid for deposits must be managed carefully to control the level of interest expense and overall net interest margin. The composition of the deposit base (time deposits versus interest-bearing demand deposits and savings) is constantly changing due to the banking segment's needs and market conditions. Overall, average deposits totaled $5.3 billion for the year ended December 31, 2013, an increase from average deposits of $4.6 billion for the month ended December 31, 2012. The table below presents the average balance of deposits and the average rate paid on those deposits (dollars in thousands).

 
  Year Ended
December 31, 2013
  Month Ended
December 31, 2012
 
 
  Average
Balance
  Average
Rate Paid
  Average
Balance
  Average
Rate Paid
 

Noninterest-bearing demand deposits

  $ 1,370,029     0.00 % $ 1,321,011     0.00 %

Interest-bearing demand deposits

    1,930,622     0.24 %   1,700,265     0.25 %

Savings deposits

    247,789     0.32 %   177,803     0.32 %

Certificates of deposit

    1,745,483     0.54 %   1,355,435     0.53 %
                       

  $ 5,293,923     0.28 % $ 4,554,514     0.26 %
                       
                       

        The maturity of interest-bearing time deposits of $100,000 or more at December 31, 2013 is set forth in the table below (in thousands).

Months to maturity:

       

3 months or less

  $ 453,642  

3 months to 6 months

    272,461  

6 months to 12 months

    492,140  

Over 12 months

    456,146  
       

  $ 1,674,389  
       
       

        The banking segment experienced growth of $693.1 million in interest-bearing time deposits of $100,000 or more at December 31, 2013 compared with December 31, 2012, primarily due to those deposits assumed as a part of the FNB Transaction. At December 31, 2013, there were $1.7 billion in interest-bearing time deposits scheduled to mature within one year.

169


Table of Contents

        Our borrowings are shown in the table below (dollars in thousands).

 
  December 31,  
 
  2013   2012  
 
  Balance   Average
Rate Paid
  Balance   Average
Rate Paid
 

Short-term borrowings

  $ 342,087     0.36 % $ 728,250     0.33 %

Notes payable

    56,327     6.33 %   141,539     5.89 %

Junior subordinated debentures

    67,012     3.59 %   67,012     3.53 %
                       

  $ 465,426     2.10 % $ 936,801     1.40 %
                       
                       

        Short-term borrowings consist of federal funds purchased, securities sold under agreements to repurchase, borrowings at the Federal Home Loan Bank ("FHLB") and short-term bank loans. The $386.2 million decrease in short-term borrowings at December 31, 2013 compared with December 31, 2012 included decreases of $250.0 million in borrowings at the FHLB and $132.4 million in federal funds purchased. These decreases were primarily the result of lower funding requirements due to a reduction in our mortgage origination segment's balance on its warehouse line of credit with the Bank. Notes payable at December 31, 2013 of $56.3 million is comprised of insurance segment term notes and nonrecourse notes owed by First Southwest. The $85.2 million decrease in notes payable at December 31, 2013 compared to December 31, 2012 was primarily due to the Notes at OP, a wholly owned subsidiary of Hilltop, being called for redemption on October 15, 2013.

        Hilltop is a financial holding company whose assets primarily consist of the stock of its subsidiaries and invested assets. Hilltop's primary investment objectives, as a holding company, are to preserve capital and have available cash resources to utilize in making acquisitions. At June 30, 2014, Hilltop had approximately $158 million in freely available cash and cash equivalents. If necessary or appropriate, we may also finance acquisitions with the proceeds from equity or debt issuances. The current short-term liquidity needs of Hilltop include operating expenses, dividends on preferred stock and the cash consideration associated with the SWS Merger.

        On March 31, 2014, we entered into a definitive merger agreement with SWS providing for the merger of SWS with and into a subsidiary of Hilltop formed for the purpose of facilitating this transaction (see "The Merger Agreement" included elsewhere in this proxy statement/prospectus). Under the terms of the merger agreement, SWS stockholders will receive per share consideration of 0.2496 shares of Hilltop common stock and $1.94 of cash, equating to $7.25 per share based on Hilltop's closing price on June 30, 2014. The value of the merger consideration will fluctuate with the market price of Hilltop's common stock. We intend to fund the cash portion of the consideration, currently estimated at approximately $78 million in the aggregate, through available cash. The merger is subject to customary closing conditions, including regulatory approvals and approval of the stockholders of SWS, and is expected to be completed prior to the end of 2014.

        On October 15, 2013, OP called for redemption all of its outstanding Notes on November 14, 2013 (the "Redemption Date"). At October 15, 2013, OP had $90.9 million in aggregate principal amount of Notes outstanding, including $6.9 million aggregate principal amount held by our insurance company subsidiaries. The Notes were redeemed at a redemption price equal to the principal amount of the Notes, plus accrued and unpaid interest up to, but excluding, the Redemption Date. At any time prior to the Redemption Date, holders of the Notes could exchange the Notes for shares of Hilltop common stock at the rate of 73.94998 shares per $1,000 principal amount of the Notes (or approximately $13.52 per share). In lieu of delivery of Hilltop common stock upon the exercise of a holder of its exchange

170


Table of Contents

right, OP could elect to pay such holder of the Notes an amount in cash (or a combination of Hilltop common stock and cash) in respect of all or a portion of such holder's Notes equal to the closing price of Hilltop's common stock for the five consecutive trading days commencing on and including the third business day following the exercise of such exchange right. As of the closing of the redemption, the Notes held by third party investors were exchanged for 6,208,005 shares of Hilltop common stock and an aggregate cash payment of $11.1 million was made in exchange for the Notes held by our insurance company subsidiaries.

        During September 2013, Hilltop and PlainsCapital contributed capital of $35.0 million and $25.0 million, respectively, to the Bank to provide additional capital in connection with the FNB Transaction.

        As a result of the PlainsCapital Merger, the outstanding shares of PlainsCapital Corporation's Non-Cumulative Perpetual Preferred Stock, Series C, all of which were held by the U.S. Treasury, were converted on a one-for-one basis into shares of Hilltop Series B Preferred Stock. The terms of our Series B Preferred Stock provide for the payment of non-cumulative dividends on a quarterly basis. The dividend rate, as a percentage of the liquidation amount, fluctuated until December 31, 2013 based upon changes in the level of "qualified small business lending" ("QSBL") by the Bank. The shares of Hilltop Series B Preferred Stock are senior to shares of our common stock with respect to dividends and liquidation preference, and qualify as Tier 1 Capital for regulatory purposes. At each of March 31, 2014, December 31, 2013 and December 31, 2012, $114.1 million of Hilltop's Series B Preferred Stock was outstanding. During the three months ended March 31, 2014, we accrued dividends of $1.4 million on the Hilltop Series B Preferred Stock.

        The dividend rate on the Hilltop Series B Preferred Stock was 4.706% for the three months ended December 31, 2013. From January 1, 2014 until March 26, 2016, the dividend rate is fixed at 5.0% based upon Hilltop's level of QSBL at September 30, 2013. Beginning March 27, 2016, the dividend rate on any outstanding shares of Hilltop Series B Preferred Stock will be fixed at nine percent (9%) per annum.

        In connection with the FNB Transaction, the Bank entered into two loss-share agreements with the FDIC that collectively cover $1.2 billion of loans and OREO acquired in the FNB Transaction, which we refer to as "covered assets". Pursuant to the loss-share agreements, the FDIC has agreed to reimburse the Bank the following amounts with respect to the covered assets: (i) 80% of losses on the first $240.4 million of losses incurred; (ii) 0% of losses in excess of $240.4 million up to and including $365.7 million of losses incurred; and (iii) 80% of losses in excess of $365.7 million of losses incurred. The Bank has also agreed to reimburse the FDIC for any subsequent recoveries. The loss-share agreements for commercial and single family residential loans are in effect for 5 years and 10 years, respectively, from the Bank Closing Date and the loss recovery provisions to the FDIC are in effect for 8 years and 10 years, respectively, from the Bank Closing Date. In accordance with the loss-share agreements, the Bank may be required to make a "true-up" payment to the FDIC, approximately ten years following the Bank Closing Date, if the FDIC's initial estimate of losses on covered assets is greater than the actual realized losses. The "true-up" payment is calculated using a defined formula set forth in the P&A Agreement.

        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

171


Table of Contents

guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

        At June 30, 2014, Hilltop exceeded all regulatory capital requirements with a total capital to risk weighted assets ratio of 18.79%, Tier 1 capital to risk weighted assets ratio of 18.11% and a Tier 1 capital to average assets, or leverage, ratio of 13.51%. At June 30, 2014, the Bank was also considered to be "well-capitalized" under regulatory requirements without giving effect to the final Basel III capital rules adopted by the Federal Reserve Board on July 2, 2013. We discuss regulatory capital requirements in more detail in Note 14 to our unaudited consolidated financial statements also included in this proxy statement/prospectus.

        Cash and cash equivalents (consisting of cash and due from banks and federal funds sold), totaled $688.8 million at June 30, 2014, a decrease of $57.2 million from $746.0 million at December 31, 2013. Cash and cash equivalents totaled $746.0 million at December 31, 2013, an increase of $19.6 million from $726.5 million at December 31, 2012. Deposit flows, calls of investment securities and borrowed funds, and prepayments of loans and mortgage-backed securities are strongly influenced by interest rates, general and local economic conditions and competition in the marketplace. These factors reduce the predictability of the timing of these sources of funds.

        Cash used in operations during the six months ended June 30, 2014 was $291.7 million, a decrease in cash flow of $306.4 million compared with the same period in 2013, and was primarily due to reductions in cash provided by our mortgage loan origination activities. Cash provided by operations during 2013 of $396.7 million increased by $281.5 million compared with 2012 primarily due to the PlainsCapital Merger on November 30, 2012 and inclusion of operating activities of the banking, mortgage origination and financial advisory segments for the year ended December 31, 2013 compared with the month ended December 31, 2012.

        Cash provided by our investment activities during the six months ended June 30, 2014 was $40.6 million, including $68.6 million from net changes in loans and $38.3 million from sales of premises and equipment and other real estate owned, partially offset by net cash paid for FHLB and FRB stock of $31.4 million, net purchases of premises and equipment and other assets of $19.8 million and net purchases of securities in our investment portfolio of $15.0 million. Cash used in our investment activities during the six months ended June 30, 2013 of $206.3 million primarily included net purchases of securities for investment of $127.5 million, $51.0 million for the origination of loans held for investment and net cash paid for FHLB and FRB stock of $21.2 million. The increase in cash provided by investing activities during the six months ended June 30, 2014, compared to the same period in 2013, was primarily due to reduced net purchases of securities driven by market conditions.

        Cash provided by Hilltop's investment activities during 2013 was $223.9 million, including $362.7 million in net cash from the FNB Transaction and net proceeds from securities in Hilltop's investment portfolio of $8.9 million, partially offset by $140.4 million for the origination of loans held for investment and net purchases of premises and equipment and other assets of $11.9 million. During 2012, cash provided by Hilltop's investment activities was $12.9 million and primarily included $165.7 million in net cash from the PlainsCapital Merger, offset by $147.4 million in net purchases of securities for investment.

        Cash provided by financing activities during the six months ended June 30, 2014 was $193.9 million, an increase in cash provided of $102.7 million compared with the same period in 2013. The increase in cash provided by financing activities was due primarily to a greater increase in short-term borrowings during the six months ended June 30, 2014, offset by a greater decrease in deposits during the six months ended June 30, 2014, compared with the same period in 2013. Cash used in financing activities during 2013 was $601.1 million, an increase in cash used of $620.9 million

172


Table of Contents

compared with 2012. The increase in cash during 2013 used was due primarily to the PlainsCapital Merger on November 30, 2012 and the inclusion of financing activities of the banking segment for the year ended December 31, 2013 compared with the month ended December 31, 2012.

        Within our banking segment, liquidity refers to the measure of our ability to meet our customers' short-term and long-term deposit withdrawals and anticipated and unanticipated increases in loan demand without penalizing earnings. Interest rate sensitivity involves the relationships between rate-sensitive assets and liabilities and is an indication of the probable effects of interest rate fluctuations on our net interest income.

        Our asset and liability group is responsible for continuously monitoring our liquidity position to ensure that assets and liabilities are managed in a manner that will meet our short-term and long-term cash requirements. Funds invested in short-term marketable instruments, the continuous maturing of other interest-earning assets, cash flows from self-liquidating investments such as mortgage-backed securities and collateralized mortgage obligations, the possible sale of available for sale securities, and the ability to securitize certain types of loans provide sources of liquidity from an asset perspective. The liability base provides sources of liquidity through deposits and the maturity structure of short-term borrowed funds. For short-term liquidity needs, we utilize federal fund lines of credit with correspondent banks, securities sold under agreements to repurchase, borrowings from the Federal Reserve and borrowings under lines of credit with other financial institutions. For intermediate liquidity needs, we utilize advances from the FHLB. To supply liquidity over the longer term, we have access to brokered certificates of deposit, term loans at the FHLB and borrowings under lines of credit with other financial institutions.

        We had deposits of $6.2 billion at June 30, 2014, a decrease of $567.6 million from $6.7 billion at December 31, 2013. This decrease is primarily due to seasonal factors related to our customers' requirements to satisfy year-end tax obligations and our strategic decision to offer lower renewal rates on certain time deposits acquired in the FNB Transaction that conform to the legacy PlainsCapital Bank interest rate structure. Deposits at December 31, 2013 increased by $2.0 billion from $4.7 billion at December 31, 2012, primarily due to the inclusion of $2.2 billion of deposits assumed as a part of the FNB Transaction. Deposit flows are affected by the level of market interest rates, the interest rates and products offered by competitors, the volatility of equity markets and other factors.

        At June 30, 2014, money market deposits, including brokered deposits, were $959.4 million; time deposits, including brokered deposits, were $1.9 billion; and noninterest bearing demand deposits were $1.8 billion. Money market deposits, including brokered deposits, decreased by $195.9 million from $1.2 billion and time deposits, including brokered deposits, decreased $419.9 million from $2.3 billion at December 31, 2013.

        At December 31, 2013, money market deposits, including brokered deposits, were $1.2 billion; time deposits, including brokered deposits, were $2.3 billion, and noninterest bearing demand deposits were $1.8 billion. Money market deposits, including brokered deposits, increased by $264.3 million from $891.0 million and time deposits, including brokered deposits, increased $910.7 million from $1.4 billion at December 31, 2012.

        The Bank's 15 largest depositors, excluding Hilltop and First Southwest, accounted for 13.26% of the Bank's total deposits, and the Bank's five largest depositors, excluding First Southwest, accounted for 8.63% of the Bank's total deposits at June 30, 2014. The loss of one or more of our largest Bank customers, or a significant decline in our deposit balances due to ordinary course fluctuations related to these customers' businesses, could adversely affect our liquidity and might require us to raise deposit rates to attract new deposits, purchase federal funds or borrow funds on a short-term basis to replace such deposits. We have not experienced any liquidity issues to date with respect to brokered deposits or our other large balance deposits, and we believe alternative sources of funding are available to more than compensate for the loss of one or more of these customers.

173


Table of Contents

        PrimeLending funds the mortgage loans it originates through a warehouse line of credit of up to $1.5 billion maintained with the Bank. At June 30, 2014 and December 31, 2013, PrimeLending had outstanding borrowings of $1.3 billion and $1.0 billion, respectively, against the warehouse line of credit. PrimeLending sells substantially all mortgage loans it originates to various investors in the secondary market, the majority with servicing released. As these mortgage loans are sold in the secondary market, PrimeLending pays down its warehouse line of credit with the Bank. In addition, PrimeLending has an available line of credit with JPMorgan Chase Bank, NA ("JPMorgan Chase") of up to $1.0 million. At both June 30, 2014 and December 31, 2013, PrimeLending had no borrowings under the JPMorgan Chase line of credit.

        Our insurance operating subsidiary's primary investment objectives is to preserve capital and manage for a total rate of return. NLC's strategy is to purchase securities in sectors that represent the most attractive relative value. Bonds, cash and short-term investments of $210.4 million, or 91.6%, equity investments of $13.9 million and other investments of $5.5 million comprised NLC's $229.8 million in total cash and investments at June 30, 2014. At December 31, 2013, bonds, cash and short-term investments of $196.6 million, or 91.5%, equity investments of $13.1 million and other investments of $5.3 million comprised NLC's $215.0 million in total cash and investments. NLC does not currently have any significant concentration in both direct and indirect guarantor exposure or any investments in subprime mortgages. NLC has custodial agreements with Wells Fargo and an investment management agreement with DTF Holdings, LLC.

        FSC relies on its equity capital, short-term bank borrowings, interest-bearing and non-interest-bearing client credit balances, correspondent deposits, securities lending arrangements, repurchase agreement financings and other payables to finance its assets and operations. FSC has credit arrangements with four unaffiliated banks of up to $305.0 million, which are used to finance securities owned, securities held for correspondent accounts, receivables in customer margin accounts and underwriting activities. These credit arrangements are provided on an "as offered" basis and are not committed lines of credit. At June 30, 2014 and December 31, 2013, FSC had borrowed $102.0 million and $97.4 million, respectively, under these credit arrangements.

        The following table presents information regarding our contractual obligations at December 31, 2013 (in thousands). Our reserve for losses and loss adjustment expenses does not have a contractual maturity date. However, based on historical payment patterns, the amounts presented are management's estimate of the expected timing of these payments. The timing of payments is subject to significant uncertainty. NLC maintains a portfolio of investments with varying maturities to provide adequate cash flows for such payments. Payments related to leases are based on actual payments specified in the underlying contracts. Payments related to short-term borrowings and long-term debt obligations include the estimated contractual interest payments under the respective agreements.

 
  Payments Due by Period  
 
  1 year
or Less
  More than
1 Year but
Less than
3 Years
  3 Years or
More but
Less than
5 Years
  5 Years
or More
  Total  

Reserve for losses and loss adjustment expenses

  $ 15,904   $ 9,120   $ 2,308   $ 136   $ 27,468  

Short-term borrowings

    343,604                 343,604  

Long-term debt obligations

    6,965     9,395     10,053     259,560     285,973  

Capital lease obligations

    1,080     2,193     2,296     9,514     15,083  

Operating lease obligations

    25,541     39,311     23,241     30,041     118,134  
                       

Total

  $ 393,094   $ 60,019   $ 37,898   $ 299,251   $ 790,262  
                       
                       

174


Table of Contents

        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.

        In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets.

        We enter into contractual loan commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon customers maintaining specific credit standards until the time of loan funding. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. We assess the credit risk associated with certain commitments to extend credit and have recorded a liability related to such credit risk in our consolidated financial statements.

        Standby letters of credit are written conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek recovery from the customer. Our policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.

        In the aggregate, the Bank had outstanding unused commitments to extend credit of $1.2 billion and $1.1 billion at June 30, 2014 and December 31, 2013, respectively, and outstanding financial and performance standby letters of credit of $40.6 million and $42.2 million at June 30, 2014 and December 31, 2013, respectively.

        In the normal course of business, FSC executes, settles and finances various securities transactions that may expose FSC to off-balance sheet risk in the event that a customer or counterparty does not fulfill its contractual obligations. Examples of such transactions include the sale of securities not yet purchased by customers or for the account of FSC, clearing agreements between FSC and various clearinghouses and broker-dealers, secured financing arrangements that involve pledged securities, and when-issued underwriting and purchase commitments.

        Our accounting policies are fundamental to understanding our management's discussion and analysis of our results of operations and financial condition. Our significant accounting policies are

175


Table of Contents

presented in Note 1 to our audited consolidated financial statements, which are included in this proxy statement/prospectus. We have identified certain significant accounting policies which involve a higher degree of judgment and complexity in making certain estimates and assumptions that affect amounts reported in our consolidated financial statements. The significant accounting policies which we believe to be the most critical in preparing our consolidated financial statements relate to Allowance for Loan Losses, FDIC Indemnification Asset, Reserve for Losses and Loss Adjustment Expenses, Goodwill and Identifiable Intangible Assets, Loan Indemnification Liability, Mortgage Servicing Rights and Acquisition Accounting.

        The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. Loans are charged to the allowance when the loss is confirmed or when a determination is made that a probable loss has occurred on a specific loan. Recoveries are credited to the allowance at the time of recovery. Throughout the year, management estimates the probable level of losses to determine whether the allowance for credit losses is appropriate to absorb losses in the existing portfolio. Based on these estimates, an amount is charged to the provision for loan losses and credited to the allowance for loan losses in order to adjust the allowance to a level determined to be appropriate to absorb losses. Management's judgment regarding the appropriateness of the allowance for loan losses involves the consideration of current economic conditions and their estimated effects on specific borrowers; an evaluation of the existing relationships among loans, potential loan losses and the present level of the allowance; results of examinations of the loan portfolio by regulatory agencies; and management's internal review of the loan portfolio. In determining the ability to collect certain loans, management also considers the fair value of any underlying collateral. The amount ultimately realized may differ from the carrying value of these assets because of economic, operating or other conditions beyond our control. For additional discussion of allowance for loan losses and provisions for loan losses, see the section entitled "Allowance for Loan Losses" earlier in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

        We have elected to account for the FDIC Indemnification Asset in accordance with FASB ASC 805. The FDIC Indemnification Asset is initially recorded at fair value, based on the discounted value of expected future cash flows under the loss-share agreements. The difference between the present value and the undiscounted cash flows we expect to collect from the FDIC will be accreted into noninterest income within the consolidated statements of operations over the life of the FDIC Indemnification Asset. The FDIC Indemnification Asset is reviewed quarterly and adjusted for any changes in expected cash flows based on recent performance and expectations for future performance of the covered portfolio. These adjustments are measured on the same basis as the related covered loans and covered OREO. Any increases in cash flow of the covered assets over those expected will reduce the FDIC Indemnification Asset, and any decreases in cash flow of the covered assets under those expected will increase the FDIC Indemnification Asset. Any amortization of changes in value is limited to the contractual terms of the loss-share agreements. Increases and decreases to the FDIC Indemnification Asset are recorded as adjustments to noninterest income within the consolidated statements of operations over the life of the loss-share agreements.

        The reserve for losses and loss adjustment expenses represents our best estimate of our ultimate liability for losses and loss adjustment expenses relating to events that occurred prior to the end of any given accounting period but have not been paid. Months and potentially years may elapse between the occurrence of a loss covered by one of our insurance policies, the reporting of the loss and the

176


Table of Contents

payment of the claim. We record a liability for estimates of losses that will be paid for claims that have been reported, which is referred to as case reserves. As claims are not always reported when they occur, we estimate liabilities for claims that have occurred but have not been reported, or IBNR.

        Each of our insurance company subsidiaries establishes a reserve for all of its unpaid losses, including case reserves and IBNR reserves, and estimates for the cost to settle the claims. We estimate our IBNR reserves by estimating our ultimate liability for loss and loss adjustment expense reserves first, and then reducing that amount by the amount of cumulative paid claims and by the amount of our case reserves. The reserve analysis performed by our actuaries provides preliminary central estimates of the unpaid losses and LAE. At each quarter-end, the results of the reserve analysis are summarized and discussed with our senior management. The senior management group considers many factors in determining the amount of reserves to record for financial statement purposes. These factors include the extent and timing of any recent catastrophic events, historical pattern and volatility of the actuarial indications, the sensitivity of the actuarial indications to changes in paid and reported loss patterns, the consistency of claims handling processes, the consistency of case reserving practices, changes in our pricing and underwriting, and overall pricing and underwriting trends in the insurance market. As experience develops or new information becomes known, we increase or decrease the level of our reserves in the period in which changes to the estimates are determined. Accordingly, the actual losses and loss adjustment expenses may differ materially from the estimates we have recorded. See "Insurance Losses and Loss Adjustment Expenses" earlier in this Item 7 for additional discussion.

        Goodwill and other identifiable intangible assets were initially recorded at their estimated fair values at the date of acquisition. Goodwill and other intangible assets having an indefinite useful life are not amortized for financial statement purposes. In the event that facts and circumstances indicate that the goodwill and other identifiable intangible assets may be impaired, an interim impairment test would be required. Intangible assets with finite lives have been fully amortized over their useful lives. We perform required annual impairment tests of our goodwill and other intangible assets as of October 1st for our reporting units.

        The goodwill impairment test is a two-step process that requires us to make judgments in determining what assumptions to use in the calculation. The first step of the process consists of estimating the fair value of each reporting unit based on valuation techniques, including a discounted cash flow model using revenue and profit forecasts and recent industry transaction and trading multiples of our peers, and comparing those estimated fair values with the carrying values of the assets and liabilities of the reporting unit, which includes the allocated goodwill. If the estimated fair value is less than the carrying value, a second step is performed to compute the amount of the impairment, if any, by determining an "implied fair value" of goodwill. The determination of the "implied fair value" of goodwill of a reporting unit requires us to allocate the estimated fair value of the reporting unit to the assets and liabilities of the reporting unit. Any unallocated fair value represents the "implied fair value" of goodwill, which is compared to its corresponding carrying value.

        Our evaluation includes multiple assumptions, including estimated discounted cash flows and other estimates that may change over time. If future discounted cash flows become less than those projected by us, future impairment charges may become necessary that could have a materially adverse impact on our results of operations and financial condition in the period in which the write-off occurs.

        The mortgage origination segment may be responsible for errors or omissions relating to its representations and warranties that the loans sold meet certain requirements, including representations as to underwriting standards and the validity of certain borrower representations in connection with the

177


Table of Contents

loan. If determined to be at fault, the mortgage origination segment either repurchases the loans from the investors or reimburses the investors' losses (a "make-whole" payment). The mortgage origination segment has established an indemnification liability for such probable losses based upon, among other things, the level of current unresolved repurchase requests, the volume of estimated probable future repurchase requests, our ability to cure the defects identified in the repurchase requests, and the severity of the estimated loss upon repurchase. Although we consider this reserve to be appropriate, there can be no assurance that the reserve will prove to be appropriate overtime to cover ultimate losses, due to unanticipated adverse changes in the economy and historical loss patterns, discrete events adversely affecting specific borrowers or industries, and/or actions taken by institutions or investors. The impact of such matters will be considered in the reserving process when known.

        The Company measures its residential mortgage servicing assets using the fair value method. Under the fair value method, the mortgage servicing rights ("MSRs") are carried in the balance sheet at fair value and the changes in fair value are reported in earnings within other noninterest income in the period in which the change occurs. Retained MSRs are measured at fair value as of the date of sale of the related mortgage loan. Subsequent fair value measurements are determined using a discounted cash flow model. In order to determine the fair value of the MSRs, the present value of expected future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income.

        The model assumptions and the MSRs fair value estimates are compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys, as available. The expected life of the loan can vary from management's estimates due to prepayments by borrowers, especially when rates fall. Prepayments in excess of management's estimates would negatively impact the recorded value of the MSRs. The value of the MSRs is also dependent upon the discount rate used in the model, which is based on current market rates. Management reviews this rate on an ongoing basis based on current market rates. A significant increase in the discount rate would reduce the value of the MSRs.

        We account for business combinations using the acquisition method, which requires an allocation of the purchase price of an acquired entity to the assets acquired, including identifiable intangibles, and liabilities assumed based on their estimated fair values at the date of acquisition. Management applies various valuation methodologies to these acquired assets and assumed liabilities which often involve a significant degree of judgment, particularly when liquid markets do not exist for the particular item being valued. Examples of such items include loans, deposits, identifiable intangible assets and certain other assets and liabilities acquired or assumed in business combinations. Management uses significant estimates and assumptions to value such items, including, among others, projected cash flows, prepayment and default assumptions, discount rates, and realizable collateral values. The purchase date valuations, which are considered preliminary and are subject to change for up to one year after the acquisition date, determine the amount of goodwill or bargain purchase gain recognized in connection with the business combination. While we are in the process of finalizing our purchase price allocation, significant changes are not anticipated. Certain assumptions and estimates must be updated regularly in connection with the ongoing accounting for purchased loans. Valuation assumptions and estimates may also have to be revisited in connection with periodic assessments of possible value impairment, including impairment of goodwill, intangible assets and certain other long-lived assets. The use of different assumptions could produce significantly different valuation results, which could have material positive or negative effects on the Company's results of operations.

178


Table of Contents


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 June 30, 2014 and December 31, 2013, total notes payable outstanding on our consolidated balance sheets was $55.6 million and $56.3 million, respectively, and was comprised entirely of indebtedness subject to variable interest rates. If LIBOR and the prime rate were to increase by one eighth of one percent (0.125%), the increase in interest expense on the variable rate debt would not have a significant impact on our future consolidated earnings or cash flows.

        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

179


Table of Contents

also maturing or repricing within that time period. During a period of rising interest rates, a negative GAP would tend to affect net interest income adversely, while a positive GAP would tend to result in an increase in net interest income. During a period of falling interest rates, a negative GAP would tend to result in an increase in net interest income, while a positive GAP would tend to affect net interest income adversely. However, it is our intent to remain relatively balanced so that changes in rates do not have a significant impact on earnings.

        As illustrated in the tables 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).

 
  June 30, 2014  
 
  3 Months or
Less
  > 3 Months to
1 Year
  > 1 Year to
3 Years
  > 3 Years to
5 Years
  > 5 Years   Total  

Interest sensitive assets:

                                     

Loans

  $ 3,197,277   $ 624,873   $ 721,139   $ 284,195   $ 671,708   $ 5,499,192  

Securities

    563,121     155,138     111,599     39,106     191,563     1,060,527  

Federal funds sold and securities purchased under agreements to resell

    14,813                     14,813  

Other interest sensitive assets

    341,181                     341,181  
                           

Total interest sensitive assets

    4,116,392     780,011     832,738     323,301     863,271     6,915,713  

Interest sensitive liabilities:

   
 
   
 
   
 
   
 
   
 
   
 
 

Interest bearing checking

  $ 2,203,098   $   $   $   $   $ 2,203,098  

Savings

    259,540                     259,540  

Time deposits

    588,856     875,132     276,967     130,068     14,353     1,885,376  

Notes payable & other borrowings

    1,004,440     75,488     1,389     745     5,290     1,087,352  
                           

Total interest sensitive liabilities

    4,055,934     950,620     278,356     130,813     19,643     5,435,366  
                           

Interest sensitivity gap

  $ 60,458   $ (170,609 ) $ 554,382   $ 192,488   $ 843,628   $ 1,480,347  
                           
                           

Cumulative interest sensitivity gap

  $ 60,458   $ (110,151 ) $ 444,231   $ 636,719   $ 1,480,347        
                             
                             

Percentage of cumulative gap to total interest sensitive assets

    0.87 %   -1.59 %   6.42 %   9.21 %   21.41 %      

        The positive GAP in the interest rate analysis indicates that banking segment net interest income would generally rise if rates increase. Because of inherent limitations in interest rate GAP analysis, the banking segment uses multiple interest rate risk measurement techniques. Simulation analysis is used to subject the current repricing conditions to rising and falling interest rates in increments and decrements of 1%, 2% and 3% to determine the effect on net interest income changes for the next twelve months. The banking segment also measures the effects of changes in interest rates on market value of equity by discounting projected cash flows of deposits and loans. Market value changes in the investment portfolio are estimated by discounting future cash flows and using duration analysis. Investment security prepayments are estimated using current market information. We believe the simulation analysis

180


Table of Contents

presents a more accurate picture than the GAP analysis. Simulation analysis recognizes that deposit products may not react to changes in interest rates as quickly or with the same magnitude as earning assets contractually tied to a market rate index. The sensitivity to changes in market rates varies across deposit products. Also, unlike GAP analysis, simulation analysis takes into account the effect of embedded options in the securities and loan portfolios as well as any off-balance-sheet derivatives.

        The table below shows the estimated impact of increases of 1%, 2% and 3% and a decrease of 0.5% in interest rates on net interest income and on economic value of equity for the banking segment at June 30, 2014 (dollars in thousands).

 
  Changes in
Net Interest Income
  Changes in
Economic Value of
Equity
 
Change in
Interest Rates
(basis points)
 
  Amount   Percent   Amount   Percent  
+300   $ (3,821 )   -1.51 % $ (73,215 )   -5.95 %
+200   $ (12,028 )   -4.75 % $ (61,258 )   -4.98 %
+100   $ (14,390 )   -5.68 % $ (24,987 )   -2.03 %

-50  

  $ 1,026     0.40 % $ 15,910     1.29 %

        The projected changes in net interest income and market value of equity to changes in interest rates at June 30, 2014 were in compliance with established internal policy guidelines. These projected changes are based on numerous assumptions of growth and changes in the mix of assets or liabilities.

        The historically low level of interest rates, combined with the existence of rate floors that are in effect for a significant portion of the loan portfolio, are projected to cause yields on our earning assets to rise more slowly than increases in market interest rates. As a result, in a rising interest rate environment, our interest rate margins are projected to compress until the rise in market interest rates is sufficient to allow our loan portfolio to reprice above applicable rate floors.

        Within our mortgage origination segment, our principal market exposure is to interest rate risk due to the impact on our mortgage-related assets and commitments, including mortgage loans held for sale, IRLCs and MSR. Changes in interest rates could also materially and adversely affect our volume of mortgage loan originations.

        IRLCs represent an agreement to extend credit to a mortgage loan applicant, whereby the interest rate on the loan is set prior to funding. Our mortgage loans held for sale, which we hold in inventory while awaiting sale into the secondary market, and our IRLCs are subject to the effects of changes in mortgage interest rates from the date of the commitment through the sale of the loan into the secondary market. As a result, we are exposed to interest rate risk and related price risk during the period from the date of the lock commitment until (i) the lock commitment cancellation or expiration date or (ii) the date of sale into the secondary mortgage market. Loan commitments generally range from 20 to 60 days, and our average holding period of the mortgage loan from funding to sale is approximately 30 days. An integral component of our interest rate risk management strategy is our execution of forward commitments to sell mortgage-backed securities to minimize the impact on earnings resulting from significant fluctuations in the fair value of mortgage loans held for sale and IRLCs caused by changes in interest rates.

        We have recently expanded, and may continue to expand, our residential mortgage servicing operations within our mortgage origination segment. As a result of our mortgage servicing business, we have a portfolio of MSRs. One of the principal risks associated with MSRs is that in a declining interest rate environment, they will likely lose a substantial portion of their value as a result of higher than anticipated prepayments. Moreover, if prepayments are greater than expected, the cash we receive over the life of the mortgage loans would be reduced. In the future, we may use various derivative

181


Table of Contents

financial instruments to provide a level of protection against such interest rate risk. However, no hedging strategy can protect us completely, and hedging strategies may fail because they are improperly designed, improperly executed and documented or based on inaccurate assumptions and, as a result, could actually increase our risks and losses. The increasing size of our MSR portfolio may increase our interest rate risk and correspondingly, the volatility of our earnings, especially if we cannot adequately hedge the interest rate risk relating to our MSRs.

        The goal of our interest rate risk management strategy within our mortgage origination segment is not to eliminate interest rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, we have established policies and procedures, which include guidelines on the amount of exposure to interest rate changes we are willing to accept.

        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.

        Our financial advisory segment is exposed to market risk primarily due to its role as a financial intermediary in customer transactions, which may include purchases and sales of securities, use of derivatives and securities lending activities.

        Our financial advisory segment is exposed to interest rate risk as a result of maintaining inventories of interest rate sensitive financial instruments and other interest earning assets including customer and correspondent margin loans and securities borrowing activities. Our exposure to interest rate risk is also from our funding sources including customer and correspondent cash balances, bank borrowings, repurchase agreements and securities lending activities. Interest rates on customer and correspondent balances and securities produce a positive spread with rates generally fluctuating in parallel.

        With respect to securities held, our interest rate risk is managed by setting and monitoring limits on the size and duration of positions and on the length of time securities can be held. Much of the interest rates on customer and correspondent margin loans are indexed and can vary daily. Our funding sources are generally short term with interest rates that can vary daily.

        Derivatives are used to support certain customer programs and hedge our related exposure to interest rate risks.

        Our financial advisory segment is engaged in various brokerage and trading activities that expose us to credit risk arising from potential non-performance from counterparties, customers or issuers of securities. This risk is managed by setting and monitoring position limits for each counterparty, conducting periodic credit reviews of counterparties, reviewing concentrations of securities and conducting business through central clearing organizations.

182


Table of Contents

        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.


Financial Statements and Supplementary Data.

        Hilltop's financial statements and the financial statements of FNB are submitted as a separate section of this proxy statement/prospectus. See "Financial Statements," commencing on page F-1 hereof.


Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

        None.


Directors, Executive Officers and Corporate Governance.

Directors

        Set forth below is a brief biography of each of the current members of Hilltop's board of directors.

Charlotte Jones Anderson
Age 48
  Ms. Anderson has served as a director of Hilltop since our acquisition of PlainsCapital in November 2012. She previously served as a director of PlainsCapital from September 2009 to November 2012. She currently serves as Executive Vice President, Brand Management and President of Charities for the Dallas Cowboys Football Club, Ltd., a National Football League team. She has worked in various capacities for the Dallas Cowboys organization since 1990. A native of Little Rock, Arkansas, Ms. Anderson is a graduate of Stanford University where she earned a Bachelor of Science degree in Human Biology. Ms. Anderson is actively involved with a number of charitable and philanthropic organizations, including The Boys and Girls Clubs of America (regional trustee), the Salvation Army (chairman of board of directors), The Rise School (board of directors), the Southwest Medical Foundation (board of directors), the Dallas Symphony (board of directors), and the President's Advisory Counsel for The Dallas Center for Performing Arts Foundation.

Rhodes R. Bobbitt
Age 69

 

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.

183


Table of Contents

Tracy A. Bolt
Age 50
  Mr. Bolt has served as a director of Hilltop since our acquisition of PlainsCapital in November 2012. He previously served as a director of PlainsCapital from September 2009 to November 2012. In 1994, Mr. Bolt co-founded Hartman Leito & Bolt, LLP, an accounting and consulting firm based in Fort Worth, Texas, where he serves as a partner and is a member of the firm's leadership committees. Mr. Bolt holds a Bachelor of Science and Master of Science from the University of North Texas, and he is a certified public accountant. He currently serves as a business advisor to numerous management teams, public and private company boards, not for profit organizations and trusts.

W. Joris Brinkerhoff
Age 62

 

Mr. Brinkerhoff has served as a director of Hilltop since June 2005. Mr. Brinkerhoff founded a Native American-owned joint venture, Doyon Drilling Inc. J.V., in 1981 and served as its operations Chief Executive Officer and Chief Financial Officer until selling his venture interests in 1992. Doyon Drilling Inc. J.V. designed, built, leased and operated state of the art mobile drilling rigs for ARCO and British Petroleum in conjunction with their development of the North Slope Alaska petroleum fields. Mr. Brinkerhoff currently manages, on a full-time basis, family interests, including oil and gas production, a securities portfolio and various other business interests. He actively participates in numerous philanthropic organizations.

Charles R. Cummings
Age 78

 

Mr. Cummings has served as a director of Hilltop since October 2005. Mr. Cummings currently serves as the Co-Manager of Acoustical Control LLC, a provider of noise abatement primarily for the oil and gas industry; DQB Solutions, LLC, a service provider to the waste industry; and Argyle Equipment, LLC, a lessor of equipment to the waste industry. In addition, Mr. Cummings is the President and Chief Executive Officer of CB Resources LLC, an investor in the oil and natural gas industry, and Container Investments, LLC, a lessor of equipment to the waste industry, each of which positions he has held since 1999 and 1991, respectively. Until its sale in January 2014, he served as the Chairman of Aaren Scientific, Inc., a manufacturer of intraocular lenses used in cataract surgery. From 1998 through 2008, he was the Chairman and Chief Executive Officer of Aaren Scientific, Inc. and its predecessors. In 1994, Mr. Cummings co-founded I.E.S.I. Corporation, a regional, non-hazardous waste management company, and serving as a director until its sale in 2005. Prior to that, he served as a Managing Director of AEA Investors,  Inc., a private investment firm. Prior to 1979, he was a partner with Arthur Young & Company.

184


Table of Contents

Hill A. Feinberg
Age 67
  Mr. Feinberg has served as Chairman and Chief Executive Officer of First Southwest since 1991. He has also served as a director of Hilltop since our acquisition of PlainsCapital in November 2012. He previously served as a director of PlainsCapital from December 31, 2008 (in conjunction with PlainsCapital's acquisition of First Southwest) to November 2012. Prior to joining First Southwest, Mr. Feinberg was a senior managing director at Bear Stearns & Co. Mr. Feinberg is a past chairman of the Municipal Securities Rulemaking Board, the self-regulatory organization with responsibility for authoring the rules that govern the municipal securities activities of registered brokers. Mr. Feinberg also is a member of the board of directors of Energy XXI (Bermuda) Limited, a public company. Mr. Feinberg also formerly served as a member of the board of directors of Compass Bancshares, Inc. and Texas Regional Bancshares, Inc., as an advisory director of Hall Phoenix Energy, LLC and as the non-executive chairman of the board of directors of General Cryogenics, Inc.

Gerald J. Ford
Age 70

 

Mr. Ford has served as Chairman of the Board of Hilltop since August 2007, and has served as a director of Hilltop since June 2005. Mr. Ford served as interim Chief Executive Officer of Hilltop from January 1, 2010 until March 11, 2010. Mr. Ford is a banking and financial institutions entrepreneur who has been involved in numerous mergers and acquisitions of private and public sector financial institutions, primarily in the Southwestern United States, over the past 35 years. In that capacity, he acquired and consolidated 30 commercial banks from 1975 to 1993, forming First United Bank Group, Inc., a multi-bank holding company for which he functioned as Chairman of the Board and Chief Executive Officer until its sale in 1994. During this period, he also led investment consortiums that acquired numerous financial institutions, forming in succession, First Gibraltar Bank, FSB, First Madison Bank, FSB and First Nationwide Bank. Mr. Ford also served as Chairman of the Board of Directors and Chief Executive Officer of Golden State Bancorp Inc. and its subsidiary, California Federal Bank, FSB, from 1998 to 2002. He currently serves on the boards of directors of Freeport McMoRan Copper and Gold Inc., SWS and Scientific Games Corporation. Mr. Ford previously served as Chairman of Pacific Capital Bancorp and a director of First Acceptance Corporation, McMoRan Exploration Co. and Triad Financial Corporation. Mr. Ford also currently serves on the Board of Trustees of Southern Methodist University, is the Co-Managing Partner of Ford Financial Fund II, L.P., a private equity fund. Hilltop's President and Chief Executive Officer, Jeremy B. Ford, is the son of Mr. Ford, and Hilltop's Executive Vice President, General Counsel and Secretary, Corey G. Prestidge, is the son-in-law of Mr. Ford.

185


Table of Contents

Jeremy B. Ford
Age 40
  Mr. Jeremy B. Ford has served as President, Chief Executive Officer and a director of Hilltop since March 2010. Mr. Jeremy B. Ford worked in the financial services industry for over thirteen years, primarily focused on investments in, and acquisitions of, depository institutions and insurance and finance companies. He also is one of the individuals who provided services to Hilltop under the prior Management Services Agreement with Diamond A Administration Company, LLC. Accordingly, he was actively involved in numerous potential acquisitions for Hilltop prior to 2010, and the divestiture of the mobile home communities business in 2007. Mr. Jeremy B. Ford also is currently Chairman of the Board of First Acceptance Corporation. Prior to becoming President and Chief Executive Officer of Hilltop, he was a principal of Ford Financial Fund, L.P., a private equity fund. From 2004 to 2008, he worked for Diamond A-Ford Corporation, where he was involved in various investments made by a family limited partnership. Prior to that, he worked at Liberté Investors Inc. (now First Acceptance Corporation), California Federal Bank, FSB (now Citigroup Inc.), and Salomon Smith Barney (now Citigroup Inc.). Jeremy Ford is the son of Gerald J. Ford, Hilltop's Chairman of the Board, and the brother-in-law of Corey G. Prestidge, Hilltop's Executive Vice President, General Counsel and Secretary.

J. Markham Green
Age 71

 

Mr. Green has served as a director of Hilltop since February 2004. Mr. Green is a private investor. From 2001 to 2003, he served as Vice Chairman of the Financial Institutions and Governments Group in investment banking at JP Morgan Chase. From 1993 until joining JP Morgan Chase, Mr. Green was involved in the start-up, and served on the boards, of eight companies, including Affordable Residential Communities Inc., the predecessor company to Hilltop Holdings Inc. From 1973 to 1992, Mr. Green served in various capacities at Goldman, Sachs & Co. in investment banking. He was a general partner of Goldman, Sachs & Co. and co-head of its Financial Services Industry Group. Mr. Green is a member of the board of directors of MENTOR/The National Mentoring Partnership. Mr. Green previously served as Chairman of the Board of PowerOne Media LLC.

Jess T. Hay
Age 83

 

Mr. Hay has served as a director of Hilltop since March 2009. Mr. Hay is the retired Chairman and Chief Executive Officer of Lomas Financial Corporation, formerly a diversified financial services company engaged principally in mortgage banking, retail banking, commercial leasing and real estate lending, and of Lomas Mortgage USA, a mortgage banking institution, from which he retired in December 1994. As Chairman and Chief Executive Officer of Lomas Financial Corporation, which included during his tenure, a total of five different corporations listed on the New York Stock Exchange, Mr. Hay has had extensive experience with all of the major functions within the operations of a public company. He was a director of Viad Corp. from 1981 until 2013, and presently is a Director Emeritus. He previously served as a director of Trinity Industries, Inc. from 1965 to 2011, Exxon Mobil from 1982 to 2001, SBC Communications (now AT&T) from 1985 to 2004 and MoneyGram International, Inc. from 2004 to 2010.

186


Table of Contents

William T. Hill, Jr.
Age 72
  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.

James R. Huffines
Age 63

 

Mr. Huffines is the President and Chief Operating Officer of PlainsCapital, a position he has held since November 2010. He has served as a director of Hilltop since our acquisition of PlainsCapital in November 2012. He previously served as a director of PlainsCapital from May 2011 to November 2012. Prior to that, Mr. Huffines served as the Chairman of the Central and South Texas region and a director of PlainsCapital Bank, a position he held since joining PlainsCapital in 2001. Mr. Huffines holds a Bachelor of Business Administration in Finance from the University of Texas. He served on the board of Energy Future Holdings (formerly TXU Corp.), from 2007 until 2012. In addition, Mr. Huffines previously served as Chairman of the University of Texas System Board of Regents for over four and a half years. Mr. Huffines also participates in many community and business organizations, including serving as a board member of the Dallas Citizens Council, Board of Advisors of Dallas Chamber, the Board of Trustees of the Bob Bullock Texas State History Museum Foundation, Vice Chair of the Texas Business Leadership Council, the Executive Committee of the Chancellor's Council at the University of Texas System; and a member of the Texas Philosophical Society.

Lee Lewis
Age 62

 

Mr. Lewis has served as a director of Hilltop since our acquisition of PlainsCapital in November 2012. He previously served as a director of PlainsCapital from 1989 to November 2012. He founded in 1976, and currently serves as the chief executive officer of, Lee Lewis Construction, Inc., a construction firm based in Lubbock, Texas. Mr. Lewis graduated from Texas Tech University and is a member of the American General Contractors Association, West Texas Chapter, the Chancellors Council for the Texas Tech University System, and the Red Raider Club.

187


Table of Contents

Andrew J. Littlefair
Age 53
  Mr. Littlefair has served as a director of Hilltop since our acquisition of PlainsCapital in November 2012. He previously served as a director of PlainsCapital from September 2009 to November 2012. He is a co-founder of Clean Energy Fuels Corp., a provider of compressed and liquefied natural gas in the United States and Canada that is publicly traded on the NASDAQ Global Select Market, and has served as that company's President, Chief Executive Officer and a director since 2001. From 1996 to 2001, Mr. Littlefair served as President of Pickens Fuel Corp., and from 1987 to 1996, he served in various management positions at Mesa, Inc., an energy company. From 1983 to 1987, Mr. Littlefair served in the Reagan Administration as a Staff Assistant to the President. He served as the Chairman of NGV America, the leading U.S. advocacy group for natural gas vehicles, from March 1993 to March 2011. Mr. Littlefair served on the board of directors of Westport Innovations Inc., a Canadian company publicly traded on the NASDAQ Global Market from 2007 to June 2010.

W. Robert Nichols, III
Age 70

 

Mr. Nichols has served as a director of Hilltop since April 2008. Mr. Nichols has been a leader in the construction machinery business since 1966. He was the president of Conley Lott Nichols, a dealer for several manufacturers of construction machinery, until its sale in 2012. In 2013, he purchased an oilfield services company in Midland, Texas, for which he serves as Chairman and President. He has served on numerous bank and bank holding company boards, including United Mexico Bancorp and Ford Bank Group. Mr. Nichols is active in civic and charitable activities, serving as an active director at M.D. Anderson Hospital, The Nature Conservancy of Texas and Mercy Street.

188


Table of Contents

C. Clifton Robinson
Age 76
  Mr. Robinson has served as a director of Hilltop since March 2007. From 2000 until its acquisition by a subsidiary of Hilltop in January 2007, Mr. Robinson was Chairman of the Board and Chief Executive Officer of NLASCO, Inc., an insurance holding company domiciled in Texas. Until December 2012, Mr. Robinson served as Chairman of the Board of NLASCO, Inc. In 2000, Mr. Robinson formed NLASCO, Inc. in conjunction with the acquisition of American Summit Insurance Company and the reacquisition of National Lloyds Insurance Company, which he had initially acquired in 1964 and later sold. In 1979, he organized National Group Corporation for the purpose of purchasing insurance companies and related businesses. In 1964, he became the President and Chief Executive Officer of National Lloyds Insurance Company in Waco, Texas, one of the two current insurance subsidiaries of NLC (formerly known as NLASCO, Inc.). From 1964 to the present, Mr. Robinson has participated in the formation, acquisition and management of numerous insurance business enterprises. Mr. Robinson established the Robinson-Lanham Insurance Agency in 1961. He previously has held positions with various insurance industry associations, including Vice-Chairman of the Board of Texas Life and Health Guaranty Association, President of the Independent Insurance Agents of Waco-McLennan County and member of the board of directors of the Texas Life Insurance Association and the Texas Medical Liability Insurance Underwriting Association. Mr. Robinson currently serves on the Board of Trustees of the Scottish Rite Hospital for Children in Dallas, Texas and the Baylor University Board of Regents.

Kenneth D. Russell
Age 65

 

Mr. Russell has served as a director of Hilltop since August 2010. Mr. Russell is a former member of the managing board of directors for KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft (KPMG DTG). While a member of KPMG DTG, Mr. Russell served in leadership of Audit—Financial Services. Subsequent to his service as a member of the German firm leadership, he functioned as a freelance strategic advisory to KPMG DTG's managing board of directors, working directly with members of its executive committee. He also participated in the integration of the UK and German KPMG firms in the formation of KPMG Europe and headed a partner development program, which focuses on assisting partners in becoming better businessmen, as well as technicians. Prior to joining KPMG DTG, Mr. Russell was the lead financial services partner in the US KPMG LLP's Department of Professional Practice in New York. His responsibilities in the Department of Profession Practice included leading the financial instruments, structured financing and securitization topic teams, and he was one of KPMG's leading consultants on financial instruments, hedging and securitization accounting issues. Prior to joining the Department of Professional Practice at KPMG in 1993, Mr. Russell spent 20 years in KPMG's Dallas office and had engagement responsibilities for several significant regional banking, thrift and other financial services clients. He currently serves as a Financial Advisor with Diamond A Administration Company, LLC, an affiliate of Gerald J. Ford.

189


Table of Contents

A. Haag Sherman
Age 48
  Mr. Sherman has served as a director of Hilltop since our acquisition of PlainsCapital in November 2012. He previously served as a director of PlainsCapital from September 2009 to November 2012. Mr. Sherman co-founded and served in various capacities, including Chief Executive Officer and Chief Investment Officer, at Salient Partners, L.P., an investment firm based in Houston, Texas, from 2002 to 2011. Mr. Sherman serves on the board of directors of The Endowment Fund complex, Salient Absolute Return Fund complex, Salient MLP & Energy Infrastructure Fund (NYSE: SMF) and Blue Dolphin Energy Company (Nasdaq: BDCO). Mr. Sherman is an honors graduate of the University of Texas School of Law and a cum laude graduate of Baylor University. He is a certified public accountant and a member of the State Bar of Texas.

Robert C. Taylor, Jr.
Age 67

 

Mr. Taylor has served as a director of Hilltop since our acquisition of PlainsCapital in November 2012. He previously served as a director of PlainsCapital from 1997 to November 2012. He has been engaged in the wholesale distribution business in Lubbock, Texas since 1971. In February 2009, Mr. Taylor was appointed to serve as Chief Executive Officer for United Supermarkets, LLC, a retail grocery business in Texas since 1915. He also serves on the board of directors of United Supermarkets, LLC. Prior to that appointment, Mr. Taylor served as the Vice President of Manufacturing and Supply Chain for United Supermarkets since 2007. From 2002 to 2007, Mr. Taylor was the President of R.C. Taylor Distributing, Inc., a business engaged in the business of general merchandise, candy and tobacco to retail outlets in West Texas and Eastern New Mexico. Mr. Taylor is a 1971 graduate of Texas Tech University. He is chairman of the Lubbock Downtown Tax Increment Finance Redevelopment Committee and serves on the Texas Tech Chancellors Advisory Board.

190


Table of Contents

Carl B. Webb
Age 64
  Mr. Webb has served as a director of Hilltop since June 2005. From August 2010 until December 2012, Mr. Webb served as the Chief Executive Officer of Pacific Capital Bancorp and as Chairman of the Board and Chief Executive Officer of Santa Barbara Bank & Trust, N.A. He was a Senior Principal of Ford Financial Fund, L.P., a private equity fund that was the parent company of SB Acquisition Company LLC, the majority stockholder of Pacific Capital Bancorp prior to its sale to UnionBanCal Corporation. Mr. Webb also is the Co-Managing Partner of Ford Financial Fund II, L.P., a private equity fund. In addition, Mr. Webb has served as a consultant to Hunter's Glen/Ford, Ltd., a private investment partnership, since November 2002. He served as the Co-Chairman of Triad Financial Corporation, a privately held financial services company, from July 2007 to October 2009, as was the interim President and Chief Executive Officer from August 2005 to June 2007. Previously, Mr. Webb was the President and Chief Operating Officer and a Director of Golden State Bancorp Inc. and its subsidiary, California Federal Bank, FSB, from September 1994 to November 2002. Prior to his affiliation with California Federal Bank, FSB, Mr. Webb was the President and Chief Executive Officer of First Madison Bank, FSB (1993 to 1994) and First Gibraltar Bank, FSB (1988 to 1993), as well as President and a Director of First National Bank at Lubbock (1983 to 1988). Mr. Webb also is a director of Prologis, Inc. He is a former director of Pacific Capital Bancorp, M&F Worldwide Corp., Plum Creek Timber Company and Triad Financial Corporation.

Alan B. White
Age 65

 

Mr. White is one of PlainsCapital's founders. He has served as Chairman and Chief Executive Officer of PlainsCapital since 1987. He has served as a director of Hilltop since our acquisition of PlainsCapital in November 2012 and is the Vice-Chairman of the Board of Directors and the Chairman of Hilltop's Executive Committee. Mr. White received his Bachelors of Business Administration in Finance at Texas Tech University. Mr. White's current charitable and civic service includes serving as a member of the Cotton Bowl Athletic Association Board of Directors, the MD Anderson Cancer Center Living Legend Committee and the Dallas Citizens Council. He was also the founding chairman of the Texas Tech School of Business Chief Executive's Roundtable; the former Chairman of the Texas Tech Board of Regents, the Covenant Health System Board of Trustees, and the Methodist Hospital System Board of Trustees; and a member of the Texas Tech University President's Council and the Texas Hospital Association Board.

191


Table of Contents


Director Compensation

        Members of our Board of Directors who also are full-time employees do not receive any compensation for their service on the Board of Directors or any committee of the Board of Directors. All other directors receive the following compensation for their service on the Board of Directors:

        In addition, members of board committees receive the following additional compensation:

        Members of our Board of Directors may elect to receive their aggregate Board of Directors and board committee compensation:

        Any elections, or changes in elections, by directors regarding the form of compensation to be received may only occur during a "trading window" and only become effective at the "trading window" immediately following such election or change in election. Cash and shares of common stock are paid and issued, respectively, in arrears on a calendar quarterly basis, with no vesting requirements. Customarily, these payments and issuances occur by the 15th day of the month following the applicable calendar quarter-end. The value of the common stock awarded is based upon the average closing price per share of our common stock for the last ten consecutive trading days of the applicable calendar quarter. In lieu of fractional shares of common stock that would otherwise be issuable to directors, we pay cash to the director based upon the value of those fractional shares at the value the shares are awarded to the director. If a director does not serve for the entire calendar quarter, that director is compensated based upon the time of service during the applicable calendar quarter.

        Each member of our Board of Directors is reimbursed for out-of-pocket expenses associated with his service on, and attendance at, Board of Directors or board committee meetings. Other than as described above, members of our Board of Directors receive no additional compensation for their service on the Board of Directors or board committees.

        The NLASCO Political Action Committee, or the PAC, is a separate segregated fund that was formed to make political contributions. To encourage participation in the PAC by eligible participants,

192


Table of Contents

for each contribution made to the PAC by an eligible individual contributor, NLC makes a matching contribution to any Section 501(c)(3) organization of the contributor's choice, dollar for dollar, up to the maximum amount an eligible individual can contribute to the PAC in a given calendar year. Under this program, no contributor to the PAC receives any financial, tax or other tangible benefit or premium from either the recipient charities or us. This program is completely voluntary.

Director Compensation Table for 2013(1)

Name
  Fees earned or
paid in cash
($)
  Stock awards
($)
  Total
($)
 

Charlotte Jones Anderson

    28,031     27,970     56,000  

Rhodes Bobbit

    89,000         89,000  

Tracy A. Bolt

    24     65,976     66,000  

W. Joris Brinkerhoff

    56,000         56,000  

Charles R. Cummings

    131,000         131,000  

Hill A. Feinberg

             

Gerald J. Ford

    50,000         50,000  

Jeremy B. Ford

             

J. Markham Green

    68,000         68,000  

Jess T. Hay

    63,000         63,000  

William T. Hill, Jr. 

    62,000         62,000  

James Huffines

             

Lee Lewis

    54,000         54,000  

Andrew J. Littlefair

    28,541     28,459     57,000  

W. Robert Nichols, III

    66,000         66,000  

C. Clifton Robinson

    50,000         50,000  

Kenneth D. Russell

    50,000         50,000  

A. Haag Sherman

    73,000         73,000  

Robert C. Taylor, Jr. 

    28,031     27,970     56,000  

Carl B. Webb

    36     49,964     50,000  

Alan B. White

             

(1)
Fees earned for services performed in 2013 include annual retainers, meeting fees and chairperson remuneration. Aggregate fees paid to non-employee directors for annual retainers and committee chairmanships were paid quarterly in arrears. Cash was paid in lieu of the issuance of fractional shares. Service for any partial quarter is calculated and paid on the basis of time served during the applicable calendar quarter. Non-employee directors are solely responsible for the payment of taxes payable on remuneration paid by the Company. The number of shares awarded was determined based upon the average closing price per share of our common stock for the last ten consecutive trading days of the calendar quarter during which the stock was earned; however, the dollar value reported in the table for each stock award was determined in accordance with FASB ASC Topic 718.

        As described above, the 2013 stock awards were issued to each non-employee director who elected to receive all or part of his or her director compensation in the form of our common stock, generally within 15 days following each applicable calendar quarter-end. All of our personnel, as well as non-employee directors, are subject to trading restrictions with regard to our common stock, and trading may only occur during a "trading window." Provided that any such party does not possess

193


Table of Contents

material, non-public information about us, this trading period commences on the next trading day following two trading days after the public release of quarterly or annual financial information and continues until the close of business on last day of the month preceding the last month of the next fiscal quarter.

        The following numbers of shares of our common stock were issued to our directors for services performed during 2013:

Name of Director
  Number of
Shares
 

Charlotte Jones Anderson

    1,623  

Tracy A. Bolt

    3,826  

Andrew J. Littlefair

    1,666  

Robert C. Taylor, Jr. 

    1,623  

Carl B. Webb

    2,908  

        Each of the following directors had outstanding the following aggregate numbers of shares of our common stock awarded for services performed on behalf of us from election or appointment through the end of fiscal 2013: For further information about the stockholdings of these directors and our management, see "Information About the Companies—Hilltop—Security Ownership of Hilltop Management" elsewhere in this proxy statement/prospectus.

Name of Director
  Number of
Shares
 

Charlotte Jones Anderson

    1,623  

Tracy A. Bolt

    3,826  

Rhodes Bobbitt

    1,562  

W. Joris Brinkerhoff

    9,943  

Charles R. Cummings

    5,379  

Gerald J. Ford

    2,893  

J. Markham Green

    3,872  

Andrew J. Littlefair

    1,666  

Robert C. Taylor, Jr. 

    1,623  

Carl B. Webb

    35,080  


Board Committees

        Our Board of Directors appoints committees to assist it in carrying out its duties. In particular, committees work on key issues in greater detail than would be practical at a meeting of all the members of the Board of Directors. Each committee reviews the results of its deliberations with the full Board of Directors.

        The standing committees of the Board of Directors currently consist of the Audit Committee, the Compensation Committee, the Executive Committee, the Investment Committee, the Merger and Acquisition Committee, and the Nominating and Corporate Governance Committee. Current copies of the charters for the Audit Committee, the Compensation Committee, and the Nominating and Corporate Governance Committee, as well as our Corporate Governance Guidelines, Code of Ethics and Business Conduct, or the General Code of Ethics and Business Conduct, and Code of Ethics for Chief Executive and Senior Financial Officers, or the Senior Officer Code of Ethics, may be found on our website at ir.hilltop-holdings.com, under the heading "Corporate Information—Governance Documents." Printed versions also are available to any stockholder who requests them by writing to our corporate Secretary at the following address: Hilltop Holdings Inc., 200 Crescent Court, Suite 1330,

194


Table of Contents

Dallas, Texas 75201. 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 following table shows the current membership of, and the 2013 fiscal meeting information for, each of the committees of the Board of Directors.

Name
  Audit
Committee
  Compensation
Committee
  Nominating and
Corporate Governance
Committee
  Investment
Committee
  Merger and
Acquisition
Committee
  Executive
Committee

Charlotte Jones Anderson

         
GRAPHIC
     
GRAPHIC
   

Rhodes Bobbit

     
GRAPHIC
      Chairman  
GRAPHIC
   

Tracy A. Bolt

 
GRAPHIC
             
GRAPHIC
   

W. Joris Brinkerhoff

     
GRAPHIC
               

Charles R. Cummings

  Chairman              
GRAPHIC
   

Hill A. Feinberg

                     
GRAPHIC

Gerald J. Ford

                     
GRAPHIC

Jeremy B. Ford

                     
GRAPHIC

J. Markham Green

 
GRAPHIC
         
GRAPHIC
       

Jess T. Hay

                  Chairman    

William T. Hill, Jr. 

     
GRAPHIC
 
GRAPHIC
     
GRAPHIC
   

James Huffines

                       

Lee Lewis

             
GRAPHIC
       

Andrew J. Littlefair

     
GRAPHIC
               

W. Robert Nichols, III

          Chairman      
GRAPHIC
   

C. Clifton Robinson

                       

Kenneth D. Russell

                       

A. Haag Sherman

      Chairman      
GRAPHIC
       

Robert C. Taylor, Jr. 

         
GRAPHIC
     
GRAPHIC
   

Carl B. Webb

                     
GRAPHIC

Alan B. White

                      Chairman
                         

Meetings in Fiscal 2013

  14   7   3   6   3   5
                         
                         

        We have a standing Audit Committee established within the meaning of Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended, or the Exchange Act. The Audit Committee helps our Board of Directors ensure the integrity of our financial statements, the qualifications and independence of our independent registered public accounting firm and the performance of our internal audit function and independent registered public accounting firm. In furtherance of those matters, the Audit Committee assists in the establishment and maintenance of our internal audit controls, selects, meets with and assists the independent registered public accounting firm, oversees each annual audit and quarterly review and prepares the report that federal securities laws require be included in our annual proxy statement. Mr. Cummings has been designated as Chairman, and Messrs. Green and Bolt are members, of the Audit Committee. Until January 9, 2013, Mr. Bobbitt also served as a member of the Audit Committee. Our Board of Directors has reviewed the education, experience and other qualifications of each member of the Audit Committee. Based upon that review, our Board of Directors has determined that each of Mr. Cummings and Mr. Bolt qualifies as an "audit committee financial expert," as defined by the rules of the SEC, and each member of the Audit Committee is independent in accordance with the listing standards of the NYSE. Currently, none of our Audit Committee members serve on the audit committees of three or more public companies.

195


Table of Contents

        The Compensation Committee reviews and approves the compensation and benefits of our executive officers, administers the Hilltop Holdings Inc. 2012 Annual Incentive Plan, or the Annual Incentive Plan, the Hilltop Holdings Inc. 2003 Equity Incentive Plan, or the 2003 Equity Incentive Plan, and the Hilltop Holdings Inc. 2012 Equity Incentive Plan, or the 2012 Equity Incentive Plan, and produces the annual report on executive compensation for inclusion in our annual proxy statement, which is also included in this proxy statement/prospectus and appears below on page 201. Each member is independent in accordance with the listing standards of the NYSE.

        The Nominating and Corporate Governance Committee's purpose is as follows:

Each member of the Nominating and Corporate Governance Committee is independent in accordance with the listing standards of the NYSE.

        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.

        The purpose of the Merger and Acquisition Committee is to review potential mergers, acquisitions or dispositions of material assets or a material portion of any business proposed by management and to report its findings and conclusions to the Board of Directors. Each member is independent in accordance with the listing standards of the NYSE.

        The Executive Committee, with certain exceptions, has the power and authority of the Board of Directors to manage the affairs of the Company between meetings of the Board of Directors.


Corporate Governance

        We are committed to good corporate governance practices and, as such, we have adopted formal corporate governance guidelines to maintain our effectiveness. The guidelines govern, among other things, board member qualifications, responsibilities, education, management succession and executive sessions. A copy of the corporate governance guidelines may be found at our corporate website at ir.hilltop-holdings.com under the heading "Corporate Information—Governance Documents." A

196


Table of Contents

copy also may be obtained upon request from our corporate Secretary at the following address: Hilltop Holdings Inc., 200 Crescent Court, Suite 1330, Dallas, Texas 75201.

        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.

        Our Board of Directors oversees an enterprise-wide approach to risk management, intended to support the achievement of organizational objectives, including strategic objectives, to improve long-term organizational performance and enhance stockholder value. Our Board of Directors is actively involved in establishing and refining our business strategy, including assessing management's appetite for risk and determining the appropriate level of overall risk for the Company. We may conduct assessments in the future as circumstances warrant.

        While the Board of Directors has the ultimate oversight responsibility for the risk management process, various committees of the Board of Directors also have responsibility for risk management. In particular, the Audit Committee focuses on financial risk, including internal controls, and, from time to time, discusses and evaluates matters of risk, risk assessment and risk management with our management team. The Compensation Committee is responsible for overseeing the management of risk associated with our compensation policies and arrangements. The Nominating and Corporate Governance Committee ensures that the internal rule processes by which we are governed are consistent with prevailing governance practices and applicable laws and regulations. Finally, the Investment Committee ensures that our funds are invested in accordance with policies and limits approved by it. Our Senior Officer Code of Ethics, General Code of Ethics and Business Conduct, committee charters and other governance documents are reviewed by the appropriate committees annually to confirm continued compliance, ensure that the totality of our risk management processes and procedures is appropriately comprehensive and effective and that those processes and procedures reflect established best practices.

        Our Board of Directors conducts an annual survey of its members regarding its performance and reviews the results of the survey with a view to improving efficacy and effectiveness of the Board of Directors. In addition, the full Board of Directors reviews annually the qualifications and effectiveness of the Audit Committee and its members.

        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 our Board of Directors strive to balance a diverse mix of experience, perspective, skill and background with the practical requirement that the Board of Directors will operate collegially, with the common purpose of overseeing our business on behalf of our stockholders. All of our directors possess relevant experience, and each of them approaches the business of the Board of Directors and their responsibilities with great seriousness of purpose. The

197


Table of Contents

following describes, with respect to each director, his or her particular experience, qualifications, attributes and skills that qualify him or her to serve as a director:

Charlotte Jones Anderson

  Ms. Anderson has significant managerial and executive officer experience with large entrepreneurial businesses and provides the Board of Directors the perspective of one of PlainsCapital's significant customers.

Rhodes Bobbitt

 

Mr. Bobbitt has an extensive investment background. This is particularly important given our available cash on hand and the investment portfolios at our subsidiaries.

Tracy A. Bolt

 

Mr. Bolt has significant experience concerning accounting matters that is essential to our Audit Committee's and Board of Directors' oversight responsibilities.

W. Joris Brinkerhoff

 

Mr. Brinkerhoff has participated, and continues to participate, in a number of business interests. Accordingly, he brings knowledge and additional perspectives to our Board of Directors from experiences with those interests.

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

 

Mr. Feinberg has extensive knowledge and experience concerning PlainsCapital's financial advisory segment and the industry in which it operates through his extended period of service to First Southwest.

Gerald J. Ford

 

Mr. Ford has been a financial institutions entrepreneur and private investor involved in numerous mergers and acquisitions of private and public sector financial institutions over the past 35 years. His extensive banking industry experience and educational background provide him with significant knowledge in dealing with financial, accounting and regulatory matters, making him a valuable member of our Board of Directors. In addition, his service on the boards of directors and audit and corporate governance committees of a variety of public companies gives him a deep understanding of the role of the Board of Directors.

Jeremy B. Ford

 

Mr. Jeremy B. Ford's career has focused on mergers and acquisitions in the financial services industry. Accordingly, he has been actively involved in numerous acquisitions, including our acquisitions of NLC (formerly known as NLASCO, Inc.), PlainsCapital Corporation and substantially all of the assets of FNB. His extensive knowledge of our operations makes him a valuable member of our Board of Directors.

J. Markham Green

 

Mr. Green has an extensive background in financial services, as well as board service. His investment banking background also provides our Board of Directors with expertise surrounding acquisitions and investments.

198


Table of Contents

Jess T. Hay

 

Mr. Hay has broad experience in managing and leading significant enterprises in the financial services industry. His service on the boards of other significant companies provides the Board of Directors with additional perspective on the Company's operations. His prior active involvement with the Democratic National Committee also provides him with broad exposure to the political processes on the national, state and local levels.

William T. Hill, Jr.

 

Mr. Hill's experience with legal and compliance matters, along with his management of a large group of highly skilled professionals, have given him considerable knowledge concerning many matters that come before our Board of Directors. Mr. Hill has also served on several civic and charitable boards over the past 35 years, which has given him invaluable experience in corporate governance matters.

James R. Huffines

 

Mr. Huffines' significant banking and managerial experience provide unique insights and experience to our Board of Directors.

Lee Lewis

 

Through his prior service on PlainsCapital's Board of Directors, Mr. Lewis has many years of knowledge of PlainsCapital and the challenges and opportunities that it is presented. The background of Mr. Lewis as a manager of a Texas-based company also provides unique insight to the Board of Directors.

Andrew J. Littlefair

 

Mr. Littlefair has significant experience serving as a chief executive officer and as a director of publicly traded companies and provides the Board of Directors with the perspective of one of PlainsCapital's significant customers.

W. Robert Nichols III

 

Mr. Nichols has broad experience in managing and leading enterprises. This significant experience provides our Board of Directors with additional perspectives on our operations.

C. Clifton Robinson

 

Mr. Robinson possesses particular knowledge and experience in the insurance industry, as we purchased NLC (formerly known as NLASCO, Inc.) from him in 2007. This provides our Board of Directors with expertise in regards to our insurance operations.

Kenneth D. Russell

 

Mr. Russell's extensive background in accounting and operating entities provides valuable insight to our Board of Directors, including merger and acquisition activities.

A. Haag Sherman

 

Mr. Sherman has significant experience concerning investing, legal and accounting matters that is essential to our Board of Director's oversight responsibilities.

Robert C. Taylor, Jr.

 

Through his prior service on PlainsCapital's Board of Directors, Mr. Taylor has many years of knowledge of PlainsCapital and the challenges and opportunities that it is presented. The background of Mr. Taylor as a manager of a Texas-based company also provides unique insight to the Board of Directors.

199


Table of Contents

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.

Alan B. White

 

Mr. White possesses knowledge of our business and industry through his lengthy tenure as PlainsCapital's Chief Executive Officer that aids him in efficiently and effectively identifying and executing our strategic priorities.


Executive Officers

        We have identified the following officers as "executive officers," consistent with the definition of that term as used by the SEC:

Name
  Age   Position
Hill A. Feinberg   67   Chief Executive Officer of First Southwest

Jeremy B. Ford

 

40

 

President, Chief Executive Officer and Director

James R. Huffines

 

63

 

President and Chief Operating Officer of PlainsCapital

John A. Martin

 

66

 

Executive Vice President, Chief Financial Officer of PlainsCapital

Darren E. Parmenter

 

51

 

Executive Vice President—Principal Financial Officer

Corey G. Prestidge

 

40

 

Executive Vice President, General Counsel and Secretary

Todd L. Salmans

 

65

 

Chief Executive Officer of PrimeLending

Jerry L. Schaffner

 

56

 

President and Chief Executive Officer of the Bank

Alan B. White

 

65

 

Chief Executive Officer of PlainsCapital

        Information concerning the business experience of Messrs. Hill A. Feinberg, Jeremy B. Ford, James R. Huffines and Mr. Alan B. White is set forth above under the caption "Directors" on page 183.

        John A. Martin.    Mr. Martin has served as the Executive Vice President and Chief Financial Officer of PlainsCapital since November 2010 and has continued in that position since our acquisition of PlainsCapital in November 2012. Mr. Martin also serves on the board of directors of the Bank, First Southwest and various other subsidiaries of PlainsCapital. Prior to joining PlainsCapital, Mr. Martin most recently served as executive vice president and chief financial officer of Family Bancorp, Inc. and its subsidiary, San Antonio National Bank, from April 2010 until October 2010. Before joining Family Bancorp, from 2009 to 2010, Mr. Martin served as a consultant to community banks, providing strategic planning services. Beginning in 2005, Mr. Martin served as chief financial officer of Texas Regional Bancshares, Inc. and later served as director of financial planning and analysis for BBVA Compass after its acquisition of Texas Regional Bancshares in 2006.

200


Table of Contents

        Darren E. Parmenter.    Mr. Parmenter has served as Executive Vice President—Principal Financial Officer of Hilltop since February 2014 and previously served as Senior Vice President of Finance of Hilltop from June 2007 to February 2014. From January 2000 to June 2007, Mr. Parmenter was with Hilltop's predecessor, Affordable Residential Communities Inc., and served as the Controller of Operations from April 2002 to June 2007. Prior to 2000, Mr. Parmenter was employed by Albertsons Inc., as an Assistant Controller.

        Corey G. Prestidge.    Mr. Prestidge has served as an Executive Vice President of Hilltop since February 2014 and General Counsel and Secretary of Hilltop since January 2008. From November 2005 to January 2008, Mr. Prestidge was the Assistant General Counsel of Mark Cuban Companies. Prior to that, Mr. Prestidge was an associate in the corporate and securities practice group at Jenkens & Gilchrist, a Professional Corporation, which is a former national law firm. Mr. Prestidge is the son-in-law of our Chairman of the Board, Gerald J. Ford, and the brother-in-law of our President and Chief Executive Officer, Jeremy B. Ford.

        Todd L. Salmans.    Mr. Salmans has served as Chief Executive Officer of PrimeLending since January 2011 and has continued in that position since our acquisition of PlainsCapital in November 2012. He also previously held the office of President of PrimeLending until August 2013. As Chief Executive Officer, Mr. Salmans is responsible for the strategic direction and day-to-day management of PrimeLending, including financial performance, compliance, business development, board and strategic partner communications and team development. He also serves as a member of PrimeLending's Board of Directors. Mr. Salmans joined PrimeLending in 2006 as Executive Vice President and Chief Operating Officer, with responsibility over daily operations, loan processing and sales. He was promoted to President in April 2007. Mr. Salmans has over 30 year of experience in the mortgage banking industry. Prior to joining PrimeLending, he served as regional executive vice president of CTX/Centex, regional senior vice president of Chase Manhattan/Chase Home Mortgage Corp., and regional senior vice president of First Union National Bank/First Union Mortgage Corp. Mr. Salmans is currently a board member of the Texas Mortgage Bankers Association.

        Jerry L. Schaffner.    Mr. Schaffner has served as the President and Chief Executive Officer of the Bank since November 2010 and has continued in that position since our acquisition of PlainsCapital in November 2012. He currently serves as a director of the Bank, First Southwest and various other subsidiaries, and previously served as a director of PlainsCapital from 1993 until March 2009. Mr. Schaffner has over 25 years of banking experience and joined PlainsCapital in 1988 as part of its original management group. He received his Bachelor of Business Administration in finance from Texas Tech University. Mr. Schaffner is a licensed Texas real estate broker.


Compensation Discussion and Analysis

        The Compensation Committee (the "Committee") is responsible for establishing, implementing and monitoring adherence with our compensation philosophy. The Committee ensures that the total compensation paid to senior executives is fair, reasonable, competitive, performance-based and aligned with stockholder interests.

Executive Summary

        Year 2013 represented a transformational time for our Company and compensation programs. It was the first year of full integration of PlainsCapital into Hilltop. In support of this significant change, the Committee established a new framework that focused on defined performance objectives. The Committee continues to refine compensation programs to further emphasize pay-for-performance, some of which have already been implemented for 2014.

201


Table of Contents

2013 Highlights

        All of this contributed to a substantial increase in stockholder value as our stock price closed out the year at $23.13 per share, up 71% from the 2012 close of $13.54 per share. Additional detail regarding our results and achievements can be found in our Annual Report on Form 10-K for the year ended December 31, 2013. Furthermore, we believe that we are well positioned to continue positive growth momentum into 2014 and beyond.

Enhanced Compensation Program

        With respect to 2013, the Committee implemented a cash incentive compensation program for all senior executive officers. In that regard, the Committee developed scorecards for each executive, which weighted cash incentive compensation on predefined objectives, including net income. The Committee also awarded long-term incentive compensation in the form of restricted stock that was subject to three-year cliff vesting. This practice was consistent with awards granted at PlainsCapital Corporation prior to the acquisition and was effective during the integration and transition period.

        The most recent equity grants in February 2014 included a combination of performance-based and time-based restricted stock units. The Committee developed a long-term incentive plan whereby half of the equity awards granted to senior executive officers are subject to performance criteria over a three-year period and all awards are subject to a one-year hold period following vesting, subject to certain exceptions. The Committee also further refined the 2014 annual cash incentive compensation program to enhance its objectives. The Committee believes the implementation of these programs has benefited the Company in clearly defining short-term and long-term objectives.

Philosophy and Objectives of Our Executive Compensation Program

        Our compensation program includes the following components: base salary, annual and long-term incentive awards that are linked to performance and the creation of stockholder value and perquisites. In structuring our compensation programs, the Committee selected the particular components and the weight given to those components based upon our strategic objectives. We believe that it is critical to structure the compensation program in such a manner to retain those with the talent, skill and experience necessary for us to realize our strategic objectives.

202


Table of Contents

        With this in mind, the following principles help guide our decisions regarding compensation of our named executive officers:

How We Determine and Assess Executive Compensation Generally

Background

        We completed the acquisition of PlainsCapital Corporation on November 30, 2012, and the compensation of our named executive officers who were employed by PlainsCapital Corporation is therefore largely based upon the compensation they were paid by PlainsCapital Corporation prior to the acquisition. Three of our named executive officers, Messrs. White, Huffines and Schaffner, were employed by PlainsCapital Corporation or its subsidiaries prior to the acquisition, and each had an employment agreement. In connection with the acquisition of PlainsCapital Corporation, we entered into retention agreements with Messrs. White and Schaffner to ensure continuity following the closing. All other existing employment arrangements at PlainsCapital Corporation were amended to terminate on November 30, 2014. For a more detailed discussion of these employment contracts, see "—Employment Contracts and Incentive Plans—Employment Contracts" commencing on page 216.

        Messrs. Ford and Parmenter do not have employment agreements and their compensation was largely discretionary prior to 2013.

Role of the Compensation Committee

        The Committee is responsible for reviewing and approving all aspects of the compensation programs for our named executive officers and making all decisions regarding specific compensation to be paid or awarded to them. The Committee is responsible for, among its other duties, the following:

203


Table of Contents

        The Committee is responsible for determining all aspects of compensation of the Chief Executive Officers of Hilltop and PlainsCapital, as well as assessing their individual performance.

        In setting the compensation of our named executive officers, the Committee, in its discretion, considers (i) the transferability of managerial skills, (ii) the relevance of each named executive officer's experience to other potential employees, and (iii) the readiness of the named executive officer to assume a different or more significant role, either within our organization or with another organization. When making pay-related decisions, the Committee also has considered our specific circumstances and the associated difficulties with attraction, retention and motivation of talent and the importance of compensation in supporting achievement of our strategic objectives.

        Information about the Committee and its composition, responsibilities and operations can be found under "Board Committees" beginning on page 194.

Role of the Chief Executive Officers in Compensation Decisions

        The Chief Executive Officers of Hilltop and PlainsCapital Corporation recommend to the Committee any compensation changes affecting the other named executive officers. The Chief Executive Officers provide input and recommendations to the Committee with regards to compensation decisions for their direct reports. These recommendations are made within the framework of the compensation programs approved by the Committee and based on market data provided by the Committee's independent consultant. The input includes base salary changes, annual incentive and long-term incentive opportunities, specific individual performance objectives, and individual performance assessments. The Chief Executive Officers make their recommendations based on their assessment of the individual officer's performance, performance of the officer's respective business or function and employee retention considerations. The Committee reviews and considers the Chief Executive Officers' recommendations when determining any compensation changes affecting our officers or executives. Each Chief Executive Officer does not play any role with respect to any matter impacting his own compensation.

Role of Stockholder Say-on-Pay Votes

        The Company provides its stockholders with the opportunity to cast an annual advisory vote on executive compensation. At the Company's annual meeting of stockholders held in June 2013, 78% of the votes cast (excluding abstentions and broker non-votes) on the say-on-pay proposal at that meeting were voted in favor of the proposal. Following such vote, the Committee has made significant enhancements to the short-term and long-term programs during 2013 to further focus on pay-for-performance. Highlights of the compensation program for fiscal 2014 are included in this Compensation, Discussion & Analysis in order to assist stockholders in evaluating the additional changes the Committee has implemented. Accordingly, the Committee will continue to consider the outcome of the Company's say-on-pay votes when making future compensation decisions for the named executive officers. A vote on the frequency of advisory votes on executive compensation will be submitted to stockholders at the 2015 annual meeting of stockholders.

Role of Compensation Consultant

        Pursuant to its charter, the Committee is authorized to retain and terminate any consultant, as well as to approve the consultant's fees and other terms of the engagement. The Committee also has the authority to obtain advice and assistance from internal or external legal, accounting or other advisors. In January 2013, the Committee engaged Pearl Meyer & Partners ("Pearl Meyer") as its compensation consultant. The Committee had not engaged a compensation consultant during any of the previous five

204


Table of Contents

years. In June 2013, the lead consultant with Pearl Meyer transferred to Meridian Compensation Partners, LLC ("Meridian"), and the Committee unanimously agreed to transfer its relationship to Meridian. The Committee believed that it was important to retain that lead consultant in order to complete the work already in progress. Meridian had also previously been the compensation consultant for PlainsCapital Corporation prior to its acquisition by Hilltop. Meridian does not provide any other services to management.

        Meridian provides research, data analyses, survey information and design expertise in developing compensation programs for executives and incentive programs for eligible employees. In addition, Meridian keeps the Committee apprised of regulatory developments and market trends related to executive compensation practices. Meridian does not determine or recommend the exact amount or form of executive compensation for any of the named executive officers. A representative of Meridian generally attends meetings of the Committee, is available to participate in executive sessions and communicates directly with the Committee.

        Pursuant to the Committee's charter, if the Committee elects to use a compensation consultant, the consultant must be independent. The Committee assesses independence taking into account the following factors:

        Meridian has provided the Committee with appropriate assurances and confirmation of its independent status pursuant to the charter and other factors. The Committee believes that Meridian has been independent throughout its service for the Committee and there is no conflict of interest between Meridian and the Committee.

Other Factors

        The Committee makes executive compensation decisions following a review and discussion of both the financial and operational performance of our businesses and the annual performance reviews of the named executive officers and other members of the management team.

Benchmarking Compensation

        During 2013, the Committee consulted with Meridian to assess the competitiveness and effectiveness of our executive compensation program. In December 2013, Meridian provided an analysis of base salary, short-term incentive, long-term incentive and benefit practices of comparable companies in the financial industry. Meridian considered individual compensation elements, as well as the total compensation package, and assessed the relationship of pay to performance.

        In performing this analysis, Meridian used a peer group of financial institutions, which was reviewed and approved by the Committee. The peer group included institutions of generally similar asset size and, to the extent possible, organizations with significant other operating segments. At the time the peer group was selected, our Company was positioned at the 55th percentile of the peer group in terms of total assets, with asset size ranging from $3.2 billion to $13.1 billion (approximately one-half

205


Table of Contents

to two times the size of our Company). The peer group used in the report presented for consideration consisted of the following financial institutions:

1st Source Corporation   BancFirst Corporation   Banner Corporation
Capital Bank Financial Corp.   Community Trust Bancorp, Inc.   First Financial Bankshares, Inc.
First Financial Holdings, Inc.   First Midwest Bancorp, Inc.   IBERIABANK Corporation
International Banchares Corp.   MB Financial, Inc.   Old National Bancorp
Park National Corporation   Pinnacle Financial Partners, Inc.   SCBT Financial Corporation
Southside Bancshares, Inc.   Sterling Financial Corporation   Texas Capital Bancshares, Inc.
Trustmark Corporation   Umpqua Holdings Corporation   Westamerica Bancorporation

        Because a peer group analysis is limited to those positions for which compensation information is disclosed publicly, these studies typically include only the five most highly compensated officers at each company. Therefore, the compensation consultant also relied on published compensation surveys to supplement information for these positions, as well as to provide the basis for analysis for other executives. Similar asset and scope comparisons were used for that benchmarking analysis.

Elements of our Executive Compensation Program

        Overall, our executive compensation program is designed to be consistent with the objectives and principles set forth in this discussion. The basic elements of our executive compensation program are summarized below, followed by a more detailed discussion of the programs.

        Our compensation policies and programs are considered by the Committee in a total rewards framework, considering both "pay"—base salary, annual incentive compensation and long-term incentive compensation; and "benefits"—benefits, perquisites and executive benefits and other compensation. Our executive compensation program consists primarily of the following components:

Compensation Component
  Purpose

Base Salary

  Fixed component of pay intended to compensate the individual fairly for the responsibility level of the position held.

Annual Incentive Awards

 

Variable component of pay intended to motivate and reward the individual's contribution to achieving our short-term/annual objectives.

Long-term Incentive Awards

 

Variable component of pay intended to motivate and reward the individual's contribution to achieving our long-term objectives.

Benefits and Perquisites

 

Fixed component of pay intended to provide an economic benefit to us in attracting and retaining executive talent.

Base Salary

        We provide base salaries for each named executive officer, commensurate with the services each provides to us, because we believe a portion of total direct compensation should be provided in a form that is fixed and liquid. In reviewing base salaries, the Committee evaluated the salaries of other named executive officers of the Company and its peers and any increased level of responsibility, among other items. As a result of that analysis, the Committee determined to increase the annual salaries of Messrs. Ford and Parmenter for 2014. With respect to the other named executive officers of the Company, the Committee determined to maintain the current salary for 2014, as they were found to be

206


Table of Contents

competitive with the Company's peers. The following are the base salaries for the named executive officers in 2013 and 2014:

 
  Base Salary    
 
Name
  2013   2014   $ Change  

Jeremy B. Ford

  $ 500,000   $ 550,000   $ 50,000  

Darren Parmenter

  $ 300,000   $ 330,000   $ 30,000  

Alan B. White

  $ 1,350,000   $ 1,350,000 (a) $  

James Huffines

  $ 690,000   $ 690,000 (b) $  

Jerry Schaffner

  $ 525,000   $ 525,000 (a) $  

(a)
Messrs. White's and Schaffner's base salaries are set forth in their respective retention agreements, which became effective upon the closing of the acquisition of PlainsCapital Corporation.

(b)
Mr. Huffines' salary is the same as that in effect prior to the acquisition of PlainsCapital Corporation.

Annual Incentive Awards

        Our named executive officers and other employees are eligible to receive annual cash incentive awards based upon our financial performance and other factors, including individual performance. The Committee believes that this element of compensation is important to focus management efforts on, and provide rewards for, annual financial and strategic results that are aligned with creating value for our stockholders.

        Target incentive awards are defined at the start of the year in consideration of market data provided by the Committee's consultant, each executive's total compensation package and the entity's budgetary considerations. Targets for 2013 were adjusted slightly lower than 2012 in consideration of these factors.

        Each executive officer had defined performance objectives during 2013 based upon measurable performance of both the individual and our Company. These awards were made pursuant to the Annual Incentive Plan. Annual Incentive Plan awards are subject to claw back for improper risk management and non-compliance with applicable laws and regulations. This component of the compensation program is pre-determined at the outset of the year and based upon measurable criteria.

        The Committee, in its sole discretion, determines the amount of each participant's award based on attainment of the applicable performance goals and assessments of individual performance. For 2013, the applicable performance goals were among the following:

        Additionally, a risk forfeiture of up to 15% of any available Annual Incentive Plan award can occur in the event that any improper risk management or non-compliance with applicable laws or regulations is identified.

207


Table of Contents

        The elements of the annual cash incentive award do not become available until net income equals 60% of the budgeted annual earnings for the entity at which that named executive officer is employed. In order to be eligible to receive the target cash annual incentive award, actual earnings must meet budgeted amounts. A maximum of 150% of the target award may be paid in the event actual earnings exceed budgeted amounts. Threshold awards are set at 50% of target. Between the threshold and target amounts, a range of the potential annual cash incentive award is defined. Our 2013 goals were intended to be realistic and reasonable but challenging in order to drive performance. The Committee and management believe that by using these metrics we are encouraging profitable top line growth and value for stockholders. For 2013 and 2014, the Committee set Annual Incentive Plan compensation target payments for named executive officers as follows:

 
  Annual Incentive
Plan Target as a
Percent of Annual
Base Salary for
Calendar Year:
 
Name
  2014   2013  

Jeremy B. Ford

    77 %   85 %

Darren Parmenter

    61 %   67 %

Alan B. White

    100 %   100 %

James R. Huffines

    80 %   87 %

Jerry L. Schaffner

    73 %   80 %

        Based upon evaluation of their respective performance in 2013, together with operations of the Company, the Committee determined the Annual Incentive Plan bonuses for 2013 as follows for the following named executive officers.

 
  2013 Annual
Incentive Plan Target
  2013 Annual
Incentive Plan Payout
 
Name
  Amount ($)   % of Base Salary   Amount ($)   % of Target  

Jeremy B. Ford

  $ 425,000     85 % $ 500,000     118 %

Darren Parmenter

  $ 200,000     77 % $ 200,000     100 %

Alan B. White

  $ 1,350,000 (a)   100 % $ 1,350,000 (a)   100 %

James R. Huffines

  $ 600,000     87 % $ 555,000     93 %

Jerry L. Schaffner

  $ 420,000     80 % $ 420,000     100 %

(a)
Determined pursuant to Mr. White's retention agreement for the achievement of earnings threshold.

        See "Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table—Annual Incentive Plan" for more information on possible future payments to the named executive officers.

Long-Term Incentive Awards

        As described above, we believe that a portion of each named executive officer's compensation should be tied to the performance of our stock price, aligning the officer's interest with that of our stockholders. In this regard, our long-term incentive compensation for 2013 was delivered in the form of restricted stock, the value of which is ultimately dependent upon the performance of our stock price. Further discussion of the 2012 Equity Incentive Plan pursuant to which such shares of restricted stock were awarded is found after the "Grants of Plan-Based Awards" section below.

        Mr. Ford has an award outstanding under the 2003 Equity Incentive Plan. However, with the adoption of the 2012 Equity Incentive Plan, all 2013 equity-based awards, including the named executive officers, have since been made pursuant to the 2012 Equity Incentive Plan. All equity-based

208


Table of Contents

awards made to the named executive officers are approved by the Committee and not pursuant to delegated authority.

        In 2013, long-term incentive awards were made in consideration of each executive's role, competitive market practice, and performance. Grants were made in the form of restricted shares on May 2, 2013, to the following named executive officers as set forth below:

Recipient
  Number of Restricted
Shares Granted
 

Jeremy Ford

    30,000  

Darren Parmenter

    5,000  

Alan B. White

    50,000  

James Huffines

    30,000  

Jerry L. Schaffner

    20,000  

        On February 24, 2014, restricted stock units were granted to the named executive officers as set forth below:

Name
  Time-Based
RSUs Awarded
  Performance-Based
RSUs Awarded
(at Target)
  Total
RSUs Awarded
 

Jeremy B. Ford

    12,696     12,696     25,392  

Darren Parmenter

    3,703     3,703     7,406  

Alan B. White

    14,812     14,811     29,623  

James Huffines

    8,887     8,887     17,774  

Jerry L. Schaffner

    5,925     5,924     11,849  

Perquisites and Other Benefits

        We provide a limited number of perquisites and other benefits to our named executive officers at Hilltop. The only perquisite currently offered to the named executive officers employed directly by Hilltop is $150 per month to be applied to a gym membership to promote wellness. With respect to named executive officers employed by PlainsCapital and its subsidiaries, those entities provide them with a monthly car allowance and reimbursement for country club membership dues. In addition, Messrs. White and Schaffner are provided access to company aircraft and bank-owned life insurance. Otherwise, generally, our named executive officers receive only medical benefits, life insurance and long-term disability coverage, as well as supplemental contributions to the Company's 401(k) program, on the same terms and conditions as available to all employees of that entity.

Severance and Other Post-Termination Compensation

        The named executive officers who are employed by PlainsCapital or its subsidiaries currently have certain contractual post-termination benefits; however, other than Messrs. White and Schaffner, those benefits will expire on November 30, 2014.

        For named executive officers employed directly by Hilltop, other than change in control provisions in our 2012 Equity Incentive Plan, we do not currently maintain any severance or change in control programs. We, however, have historically paid severance, the amount of which is generally determined both by length of tenure and level of compensation, when termination occurs other than for cause and pursuant to which certain benefits may be provided to the named executive officers. Absent the negotiation of specific agreements with the named executive officers, severance benefits would be provided on the same basis as provided to other employees of the Company.

        In connection with acquisition of PlainsCapital Corporation, we entered into retention agreements with Messrs. White and Schaffner, and Mr. Huffines' employment agreement that was in effect on the

209


Table of Contents

date of the acquisition entitles Mr. Huffines to certain severance benefits. The summary of the severance terms for each of these agreements is set forth below:

White Retention Agreement

        Pursuant to his retention agreement, Mr. White is entitled to the following:

        The foregoing cash amounts in subparagraph (1) represent "modified single trigger" benefits, payable assuming the termination of employment for any reason, and the foregoing cash amounts in subparagraph (2) represent "double trigger" benefits, payable assuming a qualifying termination of employment. With respect to the amounts described in subparagraph (1) that are paid in full satisfaction of Section 6 of Mr. White's previous employment agreement with PlainsCapital, such amounts are payable upon any termination of employment at any time, subject to any delay required by Section 409A of the Internal Revenue Code and the execution of a release of claims. The cash severance amounts described in subparagraph (2) are payable upon a termination of employment other than for cause, death or disability or a termination due to non-renewal by Hilltop, subject to any delay required by Section 409A of the Internal Revenue Code and the execution of a release of claims.

Schaffner Retention Agreement

        Pursuant to his retention agreement, Mr. Schaffner is entitled to the following:

        The foregoing cash amounts in subparagraph (1) represent "modified single trigger" benefits, payable assuming the termination of employment for any reason, and the foregoing cash amounts in subparagraph (2) represent "double trigger" benefits, payable assuming a qualifying termination of employment. With respect to the amounts described in subparagraph (1) that are paid in full satisfaction of Section 6 of Mr. Schaffner's previous employment agreement with PlainsCapital Corporation, such amounts are payable upon any termination of employment at any time, subject to any delay required by Section 409A of the Internal Revenue Code and the execution of a release of

210


Table of Contents

claims. The cash severance amounts described in subparagraph (2) are payable upon a termination of employment other than for cause, death or disability, subject to any delay required by Section 409A of the Internal Revenue Code and the execution of a release of claims.

Huffines Employment Agreement

        Pursuant to the employment agreement of Mr. Huffines with PlainsCapital, he is entitled to cash severance based on three times the sum of (i) annual base salary, and (ii) the higher of the bonus paid for the most recently completed calendar year and the average bonus paid with respect to the three most recently completed calendar years ending immediately prior to the date of termination. The foregoing cash amounts represent "double trigger" benefits, which are payable upon a termination of the applicable executive's employment by us without cause or by the executive for good reason during the six (6) months prior to, or the twenty-four (24) months following, the effective time of the acquisition of PlainsCapital, which constituted a change in control, subject to the execution of a release of claims.

        Further discussion of the agreements with Messrs. White, Schaffner and Huffines and payments made pursuant thereto may be found under the headings "Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table" and "Potential Payments Upon Termination or Change-in-Control" below.

        The 2012 Equity Incentive Plan, under which we have granted awards to the named executive officers, contains specific termination and change in control provisions. We determined to include a change in control provision in the plan to be competitive with what we believe to be the standards for the treatment of equity upon a change in control for similar companies and so that employees who remain after a change in control would be treated the same with regard to equity as the general stockholders who could sell or otherwise transfer their equity upon a change in control. Under the terms of the plan, if a change in control (as defined below in the discussion of the plan) were to occur, all awards then outstanding would become vested and/or exercisable and any applicable performance goals with respect thereto would be deemed to be fully achieved. Further discussion of the change in control payments made pursuant to the 2012 Equity Incentive Plan may be found in the "Potential Payments Upon Termination or Change-in-Control" section below.

        The Annual Incentive Plan, pursuant to which annual incentive bonuses are awarded, does not contain specific change in control provisions. Accordingly, the Committee, in its discretion, may determine what constitutes a change in control and what effects such an event may have any awards made pursuant to such plan.

Executive Compensation Changes for 2014

        We made the following key compensation decisions with respect to our named executive officers for 2014, which build upon our compensation governance framework and our overall pay-for-performance philosophy:

211


Table of Contents

Risk Considerations in Our Compensation Program

        We do not believe that our compensation policies and practices for 2013 give rise to risks that are reasonably likely to have a material adverse effect on our Company. In reaching this conclusion for 2013, we considered the following factors:

Other Programs and Policies

        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

212


Table of Contents

a defined market value of Company common stock equal to a minimum number of equity or equity-based securities as follows:

        Under this policy, directors are expected to own shares with a value greater than five times their annual retainer for serving on the Board of Directors of the Company. Our director compensation program permits directors to elect to receive their director compensation in cash, Company common stock or a combination of cash and Company common stock.

        In calculating equity ownership for purposes of this requirement, we will include all shares beneficially owned by an individual, such as shares owned by an individual in the Company's benefit plans (e.g., 401(k)), shares of restricted stock and shares with respect to which an individual has voting or investment power. Shares underlying unexercised stock options are excluded when determining ownership for these purposes.

        Executive officers are expected to hold 50% of any net shares received through compensatory equity based grants until the ownership guidelines are achieved. Once such officer achieves the ownership requirement, he or she is no longer restricted by the holding requirement; provided his or her total stock ownership level does not fall below the ownership guidelines.

        In addition, all awards of restricted stock units granted in February 2014 and thereafter are, subject to certain exceptions, required to be held for one year after vesting.

Clawback Policy

        Our compensation program also includes a claw-back from any annual cash incentive award for improper risk and significant compliance issues. Annual Incentive Plan awards are subject to any clawback, recoupment or forfeiture provisions (i) required by law or regulation and applicable to Hilltop or its subsidiaries or (ii) set forth in any policies adopted or maintained by Hilltop or any of its subsidiaries.

Tax Considerations

        Section 162(m) of the Internal Revenue Code (the "Code") imposes a $1.0 million limit on the tax-deductibility of compensation paid to our five most highly paid executives, which includes the named executive officers. Exceptions are provided for compensation that is "performance-based" and paid pursuant to a plan meeting certain requirements of Section 162(m) of the Code. The Committee has carefully considered the implications of Section 162(m) of the Code and believes that tax deductibility of compensation is an important consideration. Accordingly, where possible and considered appropriate, the Committee strives to preserve corporate tax deductions. The Committee, however, reserves the flexibility, where appropriate, to approve compensation arrangements that may not be tax deductible to the Company, such as base salary and awards of time-based restricted stock. The Committee will continue to review the Company's executive compensation practices to determine if other elements of executive compensation constitute "qualified performance-based compensation" under Section 162(m) of the Code.

Trading Controls and Hedging, Short Sale and Pledging Policies

        Executive officers, including the named executive officers, are required to receive the permission of the General Counsel prior to entering into any transactions in our securities, including gifts, grants and those involving derivatives. Generally, trading is permitted only during announced trading periods. Employees who are subject to trading restrictions, including the named executive officers, may enter into a trading plan under Rule 10b5-1 of the Exchange Act. These trading plans may be entered into only during an open trading period and must be approved by the General Counsel. We require trading plans to include a waiting period and the trading plans may not be amended during their term. The named executive officer bears full responsibility if he or she violates our policy by permitting shares to be bought or sold without pre-approval or when trading is restricted.

213


Table of Contents

        Executive officers are prohibited from entering into hedging and short sale transactions and are subject to restrictions on pledging our securities.


Compensation Committee Report

        The Compensation Committee of the Board of Directors of Hilltop Holdings Inc. has reviewed and discussed with management the Compensation Discussion and Analysis contained in this Proxy Statement. Based on its review, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Proxy Statement.

        The foregoing report has been submitted by the following members of the Compensation Committee:

Haag Sherman (Chairman)

     

Rhodes Bobbitt

     

W. Joris Brinkerhoff

 

William T. Hill, Jr.

     

Andrew Littlefair

   


Executive Compensation

        The following tables set forth information concerning the compensation earned for services performed during 2013, 2012 and 2011 by the named executive officers, who were either serving in such capacities on December 31, 2013, or during 2013, or are reportable pursuant to applicable SEC regulations.


Summary Compensation Table
Fiscal Years 2013, 2012 and 2011

Name and principal position
  Year   Salary ($)   Bonus(a)
($)
  Stock
Awards
($)
  Option
awards ($)
  Non-Equity
Incentive Plan
Compensation(h)
($)
  Change in pension
value and
nonqualified deferred
compensation
earnings ($)
  All other
compensation
($)
  Total ($)  

Jeremy B. Ford

   
2013
   
466,667

(c)
 
   
   
   
897,500
         
1,800
   
1,365,967
 

President and Chief

    2012     400,000     300,000                             700,000  

Executive Officer

    2011     400,000     230,000         782,602 (b)                   1,412,602  

Darren Parmenter

   
2013
   
296,667

(c)
 
   
   
   
266,250
         
1,800
   
564,717
 

Executive Vice President—Principal

    2012     290,000 (d)   100,000                             390,000  

Financial Officer

    2011     275,000     75,000                             350,000  

Alan B. White

   
2013
   
1,350,000
   
1,350,000
   
   
   
662,500
   
28,950
   
142,491

(g)
 
3,533,941
 

Chief Executive Officer of

    2012     112,500 (e)   1,350,000                 6,431,982     1,716 (f)   7,896,198  

PlainsCapital Corporation

    2011                                  

James R. Huffines

   
2013
   
690,000
   
   
   
   
952,500
   
   
51,145

(g)
 
1,693,645
 

President and Chief Operating Officer of

    2012     57,500 (e)   600,000                     4,039 (f)   661,539  

PlainsCapital Corporation

    2011                                  

Jerry L. Schaffner

   
2013
   
525,000
   
420,000
   
   
   
265,000
   
11,016
   
51,815

(g)
 
1,272,831
 

President and Chief Executive Officer of

    2012     43,750 (e)   420,000                 2,448,936     4,332 (f)   2,917,018  

PlainsCapital Bank

    2011                                  

(a)
Represents bonuses paid for services during 2013, 2012, and 2011, as applicable.

(b)
Represents the FASB ASC Topic 718 expense recognized for stock options granted in fiscal 2011. For more information regarding outstanding stock options held by named executive officers, refer to section "Outstanding Equity Awards at Fiscal Year-End " below.

(c)
Reflects increase in annual salary on April 1, 2013.

(d)
Reflects increase in annual salary on April 1, 2012.

(e)
Represents annual salaries (Mr. White—$1,350,000; Mr. Schaffner—$525,000; Mr. Huffines—$690,000) prorated for service from December 1, 2012 to December 31, 2012.

(f)
Includes group life insurance premiums, auto allowance, and club expenses paid during December 2013, Employee Stock Ownership Plan contributions made by employer for December 2012, use

(g)
Includes group life insurance premiums, auto allowance, and club expenses paid during 2013, 401(k) profit sharing contributions made by employer for 2013, use of a company car (Mr. Schaffner—$1,225; Mr. White—$1,851.52), use of the company aircraft (Mr. White—$58,740.65), and cash incentive payments (Messrs. Huffines and Schaffner—$750 each). The table following these footnotes is a breakdown of all other compensation included in the "Summary Compensation Table" for the Named Executive Officers.

214


Table of Contents

(h)
Reflects the grant date fair values of deferred share awards calculated in accordance with FASB Accounting Standards Codification Topic 718 ("ASC Topic 718"). Reported as "Non-Equity Incentive Plan Compensation" due to adoption of Long-Term Incentive Plan under which grants were made. Prior grants reported as "option awards".


All Other Compensation

Name
  Year   Perquisites
and
Personal
Benefits(1)
  Gross-Ups or
Other
Amounts
Reimbursed
for the
Payment of
Taxes
  Company
Contributions
to Defined
Contribution
Plans(2)
  Insurance
Policies(3)
  Director
Fees
  Total All
Other
Compensation
 

Jeremy B. Ford

    2013     1,800                     1,800  

    2012                         0  

    2011                         0  

Darren Parmenter

   
2013
   
1,800
   
   
   
   
   
1,800
 

    2012                         0  

    2011                         0  

Alan B. White

   
2013
   
127,729
   
   
9,614
   
5,148
   
   
142,491
 

    2012     429     1,287                 1,716  

    2011                          

James R. Huffines

   
2013
   
36,416
   
   
9,581
   
5,148
   
   
51,145
 

    2012     2,704         906     429         4,039  

    2011                          

Jerry L. Schaffner

   
2013
   
38,898
   
   
9,564
   
3,354
   
   
51,815
 

    2012     3,146         906     280         4,332  

    2011                          

(1)
2013. For Messrs. Ford and Parmenter, reflects $150 per month gym membership allowance. For Mr. White, includes a car allowance of $36,000, club expenses totaling $31,137.17, and the personal use of PlainsCapital airplane ($58,740.65) and automobile ($1,851.52). For Mr. Schaffner, includes a car allowance of $24,000, club expenses totaling $12,922.65, the personal use of PlainsCapital automobile ($1,225) and a holiday present ($750). For Mr. Huffines, includes a car allowance of $24,000, club expenses totaling $11,665.59 and a holiday present ($750).

(2)
2013. For Messrs. White, Schaffner, and Huffines, includes PlainsCapital's contribution to the 401(k) Profit Sharing Plan in each of their names. 2012. For Messrs. White, Schaffner, and Huffines, includes PlainsCapital's prorated contribution to the Employee Stock Ownership Plan.

(3)
Reflects Group term life insurance premiums paid during 2013.

215


Table of Contents

Grants of Plan-Based Awards
Fiscal Year 2013

 
   
   
   
   
  All other
stock
awards:
number of
shares of
stock or
units
(#)
   
 
 
   
  Estimated future payouts
under non-equity incentive plan
awards(b)
   
 
 
   
  Grant date fair
value of stock
and option
awards(c)
($)
 
Name
  Grant Date(a)   Threshold
($)
  Target
($)
  Maximum
($)
 

Jeremy B. Ford

  March 28, 2013     21,250     425,000     637,500          

President and Chief Executive Officer

  May 2, 2013                 30,000     397,500  

Darren Parmenter

 

March 28, 2013

   
10,000
   
200,000
   
300,000
   
   
 

Executive Vice President—Prinicpal

  May 2, 2013                 10,000     66,250  

Financial Officer

                                   

Alan B. White

 

March 28, 2013

   
1,089,843

(d)
 
1,350,000

(d)
 
1,350,000

(d)
 
   
 

Chief Executive Officer of

  May 2, 2013                 50,000     662,500  

PlainsCapital Corporation

                                   

James R. Huffines

 

March 28, 2013

   
30,000
   
600,000
   
900,000
   
   
 

Chief Operating Officer of

  May 2, 2013                 30,000     397,500  

PlainsCapital Corporation

                                   

Jerry L. Schaffner

 

March 28, 2013

   
371,667

(d)
 
420,000
   
630,000
   
   
 

Chief Executive Officer of

  May 2, 2013                 20,000     265,000  

PlainsCapital Bank

                                   

(a)
Represents the effective date of grant of restricted stock under the 2012 Equity Incentive Plan and annual cash incentive awards under the Annual Incentive Plan.

(b)
Represent the value of potential payments under the Annual Incentive Plan to the named executive officers based on 2013 performance. Management incentive award amounts shown above represent potential awards that may have been earned based on performance during 2013. The actual Annual Incentive Plan awards earned for 2013 are reported in the "Summary Compensation Table" above. For more information regarding the Annual Incentive Plan, see below and also refer to "Compensation Discussion and Analysis" in this Proxy Statement.

(c)
Represents the FASB ASC topic 718 expenses recognized for restricted stock granted in 2013, For more information regarding outstanding awards held by the named executive officer, refer to section "Outstanding Equity Awards at Fiscal Year-End" below.

(d)
Represents the amount he would be entitled to under his respective retention agreement.


Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table

Employment Contracts and Incentive Plans

        Set forth below is a summary of our retention agreements with Messrs. White and Schaffner and our employment agreement with Mr. Huffines. Our employment agreement with Mr. Parmenter expired in 2010, and we do not have an employment agreement with Mr. Jeremy Ford. Also set forth below is a description of our incentive plans, pursuant to which the awards included in the "Outstanding Equity Awards at Fiscal Year-End 2013" below were made to our named executive officers. The Compensation Committee believes that the arrangements described below serve our interests and the interests of our stockholders because they help secure the continued employment and dedication of our named executive officers prior to or following a change in control, without concern for their own continued employment.

        On November 30, 2012, in connection with our acquisition of PlainsCapital, we entered into a retention agreement with Mr. White. The term of the retention agreement is three years, with automatic one-year renewals at the end of the second year of the agreement and each anniversary

216


Table of Contents

thereof unless notice has been given otherwise. Pursuant to the agreement, Mr. White's annual base salary is $1,350,000. He is also entitled to an annual bonus that varies based upon the performance of PlainsCapital. If PlainsCapital's annual net income is less than or equal to $70,000,000 but greater than $15,000,000, Mr. White is entitled to a bonus equal to the average of his annual bonus in the prior three calendar years. If PlainsCapital's annual net income exceeds $70,000,000, he is entitled to a bonus equal to 100% of his annual base salary. Additionally, in accordance with the agreement, Mr. White is entitled to participate in all of the Company's employee benefit plans and programs. Further, the agreement provides that the Company will provide Mr. White with the use of a corporate aircraft and an automobile allowance, each at the same level that such benefits were available to Mr. White immediately prior to our acquisition of PlainsCapital. He continues to have bank-owned life insurance and access to the country club that was available to him through PlainsCapital's membership prior to our acquisition of PlainsCapital. For a description of compensation and benefits to which Mr. White is entitled in the event of his termination or a change in control, see "Potential Payments Upon Termination or Change-in-Control" below.

        PlainsCapital previously entered into an employment agreement with Mr. Huffines. In connection with our acquisition of PlainsCapital, we entered into an amendment to the employment agreement with Mr. Huffines, which became effective upon the closing of the acquisition on November 30, 2012 and, among other things, removed his minimum guaranteed bonus. The term of the employment agreement is two years. The annual base salary under the agreement is $650,000. Mr. Huffines is entitled to an annual bonus to be determined by our Compensation Committee. For a description of compensation and benefits to which Mr. Huffines is entitled in the event of his termination or a change in control, see "Potential Payments Upon Termination or Change-in-Control" below.

        On November 30, 2012, in connection with our acquisition of PlainsCapital, we entered into a retention agreement with Mr. Schaffner. The term of the retention agreement is two years, with automatic one-year renewals at the end of the first year of the agreement and each anniversary thereof unless notice has been given otherwise. Pursuant to the agreement, Mr. Schaffner's annual base salary is $525,000. He is also entitled to an annual bonus that varies based upon the performance of PlainsCapital. If PlainsCapital's annual net income is greater than $15,000,000, Mr. Schaffner is entitled to a bonus equal to the average of his annual bonus in the prior three calendar years. Additionally, in accordance with the agreement, Mr. Schaffner is entitled to participate in all of the Company's employee benefit plans and programs. Further, the agreement provides that the Company will provide Mr. Schaffner with the use of corporate aircraft and an automobile allowance, each at the same level that such benefits were available to Mr. Schaffner immediately prior to our acquisition of PlainsCapital. He continues to have bank-owned life insurance and access to the country club that was available to him through PlainsCapital's membership prior to our acquisition of PlainsCapital. For a description of compensation and benefits to which Mr. Schaffner is entitled in the event of his termination or a change in control, see "Potential Payments Upon Termination or Change-in-Control" below.

        On December 23, 2003, we adopted the 2003 Equity Incentive Plan, which provides for the grant of equity-based awards, including restricted shares of our common stock, stock options, grants of shares and other equity-based incentives, to our directors, officers and other employees and certain of our subsidiaries selected by our Compensation Committee. At inception, 1,992,387 shares were authorized for issuance pursuant to this plan. All shares granted and outstanding pursuant to the plan, whether vested or unvested, are entitled to receive dividends and to vote, unless forfeited. No participant in our 2003 Equity Incentive Plan may be granted awards in any fiscal year representing more than 500,000 shares of our common stock.

217


Table of Contents

        On September 20, 2012, our stockholders approved the 2012 Equity Incentive Plan, and as a result, we may no longer grant awards pursuant to the 2003 Equity Incentive Plan. However, all awards that were previously granted and outstanding under the 2003 Equity Incentive Plan will remain in full force and effect according to their respective terms and dividend equivalents may continue to be issued in respect of awards that were outstanding thereunder as of September 20, 2012.

        The 2012 Equity Incentive Plan provides for the grant of equity-based awards, including restricted shares of our common stock, restricted stock units, stock options, grants of shares, stock appreciation rights (SARs) and other equity-based incentives, to our directors, officers and other employees and those of our subsidiaries selected by our Compensation Committee. At inception, 4,000,000 shares were authorized for issuance pursuant to this plan. All shares granted and outstanding pursuant to this plan, whether vested or unvested, are entitled to receive dividends and to vote, unless forfeited. No participant in our 2012 Equity Incentive Plan may be granted performance-based equity awards in any fiscal year representing more than 500,000 shares of our common stock or stock options or SARs representing in excess of 750,000 shares of our common stock. The maximum number of shares underlying incentive stock options granted under this plan may not exceed 2,000,000.

        The 2003 Equity Incentive Plan and the 2012 Equity Incentive Plan are administered by our Compensation Committee, which has the discretion to, among other things, determine the persons to whom awards will be granted, the number of shares of our common stock to be subject to awards and the other terms and conditions of the awards. The Compensation Committee also has authority to establish performance goals for purposes of determining cash bonuses to be paid under the incentive plans. Such performance goals may be applied to our Company as a whole, any of our subsidiaries or affiliates, and/or any of our divisions or strategic business units, and may be used to evaluate performance relative to a market index or a group of other companies. Further, the Compensation Committee has the authority to adjust the performance goals in recognition of unusual or non-recurring events. The 2003 Equity Incentive Plan and the 2012 Equity Incentive Plan each provide that in no event will the Compensation Committee be authorized to reprice stock options, or to lower the base or exercise price of any other award granted under such plan, without obtaining the approval of our stockholders.

        Stock options granted under the 2003 Equity Incentive Plan and the 2012 Equity Incentive Plan may be either "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code, or nonqualified stock options. Generally, holders of restricted stock will be entitled to vote and receive dividends on their restricted shares, but our Compensation Committee may determine, in its discretion, whether dividends paid while the shares are subject to restrictions may be reinvested in additional shares of restricted stock. Except as otherwise permitted by our Compensation Committee, awards granted under the 2003 Equity Incentive Plan and the 2012 Equity Incentive Plan will be transferable only by will or through the laws of descent and distribution, and each stock option will be exercisable during the participant's lifetime only by the participant or, upon the participant's death, by his or her estate. Director compensation paid in the form of our common stock, whether at our or the director's election, is issued through the 2012 Equity Incentive Plan.

        On September 20, 2012, our stockholders approved the Annual Incentive Plan, which provides for a cash bonus to key employees of Hilltop and our subsidiaries who are selected by the Compensation Committee for participation in the plan. The Annual Incentive Plan is intended to permit the payment of amounts that constitute "performance-based compensation" under Section 162(m) of the Internal Revenue Code and is designed to reward executives whose performance during the fiscal year enabled Hilltop to achieve favorable business results and to assist Hilltop in attracting and retaining executives. A participant may receive a cash bonus under the Annual Incentive Plan based on the attainment, during each performance period, of performance objectives in support of our business strategy that are

218


Table of Contents

established by our Compensation Committee. These performance objectives may be based on one or more of the following criteria:

219


Table of Contents

        The performance objectives may be applied with respect to Hilltop or any one or more of our subsidiaries, divisions, business units or business segments and may be applied to performance relative to a market index or a group of other companies. The Compensation Committee may adjust the performance goals applicable to any awards to reflect any unusual or non-recurring events.

        Participation in the Annual Incentive Plan does not guarantee the payment of an award. All awards payable pursuant to the Annual Incentive Plan are discretionary and subject to approval by our Compensation Committee. After the performance period ends, the Compensation Committee will determine the payment amount of individual awards based on the achievement of the performance objectives. No participant in the Annual Incentive Plan may receive an award that exceeds $10,000,000 per year. Except as otherwise provided in a participant's employment or other individual agreement, the payment of a cash bonus to a participant for a performance period will be conditioned upon the participant's active employment on the date that the final awards are approved by the Compensation Committee. We may amend or terminate the Annual Incentive Plan at any time.

220


Table of Contents

        The following tables presents information pertaining to all outstanding equity awards held by the named executive officers as of December 31, 2013.


Outstanding Equity Awards at Fiscal Year End Table
Fiscal Year 2013

 
  Option Awards   Stock Awards  
Name
  Number of
securities
underlying
unexercised
options
(#)
exercisable
  Number of
securities
underlying
unexercised
options
(#)
unexercisable
  Option
exercise
price(b)
($)
  Option
expiration
date
  Number of
shares or units
that have not
vested
(#)
  Market value of
shares or units of
stock that have
not vested(c)
($)
 

Jeremy B. Ford
President & Chief Executive Officer

   
300,000

(a)
 
200,000

(a)
 
7.70
 

November 2, 2016

   
30,000
   
693,900
 

Darren Parmenter
Executive Vice President—Principal Financial Officer

                         
10,000
   
231,300
 

Alan B. White
Chief Executive Officer of PlainsCapital Corporation

                         
50,000
   
1,156,500
 

James R. Huffines
Chief Operating Officer of PlainsCapital Corporation

                         
30,000
   
693,900
 

Jerry L. Schaffner
Chief Executive Officer of PlainsCapital Bank

                         
20,000
   
462,600
 

(a)
These stock options vested or will vest in five equal installments on each of November 2, 2011, 2012, 2013, 2014 and 2015.

(b)
Represents the exercise price of the stock option held by Mr. Jeremy Ford, which is the average of the high and low sales price of Company common stock on the date of grant of the stock option.

(c)
Based upon the closing price of Company common stock on December 31, 2013.

        During the fiscal year ended December 31, 2013, none of our named executive officers exercised any options to purchase shares of common stock or held any outstanding awards of restricted stock, restricted stock units or similar instruments that vested.

221


Table of Contents

        The following table shows the non-qualified deferred compensation activity for our named executive officers during the fiscal year ended December 31, 2013.

Name
  Executive
contributions in
last fiscal year
($)
  Registrant
contributions in
last fiscal year
($)(1)
  Aggregate
earnings in last
fiscal year
($)(1)
  Aggregate
withdrawals/
distributions
($)
  Aggregate
balance at last
fiscal year end
($)
 

Alan B. White

          $ 28,950       $ 6,460,932  

Jerry L. Schaffner

          $ 11,016       $ 2,459,952  

(1)
All amounts reported as registrant contributions in last fiscal year and aggregate earnings in last fiscal year are reported as compensation in the last completed fiscal year in the Summary Compensation Table.

        In connection with acquisition of PlainsCapital, we entered into retention agreements with Messrs. White and Schaffner. Pursuant to those agreements, we agreed to contribute an amount in cash equal to $6,430,890 and $2,448,000 as deferred compensation to Messrs. White and Schaffner, respectively, in satisfaction of their respective rights under Section 6 (Termination Upon Change of Control) of their respective previous employment agreements with PlainsCapital. Such amounts accrue interest at the prevailing money market rate and are payable to Messrs. White and Schaffner on the 55th day following termination of their respective employment.


Potential Payments Upon Termination or Change-in-Control

        The 2012 Equity Incentive Plan, under which we have granted awards to the named executive officers, contains specific termination and change in control provisions. We determined to include a change in control provision in the plan to be competitive with what we believe to be the standards for the treatment of equity upon a change in control for similar companies and so that employees who remain after a change in control would be treated the same with regard to equity as the general stockholders who could sell or otherwise transfer their equity upon a change in control. Under the terms of the plan, if a change in control (as defined below in the discussion of the plan) were to occur, all awards then outstanding would become vested and/or exercisable and any applicable performance goals with respect thereto would be deemed to be fully achieved.

        With respect to each of Messrs. Huffines, Schaffner and White, if his employment or retention contract is terminated by us for cause, by the executive or due to the executive's death or disability (as such terms are defined below), he or his estate, as applicable, is entitled to:

222


Table of Contents

        In addition, Messrs. White and Schaffner or their respective estates, as applicable, are entitled to a lump-sum cash payment equal to $6,430,890 and $2,448,000, respectively, which represents the amount Messrs. White and Schaffner, respectively, would have been entitled to receive under their respective prior employment agreements with PlainsCapital if their respective employment there was terminated. Such amounts described in the preceding paragraph are referred to as the "Accrued Amounts."

        For Mr. Huffines, if his employment is terminated by us without cause (as such term is defined below), he is entitled to the Accrued Amounts, as well as a cash amount equal to the sum of:

        Such amount is payable in a lump-sum within 60 days of the effective date of the termination of the executive's employment.

        If Mr. White's employment is terminated by us other than for cause (as such term is defined below) or his death or disability, or if his employment terminates due to non-renewal by us, he is entitled to the Accrued Amounts, including the lump-sum cash payment equal to $6,430,890 and interest thereon from November 30, 2012, as well as payments generally equal to the sum of the average of Mr. White's prior annual bonuses over the preceding three years plus his annual base salary, multiplied by the greater of (i) the number of full and partial years remaining until the end of the term of his retention agreement and (ii) two. Mr. White will retain the right to be grossed-up for any excise tax relating to "excess parachute payments" (as defined in Section 280G of the Internal Revenue Code), which is set forth in his prior employment agreement, provided that the gross-up will only relate to any excise taxes arising in connection with our acquisition of PlainsCapital. These severance amounts are payable subject to Mr. White's execution of a release of claims.

        If Mr. Schaffner's employment is terminated by us other than for cause (as such term is defined below) or his death or disability, he is entitled to the Accrued Amounts, including the lump-sum cash payment equal to $2,448,000 and interest thereon from November 30, 2012, as well as payments generally equal to the sum of the average of Mr. Schaffner's prior annual bonuses over the preceding three years plus his annual base salary. Mr. Schaffner will retain the right to be grossed-up for any excise tax relating to "excess parachute payments" (as defined in Section 280G of the Internal Revenue Code), which is set forth in his prior employment agreement, provided that the gross-up will only relate to any excise taxes arising in connection with our acquisition of PlainsCapital. These severance amounts are payable subject to Mr. Schaffner's execution of a release of claims.

        For Mr. Huffines, in the event that his employment is terminated (a) by us without cause within the 24 months immediately following, or the six months immediately preceding, a change in control (as such term is defined below), or (b) by Mr. Huffines for good reason (as such term is defined below) within the 24 months immediately following, or the six months immediately preceding, a change in control, he is entitled to the Accrued Amounts, as well as a cash amount equal to three times the sum of:

        Such amount is payable in a lump-sum within 60 days of the effective date of the termination of his employment, subject to the execution of a release of claims. In addition, Mr. Huffines is entitled to continued participation in our benefit plans for a period of two years following the date of his

223


Table of Contents

termination, and full vesting of all outstanding stock options then held, with the option to receive a cash payment equal to the then difference between the option price and the current fair market value of the stock as of the effective date of such termination of employment in lieu of the right to exercise such options. In the event that any of the benefits payable upon a termination of employment in connection with a change in control would constitute "excess parachute payments," such benefits would be reduced to the level necessary such that no excise tax will be due. Messrs. White's and Schaffner's respective retention agreements do not provide for such payments upon a change in control.

        Pursuant to his employment agreement, Mr. Huffines will not, during the term of his employment agreement and for a period of one year following the earlier of his termination or the termination of the agreement, compete with any business that provides services similar to us anywhere within the State of Texas. Pursuant to their respective retention agreements, Messrs. White and Schaffner will not, during the period of their employment and for three and two years, respectively, following their respective termination: (i) solicit any person who is employed by us or any of our affiliates; (ii) interfere with our relationships with our customers, suppliers or other business contacts; nor (iii) compete with any business that provides services similar to us anywhere within the State of Texas. Messrs. White and Schaffner have also agreed that all confidential records, material and information concerning us or our affiliates shall remain our exclusive property and they shall not divulge such information to any person.

        For the purposes of each employment or retention contract described above:

        For the purposes of Messrs. White's and Schaffner's retention agreements:

        For the purposes of the employment agreement with Mr. Huffines:

224


Table of Contents

        Set forth below are the amounts that Messrs. Ford, Parmenter, White, Huffines and Schaffner would have received if the specified events had occurred on December 31, 2013.

Jeremy B. Ford
  Termination for
Cause
  Termination due
to death or
disability
  Termination
without
cause
  Change of
Control
 

Accrued Amounts

  $   $   $   $  

Cash Payment

                 

Cash Severance

                 

Stock Options(1)

                3,086,000  

Restricted Stock(2)

        154,200     154,200     693,900  

Welfare Benefits

                 
                   

Total

  $   $ 154,200   $ 154,200   $ 3,779,900  
                   

(1)
Pursuant to the provisions of the 2003 Equity Incentive Plan under which issuances of stock option awards were made, if a change in control event, as defined under the plan, were to occur, all awards then outstanding would become vested and, if applicable, exercisable and any applicable performance goals with respect thereto would be deemed to be fully achieved. The Company has the discretion to require payment by the option holder of any amount it deems necessary to satisfy its liability to withhold income or any other taxes incurred by reason of exercise of options. Further, pursuant to the terms of the non-qualified stock option agreements that govern the issuance of options, upon the death of the option holder all options become fully vested and exercisable. Represents the value of unvested stock option grants that would vest upon a change in control, assuming a change in control event on the last business day of 2013. The value realized assumes the exercise of all stock options that became vested as a result of the event and is calculated as the difference between the option exercise price per share and the closing market price of $23.13 on December 31, 2013.

(2)
The restricted stock vests ratably upon the death or disability of the participant or termination of the participant without cause. The foregoing assume the death or disability or termination of the participant without cause on December 31, 2013. If a change of control under the 2012 Equity Incentive Plan occurs, all unvested restricted stock vest upon such event, which for purposes of the foregoing assumes December 31, 2013.

Darren Parmenter
  Termination for
Cause
  Termination due
to death or
disability
  Termination
without cause
  Change of
Control
 

Accrued Amounts

  $   $   $   $  

Cash Payment

                 

Cash Severance

                 

Stock Options

                 

Restricted Stock(1)

        51,400     51,400     231,300  

Welfare Benefits

                 
                   

Total

  $   $ 51,400   $ 51,400   $ 231,300  
                   

(1)
The restricted stock vests ratably upon the death or disability of the participant or termination of the participant without cause. The foregoing assume the death or disability or termination of the participant without cause on December 31, 2013. If a change of

225


Table of Contents

Alan B. White
  Termination for
Cause
  Termination due
to death or
disability or by
Executive for any
Reason
  Termination
without cause
or non-renewal
of retention
agreement
  Change of
Control
 

Accrued Amounts(1)

  $ 1,350,000   $ 1,350,000   $ 1,350,000   $  

Cash Payment(2)

    6,431,982     6,431,982     6,431,982      

Cash Severance(3)

            4,879,753      

Stock Options

                 

Restricted Stock(4)

        257,000     257,000     1,156,500  

Welfare Benefits

                 
                   

Total

  $ 7,781,982   $ 8,038,982   $ 12,918,735   $ 1,156,500  
                   

(1)
Accrued Amounts calculation based upon the sum of: (i) Mr. White's annual base salary through December 31, 2013, to the extent not already paid and not deferred; (ii) any annual bonus earned, to the extent not already paid and not deferred; (iii) any business expenses incurred that have not yet been reimbursed as of the date of termination; and (iv) any other amounts or benefits, including all unpaid and/or vested, nonforfeitable amounts owing or accrued to Mr. White.

(2)
Cash Payments refers to a lump-sum cash payment that represents the amount, including interest thereon, Mr. White would have been entitled to receive under his prior employment agreement with PlainsCapital if his employment had been terminated.

(3)
Cash Severance calculation based upon the sum of the average of Mr. White's prior annual bonuses for each of the preceding three years plus his annual base salary, multiplied by the greater of: (i) the number of full and partial years remaining until the end of the term of his employment agreement and (ii) two.

(4)
The restricted stock vests ratably upon the death or disability of the participant or termination of the participant without cause. The foregoing assume the death or disability or termination of the participant without cause on December 31, 2013. If a change of control under the 2012 Equity Incentive Plan occurs, all unvested restricted stock vest upon such event, which for purposes of the foregoing assumes December 31, 2013.

James R. Huffines
  Termination for
Cause
  Termination due
to death or
disability
  Termination
without
cause
  Change of
Control
 

Accrued Amounts(1)

  $   $   $   $  

Cash Payment

                 

Cash Severance(2)

            1,027,567     3,726,000  

Stock Options

                 

Restricted Stock(3)

        154,200     154,200     693,900  

Welfare Benefits

                 
                   

Total

  $   $ 154,200   $ 1,181,767   $ 4,419,900  
                   

(1)
Accrued Amounts calculation based upon the sum of: (i) Mr. Huffines annual base salary through December 31, 2013, to the extent not already paid and not deferred; (ii) any annual bonus earned, to the extent not already paid and not deferred; (iii) any business expenses incurred that have not yet been reimbursed as of the date of termination; and

226


Table of Contents

(2)
Cash severance calculation if Mr. Huffines is terminated without cause is based upon the sum of: (i) Mr. Huffines' annual base salary rate and (ii) the average of the bonuses he received for each of the last three calendar years immediately preceding the year of termination of his employment. If his employment is terminated upon a change in control, the cash severance calculation is based upon three times the sum of: (i) Mr. Huffines' annual base salary rate and (ii) the greater of (A) the annual bonus paid or payable with respect to the calendar year prior to the calendar year in which termination occurs and (B) the averages of the bonuses he received for each of the last three calendar years immediately preceding the year of termination of his employment.

(3)
The restricted stock vests ratably upon the death or disability of the participant or termination of the participant without cause. The foregoing assume the death or disability or termination of the participant without cause on December 31, 2013. If a change of control under the 2012 Equity Incentive Plan occurs, all unvested restricted stock vest upon such event, which for purposes of the foregoing assumes December 31, 2013.

Jerry L. Schaffner
  Termination for
Cause
  Termination due
to death or
disability or by
Executive for any
Reason
  Termination
without
cause
  Change of
Control
 

Accrued Amounts(1)

  $ 525,000   $ 525,000   $ 525,000   $  

Cash Payment(2)

    2,448,000     2,448,000     2,448,000      

Cash Severance(3)

            896,667      

Stock Options

                 

Restricted Stock(4)

        102,800     102,800     462,600  

Welfare Benefits

                 
                   

Total

  $ 2,973,000   $ 3,075,800   $ 3,972,467   $ 462,600  
                   

(1)
Accrued Amounts calculation based upon the sum of: (i) Mr. Schaffner's annual base salary through December 31, 2013, to the extent not already paid and not deferred; (ii) any annual bonus earned, to the extent not already paid and not deferred; (iii) any business expenses incurred that have not yet been reimbursed as of the date of termination; and (iv) any other amounts or benefits, including all unpaid and/or vested, nonforfeitable amounts owing or accrued to Mr. Schaffner.

(2)
Cash Payments refers to a lump-sum cash payment that represents the amount, including interest thereon, Mr. Schaffner would have been entitled to receive under his prior employment agreement with PlainsCapital if his employment had been terminated.

(3)
Cash Severance calculation based upon the sum of the average of Mr. Schaffner's prior annual bonuses for each of the preceding three years plus his annual base salary.

(4)
The restricted stock vests ratably upon the death or disability of the participant or termination of the participant without cause. The foregoing assume the death or disability or termination of the participant without cause on December 31, 2013. If a change of control under the 2012 Equity Incentive Plan occurs, all unvested restricted stock vest upon such event, which for purposes of the foregoing assumes December 31, 2013.

227


Table of Contents

        Each of the incentive plans has a complex definition of "change in control". Generally speaking, under the 2003 Equity Incentive Plan, a change in control occurs if: (i) with certain exceptions, any person becomes the owner of 50% or more of the combined voting power of our outstanding stock and other voting securities; (ii) a majority of the directors serving on our Board of Directors are replaced other than by new directors approved by at least two-thirds of the members of our Board of Directors; (iii) we are not the surviving company after a merger or consolidation; or (iv) with certain exceptions, our stockholders approve a plan of complete liquidation or dissolution or an agreement for the sale or disposition of all or substantially all of our assets is consummated. Under the 2012 Equity Incentive Plan, a change in control occurs if: (i) with certain exceptions, any person becomes the owner of 33% or more of the outstanding shares of our common stock or the combined voting power of our outstanding stock and other voting securities; (ii) a majority of the directors serving on our Board of Directors are replaced other than by new directors approved by at least two-thirds of the members of our Board of Directors; (iii) we are not the surviving company after a merger or consolidation or sale of all or substantially all of our assets; or (iv) with certain exceptions, our stockholders approve a plan of complete liquidation or dissolution.

        Both our 2003 Equity Incentive Plan and our 2012 Equity Incentive Plan are "single trigger" plans, meaning that stock option acceleration occurs upon a change in control even if the award holder remains with us after the change in control, regardless of whether awards are assumed or substituted by the surviving company. We believe a "single trigger" change in control provision was appropriate because it allows management to pursue all alternatives for us without undue concern for their own financial security.

        In the event of a change in control, all awards then outstanding under the 2003 Equity Incentive Plan will become vested and, if applicable, exercisable, and any performance goals imposed with respect to then-outstanding awards will be deemed to be fully achieved. With respect to awards granted pursuant to the 2012 Equity Incentive Plan, in the event of a change in control: (i) all outstanding stock options and SARs will become fully vested and exercisable; (ii) all restrictions on any restricted stock, restricted stock units or other stock-based awards that are not subject to performance goals will become fully vested; and (iii) all restrictions on any restricted stock, restricted stock units, performance units or other stock-based awards that are subject to performance goals will be deemed to be fully achieved.

        In addition to acceleration of benefits upon a change in control event, the non-qualified stock option agreements pursuant to which all option awards are granted provide for acceleration of vesting upon the death of the option holder. No other rights of acceleration are provided for under the terms of the Company's benefit plans.


Compensation Committee Interlocks and Insider Participation

        During fiscal year 2013, directors Rhodes Bobbitt, W. Joris Brinkerhoff, William T. Hill, Jr., Andrew J. Littlefair and A. Haag Sherman served on the Compensation Committee. During fiscal year 2013:

228


Table of Contents

        Each of Mr. White, PlainsCapital's Chief Executive Officer, Mr. Martin, PlainsCapital's Executive Vice President and Chief Financial Officer, Mr. Huffines, PlainsCapital's Chief Operating Officer, and Mr. Schaffner, President and Chief Executive Officer of PlainsCapital Bank, serves as a director of First Southwest, a wholly owned subsidiary of PlainsCapital. Hill A. Feinberg serves as the Chief Executive Officer of First Southwest and on the Board of Directors of Hilltop. Hilltop's Compensation Committee is comprised of independent directors, reviews and sets the compensation of each of Messrs. White, Martin, Feinberg, Huffines and Schaffner and does not believe that these interlocks pose any risks that are likely to have a material adverse effect on us.


Section 16(a) Beneficial Ownership Reporting Compliance

        Section 16(a) of the Exchange Act requires officers and directors, and persons who beneficially own more than ten percent of our stock, to file initial reports of ownership and reports of changes in ownership with the SEC. Officers, directors and greater than ten percent beneficial owners are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.

        Based solely on a review of the copies furnished to us and representations from our officers and directors, we believe that all Section 16(a) filing requirements for the year ended December 31, 2013, applicable to our officers, directors and greater than ten percent beneficial owners were timely satisfied except for the failure to file one Form 4 by each of Gerald J. Ford and Carl B. Webb, each of whom received a distribution of common stock in a transaction that he did not initiate. Further, Diamond A Financial, L.P. did not file a Form 3 or subsequent Forms 4; however, such transactions were reported on Mr. Gerald Ford's Section 16 filings. Mr. Green has failed to file a Form 4 reporting the redemption by the Company of partnership units in July 2007.

        Based on written representations from our officers and directors, we believe that all Forms 5 for directors, officers and greater than ten percent beneficial owners that have been filed with the SEC are the only Forms 5 required to be filed for the period ended December 31, 2013.


Certain Relationships and Related Party Transactions

General

        Transactions with related persons are governed by our General Code of Ethics and Business Conduct, which applies to all officers, directors and employees. This code covers a wide range of potential activities, including, among others, conflicts of interest, self-dealing and related party transactions. Waiver of the policies set forth in this code will only be permitted when circumstances warrant. Such waivers for directors and executive officers, or that provide a benefit to a director or executive officer, may be made only by the Board of Directors, as a whole, or the Audit Committee of the Board of Directors and must be promptly disclosed as required by applicable law or regulation. Absent such a review and approval process in conformity with the applicable guidelines relating to the particular transaction under consideration, such arrangements are not permitted.


Management Services Agreement

        Prior to December 2012, Diamond A Administration Company, LLC, or Diamond A, an affiliate of Gerald J. Ford, the current Chairman of the Board of Hilltop and the beneficial owner of 17.2% of Hilltop common stock as of April 8, 2014, provided certain management services to Hilltop and its subsidiaries, including, among others, financial and acquisition evaluation, and office space to Hilltop,

229


Table of Contents

pursuant to a Management Services Agreement. The services and office space were provided at a cost of $91,500 per month, plus reasonable out-of-pocket expenses. The services provided under this agreement included those of several of Hilltop's directors, including Gerald J. Ford, Kenneth Russell and Carl B. Webb. Prior to Jeremy B. Ford assuming the role of Chief Executive Officer of Hilltop, he provided services to Hilltop under the Management Services Agreement. The Management Services Agreement was terminated upon our acquisition of PlainsCapital. Hilltop also agreed to indemnify and hold harmless Diamond A for its performance or provision of these services, except for gross negligence and willful misconduct. Further, Diamond A's maximum aggregate liability for damages under this agreement is limited to the amounts paid to Diamond A under this agreement during twelve months prior to that cause of action.

        Jeremy B. Ford, a director and the Chief Executive Officer of Hilltop, is the beneficiary of a trust that owns a 49% limited partnership interest in Diamond A Financial, L.P. Diamond A Financial, L.P. owns 17.2% of the outstanding Hilltop common stock at April 8, 2014. He also is a director and the Secretary of Diamond A, which provided management services to Hilltop under the Management Services Agreement described in the preceding paragraph. Diamond A is owned by Hunter's Glen/Ford, Ltd., a limited partnership in which a trust for the benefit of Jeremy B. Ford is a 46% limited partner. The spouse of Corey G. Prestidge is the beneficiary of a trust that also owns a 46% limited partnership interest in Hunter's Glen/Ford, Ltd. and a trust that owns a 49% limited partnership interest in Diamond A Financial, L.P.

        Jeremy B. Ford is the son of Gerald J. Ford. Corey G. Prestidge, Hilltop's Executive Vice President, General Counsel and Secretary, is the son-in-law of Gerald J. Ford. Accordingly, Messrs. Jeremy B. Ford and Corey G. Prestidge are brothers-in-law.


Hilltop Sublease

        In connection with our acquisition of PlainsCapital, we terminated the Management Services Agreement described above. Hilltop, however, desired to continue to occupy the office space provided pursuant to the Management Services Agreement. Accordingly, Hilltop entered into a sublease with Hunter's Glen/Ford, Ltd., an affiliate of Mr. Gerald J. Ford and the tenant of the office space (See "Management Services Agreement" above for further discussion regarding Hunter's Glen/Ford, Ltd.) on December 1, 2012. The Sublease is subject to the base Lease and on the same terms as the base Lease. Pursuant to the Sublease, until February 27, 2014, Hilltop leased 5,491 square feet for $219,640 annually, plus additional rent due of $1,168 for the month of December 2012 and $14,975 for 2013 under the base Lease. On February 28, 2014, the parties amended the Sublease to increase the square footage subleased to 6,902 square feet, increase the rent based on such additional square footage, and extend the term to July 31, 2018. Hilltop pays the same rate per square foot as Hunter's Glen/Ford, Ltd. is required to pay under the base Lease, as amended.


The NLASCO Acquisition

        ARC Insurance Holdings Inc., or Holdings, a subsidiary of us, on the one hand, and C. Clifton Robinson, C.C. Robinson Property Company, Ltd. and The Robinson Charitable Remainder Unitrust, on the other hand, entered into a stock purchase agreement, dated as of October 6, 2006, or the NLASCO Agreement. Pursuant to the NLASCO Agreement, on January 31, 2007, Holdings acquired all of the outstanding shares of capital stock of NLASCO, Inc., or NLASCO, a privately held property and casualty insurance holding company domiciled in the state of Texas. In exchange for the stock, NLASCO's shareholders, consisting of C. Clifton Robinson and affiliates, as specified above, received $105.75 million in cash and 1,218,880 shares of our common stock issued to Mr. Robinson, for a total consideration of $122.0 million. The NLASCO Agreement included customary representations, warranties and covenants, as well as indemnification provisions. The purchase price was subject to specified post-closing adjustments that resulted in the following additional aggregate consideration paid

230


Table of Contents

to Mr. Robinson and his affiliates: $2,852,879 on March 16, 2010 and $252,997 on March 25, 2011. As a result of these payments, no further post-closing adjustments are required under the stock purchase agreement. The parties also entered into several ancillary agreements, including a non-competition agreement, a registration rights agreement, a release, employment agreements and a share lock-up agreement.


C. Clifton Robinson Relationship with Hilltop

        In furtherance of the terms of the NLASCO Agreement, C. Clifton Robinson, Chairman of NLASCO and a member of our Board of Directors, entered into certain ancillary agreements with us or NLASCO, including, among others, an employment agreement, a non-competition agreement, a lock-up agreement and a registration rights agreement.

        In conjunction with the closing of the NLASCO acquisition, NLASCO entered into an employment agreement with C. Clifton Robinson that provides that he was to serve as chairman of NLASCO and would be paid $100,000 a year. In addition, NLASCO entered into an employment agreement with Mr. Robinson's son, Gordon B. Robinson, the former vice chairman and deputy chief executive officer of NLASCO, pursuant to which he was to serve in an advisory capacity to NLASCO and for which he would be paid $100,000 per year. Each employment agreement was for a one-year term with automatic one-year extensions by agreement of the parties. Both of these agreements were terminated on January 1, 2011. The employment agreements also included non-competition and non-solicitation provisions similar to that in the non-competition agreement discussed below, but with terms until two years after the termination of employment. Further, each of the Robinsons entered into a non-competition agreement pursuant to which he agreed not to, directly or indirectly, engage or invest in, own, manage, operate, finance, control, or participate in the ownership, management, operation, financing, or control of, be employed by, lend credit to, or render services to, any business whose products, services or activities compete with those of NLASCO or any of its subsidiaries within certain states. Each non-competition agreement included customary non-solicitation provisions. The term of the non-competition agreements was five years, and such agreements expired in January 2012. Finally, C. Clifton Robinson executed a share lock-up agreement pursuant to which he agreed not to offer, sell, contract to sell, hypothecate, pledge, sell or grant any option, right or warrant to purchase, or otherwise dispose of, or contract to dispose of, our common stock until 20 months after the closing date of the NLASCO acquisition. This lock-up agreement expired in September 2008. Upon the closing of the NLASCO acquisition in January 2007, NLASCO became our wholly-owned subsidiary.

        Mr. Robinson was elected to our board of directors in March 2007 pursuant to the terms of the NLASCO Agreement.


Assumption of NLASCO, Inc. Subsidiary Office Leases

        With the acquisition of all of the capital stock of NLASCO, we also assumed all assets and liabilities of its wholly-owned subsidiaries. Prior to Mr. Robinson's disposition of his office building on August 24, 2011, NLASCO and its affiliates in Waco, Texas leased office space from affiliates of Mr. Robinson. There were three separate leases. The first lease was a month-to-month lease for office space at a rate of $900 per month. The second lease was a month-to-month lease at a monthly rental rate of $3,500 per month. The first and second leases were terminated in August 2010. The third lease, as amended, currently requires payments of $40,408 per month and expires on December 31, 2014, but does have renewal options at the discretion of the lessee. Aggregate office space under lease with regard to the foregoing is approximately 28,863 square feet.

231


Table of Contents


The PlainsCapital Acquisition

        Hilltop and PlainsCapital entered into an Agreement and Plan of Merger, dated as of May 8, 2012, pursuant to which we acquired PlainsCapital on November 30, 2012. Pursuant to the Agreement and Plan of Merger, PlainsCapital's shareholders, which included Ms. Anderson and Messrs. Bolt, Feinberg, Huffines, Lewis, Littlefair, Martin, Salmans, Schaffner, Sherman, Taylor and White, received 0.776 shares of Hilltop common stock and $9.00 in cash for each share of PlainsCapital's outstanding common stock they held. Based on Hilltop's closing stock price on November 30, 2012, the total purchase price in the PlainsCapital acquisition was $813.5 million, consisting of $311.8 million in cash and the issuance of 27.1 million shares of common stock and 114,068 shares of Non-Cumulative Perpetual Preferred Stock, Series B. In addition, Mrs. Anderson and Messrs. Bolt, Feinberg, Huffines, Lewis, Littlefair, Sherman, Taylor and White were appointed to serve as members of our Board of Directors. The Agreement and Plan of Merger contained customary representations, warranties and covenants, as well as indemnification provisions.


Consultant

        We are currently paying Richard P. Hodge $80,000 per year for tax services. Mr. Hodge also provides tax services to Mr. Gerald Ford and his affiliates.


Employment of Certain Family Members

        During 2013, Corey Prestidge, the brother-in-law of Jeremy B. Ford, our President and Chief Executive Officer, and the son-in-law of Gerald J. Ford, the Chairman of our Board, served as Hilltop's General Counsel and Secretary; Lee Ann White, the wife of Alan B. White, PlainsCapital's Chairman and Chief Executive Officer, served as our Senior Vice President, Director of Public Relations; and Kale Salmans, the son of Todd Salmans, Chief Executive Officer of PrimeLending, served as a Regional Manager of PrimeLending. Pursuant to our employment arrangements with these individuals, we paid Corey Prestidge $575,000, Lee Ann White $147,500 and Kale Salmans $275,000 as compensation for their services as employees during 2013.


Cowboys Stadium Suite

        In 2007, PlainsCapital Bank contracted with Cowboys Stadium, L.P., a company affiliated with the employer of Ms. Anderson and that is beneficially owned by Ms. Anderson and certain of her immediate family members, for the 20-year lease of a suite at Cowboys Stadium beginning in 2009. Pursuant to the lease agreement, PlainsCapital Bank has agreed to pay Cowboys Stadium, L.P. annual payments of $500,000, subject to possible annual escalations, not to exceed 3% per year, beginning with the tenth year of the lease.


Indebtedness

        The Bank has had, and may be expected to have in the future, lending relationships in the ordinary course of business with our directors and executive officers, members of their immediate families and affiliated companies in which they are employed or in which they are principal equity holders. In our management's opinion, the lending relationships with these persons were made in the ordinary course of business and on substantially the same terms, including interest rates, collateral and repayment terms, as those prevailing at the time for comparable transactions with persons not related to us and do not involve more than normal collection risk or present other unfavorable features.

232


Table of Contents


Principal Stockholders of Hilltop

        The following table sets forth information regarding our common stock beneficially owned on April 8, 2014 by any person or "group," as that term is used in Section 13(d)(3) of the Exchange Act, known to us to beneficially own more than five percent of the outstanding shares of our common stock.

Name and Addresss of Beneficial Owner
  Amount and Nature of
Beneficial Ownership
  Percent of
Class(a)
 

Gerald J. Ford(b)
200 Crescent Court, Suite 1350
Dallas, Texas 75201

    15,548,160     17.2 %

Burgundy Asset Management Ltd.(c)
181 Bay Street, Suite 4510
Toronto, Ontario M5J 2T3

   
4,655,202
   
5.2

%

(a)
Based on 90,177,991 shares of common stock outstanding on April 8, 2014. Shares issuable under instruments to purchase our common stock that are exercisable within 60 days of April 8, 2014 are treated as if outstanding for computing the percentage ownership of the person holding these instruments, but are not treated as outstanding for purposes of computing the percentage ownership of any other person.

(b)
The shares of common stock beneficially owned by Mr. Ford include 15,544,674 shares owned by Diamond A Financial, LP. Mr. Ford is the sole general partner of Diamond A Financial, LP. Mr. Ford has sole voting and dispositive power of these shares.

(c)
Based upon Schedule 13G/A (Amendment No. 3) filed on February 3, 2014. Burgundy Asset Management Ltd. has sole voting power with respect to 2,953,642 of these shares and sole dispositive power with respect to all of these shares. Clients for whom Burgundy Asset Management Ltd. acts as investment adviser may withdraw dividends or proceeds from the sale securities from the accounts managed by Burgundy Asset Management Ltd. No one client of Burgundy Asset Management Ltd. has an interest in the common stock of Hilltop in excess of five percent of the total outstanding shares.


Security Ownership of Hilltop Management

        The following table sets forth information regarding the number of shares of our common stock beneficially owned on April 8, 2014, by:

Except as otherwise set forth below, the address of each of the persons listed below is c/o Hilltop Holdings Inc., 200 Crescent Court, Suite 1330, Dallas, Texas 75201. Except as otherwise indicated in the footnotes to this table, the persons named in the table have specified that they have sole voting and

233


Table of Contents

investment power with respect to all shares of stock shown as beneficially owned by them, subject to any applicable community property law.

 
  Common Stock  
Name of Beneficial Owner
  Amount and Nature of
Beneficial Ownership
  Percent of
Class(a)
 

Charlotte Jones Anderson

    4,405     *  

Rhodes Bobbitt

    126,059 (b)   *  

Tracy A. Bolt

    6,608     *  

W. Joris Brinkerhoff

    35,228     *  

Charles R. Cummings

    37,476     *  

Hill A. Feinberg

    1,376,552 (c)   1.5 %

Gerald J. Ford

    15,548,160 (d)   17.2 %

200 Crescent Court, Suite 1350

             

Dallas, Texas 75201

             

Jeremy B. Ford

    392,500 (e)   *  

J. Markham Green

    119,152     *  

Jess T. Hay

        *  

William T. Hill, Jr. 

    48,350 (f)   *  

James R. Huffines

    354,731 (g)   *  

Lee Lewis

    656,199 (h)   *  

Andrew J. Littlefair

    12,948     *  

W. Robert Nichols, III

    41,000 (i)   *  

Darren Parmenter

    5,361 (j)   *  

C. Clifton Robinson

    1,218,880     1.4 %

Kenneth D. Russell

        *  

Jerry L. Schaffner

    88,546 (k)   *  

A. Haag Sherman

    14,422     *  

Robert C. Taylor, Jr. 

    29,918     *  

Carl B. Webb

    104,462     *  

Alan B. White

    2,327,338 (l)   2.6 %

All Directors and Named Executive Officers, as a group (26 persons)

    22,776,434 (m)   25.2 %

*
Represents less than 1% of the outstanding shares of such class.

(a)
Based on 90,177,991 shares of common stock outstanding on April 8, 2014. Shares issuable under instruments to purchase our common stock that are exercisable within 60 days of April 8, 2014 are treated as if outstanding for computing the percentage ownership of the person holding these instruments, but are not treated as outstanding for purposes of computing the percentage ownership of any other person.

(b)
Includes 62,100 shares of common stock held in an IRA account for the benefit of Mr. Bobbitt.

(c)
Includes 25,776 shares of common stock held directly by Mr. Feinberg's wife. Also includes 776 shares of common stock held by the Max McDermott Trust for the benefit of Mr. Feinberg's stepson. Mr. Feinberg's wife is the trustee of the trust. Includes 15,000 restricted shares of common stock that cliff vest on April 11, 2016. Mr. Feinberg can vote such restricted shares but may not dispose of them until they have vested. Excludes 8,887 shares of common stock deliverable upon the vesting of restricted stock units that will not vest within 60 days of April 8, 2014.

234


Table of Contents

(d)
The shares of common stock beneficially owned by Mr. Ford include 15,544,674 shares owned by Diamond A Financial, LP. Mr. Ford is the sole general partner of Diamond A Financial, LP. Mr. Ford has sole voting and dispositive power of these shares.

(e)
Jeremy Ford is a beneficiary of a trust that owns a 49% limited partnership interest in Diamond A Financial, LP (see footnote (d)). Includes (a) 300,000 shares of common stock acquirable upon the exercise of a stock option and (b) 30,000 restricted shares of common stock that cliff vest on April 1, 2016. Mr. Jeremy Ford can vote such restricted shares but may not dispose of them until they have vested. Excludes (x) 200,000 shares of common stock acquirable upon the exercise of a stock option that will not vest within 60 days of April 8, 2014, (y) 25,392 shares of common stock deliverable upon the vesting of restricted stock units that will not vest within 60 days of April 8, 2014 and (z) 15,544,674 shares of common stock held by Diamond A Financial, LP.

(f)
Includes 7,300 shares of common stock held in a SEP IRA account for the benefit of Mr. Hill and 15,750 shares of common stock held by the William T. Hill P.C. retirement account for the benefit of Mr. Hill.

(g)
Includes 952 shares of common stock allocated to an account pursuant to the Plains Capital Corporation Employee Stock Ownership Plan (the "ESOP") for the benefit of Mr. Huffines. Each ESOP participant has the right to direct the ESOP trustees how to vote the shares allocated to his account and may therefore be deemed to beneficially own such shares. Also includes (a) 47,000 shares of common stock held by the James Huffines 1994 Trust for the benefit of Mr. Huffines, (b) 11,077 shares of common stock held in a self-directed individual retirement account and (c) 30,000 restricted shares of common stock that cliff vest on April 1, 2016. Mr. Huffines can vote such restricted shares but may not dispose of them until they have vested. Excludes 17,774 shares of common stock deliverable upon the vesting of restricted stock units that will not vest within 60 days of April 8, 2014.

(h)
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.

(i)
Includes 11,000 shares of common stock held in an IRA account for the benefit of Mr. Nichols.

(j)
Includes 5,000 restricted shares of common stock that cliff vest on April 1, 2016. Mr. Parmenter can vote such restricted shares but may not dispose of them until they have vested. Excludes 7,406 shares of common stock deliverable upon the vesting of restricted stock units that will not vest within 60 days of April 8, 2014.

(k)
Includes 36,920 shares of common stock allocated to an account pursuant to the ESOP for the benefit of Mr. Schaffner. Each ESOP participant has the right to direct the ESOP trustees how to vote the shares allocated to his account and may therefore be deemed to beneficially own such shares. Also includes (a) 3,931 shares of common stock held directly by Mr. Schaffner's wife, (b) 11,970 shares of common stock held in a self-directed individual retirement account and (c) 20,000 restricted shares of common stock that cliff vest on April 1, 2016. Mr. Schaffner can vote such restricted shares but may not dispose of them until they have vested. Excludes 11,849 shares of common stock deliverable upon the vesting of restricted stock units that will not vest within 60 days of April 8, 2014.

(l)
Includes (a) 9,785 shares of common stock held directly by Mr. White's wife, (b) 454 shares of common stock allocated to the ESOP account of Mr. White's wife, (c) 23,806 shares of common stock held by Double E Investments ("Double E"), (d) 12,883 shares of common stock held by EAW White Family Partnership, Ltd. ("EAW"), (e) 8,045 shares of common stock held by Maedgen, White and Maedgen ("MW&M"), (f) 1,853,958 shares of common stock held by Maedgen & White, Ltd., and (g) 952 shares of common stock allocated to an account pursuant to

235


Table of Contents

(m)
Represents 26 persons and includes (a) 360,000 shares of common stock acquirable pursuant to the exercise of stock options and (b) 210,000 restricted shares of common stock that cliff vest on April 1, 2016. The holders of such restricted shares can vote the restricted shares but may not dispose of them until they have vested. Excludes (x) 240,000 shares of common stock acquirable by our executive officers pursuant to the exercise of stock options that will not vest within 60 days of April 8, 2014 and (y) 140,076 shares of common stock deliverable upon the vesting of restricted stock units that will not vest within 60 days of April 8, 2014.


INFORMATION ABOUT THE COMPANIES—SWS

        SWS, a Delaware corporation, is a savings and loan holding company with principal executive offices at 1201 Elm Street, Suite 3500, Dallas, Texas 75270. The telephone number of SWS's executive offices is (214) 859-1800, and its Internet website address is www.swsgroupinc.com. SWS is focused on delivering a broad range of investment banking, commercial banking and related financial services to corporate, individual and institutional investors, broker/dealers, governmental entities and financial intermediaries. SWS is the largest full-service brokerage firm headquartered in the Southwestern United States (based on the number of financial advisors). SWS conducts its banking business through its wholly owned subsidiary, Southwest Securities, FSB, a federally chartered savings bank.

        SWS's common stock is listed on the New York Stock Exchange under the symbol "SWS."


INFORMATION ABOUT THE COMPANIES—PERUNA LLC

        Peruna LLC, a Delaware limited liability company, is a wholly owned subsidiary of Hilltop. Peruna LLC is newly formed, and was organized for the purpose of effecting the merger. Other than those incident to its formation and the matters contemplated by the merger agreement, Peruna LLC has engaged in no business activities to date and it has no material assets or liabilities of any kind.

236


Table of Contents


THE MERGER

Terms of the Merger

        Each of Hilltop's and SWS's respective boards of directors has approved the merger agreement. The merger agreement provides for the merger of SWS with and into Peruna LLC, a subsidiary of Hilltop, with Peruna LLC continuing as the surviving entity. In the merger, each share of SWS common stock, par value $0.10 per share, issued and outstanding immediately prior to the completion of the merger will be converted into the right to receive $1.94 in cash and 0.2496 of Hilltop common stock. No fractional shares of Hilltop common stock will be issued in connection with the merger, and holders of SWS common stock will be entitled to receive cash in lieu thereof. Immediately following the completion of the merger, SWS's wholly owned bank subsidiary, Southwest Securities, FSB, will merge with and into Hilltop's wholly owned bank subsidiary, PlainsCapital Bank. PlainsCapital Bank will be the surviving bank in the bank merger.

        SWS stockholders are being asked to approve the merger agreement. See "The Merger Agreement" included elsewhere in this proxy statement/prospectus for additional and more detailed information regarding the legal documents that govern the merger, including information about the conditions to the completion of the merger and the provisions for terminating and amending the merger agreement.


Background of the Merger

        As part of their ongoing consideration and evaluation of SWS's long-term prospects and strategies, the SWS Board and senior management have regularly reviewed and assessed SWS's business strategies and objectives, including potential strategic opportunities, all with the goal of enhancing value for its stockholders. These potential strategic opportunities, from time to time, have included, among other things, the consideration of potential business combination transactions.

        On July 29, 2011, in response to ongoing challenging business conditions and to ensure that Southwest Securities, FSB, the bank subsidiary of SWS, was able to maintain its required level of regulatory capital, SWS entered into a credit agreement (the "Credit Agreement") with Hilltop and Oak Hill Capital Partners III, L.P. and Oak Hill Capital Management Partners III, L.P. (together, "Oak Hill") pursuant to which each of Hilltop and Oak Hill made a $50 million loan to SWS, certain proceeds of which were invested in Southwest Securities, FSB. SWS also issued each of Hilltop and Oak Hill warrants to purchase 8,695,652 shares of common stock at an exercise price of $5.75 per share (the "Warrants").

        The terms of the Credit Agreement include a covenant prohibiting SWS, subject to certain exceptions, from undergoing a "Fundamental Change," which includes any merger, amalgamation or consolidation (the "Merger Covenant"), and which SWS would breach by engaging in a merger, amalgamation or consolidation unless compliance were waived by each lender thereunder.

        The Merger Covenant specifically provides that while any loans are outstanding under the Credit Agreement, SWS may not merge, consolidate or amalgamate, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or dispose of all or substantially all of its assets or business, except that SWS or any of its subsidiaries may merge or consolidate with any person; provided that (A) in the case of any merger or consolidation involving SWS, SWS shall be the continuing or surviving corporation and the stockholders of SWS immediately prior to such merger or consolidation shall hold at least a majority of the outstanding shares of the combined entity immediately after the consummation of such merger or consolidation; (B) in the case of any merger or consolidation involving SWS or its subsidiaries that are party to the Credit Agreement, the surviving entity shall be a party to the Credit Agreement; and (C) in the case of any merger or consolidation involving a

237


Table of Contents

subsidiary of SWS that is a registered broker-dealer, the surviving entity shall be a registered broker-dealer;

        The Credit Agreement also prohibits SWS from prepaying the loan other than following a period during which the closing price for SWS common stock exceeds 150% of the exercise price of the Warrants (or $8.625) for twenty out of any thirty consecutive trading days. In connection with these transactions, Mr. Gerald J. Ford of Hilltop and Mr. J. Taylor Crandall of Oak Hill were appointed to the SWS Board. These transactions were approved by the SWS stockholders.

        On January 9, 2014, Hilltop delivered an unsolicited offer to the President and Chief Executive Officer of SWS proposing, subject to the approval of the SWS Board and subsequent approval by SWS stockholders, a transaction in which the public stockholders of SWS would receive $7.00 per share, to be paid 50% in cash and 50% in Hilltop common stock. On January 10, 2014, Hilltop issued a press release and filed an amended Schedule 13D disclosing the proposal. Also on January 10, 2014, SWS issued a press release announcing its receipt of Hilltop's proposal letter.

        On January 15, 2014, the SWS Board met and discussed Hilltop's offer and appropriate next steps to consider taking, including the creation of a committee of the SWS Board to be composed solely of directors not affiliated with Hilltop, in light of the potential for actual or perceived conflicts of interest presented by Hilltop's relationship with SWS. The SWS Board discussed SWS's business plan, industry trends and the potential for increasing stockholder value through implementation of SWS's business initiatives. The SWS Board also considered the prospects of SWS, the public markets' valuation of SWS and other companies in SWS's industry and the potential challenges to achieving its business plan. The SWS Board also discussed the need to repay the loans under the Credit Agreement in full on July 28, 2016, or to refinance such loans. After evaluation of Hilltop's offer and discussion of potential strategic alternatives, the SWS Board determined that SWS should explore potential strategic alternatives available to SWS, including a possible sale of SWS to Hilltop or another party, with the goal of maximizing stockholder value. To address the potential for actual or perceived conflicts of interest, the SWS Board determined that it would be prudent to form a committee of directors from SWS's Board not affiliated with Hilltop or Oak Hill consisting of Robert A. Buchholz, Christie S. Flanagan and Tyree B. Miller, to lead the review of Hilltop's offer and other strategic alternatives. The Special Committee members were selected due to their disinterested and non-executive status, their knowledge and experience, and their ability and willingness to devote a sufficient amount of time to their service on the Special Committee. The SWS Board also authorized the Special Committee to retain any external advisors that it deemed necessary to fulfill its duties. The Special Committee retained Davis Polk & Wardwell LLP ("Davis Polk") as its legal advisor on January 29, 2014 and Sandler O'Neill + Partners, L.P. ("Sandler O'Neill") as its financial advisor on February 3, 2014, after discussion with a number of investment banks and law firms. On January 30, 2014, the Special Committee held a meeting to discuss the role, responsibilities and composition of the Special Committee, and after further consideration recommended that the SWS Board replace Christie S. Flanagan as a member of the Special Committee with Joel T. Williams III.

        On February 3, 2014, the SWS Board adopted formal resolutions ratifying the formation of the Special Committee and the establishment of its powers. The SWS Board selected Robert A. Buchholz, Tyree B. Miller and Joel T. Williams III as the members of the Special Committee with Mr. Miller as chairman. The SWS Board authorized the Special Committee to explore, review, reject, evaluate and negotiate Hilltop's offer and the strategic alternatives that were available to SWS, including empowering the Special Committee to, among other things, determine and recommend to the SWS Board whether a potential transaction was advisable and fair to and in the best interests of the stockholders of SWS and to retain and compensate advisors to the Special Committee. The Special Committee was not obligated to recommend either Hilltop's offer or any other strategic alternative and the resolutions provided that (i) the Special Committee could not approve the execution of any definitive agreement evidencing the final terms of any strategic alternative but would instead submit its

238


Table of Contents

recommendation of any such agreement to the SWS Board and (ii) the SWS Board would not approve any strategic alternative without the affirmative recommendation of the Special Committee.

        On February 4, 2014, Sandler O'Neill received a call from Esposito Global, LLC ("Esposito Global") expressing interest in acquiring SWS's retail business, but not its bank subsidiary. Following that call, on February 12, 2014, the Special Committee received a letter from Esposito Global which stated that Esposito Global was prepared to make a proposal, conditioned on Esposito Global undertaking and completing due diligence, to acquire all the outstanding shares of SWS common stock for per share consideration of $8.00 in cash.

        At a February 13, 2014 meeting of the Special Committee, in which members of SWS senior management and representatives of the Special Committee's financial and legal advisors participated, Sandler O'Neill made a presentation to the Special Committee on various financial aspects of potential strategic alternatives available to SWS, including Hilltop's offer and the Esposito Global proposal, taking into account various factors such as financial projections prepared by SWS management. Representatives of Davis Polk reviewed with the Special Committee the fiduciary duties of the Special Committee members applicable to their consideration of Hilltop's offer and other potential strategic alternatives. Further, the Special Committee discussed with Sandler O'Neill recent communications received by Sandler O'Neill from parties expressing interest in a possible transaction with SWS, including the letter from Esposito Global. The Special Committee discussed, among other things, the alternatives to a sale of SWS as a whole including the significant risks of SWS continuing to operate some or all of its lines of business on a standalone basis. The Special Committee noted, among other things, that SWS was not generating earnings, that it was subscale in all of its principal business lines, that it continually failed to meet budgets, which led to concerns as to the ability to achieve targets in the future, and that it would be required to repay or refinance amounts due under the Credit Agreement in 2016. The Special Committee agreed that it would be in the best interests of SWS and its stockholders to explore the range of strategic alternatives, including a possible sale of SWS, that were reasonably available to SWS with the goal of maximizing stockholder value.

        The Special Committee considered the possible disruption to SWS's business that could result from the public announcement of an exploratory process that might involve the sale of SWS and the resulting distraction of the attention of SWS management and employees, concluding that such risks could be minimized by proceeding with an exploratory process on a non-public basis. In particular the Special Committee was concerned with the risk of loss of key employees. The Special Committee felt that such employee losses not only would adversely affect SWS in the event there were no transaction for SWS, but, under some circumstances, might also adversely affect SWS's ability to enter into, or maximize stockholder value in, a transaction.

        The Special Committee also noted the fact that Hilltop's unsolicited offer had been publicized in a press release by Hilltop and described in Hilltop's Amended Statement on Schedule 13D, and the fact that SWS had issued a press release with respect to this offer, including indicating that a Special Committee had been formed. As a result, the Special Committee believed that the financial markets were fully aware that SWS was the subject of takeover interest and that any party having an interest in a strategic transaction with SWS was likely to contact one or both of SWS and its financial advisor.

        The Special Committee therefore requested that Sandler O'Neill assist with a confidential outreach to an identified group of third parties that the Special Committee and Sandler O'Neill felt might be interested in acquiring SWS and by detailing to such parties the benefits of a transaction with SWS. A group of potential acquirors was identified by selecting parties that were financially capable of effecting such a transaction, would be reasonably likely to obtain the necessary regulatory approvals without material conditions to consummate such a transaction and might be interested in acquiring SWS or, subsequent to the public disclosure of Hilltop's offer, had expressed to SWS or Sandler O'Neill an interest in a strategic transaction with SWS.

239


Table of Contents

        Following the February 13, 2014 meeting, and in accordance with the Special Committee's instructions, Sandler O'Neill began to contact potential interested parties to encourage and determine levels of interest in a transaction involving the potential acquisition of SWS. During the course of its engagement, Sandler O'Neill contacted a total of seventeen parties (which included all of the parties that had contacted SWS or Sandler O'Neill on their own) that the Special Committee and Sandler O'Neill believed might be interested in a strategic transaction with SWS, including, on February 18, 2014, making contact with representatives of a financial institution referred to as "Party A".

        On February 14, 2014, in order to provide the Special Committee with greater flexibility in soliciting and considering offers from third parties, representatives of Davis Polk, at the request of the Special Committee, called Wachtell, Lipton, Rosen & Katz, counsel to Hilltop ("Wachtell Lipton"), to request that Hilltop agree to waive the Merger Covenant. Wachtell Lipton stated that it would convey the request to Hilltop. Also, at the request of the Special Committee, representatives of Sandler O'Neill had preliminary discussions with a representative of Hilltop regarding Hilltop's offer, including with respect to regulatory matters and due diligence.

        On February 18, 2014, Esposito Global publicly disclosed its proposal to acquire all the outstanding shares of SWS common stock for $8.00 per share in cash. The proposal was expressly contingent on third party financing being arranged.

        On February 20, 2014, the Special Committee held a meeting in which members of SWS senior management and representatives of the Special Committee's financial and legal advisors participated. At the meeting, Sandler O'Neill reviewed with the Special Committee the results of certain financial analyses Sandler O'Neill had performed and its exploration of certain alternatives to a sale of SWS as a whole, including SWS continuing as a standalone business, SWS selling Southwest Securities, FSB, the bank subsidiary of SWS, and continuing to operate its other lines of business, and SWS breaking itself up through the separate sale of each of SWS's business units. Sandler O'Neill informed the Special Committee that the results of its analysis showed, as compared to a sale of SWS as a whole, that none of these options was likely to increase stockholder value and that each would carry significant timing and/or execution risks. It was also noted that separating the lines of business would be problematic because of linkages between them. The representatives of Sandler O'Neill also stated that they believed that they had made initial contact with all of the parties that would likely be interested in acquiring SWS. Following discussion, the Special Committee directed Sandler O'Neill to schedule a meeting with Hilltop to discuss its offer, to contact Esposito Global to obtain additional information relating to its acquisition proposal, including its plans for arranging outside financing and its ability to obtain required regulatory approvals, and to continue discussions with other potentially interested parties, including Party A.

        During this period, Sandler O'Neill and SWS received various unsolicited calls from other third parties expressing a preliminary interest in a possible transaction involving SWS and Sandler O'Neill also had preliminary discussions with a number of parties it contacted at the direction of the Special Committee. However, for a variety of reasons, including that a number of these parties expressed an interest only in purchasing select assets or divisions (which, as discussed above and taking into consideration the analysis of Sandler O'Neill, the Special Committee believed would not maximize stockholder value) and the regulatory hurdles that some parties would face in order to acquire the whole of SWS, none of these third parties continued to pursue a transaction with SWS after the early stage contact.

        On February 21, 2014, representatives of Davis Polk and Wachtell Lipton had a call regarding the Merger Covenant. Wachtell Lipton indicated that Hilltop was not prepared to grant a waiver of the Merger Covenant to permit a third party transaction.

        At the request of the Special Committee, on February 24, 2014, representatives of Davis Polk discussed with Esposito Global's counsel, Esposito Global's plans with respect to the regulatory process

240


Table of Contents

approvals that would be required to consummate their proposed transaction, particularly with respect to SWS's bank subsidiary. Esposito Global's counsel acknowledged that Esposito Global would require additional resources to meet applicable regulatory requirements and pay the purchase price and stated that it was in the process of assembling those resources.

        On or about February 26, 2014, representatives of Davis Polk called Oak Hill's outside counsel to request that Oak Hill consider waiving the Merger Covenant. Oak Hill's outside counsel subsequently informed representatives of Davis Polk that, assuming as part of any merger transaction the debt held by Oak Hill pursuant to the Credit Agreement would be prepaid in accordance with the terms of the Credit Agreement (at an amount equal to principal plus the "make whole" payment specified in the Credit Agreement), the director appointed by Oak Hill to the SWS Board would expect to recommend to Oak Hill's investment committee that Oak Hill waive the Merger Covenant with regard to any transaction at or above Hilltop's offer of $7.00 per share. Oak Hill's outside counsel also confirmed that Oak Hill was not requesting different consideration in respect of its Warrants than it would be entitled to as a stockholder on exercise of its Warrants.

        On February 26, 2014, the Special Committee held a meeting, in which members of SWS senior management and representatives of the Special Committee's financial and legal advisors participated, to discuss the status of Sandler O'Neill's and Davis Polk's communications with various interested parties. Following discussion, the Special Committee directed Sandler O'Neill to schedule a meeting with Hilltop to discuss its offer, to contact Esposito Global to obtain additional information relating to its acquisition proposal, including its plans for arranging outside financing, and to continue discussions with other potentially interested parties, including Party A.

        On February 27, 2014, representatives of Davis Polk and Sandler O'Neill had a call with representatives of Esposito Global and its counsel to discuss Esposito Global's plans to arrange the outside financing required to support its offer and to manage the regulatory process with respect to acquiring a bank. Esposito Global stated that it planned to work with an established bank holding company, Party B, that would take the lead role in any potential transaction.

        In late February 2014, representatives of Party A and Sandler O'Neill had several calls discussing Party A's interest in acquiring SWS at a price that Party A said it expected would be close to the tangible book value of SWS's "liquid assets," which Sandler O'Neill believed to approximate the fully diluted tangible book value of $8.15 per share. In subsequent conversations prior to March 18, 2014, Party A referred to its indication of interest at a price of $8.15 per share.

        On February 28, 2014, at the request of the Special Committee, Sandler O'Neill sent draft non-disclosure agreements to each of Party A and Hilltop.

        On March 3, 2014, representatives of Sandler O'Neill and of Davis Polk spoke with representatives of Esposito Global and Party B. During that conversation, Party B stated that it was interested in acquiring SWS, but that it and Esposito Global would need to obtain significant external financing in order to consummate a transaction with SWS, that they expected that at least three separate private equity firms would need to participate in the financing to avoid additional regulatory issues and that the financing process would likely take eight weeks or longer.

        On March 3, 2014, the Special Committee held a meeting, in which members of SWS senior management and representatives of the Special Committee's financial and legal advisors participated, to discuss the status of Sandler O'Neill's and Davis Polk's communications with various interested parties. The representatives of Sandler O'Neill stated at this meeting that they believed that Sandler O'Neill had been in contact with all of the parties that would likely be interested in acquiring SWS, and that only four parties remained interested (Hilltop, Esposito Global, Party A and, working with Esposito Global, Party B). Representatives of Sandler O'Neill and Davis Polk discussed with the Special Committee their call earlier in the day with representatives of Esposito Global and Party B. The

241


Table of Contents

Special Committee discussed concerns related to the financing and timing risks of a potential transaction with Esposito Global and Party B. In addition, the representatives of Sandler O'Neill reported that on March 3, 2014, they received a call from representatives of Hilltop requesting the Special Committee to respond to Hilltop's offer and enter into direct negotiations.

        Following discussion, the Special Committee concluded that Hilltop's offer of $7.00 per share undervalued SWS and was inadequate. The Special Committee directed Sandler O'Neill to inform Hilltop that the Special Committee rejected the offer of $7.00 per share. After the representatives of Sandler O'Neill left the meeting, the Special Committee concluded that it would be desirable, in the interest of maximizing the possible price obtained for a sale of SWS, to amend the Special Committee's engagement letter with Sandler O'Neill to provide for an incentive fee to be paid in the event that SWS were acquired at a per share price above $7.75, and on March 5, 2014, the Special Committee and Sandler O'Neill entered into an amendment to the Sandler O'Neill engagement letter providing for such an incentive fee arrangement.

        On March 4, 2014, a representative of Sandler O'Neill discussed with representatives of Hilltop the Special Committee's rejection of Hilltop's offer of $7.00 per share and informed Hilltop that SWS had received indications of interest from other credible bidders at prices approximating fully diluted tangible book value ($8.15 per share). Hilltop's representatives stated that Hilltop would not waive the Merger Covenant including with respect to a transaction with a third party at that value.

        On March 5, 2014, the Special Committee held a meeting, in which members of SWS senior management and representatives of the Special Committee's financial and legal advisors participated, to discuss Hilltop's refusal to waive the Merger Covenant and how the existence of the Merger Covenant might affect discussions with other potential acquirers. The Special Committee also discussed further the risks inherent in sharing certain confidential information with the interested parties, particularly Party A, as a direct competitor of SWS, including the importance of protecting SWS's business by ensuring that SWS's confidential information was only shared pursuant to a non-disclosure agreement with, among other things, an appropriate employee non-solicit provision and ensuring that any proposals received from such interested parties were genuine before providing extensive confidential information.

        Later on March 5, 2014, representatives of Sandler O'Neill and Davis Polk had a call with representatives of Esposito Global and Party B. Esposito Global and Party B indicated that they would need at least thirty to sixty days to complete their due diligence review and arrange for the financing required for their offer and that they would not be able to confirm their price until the due diligence review was complete and they had arranged for all required financing.

        Following the March 5, 2014 Special Committee meeting, at the request of the Special Committee Sandler O'Neill called Hilltop to tell its representatives that the Company was worth at least tangible book value of $8.15 per share. Hilltop indicated that it did not believe that book value was the correct method to value SWS, based on, among other things, its lack of earnings and prospective earnings.

        On the morning of March 6, 2014, Party A sent Sandler O'Neill a due diligence request for SWS of items they considered high priority. On a call between representatives of Party A and Sandler O'Neill that same day, Party A inquired whether Hilltop and Oak Hill were willing to waive the Merger Covenant, and the representative of Sandler O'Neill indicated its understanding that Oak Hill might be willing to do so, but that Hilltop had stated that it would not.

        On March 7, 2014, the Special Committee held a meeting, in which members of SWS senior management and representatives of the Special Committee's financial and legal advisors participated, to discuss the status of Sandler O'Neill's and Davis Polk's communications with various interested parties. The Special Committee discussed its concerns that (i) providing certain confidential information about its employees, and in particular its top revenue-generating employees, to Party A would expose SWS to

242


Table of Contents

the risk that Party A might recruit such employees, (ii) if it became publicly known that Party A were interested in acquiring SWS, SWS's employees might become concerned about possible employment reductions or other employment changes and start seeking alternative employment, and (iii) there was a risk Party A might be seeking confidential information of SWS for competitive purposes rather than to pursue a transaction. The Special Committee concluded that at this stage Party A should be permitted to share SWS's confidential information with only a select group of its employees and representatives and SWS should provide only certain due diligence materials to Party A, and not information identifying individual SWS employees. The Special Committee also directed Sandler O'Neill to arrange for an in-person meeting to discuss Hilltop's offer and the appropriate valuation of SWS.

        On March 13, 2014, representatives of Sandler O'Neill and Esposito Global/Party B had a call to discuss the status of Esposito Global/Party B's efforts to obtain the financing they required to complete a transaction with SWS. The representatives of Party B indicated that they were in the process of interviewing investment banks but had not reached out to any potential financing sources. In addition, Party B's representatives stated that they estimated that their process for diligence and raising financing would take approximately eight weeks.

        On March 13, 2014, the Special Committee held a meeting, in which members of SWS senior management and representatives of the Special Committee's financial and legal advisors participated, to discuss the status of negotiations with Hilltop, Party A and Esposito Global/Party B. At this meeting, the Special Committee discussed the timing and process for providing the due diligence information requested by Party A. The members of the Special Committee also discussed their concern that Esposito Global/Party B would be unable to obtain the outside financing they require in a timely manner, if at all, and the inherent execution risks that this would pose.

        On March 15, 2014, SWS and Hilltop executed a non-disclosure agreement to allow for the sharing of confidential information relating to the parties.

        On March 16, 2014 and March 17, 2014, Sandler O'Neill and Party A had a series of calls regarding the Merger Covenant and its impact on a potential sale. The Chief Executive Officer of Party A inquired specifically about whether Hilltop would agree to waive the Merger Covenant. Sandler O'Neill told Party A that Hilltop had stated that it would not be willing to do so.

        On March 17, 2014, representatives of Sandler O'Neill requested that Esposito Global/Party B provide SWS with a focused due diligence request list and additional details on their plans for arranging financing for their offer, including the timing of such financing. Party B's financial advisor indicated that Esposito Global/Party B would require sixty days in order to secure such financing and finalize its price.

        On March 17, 2014, representatives of the Special Committee, Hilltop and Sandler O'Neill met to discuss Hilltop's offer. During this meeting, Hilltop indicated that its goals were to have SWS's debt to Hilltop under the Credit Agreement repaid in accordance with its terms and to have an opportunity to acquire SWS. Hilltop also indicated that its offer had been outstanding for over two months and that Hilltop was unwilling to continue to participate in a lengthy process. Mr. Miller told Hilltop that the Special Committee and SWS would be willing and able to consider moving quickly to a possible transaction if Hilltop were to offer a price approximating SWS's fully diluted tangible book value of $8.15 per share. Hilltop indicated to Mr. Miller that it did not believe that book value was the correct method to value SWS and that the value of SWS was meaningfully below book value. Because the Special Committee believed that Hilltop stock was an attractive currency, Mr. Miller also asked Hilltop to increase the stock portion of its offer from 50% to 100% and, on this point, Hilltop responded that, although it could not increase the stock portion of its offer to 100%, it would increase it to an amount greater than 50%. At the conclusion of this meeting, Hilltop expressed frustration with the time the process was taking and stated that it would submit a revised offer to SWS within two days.

243


Table of Contents

        Later on March 17, 2014, the Special Committee held a meeting, in which members of SWS senior management and representatives of the Special Committee's financial and legal advisors participated, to discuss recent communications with Hilltop, Party A and Esposito Global/Party B and how to move forward with each interested party. The Special Committee also discussed the risks that Esposito Global/Party B would not be able to find the outside financing they required, and the delays inherent with such process, and that Hilltop might withdraw its offer if the Special Committee's discussions with other interested parties entailed significant additional delay. Following discussion, the Special Committee directed Sandler O'Neill to ask Party A to sign the non-disclosure agreement and to request from Esposito Global/Party B their due diligence request list.

        On March 18, 2014, representatives of Party A and Sandler O'Neill had a call to discuss Party A's interest in acquiring SWS. The Chief Executive Officer of Party A stated that Party A valued SWS at a price of approximately $8.00 per share, although it could potentially be higher, and that Party A had discussed the Merger Covenant with Hilltop's financial advisor and that Hilltop's financial advisor told Party A that Hilltop would not waive the Merger Covenant to permit a third party sale.

        On March 19, 2014, Hilltop submitted a revised offer to SWS to acquire all of the outstanding common stock of SWS that Hilltop did not already own at a price of $7.50 per share, composed of 25% cash and 75% Hilltop common stock. In delivering the revised offer, Hilltop indicated to representatives of Sandler O'Neill that it was approaching its limit, in terms of price, and was not prepared to leave its offer outstanding for a prolonged period. Hilltop also stated that it was prepared to move forward quickly, had already begun preparing a draft merger agreement, and would require minimal due diligence.

        On March 19, 2014, the Special Committee held a meeting, in which members of SWS senior management and representatives of the Special Committee's financial and legal advisors participated, to discuss the status of Sandler O'Neill's and Davis Polk's communications with various interested parties. During the meeting, representatives of Davis Polk discussed the Credit Agreement and whether Hilltop and Oak Hill would waive the Merger Covenant, as well as exploring possible transaction structures that could possibly address the Merger Covenant without the need for a waiver from Hilltop. Although the Special Committee concluded that there might be possible ways to address the Merger Covenant in connection with a transaction involving a party other than Hilltop, it was recognized that these approaches entailed litigation risk and therefore that any such structures would involve closing risk. With respect to Hilltop's offer, the Special Committee discussed their concern that Hilltop might withdraw its offer if SWS delayed reaching a definitive agreement with Hilltop in order to continue discussions with other interested parties. With respect to Esposito Global/Party B's offer, the Special Committee discussed the timing and other risks associated with Esposito Global/Party B's need to arrange financing. With respect to the proposal from Party A, representatives of Sandler O'Neill reported that they had received a call from the Chief Executive Officer of Party A, reporting that Party A valued the Company at approximately $8.00 per share and that Party A had discussed with Hilltop's financial advisors the Credit Agreement and was aware of the Merger Covenant. The Special Committee discussed that Party A's $8.00 figure represented a lower price than they understood had previously been indicated by Party A and this led to questions regarding the level of commitment of Party A to pursuing a transaction. The Special Committee also discussed its desire to maximize the value of any offer to SWS's stockholders, the appropriate valuation of SWS, the stockholder vote required to approve of any acquisition of SWS and the range of prices that the Special Committee would consider recommending to the SWS Board as being advisable and fair to and in the best interests of the stockholders of SWS. Following discussion, the Special Committee directed Sandler O'Neill to contact Hilltop to request that Hilltop increase its offer to $8.00 per share and to inform Hilltop that the Special Committee was discussing transaction structures that could address the Merger Covenant without the need for a waiver from Hilltop.

244


Table of Contents

        On March 20, 2014, representatives of Sandler O'Neill and Hilltop discussed Hilltop's offer. Representatives of Sandler O'Neill requested that Hilltop increase its offer to $8.00 per share and also noted that the Special Committee had discussed potential transaction structures that could address the Merger Covenant without the need for a waiver from Hilltop. Hilltop reacted unfavorably to Sandler O'Neill's statements and indicated that SWS would need to move quickly if it wished to accept Hilltop's offer.

        Later on March 20, 2014, the Special Committee held a meeting, in which members of SWS senior management and representatives of the Special Committee's financial and legal advisors participated, to discuss Sandler O'Neill's discussion with Hilltop earlier that day. The Special Committee discussed the risks that Esposito Global/Party B would not be able to secure the outside financing they required, whether Esposito Global/Party B would be able to confirm the $8.00 price and, even assuming they could raise the financing and confirm the price, the estimated amount of time it would take to do so. The Special Committee also discussed the risk that further delays in reaching an agreement with Hilltop in order to continue discussions with other interested parties might cause Hilltop to withdraw its offer, and whether if Hilltop were to withdraw its offer, there would be any other bona fide offers to acquire SWS and, if there would be, at what price. After considering the risk of Hilltop withdrawing its offer and the lack of any other firm offers, the Special Committee concluded that it would consider an offer from Hilltop of $7.75 per share as being advisable and fair to and in the best interests of the stockholders of SWS and directed Sandler O'Neill to call Hilltop and push for a further increase of Hilltop's offer to $7.75 per share. Representatives of Sandler O'Neill left the meeting and called Hilltop, and Hilltop agreed to increase its offer to $7.75 per share, composed of 25% cash and 75% Hilltop common stock. Hilltop told Sandler O'Neill that Hilltop wanted to move as quickly as possible to definitive documentation and asked the Special Committee to cease discussions with any other interested parties. Representatives of Sandler O'Neill then rejoined the Special Committee meeting and conveyed Hilltop's revised offer. The Special Committee determined that it was in the best interests of SWS's stockholders to move forward with the negotiations with Hilltop on the basis of Hilltop's offer of $7.75 per share.

        Later on March 20, 2014, as directed by the Special Committee, representatives of Sandler O'Neill called representatives of Party B to inform them that the Special Committee was uncomfortable with the uncertainty surrounding their extended timeline to secure financing, complete due diligence and affirm their price.

        Between March 20, 2014 and March 24, 2014, representatives of Sandler O'Neill and Party A had a number of communications regarding Party A's interest in acquiring SWS and the status of the non-disclosure agreement between SWS and Party A. Party A's representatives reiterated to Sandler O'Neill's representatives that Party A was interested in a transaction and stated that, depending on the outcome of its due diligence, the price could be above $8.00. Party A's representative stated, however, that Party A might now be unwilling to sign a non-disclosure agreement containing a "standstill" provision, a provision that had been agreed earlier in the negotiations relating to the terms of the non-disclosure agreement. The Special Committee remained concerned about the potential loss of employees to, and sharing confidential information with, a competitor like Party A, and the possibility that Party A might simply be attempting to disrupt a sale to Hilltop. The Special Committee concluded, however, that if Party A would sign the previously negotiated version of the non-disclosure agreement, it would move forward with Party A on a parallel track with Hilltop.

        On March 24, 2014, representatives of the Special Committee and Sandler O'Neill informed Hilltop that another party was seeking to participate in the process at a price higher than Hilltop's offer of $7.75 per share and that the Special Committee was intending to sign a non-disclosure agreement with the interested party. Hilltop's representatives reiterated Hilltop's intention not to waive the Merger Covenant with respect to any deal with another party. Furthermore, Hilltop's representatives stated that if a definitive agreement was not reached by March 31, 2014, Hilltop would withdraw its offer and Mr. Ford would resign from the SWS Board.

245


Table of Contents

        Later on March 24, 2014, the Special Committee held a meeting, in which members of SWS senior management and representatives of the Special Committee's financial and legal advisors participated, to discuss the conversation with Hilltop earlier in the day and how to proceed with Party A. The Special Committee discussed Hilltop's stated intention to withdraw its offer if a definitive agreement were not reached by March 31, 2014 and concluded that the risk and potential negative consequences for the stockholders of this potential outcome were significant. The Special Committee also directed Sandler O'Neill to inform Party A that if it wished to proceed with a transaction, it must sign the previously agreed non-disclosure agreement and it would need to be able to provide a firm offer within a few days.

        On March 25, 2014, Wachtell Lipton sent Davis Polk a proposed draft merger agreement, which contemplated, among other things, that SWS would be required to submit the merger agreement to a vote of SWS's stockholders even if the SWS Board changed its recommendation with respect to the merger and would not have a standalone termination right in the event it wished to enter into an agreement with a third party with respect to a "superior proposal" (a so-called "force the vote" provision), and a termination fee of an unspecified amount payable by SWS in certain circumstances.

        On March 25, 2014, representatives of Sandler O'Neill and Party A had a call regarding the status of the non-disclosure agreement between SWS and Party A and Party A's interest in acquiring SWS. Party A agreed to sign a non-disclosure agreement on the previously agreed terms and representatives of Sandler O'Neill reiterated to Party A that SWS wished to move very quickly and if Party A wished to proceed with a transaction, they would need to be able to provide a firm offer within a few days.

        Later on March 25, 2014, SWS and Party A executed a non-disclosure agreement. As previously negotiated, the non-disclosure agreement contained a "standstill" provision limiting Party A's ability to acquire SWS stock or offer to acquire SWS for a period of time, subject to a "fallaway" provision that would permit Party A to make such an offer in the event that SWS executed a definitive transaction agreement with a party other than Party A.

        On March 26, 2014, the Special Committee held a meeting, in which members of SWS senior management and representatives of the Special Committee's financial and legal advisors participated, to discuss the proposed merger agreement received from Wachtell Lipton on March 25, 2014. Representatives of Davis Polk and Sandler O'Neill discussed the proposed merger agreement with the Special Committee and focused particularly on the proposed "force the vote" provision. The Special Committee also considered the range of possible structures for determining the exchange ratio for the share element of the consideration and concluded that while the "fixed exchange ratio" proposed by Hilltop presented some risk if there were a decline in Hilltop's share price prior to closing, the fixed exchange ratio was preferable because it would allow SWS stockholders to benefit from the upside of any increase in the Hilltop share price that might occur as a result of the announcement of a transaction. The Special Committee discussed these provisions, and others, with representatives of Davis Polk and Sandler O'Neill, and requested that Davis Polk discuss the key issues with Wachtell Lipton. The Special Committee also requested that Davis Polk explore with Wachtell Lipton the possibility of requiring the transaction to be approved by a majority of SWS's disinterested stockholders (a so-called "majority of the minority" vote).

        Between March 26, 2014 and March 31, 2014, representatives of SWS and Hilltop, together with representatives of Hilltop's legal and financial advisors and the Special Committee's legal and financial advisors, held a series of conference calls to negotiate the terms of the merger agreement and exchanged multiple drafts of the merger agreement.

        On March 27, 2014, the SWS Board held a meeting, at which Mr. Ford was not present and in which members of SWS senior management and representatives of the Special Committee's financial and legal advisors participated, to discuss the status of Sandler O'Neill's and Davis Polk's communications with Hilltop, Party A and Esposito Global/Party B. Representatives of Davis Polk

246


Table of Contents

reviewed with the SWS Board the fiduciary duties of the SWS Board members applicable to their consideration of Hilltop's offer and strategic alternatives. The representatives of Sandler O'Neill reviewed with the SWS Board Sandler O'Neill's financial analysis of SWS, Hilltop and the proposed transaction with Hilltop, including discussing the various financial methodologies used in its analyses. The representatives of Sandler O'Neill also reviewed with the SWS Board the outcome of the confidential market check the Special Committee had previously requested Sandler O'Neill to perform, noting that Sandler O'Neill had been in contact with seventeen parties, including Hilltop, and that at this time only Hilltop, Party A and Esposito Global/Party B remained interested in an acquisition of SWS in its entirety. Representatives of Davis Polk and Sandler O'Neill discussed the proposed merger agreement with the SWS Board and focused particularly on the proposed "force the vote" provision.

        Later on March 27, 2014, on a call between representatives of Sandler O'Neill and representatives of Party A, Party A's representatives provided a non-binding indication of interest to acquire SWS for $8.65 per share, subject to its satisfactory completion of due diligence.

        Later on March 27, 2014, representatives of Davis Polk had a conversation with Wachtell Lipton, during which they discussed, among other things, the inclusion of a "force the vote" provision, the possible inclusion of a "majority of the minority" vote condition, the circumstances under which each party might terminate the merger agreement and the size and form of the termination fee. The representatives of Wachtell Lipton stated that, among other things, Hilltop would not be prepared to sign a merger agreement that did not contain a "force the vote" provision and further, that Hilltop was not prepared to accept a "majority of the minority" vote requirement.

        Later on March 27, 2014, the Special Committee held a meeting, in which members of SWS senior management and representatives of the Special Committee's financial and legal advisors participated, to further discuss the proposed merger agreement received from Wachtell Lipton and to discuss Party A's non-binding indication of interest. The representatives of Davis Polk reviewed with the Special Committee their call earlier in the day with Wachtell Lipton. Representatives of Davis Polk and Sandler O'Neill continued their previous discussions with the Special Committee of the proposed merger agreement from Hilltop and focused particularly on the proposed "force the vote" provision and the possibility of including a two-tier termination fee that would provide for a lower payment in the event that the termination fee became payable because SWS executed an agreement with Party A. The Special Committee directed Sandler O'Neill to contact Party A and request that it describe the process, including due diligence and negotiation of a merger agreement, that Party A would require for it to be in a position to sign a definitive agreement on March 31, 2014. Subsequently, in a letter dated March 27, 2014, Party A confirmed its non-binding proposal to acquire SWS for $8.65 per share, subject to completing due diligence, and described the process that it would require to meet a March 31, 2014 deadline.

        On March 28, 2014, representatives of Sandler O'Neill and Party A had a call during which Party A stated that it would work to be, and believed it could be, in a position to execute a definitive agreement with SWS by March 31, 2014, but requested that the Special Committee extend the March 31, 2014 deadline. In addition, Party A informed SWS that it would like to have employee retention agreements in place before any definitive agreement is executed.

        On March 28, 2014, representatives of Sandler O'Neill had a call with representatives of Hilltop. During that conversation, Hilltop expressed concern regarding the Special Committee's willingness to meet the March 31, 2014 deadline, which Hilltop's representatives reiterated was critical to it, and would not be extended.

        Following the call from Party A, on March 28, 2014, the Special Committee held a meeting, in which members of SWS senior management and representatives of the Special Committee's financial and legal advisors participated, to discuss Party A's request for additional diligence materials and employee retention agreements. The Special Committee discussed with their financial and legal advisors

247


Table of Contents

the risks presented if Party A sought to enter into employee retention agreements prior to the execution of a definitive agreement as well as the risk of allowing execution of employee retention agreements to be a condition to the closing of any transaction. Representatives of Sandler O'Neill reviewed with the Special Committee a call they received earlier in the day from representatives of Hilltop. The Special Committee discussed whether Hilltop would be willing to extend its March 31, 2014 deadline. The Special Committee directed Sandler O'Neill to call the representatives of Hilltop to discuss the amount of the termination fee (which Hilltop proposed to be $12 million) and to request that Hilltop agree to extend its March 31, 2014 deadline. The Special Committee also directed Sandler O'Neill to inform Party A that SWS would not be willing to engage in discussions regarding employee retention agreements prior to executing a definitive agreement. Finally, the Special Committee directed the representatives of Davis Polk to send a proposed draft merger agreement to counsel to Party A. Davis Polk sent a draft merger agreement to counsel to Party A on March 29, 2014.

        Later on March 28, 2014, the Special Committee received a letter from Party A requesting additional time, beyond the March 31, 2014 deadline, to complete its due diligence and negotiate a merger agreement.

        On March 29, 2014, Davis Polk had a call with Oak Hill's outside counsel. In this call, Oak Hill's outside counsel conveyed that Oak Hill would be willing, in connection with a transaction, to waive the Merger Covenant and consent to the exchange of Oak Hill's loans under the Credit Agreement and the Warrants for the equivalent consideration paid in any merger and an amount equal to the Applicable Premium (as defined in the Credit Agreement) payable upon prepayment of its loans, and Oak Hill's counsel also indicated that Oak Hill would be willing to sign a letter waiving the Merger Covenant on those terms, to the extent its consent was needed, with respect to any merger transaction the Special Committee approved (the "Oak Hill Letter Agreement").

        Later on March 29, 2014, the Special Committee held a meeting, in which members of SWS senior management and representatives of the Special Committee's financial and legal advisors participated, to discuss the status of Sandler O'Neill's and Davis Polk's communications with advisors for and representatives of Hilltop and Party A and how to proceed with each party. Representatives of Sandler O'Neill reviewed with the Special Committee Party A's request for additional due diligence materials, including data on SWS's revenue-generating employees and interviews with SWS management as well as Party A's continued interest in executing employee retention agreements prior to executing a definitive agreement. During the meeting, representatives of Davis Polk discussed the Credit Agreement and the Merger Covenant, discussed possible transaction structures that could address the Merger Covenant without the need for a waiver from Hilltop and discussed the attendant execution and litigation risk involved with such transaction structures. The representatives of Davis Polk also discussed with the Special Committee their recent call with Oak Hill's outside counsel regarding the treatment of Oak Hill's loan and Warrants in the transaction. It was noted that what Oak Hill's counsel was requesting with its proposed structure was essentially to collapse two steps (i.e. first, Oak Hill receives prepayment of its loan for an amount equal to the principal plus an amount equal to the Applicable Premium (as defined in the Credit Agreement) and, second, Oak Hill uses the principal repayment amount to exercise the Warrants and receive the merger consideration) into one step that would obviate the need for SWS to repay the principal amount and then immediately receive it back, but that this structure would otherwise result in the same economic outcome as prepayment of the loans (including the payment of the Applicable Premium as required by the Credit Agreement) followed by exercise of the Warrants. Representatives of Davis Polk and Sandler O'Neill continued their previous discussions with the Special Committee of the proposed merger agreement from Hilltop and focused on, among other things, the proposed "force the vote" provision.

        Between March 29 and March 31, 2014, representatives of Party A conducted in-person due diligence at SWS' Dallas offices.

248


Table of Contents

        On March 30, 2014, Mr. Miller, on behalf of the Special Committee, and the Chief Executive Officer of Party A met to discuss Party A's interest in acquiring SWS. Mr. Miller asked the Chief Executive Officer of Party A whether Party A would be willing to agree to a transaction that day at $9.00 per share, a price that was discussed as sufficient to avoid the need for Hilltop to waive the Merger Covenant. Party A's Chief Executive Officer declined to agree to a transaction at $9.00 per share. Furthermore, the Chief Executive Officer of Party A indicated that Party A would not agree to a transaction with SWS if Hilltop did not agree to waive the Merger Covenant because Party A was concerned about the risk of litigation in the event Party A executed a definitive agreement with SWS without such waiver. In addition, the Chief Executive Officer of Party A stated that Party A needed more time to complete its due diligence review.

        On March 30, 2014, the Special Committee held a series of calls, on which members of SWS senior management and representatives of the Special Committee's financial and legal advisors participated, to discuss the status of Sandler O'Neill's and Davis Polk's communications with advisors for and representatives of Hilltop and Party A and how to proceed with each party. Mr. Miller reviewed with the Special Committee the results of his discussion with representatives of Party A, noting that starting on March 29, 2014 Party A had representatives at SWS's Dallas headquarters conducting due diligence. Among other things, the Special Committee discussed Party A's concern over the existence of the Merger Covenant and the Special Committee's concern that Hilltop would withdraw its offer on March 31, 2014 if SWS did not execute a definitive agreement by such date. On the call that evening, the representatives of Davis Polk reviewed a recent call with counsel to Party A to discuss the Credit Agreement, the Merger Covenant, and possible transaction structures to address the Merger Covenant without the need for a waiver from Hilltop.

        Later on March 30, the SWS Board held a meeting at which the Special Committee and its financial and legal advisors provided an update on negotiations with Hilltop and with Party A. Representatives of Davis Polk and Sandler O'Neill also discussed in detail with the SWS Board the status of negotiations with Hilltop on the draft merger agreement, and feedback from Sandler O'Neill's call with Hilltop, noting that the outstanding issues included Hilltop's refusal to eliminate the "force the vote" provision and Hilltop's refusal to accept a possible two-tier termination fee that would provide for a lower payment in the event that the fee became payable because SWS executed an agreement with Party A.

        On March 31, 2014, the Special Committee received a letter from Party A confirming that Party A would not be able to execute a definitive agreement with SWS that day because Party A was concerned about the need for Hilltop to waive the Merger Covenant and the risk of litigation in the event that Party A executed a definitive agreement with SWS without such a waiver. In its letter, Party A noted that it valued certainty. The letter noted that Party A would normally expect the support of large shareholders, such as Hilltop and Oak Hill (assuming they exercised their Warrants), before entering into any transaction to acquire the company. In addition, Party A's letter stated that Party A needed "a couple more days" to complete its due diligence review.

        Based on this letter, and prior conversations with Party A, the Special Committee concluded that there was no possibility that Party A would be able to enter into a definitive agreement by March 31, 2014. In addition, the Special Committee believed that Party A would not enter into a definitive agreement to acquire SWS without an explicit waiver by Hilltop of the Merger Covenant, which Hilltop had indicated repeatedly that it would refuse to grant. The Special Committee also believed that it was highly likely that Hilltop would withdraw its offer if not accepted by the March 31, 2014 deadline and if Hilltop withdrew its offer and disclosed such withdrawal, the stock price of SWS might decline significantly. In that event, the Special Committee was concerned that with a lower stock price, and no competitive dynamic, there was a significant risk that even if Party A were to complete due diligence satisfactorily and be willing to proceed without a waiver by Hilltop of the Merger Covenant, it would lower any price it was prepared to pay in a transaction.

249


Table of Contents

        Later on March 31, 2014, the SWS Board held a meeting, at which Mr. Ford was not present. Representatives of Sandler O'Neill and Davis Polk were present and reviewed the letter from and communications with Party A, and in particular Party A's concerns about the Merger Covenant, the lack of support of Hilltop for Party A's proposed transaction and Party A's concerns about the consequent litigation risk of proceedings without such support. Mr. Miller then updated the SWS Board on the status of discussions with Hilltop. Mr. Miller reported that he intended to continue pressing Hilltop to remove the "force the vote" provision and to agree to a two-tier termination fee. Representatives of Sandler O'Neill then reviewed their financial analysis and indicated that Sandler O'Neill would be prepared to deliver an opinion that the consideration to be paid by Hilltop for each share of the Company's common stock would be fair to the holders of SWS common stock (other than Hilltop) from a financial point of view. As part of this discussion, Sandler O'Neill expressed its view that it had identified and contacted all of the parties that it expected would be interested in an acquisition of SWS based on its professional judgment. The SWS Board then discussed the risks associated with continuing SWS's business on a standalone basis and the impact on its ability to sell SWS to Party A or anyone else, and the pricing of such a potential transaction, if Hilltop withdrew its offer. The SWS Board noted, among other things, that SWS was not generating earnings, that it was subscale in all of its principal business lines and that it continually failed to meet budgets, which led to concerns as to the ability to achieve targets in the future.

        Following the SWS Board meeting, Messrs. Miller and Williams met with Hilltop to request the elimination of the "force the vote" provision in Hilltop's proposed merger agreement and to request a two-tier termination fee. The representatives of Hilltop reiterated to Messrs. Miller and Williams that Hilltop would not execute a merger agreement that did not contain a "force the vote" provision and that Hilltop viewed the "force the vote" provision as integral to its offer. Hilltop's representatives also did not agree to a two-tier termination fee but did agree, however, to a reduction in the termination fee to $8 million (a $4 million reduction compared to the original Hilltop proposal of $12 million).

        Later on March 31, 2014, the Special Committee held a meeting, in which members of SWS senior management and representatives of the Special Committee's financial and legal advisors participated. Messrs. Miller and Williams reported to the Special Committee the results of their meeting with Hilltop. A representative of Sandler O'Neill reviewed with the Special Committee his call with Hilltop's representatives earlier in the day to request an extension of the March 31, 2014 deadline and for Hilltop to agree to meeting with a potential buyer (Party A), as had been requested by Party A, to discuss a possible waiver of the Merger Covenant. Hilltop had rejected both requests. The Special Committee discussed the results of these conversations. Representatives of Davis Polk reviewed with the Special Committee the fiduciary duties of the Special Committee members applicable to their consideration of Hilltop's offer and then summarized the material terms of Hilltop's then current proposed form of merger agreement, including, among others, a description of the consideration to be paid, the representations, warranties, and covenants, the provisions relating to exclusivity, "no-shop" and changing the SWS Board recommendation, the "force the vote" provision, the events of termination and the termination fee. At the request of the Special Committee, representatives of Sandler O'Neill reviewed with the Special Committee Sandler O'Neill's financial analysis of the merger consideration and delivered to the Special Committee its oral opinion, which was subsequently confirmed in writing, that, based upon and subject to the assumptions, limitations, qualifications and conditions set forth in its written opinion, as of the date of the meeting the merger consideration to be paid by Hilltop for each share of SWS's common stock was fair to the holders of SWS common stock other than Hilltop from a financial point of view. The members of the Special Committee deliberated, considering, among other factors, the certainty of Hilltop's offer as compared to the indications of interest from Esposito Global/Party B and Party A, its view as to the high likelihood that Hilltop would withdraw its offer if not accepted by its March 31 deadline and the potential detrimental impact to SWS and its stockholders if that were to happen and the fact that Sandler O'Neill had conducted a comprehensive market check. Following the deliberations, the Special Committee unanimously adopted

250


Table of Contents

resolutions recommending that the SWS Board adopt and approve the proposed merger agreement and proposed transaction with Hilltop. The Special Committee then requested that Mr. Miller present the Special Committee's determination and recommendation to accept Hilltop's offer to the SWS Board at its meeting later that day.

        At the SWS Board meeting later that day, Mr. Miller presented the Special Committee's recommendation to accept Hilltop's offer, substantially on the terms set forth in the proposed merger agreement and related documents. The members of the Special Committee, together with the Special Committee's financial and legal advisors, reviewed with the SWS Board the status of negotiations with Hilltop, Party A and Esposito Global/Party B, and provided updates regarding their recent communications with each such interested party. Representatives of Davis Polk reviewed with the SWS Board the fiduciary duties of the SWS Board members applicable to their consideration of Hilltop's offer and then summarized the material terms of Hilltop's proposed form of merger agreement, including a description of the consideration to be paid, the representations, warranties, and covenants, the provisions relating to exclusivity, "no-shop" and changing the SWS Board recommendation, the "force the vote" provision, the events of termination and the termination fee. At the request of the Special Committee, representatives of Sandler O'Neill reviewed with the SWS Board Sandler O'Neill's financial analysis of the merger consideration and shared with the SWS Board its oral opinion that had been given to the Special Committee, which was subsequently confirmed in writing, that, based upon and subject to the assumptions, limitations, qualifications and conditions set forth in its written opinion, as of the date of the meeting the merger consideration to be paid by Hilltop for each share of SWS's common stock was fair to the holders of SWS common stock other than Hilltop from a financial point of view. The members of the SWS Board discussed, among other things, the concern that, in the absence of a transaction with Hilltop or any other party, the repayment of the loans outstanding under the Credit Agreement presented serious issues, including that it may raise a going concern issue for the next fiscal year's audit. The members of the SWS Board (other than Mr. Ford) then deliberated and considered the Special Committee's recommendation and then, with Mr. Crandall, the director appointed by Oak Hill, recusing himself due to a potential conflict of interest based on his firm's ownership of securities other than common stock and being a party to the Oak Hill Letter Agreement, by unanimous vote of those directors that voted (i) determined that the merger agreement and the transactions contemplated thereby, including the Oak Hill Letter Agreement, were advisable and fair to and in the best interests of the stockholders of SWS, (ii) approved and adopted the merger agreement and approved the merger and the other transactions contemplated thereby and (iii) recommended the approval and adoption of the merger agreement and the transactions contemplated thereby by SWS's stockholders.

        Subsequently, the merger agreement and Oak Hill Letter Agreement were executed and delivered and the transaction was announced on the morning of April 1, 2014 in a press release issued jointly by SWS and Hilltop.


SWS's Reasons for the Merger

        The SWS Board and the Special Committee believe that the merger agreement and the transactions contemplated thereby, including the merger, are advisable and fair to and in the best interests of the SWS stockholders (other than Hilltop). Accordingly, the SWS Board (other than Mr. Ford and Mr. Crandall, who were recused from the voting), acting upon the unanimous recommendation of the Special Committee, has approved the merger agreement and the transactions contemplated thereby, and recommends that SWS stockholders vote "FOR" adoption of the merger agreement and the transactions contemplated thereby, including the merger.

        As described above under "Background of the Merger," the SWS Board, prior to and in reaching its decision at its meeting on March 31, 2014 to approve the merger agreement and the transactions contemplated thereby, consulted with SWS's management, the Special Committee and financial and

251


Table of Contents

legal advisors and considered a variety of potentially positive factors relating to the merger, including, but not limited to, the following:

252


Table of Contents

253


Table of Contents

        In the course of its deliberations, the SWS Board, in consultation with SWS management, the Special Committee and legal and financial advisors, also considered a variety of risks and other potentially negative factors relating to the merger, including the following:

254


Table of Contents

        The foregoing discussion of the factors considered by the SWS Board is not intended to be exhaustive, but rather a summary of the material factors considered by the SWS Board. In reaching its decision to approve and adopt the merger agreement, including the merger and the other transactions contemplated by the merger agreement, the SWS Board did not quantify or assign any relative weights to the factors considered, and individual directors may have given different weights to different factors. The SWS Board considered the various factors as a whole, including discussions with, and questioning

255


Table of Contents

of, SWS management and SWS's financial and legal advisors, and overall considered the factors to be favorable to, and to support, its determination.

        The foregoing discussion of the information and factors considered by the SWS Board is forward-looking in nature. This information should be read in light of the factors described under the section entitled "Forward-Looking Statements" included elsewhere in this proxy statement/prospectus.


Hilltop's Reasons for the Merger

        In reaching its decision to adopt and approve the merger agreement, the merger and the other transactions contemplated by the merger agreement, the Hilltop board of directors consulted with Hilltop management, as well as its financial and legal advisors, and considered a number of factors, including the following material factors:


Opinion of Sandler O'Neill & Partners, L.P.

        By letter dated February 3, 2014, and amended on March 5, 2014, the Special Committee retained Sandler O'Neill, to act as financial advisor to the Special Committee in connection with a possible business combination transaction. Sandler O'Neill is a nationally recognized investment banking firm

256


Table of Contents

whose principal business specialty is financial institutions. In the ordinary course of its investment banking business, Sandler O'Neill is regularly engaged in the valuation of financial institutions and their securities in connection with mergers and acquisitions and other corporate transactions. The Special Committee selected Sandler O'Neill to act as the Special Committee's advisor in connection with a possible business combination based on its qualifications, expertise, reputation and experience in mergers and acquisitions involving financial institutions.

        Sandler O'Neill acted as financial advisor to the Special Committee in connection with the proposed transaction and participated in certain of the negotiations leading to the execution of the merger agreement. At the March 31, 2014 meeting of the Special Committee, Sandler O'Neill delivered to the Special Committee its oral opinion, which was subsequently confirmed in writing on March 31, 2014, that, as of March 31, 2014, the merger consideration was fair to the holders of SWS common stock, other than Hilltop, from a financial point of view. The full text of Sandler O'Neill's opinion is attached as Annex B to this proxy statement/prospectus. The opinion outlines the procedures followed, assumptions made, matters considered and qualifications and limitations on the review undertaken by Sandler O'Neill in rendering its opinion. The description of the opinion set forth below is qualified in its entirety by reference to the full text of the opinion. Holders of SWS common stock are urged to read the entire opinion carefully in connection with their consideration of the proposed merger.

        Sandler O'Neill's opinion speaks only as of the date of the opinion. The opinion was directed to the Special Committee and is directed only to the fairness of the merger consideration to the holders of SWS common stock, other than Hilltop, from a financial point of view. It does not address the underlying business decision of SWS to engage in the merger or any other aspect of the merger and is not a recommendation to any holder of SWS common stock as to how such holder of SWS common stock should vote at the special meeting with respect to the merger or any other matter. Sandler O'Neill did not express any opinion as to the fairness of the amount or nature of the compensation to be received in connection with the merger by SWS's officers, directors, or employees, or any class of such persons, relative to the merger consideration to be received in the merger by any other shareholders of SWS.

        In connection with rendering its opinion on March 31, 2014, Sandler O'Neill reviewed and considered, among other things:

257


Table of Contents

        Sandler O'Neill also discussed with certain members of the senior management of SWS the business, financial condition, results of operations and prospects of SWS and held similar discussions with the senior management of Hilltop regarding the business, financial condition, results of operations and prospects of Hilltop.

        In performing its reviews and analyses and in rendering its opinion, Sandler O'Neill relied upon the accuracy and completeness of all of the financial and other information that was available to Sandler O'Neill from public sources, that was provided to Sandler O'Neill by SWS or Hilltop or their respective representatives or that was otherwise reviewed by Sandler O'Neill, and Sandler O'Neill assumed such accuracy and completeness for purposes of rendering its opinion. Sandler O'Neill relied, at the direction of SWS, without independent verification or investigation, on the assessments of the management of SWS as to SWS's existing and future relationships with key employees and partners, clients, products and services and Sandler O'Neill assumed, with the Special Committee's consent, that there would be no developments with respect to any such matters that would affect its analyses or opinion. Sandler O'Neill further relied on the assurances of the respective senior managements of SWS and Hilltop that they were not aware of any facts or circumstances that would make any of such information inaccurate or misleading. Sandler O'Neill was informed by SWS that certain provisions of a credit agreement to which SWS is a party that may place significant constraints on SWS's ability to sell itself or certain of its assets. With respect to the SWS Forecasts, Sandler O'Neill assumed that they had been reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of SWS as to the future financial performance of SWS. Sandler O'Neill was not asked to undertake, and did not undertake, an independent verification of any of such information and Sandler O'Neill assumes no responsibility or liability for the accuracy or completeness thereof.

        Sandler O'Neill used median publicly available earnings estimates and long-term growth rates for Hilltop in its analyses. The management of Hilltop confirmed to Sandler O'Neill that they reflected the best currently available estimates and judgments of the future financial performance of Hilltop, and Sandler O'Neill assumed that such performance would be achieved. With respect to the projections of transaction expenses, purchase accounting adjustments and cost savings discussed with the senior management of Hilltop, the management of Hilltop confirmed to Sandler O'Neill that they reflected the best currently available estimates and judgments of such management and Sandler O'Neill assumed that such performances would be achieved.

        Sandler O'Neill expressed no opinion as to the trading values of the common stock of SWS and Hilltop after the date of the opinion or what the value of Hilltop common stock will be once it is actually received by the holders of SWS common stock. Sandler O'Neill expressed no opinion as to any of the legal, accounting and tax matters relating to the merger and any other transaction contemplated by SWS. Sandler O'Neill's opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to Sandler O'Neill as of, the date of its opinion. Events occurring after the date thereof could materially affect Sandler O'Neill's opinion. Sandler O'Neill has not undertaken to update, revise, reaffirm or withdraw its opinion or otherwise comment upon events occurring after the date of its opinion.

258


Table of Contents

        In rendering its March 31, 2014 opinion, Sandler O'Neill performed a variety of financial analyses. The following is a summary of the material analyses performed by Sandler O'Neill, but it is not a complete description of all the analyses underlying Sandler O'Neill's opinion. The summary includes information presented in tabular format. In order to fully understand the financial analyses, these tables must be read together with the accompanying text. The tables alone do not constitute a complete description of the financial analyses. The preparation of a fairness opinion is a complex process involving subjective judgments as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. The process, therefore, is not necessarily susceptible to a partial analysis or summary description. Sandler O'Neill believes that its analyses must be considered as a whole and that selecting portions of the factors and analyses to be considered without considering all factors and analyses, or attempting to ascribe relative weights to some or all such factors and analyses, could create an incomplete view of the evaluation process underlying its opinion. Also, no company included in Sandler O'Neill's comparative analyses described below is identical to SWS or Hilltop and no transaction is identical to the merger. Accordingly, an analysis of comparable companies or transactions involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies and other factors that could affect the public trading values or merger transaction values, as the case may be, of SWS and Hilltop and the companies to which they are being compared.

        Sandler O'Neill reviewed the financial terms of the proposed transaction. As described in the merger agreement, SWS shareholders have the right to receive consideration consisting of (i) 0.2496 shares of Hilltop common stock and (ii) an amount in cash equal to $1.94 in exchange for each share of SWS's common stock. Based upon Hilltop's closing price of $23.29 as of March 20, 2014, Sandler O'Neill calculated a merger consideration value of $7.75 per share of SWS common stock. Based upon 40,288,293 common shares outstanding and using Hilltop's closing price of $23.29 as of March 20, 2014, Sandler O'Neill calculated an aggregate merger consideration value of $312.2 million. Based upon financial information as of December 31, 2013, Sandler O'Neill calculated the following transaction ratios:

Transaction Value / Book Value Per Share:

    81 %

Transaction Value / Tangible Book Value Per Share:

    83 %

Transaction Value / Tangible Book Value Per Share (all warrants exercised):

    95.1 %

Transaction Value / Estimated FY 2015 EPS (Street):

    86.1x  

        Sandler O'Neill used publicly available information to compare selected financial information for SWS and a group of financial institutions selected by Sandler O'Neill based on Sandler O'Neill's professional judgment and experience. The peer group consisted of NASDAQ and NYSE traded institutional broker dealers and broker dealers with retail distribution.

        The following financial institutions were selected for the comparison:

259


Table of Contents

        The analysis compared publicly available financial information for SWS as of December 31, 2013 and the high, mean, median and low financial and market trading data for the peer group as of March 28, 2014. The results of these analyses are summarized in the following table.

 
   
   
  Institutional Broker Dealers and Broker
Dealers w/Retail Distribution (03/28/14
pricing)
 
 
  SWS
(01/09/14
pricing)
  SWS
03/28/14
pricing)
 
 
  High   Mean   Median   Low  

Market Value ($ in millions)

  $ 198   $ 246   $ 7,671   $ 1,591   $ 542   $ 150  

Trading as % of High

    97.1 %   89.9 %   98.9 %   89.4 %   90.5 %   73.2 %

Price Change (Last Twelve Months)

    2.5 %   23.1 %   80.1 %   35.9 %   34.4 %   (0.4 )%

Price Change (Year To Date)

    (0.0 )%   22.5 %   99.3 %   13.0 %   4.4 %   (7.2 )%

Price / Book Value

    63 %   78 %   202 %   118 %   97 %   72 %

Price / Tangible Book Value

    65 %   80 %   240 %   147 %   119 %   89 %

Price / Last Twelve Months Earnings Per Share

    NM     NM     107 %   32.4 %   19.6 %   3.4 %

Price / Estimated 2014 Earnings Per Share

    NM     NM     17.0x     15.1x     16.1x     9.8x  

Price / Estimated 2015 Earnings Per Share

    NM     NM     33.2x     15.8x     14.3x     8.7x  

Median Long Term Growth Rate

    N/A     N/A     15.0 %   13.8 %   14.0 %   12.5 %

Current Dividend Yield

    0.00 %   0.00 %   5.63 %   1.35 %   1.17 %   0.00 %

Last Twelve Months Return On Equity

    (10.95 )%   (10.95 )%   32.18 %   8.98 %   5.90 %   1.82 %

        Sandler O'Neill used publicly available information to compare selected financial information for Hilltop and a group of financial institutions selected by Sandler O'Neill based on Sandler O'Neill's professional judgment and experience. The peer group consisted of NASDAQ and NYSE traded bank holding companies headquartered in the Southwest or Southeast regions and with total assets ranging from $5 to $15 billion as of September 30, 2013.

        The following companies were selected for the comparison:

BancFirst Corporation   International Bancshares Corporation
BancorpSouth, Inc.   National Bank Holdings Corporation
BankUnited, Inc.   Pinnacle Financial Partners, Inc.
Capital Bank Financial Corp.   Renasant Corporation
First Citizens Bancorporation, Inc.   Texas Capital Bancshares, Inc.
First Financial Bankshares, Inc.   Trustmark Corporation
First Financial Holdings, Inc.   United Bankshares, Inc.
Home BancShares, Inc.   United Community Banks, Inc.
IBERIABANK Corporation   WesBanco, Inc.

260


Table of Contents

        The analysis compared publicly available financial information for Hilltop as of December 31, 2013 and the high, mean, median and low financial and market trading data for the peer group as of March 28, 2014. The results of these analyses are summarized in the following table.

 
   
  Company  
 
  Hilltop
(01/09/14
pricing)
 
 
  High   Mean   Median   Low  

Total Assets ($ in millions)

  $ 8,903   $ 15,047   $ 8,697   $ 7,678   $ 4,914  

Tangible Common Equity to Tangible Assets

    10.19 %   16.89 %   9.31 %   8.48 %   6.64 %

Leverage Ratio

    12.78 %   16.63 %   10.53 %   9.77 %   8.32 %

Total Risk-Based Capital Ratio

    19.10 %   39.53 %   16.53 %   14.22 %   10.73 %

Return On Average Assets

    1.66 %   3.86 %   1.10 %   1.02 %   0.13 %

Return On Average Equity

    10.59 %   37.30 %   9.58 %   8.57 %   0.67 %

Net Interest Margin

    4.47 %   5.73 %   3.90 %   3.76 %   2.57 %

Efficiency Ratio

    79.6 %   82.5 %   62.0 %   62.5 %   45.4 %

Loan Loss Ratio / Gross Loans

    0.61 %   1.76 %   1.19 %   1.21 %   0.67 %

Non-Performing Assets(2)/Total Assets

    0.33 %   2.88 %   1.32 %   1.30 %   0.34 %

Net Charge Offs / Average Loans

    0.10 %   0.43 %   0.16 %   0.15 %   (0.09 %)

Price / Tangible Book Value

    232 %   424 %   216 %   190 %   85 %

Price/ Last Twelve Months Earnings Per Share

    16.1x     33.7x     20.3x     22.1x     4.3x  

Price / Estimated 2014 Earnings Per Share

    15.8x     22.4x     17.9x     18.3x     13.8x  

Price / Estimated 2015 Earnings Per Share

    13.7x     26.2x     16.3x     15.4x     13.2x  

Current Dividend Yield

    0.0 %   4.3 %   1.6 %   1.5 %   0.0 %

Last Twelve Months Dividend Ratio

    0.0 %   142.9 %   43.6 %   37.2 %   2.1 %

Market Value ($ in millions)

  $ 2,034   $ 3,441   $ 1,589   $ 1,553   $ 452  

Adjusted Beta

    0.81     1.20     0.96     0.96     0.55  

(2)
Non-Performing Assets include nonaccrual loans and leases, renegotiated loans and leases, and other real estate.

        Sandler O'Neill performed an analysis that estimated the net present value per share of SWS common stock through December 31, 2017.

        Sandler O'Neill based the analysis on SWS's projected earnings stream (as provided in the SWS Forecasts) for the years ending December 31, 2014 through 2017, which projections assumed (i) a reversal of the deferred tax assets valuation allowance on December 31, 2015 and (ii) that the current holders of SWS's outstanding warrants would exercise such warrants in 2016, with the proceeds of such exercise used to repay approximately $100 million of SWS's outstanding debt. SWS's projections are summarized in the section entitled "Certain SWS Prospective Financial Information."

        To approximate the terminal value of SWS's common stock at December 31, 2017, Sandler O'Neill applied price to earnings multiples of 10.0x to 15.0x and multiples of tangible book value ranging from 100% to 180% as determined by Sandler O'Neill in its professional judgment and experience. Sandler O'Neill selected the price to earnings multiples based on price to earnings multiples of the SWS peer group. Sandler O'Neill selected the tangible book value multiples based on tangible book value multiples of the SWS peer group. The income streams and terminal values were then discounted to present values using different discount rates ranging from 10.0% to 15.0%, which were assumed deviations, both up and down, as selected by Sandler O'Neill based on the SWS discount rate of 14.49% as determined by Sandler O'Neill. Sandler O'Neill determined the discount rate based on the 10-year treasury bond yield of 2.73%, an equity risk premium of 5.70%, a size premium of 3.81%, and

261


Table of Contents

an industry premium of 2.25%. These analyses resulted in the following reference ranges of implied present values per share of SWS common stock:

Range of Implied Present Values Per Share
Based on Price / Earnings
 
Range of Implied Present Values Per Share
Based on Tangible Book Value
$3.20 - $5.74   $5.80 - $12.47

        Sandler O'Neill also considered and discussed with the Special Committee how this analysis would be affected by changes in the underlying assumptions, including variations with respect to net income. To illustrate this impact, Sandler O'Neill performed a similar analysis assuming SWS's net income varied from 25% above projections to 25% below projections. Using a discount rate of 14.49% for this analysis, Sandler O'Neill noted a range of $2.67—$6.68 per share of SWS common stock.

        During the March 31, 2014 meeting of the Special Committee, Sandler O'Neill noted that the net present value analysis is a widely used valuation methodology, but the results of such methodology are highly dependent upon the numerous assumptions that must be made, and the results thereof are not necessarily indicative of actual values or future results.

        Sandler O'Neill also performed an analysis that estimated the net present value per share of Hilltop common stock through December 31, 2017.

        Sandler O'Neill based the analysis on Hilltop's projected earnings stream as derived from median consensus publicly available analyst estimates through the year ended December 31, 2015 and a consensus long-term earnings growth rate of 10% for the years ending 2016 and 2017. These projections are summarized in the section entitled "Opinion of Sandler O'Neill & Partners, L.P.—Other Information Reviewed By Sandler O'Neill—Hilltop's Projected Earnings Stream."

        To approximate the terminal value of Hilltop's common stock at December 31, 2017, Sandler O'Neill applied price to earnings multiples of 14.0x to 24.0x and multiples of tangible book value ranging from 175% to 300% as determined by Sandler O'Neill in its professional judgment and experience. Sandler O'Neill selected the price to earnings multiples based on the price to earnings multiples of the Hilltop peer group. Sandler O'Neill selected the tangible book value multiples based on tangible book value multiples of the Hilltop peer group. The income streams and terminal values were then discounted to present values using different discount rates ranging from 9.0% to 15.0%, which were assumed deviations, both up and down, as selected by Sandler O'Neill based on the Hilltop discount rate of 12.75% as determined by Sandler O'Neill. Sandler O'Neill determined the discount rate based on the 10-year treasury bond yield of 2.73%, an equity risk premium of 5.70%, a size premium of 1.12%, and an industry premium of 3.20%. These analyses resulted in the following reference ranges of implied present values per share of Hilltop common stock:

Range of Implied Present Values Per Share
Based on Price / Earnings
 
Range of Implied Present Values Per Share
Based on Tangible Book Value
$16.02 - $34.04   $17.07 - $36.27

        Sandler O'Neill also considered and discussed with the Special Committee how this analysis would be affected by changes in the underlying assumptions, including variations with respect to net income. To illustrate this impact, Sandler O'Neill performed a similar analysis assuming Hilltop's net income varied from 25% above projections to 25% below projections. Using a discount rate of 12.75% for this analysis, Sandler O'Neill noted a range of $13.36—$38.17 per share of Hilltop common stock.

        During the March 31, 2014 meeting of the Special Committee, Sandler O'Neill noted that the net present value analysis is a widely used valuation methodology, but the results of such methodology are

262


Table of Contents

highly dependent upon the numerous assumptions that must be made, and the results thereof are not necessarily indicative of actual values or future results.

        Sandler O'Neill reviewed two groups of comparable mergers and acquisitions. The first group consisted of mergers and acquisitions with deal values greater than $75 million that involved institutional, regional, national or multinational broker dealers. The second group consisted of mergers and acquisitions of companies in the financial services industry where the buyer and the target had ownership or other relationships similar to those between SWS and Hilltop.

        The first group of mergers and acquisitions included seven transactions announced between August 17, 2011 and January 16, 2014, selected based on Sandler O'Neill's professional judgment and experience. The group was composed of the following transactions:

        American International Group, Inc. / Woodbury Financial Services, Inc.

        Chestnut Venture Holdings, LLC / Genworth Financial Investment Services Inc.

        Ladenburg Thalmann Financial Services Inc. / Securities America Financial Corporation

        Leucadia National Corporation / Jefferies Group, Inc.

        Raymond James Financial, Inc. / Morgan Keegan & Company, Inc. / MK Holding Inc.

        RCS Capital Corporation / Cetera Financial Holdings, Inc.

        Stifel Financial Corp. / KBW, Inc.

        Sandler O'Neill then reviewed the following multiples for each of the transactions: transaction price to last twelve months' revenue, transaction price to book value, transaction price to tangible book value and transaction price to market price of target's stock before announcement. Sandler O'Neill then compared the imputed per share valuation for the high, mean, median and low data for the transactions with the book value per share and tangible book value per share valuations of SWS based on last twelve month's total revenue for FY2013. The results of these analyses are summarized in the following tables.

 
  Precedent Broker Dealer
Transactions
 
 
  High   Mean   Median   Low  

Price / Last Twelve Months Revenue

    2.4x     1.3x     1.0x     0.5x  

Price / Book Value

    171 %   123 %   118 %   88 %

Price / Tangible Book Value

    171 %   129 %   120 %   95 %

Market Premium

    15.6 %   11.5 %   11.5 %   7.4 %

 

 
  Imputed Per Share Valuation for
Precedent Broker Dealer Transactions
 
 
  High   Mean   Median   Low  

Price / Last Twelve Months Revenue

  $ 12.26   $ 6.46   $ 5.20   $ 2.52  

Price / Book Value

  $ 14.18   $ 10.25   $ 9.77   $ 7.27  

Price / Tangible Book Value

  $ 13.93   $ 10.48   $ 9.78   $ 7.72  

263


Table of Contents


SWS Basis as of December 31, 2013  
2013 LTM Total Revenue
($ in millions)
  Book
Value / Share
  Tangible Book
Value / Share
 
$259.68   $8.30   $ 8.15  

        The second group of mergers and acquisitions included ten transactions announced between November 20, 2006 and December 16, 2013, selected based on Sandler O'Neill's professional judgment and experience. The group was composed of the following transactions:

        Alfa Mutual / Alfa Corp.

        Annaly Capital Management Inc. / CreXus Investment Corp

        Banco Santander SA / Sovereign Bancorp Inc.

        Bank of Tokyo-Mitsubishi UFJ Ltd. / UnionBanCal Corp, CA

        CETCO Holding Company / Knight Capital Group

        Fairfax Financial Holdings Limited / Odyssey Re Holdings Corp.

        KKR & Co / KKR Financial Holdings

        Leucadia National Corp / Jefferies Group Inc.

        Nationwide Mutual Insurance Co / Nationwide Finl Svcs Inc.

        Toronto-Dominion Bank / TD Banknorth Inc.

        Sandler O'Neill then reviewed the following multiples for each of the transactions: initial offer to initial stock price, final offer to initial stock price and final offer to initial offer. Sandler O'Neill compared the proposed merger multiples to the high, mean, median and low multiples of these comparable transactions. The results of these analyses are summarized in the following table.

 
   
  Related Party Financial Services
Transactions
 
 
  Hilltop /
SWS
 
 
  High   Mean   Median   Low  

Initial Offer / Initial Stock Price

    15.5 %   40.6 %   14.4 %   14.0 %   0.0 %

Final Offer / Initial Stock Price

    27.9 %   50.6 %   27.7 %   29.3 %   0.0 %

Increase from Initial Offer

    10.7 %   26.7 %   11.7 %   7.8 %   0.0 %

        Sandler O'Neill analyzed certain potential pro forma effects of the merger, assuming the following: (i) the merger closes on September 30, 2014; (ii) per share merger consideration value of $7.75, based on Hilltop's closing stock price on March 20, 2014 of $23.29; (iii) SWS repays $100 million loan immediately prior to closing plus the applicable make-whole amount for early repayment of the loans to Oak Hill; (iv) the warrants held by Oak Hill are exercised prior to closing; (v) the warrants and shares held by Hilltop are cancelled prior to closing; (vi) SWS's performance is consistent with the financial forecasts and estimates prepared by the management of the Company; (vii) Hilltop's performance is consistent with publicly available mean analyst estimated earnings per share for the year ending December 31, 2015 and an estimated long-term growth rate of 10% for the years thereafter; (viii) the SWS common stock owned by Hilltop is eliminated immediately prior to closing, resulting in a $11.4 million negative purchase accounting adjustment; (ix) the impact of a $17.4 million negative purchase accounting adjustment relating to the cancellation of shares received from the exercise of the warrants; (x) Hilltop is able to achieve annualized cost savings of $25 million per year; (xi) pre-tax deal

264


Table of Contents

related costs for Hilltop and SWS amount to $30 million and $2 million, respectively; (xii) a gross loan mark of $20 million at closing; (xiii) a $1 million mark on other real estate owned at closing; (xiv) customer relationship identifiable intangible of $7 million; (xv) reversal of only 40% of the deferred tax asset valuation at closing; and (xvi) an estimated bargain purchase gain of $31 million. The actual results achieved by the combined company, however, may vary from projected results and the variations may be material.

        The table below shows Sandler O'Neill's projected accretion/dilution percentages for Hilltop as of closing and for each of the years 2014-2017.

 
  Closing   Year Ending
12/31/2014
  Year Ending
12/31/2015
  Year Ending
12/31/2016
  Year Ending
12/31/2017
 

Hilltop Earnings Per Share Accretion / (Dilution)—excluding transaction expenses

          25.6 %   9.4 %   12.5 %   12.0 %

Hilltop Tangible Book Value Accretion / (Dilution)

    13.2 %   12.6 %   11.3 %   11.3 %   11.3 %

        Sandler O'Neill also noted certain additional factors that were not considered part of its financial analyses with respect to its opinion but were referenced for informational purposes, including, among other things, the premium reflected in the merger consideration as compared to the unaffected stock price of approximately 27.9%; the premium reflected in the merger consideration as compared to the market price as of March 28, 2014 of approximately 4.0%; the premium reflected in the merger consideration as compared to the 52 week high of approximately (5.4%); the premium reflected in the merger consideration as compared to the 52 week low of approximately 49.3%; and the premium reflected in the merger consideration as compared to the one-month average of approximately (2.3%).

        Sandler O'Neill also reviewed for informational purposes the publicly reported trading prices of SWS's common stock for the three-year periods ended January 9, 2014, the date upon which SWS received the initial proposal from Hilltop, and March 25, 2014. Sandler O'Neill then compared the relationship between the movements in the price of SWS's common stock against the movements in the prices of the SWS peer group referenced above and the SNL U.S. Broker/Dealer Index.


Three-Year Comparative Stock Performance

 
  Beginning Value
January 9, 2011
  Ending Value
January 9, 2014
 

SWS

    100 %   123.4 %

SWS Peers

    100 %   140.6 %

U.S. Broker Dealers

    100 %   122.6 %

 

 
  Beginning Value
March 25, 2011
  Ending Value
March 25, 2014
 

SWS

    100 %   128.5 %

SWS Peers

    100 %   130.0 %

U.S. Broker Dealers

    100 %   123.1 %

265


Table of Contents

        Sandler O'Neill also reviewed for informational purposes the publicly reported trading prices of Hilltop's common stock for the one-year and three-year periods ended March 28, 2014. Sandler O'Neill then compared the relationship between the movements in the price of Hilltop's common stock against the movements in the prices of the Hilltop peer group referenced above and the SNL U.S. Bank Index.


One-Year Comparative Stock Performance

 
  Beginning Value
March 28, 2013
  Ending Value
March 28, 2014
 

Hilltop

    100 %   167.2 %

Hilltop Peers

    100 %   132.9 %

U.S. Banks

    100 %   127.3 %


Three-Year Comparative Stock Performance

 
  Beginning Value
March 28, 2011
  Ending Value
March 28, 2011
 

Hilltop

    100 %   224.8 %

Hilltop Peers

    100 %   151.1 %

U.S. Banks

    100 %   139.2 %

        Sandler O'Neill reviewed analyst estimated earnings per share for SWS for 2014 and 2015 along with analyst estimated future price targets. The 2014 and 2015 earnings per share estimates and the future price target for SWS were based on a report from one research analyst.


Summary of SWS Analyst Estimates

 
  Earnings Per Share    
 
 
  Future Price
Target
 
 
  2014   2015  

  $ 0.01   $ 0.09   $ 8.00  

        Sandler O'Neill reviewed analyst estimated earnings per share for Hilltop for 2014 and 2015 along with analyst estimated future price targets. The median for 2014 and 2015 earnings per share was based on reports from three research analysts. The mean and median future price target for Hilltop was based on reports from four research analysts.


Summary of Hilltop Analyst Estimates

 
  Earnings Per
Share
   
 
 
  Future Price
Target
 
 
  2014   2015  

Mean

          $ 27.25  

Median

  $ 1.43   $ 1.65   $ 27.50  

        Sandler O'Neill noted the reconciliation of the fully converted tangible book value of SWS as of December 31, 2013, as summarized in the following table. The fully converted tangible common equity represents the tangible common equity as adjusted for the exercise of the Warrants. Such adjustments included the addition of the proceeds from the exercise of the Warrants (offset by certain tax-effected adjustments) to eliminate the balance sheet items related to SWS's outstanding debt and the Warrants.

266


Table of Contents

The fully converted shares outstanding represents the shares outstanding adjusted for the exercise of the Warrants.


Reconciliation of Fully Converted Tangible Book Value

Fully Converted Tangible Common Equity

  $ 411,351,000  

Fully Converted Shares Outstanding

    50,459,422  

Fully Converted Tangible Book Value Per Share

  $ 8.15  

        As summarized in the following table, Sandler O'Neill noted Hilltop's projected earnings stream as derived from median consensus publicly available analyst estimates through the year ended December 31, 2015 and a consensus long-term earnings growth rate of 10% for the years ending 2016 and 2017.

 
  12/31/2013   12/31/2014   12/31/2015   12/31/2016   12/31/2017  

Net Income (dollar value in thousands)

  $ 121,015   $ 129,262   $ 149,286   $ 164,731   $ 181,191  

Earnings Per Share

  $ 1.40   $ 1.43   $ 1.65   $ 1.82   $ 2.00  

Dividends Per Share

  $ 0.00   $ 0.00   $ 0.00   $ 0.00   $ 0.00  

Tangible Book Value Per Share

  $ 9.70   $ 11.26   $ 13.03   $ 14.96   $ 17.06  

        Sandler O'Neill acted as the financial advisor to the Special Committee in connection with the merger and will receive a fee comprised of (i) $150,000 upon execution of the engagement letter, (ii) $250,000 for each time it indicates it is prepared to deliver a fairness opinion, subject to a maximum fee of $500,000 for all opinions, (iii) $350,000 upon the consummation of the merger and (iv) an incentive fee based on the price of a consummated merger of (a) $18,750.00 for each penny ($0.01) by which the per share price exceeds $7.75, up to $8.15; plus (b) $31,250.00 for each penny ($0.01) by which the per share price exceeds $8.15, up to $8.63; plus (c) $14,598.54 for each penny ($0.01) by which the per share price exceeds $8.63, up to $10.00. SWS has also agreed to reimburse Sandler O'Neill's reasonable out-of-pocket expenses incurred in connection with its engagement and to indemnify Sandler O'Neill and its affiliates and their respective partners, directors, officers, employee and agents against certain expenses and liabilities, including liabilities under the securities laws.

        In the ordinary course of its respective broker and dealer businesses, Sandler O'Neill may purchase securities from and sell securities to SWS and Hilltop and their respective affiliates. Sandler O'Neill may also actively trade the debt and/or equity securities of SWS or Hilltop or their respective affiliates for their own accounts and for the accounts of their customers and, accordingly may at any time hold a long or short position in such securities. In the two years prior to the execution of the merger agreement, Sandler O'Neill has not provided investment banking services to, or received fees for such services from, SWS, Hilltop or Oak Hill, except for its services to the Special Committee in connection with the merger.


Certain SWS Prospective Financial Information

        SWS management does not as a matter of course make public projections as to future performance or earnings and is especially wary of making projections for extended periods due to the significant unpredictability of the underlying assumptions and estimates. However, SWS provided, among other information, certain financial projections prepared by SWS management to Hilltop in connection with its consideration of the merger and to Sandler O'Neill, the financial advisor to the Special Committee.

267


Table of Contents

        The financial projections reflect numerous estimates and assumptions with respect to industry performance, general business, economic, regulatory, market and financial conditions and other future events, as well as matters specific to SWS's business, all of which are inherently uncertain and difficult to predict and many of which are beyond SWS's control. These financial projections are subjective in many respects and thus are susceptible to multiple interpretations and periodic revisions based on actual experience and business developments. These projections may also be affected by SWS's ability to achieve strategic goals, objectives and targets over the applicable periods. As such, these financial projections constitute forward-looking information and are subject to risks and uncertainties, including the various risks set forth in the sections of this proxy statement/prospectus entitled "Forward Looking Statements" and "Risk Factors" and in SWS's Form 10-K for the fiscal year ended June 30, 2014 and the other reports filed by SWS with the SEC. The financial projections cover multiple years and such information by its nature becomes less reliable with each successive year.

        The financial projections were not prepared with a view toward public disclosure or complying with GAAP, the published guidelines of the SEC regarding projections or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. Neither SWS's independent registered public accounting firm, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the financial projections included below, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and they assume no responsibility for, and disclaim any association with, the financial projections. Furthermore, the financial projections do not take into account any circumstances or events occurring after the date they were prepared.

        You are strongly cautioned not to place undue reliance on the financial projections set forth below. The inclusion of the projections in this proxy statement/prospectus should not be regarded as an indication that any of SWS, Hilltop or their affiliates, advisors or representatives considered or consider the projections to be predictive of actual future events, and the projections should not be relied upon as such. None of SWS, Hilltop or their respective affiliates, advisors, officers, directors or representatives can give any assurance that actual results will not differ from the projections, and none of them undertakes any obligation to update or otherwise revise or reconcile the projections to reflect circumstances existing after the date such projections were generated or to reflect the occurrence of future events even in the event that any or all of the assumptions underlying the projections are shown to be in error. None of SWS, Hilltop or their respective affiliates, advisors or representatives makes any representation to any other person regarding the projections. The projections are not being included in this proxy statement/prospectus to influence a stockholder's decision regarding how to vote on any given proposal, but because the projections were provided to Hilltop and Sandler O'Neill.

        Set forth below is a summary of the projections provided to Hilltop by SWS.

 
  Fiscal Year Ending June  
 
  2014   2015   2016  
 
  (in thousands)
 

Net Revenues

    275,093     287,874     312,334  

Non-Interest Expense

    270,836     281,166     292,435  

Gain/(Loss) on warrant

    (91 )        

Pre-tax Income

    4,166     6,707     19,899  

        Set forth below is a summary of the projections used by Sandler O'Neill for purposes of its net present value analysis of SWS. These projections are the same as the projections provided to Hilltop except that Sandler O'Neill assumed, in consultation with SWS and with its consent, (i) an annualized growth rate in net revenues of approximately 8% for the remainder of 2016 and 5.6% in 2017, (ii) a reversal of the deferred tax assets valuation allowance on December 31, 2015 and (iii) that the current

268


Table of Contents

holders of SWS's outstanding warrants would exercise such warrants in 2016, with the proceeds of such exercise used to repay approximately $100 million of SWS's outstanding debt.

 
  Calendar Year Ending December 31  
 
  2014   2015   2016   2017  
 
  (in thousands, except per share numbers)
 

Net Revenues

    279,472     300,273     324,645     342,828  

Non-Interest Expense

    274,285     287,593     270,083     299,315  

Gain/(Loss) on warrant

            24,288      

Pre-tax Income

    5,187     12,680     54,562     43,513  

Tax Provision

        (24,395 )   19,097     15,229  

Net Income

    5,187     37,075     35,465     28,284  

Earnings per Share

  $ 0.16   $ 0.85   $ 0.78   $ 0.56  

Fully Converted Tangible Book Value per Share

  $ 8.33   $ 9.14   $ 9.58   $ 10.15  

        Reconciliation of Non-GAAP to GAAP.    The above projections used by Sandler O'Neill include the presentation of fully converted tangible book value per share. Fully converted tangible book value per share is a non-GAAP financial measure as defined by SEC rules. Fully converted tangible book value per share is stockholders' equity reduced by goodwill and other intangible assets, divided by total common shares outstanding and reflects the impact of the adjustments required if the warrants were fully exercised. This non-GAAP financial measure is useful in evaluating SWS, this information should be considered as supplemental in nature and not as a substitute for, or superior to, the related financial information prepared in accordance with GAAP. Pursuant to the applicable rules, regulations, interpretations and position of the SEC and its staff under the Exchange Act related to the presentation of non-GAAP financial information, the information in the following tables provides a reconciliation of fully converted tangible book value per share.

 
  Calendar Year Ending December 31  
 
  2014   2015   2016   2017  
 
  (in thousands, except per share numbers)
 

Book Value

    318,651     355,726     491,191     519,474  

Less: Goodwill and Other Intangibles

    (7,552 )   (7,552 )   (7,552 )   (7,552 )
                   

Tangible Book Value

    311,099     348,174     483,639     511,922  

Plus: Warrant Impact

                         

Exercise Price

    100,000     100,000     NA (1)   NA (1)

After Tax Balance Sheet Adjustments(2)

    9,000     12,869     NA (1)   NA (1)
                   

Adjusted Tangible Book Value

    420,099     461,043     483,639     511,922  

Shares Outstanding

    33,068,118     33,068,118     50,459,422     50,459,422  

Warrant Shares

    17,391,304     17,391,304     NA (1)   NA (1)

Full Converted Shares Outstanding

    50,459,422     50,459,422     50,459,422     50,459,422  

Tangible Book Value per Share

  $ 9.41   $ 10.53   $ 9.58   $ 10.15  

Fully Converted Tangible Book Value per Share

  $ 8.33   $ 9.14   $ 9.58   $ 10.15  

(1)
Warrants assumed to be exercised concurrently with the maturity of the Hilltop and Oak Hill loan in July, 2016

(2)
Includes after-tax impact of reversing warrant liability, debt discount and unamoritized debt issuance costs

269


Table of Contents


Public Trading Markets

        Hilltop common stock trades on the New York Stock Exchange under the symbol "HTH". SWS common stock trades on the New York Stock Exchange under the symbol "SWS". The newly issued Hilltop common stock issuable pursuant to the merger agreement will be listed on the New York Stock Exchange under the symbol "HTH".


Appraisal / Dissenters' Rights

        Holders of SWS common stock who do not vote for the adoption of the merger agreement and who are otherwise eligible and who otherwise comply with the applicable statutory procedures of Section 262 of the DGCL will have the right to obtain an appraisal of the value of their shares of SWS common stock in connection with the merger. This means that such stockholders are entitled to obtain a judicial determination of the fair value of their SWS shares (exclusive of any element of value arising from the accomplishment or expectation of the merger) determined by the Court of Chancery of the State of Delaware (the "Court of Chancery") and entitled to receive payment based upon that valuation, together with interest, if any, to be paid upon the amount determined to be a fair value, in lieu of any consideration to be received under the merger agreement.

        The following is intended as a brief summary of the material provisions of the Delaware statutory procedures required to be followed by a stockholder in order to properly demand and perfect appraisal rights. This summary, however, is not a complete statement of law pertaining to appraisal rights under Delaware law and is qualified in its entirety by the full text of Section 262 of the DGCL, which is attached hereto as Annex C. The preservation and exercise of appraisal right requires strict and timely adherence to the applicable provisions of the DGCL. Failure to follow the requirements of Section 262 of the DGCL for demanding and perfecting appraisal rights may result in the loss of such rights. All references in this summary to a "stockholder" are to a record holder of SWS common stock on the record date for the special meeting unless otherwise indicated.

        If you wish to consider exercising your appraisal rights, you should carefully review the text of Section 262 of the DGCL contained in Annex C hereto and should consult your legal advisor since failure to timely and properly comply with the requirements of Section 262 of the DGCL will result in the loss of your appraisal rights under the DGCL. All demands for appraisal must be received prior to the vote on the merger agreement and should be addressed to SWS, 1201 Elm Street, Suite 3500, Dallas, Texas 75270, Attention: Secretary, and should be executed by, or on behalf of, the record holder of the shares of SWS common stock. Holders of SWS common stock who desire to exercise their appraisal rights must not vote in favor of adoption of the merger agreement and must continuously hold their shares of SWS common stock through the effective date of the merger.

        Under Section 262 of the DGCL, where a merger agreement relating to a proposed merger is to be submitted for adoption at a meeting of stockholders, as in the case of the special meeting, the corporation, not less than 20 days prior to such meeting, must notify each of its stockholders who was a stockholder on the record date for notice of such meeting with respect to shares for which appraisal rights are available, that appraisal rights are so available, and must include in each such notice a copy of Section 262 of the DGCL. This proxy statement/prospectus constitutes such notice to the holders of SWS common stock and Section 262 of the DGCL is attached to this proxy statement/prospectus as Annex C.

        If you wish to exercise appraisal rights you must not vote for the adoption of the merger agreement and must deliver to SWS, before the vote on the proposal to adopt the merger agreement, a written demand for appraisal of your shares of SWS common stock. If you sign and return a proxy card that does not contain voting instructions or submit a proxy by telephone or through the Internet that does not contain voting instructions, you will effectively waive your appraisal rights because such shares represented by the proxy will, unless the proxy is revoked, be voted for the adoption of the merger

270


Table of Contents

agreement. Therefore, a stockholder who submits a proxy and who wishes to exercise appraisal rights must submit a proxy containing instructions to vote against the adoption of the merger agreement or abstain from voting on the adoption of the merger agreement. However, neither voting against the adoption of the merger agreement, nor abstaining from voting or failing to vote on the proposal to adopt the merger agreement, will in and of itself constitute a written demand for appraisal satisfying the requirements of Section 262 of the DGCL.

        A demand for appraisal will be sufficient if it reasonably informs SWS of the identity of the stockholder and that such stockholder intends thereby to demand appraisal of such stockholder's shares of common stock. This written demand for appraisal must be separate from any proxy or vote abstaining from or voting against the adoption of the merger agreement. If you wish to exercise appraisal rights, you must be the record holder of such shares of SWS common stock on the date the written demand for appraisal is made and you must continue to hold such shares of record through the effective date of the merger. Accordingly, a stockholder who is the record holder of shares of common stock on the date the written demand for appraisal is made, but who thereafter transfers such shares prior to the effective date of the merger, will lose any right to appraisal in respect of such shares.

        Only a holder of record of shares of SWS common stock on the record date for the special meeting is entitled to assert appraisal rights for such shares of common stock registered in that holder's name. To be effective, a demand for appraisal by a stockholder must be made by, or on behalf of, such stockholder of record. Beneficial owners who do not also hold their SWS shares of record may not directly make appraisal demands to SWS. The beneficial holder must, in such cases, have the owner of record, such as a broker, bank or other nominee, submit the required demand in respect of those shares of SWS common stock. If shares of SWS common stock are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of a demand for appraisal should be made by or for the fiduciary; and if the shares of SWS common stock are owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand should be executed by or for all joint owners. An authorized agent, including an authorized agent for two or more joint owners, may execute the demand for appraisal for a stockholder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in executing the demand, he or she is acting as agent for the record owner. A record owner, such as a broker, who holds shares of SWS common stock as a nominee for others, may exercise his or her right of appraisal with respect to the shares of SWS common stock held for one or more beneficial owners, while not exercising this right for other beneficial owners. In that case, the written demand should state the number of shares of SWS common stock as to which appraisal is sought. Where no number of shares of SWS common stock is expressly mentioned, the demand will be presumed to cover all shares of SWS common stock held in the name of the record owner.

        If you hold your shares of SWS common stock in a brokerage account or in other nominee form and you wish to exercise appraisal rights, you should consult with your broker or the other nominee to determine the appropriate procedures for the making of a demand for appraisal by the nominee.

        If any stockholder who demands appraisal under Delaware law fails to perfect or has effectively withdrawn or lost its right of appraisal, each share of SWS common stock held by such stockholder will be deemed to have been converted into and to have become, as of the effective time of the merger, the right to receive the merger consideration. A stockholder may withdraw his or her demand for appraisal and agree to accept the merger consideration by delivering to us a written withdrawal of his or her demand for appraisal and acceptance of the merger consideration within 60 days after the effective date of the merger (or thereafter with the consent of the surviving entity). Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery will be dismissed as to any stockholder without the approval of the Court of Chancery, and such approval may be conditioned upon such terms as the Court deems just; provided, however, that any stockholder who has not commenced an appraisal

271


Table of Contents

action or joined that proceeding as a named party may withdraw his or her demand for appraisal and agree to accept the merger consideration offered within 60 days after the effective date.

        Within 10 days after the effective date of the merger, the surviving entity will notify each stockholder who properly asserted appraisal rights under Section 262 of the DGCL and has not voted for the adoption of the merger agreement of the effective date of the merger. Within 120 days after the effective date of the merger, but not thereafter, either the surviving entity, or any stockholder who has complied with the requirements of Section 262 of the DGCL and who is otherwise entitled to appraisal rights, may file a petition in the Court of Chancery demanding a determination of the fair value of the shares of SWS common stock held by all stockholders entitled to appraisal. A person who is the beneficial owner of shares of SWS common stock held in a voting trust or by a nominee on behalf of such person may, in such person's own name, file the petition described in the previous sentence. Upon the filing of the petition by a stockholder, service of a copy of such petition shall be made upon the surviving entity. The surviving entity of the merger does not have an obligation to file such a petition in the event there are dissenting stockholders. Accordingly, the failure of a stockholder to file such a petition within the period specified could nullify the stockholder's previously written demand for appraisal. Hilltop has no present intent to cause an appraisal petition to be filed, and stockholders seeking to exercise appraisal rights should not assume that the surviving entity will file such a petition or that it will initiate any negotiations with respect to the fair value of such shares of SWS common stock. Accordingly, stockholders who desire to have their shares of SWS common stock appraised should initiate any petitions necessary for the perfection of their appraisal rights within the time periods and in the manner prescribed in Section 262 of the DGCL.

        The costs of the appraisal action may be determined by the Court of Chancery and made payable by the parties as the Court deems equitable in the circumstances. The Court also may order that all or a portion of the expenses incurred by any stockholder in connection with an appraisal, including, without limitation, reasonable attorneys' fees and the fees and expenses of experts utilized in the appraisal proceeding, be charged pro rata against the value of all of the shares entitled to appraisal.

        If a petition for appraisal is duly filed by a stockholder and a copy of the petition is delivered to the surviving entity of the merger, such surviving entity will then be obligated, within 20 days after receiving service of a copy of the petition, to provide the Court of Chancery with a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares of SWS common stock and with whom agreements as to the value of their shares of SWS common stock have not been reached by the surviving entity. After notice to dissenting stockholders who demanded payment of their shares of SWS common stock, the Court of Chancery is empowered to conduct a hearing upon the petition, and to determine those stockholders who have complied with Section 262 of the DGCL and who have become entitled to the appraisal rights provided thereby. The Court of Chancery may require the stockholders who have demanded appraisal for their shares of SWS common stock to submit their stock certificates to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with that direction, the Court of Chancery may dismiss the proceedings as to that stockholder.

        Within 120 days after the effective date, any stockholder (including any beneficial owner of shares entitled to appraisal rights) that has complied with the requirements for exercise of appraisal rights will be entitled, upon written request, to receive from the surviving entity a statement setting forth the aggregate number of shares of SWS common stock not voted in favor of adoption of the merger agreement and with respect to which demands for appraisal have been received and the aggregate number of holders of those shares. These statements must be mailed to the stockholder within 10 days after a written request by such stockholder for the information has been received by the surviving entity, or within 10 days after expiration of the period for delivery of demands for appraisal under Section 262 of the DGCL, whichever is later.

272


Table of Contents

        After determination of the stockholders entitled to appraisal of their shares of SWS common stock (unless the Court of Chancery, in its discretion, proceeds to trial upon the appraisal prior to the final determination of the stockholders entitled to an appraisal), the Court of Chancery will appraise the shares of SWS common stock, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger, together with interest, if any. Unless the Court of Chancery in its discretion determines otherwise for good cause shown, interest from the effective date through the date of payment of the judgment shall be compounded quarterly and shall accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the effective date of the merger and the date of payment of the judgment. When the value is determined, the Court of Chancery will direct the payment of such value, with interest thereon, if any, to the stockholders entitled to receive the same, upon surrender by such stockholders of their certificates representing such shares or surrender of their book-entry shares, as applicable.

        In determining the fair value of the shares of SWS common stock, the Court of Chancery is required to take into account all relevant factors. Accordingly, such determination could be based upon considerations other than, or in addition to, the market value of the shares of SWS common stock, including, among other things, asset values and earning capacity. In Weinberger v. UOP, Inc., the Delaware Supreme Court stated, among other things, that "proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court" should be considered in an appraisal proceeding. The surviving entity of the merger may argue in an appraisal proceeding that, for purposes of such a proceeding, the fair value of the shares of SWS common stock is less than the merger consideration. Therefore, the value so determined in any appraisal proceeding could be the same as, or more or less than, the merger consideration.

        Section 262 of the DGCL provides that fair value is to be "exclusive of any element of value arising from the accomplishment or expectation of the merger." In Cede & Co. v. Technicolor, Inc., the Delaware Supreme Court stated that such exclusion is a "narrow exclusion [that] does not encompass known elements of value," but which rather applies only to the speculative elements of value arising from such accomplishment or expectation. In Weinberger, the Delaware Supreme Court construed Section 262 of the DGCL to mean that "elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered." In view of the complexity of Section 262 of the DGCL, stockholders who may wish to pursue appraisal rights should consult their legal advisors.

        Any stockholder who has duly demanded and perfected an appraisal in compliance with Section 262 of the DGCL will not, after the effective date of the merger, be entitled to vote his or her shares for any purpose or be entitled to the payment of dividends or other distributions thereon, except dividends or other distributions payable to holders of record of shares of SWS common stock as of a date prior to the effective date of the merger.

        If you desire to exercise your appraisal rights, you must not vote for the adoption of the merger agreement and you must strictly comply with the procedures set forth in Section 262 of the DGCL. Failure to take any required step in connection with the exercise of appraisal rights will result in the termination or waiver of such rights.


Regulatory Approvals Required for the Merger

        Hilltop and SWS have agreed to use their reasonable best efforts to obtain all regulatory approvals required to complete the transactions contemplated by the merger agreement, including the merger and the bank merger. These approvals include approvals from the Federal Reserve Board and the Texas Department of Banking and, to the extent required, the expiration or termination of any applicable waiting period under the HSR Act. Hilltop and SWS have filed, or are in the process of filing, applications and notifications to obtain the required regulatory approvals.

273


Table of Contents

        Federal Reserve Board.    The transactions contemplated by the merger agreement are subject to approval by the Federal Reserve Board pursuant to section 4 of the Bank Holding Company Act. The Federal Reserve Board takes into consideration a number of factors when acting on notices under section 4 of the BHC Act of 1956 (12 U.S.C. § 1843(j)) and Regulation Y (12 CFR 225.26). These factors include the financial and managerial resources (including consideration of the competence, experience, and integrity of the officers, directors, and principal shareholders, as well as the pro forma capital ratios) and future prospects of the combined organization. The Federal Reserve Board also considers whether the transaction can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. The Federal Reserve Board must also consider the extent to which the proposal would result in greater or more concentrated risks to the stability of the U.S. banking or financial system.

        The merger of PlainsCapital Bank and Southwest Securities, FSB contemplated by the merger agreement is subject to approval by the Federal Reserve Board pursuant to the Bank Merger Act, 12 U.S.C. § 1828(c), and pursuant to Section 9 of the Federal Reserve Act. The Federal Reserve Board takes into consideration a number of factors when acting on applications under the Bank Merger Act. These factors include the financial and managerial resources (including consideration of the competence, experience, and integrity of the officers, directors, and principal shareholders) and future prospects of the combined organization. The Federal Reserve Board also considers the effectiveness of the applicant in combatting money laundering, the convenience and needs of the communities to be served, as well as the extent to which the proposal would result in greater or more concentrated risks to the stability of the U.S. banking or financial system. The Federal Reserve Board may not approve a proposal that would have significant adverse effects on competition or on the concentration of resources in any banking market.

        In reviewing the convenience and needs of the communities to be serviced, the Federal Reserve Board will consider the records of performance of the relevant insured depository institutions under the CRA. In their most recent respective CRA examinations, both PlainsCapital Bank and Southwest Securities, FSB received an overall "satisfactory" regulatory rating.

        Furthermore, the Bank Merger Act and applicable regulations require published notice of, and the opportunity for public comment on, these applications. The Federal Reserve Board will take into account the views of third party commenters, particularly on the subject of the merging parties' service to their respective communities, and any hearing, meeting or comments provided by third parties could prolong the period during which the application is under review by the Federal Reserve Board.

        Transactions approved under the Bank Merger Act generally may not be completed until 30 days after the approval of the applicable federal agency is received, during which time the Department of Justice ("DOJ") may challenge the transaction on antitrust grounds. With the approval of the applicable federal agency and the concurrence of the DOJ, the waiting period may be reduced to no less than 15 days. The commencement of an antitrust action would stay the effectiveness of such an approval unless a court specifically ordered otherwise. In reviewing the merger, the DOJ could analyze the merger's effect on competition differently than the Federal Reserve Board, and thus it is possible that the DOJ could reach a different conclusion than the Federal Reserve Board regarding the transaction's effects on competition. A determination by the DOJ not to object to the merger may not prevent the filing of antitrust actions by private persons or state attorneys general.

        Antitrust Considerations.    The HSR Act, and the rules and regulations thereunder, provide that the transaction may not be completed until pre-merger notification filings have been made with the Federal Trade Commission (the "FTC") and the Antitrust Division of the DOJ (the "Antitrust Division") and any applicable waiting period has expired or is terminated. Even after the waiting period expires or is terminated, the Antitrust Division and the FTC retain the authority to challenge the transaction on

274


Table of Contents

antitrust grounds before or after the transaction is completed. Each of Hilltop and SWS filed a notification and report form for the transaction with the FTC and the Antitrust Division on May 14, 2014. On May 28, 2014, the parties received early termination of the waiting period under the HSR Act with respect to the transaction.

        Additional Regulatory Approvals and Notices.    A copy of the application submitted to the Federal Reserve Board in connection with the merger must be submitted to the Texas Department of Banking, which must approve the transaction, and Southwest Securities, FSB must submit a notification to the Office of the Comptroller of the Currency. Notifications and/or applications requesting approval may be submitted to various other federal and state regulatory authorities and self-regulatory organizations.

        Timing.    We cannot assure you that all of the regulatory approvals described above will be obtained and, if obtained, we cannot assure you as to the timing of any such approvals, our ability to obtain the approvals on satisfactory terms or the absence of any litigation challenging such approvals. We also cannot assure you that any third party will not attempt to challenge the merger on antitrust grounds, and, if such a challenge is made, we cannot assure you as to its result.

        Hilltop and SWS believe that the merger does not raise substantial antitrust or other significant regulatory concerns and that we will be able to obtain all requisite regulatory approvals on a timely basis without the imposition of any condition that would have a material adverse effect on Hilltop or SWS. The parties' obligation to complete the merger is conditioned upon the receipt of all required regulatory approvals and Hilltop's obligation to complete the merger is conditioned upon there being no action taken or determination made, or any law enacted or deemed applicable to the transactions contemplated by the merger agreement by any governmental entity, in connection with the grant of any requisite regulatory approvals, which imposes or would result in the imposition of a restriction on Hilltop, SWS or the surviving company in connection therewith, that would reasonably be expected to have a material adverse effect (measured on a scale relative to SWS) on Hilltop or SWS.

        We are not aware of any material governmental approvals or actions that are required for completion of the merger other than those described above. It is presently contemplated that if any such additional governmental approvals or actions are required, those approvals or actions will be sought. There can be no assurance, however, that any additional approvals or actions will be obtained.


Interests of SWS Directors and Executive Officers in the Merger

        At the effective time of the merger, each share of SWS common stock held by SWS's directors and executive officers (other than certain restricted shares, as described below under "Equity Awards—Restricted shares (post-merger agreement grants)—Executive officers") will be converted into the right to receive the merger consideration (i.e., 0.2496 shares of Hilltop common stock and $1.94 in cash) on the same basis as SWS stockholders generally.

        In addition, in considering the recommendation of the Board that you approve the merger agreement, you should be aware that SWS's directors and executive officers have interests in the merger that are different from, or in addition to, those of SWS stockholders generally. The members of the Board were aware of these interests and considered them, among other matters, in evaluating the merger agreement, in reaching their decision to adopt the merger agreement, and in recommending to SWS stockholders that the merger agreement be approved. These interests, which are described and quantified below, include the following:

275


Table of Contents

276


Table of Contents

        Messrs. Gerald J. Ford and J. Taylor Crandall are members of the SWS board of directors appointed by Hilltop and Oak Hill, respectively. Messrs. Ford and Crandall recused themselves from the vote of the SWS board of directors with respect to the approval and adoption of the merger agreement and the transactions contemplated thereby, including the merger. The decisions by the SWS Board that are described in this proxy statement/prospectus were all taken by unanimous vote of those directors who voted.

Golden Parachute Compensation

        This section sets forth the information required by Item 402(t) of Regulation S-K regarding the compensation that may be paid or would be payable to SWS's "named executive officers" (as defined under SEC disclosure rules) that is based on or otherwise relates to the merger. The table below sets forth for each of SWS's six named executive officers estimates of the amounts of compensation that are based on or otherwise relate to the merger and that may be paid or would be payable to the executive either immediately after the effective time of the merger or on a subsequent termination of employment by the employer without "cause" (as defined below). SWS stockholders are being asked to approve, on a non-binding, advisory basis, such compensation for these named executive officers (see

277


Table of Contents

"Non-Binding Advisory Vote Approving Compensation (Proposal 2)" beginning on page 67). Because the vote to approve such compensation is advisory only, it will not be binding on either SWS or Hilltop. Accordingly, if the merger agreement is approved by SWS stockholders and the merger is completed, the compensation will be paid (or payable) regardless of the outcome of the vote to approve such compensation, subject only to the conditions applicable thereto, which are described in the footnotes to the table below.

        The table below also sets forth estimates of the amounts of such compensation for SWS's two executive officers who are not named executive officers. SWS stockholders are not being asked to approve such compensation for these executive officers.

        The estimates in the table below assume that the merger had become effective on October 13, 2014 (the latest practicable date before the date of this proxy statement/prospectus) and that the employment of each of the executive officers was terminated without "cause" (as defined below) immediately thereafter. See the footnotes to the table for additional information.

Name
  Cash
($)(1)
  Equity
($)(2)
  Pension/
NQDC
($)
  Perquisites/
Benefits
($)
  Tax
Reimbursement
($)
  Other
($)
  Total
($)
 

Named Executive Officers

                                           

James H. Ross, President and Chief Executive Officer

    623,077     1,980,837     0     0     0     0     2,603,914  

J. Michael Edge, Interim Chief Financial Officer and Treasurer

    291,154     90,469     0     0     0     0     381,623  

Stacy M. Hodges, Executive Vice President, Chief Financial Officer and Treasurer(3)

                             

Robert A. Chereck, Executive Chairman and President of Southwest Securities, FSB

    126,923     13,427     0     0     0     0     140,350  

Daniel R. Leland, Executive Vice President

    103,846     387,425     0     0     0     0     491,271  

Richard H. Litton, Executive Vice President

    103,846     611,989     0     0     0     0     715,835  

Other Executive Officers

   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

W. Norman Thompson, Executive Vice President and Chief Information Officer

    253,846     254,009     0     0     0     0     507,855  

Allen R. Tubb, Executive Vice President, General Counsel and Secretary

    288,462     319,241     0     0     0     0     607,703  

(1)
The amounts in this column reflect the cash severance payment that each executive would be entitled to receive on termination of employment by the employer without "cause" (as defined below) on or prior to December 31, 2015 in accordance with SWS's severance practice (see above under "Severance and Retention Payments—Severance practice"). For Messrs. Ross, Edge, Chereck, Thompson and Tubb, the amount in this column also reflects a cash retention payment that each executive is eligible to receive pursuant to his retention agreement with SWS (see above under "Severance and Retention Payments—Retention agreements"). These retention payments will be paid in a lump sum within 30 days of the six-month anniversary of the effective time of the merger, subject to the applicable executive's continued employment with SWS through such six-month anniversary (except that, on a termination of employment by the employer without "cause" (see definition below under "Definition of 'Cause"') after the effective time, the retention payment will be paid within 30 days of such termination date, contingent on the executive's execution and non-revocation of a release of claims).

278


Table of Contents

Name
  Severance
Payment ($)
  Retention
Payment ($)
 

James H. Ross

    173,077     450,000  

J. Michael Edge

    166,154     125,000  

Stacy M. Hodges

         

Robert A. Chereck

    26,923     100,000  

Daniel R. Leland

    103,846      

Richard H. Litton

    103,846      

W. Norman Thompson

    103,846     150,000  

Allen R. Tubb

    138,462     150,000  
(2)
For all named executive officers and executive officers other than Mr. Edge, the amount in this column reflects the value of the accelerated vesting of the executives' outstanding unvested restricted shares of SWS common stock granted prior to the date of the merger agreement that would occur at the effective time of the merger (i.e., on a "single-trigger" basis). For Mr. Edge, the amount in this column reflects the value of the accelerated vesting of his deferred shares of SWS common stock, assuming Mr. Edge's employment was terminated by the employer without "cause" upon the effective time of the merger (i.e., on a "double-trigger" basis). At the effective time of the merger, each such restricted share will be converted into the merger consideration (i.e., 0.2496 shares of Hilltop common stock and $1.94 in cash) on the same basis as shares SWS stockholders generally and each such deferred share will be converted into 0.3328 of a deferred share of Hilltop common stock.

For all named executive officers and executive officers other than Mr. Chereck, the amount in this column also reflects the value of the accelerated vesting of the executives' restricted shares of SWS common stock granted after the date of the merger agreement in satisfaction of their fiscal 2014 annual bonuses that would occur on termination of employment by the employer without "cause" (i.e., on a "double-trigger" basis) (see above under "Restricted shares (post-merger agreement grants)—Executive officers"), assuming each executive's employment was terminated without "cause" upon the effective time of the merger. At the effective time of the merger, such restricted shares will be converted into a number of restricted shares of Hilltop common stock, with the number of Hilltop shares determined based on the value of the merger consideration, which, for purposes of this column, has been estimated to equal 0.3439 of a restricted share of Hilltop common stock, based on the average of the high and low prices of a Hilltop share on the New York Stock Exchange from October 2, 2014 through October 8, 2014. The actual number of restricted shares of Hilltop common stock will be determined based on the average of the high and low sales prices of a Hilltop share on the New York Stock Exchange on each of the five consecutive trading days ending on the trading day that is two trading days prior to the closing date of the merger. Mr. Chereck was not granted any such restricted shares as his entire fiscal 2014 annual bonus was paid in cash.

For purposes of this column, each Hilltop share is assumed to have a value of $24.33 (which represents the average closing market price of Hilltop's securities over the first five business days following the first public announcement of the merger on April 1, 2014).

Under the SWS Group, Inc. Deferred Compensation Plan, participants who elect to defer amounts under the plan are eligible for allocations of employer matching contributions in the form of deferred shares of SWS common stock (see "Equity Awards—Deferred shares" above). Mr. Edge is the only executive officer who elected to defer amounts under the plan for 2014, and so he is eligible for allocations of deferred shares to his account under the plan for 2014. The amounts in this column do not reflect any additional deferred shares that may be allocated after the date

279


Table of Contents

Name
  "Single-Trigger"
Restricted Shares ($)
  "Double-Trigger"
Restricted Shares ($)
  "Double-Trigger"
Deferred Shares ($)
 

James H. Ross

    1,636,519     344,318      

J. Michael Edge

        86,080     4,389  

Stacy M. Hodges

             

Robert A. Chereck

    13,427          

Daniel R. Leland

    249,693     137,732      

Richard H. Litton

    168,988     443,001      

W. Norman Thompson

    182,284     71,725      

Allen R. Tubb

    233,161     86,080      
(3)
Ms. Hodges resigned from SWS as of September 30, 2013.

        As discussed above, on termination of employment by the employer without "cause", the executive officers are entitled to severance payments in accordance with SWS's severance practice (if such termination occurs on or before December 31, 2015, and contingent on the executive's execution and non-revocation of a release of claims) and accelerated vesting of their deferred shares. In addition, the additional restricted shares of SWS common stock that were granted to the executive officers following the execution of the merger agreement will accelerate in full on termination of employment by the employer without "cause". For these purposes, "cause" means the executive's:

        In each case (other than the first two events described above), SWS must provide the executive with written notice specifying the circumstances alleged to constitute "cause" and, to the extent subject to cure, the executive will have 30 days following receipt of such notice to cure such circumstances to SWS's reasonable satisfaction.

280


Table of Contents

        In addition, the cash retention amounts payable pursuant to the retention agreements entered into between SWS and Messrs. Ross, Chereck, Thompson, Tubb and Edge will accelerate on termination of employment by the employer without "cause". For this purpose, "cause" means the executive's:

        In the case of the first and third events, SWS must first provide the executive with 15 days' prior written notice specifying the circumstances alleged to constitute "cause", and the executive will have a reasonable opportunity to cure such circumstances, if practicable, within such 15-day period, as determined by SWS in its sole discretion.


Indemnification of SWS Directors and Officers and Continuation of Directors' and Officers' Insurance

        Each of Hilltop and Peruna LLC has agreed to indemnify and advance expenses to each present and former director and officer of SWS and its subsidiaries (when acting in such capacity) to the fullest extent permitted by law for any acts arising out of or pertaining to matters occurring at or existing prior to the closing. Additionally, Hilltop will provide director and officer liability insurance with respect to claims arising from facts or events occurring before the completion of the merger, which will contain at least the same coverage and amounts, and on no less advantageous terms to the indemnified party as that coverage currently provided by SWS, at an aggregate cost per annum not to exceed 300% of the annual aggregate premiums currently paid by SWS for such insurance, provided that if premiums for such insurance would exceed such cap, then Hilltop will maintain policies of insurance which provide the maximum coverage available at an annual premium equal to such cap. In lieu of the foregoing insurance, prior to the closing, SWS may purchase "tail" D&O insurance, at an aggregate cost not to exceed 300% of the annual aggregate premiums currently paid by it for such insurance.


Hilltop's Relationship with SWS

        In March 2011, Hilltop, Oak Hill Capital Partners III, L.P. ("OHCP") and Oak Hill Capital Management Partners III, L.P. (collectively with OHCP, "Oak Hill") entered into a Funding Agreement (the "Funding Agreement") with SWS. On July 29, 2011, after receipt of regulatory and SWS stockholder approval, SWS completed the following transactions contemplated by the Funding Agreement:

281


Table of Contents

        On October 2, 2014, Hilltop exercised its warrant in full, acquiring 8,695,652 shares of SWS common stock for the warrant exercise price of $5.75 per share. Pursuant to the terms of the warrant and Credit Agreement, the exercise price was paid by an automatic elimination of the $50,000,000 amount outstanding due to Hilltop under the Credit Agreement. Accordingly, as of the date of this proxy statement/prospectus, Hilltop (i) owns 10,171,039 shares of SWS common stock, representing approximately 21.0% of the outstanding shares of SWS common stock and (ii) is no longer a lender under the Credit Agreement. Mr. Gerald J. Ford, who is Chairman of Hilltop's board of directors, currently serves as Hilltop's designee on SWS's board of directors. Hilltop has agreed in the merger agreement to vote any shares of SWS that it owns as of the record date for the SWS special meeting in favor of approval and adoption of the merger agreement.

        In connection with its acquisition of PlainsCapital Corporation in 2012, Hilltop provided certain passivity commitments to the Federal Reserve Board related to SWS. These passivity commitments provide that Hilltop cannot take certain actions, namely exercising any controlling influence over management or policies of SWS, without the prior approval of the Federal Reserve Bank.

        The terms of the Credit Agreement include a covenant prohibiting SWS from undergoing a "Fundamental Change," which includes any merger, amalgamation or consolidation, and which SWS would breach by engaging in a merger, amalgamation or consolidation unless compliance were waived by each lender thereunder. During the parties' negotiations with respect to the merger, Hilltop indicated to SWS that it would not be willing to grant a waiver of this covenant to permit a third party transaction (see "The Merger—Background of the Merger"). The Credit Agreement also prohibits SWS from prepaying the loan other than following a period during which the closing price for SWS common stock exceeds 150% of the exercise price of the warrants (or $8.625) for twenty out of any thirty consecutive trading days.


Oak Hill Letter Agreement

        On September 26, 2014, Oak Hill partially exercised its warrants, acquiring a total of 6,521,739 shares of SWS common stock for the warrant exercise price of $5.75 per share. Pursuant to the terms of the warrant and Credit Agreement, the exercise price was paid by an automatic reduction by $37,499,999.25 of the $50,000,000 amount which had previously been due to Oak Hill under the Credit Agreement. Accordingly, as of the date of this proxy statement/prospectus, Oak Hill (i) owns and is entitled to vote 6,521,739 shares of SWS common stock, representing approximately 13.5% of the outstanding shares of SWS common stock, (ii) beneficially owns an additional 2,173,913 shares of SWS common stock pursuant to the unexercised portion of Oak Hill's warrants, equivalent to total beneficial ownership of approximately 17.2% if Oak Hill's warrants were fully exercised and (iii) remains a lender under the Credit Agreement with an outstanding loan balance of $12,500,000.75, which is the entire amount currently outstanding under the Credit Agreement. In addition, Oak Hill Capital Management, LLC and OHCM Management LLC, which are affiliates of Oak Hill, beneficially own an additional 19,925 shares of SWS common stock, equivalent to approximately 0.04% of the currently outstanding SWS common shares.

        On March 31, 2014, concurrently with the entry by Hilltop and SWS into the merger agreement, SWS entered into a letter agreement with Oak Hill (the "Oak Hill Letter Agreement"). The Oak Hill Letter Agreement, among other things, provides:

282


Table of Contents

        The Oak Hill Letter Agreement does not preclude Oak Hill from granting a similar consent to any other transaction involving SWS that the Special Committee may recommend in the future. The Oak Hill Letter Agreement will terminate automatically if the merger agreement is terminated, if the merger is otherwise not consummated, or if the Special Committee withdraws or materially modifies its recommendation of the merger.


Litigation Relating to the Merger

        Each of Hilltop, Peruna LLC, SWS and the individual members of the board of directors of SWS have been named as defendants in two purported shareholder class action lawsuits arising out of the merger. Both lawsuits were filed in Delaware Chancery Court (Joseph Arceri v. SWS Group, Inc. et al and Chaile Steinberg v. SWS Group, Inc. et al filed April 8, 2014 and April 11, 2014, respectively). On May 13, 2014, the Delaware Chancery Court consolidated the two actions for all purposes. On June 10, 2014, plaintiffs filed a consolidated amended complaint, a copy of which is attached to this proxy statement/prospectus as Annex D. The complaint generally alleges, among other things, that the SWS Board breached its fiduciary duties to stockholders by failing to take steps to maximize stockholder value or to engage in a fair sale process before approving the merger, that the SWS Board labored under conflicts of interest, that certain provisions of the merger agreement unduly restrict SWS's ability to negotiate with other potential bidders, and that the other defendants aided and abetted the SWS Board's breaches of fiduciary duty. The complaint further alleges, among other things, that the proxy statement/prospectus filed by Hilltop on May 29, 2014 omits or misstates certain material information. The complaints seek relief that includes, among other things, an injunction prohibiting the consummation of the merger, rescission to the extent the merger terms have already been implemented, damages for the alleged breaches of fiduciary duty, and the payment of plaintiffs' attorneys' fees and costs. On June 16, 2014, plaintiffs moved for a preliminary injunction prohibiting the consummation of the merger, and for expedited proceedings in connection therewith. Pursuant to negotiations between the parties to the lawsuit, plaintiffs subsequently withdrew those motions. Hilltop and SWS believe that the claims are without merit and each intends to vigorously defend against these actions.

283


Table of Contents


THE MERGER AGREEMENT

        The following describes certain aspects of the merger, including certain material provisions of the merger agreement. The following description of the merger agreement is subject to, and qualified in its entirety by reference to, the merger agreement, which is attached to this proxy statement/prospectus as Annex A and is incorporated by reference into this proxy statement/prospectus. We urge you to read the merger agreement carefully and in its entirety, as it is the legal document governing the merger.


Structure of the Merger

        The merger agreement provides that SWS will merge into and with Peruna LLC, with Peruna LLC continuing as the surviving company and a wholly owned subsidiary of Hilltop. Subject to the terms of the merger agreement, each stockholder of SWS common stock issued and outstanding immediately prior to the completion of the merger will receive per share consideration consisting of $1.94 in cash and 0.2496 shares of Hilltop common stock, except for (i) certain shares of SWS common stock held by SWS or Hilltop and (ii) shares of SWS common stock held by stockholders properly asserting dissenters' rights at the completion of the merger.

        The merger agreement provides that immediately following the merger, Southwest Securities, FSB, a wholly-owned subsidiary of SWS, will merge with and into Hilltop's wholly-owned subsidiary PlainsCapital Bank, with PlainsCapital Bank continuing as the surviving bank (the "bank merger"). In addition, SWS has agreed to reasonably cooperate with Hilltop to obtain the necessary regulatory approvals to permit the merger of Hilltop's broker-dealer subsidiary First Southwest Company with Southwest Securities, Inc., a wholly-owned subsidiary of SWS, to be effected following the bank merger.

        Hilltop will not issue any fractional shares of Hilltop common stock in the merger. Instead, an SWS stockholder who otherwise would have received a fraction of a share of Hilltop common stock will receive an equivalent amount in cash rounded to the nearest cent. The cash amount will be determined by multiplying (i) the average of the high and low sales prices of SWS common stock on the New York Stock Exchange, as reported on the New York Stock Exchange Composite Transaction Tape, on each of the five consecutive trading days ending on the trading day that is two trading days prior to the effective date of the merger, and (ii) the fraction of a share (after taking into account all shares of SWS common stock held by such stockholder at the effective date of the merger and rounded to the nearest thousandth when expressed in decimal form) of SWS common stock which such stockholder would otherwise be entitled to receive.

        At the completion of the merger, the certificate of formation and limited liability company agreement of Peruna LLC in effect immediately prior to the effective time will be the certificate of formation and limited liability company agreement of the surviving company after completion of the merger until thereafter amended in accordance with their respective terms and applicable law.

        At the completion of the merger, the directors of Peruna LLC immediately prior to the effective date shall become the initial directors of the surviving company and shall hold office until their respective successors are appointed.

284


Table of Contents


Treatment of SWS Restricted Shares and Deferred Shares

        Each restricted share of SWS common stock granted prior to the date of the merger agreement will vest in full at the effective time of the merger, and the holders of such restricted shares will be entitled to receive the merger consideration for each such share on the same basis as SWS stockholders generally, less applicable withholding taxes, which will be withheld first from the cash portion of the merger consideration payable in respect of each such share. As permitted under the terms of the merger agreement, on August 20, 2014, SWS granted additional restricted shares of SWS common stock to certain executive officers and key employees in satisfaction of their fiscal 2014 annual bonuses, which will be converted into restricted shares of Hilltop as of the effective time of the merger (with the number of Hilltop shares determined based on the value of the merger consideration), and will be subject to accelerated vesting (i) as to all of such restricted shares on termination of employment by the employer without "cause" (as defined in the merger agreement) following the effective time of the merger, (ii) as to all of such restricted shares upon a change of control event (other than the merger) and (iii) as to a prorated portion of such restricted shares on termination of employment due to an employee's death or disability. The merger agreement also permits SWS to grant, prior to the effective time of the merger, restricted shares of SWS common stock to non-employee directors of SWS in the ordinary course of business consistent with past practice with a grant date value not to exceed $35,000 per non-employee director.

        As of the effective time of the merger, each deferred share of SWS common stock reflected in participant accounts under SWS deferred compensation plans will be converted into 0.3328 of a deferred share of Hilltop common stock (i.e., the sum of the portion of the merger consideration paid in Hilltop common stock and a number of shares of Hilltop common stock with a value as of immediately prior to the date of the merger agreement that is equal to the portion of the merger consideration paid in cash). Following the effective time of the merger, any such deferred shares that are not vested will continue to vest in accordance with the original terms of the SWS deferred shares and will vest in full on termination of employment by the employer without "cause" (as defined in the merger agreement) following the effective time of the merger. Hilltop deferred shares will be distributed in accordance with the terms of the applicable plan and the participants' individual elections.

        For more information about these restricted and deferred shares, see "The Merger—Interests of SWS Directors and Executive Officers in the Merger".


Treatment of Warrants

        Concurrently with the execution of the merger agreement, Oak Hill and SWS entered into the Oak Hill Letter Agreement (see "The Merger—Oak Hill Letter Agreement"). Pursuant to the Oak Hill Letter Agreement and the merger agreement, at the closing of the merger, Oak Hill will deliver to SWS the certificates evidencing its outstanding warrants and any loans of Oak Hill to SWS then outstanding under the Credit Agreement, and SWS will issue and deliver to Oak Hill, in exchange for its outstanding warrants and loans, the following consideration: (i) the merger consideration that Oak Hill would have been entitled to receive upon consummation of the merger if its outstanding warrants had been exercised immediately prior to the effective time of the merger and (ii) an amount equal to the Applicable Premium (as defined in the Credit Agreement, being a calculation of the present value of all required interest payments due on a loan through its maturity date on the date the loan is repaid) calculated as if the loans held by Oak Hill were prepaid in full as of the closing date of the merger.

285


Table of Contents


Closing of the Merger

        The merger shall become effective when the certificate of merger is accepted for filing by the Secretary of State of the State of Delaware in accordance with the DGCL. The completion of the merger will occur at 10:00 a.m. New York City time on a date no later than three business days after the satisfaction or waiver of the last of the conditions to the merger to be satisfied or waived, unless extended by mutual agreement of the parties. It is currently anticipated that the completion of the merger will occur by the end of 2014 subject to the receipt of SWS shareholder approval, regulatory approvals and other customary closing conditions, but neither Hilltop nor SWS can guarantee when or if the merger will be completed.


Hilltop Board of Directors Following Completion of the Merger

        The Hilltop board of directors will not change pursuant to the merger agreement.


Conversion of Shares; Exchange of Certificates

        The conversion of SWS common stock into the right to receive the merger consideration will occur automatically at the completion of the merger. Promptly after completion of the merger, the exchange agent (being a bank or trust company with certain responsibilities relating to distribution of the merger consideration) will exchange certificates or book-entry shares representing shares of SWS common stock for the merger consideration to be received pursuant to the terms of the merger agreement.

        As soon as reasonably practicable after the completion of the merger, and in any event within five business days thereafter, the exchange agent will mail appropriate transmittal materials and instructions to those persons who were holders of SWS common stock immediately prior to the completion of the merger. These materials will contain instructions on how to surrender shares of SWS common stock, SWS common stock certificates and shares of SWS common stock held in book-entry form in exchange for the merger consideration such holders are entitled to receive under the merger agreement.

        If a certificate for SWS common stock has been lost, stolen or destroyed, the exchange agent will issue the merger consideration upon receipt of (1) an affidavit of that fact by the claimant and (2) if reasonably required by Hilltop, such bond as Hilltop may determine is reasonably necessary as indemnity against any claim that may be made against Hilltop with respect to such lost, stolen or destroyed certificate.

        After completion of the merger, there will be no further transfers on the stock transfer books of SWS other than to settle transfers of SWS common stock that occurred prior to the effective time of the merger.

        Hilltop and the exchange agent will be entitled to deduct and withhold from the consideration otherwise payable to any SWS stockholder the amounts Hilltop and the exchange agent are required to deduct and withhold under any applicable federal, state, local or foreign tax law. If any such amounts are withheld, these amounts will be treated for all purposes of the merger agreement as having been paid to the stockholders from whom they were withheld.

        No dividends or other distributions declared with respect to Hilltop common stock will be paid to the holder of any unsurrendered certificates or book-entry shares of SWS common stock until the holder surrenders such certificate in accordance with the merger agreement. After the surrender of a

286


Table of Contents

certificate or book-entry share in accordance with the merger agreement, the record holder thereof will be entitled to receive (1) any such dividends or other distributions, without any interest, with a record date after the effective time and payable at that time with respect to the whole shares of Hilltop common stock represented by such certificate or book-entry share and paid prior to the date of surrender, or (2) at the appropriate payment date, the amount of dividends or other distributions payable with respect to shares of Hilltop common stock which the shares of SWS common stock represented by such certificate or book-entry share with a record date after the effective time of the merger but prior to the surrender date and with a payment date subsequent to the issuance of the Hilltop common stock issuable with respect to such SWS common stock.


Representations and Warranties

        The representations, warranties and covenants described below and included in the merger agreement were made only for purposes of the merger agreement and as of specific dates, are solely for the benefit of Hilltop and SWS, may be subject to limitations, qualifications or exceptions agreed upon by the parties, including those included in confidential disclosures made for the purposes of, among other things, allocating contractual risk between Hilltop and SWS rather than establishing matters as facts, and may be subject to standards of materiality that differ from those standards relevant to investors. Investors should not rely on the representations, warranties, covenants or any description thereof as characterizations of the actual state of facts or condition of Hilltop, SWS or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of the merger agreement, which subsequent information may or may not be fully reflected in public disclosures by Hilltop or SWS. The representations and warranties and other provisions of the merger agreement should not be read alone, but instead should be read only in conjunction with the information provided elsewhere in this proxy statement/prospectus and in the documents incorporated by reference into this proxy statement/prospectus.

        The merger agreement contains customary representations and warranties of Hilltop and SWS relating to their respective businesses. The representations and warranties in the merger agreement do not survive the completion of the merger.

        SWS has made representations and warranties regarding, among other things:

287


Table of Contents

        Hilltop has made representations and warranties regarding, among other things:

288


Table of Contents

        Certain representations and warranties of Hilltop and SWS are qualified as to "materiality" or "material adverse effect." For purposes of the merger agreement, a "material adverse effect" means, with respect to either party, any occurrence, event, development, effect, change or condition that has had, or would reasonably be expected to have, individually or in the aggregate, a material adverse effect on the business, results of operations or financial condition of it and its subsidiaries, taken as a whole. However, the following shall not be considered when determining whether a material adverse effect has occurred:


Covenants and Agreements

        SWS has agreed that, prior to the completion of the merger, it will, and will cause each of its subsidiaries to, conduct its business in the ordinary course consistent with past practice in all material respects and use commercially reasonable efforts to maintain and preserve intact its business

289


Table of Contents

organization and advantageous business relationships. SWS and Hilltop agree to, and to cause each of their respective subsidiaries to, take no action that is intended to or would reasonably be expected to adversely affect or materially delay the ability of either SWS, Peruna LLC or Hilltop to obtain any necessary approvals of any regulatory agency or other governmental entity required for the transactions contemplated by the merger agreement or to perform their covenants and agreements under the merger agreement.

        Additionally, SWS has agreed that prior to the completion of the merger, except as disclosed to Hilltop prior to the date of the merger agreement, and except as required by the merger agreement, required by applicable law or with the prior written consent of Hilltop, SWS will not, and will not permit any of its subsidiaries to, subject to certain exceptions, undertake certain actions, including the following:

290


Table of Contents

291


Table of Contents

        Hilltop has agreed that prior to the completion of the merger, except as disclosed to SWS prior to the date of the merger agreement, and except as expressly permitted by the merger agreement or with the prior consent of SWS, Hilltop will not, and will not permit any of its subsidiaries to, subject to certain exceptions, undertake the following actions:

        Hilltop and SWS have agreed to cooperate with each other and use their respective reasonable best efforts to promptly prepare and file all necessary documentation (including applications for approval from the Federal Reserve Board and the Texas Department of Banking and, if applicable, notification under the HSR Act), to effect all applications, notices, petitions and filings, and to consult with each other with respect to obtaining, and to obtain as promptly as practicable, all permits, consents, approvals and authorizations of all third parties and governmental entities that are necessary or advisable to consummate the merger, the bank merger and the other transactions contemplated by the merger agreement. Hilltop and SWS will use their respective reasonable best efforts to resolve any objections that may be asserted by any regulatory authority with respect to the merger agreement, the merger, the bank merger or the transactions contemplated by the merger agreement and will consult with the other party in advance of any meeting or conference with any governmental entity. Hilltop will not be required to take or commit to take any actions that would reasonably be expected to have a material adverse effect (measured on a scale relative to SWS) on Hilltop or SWS (referred to as a "materially burdensome regulatory condition"), and SWS shall not be required to take or commit to take any such action unless such actions are conditioned on the closing of the merger.

292


Table of Contents

        The merger agreement provides that Hilltop will provide or cause to be provided to each employee who is employed by SWS or any of its subsidiaries on the closing date, during the period in which such employee is employed by Hilltop or any of its affiliates following the closing date, commencing on the closing date and ending on:

        Each of Hilltop and Peruna LLC has agreed to indemnify and advance expenses to each present and former director and officer of SWS and its subsidiaries (when acting in such capacity) to the fullest extent permitted by law for any acts arising out of or pertaining to matters occurring at or existing prior to the closing. Additionally, Hilltop will provide director and officer liability insurance with respect to claims arising from facts or events occurring before the completion of the merger, which will contain at least the same coverage and amounts, and on no less advantageous terms to the indemnified party as that coverage currently provided by SWS, at an aggregate cost per annum not to exceed 300% of the annual aggregate premiums currently paid by SWS for such insurance, provided that if premiums for such insurance would exceed such cap, then Hilltop will maintain policies of insurance which provide the maximum coverage available at an annual premium equal to such cap. In lieu of the foregoing insurance, prior to the closing, SWS may purchase "tail" D&O insurance, at an aggregate cost not to exceed 300% of the annual aggregate premiums currently paid by it for such insurance.

        Hilltop has agreed in the merger agreement to vote any shares of SWS that it owns as of the record date for the SWS special meeting (not including unissued shares that would be issuable upon the exercise of all or a portion of Hilltop's warrant) in favor of approval and adoption of the merger agreement.

        The merger agreement also contains additional covenants, including covenants relating to the filing of this proxy statement/prospectus, obtaining required consents, the listing of the shares of Hilltop common stock to be issued in the merger, access to information of the other company and public announcements with respect to the transactions contemplated by the merger agreement.


No Solicitation

        SWS agreed in the merger agreement that it shall not, and shall cause its subsidiaries not to, and shall use its reasonable best efforts to cause its or their respective officers, directors, employees, representatives or agents not to (a) knowingly encourage, solicit, participate in, knowingly facilitate or initiate discussions, negotiations, inquiries, proposals or offers with or provide any non-public information to, any person relating to any third party acquisition (as defined below) or any inquiry, proposal or offer reasonably likely to lead to a third party acquisition or (b) waive, terminate, modify or fail to enforce any provision of any contractual "standstill" or similar obligation of any person other than Hilltop and Peruna LLC; provided, that prior to SWS stockholder approval of the merger, if SWS

293


Table of Contents

receives a bona fide unsolicited written proposal for a third party acquisition that the SWS board of directors determines in its good faith judgment is or could reasonably be expected to result in a superior proposal and was made after the date of the merger agreement, then the SWS board of directors may provide information to and enter into discussions with such third party, but only if (i) in the case of provision of information, prior to such provision of information such third party shall have entered into a confidentiality agreement with terms no less favorable to SWS than those contained in SWS's confidentiality agreement with Hilltop and any non-public information provided to such third party shall have been previously provided to Hilltop or shall be provided to Hilltop prior to or concurrently with being provided to such third party and (ii) the SWS board of directors determines in its good faith judgment, after consultation with and based upon the advice of outside legal counsel, that the failure to take such action would be reasonably likely to be inconsistent with its fiduciary duties under applicable law.

        SWS has agreed to notify Hilltop within 24 hours of the receipt of a proposal for a third party acquisition. The notice must indicate the person making the proposal along with the material terms of the proposal and a copy of any written documentation. SWS will keep Hilltop fully informed, on a timely basis, of any material developments with respect to such proposal.

        For purposes of the merger agreement:


Change in Recommendation

        The board of directors of SWS has agreed to recommend in favor of the proposals related to the merger and the transactions contemplated by the merger agreement; provided if the SWS board of directors determines in its good faith judgment, after consultation with and based upon the advice of outside legal counsel, that, because of (i) the receipt of a written proposal for a third party acquisition that it determines in good faith constitutes a superior proposal or (ii) the occurrence of an intervening event (as defined below), the failure to take such action would be reasonably likely to be inconsistent with its fiduciary duties under applicable law (after taking into account all counteroffers proposed by Hilltop) the SWS board of directors may make a change in its recommendation in favor of the merger and, in the event of a superior proposal, recommend a superior proposal but only (i) after the fifth business day following Hilltop's receipt of written notice from SWS advising Hilltop that the SWS

294


Table of Contents

board of directors has received a superior proposal or that an intervening event has occurred, specifying, as applicable, (A) the terms and conditions of such superior proposal and identifying the person making it or (B) the nature of such intervening event in reasonable detail. During such five business day period, SWS must negotiate with Hilltop in good faith regarding adjustments to the merger agreement that would obviate the need for the SWS board of directors to change its recommendation in favor of the merger. Notwithstanding any change in its recommendation, SWS shall submit the merger agreement to the SWS shareholders at the SWS shareholder meeting and SWS may not enter into any alternative acquisition agreement until the SWS stockholder meeting has been held, the merger agreement has been terminated in accordance with its terms and any applicable termination fee has been paid to Hilltop.

        If, on the date of the SWS shareholder meeting, Hilltop reasonably determines in good faith that SWS has not received sufficient proxies to obtain shareholder approval of the merger proposal, Hilltop may require SWS to adjourn the meeting until such date as shall be mutually agreed upon by SWS and Hilltop, which date shall be not less than five days nor more than ten days after the date of adjournment. SWS is only required to adjourn the SWS shareholder meeting one time.

        An "intervening event" is any event, change, effect, development or occurrence occurring or arising after the date of the merger agreement that (i) was not known, or reasonably foreseeable, to the Board of Directors of SWS as of or prior to the date of the merger agreement and did not result from a breach of the merger agreement by SWS and (ii) does not relate to or involve a third party acquisition.


Conditions to Completion of the Merger

        Hilltop and SWS's respective obligations to complete the merger are subject to the satisfaction or waiver of the following conditions:

295


Table of Contents

        Hilltop's obligation to complete the merger is further conditioned on:


Termination of the Merger Agreement

        The merger agreement can be terminated at any time prior to the completion of the merger (i) by mutual consent, (ii) by Hilltop if (A) at any time prior to obtaining the SWS shareholder approval, the SWS board of directors has changed its recommendation in favor of the merger, (B) at any time prior to obtaining the SWS shareholder approval, SWS is in material breach of its non-solicitation obligations or its obligations regarding soliciting stockholder approval for the merger or (C) if any governmental entity that must grant a requisite regulatory approval imposes a materially burdensome regulatory condition and there is no meaningful possibility such condition can be revised prior to March 31, 2015 unless the failure to obtain such approval without a materially burdensome regulatory condition is due to any breach by Hilltop of the merger agreement or (iii) by either party in the following circumstances:


Termination Fee

        SWS is required to pay Hilltop a termination fee of $8 million if:

296


Table of Contents


Effect of Termination

        If the merger agreement is terminated, it will become void, and no directors or officers of Hilltop or SWS shall have any liability under the agreement, except that (i) each of Hilltop and SWS will remain liable for any willful breach of the merger agreement and (ii) designated provisions of the merger agreement will survive the termination, including those relating to payments of fees and expenses and the confidential treatment of information.


Expenses and Fees

        All fees and expenses incurred in connection with the merger shall be paid by the party incurring such fees or expenses, whether or not the merger is consummated.


Amendment, Waiver and Extension of the Merger Agreement

        Subject to applicable law, Hilltop and SWS may amend the merger agreement by action by their respective boards of directors (and, in the case of SWS, the Special Committee). However, after approval of the merger agreement by SWS stockholders, there may not be, without further approval of SWS stockholders, any amendment of the merger agreement that requires further approval under applicable law.

        At any time prior to the completion of the merger, each party, to the extent legally allowed, may by action of its board of directors (and in the case of SWS, the Special Committee) extend the time for the performance of any of the obligations or other acts of the other party; waive any inaccuracies in the representations and warranties of the other party; and waive compliance by the other party with any of the agreements and conditions contained in the merger agreement except that after approval of the merger agreement by the SWS stockholders, there may not be, without further approval of such stockholders, any extension or waiver of the merger agreement or any portion thereof that reduces the amount or changes the form of the consideration to be delivered to the holders of SWS common stock or that otherwise requires further approval under applicable law.


ACCOUNTING TREATMENT OF THE MERGER

        The merger will be accounted for as a "purchase," as that term is used under generally accepted accounting principles, for accounting and financial reporting purposes. Under purchase accounting, the assets (including identifiable intangible assets) and liabilities (including executory contracts and other commitments) of SWS as of the effective time of the merger will be recorded at their respective fair values and added to those of Hilltop. Any excess of purchase price over the aggregate of the fair values is recorded as goodwill. Consolidated financial statements of Hilltop issued after the merger would reflect these fair values and would not be restated retroactively to reflect the historical consolidated financial position or results of operations of SWS.

297


Table of Contents


UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER

        The following general discussion addresses the material United States federal income tax consequences of the merger to U.S. holders (as defined below) of SWS common stock that exchange their shares of SWS common stock for shares of Hilltop common stock and cash in the merger. This discussion does not address any tax consequences arising under the laws of any state, local or foreign jurisdiction, or under any United States federal laws other than those pertaining to income tax. This discussion is based upon the Code, the regulations promulgated under the Code and court and administrative rulings and decisions, all as in effect on the date of this proxy statement/prospectus. These laws may change, possibly retroactively, and any change could affect the accuracy of the statements and conclusions set forth in this discussion.

        This discussion addresses only those holders of SWS common stock that hold their shares of SWS common stock as capital assets within the meaning of Section 1221 of the Code (generally, property held for investment). Further, this discussion does not address all aspects of United States federal income taxation that may be relevant to you in light of your particular circumstances or that may be applicable to you if you are subject to special treatment under the United States federal income tax laws, including if you are:

        In addition, the discussion does not address any alternative minimum tax or any state, local or foreign tax consequences of the merger, nor does it address any tax consequences arising under the unearned income Medicare contribution tax pursuant to the Health Care and Education Reconciliation Act of 2010. Determining the actual tax consequences of the merger to you may be complex. They will depend on your specific situation and on factors that are not within the control of SWS or Hilltop. You should consult with your own tax advisor as to the tax consequences of the merger in your particular circumstances.

        For purposes of this discussion, the term "U.S. holder" means a beneficial owner of SWS common stock that is for United States federal income tax purposes (i) an individual citizen or resident of the United States, (ii) a corporation, or entity treated as a corporation, organized in or under the laws of the United States or any state thereof or the District of Columbia, (iii) a trust if (a) a court within the United States is able to exercise primary supervision over the administration of the trust and one or

298


Table of Contents

more U.S. persons have the authority to control all substantial decisions of the trust or (b) such trust has made a valid election to be treated as a U.S. person for U.S. federal income tax purposes or (iv) an estate, the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source.

        The United States federal income tax consequences to a partner in an entity or arrangement that is treated as a partnership for United States federal income tax purposes and that holds SWS common stock generally will depend on the status of the partner and the activities of the partnership. Partners in a partnership holding SWS common stock should consult their own tax advisors.


Tax Consequences of the Merger Generally

        The parties intend for the merger to qualify as a "reorganization" within the meaning of Section 368(a) of the Code. It is a condition to Hilltop's obligation to complete the merger that Hilltop receive an opinion from Wachtell, Lipton, Rosen & Katz ("Wachtell Lipton"), dated the closing date of the merger, to the effect that the merger will qualify as a "reorganization" within the meaning of Section 368(a) of the Code. It is a condition to SWS's obligation to complete the merger that SWS receive an opinion from Davis Polk & Wardwell LLP ("Davis Polk"), dated the closing date of the merger, to the effect that the merger will qualify as a "reorganization" within the meaning of Section 368(a) of the Code. These opinions will be based on representation letters provided by Hilltop and SWS and on customary factual assumptions. Neither of the opinions described above will be binding on the Internal Revenue Service. Hilltop and SWS have not sought and will not seek any ruling from the Internal Revenue Service regarding any matters relating to the merger, and as a result, there can be no assurance that the Internal Revenue Service will not assert, or that a court would not sustain, a position contrary to any of the conclusions set forth below.

        In addition, in connection with the effectiveness of the registration statement of which this proxy statement/prospectus forms a part, each of Wachtell Lipton and Davis Polk has delivered its opinion to the effect that, on the basis of the facts, representations, assumptions and exclusions set forth in such opinion and certificates obtained from officers of Hilltop and SWS, (i) the merger will qualify as a "reorganization" within the meaning of Section 368(a) of the Code and (ii) the following discussion constitutes their opinion as to the material U.S. federal income tax consequences of the merger to holders of SWS common stock. Neither of these opinions is binding on the Internal Revenue Service or the courts, and neither Hilltop nor SWS intends to request a ruling from the Internal Revenue Service regarding the United States federal income tax consequences of the merger. Consequently, no assurance can be given that the Internal Revenue Service will not assert, or that a court would not sustain, a position contrary to any of those set forth below. In addition, if any of the representations or assumptions upon which such opinions are based are inconsistent with the actual facts, the United States federal income tax consequences of the merger could be adversely affected.

        In general, the merger is intended to be tax-free to you, except to the extent of any cash that you receive in exchange for your shares of SWS common stock. Upon exchanging your SWS common stock for Hilltop common stock and cash (other than cash received in lieu of a fractional share), you generally will recognize gain (but not loss) in an amount equal to the lesser of (1) the amount of gain realized (i.e., the excess of the sum of the amount of cash and the fair market value of the Hilltop common stock received pursuant to the merger over your adjusted tax basis in your shares of SWS common stock surrendered) and (2) the amount of cash received pursuant to the merger (excluding any cash received in lieu of a fractional share). If you acquired different blocks of SWS common stock at different times or different prices, you should consult your tax advisor regarding the manner in which gain or loss should be determined. Any recognized gain generally will be long-term capital gain if, as of the effective date of the merger, your holding period with respect to the SWS common stock surrendered exceeds one year. If, however, the cash received has the effect of the distribution of a dividend as described below, the gain will be treated as a dividend to the extent of your ratable share

299


Table of Contents

of Hilltop's accumulated earnings and profits as calculated for United States federal income tax purposes. See "—Possible Treatment of Cash as a Dividend" below.

        The aggregate tax basis in the shares of Hilltop common stock that you receive in the merger, including any fractional share interests deemed received and sold as described below, will equal your aggregate adjusted tax basis in the SWS common stock you surrender, reduced by the amount of cash received (excluding any cash received in lieu of a fractional share) and increased by the amount of gain, if any, recognized by you (excluding any gain recognized with respect to cash received in lieu of a fractional share) on the exchange. Your holding period for the shares of Hilltop common stock that you receive in the merger (including a fractional share interest deemed received and sold as described below) will include your holding period for the shares of SWS common stock that you surrender in the exchange.

        In general, the determination of whether the gain recognized in the exchange will be treated as capital gain or has the effect of a distribution of a dividend depends upon whether and to what extent the exchange reduces your deemed percentage stock ownership of Hilltop. For purposes of this determination, you are treated as if you first exchanged all of your shares of SWS common stock solely for Hilltop common stock and then Hilltop immediately redeemed, which we refer to in this document as the "deemed redemption," a portion of the Hilltop common stock in exchange for the cash you actually received. The gain recognized in the deemed redemption will be treated as capital gain if the deemed redemption is (1) "substantially disproportionate" with respect to you or (2) "not essentially equivalent to a dividend."

        The deemed redemption will generally be "substantially disproportionate" with respect to you if the percentage described in (2) below is less than 80% of the percentage described in (1) below. Whether the deemed redemption is "not essentially equivalent to a dividend" with respect to you will depend upon your particular circumstances. At a minimum, however, in order for the deemed redemption to be "not essentially equivalent to a dividend," the deemed redemption must result in a "meaningful reduction" in your deemed percentage stock ownership of Hilltop. In general, that determination requires a comparison of (1) the percentage of the outstanding stock of Hilltop that you are deemed actually and constructively to have owned immediately before the deemed redemption and (2) the percentage of the outstanding stock of Hilltop that is actually and constructively owned by you immediately after the deemed redemption. In applying the above tests, you may, under the constructive ownership rules, be deemed to own stock that is owned by other persons or stock underlying any option you hold to purchase stock in addition to the stock actually owned by you.

        The Internal Revenue Service has ruled that a stockholder in a publicly held corporation whose relative stock interest is minimal (e.g., less than 1%) and who exercises no control with respect to corporate affairs is generally considered to have a "meaningful reduction" if that stockholder has a relatively minor (e.g., approximately 3%) reduction in its percentage stock ownership under the above analysis; accordingly, the gain recognized in the exchange by such a stockholder would be treated as capital gain.

        These rules are complex and dependent upon the specific factual circumstances particular to you. Consequently, you should consult your tax advisor as to the application of these rules to the particular facts relevant to you.

        If you receive cash instead of a fractional share of Hilltop common stock, you will be treated as having received the fractional share of Hilltop common stock pursuant to the merger and then as having sold that fractional share of Hilltop common stock for cash. As a result, you generally will

300


Table of Contents

recognize gain or loss equal to the difference between the amount of cash received and the basis allocable to your fractional share of Hilltop common stock. This gain or loss generally will be capital gain or loss, and will be long-term capital gain or loss if, as of the effective date of the merger, the holding period for the shares (including the holding period of SWS common stock surrendered therefor) is greater than one year. The deductibility of capital losses is subject to limitations.

        If you are a non-corporate holder of SWS common stock you may be subject to information reporting and backup withholding (currently at a rate of 28%) on any cash payments you receive. You generally will not be subject to backup withholding, however, if you:

        Any amounts withheld under the backup withholding rules will generally be allowed as a refund or credit against your United States federal income tax liability, provided you timely furnish the required information to the Internal Revenue Service.

        This discussion of certain material United States federal income tax consequences is for general information only and is not tax advice. You are urged to consult your tax advisor with respect to the application of United States federal income tax laws to your particular situation as well as any tax consequences arising under the United States federal estate or gift tax rules, or under the laws of any state, local, foreign or other taxing jurisdiction.

301


Table of Contents


DESCRIPTION OF HILLTOP CAPITAL STOCK

        As a result of the merger, SWS stockholders who receive shares of Hilltop common stock in the merger will become shareholders of Hilltop. Your rights as shareholders of Hilltop will be governed by Maryland law and the charter and bylaws of Hilltop. The following briefly summarizes the material terms of Hilltop common stock and preferred stock. We urge you to read provisions of the Maryland General Corporate Law (which we refer to as the MGCL), Hilltop's charter and bylaws and federal law governing bank holding companies carefully in their entirety. Copies of Hilltop's governing documents have been filed with the SEC. To find out where copies of these documents can be obtained, see "Where You Can Find More Information".


Authorized Capital Stock

        Hilltop's authorized capital stock consists of 125,000,000 shares of common stock, par value $0.01 per share, 10,000,000 shares of special voting stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par value $0.01 per share. As of October 13, 2014, there were 90,182,915 shares of Hilltop common stock outstanding, zero shares of special voting stock outstanding and 114,068 shares of Hilltop Series B preferred stock outstanding.


Common Stock

Preemptive Rights

        Hilltop common stock has no preemptive rights.

Dividend Rights

        Hilltop can pay dividends if, as and when declared by Hilltop's board of directors, subject to compliance with limitations imposed by law. The holders of Hilltop common stock are entitled to receive and share equally in these dividends as they may be declared by Hilltop's board of directors out of funds legally available for such purpose. The holders of such preferred stock may have a priority over the holders of the common stock with respect to dividends. For a description of the dividend rights of holders of Series B Preferred Stock, see "Series B Preferred Stock" below.

Voting Rights

        Each holder of Hilltop common stock is entitled to one vote per share and does not have any right to cumulate votes in the election of directors. Directors are elected by a plurality of the shares actually voting on the matter. Holders of the preferred stock and special voting stock may also possess voting rights. For a description of the voting rights of holders of Series B Preferred Stock, see "Series B Preferred Stock" below.

Liquidation Rights

        In the event of liquidation, dissolution or winding up of Hilltop, whether voluntary or involuntary, the holders of Hilltop common stock would be entitled to receive, after payment or provision for payment of all its debts and liabilities, all of the assets of Hilltop available for distribution. Holders thereof may have a priority over the holders of the common stock in the event of liquidation or dissolution. For a description of the rights of holders of Series B Preferred Stock in the event of liquidation or dissolution, see "Series B Preferred Stock" below.

Ownership Limitations

        Hilltop's charter provides for certain limitations on the amount of Hilltop common stock that may be acquired by any person, until such time as the Hilltop board of directors determines that such

302


Table of Contents

limitations shall cease to be effective. The Hilltop board of directors made such a determination in connection with the 2012 PlainsCapital corporation merger, and such restrictions ceased to be effective at the effective time of that merger.


Preferred Stock

Relative Rights

        The Hilltop board of directors is authorized to set and change, subject to certain limitations, the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms and conditions of redemption for each class or series of Hilltop preferred stock. In general, the holders of Hilltop preferred stock may have, and the holders of the Series B Preferred Stock do have, preferences over holders of Hilltop common stock in the payment of dividends, upon liquidation of Hilltop, in respect of voting rights and in the redemption of the capital stock of Hilltop. For a description of the rights of holders of Series B Preferred Stock, see "Series B Preferred Stock" below.

Preemptive Rights

        The Board of Directors may provide, when setting the terms of classified or reclassified shares of stock, that a class or series of Hilltop preferred stock carries preemptive rights.


Series B Preferred Stock

Dividend Rights

        Holders of the Series B Preferred Stock are entitled to non-cumulative cash dividends at a fluctuating dividend rate based on Hilltop's level of qualified small business lending. Hilltop may generally declare and pay dividends on Hilltop common stock only if full dividends on all outstanding shares of Series B Preferred Stock for the most recently completed dividend period have been or are contemporaneously declared and paid.

Voting Rights

        The Series B Preferred Stock is non-voting, except in limited circumstances. For instance, the holders of Series B Preferred Stock would have the right to vote in connection with the authorization of stock senior to the Series B Preferred Stock, amendments to the certificate of formation of the company adversely affecting the Series B Preferred Stock or certain fundamental transactions affecting the Series B Preferred Stock. In addition, in the event the company misses dividend payments for six consecutive quarters, whether or not consecutive, the holders of the Series B Preferred Stock have, in certain circumstances, the right to appoint representatives to the company's board of directors until the dividends have been paid timely for four consecutive periods.

Liquidation Rights

        In the event of any liquidation, dissolution or winding up of the affairs of Hilltop, holders of Series B Preferred Stock are entitled to receive for each share of Series B Preferred Stock, out of the assets of Hilltop or proceeds thereof (whether capital or surplus) available for distribution to stockholders of Hilltop, subject to the rights of any creditors of Hilltop, before any distribution of such assets or proceeds is made to or set aside for the holders of Hilltop common stock, payment in full of the liquidation amount (being $1,000 per share of Series B Preferred Stock) plus the amount of any accrued and unpaid dividends on each such share.

303


Table of Contents

Redemption Rights

        The Series B Preferred Stock may be redeemed at any time at Hilltop's option, at a redemption price of 100% of the liquidation amount plus accrued but unpaid dividends to the date of redemption for the current period, subject to the approval of its federal banking regulator.

Preemptive Rights

        The Series B Preferred Stock has no preemptive rights.


Listing

        Hilltop common stock is traded on the NYSE under the symbol "HTH."

304


Table of Contents


COMPARISON OF STOCKHOLDERS' RIGHTS

        Hilltop is incorporated in Maryland and SWS is incorporated in Delaware. Your rights as a stockholder of SWS are governed by the DGCL, the SWS certificate of incorporation, as amended, and the SWS bylaws. Upon completion of the merger, as a Hilltop stockholder your rights will be governed by the Maryland General Corporation Law (the "MGCL"), the Hilltop charter, as amended, and the Hilltop bylaws.

        The following is a summary of the material differences between the rights of holders of Hilltop common stock and the rights of holders of SWS common stock, but does not purport to be a complete description of those differences. These differences may be determined in full by reference to the MGCL, the DGCL, the Hilltop charter, the SWS certificate of incorporation, the Hilltop bylaws and the SWS bylaws, in each case as amended. The SWS certificate of incorporation, the Hilltop charter and each corporation's bylaws are subject to amendment in accordance with their terms. Although the MGCL and the DGCL are similar in most respects, there are a number of differences between the two statutes, many (but not all) of which are summarized below. In addition, there is a substantial body of case law in Delaware interpreting the corporation laws of that state. A comparable body of judicial interpretations does not exist in Maryland such that there may be less certainty as to the outcome of matters governed by Maryland corporation law than would be the case under Delaware corporation law. Copies of the governing corporate instruments are available, without charge, to any person, including any beneficial owner to whom this proxy statement/prospectus is delivered, by following the instructions listed under "Where You Can Find More Information" included elsewhere in this proxy statement/prospectus.

SWS   HILLTOP
AUTHORIZED CAPITAL STOCK

Authorized Shares.    SWS is authorized under the SWS certificate of incorporation to issue 60,000,000 of common stock, par value $0.10 per share, and 100,000 of preferred stock, par value $1.00 per share. The SWS certificate of incorporation authorizes the board of directors to classify and reclassify any unissued shares of Hilltop common stock and preferred stock into other classes or series of stock.

 

Authorized Shares.    Hilltop is authorized under the Hilltop charter to issue 125,000,000 shares of common stock, par value $0.01 per share, 10,000,000 shares of Special Voting Stock, par value $0.01 per share and 10,000,000 shares of preferred stock, par value $0.01 per share. As permitted by the MGCL, the Hilltop charter authorizes the Hilltop board of directors to classify and reclassify any unissued shares of Hilltop common stock and preferred stock into other classes or series of stock. The Hilltop charter authorizes the Hilltop board of directors, without further stockholder action, to amend the Hilltop charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that Hilltop has authority to issue.

305


Table of Contents

SWS   HILLTOP

 

 

Special Voting Stock.    The Hilltop charter authorizes the board of directors, without further stockholder action, to issue up to 10,000,000 shares of special voting stock, none of which are currently issued and outstanding. A holder of special voting stock is not entitled to any regular or special dividend payments or other distributions, including any dividends or other distributions declared or paid with respect to shares of Hilltop's common stock or any other stock, and is not entitled to receive any distributions or other rights to receive property in the event of liquidation or dissolution. A holder of special voting stock has the right to one vote on all matters submitted to a vote of Hilltop's stockholders, and the holders of special voting stock vote collectively with the holders of Hilltop common stock as one class on all matters submitted to a vote of Hilltop's stockholders.

Preferred Stock.    The SWS certificate of incorporation authorizes the board of directors, without further stockholder action, to issue up to 100,000 shares of preferred stock, in one or more series, and determine any designations, preferences, limitations or relative rights in each series. The rights of preferred stockholders may supersede the rights of common stockholders.

 

Preferred Stock.    The Hilltop charter authorizes the board of directors, without further stockholder action, to issue up to 10,000,000 shares of preferred stock, in one or more series, and determine any preferences, conversion or other rights, voting powers, restrictions or limitations of additional series. The rights of preferred stockholders may supersede the rights of common stockholders.

PREEMPTIVE RIGHTS

SWS stockholders do not have preemptive rights.

 

Hilltop's stockholders do not have preemptive rights.

VOTING RIGHTS IN AN EXTRAORDINARY TRANSACTION

The DGCL generally requires that any merger, consolidation, or sale of substantially all the assets of a corporation be approved by a vote of a majority of all outstanding shares entitled to vote thereon. Although a Delaware corporation's certificate of incorporation may provide for a greater vote, the SWS certificate of incorporation does not.

 

Under the MGCL, a board of directors must generally declare a merger, consolidation, share exchange or transfer of all or substantially all of its assets advisable and direct that such transaction be submitted to the stockholders of the corporation for consideration. The transaction must be approved by the affirmative vote of stockholders entitled to cast at least two-thirds of all the votes entitled to be cast on the matter, unless the charter provides for a greater or lesser vote (which must be at least a majority of all votes entitled to be cast on the matter). Hilltop's charter provides that such transactions shall be effective and valid if taken or approved by the affirmative vote of holders of shares entitled to cast a majority of all the votes entitled to be cast on the matter.

306


Table of Contents

SWS   HILLTOP

DIVIDENDS

The SWS bylaws provide that the board of directors may declare dividends upon its capital stock at any regular meeting, and the dividend payments shall be made, pursuant to Delaware law, either (1) out of its surplus or (2) in case of no such surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.

 

Under Maryland law, Hilltop may make any distribution authorized by the board of directors unless, after the distribution (1) the corporation would not be able to pay its debts as they become due in the usual course of business or (2) generally, the corporation's total assets would be less than the sum of its total liabilities, plus the amount that would be needed if the corporation were dissolved at the time of the distribution to satisfy senior liquidation preferences. Hilltop is permitted to make a distribution so long as the distribution is made from (1) the net earnings of the corporation for the fiscal year in which the distribution is made, (2) its net earnings for the preceding fiscal year or (3) the sum of its net earnings for the preceding eight fiscal quarters.

AMENDMENT TO THE CHARTER/ARTICLES OF INCORPORATION

Under § 242 of the DGCL and the SWS certificate of incorporation, the SWS certificate of incorporation may be amended, altered, changed or repealed by the SWS board of directors, the holders of a majority of the outstanding stock entitled to vote on the amendment and, in certain cases, the holders of a majority of each class of stock entitled to vote on the amendment as a class.

 

The Hilltop charter authorizes the Hilltop board of directors, without further stockholder action, to amend the Hilltop charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that Hilltop has authority to issue. Subject to limited exceptions, Hilltop's charter may otherwise be amended only by the affirmative vote of the holders of not less than two-thirds of all the votes entitled to be cast on the matter.

AMENDMENT TO THE BYLAWS

The SWS board of directors has the power to adopt, amend or repeal its bylaws. SWS stockholders require an affirmative vote of at least 662/3% in voting power of the issued and outstanding shares entitled to vote in order to alter, amend, repeal or adopt a provision inconsistent with the bylaws.

 

The Hilltop board of directors generally has the exclusive power to adopt, alter or appeal any provision of its bylaws and to make new bylaws.

307


Table of Contents

SWS   HILLTOP

APPRAISAL/DISSENTERS' RIGHTS

Under the DGCL, a stockholder of a Delaware corporation generally has appraisal rights in connection with certain mergers or consolidations in which the corporation is participating, subject to specified procedural requirements. The DGCL, however, does not confer appraisal rights for the shares of any class or series of stock that is (subject to certain exceptions) either (1) listed on a national securities exchange, or (2) held of record by more than 2,000 holders. There are no appraisal rights available for stockholders if the merger does not require the vote of stockholders for its approval. Even if a corporation's stock meets the foregoing requirements the DGCL provides that appraisal rights generally will be permitted if stockholders of the corporation are required to accept for their stock in certain mergers or consolidations anything other than (1) shares of stock of the corporation surviving or resulting from such merger or consolidation, or depository receipts in respect thereof; (2) shares of stock of any other corporation, or depository receipts in respect thereof, which shares of stock (or depository receipts in respect thereof) or depository receipts at the effective date of the merger or consolidation will be either listed on a national securities exchange or held of record by more than 2,000 holders; (3) cash in lieu of fractional shares or fractional depository receipts described in the foregoing; or (4) any combination of the foregoing.

 

Under Maryland law, a dissenting or objecting stockholder has the right to demand and receive payment of the fair value of the stockholders' stock from the successor if (1) the corporation consolidates or merges with another corporation; (2) the corporation's stock is to be acquired in a statutory share exchange; (3) the corporation transfers its assets in a manner requiring stockholder approval under section 3-105(e) of the MGCL; (4) the corporation amends its charter in a way which alters the contract rights, as expressly set forth in the charter, of any outstanding stock and substantially adversely affects the stockholder's rights, unless the right to do so is reserved in the charter of the corporation; or (5) the transaction is subject to certain provisions of the Maryland Business Combination Act, referred to as the MBCA.

Maryland law provides that a stockholder may not demand the fair value of the stockholder's stock and is bound by the terms of the transaction if, among other things, (1) generally, the class or series of stock is listed on a national securities exchange on the record date for determining stockholders entitled to vote on the matter or, in certain mergers, the date notice is given or waived (except certain mergers where stock held by directors and executive officers is exchanged for merger consideration not available generally to stockholders); (2) the stock is that of the successor in the merger, unless either (A) the merger alters the contract rights of the stock as expressly set forth in the charter and the charter does not reserve the right to do so or (B) the stock is to be changed or converted in whole or in part in the merger into something other than either stock in the successor or cash, scrip or other rights or interests arising out of provisions for the treatment of fractional shares of stock in the successor; or (3) the charter provides that the holders of the stock are not entitled to exercise the rights of an objecting stockholder.

 

 

Hilltop's common stock is listed on the NYSE and is expected to be listed on the NYSE on the record date for the Hilltop special meeting. Accordingly, holders of Hilltop common stock are not expected to be entitled to demand and receive payment of fair value in accordance with the MGCL (commonly referred to as appraisal or dissenters' rights) in connection with the merger.

308


Table of Contents

SWS   HILLTOP

SPECIAL MEETINGS OF STOCKHOLDERS

The board of directors may call a special meeting of stockholders for any purpose or purposes at any time. Business transacted at the special meeting shall be limited to the purposes stated in the notice of meeting.

 

The chairman of the board, chief executive officer, president or board of directors may call a special meeting of the Hilltop stockholders. A special meeting must also be called by the secretary at the request of stockholders entitled to cast at least a majority of all the votes entitled to be cast on the matter to be considered at the meeting.

STOCKHOLDER PROPOSALS AND NOMINATIONS

The SWS bylaws provide that with respect to an annual meeting of stockholders, nominations of individuals for election to the board of directors and the proposal of business to be considered by stockholders may be made only (i) pursuant to an SWS notice of meeting, (ii) by or at the direction of the board of directors or any committee thereof or (iii) by any stockholder of record entitled to vote at the meeting and who has complied with the notice provisions of the bylaws. With respect to special meetings of stockholders, only business specified in an SWS notice of meeting may be brought before the meeting. Nominations of individuals to the SWS board of directors at a special meeting may be made only pursuant to an SWS notice of meeting (i) by or at the direction of the board of directors or any committee thereof or (ii) provided that the board of directors has determined that directors will be elected at the meeting, by a stockholder who is entitled to vote at the meeting and who has complied with the notice provisions of the bylaws.

 

The Hilltop bylaws provide that with respect to an annual meeting of stockholders, nominations of individuals for election to the board of directors and the proposal of business to be considered by stockholders may be made only (i) pursuant to Hilltop's notice of the meeting, (ii) by or at the direction of the board of directors or (iii) by a stockholder who is entitled to vote at the meeting and who has complied with the advance notice procedures of the bylaws. With respect to special meetings of stockholders, only the business specified in Hilltop's notice of the meeting may be brought before the meeting. Nominations of individuals for election to the Hilltop board of directors at a special meeting may be made only (i) by or at the direction of the board of directors, or (ii) provided that the board of directors has duly called the special meeting for the purpose of electing directors, by a stockholder who is entitled to vote at the meeting and who has complied with the advance notice provisions of the bylaws.

BOARD OF DIRECTORS

Number of Directors

The SWS board of directors has ten (10) members. The SWS bylaws provide that the number of directors shall be determined by the board of directors. Directors are elected by a plurality of votes of the shares present in person or represented by a proxy and entitled to vote on the election of directors, at a meeting of stockholders duly called and at which a quorum is present.

 

The Hilltop board of directors has twenty-one (21) members. The Hilltop bylaws provide that the number of directors will be not less than one (the minimum required by the MGCL) or more than fifteen (15) and may be increased or decreased from time to time in the discretion of the board, except that no decrease in the number of directors may affect the term of any incumbent director. Notwithstanding the foregoing or any other provision of its charter or bylaws, pursuant to Section 3-804(b) of the MGCL, to which Hilltop has elected in its charter to be subject, the Hilltop board of directors has the ability to fix the number of directors constituting the Hilltop board of directors. Directors are elected by a plurality of all the votes cast at a meeting of stockholders duly called and at which a quorum is present.

309


Table of Contents

SWS   HILLTOP

Classification

The SWS board of directors is not classified; all directors are subject to re-election on an annual basis.

 

The Hilltop board of directors is not classified; all directors are subject to re-election on an annual basis.

Removal

Subject to applicable law, a director of SWS may be removed from office with or without cause by the holders of the majority of the shares then entitled to vote at an election of directors.

 

A director of Hilltop may be removed from office only for cause and then only by the affirmative vote of at least two-thirds of the votes entitled to be cast generally in the election of directors.

Vacancies

Subject to applicable law, vacancies on the SWS board of directors may be filled by a vote of a majority of the remaining members of the board of directors.

 

Vacancies on the Hilltop board of directors may be filled by vote of a majority of the remaining members of the board of directors, even if less than a quorum.

Special Meetings of the Board

Special meetings of the SWS board of directors may be called by the Chairman of the Board, Chief Executive Officer, the President, or the Secretary on 24 hours' notice to each director. Special meetings shall be called by the Chairman of the Board, Chief Executive Officer, the President, or the Secretary on the written request of any two directors. Notice of any such meeting need not be given to any director, however, if waived by him in writing or if he shall be present at such meeting.

 

Special meetings of the Hilltop board of directors may be called by or at the request of the chairman of the board, the chief executive officer, the president or a majority of the directors then in office. The person or persons authorized to call special meetings of the board may fix any place as the place for holding any special meeting of the board called by them. The board may provide, by resolution, the time and place for the holding of special meetings of the board without other notice than such resolution.

310


Table of Contents

SWS   HILLTOP

Director Liability and Indemnification

The SWS certification of incorporation provides that (to the fullest extent permitted by Delaware statutory or decisional law) a director shall not be liable to SWS or its stockholders for any act or omission in its capacity as a director.

Under the Delaware law, a corporation may exculpate a director for breach of fiduciary duty as a director, except for liability (i) for a breach of a director's duty of loyalty to SWS or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any transaction from which a director derived an improper personal benefit.

The SWS bylaws also provide that SWS shall indemnify any person who is or was a director or officer who was or is made a party to or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that he is or was a director or officer of SWS against certain expenses, (1) if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of SWS; (2) to the extent that the action did not relate to service or performance of his duties as a director, officer, employee or agent of another enterprise; and (3) if, with respect to any criminal action, he had no reasonable cause to believe his conduct was unlawful. The determination of indemnification shall be made by (1) majority vote of the members of the board of directors who are not party to the action (even though it may be less than a quorum); (2) by a committee of such directors designated by majority vote of such directors (even though it may be less than a quorum); (3) if there are no such directors, or if such directors so direct, by independent legal counsel in written opinion; or (4) the stockholders.

 

The Hilltop bylaws provide for indemnification and advancement of expenses by Hilltop, to the fullest extent permitted by Maryland law, of Hilltop directors and officers who are made or threatened to be made a party to a proceeding by reason of his or her service in that capacity. The bylaws also permit Hilltop to provide such indemnification and advancement of expenses to any Hilltop employee or agent.

Under Maryland law, directors' and officers' liability to the corporation or its stockholders for money damages may be expanded or limited, except that liability of a director or officer may not be limited: (1) to the extent that it is proved that the person actually received an improper benefit or profit in money, property or services for the amount of the benefit or profit in money, property or services actually received; or (2) to the extent that a judgment or other final adjudication adverse to the person is entered in a proceeding based on a finding in the proceeding that the person's action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding.

Under Maryland law, a corporation may not indemnify a director or officer if it is established that: (1) the act or omission of the director or officer was material to the matter giving rise to the proceeding; and (A) was committed in bad faith or (B) was the result of active and deliberate dishonesty; or (2) the director or officer actually received an improper personal benefit in money, property or services; or (3) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.

311


Table of Contents

SWS   HILLTOP

Under Delaware law, as stated in the bylaws, there is a mandatory right to indemnification where a present or former director or officer has been successful on the merits or otherwise in defense of any action, suit or proceedings in the bylaws. The indemnification covers expenses (including attorney's fees) actually and reasonably incurred by the director or officer in connection with the matter.

 

Under Maryland law, a corporation may not indemnify a director or officer who has been adjudged liable in a suit by or in the right of the corporation or in which the director or officer was adjudged liable to the corporation or on the basis that a personal benefit was improperly received. A court may order indemnification if it determines that the director is fairly and reasonably entitled to indemnification, even though the director may not have met the prescribed standard of conduct or may have been adjudged liable on the basis that personal benefit was improperly received; however, indemnification for an adverse judgment in a suit by or in the right of the corporation, or for a judgment of liability on the basis that personal benefit was improperly received, is limited to expenses. Except for a proceeding brought to enforce indemnification or where a resolution of the board of directors or an agreement approved by the board expressly provides otherwise, a corporation may not indemnify a director for a proceeding brought by the director against the corporation.

STOCKHOLDER RIGHTS PLAN

SWS does not have a stockholder rights plan currently in effect.

 

Hilltop does not have a stockholder rights plan currently in effect.

312


Table of Contents

SWS   HILLTOP

STATE ANTI-TAKEOVER STATUTES AND ARTICLE PROVISIONS

Business Combinations

Under the DGCL if a person acquires 15% or more of the stock of a Delaware corporation, thereby becoming an "interested stockholder" (for purposes of Section 203 of the DGCL), that person is generally prohibited from engaging in a business combinations for a period of three years after the date of the transaction in which the person became an interested stockholder, unless (1) the board of directors approved the transaction which resulted in the stockholder becoming an interested stockholder or the business combination transaction prior to the time that the person became an interested stockholder; (2) the person became an interested stockholder and 85% owner of the voting stock of the corporation in the same transaction, excluding (for the purpose of determining the stock outstanding) voting stock owned by directors who are also officers and certain employee stock plans; or (3) the business combination transaction is approved by the board of directors and by the affirmative vote of two-thirds of the outstanding voting stock which is not owned by the interested stockholder at an annual or special meeting. Under the DGCL, the term "business combination" is defined to include a wide variety of transactions, including mergers, consolidations, sales or other dispositions of 10% or more of a corporation's assets and various other transactions that may benefit an "interested stockholder."

A Delaware corporation may elect not to be governed by Section 203. SWS has not made such an election and accordingly is subject to Section 203.

 
Under Maryland law, "business combinations" between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:

any person who beneficially owns 10% or more of the voting power of the corporation's shares; or

an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.

A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which he otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.

After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:

80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and

two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.

These super-majority vote requirements do not apply if the corporation's common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.

313


Table of Contents

SWS   HILLTOP

 

 

The statute permits the board of directors to adopt a resolution opting out of the application of the statute, and the Hilltop board of directors has adopted such a resolution. In addition, the Hilltop charter contains a provision that requires Hilltop to obtain stockholder approval before it can opt back into the statute.

Control Share Acquisition

Delaware law does not contain a control share acquisition statute.

 
Maryland law provides that holders of control shares of a Maryland corporation acquired in a control share acquisition have no voting rights with respect to the control shares except to the extent approved by an affirmative vote of at least two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquirer, by officers or by directors who are employees of the corporation are excluded from shares entitled to vote on the matter. Control shares are shares of stock which, if aggregated with all other shares of stock owned by the acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power:

one-tenth or more but less than one-third,

one-third or more but less than a majority, or

a majority or more of all voting power.

Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A control share acquisition means the acquisition of control shares, or the power to direct the exercise of voting power with respect to such shares, subject to certain exceptions.


 

 

A person who has made or proposes to make a control share acquisition may compel the board of directors of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. The right to compel the calling of a special meeting is subject to the satisfaction of certain conditions, including an undertaking to pay the expenses of the meeting. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting.

314


Table of Contents

SWS   HILLTOP

 

 

If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then the corporation may redeem for fair value any or all of the control shares, except those for which voting rights have previously been approved. The right of the corporation to redeem control shares is subject to certain conditions and limitations. Fair value is determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquirer or of any meeting of stockholders at which the voting rights of the shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquirer becomes entitled to vote a majority of the shares entitled to vote, or direct the exercise of a majority of all voting power, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of appraisal rights may not be less than the highest price per share paid by the acquirer in the control share acquisition.

 

 

The control share acquisition statute does not apply (i) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (ii) to acquisitions approved or exempted by the charter or bylaws of the corporation.

 

 

Hilltop's bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of shares of Hilltop's stock. In addition, Hilltop's charter contains a provision that requires Hilltop to obtain the approval of its stockholders before it can opt back into the statute.

 

 

The Hilltop charter provides for certain transfer restrictions that, subject to certain exceptions (including board approval), prohibit and void transactions which would create new 5% stockholders or increase the ownership percentage of existing 5% stockholders of Hilltop. The Hilltop board of directors has resolved that as of the effective time of the merger, such restrictions will no longer be in the best interests of Hilltop and its stockholders, and that such restrictions shall cease to be effective as of the effective time.

315


Table of Contents

SWS   HILLTOP

DUTIES OF DIRECTORS

Under Delaware law, the standards of conduct for directors have developed through written opinions of the Delaware courts. Generally, directors of a Delaware corporation are subject to a duty of loyalty, a duty of care and a duty of disclosure to the corporation's stockholders. The duty of care requires directors to exercise the care that a similarly situated person would exercise under similar circumstances, including informing themselves prior to making a business decision of all material information reasonably available to them. Directors should have sufficient information and should critically examine the information they have. The duty of loyalty requires directors to act in a manner that a director honestly believes to be in the best interest of the corporation and its stockholders, and refrain from self-dealing. The duty of disclosure requires directors to disclose fully and fairly all material information within the board's control when it seeks stockholder action.

 

Under the MGCL, the standard of conduct for directors is governed by statute. The MGCL requires that a director of a Maryland corporation perform his or her duties: (1) in good faith, (2) in a manner the director reasonably believes to be in the interests of the corporation and (3) with the care that an ordinarily prudent person in a like position would use under similar circumstances.

316


Table of Contents


LEGAL MATTERS

        The validity of the Hilltop common stock to be issued in connection with the merger will be passed upon for Hilltop by Wachtell, Lipton, Rosen & Katz. Certain U.S. federal income tax consequences relating to the merger will also be passed upon for Hilltop by Wachtell, Lipton, Rosen & Katz, and for SWS by Davis Polk & Wardwell LLP.


EXPERTS

        The audited consolidated financial statements of Hilltop included in this proxy statement/prospectus, except as they relate to PrimeLending and First Southwest Company as of December 31, 2012 and for the period from December 1, 2012 through December 31, 2012, have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. Such financial statements, except as they relate to PrimeLending and First Southwest Company as of December 31, 2012 and for the period from December 1, 2012 through December 31, 2012, have been so included in reliance on the report of such independent registered public accounting firm given on the authority of said firm as experts in auditing and accounting.

        The financial statements of PrimeLending and First Southwest Company as of December 31, 2012 and for the period from December 1, 2012 through December 31, 2012, not separately presented herein, but which are referred to and made a part of this proxy statement/prospectus and Registration Statement, have been audited by Ernst & Young LLP, an independent registered public accounting firm, as set forth in their reports appearing elsewhere herein. The audited financial statements of Hilltop, to the extent they relate to PrimeLending and First Southwest Company as of December 31, 2012 and for the period from December 1, 2012 through December 31, 2012, have been so included in reliance upon such reports given on the authority of such firm as experts in accounting and auditing.

        The audited statement of assets acquired and liabilities assumed by PlainsCapital Bank, a wholly-owned subsidiary of Hilltop, included in this proxy statement/prospectus has been so included in reliance on the report of PricewaterhouseCoopers LLP, independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

        The consolidated financial statements and management's assessment of the effectiveness of internal control over financial reporting of SWS (which is included in Management's Report on Internal Control Over Financial Reporting) incorporated in this proxy statement/prospectus by reference to SWS's Annual Report on Form 10-K for the year ended June 30, 2014 have been so incorporated in reliance on the reports of Grant Thornton LLP, an independent registered public accounting firm, upon the authority of said firm as experts in auditing and accounting.


OTHER MATTERS

        According to the SWS bylaws, business to be conducted at a special meeting of stockholders may be brought before the meeting only pursuant to a notice of meeting. Accordingly, no matters other than the matters described in this proxy statement/prospectus will be presented for action at the special meeting or at any adjournment or postponement of the special meeting.


DEADLINE FOR SUBMITTING STOCKHOLDER PROPOSALS

        SWS will hold an annual meeting for its 2014 fiscal year only if the merger has not already been completed.

        Pursuant to rules of the SEC, a stockholder who intends to present a proposal at SWS's next annual meeting of stockholders and who wishes the proposal to be included in the proxy statement for that meeting must submit the proposal in writing to the attention of the Corporate Secretary of SWS

317


Table of Contents

at 1201 Elm Street, Suite 3500, Dallas, Texas 75270. The proposal must be received no later than June 5, 2014.

        Stockholders wishing to submit proposals to be presented directly at SWS's next annual meeting of stockholders instead of by inclusion in next year's proxy statement must follow the submission criteria and deadlines set forth in SWS's bylaws concerning stockholder proposals. To be timely in connection with SWS's next annual meeting, a stockholder proposal concerning business other than director nominations must be received by SWS at its principal executive offices not later than the close of business on August 16, 2014, nor earlier than the close of business on July 17, 2014, unless the date of SWS's annual meeting is more than 30 days before or more than 70 days after November 14, 2014, in which case notice must be delivered not earlier than the close of business on the one hundred twentieth day prior to such annual meeting and not later than the close of business on the later of the ninetieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by SWS. In no event shall the public announcement of an adjournment or postponement of an annual meeting commence a new time period (or extend any time period) for the giving of a stockholder's notice as described above.

        You may obtain a copy of SWS's bylaws by writing to the Corporate Secretary of SWS at the above address. The chairman of the meeting may refuse to bring before a meeting any business not brought in compliance with applicable law and SWS's bylaws.


STOCKHOLDERS SHARING AN ADDRESS

        Only one copy of this proxy statement/prospectus is being delivered to multiple stockholders of SWS sharing an address unless SWS has previously received contrary instructions from one or more of such stockholders. On written or oral request to the Secretary of SWS at 1201 Elm Street, Suite 3500, Dallas, Texas 75270, (214) 859-1800, SWS will deliver promptly a separate copy of this proxy statement/prospectus to a stockholder at a shared address to which a single copy of the proxy statement/prospectus was delivered. Stockholders sharing an address who wish, in the future, to receive separate copies or a single copy of SWS's proxy statements and annual reports should provide written or oral notice to the Secretary of SWS at the address and telephone number set forth above.

318


Table of Contents


WHERE YOU CAN FIND MORE INFORMATION

        Hilltop and SWS separately file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any of this information filed with the SEC at the SEC's public reference room:

Public Reference Room
100 F Street NE
Room 1024
Washington, D.C. 20549

        For information regarding the operation of the Public Reference Room, you may call the SEC at 1-800-SEC-0330. The SEC also maintains an internet website that contains reports, proxy statements and other information about issuers, like Hilltop and SWS, who file electronically with the SEC. The address of the site is www.sec.gov. Copies of the documents filed with the SEC by SWS are also available free of charge on SWS's internet website at www.swst.com or by contacting SWS's Investor Relations Department at (214) 859-1800. Copies of the documents filed with the SEC by Hilltop are also available free of charge on Hilltop's internet website at www.hilltop-holdings.com or by contacting Hilltop's Investor Relations Department at (214) 252-4029. We have included the web addresses of the SEC and Hilltop as inactive textual references only.

        Hilltop is currently not eligible to incorporate in this proxy statement/prospectus by reference any documents that it filed, or may file in the future, with the SEC under Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act.

        The SEC allows SWS to incorporate by reference information in this proxy statement/prospectus. This means that SWS can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be a part of this proxy statement/prospectus, except for any information that is superseded by information that is included directly in this proxy statement/prospectus. Neither SWS nor Hilltop incorporates the contents of their websites into this proxy statement/prospectus.

        This proxy statement/prospectus incorporates by reference the documents listed below, which contain important information about SWS and its financial condition. The following documents, which were filed by SWS with the SEC, are incorporated by reference into this proxy statement/prospectus:

SWS SEC Filings
(SEC File No. 000-19483)
  Period or Date Filed
Annual Report on Form 10-K and 10-K/A   Fiscal year ended June 30, 2014

Current Reports on Form 8-K

 

Filed on September 5, 2014, October 2, 2014 and October 6, 2014

        To the extent that any information contained in any report on Form 8-K or any exhibit thereto, was furnished to, rather than filed with the SEC, such information or exhibit is specifically not incorporated by reference.

        In addition, SWS incorporates by reference additional documents that it may file with the SEC pursuant to Sections 13(a), 13(c), 14, or 15(d) of the Exchange Act between the date of this proxy statement/prospectus and the date of the SWS special meeting. These documents include periodic reports, such as annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, excluding any information furnished pursuant to Items 2.02 or 7.01 of any current report on Form 8-K, as well as proxy statements.

        Except where the context otherwise indicates, SWS has supplied all information contained or incorporated by reference in this proxy statement/prospectus relating to SWS, and Hilltop has supplied

319


Table of Contents

all information contained in this proxy statement/prospectus relating to Hilltop as well as all pro forma financial information.

        Documents incorporated by reference are available from SWS without charge, excluding any exhibits to those documents unless the exhibit is specifically incorporated by reference as an exhibit in this proxy statement/prospectus. You can obtain documents incorporated by reference in this proxy statement/prospectus by requesting them in writing or by telephone from SWS as follows:

        IF YOU WOULD LIKE TO REQUEST DOCUMENTS FROM SWS, PLEASE CONTACT SWS NO LATER THAN NOVEMBER 14, 2014, IN ORDER TO RECEIVE THEM BEFORE THE SPECIAL MEETING. You will not be charged for any of these documents that you request. If you request any incorporated documents from SWS, SWS will mail them to you by first class mail, or another equally prompt means after it receives your request.

        Neither Hilltop nor SWS has authorized anyone to give any information or make any representation about the merger or our companies that is different from, or in addition to, that contained in this proxy statement/prospectus or in any of the materials that have been incorporated in this proxy statement/prospectus. Therefore, if anyone does give you information of this sort, you should not rely on it. If you are in a jurisdiction where offers to exchange or sell, or solicitations of offers to exchange or purchase, the securities offered by this proxy statement/prospectus or the solicitation of proxies is unlawful, or if you are a person to whom it is unlawful to direct these types of activities, then the offer presented in this proxy statement/prospectus does not extend to you. The information contained in this proxy statement/prospectus speaks only as of the date of this proxy statement/prospectus unless the information specifically indicates that another date applies.

        The representations, warranties and covenants described in this proxy statement/prospectus and included in the merger agreement were made only for purposes of the merger agreement and as of specific dates, are solely for the benefit of Hilltop and SWS, may be subject to limitations, qualifications or exceptions agreed upon by the parties, including those included in confidential disclosures made for the purposes of, among other things, allocating contractual risk between Hilltop and SWS rather than establishing matters as facts, and may be subject to standards of materiality that differ from those standards relevant to investors. You should not rely on the representations, warranties, or covenants or any description thereof as characterizations of the actual state of facts or condition of Hilltop, SWS or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations, warranties, and covenants may change after the date of the merger agreement, which subsequent information may or may not be fully reflected in public disclosures by Hilltop or SWS. The representations and warranties and other provisions of the merger agreement should not be read alone, but instead should be read only in conjunction with the information provided elsewhere in this proxy statement/prospectus and in the documents incorporated by reference into this proxy statement/prospectus.

320


Table of Contents


Index to Consolidated Financial Statements

Financial Statements of Hilltop Holdings Inc.

   

Report of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP) for Hilltop Holdings Inc. 

 
F-2

Report of Independent Registered Public Accounting Firm (Ernst & Young LLP) for PrimeLending

  F-3

Report of Independent Registered Public Accounting Firm (Ernst & Young LLP) for First Southwest Company

  F-4

Audited Consolidated Financial Statements, Years Ended December 31, 2013, 2012 and 2011

 
 

Consolidated Balance Sheets

 
F-5

Consolidated Statements of Operations

  F-6

Consolidated Statements of Comprehensive Income (Loss)

  F-7

Consolidated Statements of Stockholders' Equity

  F-8

Consolidated Statements of Cash Flows

  F-9

Notes to Consolidated Financial Statements

  F-10

Unaudited Consolidated Interim Financial Statements

 
 

Consolidated Balance Sheets, June 30, 2014 and December 31, 2013

 
F-94

Consolidated Statements of Operations, Three and Six Months Ended June 30, 2014 and 2013

  F-95

Consolidated Statements of Comprehensive Income, Three and Six Months Ended June 30, 2014 and 2013

  F-96

Consolidated Statements of Stockholders' Equity, Six Months Ended June 30, 2014 and 2013

  F-97

Consolidated Statements of Cash Flows, Six Months Ended June 30, 2014 and 2013

  F-98

Notes to Consolidated Financial Statements

  F-99

Financial Statements Relating to the First National Bank Transaction

 
 

Report of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm

 
F-157

Statement of Assets Acquired and Liabilities Assumed by PlainsCapital Bank on September 13, 2013

  F-158

Notes to Statement of Assets Acquired and Liabilities Assumed

  F-159

F-1


Table of Contents


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Hilltop Holdings Inc.:

        In our opinion, based on our audits and the report of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of operations, of comprehensive income (loss), of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Hilltop Holdings Inc. and its subsidiaries (the "Company") at December 31, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of PrimeLending and First Southwest Company as of December 31, 2012 and for the period from December 1, 2012 to December 31, 2012, both wholly owned subsidiaries of the Company, which statements reflect total assets of approximately $1.5 billion and $0.5 billion, respectively, of the related consolidated total as of December 31, 2012 and total net income before tax of approximately $5.7 million and $1.6 million, respectively, of the related consolidated total for the year ended December 31, 2012. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for PrimeLending and First Southwest Company, is based solely on the reports of the other auditors. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Dallas, Texas
March 3, 2014

F-2


Table of Contents


Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholder
PrimeLending, a PlainsCapital Company

        We have audited the consolidated financial statements of PrimeLending, a PlainsCapital Company (the Company), which comprise the consolidated balance sheet as of December 31, 2012, and the related consolidated statement of income, stockholder's equity, and cash flows for the period from December 1, 2012 through December 31, 2012, and the related consolidated notes to the financial statements (not presented separately herein).


Management's Responsibility for the Financial Statements

        Management is responsible for the preparation and fair presentation of these consolidated financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free of material misstatement, whether due to fraud or error.


Auditor's Responsibility

        Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States and in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.

        An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

        We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.


Opinion

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of PrimeLending, a PlainsCapital Company at December 31, 2012, and the results of its operations and its cash flows for the period from December 1, 2012 through December 31, 2012 in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Dallas, Texas
March 15, 2013

F-3


Table of Contents


Report of Independent Registered Public Accounting Firm

Board of Directors
First Southwest Company

        We have audited the financial statements of First Southwest Company (the Company), which comprise the statement of financial condition as of December 31, 2012, and the related statements of income, changes in stockholder's equity, and cash flows for the period from December 1, 2012 through December 31, 2012 that are filed pursuant to Rule 17a-5 under the Securities Exchange Act of 1934, and the related notes to the financial statements (not presented separately herein).


Management's Responsibility for the Financial Statements

        Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.


Auditor's Responsibility

        Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States and in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

        An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

        We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.


Opinion

        In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of First Southwest Company as of December 31, 2012, and the results of its operations and its cash flows for the period from December 1, 2012 through December 31, 2012, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Dallas, Texas
February 28, 2013

F-4


Table of Contents


HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 
  December 31,  
 
  2013   2012  

Assets

             

Cash and due from banks

  $ 713,099   $ 722,039  

Federal funds sold and securities purchased under agreements to resell

    32,924     4,421  

Securities:

             

Trading, at fair value

    58,846     90,113  

Available for sale, at fair value (amortized cost of $1,256,862 and $978,502, respectively)

    1,203,143     990,953  
           

    1,261,989     1,081,066  

Loans held for sale

    1,089,039     1,401,507  

Non-covered loans, net of unearned income

    3,514,646     3,152,396  

Allowance for non-covered loan losses

    (33,241 )   (3,409 )
           

Non-covered loans, net

    3,481,405     3,148,987  

Covered loans, net of allowance of $1,061

    1,005,308      

Broker-dealer and clearing organization receivables

    119,317     145,564  

Insurance premiums receivable

    25,597     24,615  

Deferred policy acquisition costs

    20,991     19,812  

Premises and equipment, net

    200,706     111,381  

FDIC indemnification asset

    188,291      

Covered other real estate owned

    142,833      

Mortgage servicing rights

    20,149     2,080  

Other assets

    279,745     293,885  

Goodwill

    251,808     253,770  

Other intangible assets, net

    70,921     77,738  
           

Total assets

  $ 8,904,122   $ 7,286,865  
           
           

Liabilities and Stockholders' Equity

             

Deposits:

             

Noninterest-bearing

  $ 1,773,749   $ 1,349,584  

Interest-bearing

    4,949,169     3,350,877  
           

Total deposits

    6,722,918     4,700,461  

Broker-dealer and clearing organization payables

    129,678     187,990  

Reserve for losses and loss adjustment expenses

    27,468     34,012  

Unearned insurance premiums

    88,422     82,598  

Short-term borrowings

    342,087     728,250  

Notes payable

    56,327     141,539  

Junior subordinated debentures

    67,012     67,012  

Other liabilities

    158,288     198,453  
           

Total liabilities

    7,592,200     6,140,315  

Commitments and contingencies (see Notes 18 and 19)

             

Stockholders' equity:

             

Hilltop stockholders' equity:

             

Preferred stock, $0.01 par value, 10,000,000 shares authorized; Series B, liquidation value per share of $1,000; 114,068 shares issued and outstanding

    114,068     114,068  

Common stock, $0.01 par value, 100,000,000 shares authorized; 90,175,688 and 83,487,340 shares issued and outstanding, respectively

    902     835  

Additional paid-in capital

    1,388,641     1,304,448  

Accumulated other comprehensive income (loss)

    (34,863 )   8,094  

Accumulated deficit

    (157,607 )   (282,949 )
           

Total Hilltop stockholders' equity

    1,311,141     1,144,496  

Noncontrolling interest

    781     2,054  
           

Total stockholders' equity

    1,311,922     1,146,550  
           

Total liabilities and stockholders' equity

  $ 8,904,122   $ 7,286,865  
           
           

   

See accompanying notes.

F-5


Table of Contents


HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 
  Year Ended December 31,  
 
  2013   2012   2011  

Interest income:

                   

Loans, including fees

  $ 284,782   $ 23,900   $  

Securities:

                   

Taxable

    27,078     13,116     11,049  

Tax-exempt

    4,775     464      

Federal funds sold and securities purchased under agreements to resell

    113     106      

Interest-bearing deposits with banks

    1,848     801      

Other

    10,479     651      
               

Total interest income

    329,075     39,038     11,049  

Interest expense:

                   

Deposits

    14,877     1,013      

Short-term borrowings

    1,814     215      

Notes payable

    10,512     8,613     8,985  

Junior subordinated debentures

    2,409     212      

Other

    3,262     143      
               

Total interest expense

    32,874     10,196     8,985  
               

Net interest income

    296,201     28,842     2,064  

Provision for loan losses

    37,158     3,800      
               

Net interest income after provision for loan losses

    259,043     25,042     2,064  

Noninterest income:

                   

Net realized gains on securities

    4,937     112     817  

Net gains from sale of loans and other mortgage production income

    457,531     50,384      

Mortgage loan origination fees

    79,736     7,224      

Net insurance premiums earned

    157,533     146,701     134,048  

Investment and securities advisory fees and commissions

    93,093     11,238      

Bargain purchase gain

    12,585          

Other

    44,670     8,573     6,785  
               

Total noninterest income

    850,085     224,232     141,650  

Noninterest expense:

                   

Employees' compensation and benefits

    480,496     60,972     7,743  

Loss and loss adjustment expenses

    110,755     109,159     96,734  

Policy acquisition and other underwriting expenses

    46,289     43,658     40,196  

Occupancy and equipment, net

    86,248     7,360     788  

Other

    187,947     34,368     9,793  
               

Total noninterest expense

    911,735     255,517     155,254  
               

Income (loss) before income taxes

    197,393     (6,243 )   (11,540 )

Income tax expense (benefit)

    70,684     (1,145 )   (5,009 )
               

Net income (loss)

    126,709     (5,098 )   (6,531 )

Less: Net income attributable to noncontrolling interest

    1,367     494      
               

Income (loss) attributable to Hilltop

    125,342     (5,592 )   (6,531 )

Dividends on preferred stock

    4,327     259      
               

Income (loss) applicable to Hilltop common stockholders

  $ 121,015   $ (5,851 ) $ (6,531 )
               
               

Earnings (loss) per common share:

                   

Basic

  $ 1.43   $ (0.10 ) $ (0.12 )
               
               

Diluted

  $ 1.40   $ (0.10 ) $ (0.12 )
               
               

Weighted average share information:

                   

Basic

    84,382     58,754     56,499  
               
               

Diluted

    90,331     58,754     56,499  
               
               

   

See accompanying notes.

F-6


Table of Contents


HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

 
  Year Ended December 31,  
 
  2013   2012   2011  

Net income (loss)

  $ 126,709   $ (5,098 ) $ (6,531 )

Other comprehensive income (loss):

                   

Unrealized gains (losses) on securities available for sale, net of tax of $(23,765), $(3,172) and $4,692, respectively

    (43,039 )   (5,889 )   8,713  

Other

    82          
               

Comprehensive income (loss)

    83,752     (10,987 )   2,182  

Less: comprehensive income attributable to noncontrolling interest

    1,367     494      
               

Comprehensive income (loss) applicable to Hilltop

  $ 82,385   $ (11,481 ) $ 2,182  
               
               

   

See accompanying notes.

F-7


Table of Contents


HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands)

 
  Preferred Stock   Common Stock    
  Accumulated
Other
Comprehensive
Income (Loss)
   
  Total
Hilltop
Stockholders'
Equity
   
   
 
 
  Additional
Paid-in
Capital
  Accumulated
Deficit
  Noncontrolling
Interest
  Total
Stockholders'
Equity
 
 
  Shares   Amount   Shares   Amount  

Balance, December 31, 2010

      $     56,495   $ 565   $ 918,046   $ 5,270   $ (270,826 ) $ 653,055   $   $ 653,055  

Net loss

                            (6,531 )   (6,531 )       (6,531 )

Other comprehensive income

                        8,713         8,713         8,713  

Stock-based compensation expense

                    98             98         98  

Common stock issued to board members

            6         48             48         48  
                                           

Balance, December 31, 2011

      $     56,501   $ 565   $ 918,192   $ 13,983   $ (277,357 ) $ 655,383   $   $ 655,383  
                                           
                                           

Net loss

                            (5,592 )   (5,592 )   494     (5,098 )

Other comprehensive income

                        (5,889 )       (5,889 )       (5,889 )

Issuance of preferred stock

    114     114,068                         114,068         114,068  

Issuance of common stock

            27,123     271     387,312             387,583         387,583  

Stock-based compensation expense

                    450             450         450  

Common stock issued to board members

            4         50             50         50  

Repurchase and retirement of common stock

            (141 )   (1 )   (1,297 )           (1,298 )       (1,298 )

Dividends on preferred stock

                    (259 )           (259 )       (259 )

Acquired noncontrolling interest

                                    1,789     1,789  

Cash distributions to noncontrolling interest

                                    (229 )   (229 )
                                           

Balance, December 31, 2012

    114   $ 114,068     83,487   $ 835   $ 1,304,448   $ 8,094   $ (282,949 ) $ 1,144,496   $ 2,054   $ 1,146,550  
                                           
                                           

Net income

                            125,342     125,342     1,367     126,709  

Other comprehensive loss

                        (42,957 )       (42,957 )       (42,957 )

Issuance of common stock

            6,208     62     86,705             86,767         86,767  

Stock-based compensation expense

                    1,671             1,671         1,671  

Common stock issued to board members

            10         149             149         149  

Issuance of restricted common stock

            471     5     (5 )                    

Dividends on preferred stock

                    (4,327 )           (4,327 )       (4,327 )

Cash distributions to noncontrolling interest

                                    (2,640 )   (2,640 )
                                           

Balance, December 31, 2013

    114   $ 114,068     90,176   $ 902   $ 1,388,641   $ (34,863 ) $ (157,607 ) $ 1,311,141   $ 781   $ 1,311,922  
                                           
                                           

   

See accompanying notes.

F-8


Table of Contents


HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 
  Year Ended December 31,  
 
  2013   2012   2011  

Operating Activities

                   

Net income (loss)

  $ 126,709   $ (5,098 ) $ (6,531 )

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities

                   

Provision for loan losses

    37,158     3,800      

Depreciation, amortization and accretion, net

    (53,794 )   (2,533 )   1,714  

Net realized gains on securities

    (4,937 )   (112 )   (817 )

Bargain purchase gain

    (12,585 )        

Deferred income taxes

    15,829     (6,426 )   (3,930 )

Other, net

    6,249     612     546  

Net change in trading securities

    31,267     12,900      

Net change in broker-dealer and clearing organization receivables

    21,219     43,309      

Net change in other assets

    7,465     (541 )   12,237  

Net change in broker-dealer and clearing organization payables

    (55,247 )   (46,509 )    

Net change in loss and loss adjustment expense reserve

    (6,544 )   (10,823 )   (14,047 )

Net change in unearned insurance premiums

    5,824     1,937     7,847  

Net change in other liabilities

    (34,540 )   9,025     (341 )

Net gains from sale of loans

    (457,531 )   (50,384 )    

Loans originated for sale

    (11,752,800 )   (1,344,577 )    

Proceeds from loans sold

    12,522,963     1,510,639      
               

Net cash provided by (used in) operating activities

    396,705     115,219     (3,322 )
               

Investing Activities

                   

Proceeds from maturities and principal reductions of securities held to maturity

            7,336  

Proceeds from sales, maturities and principal reductions of securities available for sale

    381,890     77,445     13,846  

Purchases of securities available for sale

    (372,998 )   (224,893 )   (81,583 )

Net change in loans

    (140,437 )   10,673      

Purchases of premises and equipment and other assets

    (33,066 )   (17,412 )   (296 )

Proceeds from sales of premises and equipment and other real estate owned

    21,233     1,377      

Net cash received for Federal Home Loan Bank and Federal Reserve Bank stock

    4,600          

Net cash from FNB Transaction and PlainsCapital Merger

    362,695     165,679      
               

Net cash provided by (used in) investing activities

    223,917     12,869     (60,697 )
               

Financing Activities

                   

Net change in deposits

    (210,491 )   207,997      

Net change in short-term borrowings

    (386,163 )   (185,812 )    

Proceeds from notes payable

    2,000          

Payments on notes payable

    (3,262 )   (766 )   (6,900 )

Payments to repurchase common stock

        (1,298 )    

Dividends paid on preferred stock

    (2,985 )        

Net cash distributed to noncontrolling interest

    (2,640 )   (229 )    

Other, net

    2,482     (40 )    
               

Net cash provided by (used in) financing activities

    (601,059 )   19,852     (6,900 )
               

Net change in cash and cash equivalents

    19,563     147,940     (70,919 )

Cash and cash equivalents, beginning of year

    726,460     578,520     649,439  
               

Cash and cash equivalents, end of year

  $ 746,023   $ 726,460   $ 578,520  
               
               

Supplemental Disclosures of Cash Flow Information

                   

Cash paid for interest

  $ 31,805   $ 10,371   $ 8,780  
               
               

Cash paid for income taxes, net of refunds

  $ 73,802   $ (184 ) $ (811 )
               
               

Supplemental Schedule of Non-Cash Activities

                   

Redemption of senior exchangeable notes for common stock

  $ 83,950   $   $  
               
               

Conversion of loans to other real estate owned

  $ 25,639   $   $  
               
               

Preferred stock issued in acquisition

  $   $ 114,068   $  
               
               

Common stock issued in acquisition

  $   $ 387,583   $  
               
               

   

See accompanying notes.

F-9


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1. Summary of Significant Accounting and Reporting Policies

Nature of Operations

        Hilltop Holdings Inc. ("Hilltop" and, collectively with its subsidiaries, the "Company") was organized in July 1998 as a Maryland corporation. Hilltop is a financial holding company registered under the Bank Holding Company Act of 1956, as amended by the Gramm-Leach-Bliley Act of 1999. On November 30, 2012, Hilltop acquired PlainsCapital Corporation pursuant through a plan of merger whereby PlainsCapital Corporation merged with and into a wholly owned subsidiary (the "PlainsCapital Merger"), which continued as the surviving entity under the name "PlainsCapital Corporation" ("PlainsCapital").

        PlainsCapital is a financial holding company, headquartered in Dallas, Texas, that provides, through its subsidiaries, an array of financial products and services. In addition to traditional banking services, PlainsCapital provides residential mortgage lending, investment banking, public finance advisory, wealth and investment management, treasury management, capital equipment leasing, fixed income sales, asset management, and correspondent clearing services. The operating results of Hilltop for the year ended December 31, 2012 include the results from the operations acquired in the PlainsCapital Merger for the month ended December 31, 2012. Certain disclosures within the notes to consolidated financial statements are specific to financial products and services of PlainsCapital and its subsidiaries and therefore include information at December 31, 2013 and 2012 and relating to the post-acquisition year ended December 31, 2013 and one month period ended December 31, 2012.

        Prior to the consummation of the PlainsCapital Merger, the Company's primary operations were limited to providing fire and homeowners insurance to low value dwellings and manufactured homes primarily in Texas and other areas of the southern United States through the Company's wholly owned property and casualty insurance holding company, National Lloyds Corporation ("NLC"), formerly known as NLASCO, Inc.

        On September 13, 2013 (the "Bank Closing Date"), PlainsCapital Bank (the "Bank") assumed substantially all of the liabilities, including all of the deposits, and acquired substantially all of the assets of Edinburg, Texas-based First National Bank ("FNB") from the Federal Deposit Insurance Corporation (the "FDIC"), as receiver, and reopened former FNB branches acquired from the FDIC under the "PlainsCapital Bank" name (the "FNB Transaction"). Pursuant to the Purchase and Assumption Agreement (the "P&A Agreement"), the Bank and the FDIC entered into loss-share agreements whereby the FDIC agreed to share in the losses of certain covered loans and covered other real estate owned ("OREO") that the Bank acquired, as further described in Note 2 to the consolidated financial statements. Based on preliminary purchase date valuations, the fair value of the assets acquired was $2.2 billion, including $1.1 billion in covered loans, $286.2 million in securities, $135.2 million in covered OREO and $42.9 million in non-covered loans. The Bank also assumed $2.2 billion in liabilities, consisting primarily of deposits. FNB's expansive branch network allows the Bank to further develop its Texas footprint through expansion into the Rio Grande Valley, Houston, Corpus Christi, Laredo and El Paso markets, among others.


Basis of Presentation

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the

F-10


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting and Reporting Policies (Continued)

reporting period. Actual results could differ from those estimates. Estimates regarding the allowance for loan losses, the fair values of financial instruments, the amounts receivable under the loss-share agreements with the FDIC ("FDIC Indemnification Asset"), reserves for losses and loss adjustment expenses, the mortgage loan indemnification liability, and the potential impairment of assets are particularly subject to change. The Company has applied its critical accounting policies and estimation methods consistently in all periods presented in these consolidated financial statements. As discussed in Note 2 to the consolidated financial statements, the purchase date valuations for certain identifiable assets acquired and liabilities assumed in the FNB Transaction are considered preliminary because management made significant estimates and exercised significant judgment in estimating fair values and accounting associated with the real estate appraisal validation exercise due to the short time period between the Bank Closing Date and December 31, 2013.

        The presentation of the Company's historical consolidated financial statements has been modified and certain items in the prior period financial statements have been reclassified to conform to the current period presentation, which is more consistent with that of a financial institution that provides an array of financial products and services.

        Certain reclassifications have been made to the prior period consolidated financial statements to conform with the current period presentation. In addition, the Company revised its historical consolidated balance sheets to correct the classification of certain noninterest-bearing deposits. The correction resulted in an increase in noninterest-bearing deposits and a decrease in interest-bearing deposits of $1.3 billion and $1.0 billion at December 31, 2013 and 2012, respectively, and the correction of the deposits note to the consolidated financial statements. Management has evaluated the impact of the correction as immaterial to previously issued financial statements; however, management has elected to revise such amounts in the accompanying consolidated financial statements. The Company will similarly revise the consolidated balance sheets and deposits note to the quarterly and annual consolidated financial statements in its future filings.

        Hilltop owns 100% of the outstanding stock of PlainsCapital. PlainsCapital owns 100% of the outstanding stock of the Bank and 100% of the membership interest in PlainsCapital Equity, LLC. The Bank owns 100% of the outstanding stock of PrimeLending, a PlainsCapital Company ("PrimeLending") and PCB-ARC, Inc. The Bank has a 100% membership interest in First Southwest Holdings, LLC ("First Southwest") and PlainsCapital Securities, LLC, as well as a 51% voting interest in PlainsCapital Insurance Services, LLC.

        Hilltop also owns 100% of NLC, which operates through its wholly owned subsidiaries, National Lloyds Insurance Company ("NLIC") and American Summit Insurance Company ("ASIC").

        PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC, the controlling and sole managing member of PrimeLending Ventures, LLC ("Ventures").

        The principal subsidiaries of First Southwest are First Southwest Company ("FSC"), a broker-dealer registered with the Securities and Exchange Commission (the "SEC") and the Financial Industry Regulatory Authority, and First Southwest Asset Management, Inc., a registered investment advisor under the Investment Advisors Act of 1940.

        The consolidated financial statements include the accounts of the above-named entities. All significant intercompany transactions and balances have been eliminated. Noncontrolling interests have been recorded for minority ownership in entities that are not wholly owned and are presented in

F-11


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting and Reporting Policies (Continued)

compliance with the provisions of Noncontrolling Interest in Subsidiary Subsections of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC").

        PlainsCapital also owns 100% of the outstanding common stock of PCC Statutory Trusts I, II, III and IV (the "Trusts"), which are not included in the consolidated financial statements under the requirements of the Variable Interest Entities Subsections of the ASC, because the primary beneficiaries of the Trusts are not within the consolidated group.


Accounting Change

        Effective October 1, 2013, the Company changed its method of applying ASC Topic 350 such that the annual goodwill impairment testing date was changed from December 31st to October 1st for its insurance reporting unit. This new testing date is preferable under the circumstances in order to combine evaluation efforts to provide for a more consistent, efficient and effective entity-wide impairment testing process and it allows the Company more time to accurately complete its impairment testing process in order to incorporate the results in the annual consolidated financial statements. The Company has prospectively applied the change in the annual goodwill impairment testing date from October 1, 2013.


Acquisition Accounting

        Acquisitions are accounted for under the purchase method of accounting. Purchased assets, including identifiable intangible assets, and assumed liabilities are recorded at their respective acquisition date fair values. If the fair value of net assets purchased exceeds the consideration given, a "bargain purchase gain" is recognized. If the consideration given exceeds the fair value of the net assets received, goodwill is recognized.


Securities Purchased Under Agreements to Resell

        Securities purchased under agreements to resell (reverse repurchase agreements or reverse repos) are treated as collateralized financings and are carried at the amounts at which the securities will subsequently be resold as specified in the agreements. PlainsCapital is in possession of collateral with a fair value equal to or in excess of the contract amounts.


Securities

        Management classifies securities at the time of purchase and reassesses such designation at each balance sheet date. Transfers between categories from these reassessments are rare. Securities held for resale to facilitate principal transactions with customers, as well as certain securities acquired in the PlainsCapital Merger, are classified as trading, and are carried at fair value, with changes in fair value reflected in the consolidated statements of operations. Hilltop reports interest income on trading securities as interest income on securities and other changes in fair value as other noninterest income.

        Securities held but not intended to be held to maturity or on a long-term basis are classified as available for sale. Securities included in this category are those that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk, and other factors related to interest rate and resultant prepayment risk changes. Securities available for sale are carried at fair value. Unrealized holding gains and losses on

F-12


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting and Reporting Policies (Continued)

securities available for sale, net of taxes, are reported in other comprehensive income (loss) until realized. Premiums and discounts are recognized in interest income using the effective interest method and consider any optionality that may be embedded in the security.

        Purchases and sales (and related gain or loss) of securities are recorded on the trade date, based on specific identification. Declines in the fair value of available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses to the extent the other-than-temporary impairment ("OTTI") is related to credit losses. The amount of the OTTI related to other factors is recognized in other comprehensive income (loss). In estimating OTTI, management considers in developing its best estimate of cash flows, among other things, (i) the length of time and the extent to which the fair value has been less than cost, (ii) the financial condition and near-term prospects of the issuer, (iii) the historic and implied volatility of the security, (iv) failure of the issuer to make scheduled interest payments and (v) changes to the rating of the security by a rating agency.


Loans Held for Sale

        Loans held for sale consist primarily of single-family residential mortgages funded through PrimeLending. These loans are generally on the consolidated balance sheet for no more than 30 days. Substantially all mortgage loans originated by PrimeLending are sold in the secondary market, the majority with servicing released. Mortgage loans held for sale are carried at fair value under the provisions of the Fair Value Option Subsections of the ASC ("Fair Value Option"). Changes in the fair value of the loans held for sale are recognized in earnings and fees and costs associated with origination are recognized as incurred. The specific identification method is used to determine realized gains and losses on sales of loans, which are reported as net gains (losses) in noninterest income. Loans sold are subject to certain indemnification provisions with investors, including the repurchase of loans sold and repayment of certain sales proceeds to investors under certain conditions.


Loans

Originated Loans

        Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal reduced by unearned income, net unamortized deferred fees and an allowance for loan losses. Unearned income on installment loans and interest on other loans is recognized using the effective interest method. Net fees received for providing loan commitments and letters of credit that result in loans are deferred and amortized to interest income over the life of the related loan, beginning with the initial borrowing. Net fees on commitments and letters of credit that are not expected to be funded are amortized to noninterest income over the commitment period. Income on direct financing leases is recognized on a basis that achieves a constant periodic rate of return on the outstanding investment.

        Impaired loans include non-accrual loans, troubled debt restructurings and partially charged-off loans. The accrual of interest on impaired loans is discontinued when, in management's opinion, there is a clear indication that the borrower's cash flow may not be sufficient to meet principal and interest payments as they become due according to the terms of the loan agreement, which is generally when a loan is 90 days past due unless the loan is both well secured and in the process of collection. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is charged against income. If the ultimate collectability of principal, wholly or partially, is in doubt, any payment received

F-13


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting and Reporting Policies (Continued)

on a loan on which the accrual of interest has been suspended is applied to reduce principal to the extent necessary to eliminate such doubt. Once the collection of the remaining recorded loan balance is fully expected, interest income is recognized on a cash basis.

        The Bank originates loans to customers primarily in Texas. Although the Bank has diversified loan and leasing portfolios and, generally, holds collateral against amounts advanced to customers, its debtors' ability to honor their contracts is substantially dependent upon the general economic conditions of the region and of the industries in which its debtors operate, which consist primarily of energy, agribusiness, wholesale/retail trade, construction and real estate. PrimeLending originates loans to customers in its offices, which are located throughout the United States. Substantially all mortgage loans originated by PrimeLending are sold in the secondary market with servicing released, although PrimeLending does retain servicing in certain circumstances. FSC makes loans to customers through margin transactions. FSC controls risk by requiring customers to maintain margin collateral in compliance with various regulatory and internal guidelines, which may vary based upon market conditions. Securities owned by customers and held as collateral for margin loans are not included in the consolidated financial statements.

Acquired Loans

        Management has defined the loans acquired in a business combination as acquired loans. Acquired loans are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan losses. Acquired loans were segregated between those considered to be credit impaired and those without credit impairment at acquisition. To make this determination, management considered such factors as past due status, nonaccrual status and credit risk ratings. The fair value of acquired performing loans was determined by discounting expected cash flows, both principal and interest, at prevailing market interest rates. The difference between the fair value and principal balances due at acquisition date, the fair value discount, is accreted into income over the estimated life of each loan.

        Purchased credit impaired ("PCI") loans acquired in the PlainsCapital Merger are accounted for on an individual loan basis, while PCI loans acquired in the FNB Transaction are accounted for both in pools and on an individual loan basis. The Company has established under its PCI accounting policy a framework to aggregate certain acquired loans into various loan pools based on a minimum of two layers of common risk characteristics for the purpose of determining their respective fair values as of their acquisition dates, and for applying the subsequent recognition and measurement provisions for income accretion and impairment testing. The common risk characteristics used for the pooling of the FNB PCI loans are risk grade and loan collateral type.

        PCI loans showed evidence of credit deterioration that makes it probable that all contractually required principal and interest payments will not be collected. Their fair value was initially based on an estimate of cash flows, both principal and interest, expected to be collected, discounted at prevailing market rates of interest. Management estimated cash flows using key assumptions such as default rates, loss severity rates assuming default, prepayment speeds and estimated collateral values. The excess of cash flows expected to be collected from a loan or pool over its estimated fair value at acquisition is referred to as the accretable yield and is recognized in interest income using an effective yield method over the remaining life of the loan or pool. Subsequent to acquisition, management must update these estimates of cash flows expected to be collected at each reporting date. These updates require the

F-14


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting and Reporting Policies (Continued)

continued use of key assumptions and estimates, similar to those used in the initial estimate of fair value.

        The Bank accretes the discount for PCI loans for which it can predict the timing and amount of cash flows. PCI loans for which a discount is accreted are considered performing.


Allowance for Loan Losses

Originated Loans

        The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management's best estimate of probable losses inherent in the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses inherent in the loan portfolio at the balance sheet date. The allowance for loan losses includes allowance allocations calculated in accordance with the Receivables and Contingencies Topics of the ASC. The level of the allowance reflects management's continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions, and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management's judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Bank's control, including the performance of the Bank's loan portfolio, the economy and changes in interest rates.

        The Bank's allowance for loan losses consists of three elements: (i) specific valuation allowances established for probable losses on impaired loans; (ii) general historical valuation allowances calculated based on historical loan loss experience for homogenous loans with similar collateral; and (iii) valuation allowances to adjust general reserves based on recent economic conditions and other qualitative risk factors both internal and external to the Bank.

Acquired Loans

        Purchased loans acquired in a business combination are recorded at their estimated fair value on their purchase date with no carryover of the related allowance for loan losses. Loans without evidence of credit impairment at acquisition are subsequently evaluated for any required allowance at each reporting date. An allowance for loan losses is calculated using a methodology similar to that described above for originated loans. The allowance as determined for each loan collateral type is compared to the remaining fair value discount for that loan collateral type. If greater, the excess is recognized as an addition to the allowance through a provision for loan losses. If less than the discount, no additional allowance is recorded. Charge-offs and losses first reduce any remaining fair value discount for the loan and once the discount is depleted, losses are applied against the allowance established for that loan.

        For PCI loans, cash flows expected to be collected are recast at each reporting date for each loan or pool. These evaluations require the continued use and updating of key assumptions and estimates such as default rates, loss severity given default and prepayment speed assumptions, similar to those used for the initial fair value estimate. Management judgment must be applied in developing these assumptions. If expected cash flows for a loan or pool decreases, an increase in the allowance for loan losses is made through a charge to the provision for loan losses. If expected cash flows for a loan

F-15


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting and Reporting Policies (Continued)

increase, any previously established allowance for loan losses is reversed and any remaining difference increases the accretable yield which will be taken into income over the remaining life of the loan or pool.


Assets Segregated for Regulatory Purposes

        Under certain conditions, FSC may be required to segregate cash and securities in a special reserve account for the benefit of customers under Rule 15c3-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Assets segregated under the provisions of the Exchange Act are not available for general corporate purposes. At December 31, 2013, FSC was not required to segregate cash and securities. FSC was required to segregate an aggregate of $19.0 million in cash and securities at December 31, 2012, which is included in other assets within the consolidated balance sheets.

        FSC was not required to segregate cash or securities in a special reserve account for the benefit of proprietary accounts of introducing broker-dealers at December 31, 2013 and 2012.


Broker-Dealer and Clearing Organization Transactions

        Amounts recorded in broker-dealer and clearing organization receivables and payables include securities lending activities, as well as amounts related to securities transactions for either FSC customers or for the account of FSC. Securities-borrowed and securities-loaned transactions are generally reported as collateralized financings except where letters of credit or other securities are used as collateral. Securities-borrowed transactions require FSC to deposit cash, letters of credit, or other collateral with the lender. With respect to securities loaned, FSC receives collateral in the form of cash or other assets in an amount generally in excess of the market value of securities loaned. FSC monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as necessary. Interest income and interest expense associated with collateralized financings is included in the accompanying consolidated statements of operations.


Insurance Premiums Receivable

        Insurance premiums receivable include premiums written and not yet collected. NLC routinely evaluates the receivable balance to determine if an allowance for uncollectible amounts is necessary. At December 31, 2013 and 2012, NLC determined that no valuation allowance was necessary.


Deferred Policy Acquisition Costs

        Costs of acquiring insurance vary with and are primarily related to the successful acquisition of new and renewal business, primarily consisting of commissions, premium taxes and underwriting expenses, and are deferred and amortized over the terms of the policies or reinsurance treaties to which they relate. Proceeds from reinsurance transactions that represent recovery of acquisition costs reduce applicable unamortized acquisition costs in such a manner that net acquisition costs are capitalized and charged to expense in proportion to net revenue recognized. Future investment income is considered in determining the recoverability of deferred policy acquisition costs. NLC regularly reviews the categories of acquisition costs that are deferred and assesses the recoverability of this asset. A premium deficiency and a corresponding charge to income is recognized if the sum of the expected loss and loss adjustment expenses, unamortized policy acquisition costs, and maintenance costs exceed

F-16


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting and Reporting Policies (Continued)

related unearned insurance premiums and anticipated investment income. At December 31, 2013 and 2012, there was no premium deficiency.


Reinsurance

        In the normal course of business, NLC seeks to reduce the loss that may arise from catastrophes or other events that could cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with other insurance enterprises or reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the reinsured policy. NLC routinely evaluates the receivable balance to determine if any uncollectible balances exist.

        Net insurance premiums earned, losses and loss adjustment expenses ("LAE") and policy acquisition and other underwriting expenses are reported net of the amounts related to reinsurance ceded to other companies. Amounts recoverable from reinsurers related to the portions of the liability for losses and LAE and unearned insurance premiums ceded to them are included in other assets within the consolidated balance sheets. Reinsurance assumed from other companies, including assumed premiums written and earned and losses and LAE, is accounted for in the same manner as direct insurance written.


Premises and Equipment

        Premises and equipment are stated at cost less accumulated depreciation and amortization computed principally on the straight-line method over the estimated useful lives of the assets, which range between 3 and 40 years. Gains or losses on disposals of premises and equipment are included in results of operations.


FDIC Indemnification Asset

        The Company has elected to account for the FDIC Indemnification Asset in accordance with FASB ASC 805. The FDIC Indemnification Asset is initially recorded at fair value, based on the discounted value of expected future cash flows under the loss-share agreements. The difference between the present value and the undiscounted cash flows the Company expects to collect from the FDIC will be accreted into noninterest income within the consolidated statements of operations over the life of the FDIC Indemnification Asset. The FDIC Indemnification Asset is reviewed quarterly and adjusted for any changes in expected cash flows based on recent performance and expectations for future performance of the covered portfolio. These adjustments are measured on the same basis as the related covered loans and covered OREO. Any increases in cash flow of the covered assets over those expected will reduce the FDIC Indemnification Asset and any decreases in cash flow of the covered assets under those expected will increase the FDIC Indemnification Asset. Any amortization of changes in value is limited to the contractual term of the loss-share agreements. Increases and decreases to the FDIC Indemnification Asset are recorded as adjustments to noninterest income within the consolidated statements of operations over the life of the loss-share agreements.


Covered Other Real Estate Owned

        Acquired OREO subject to FDIC loss-share agreements is referred to as "covered OREO" and reported separately in the consolidated balance sheets. Covered OREO is reported exclusive of expected reimbursement cash flows from the FDIC. Foreclosed covered loan collateral is transferred

F-17


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting and Reporting Policies (Continued)

into covered OREO at the collateral's fair value, less selling costs. Covered OREO was initially recorded at its estimated fair value based on similar market comparable valuations, less estimated selling costs. Subsequently, loan collateral transferred to OREO is recorded at its net realizable value. Any subsequent valuation adjustments due to declines in fair value of the covered OREO will be charged to noninterest expense, and will be partially offset by noninterest income representing the corresponding increase to the FDIC Indemnification Asset for loss reimbursements. Any recoveries of previous valuation decreases will be credited to noninterest expense with a corresponding charge to noninterest income for the portion of the recovery that is due to the FDIC.


Other Real Estate Owned

        Real estate acquired through foreclosure is included in other assets within the consolidated balance sheets and is carried at management's estimate of fair value less costs to sell. Any excess of recorded investment over fair value less cost to sell is charged against the allowance for loan losses when property is initially transferred to OREO. Subsequent to the initial transfer to OREO, valuation adjustments are charged against earnings. Valuation adjustments, revenue and expenses from operations of the properties and resulting gains or losses on sale are included in other noninterest expense within the consolidated statements of operations.


Debt Issuance Costs

        The Company capitalizes debt issuance costs associated with financing of debt. These costs are amortized on a straight-line basis, which approximates the effective interest method, over the repayment term of the loans. Debt issuance costs of $2.3 million, $0.2 million and $0.4 million in 2013, 2012 and 2011 were amortized and included in interest expense within the consolidated statements of operations. In November 2013, the total remaining unamortized balance of $2.1 million was expensed as a result of the redemption of all outstanding 7.5% Senior Exchangeable Notes due 2025 ("the Notes"), as further described in Note 13 to the consolidated financial statements. In 2011, an additional $0.2 million of the unamortized balance was written down as a result of NLC purchasing $6.9 million of the Notes in the open market.


Goodwill

        Goodwill, which represents the excess of cost over the fair value of the net assets acquired, is allocated to reporting units and tested for impairment annually, or whenever events or changes in circumstances indicate that the carrying amount should be assessed. The Company performs required annual impairment tests of its goodwill and other intangible assets as of October 1st for each of its reporting units. Prior to testing goodwill for impairment, the Company has the option to assess on a qualitative basis whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If determined, based on its assessment of qualitative factors that it is more likely than not that fair value of a reporting unit is less than its carrying amount, the Company will proceed to test goodwill for impairment as a part of a two-step process. First, the Company determines the fair value of a reporting unit and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value of that goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to

F-18


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting and Reporting Policies (Continued)

a purchase price allocation. The residual fair value after this allocation is the implied fair value of the reporting unit goodwill.


Intangibles and Other Long-Lived Assets

        Intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. The Company's intangible assets primarily relate to core deposits, trade names, customer and agent relationships and noncompete agreements. Intangible assets with definite useful lives are generally amortized on the straight-line method over their estimated lives, although certain intangibles, including core deposits and customer and agent relationships, are amortized on an accelerated basis. Amortization of intangible assets is recorded in other noninterest expense within the consolidated statements of operations. Intangible assets with indefinite useful lives are tested for impairment annually, or more often if events or circumstances indicate there may be impairment, and not amortized until their lives are determined to be definite. Intangible assets with definite useful lives, premises and equipment, and other long-lived assets are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.


Mortgage Servicing Rights

        The Company determines its classes of residential mortgage servicing assets based on the asset type being serviced along with the methods used to manage the risk inherent in the servicing assets, which includes the market inputs used to value the servicing assets. The Company measures its servicing assets at fair value and reports changes in fair value through earnings. Fair value adjustments that encompass market-driven valuation changes and the runoff in value that occurs from the passage of time are each separately reported.

        Retained mortgage servicing rights ("MSR") are measured at fair value as of the date of sale of the related mortgage loan. Subsequent fair value measurements are determined using a discounted cash flow model. In order to determine the fair value of the MSR, the present value of expected future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income.

        The model assumptions and the MSR fair value estimates are compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys, as available. The expected life of the loan can vary from management's estimates due to prepayments by borrowers, especially when rates fall. Prepayments in excess of management's estimates would negatively impact the recorded value of the MSR. The value of the MSR is also dependent upon the discount rate used in the model, which is based on current market rates. Management reviews this rate on an ongoing basis based on current market rates. A significant increase in the discount rate would reduce the value of the MSR.


Derivative Financial Instruments

        The Company's hedging policies permit the use of various derivative financial instruments, including interest rate lock commitments ("IRLCs"), forward commitments and interest rate swaps, to manage interest rate risk or to hedge specified assets and liabilities. The IRLCs and forward

F-19


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting and Reporting Policies (Continued)

commitments meet the definition of a derivative under the provisions of the Derivatives and Hedging Topic of the ASC.

        Derivatives are recorded at fair value in the consolidated balance sheets. To qualify for hedge accounting, derivatives must be highly effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the derivative contract. If derivative instruments are designated as hedges of fair values, the change in the fair value of both the derivative instrument and the hedged item are included in current earnings. Changes in the fair value of derivatives designated as hedges of cash flows are recorded in other comprehensive income (loss). Actual cash receipts and/or payments and related accruals on derivatives related to hedges are recorded as adjustments to the line item where the hedged item's effect on earnings is recorded.


Reserve for Losses and Loss Adjustment Expenses

        The liability for losses and LAE includes an amount determined from loss reports and individual cases and an amount, based on past experience, for losses incurred but not reported. Such liabilities are necessarily based on estimates and, while management believes that the amount is adequate, the ultimate liability may be in excess of or less than the amounts provided. The methods for making such estimates and for establishing the resulting liability are continually reviewed, and any adjustments are reflected in earnings currently. The liability for losses and loss adjustment expenses has not been reduced for reinsurance recoverable.


Loss Contingencies

        Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.


Stock-Based Compensation

        Stock-based compensation expense for all share-based awards granted is based on the grant date fair value estimated in accordance with the provisions of the Stock Compensation Topic of the ASC. The Company recognizes these compensation costs for only those awards expected to vest over the service period of the award.


Advertising

        Advertising costs are expensed as incurred. Advertising expense totaled $5.3 million, $0.4 million and $34 thousand during 2013, 2012 and 2011, respectively.


Income Taxes

        Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recorded for the estimated future tax effects of the temporary difference between the tax basis and book basis of assets and liabilities reported in the accompanying consolidated balance sheets. The provision for income tax expense or benefit differs from the amounts of income taxes currently payable because certain items of income and expense included in the consolidated financial statements

F-20


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting and Reporting Policies (Continued)

are recognized in different time periods by taxing authorities. Interest and penalties incurred related to tax matters are charged to other interest expense or other noninterest expense, respectively.

        Benefits from uncertain tax positions are recognized in the consolidated financial statements only when it is more likely than not that the tax position will be sustained upon examination by the appropriate taxing authority having full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of cumulative benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold are recognized in the reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold are derecognized in the reporting period in which that threshold is no longer met. The Company has not recorded any significant liabilities for uncertain tax positions.

        Deferred tax assets, including net operating loss and tax credit carry forwards, are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that any portion of these tax attributes will not be realized.


Cash Flow Reporting

        For the purpose of presentation in the consolidated statements of cash flows, cash and cash equivalents are defined as the amount included in the consolidated balance sheets caption "Cash and due from banks" and the portion of the amount in the caption "Federal funds sold and securities purchased under agreements to resell" that represents federal funds sold. Cash equivalents have original maturities of three months or less.


Basic and Diluted Net Income (Loss) Per Share

        Nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and are included in the computation of earnings per share pursuant to the two-class method prescribed by the Earnings Per Share Topic of the ASC. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In May 2013, as discussed in Note 20 to the consolidated financial statements, Hilltop issued restricted stock awards which qualify as participating securities.

        Net earnings, less any preferred dividends accumulated for the period (whether or not declared), is allocated between the common stock and participating securities pursuant to the two-class method. Basic earnings per common share is computed by dividing net earnings available to common shareholders by the weighted average number of common shares outstanding during the period, excluding participating nonvested restricted shares.

        Diluted earnings per common share is computed in a similar manner, except that first the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares, excluding the participating securities, were issued using the treasury stock method. For all periods presented, stock options and redemption of the Notes are the only potentially dilutive non-participating instruments issued by Hilltop. Next, we determine and include in the diluted earnings per common share calculation the more dilutive effect of the

F-21


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

1. Summary of Significant Accounting and Reporting Policies (Continued)

participating securities using the treasury stock method or the two-class method. Undistributed losses are not allocated to the nonvested share-based payment awards (the participating securities) under the two-class method as the holders are not contractually obligated to share in the losses of the Company.

2. Acquisitions

FNB Transaction

        On the Bank Closing Date, the Bank assumed substantially all of the liabilities, including all of the deposits, and acquired substantially all of the assets of FNB from the FDIC in an FDIC-assisted transaction. As part of the P&A Agreement, the Bank and the FDIC entered into loss-share agreements covering future losses incurred on certain acquired loans and OREO. The Company refers to acquired commercial and single family residential loan portfolios and OREO that are subject to the loss-share agreements as "covered loans" and "covered OREO", respectively, and these assets are presented as separate line items in the Company's consolidated balance sheet. Collectively, covered loans and covered OREO are referred to as "covered assets". Pursuant to the loss-share agreements, the FDIC has agreed to reimburse the Bank the following amounts with respect to the covered assets pursuant to the loss-share agreements: (i) 80% of losses on the first $240.4 million of losses incurred; (ii) 0% of losses in excess of $240.4 million up to and including $365.7 million of losses incurred; and (iii) 80% of losses in excess of $365.7 million of losses incurred. The loss-share agreements for commercial and single family residential loans are in effect for 5 years and 10 years, respectively, from the Bank Closing Date and the loss recovery provisions to the FDIC are in effect for 8 years and 10 years, respectively, from the Bank Closing Date.

        In accordance with the loss-share agreements, the Bank may be required to make a "true-up" payment to the FDIC approximately ten years following the Bank Closing Date if the FDIC's initial estimate of losses on covered assets is greater than the actual realized losses. The "true-up" payment is calculated using a defined formula set forth in the P&A Agreement.

        The operations of FNB are included in the Company's operating results beginning September 14, 2013. For the period from September 14, 2013 through December 31, 2013, FNB's operations include net interest income of $32.0 million, other revenues of $20.4 million and net income of $18.5 million. Such operating results include a preliminary bargain purchase gain of $12.6 million, before taxes of $4.5 million, and are not necessarily indicative of future operating results. FNB's results of operations prior to the Bank Closing Date are not included in the Company's consolidated operating results.

        Transaction-related expenses of $0.1 million associated with the FNB Transaction are included in noninterest expense within the consolidated statement of operations for the year ended December 31, 2013. Such expenses were for professional services and other incremental costs associated with the integration of FNB's operations.

        The FNB Transaction was accounted for using the purchase method of accounting and, accordingly, purchased assets, including identifiable intangible assets and assumed liabilities, were recorded at their respective Bank Closing Date fair values using significant estimates and assumptions to value certain identifiable assets acquired and liabilities assumed. During the quarter ended December 31, 2013, the estimated fair values of certain identifiable assets acquired and liabilities assumed as of the Bank Closing Date were adjusted as a result of additional information obtained primarily related to the fair values of loans, covered OREO, FDIC Indemnification Asset, premises and

F-22


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

2. Acquisitions (Continued)

equipment and other intangible assets. Due to the short time period between the Bank Closing Date and December 31, 2013, the real estate appraisal validation exercise remains outstanding and the Bank Closing Date valuations related to covered OREO and FDIC Indemnification Asset are considered preliminary and could differ significantly when finalized. The amounts are also subject to adjustments based upon final settlement with the FDIC. The terms of the P&A Agreement provide for the FDIC to indemnify the Bank against claims with respect to liabilities and assets of FNB or any of its affiliates not assumed or otherwise purchased by the Bank and with respect to certain other claims by third parties.

        A summary of the net assets received from the FDIC in the FNB Transaction and the estimated fair value adjustments resulting in the bargain purchase gain are presented below (in thousands).

Cost basis net assets on September 13, 2013

  $ 215,000  

Cash payment received from the FDIC

    45,000  

Fair value adjustments:

       

Securities

    (3,341 )

Loans

    (343,068 )

Premises and equipment

    3,565  

Other real estate owned

    (79,273 )

FDIC indemnification asset

    185,680  

Other intangible assets

    4,270  

Deposits

    (8,282 )

Other

    (6,966 )
       

Bargain purchase gain

  $ 12,585  
       
       

        In FDIC-assisted transactions, only certain assets and liabilities are transferred to the acquirer and, depending on the nature and amount of the acquirer's bid, the FDIC may be required to make a cash payment to the acquirer or the acquirer may be required to make a payment to the FDIC. In the FNB Transaction, cost basis net assets of $215.0 million and an initial cash payment received from the FDIC of $45.0 million were transferred to the Bank. This initial cash payment from the FDIC is subject to adjustment and settlement. The bargain purchase gain represents the excess of the estimated fair value of the assets acquired over the estimated fair value of the liabilities assumed.

        The FDIC bid form provided a list of properties (branches and support facilities) owned by FNB for sale at fixed prices. The Bank purchased 44 properties owned by FNB in connection with its bid for an aggregate purchase price of $59.5 million. For those properties owned by FNB that the Bank declined to purchase in its bid, the Bank had exclusive options to purchase those properties following the Bank Closing Date. In connection with those options, the Bank purchased an additional seven properties owned by FNB, for an aggregate purchase price of $4.9 million. The Bank also had an option to assume the leases of properties leased by FNB. The Bank was required to purchase all data management equipment and, other certain special assets, furniture, fixtures and equipment, in each case at an appraised value at any properties purchased or leased by the Bank. The Bank paid $10.3 million to the FDIC for furniture, fixtures and data management equipment. The Bank is required to pay rent to the FDIC on properties owned or leased by FNB and furniture and equipment at such properties until it surrenders such properties to the FDIC.

F-23


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

2. Acquisitions (Continued)

        The resulting fair values of the identifiable assets acquired, and liabilities assumed, of FNB at September 13, 2013 are summarized in the following table (in thousands).

Cash and due from banks

  $ 362,695  

Securities

    286,214  

Non-covered loans

    42,884  

Covered loans

    1,116,583  

Premises and equipment

    78,399  

FDIC indemnification asset

    185,680  

Covered other real estate owned

    135,187  

Other assets

    26,300  

Other intangible assets

    4,270  
       

Total identifiable assets acquired

    2,238,212  

Deposits

   
(2,211,740

)

Other liabilities

    (13,887 )
       

Total liabilities assumed

    (2,225,627 )
       

Net identifiable assets acquired/bargain purchase gain

  $ 12,585  
       
       

        The Bank acquired loans both with and without evidence of credit quality deterioration since origination. Based on purchase date valuations, the Bank's portfolio of acquired loans had a fair value of $1.2 billion as of the Bank Closing Date, with no carryover of any allowance for loan losses. Acquired loans were segregated between those considered to be PCI loans and those without credit impairment at acquisition. The following table presents details on acquired loans at the Bank Closing Date (in thousands).

 
  Loans, excluding
PCI Loans
  PCI
Loans
  Total
Loans
 

Commercial and industrial

  $ 47,874   $ 47,751   $ 95,625  

Real estate

    242,998     611,219     854,217  

Construction and land development

    26,669     158,247     184,916  

Consumer

    19,095     5,614     24,709  
               

Total

  $ 336,636   $ 822,831   $ 1,159,467  
               
               

        The following table presents information about the acquired PCI loans at the Bank Closing Date (in thousands).

Contractually required principal and interest payments

  $ 1,533,667  

Nonaccretable difference

    542,241  
       

Cash flows expected to be collected

    991,426  

Accretable difference

    168,595  
       

Fair value of loans acquired with a deterioration of credit quality

  $ 822,831  
       
       

F-24


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

2. Acquisitions (Continued)

        The following table presents information about the acquired loans without credit impairment at the Bank Closing Date (in thousands).

Contractually required principal and interest payments

  $ 466,754  

Contractual cash flows not expected to be collected

    43,783  

Fair value at acquisition

    336,636  

PlainsCapital Merger

        After the close of business on November 30, 2012, Hilltop acquired PlainsCapital Corporation in a stock and cash transaction. PlainsCapital Corporation merged with and into a wholly owned subsidiary, which continued as the surviving entity under the name "PlainsCapital Corporation". Based on Hilltop's closing stock price on November 30, 2012, the total purchase price was $813.5 million, consisting of 27.1 million shares of common stock, $311.8 million in cash and the issuance of 114,068 shares of Hilltop Non-Cumulative Perpetual Preferred Stock, Series B (the "Hilltop Series B Preferred Stock") in exchange on a one-for-one basis for the outstanding shares of PlainsCapital Non-Cumulative Perpetual Preferred Stock, Series C, all of which were held by the United States Department of the Treasury (the "U.S. Treasury"). The fair value of assets acquired, excluding goodwill, totaled $6.5 billion, including $3.2 billion of loans, $730.8 million of investment securities and $70.7 million of identifiable intangibles. The fair value of the liabilities assumed was $5.9 billion, including $4.5 billion of deposits.

        The PlainsCapital Merger was accounted for using the purchase method of accounting, and accordingly, purchased assets, including identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair values. The components of the consideration paid are shown in the following table (in thousands).

Fair value of consideration paid:

       

Common stock issued

  $ 387,584  

Preferred stock issued

    114,068  

Cash

    311,805  
       

Total consideration paid

  $ 813,457  
       
       

F-25


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

2. Acquisitions (Continued)

        The resulting fair values of the identifiable assets acquired, and liabilities assumed, of PlainsCapital at December 1, 2012 are summarized in the following table (in thousands).

Cash and due from banks

  $ 393,132  

Federal funds sold and securities purchased agreements to resell

    84,352  

Securities

    730,779  

Loans held for sale

    1,520,833  

Loans, net

    3,195,309  

Broker-dealer and clearing organization receivables

    149,457  

Premises and equipment

    96,886  

Other intangible assets

    70,650  

Other assets

    241,876  
       

Total identifiable assets acquired

    6,483,274  

Deposits

   
4,463,069
 

Broker-dealer and clearing organization payables

    263,894  

Short-term borrowings

    914,062  

Notes payable

    10,855  

Junior subordinated debentures

    67,012  

Other liabilities

    180,998  
       

Total liabilities assumed

    5,899,890  
       

Net identifiable assets acquired

    583,384  

Goodwill resulting from the acquisition

    230,073  
       

Net assets acquired

  $ 813,457  
       
       

        For further information regarding goodwill recorded in connection with the PlainsCapital Merger, refer to Note 9, Goodwill and Other Intangible Assets.

        Expenses of $6.6 million associated with the PlainsCapital Merger are included in noninterest expense within the consolidated statement of operations for 2012. Such expenses were for professional services and other incremental costs associated with the integration of PlainsCapital's operations.

        In connection with the PlainsCapital Merger, Hilltop acquired loans both with and without evidence of credit quality deterioration since origination. The acquired loans were initially recorded at fair value with no carryover of any allowance for loan losses. Acquired loans were segregated between

F-26


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

2. Acquisitions (Continued)

those considered to be PCI loans and those without credit impairment at acquisition. The following table presents details on acquired loans at the acquisition date (in thousands).

 
  Loans,
excluding
PCI Loans
  PCI
Loans
  Total
Loans
 

Commercial and industrial

  $ 1,684,706   $ 74,911   $ 1,759,617  

Real estate

    1,077,295     63,866     1,141,161  

Construction and land development

    232,313     34,008     266,321  

Consumer

    28,131     79     28,210  
               

Total

  $ 3,022,445   $ 172,864   $ 3,195,309  
               
               

        The following table presents information about the PCI loans at acquisition (in thousands).

Contractually required principal and interest payments

  $ 252,818  

Nonaccretable difference

    61,527  
       

Cash flows expected to be collected

    191,291  

Accretable difference

    18,427  
       

Fair value of loans acquired with a deterioration of credit quality

  $ 172,864  
       
       

        The following table presents information about the acquired loans without credit impairment at acquisition (in thousands).

Contractually required principal and interest payments

  $ 3,498,554  

Contractual cash flows not expected to be collected

    92,526  

Fair value at acquisition

    3,022,445  

Pro Forma Results of Operations

        The purchase of assets and assumption of certain liabilities of FNB from the FDIC, as receiver, was significant at a level to require disclosure of historical financial statements and related pro forma financial disclosure. An essential part of the transaction is the federal financial assistance governed by the P&A Agreement with the FDIC, which is not reflective of the previous operations of FNB. The nature and magnitude of the FNB Transaction, coupled with the federal assistance, substantially reduces the relevance of historical financial information of FNB when considering the assessment of the historical financial information relative to future operations. Because the Company believes that the continuity of FNB's historical operations is substantially lacking after the FNB Transaction and pro forma information is not reasonably available, the Company has omitted certain historical financial information and the related pro forma financial information of FNB pursuant to the guidance provided in Staff Accounting Bulletin Topic 1.K, Financial Statements of Acquired Troubled Financial Institutions ("SAB 1:K"), and a request for relief granted by the SEC. SAB 1:K provides relief from the requirements of Rule 3-05 of Regulation S-X in certain instances, such as the FNB Transaction, where a registrant engages in an acquisition of a significant amount of assets of a troubled financial institution that involves pervasive federal assistance and audited financial statements of the troubled

F-27


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

2. Acquisitions (Continued)

financial institution are not reasonably available. Therefore, no additional historical pro forma information regarding FNB is provided below.

        The results of operations acquired in the PlainsCapital Merger have been included in the Company's consolidated financial results since December 1, 2012. The following table discloses the impact of PlainsCapital (excluding the impact of acquisition-related merger and restructuring charges discussed below) since the acquisition date through December 31, 2012.

        The table also presents pro forma results had the PlainsCapital Merger taken place on January 1, 2011 (in thousands), and includes the estimated impact of purchase accounting adjustments. The purchase accounting adjustments reflect the impact of recording the acquired loans at fair value, including the estimated accretion of the purchase discount on the loan portfolio. Accretion estimates were based on the acquisition date purchase discount on the loan portfolio, as it was not practicable to determine the amount of discount that would have been recorded based on economic conditions that existed on January 1, 2011. The pro forma results do not include any potential operating cost savings as a result of the PlainsCapital Merger. Further, certain costs associated with any restructuring or integration activities are also not reflected in the pro forma results. Pro forma results include any acquisition-related merger and restructuring charges incurred during the period. The pro forma results are not indicative of what would have occurred had the PlainsCapital Merger taken place on the indicated date.

 
   
  Pro Forma Combined  
 
  PlainsCapital  
 
  Twelve Months Ended
December 31,
 
 
  Acquisition Date
through
December 31,
2012
 
 
  2012   2011  

Net interest income

  $ 24,029   $ 221,635   $ 225,436  

Other revenues

    70,085     901,347     616,582  

Net income

    8,361     75,138     63,067  

3. Fair Value Measurements

Fair Value Measurements and Disclosures

        The Company determines fair values in compliance with The Fair Value Measurements and Disclosures Topic of the ASC (the "Fair Value Topic"). The Fair Value Topic defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. The Fair Value Topic defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Fair Value Topic assumes that transactions upon which fair value measurements are based occur in the principal market for the asset or liability being measured. Further, fair value measurements made under the Fair Value Topic exclude transaction costs and are not the result of forced transactions.

        The Fair Value Topic creates a fair value hierarchy that classifies fair value measurements based upon the inputs used in valuing the assets or liabilities that are the subject of fair value measurements. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs, as indicated below.

F-28


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

3. Fair Value Measurements (Continued)

Fair Value Option

        The Company has elected to measure substantially all of PrimeLending's mortgage loans held for sale at fair value and MSR, and certain time deposits at the Bank under the provisions of the Fair Value Option. The Company elected to apply the provisions of the Fair Value Option to these items so that it would have the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company determines the fair value of the financial instruments accounted for under the provisions of the Fair Value Option in compliance with the provisions of the Fair Value Topic of the ASC discussed above.

        At December 31, 2013, the aggregate fair value of PrimeLending's mortgage loans held for sale accounted for under the Fair Value Option was $1.09 billion, and the unpaid principal balance of those loans was $1.07 billion. At December 31, 2012, the aggregate fair value of PrimeLending's mortgage loans held for sale accounted for under the Fair Value Option was $1.40 billion, and the unpaid principal balance of those loans was $1.36 billion. The interest component of fair value is reported as interest income on loans in the accompanying consolidated statements of operations.

        The Company holds a number of financial instruments that are measured at fair value on a recurring basis, either by the application of the Fair Value Option or other authoritative pronouncements. The fair values of those instruments are determined primarily using Level 2 inputs, as further described below. Those inputs include quotes from mortgage loan investors and derivatives dealers, data from independent pricing services and rates paid in the brokered certificate of deposit market.

        Cash and Cash Equivalents—For cash and due from banks and federal funds sold, the carrying amount is a reasonable estimate of fair value.

        Available For Sale Securities—Most securities available for sale are reported at fair value using Level 2 inputs. The Company obtains fair value measurements from independent pricing services. As the Company is responsible for the determination of fair value, control processes are designed to ensure that the fair values received from independent pricing services are reasonable and the valuation techniques and assumptions used appear reasonable and consistent with prevailing market conditions. The fair value measurements consider observable data that may include dealer quotes, market spreads,

F-29


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

3. Fair Value Measurements (Continued)

cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the financial instruments' terms and conditions, among other things. For public common and preferred equity stocks, the determination of fair value uses Level 1 inputs based on observable market transactions. Regarding the note receivable and warrants, the determination of fair value uses Level 3 inputs such as internal or external fund manager valuations based on unobservable inputs including recent filings, operating results, balance sheet stability, growth and other business and market sector fundamentals.

        Trading Securities—Trading securities are reported at fair value using either Level 1 or Level 2 inputs in the same manner as discussed previously for securities available for sale.

        Loans Held for Sale—Mortgage loans held for sale are reported at fair value, as discussed above, using Level 2 inputs that consist of commitments on hand from investors or prevailing market prices. These instruments are held for relatively short periods, typically no more than 30 days. As a result, changes in instrument-specific credit risk are not a significant component of the change in fair value. Mortgage loans that are non-performing, including monitored loans, are reported at fair value using Level 3 inputs. These loans were previously valued using Level 2 inputs. However, refinements made during 2013 to the fair value inputs for these loans resulted in the use of significant unobservable inputs.

        Deposits—As discussed previously, certain time deposits are reported at fair value by virtue of an election under the provisions of Fair Value Option. Fair values are determined using Level 2 inputs that consist of observable rates paid on instruments of the same tenor in the brokered certificate of deposit market.

        Derivatives—Derivatives are reported at fair value using either Level 2 or Level 3 inputs. PlainsCapital uses dealer quotes to determine the fair value of interest rate swaps used to hedge time deposits. PrimeLending and FSC use dealer quotes to value forward purchase commitments and forward sale commitments, respectively, executed for both hedging and non-hedging purposes. PrimeLending also issues IRLCs to its customers and FSC issues forward purchase commitments to its clients that are valued based on the change in the fair value of the underlying mortgage loan from inception of the IRLC or purchase commitment to the balance sheet date, adjusted for projected loan closing rates. PrimeLending determines the value of the underlying mortgage loan as discussed in "Loans Held for Sale", above. FSC determines the value of the underlying mortgage loan from prices of comparable securities used to value forward sale commitments. Additionally, First Southwest entered into a derivative option agreement ("Fee Award Option").

        Mortgage servicing asset—The mortgage servicing asset is reported at fair value using Level 3 inputs. Fair value is determined by projecting net servicing cash flows, which are then discounted to estimate the fair value. The fair value of the mortgage servicing asset is impacted by a variety of factors, including prepayment assumptions, discount rates, delinquency rates, contractually specified servicing fees, servicing costs and underlying portfolio characteristics.

F-30


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

3. Fair Value Measurements (Continued)

        The following tables present information regarding financial assets and liabilities measured at fair value on a recurring basis (in thousands).

December 31, 2013
  Level 1
Inputs
  Level 2
Inputs
  Level 3
Inputs
  Total
Fair Value
 

Cash and cash equivalents

  $ 746,023   $   $   $ 746,023  

Trading securities

    33     58,813         58,846  

Available for sale securities

    22,079     1,121,011     60,053     1,203,143  

Loans held for sale

        1,061,310     27,729     1,089,039  

Derivative assets

        23,564         23,564  

Mortgage servicing asset

            20,149     20,149  

Trading liabilities

        46         46  

Derivative liabilities

        139     5,600     5,739  

 

December 31, 2012
  Level 1
Inputs
  Level 2
Inputs
  Level 3
Inputs
  Total
Fair Value
 

Cash and cash equivalents

  $ 726,460   $   $     726,460  

Trading securities

        90,113         90,113  

Available for sale securities

    20,428     914,248     56,277     990,953  

Loans held for sale

        1,400,737         1,400,737  

Derivative assets

        15,697         15,697  

Mortgage servicing asset

            2,080     2,080  

Time deposits

        1,073         1,073  

Trading liabilities

        3,164         3,164  

Derivative liabilities

        1,080     4,490     5,570  

F-31


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

3. Fair Value Measurements (Continued)

        The following table includes a rollforward for those financial instruments measured at fair value using Level 3 inputs (in thousands).

 
   
   
   
   
  Total Gains or Losses
(Realized or Unrealized)
   
 
 
  Balance at
Beginning of
Period
  Purchases   Sales   Transfers
into Level 3
  Included in
Net Income
(Loss)
  Included in
Other
Comprehensive
Income
(Loss)
  Balance at
End of
Period
 

Year ended December 31, 2013

                                           

Available for sale securities

  $ 56,277   $   $   $   $ 2,166   $ 1,610   $ 60,053  

Loans held for sale

                27,729             27,729  

Mortgage servicing asset

    2,080     13,886             4,183         20,149  

Derivative liabilities

    (4,490 )               (1,110 )       (5,600 )
                               

Total

  $ 53,867   $ 13,886   $   $ 27,729   $ 5,239   $ 1,610   $ 102,331  
                               
                               

Year ended December 31, 2012

                                           

Available for sale securities

  $ 60,377   $   $   $   $ 1,867   $ (5,967 ) $ 56,277  

Mortgage servicing asset

        1,890             190         2,080  

Derivative liabilities

        (4,455 )           (35 )       (4,490 )
                               

Total

  $ 60,377   $ (2,565 ) $   $   $ 2,022   $ (5,967 ) $ 53,867  
                               
                               

Year ended December 31, 2011

                                           

Available for sale securities

  $   $ 50,000   $   $   $ 709   $ 9,668   $ 60,377  
                               

Total

  $   $ 50,000   $   $   $ 709   $ 9,668   $ 60,377  
                               
                               

        All net unrealized gains (losses) in the table above are reflected in the accompanying consolidated financial statements. The unrealized gains (losses) relate to financial instruments still held at December 31, 2013. The available for sale securities noted in the table above reflect Hilltop's note receivable and warrant to purchase common stock of SWS Group, Inc. ("SWS") as discussed in Note 4 to the consolidated financial statements.

        Hilltop's note receivable is valued using a cash flow model that estimates yield based on comparable securities in the market. The interest rate used to discount cash flows is the most significant unobservable input. An increase or decrease in the discount rate would result in a corresponding decrease or increase, respectively, in the fair value measurement of the note receivable.

        The warrant is valued utilizing a binomial model. The underlying SWS common stock price and its related volatility, an unobservable input, are the most significant inputs into the model, and, therefore, decreases or increases to the SWS common stock price would result in a significant change in the fair value measurement of the warrant.

        Loans held for sale, including monitored mortgage loans, are valued using commitments on hand from investors or prevailing market prices.

        The mortgage servicing asset is valued by projecting net servicing cash flows, which are then discounted to estimate the fair value. The fair value of the mortgage servicing asset is impacted by a

F-32


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

3. Fair Value Measurements (Continued)

variety of factors, including prepayment assumptions, discount rates, delinquency rates, contractually specified servicing fees, servicing costs and underlying portfolio characteristics.

        Derivative liabilities in the tables above include a Fee Award Option valued using discounted cash flows and probability of exercise.

        The Company had no transfers between Levels 1 and 2 during the periods presented.

        The following table presents the changes in fair value for instruments that are reported at fair value under the Fair Value Option (in thousands).

 
  Changes in Fair Value for Assets and Liabilities Reported at Fair Value under Fair Value Option  
 
  Year Ended December 31, 2013   Year Ended December 31, 2012  
 
  Net Gains
(Losses) from
Sale of Loans
  Other
Noninterest
Income
  Total
Changes in
Fair Value
  Net Gains
(Losses) from
Sale of Loans
  Other
Noninterest
Income
  Total
Changes in
Fair Value
 

Loans held for sale

  $ (19,353 ) $   $ (19,353 ) $ (3,297 ) $   $ (3,297 )

Mortgage servicing asset

    18,069         18,069     190         190  

Time deposits

        12     12         7     7  

        The Company also determines the fair value of certain assets and liabilities on a non-recurring basis. In particular, the fair value of all of the assets and liabilities purchased in the PlainsCapital Merger was determined at the acquisition date, while fair value of all assets acquired and liabilities assumed in the FNB Transaction was determined at the Bank Closing Date. In addition, facts and circumstances may dictate a fair value measurement when there is evidence of impairment. Assets and liabilities measured on a non-recurring basis include the items discussed below.

        Impaired Loans—The Company reports impaired loans based on the underlying fair value of the collateral through specific allowances within the allowance for loan losses. The Company acquired PCI loans with a fair value of $172.9 million and $822.8 million upon completion of the PlainsCapital Merger and the FNB Transaction, respectively. Substantially all PCI loans acquired in the FNB Transaction are covered by FDIC loss-share agreements. The fair value of PCI loans was determined using Level 3 inputs, including estimates of expected cash flows that incorporated assumptions regarding default rates, loss severity rates assuming default, prepayment speeds and estimated collateral values. At December 31, 2013, non-covered PCI loans with a carrying amount of $100.4 million had been reduced by specific allowances within the allowance for non-covered loan losses of $3.1 million, resulting in a reported value of $97.3 million that approximates fair value. At December 31, 2013, covered PCI loans with a carrying amount of $729.2 million had been reduced by specific allowances within the allowance for covered loan losses of $0.9 million, resulting in a reported value of $728.3 million.

        Other Real Estate Owned—The Company reports OREO at fair value less estimated cost to sell. Any excess of recorded investment over fair value, less cost to sell, is charged against the allowance for loan losses when property is initially transferred to OREO. Subsequent to the initial transfer to OREO, downward valuation adjustments are charged against earnings. The Company determines fair value primarily using independent appraisals of OREO properties. The resulting fair value measurements are classified as Level 2 or Level 3 inputs, depending upon the extent to which unobservable inputs determine the fair value measurement. The Company considers a number of factors in determining the

F-33


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

3. Fair Value Measurements (Continued)

extent to which specific fair value measurements utilize unobservable inputs, including, but not limited to, the inherent subjectivity in appraisals, the length of time elapsed since the receipt of independent market price or appraised value, and current market conditions. In the FNB Transaction, the Bank acquired OREO of $135.2 million, all of which is covered by an FDIC loss-share agreement. At December 31, 2013, the estimated fair value of covered OREO was $142.8 million, and the underlying fair value measurements utilize Level 3 inputs. The fair value of non-covered OREO at December 31, 2013 and 2012 was $4.8 million and $11.1 million, respectively, and is included in other assets within the consolidated balance sheets. During the reported periods, all fair value measurements for non-covered OREO utilized Level 2 inputs.

        The Fair Value of Financial Instruments Subsection of the ASC requires disclosure of the fair value of financial assets and liabilities, including the financial assets and liabilities previously discussed. The methods for determining estimated fair value for financial assets and liabilities measured at fair value on a recurring or non-recurring basis are discussed above. For other financial assets and liabilities, the Company utilizes quoted market prices, if available, to estimate the fair value of financial instruments. Because no quoted market prices exist for a significant portion of the Company's financial instruments, the fair value of such instruments has been derived based on management's assumptions with respect to future economic conditions, the amount and timing of future cash flows, and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the estimates provided herein do not necessarily indicate amounts which could be realized in a current transaction. Further, as it is management's intent to hold a significant portion of its financial instruments to maturity, it is not probable that the fair values shown below will be realized in a current transaction.

        Because of the wide range of permissible valuation techniques and the numerous estimates which must be made, it may be difficult to make reasonable comparisons of the Company's fair value information to that of other financial institutions. The aggregate estimated fair value amount should in no way be construed as representative of the underlying value of Hilltop and its subsidiaries. The following methods and assumptions are typically used in estimating the fair value disclosures for financial instruments:

        Loans—The fair value of non-covered and covered loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

        Broker-Dealer and Clearing Organization Receivables—The carrying amount approximates their fair value.

        FDIC Indemnification Asset—The fair value of the FDIC Indemnification Asset is based on Level 3 inputs, including the discounted value of expected future cash flows under the loss-share agreements. The discount rate contemplates the credit worthiness of the FDIC as counterparty to this asset, and considers an incremental discount rate risk premium reflective of the inherent uncertainty associated with the timing of the cash flows.

F-34


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

3. Fair Value Measurements (Continued)

        Deposit Liabilities—The estimated fair value of demand deposits, savings accounts and NOW accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. The carrying amount for variable-rate certificates of deposit approximates their fair values.

        Broker-Dealer and Clearing Organization Payables—The carrying amount approximates their fair value.

        Short-Term Borrowings—The carrying amounts of federal funds purchased, borrowings under repurchase agreements and other short-term borrowings approximate their fair values.

        Debt—The fair values are estimated using discounted cash flow analysis based on current incremental borrowing rates for similar types of borrowing arrangements.

        The following table presents the carrying values and estimated fair values of financial instruments (in thousands).

 
   
  Estimated Fair Value  
December 31, 2013
  Carrying
Amount
  Level 1
Inputs
  Level 2
Inputs
  Level 3
Inputs
  Total  

Financial assets:

                               

Non-covered loans, net

  $ 3,481,405   $   $ 281,712   $ 3,119,319   $ 3,401,031  

Covered loans, net

    1,005,308             997,371     997,371  

Broker-dealer and clearing organization receivables

    119,317         119,317         119,317  

FDIC indemnification asset

    188,291             188,291     188,291  

Other assets

    66,055         43,946     22,109     66,055  

Financial liabilities:

   
 
   
 
   
 
   
 
   
 
 

Deposits

    6,722,019         6,722,909         6,722,909  

Broker-dealer and clearing organization payables

    129,678         129,678         129,678  

Short-term borrowings

    342,087         342,087         342,087  

Debt

    123,339         114,671         114,671  

Other liabilities

    3,362         3,362         3,362  

F-35


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

3. Fair Value Measurements (Continued)

 

 
   
  Estimated Fair Value  
December 31, 2012
  Carrying
Amount
  Level 1
Inputs
  Level 2
Inputs
  Level 3
Inputs
  Total  

Financial assets:

                               

Non-covered loans, net

  $ 3,148,987   $   $   $ 3,148,987   $ 3,148,987  

Broker-dealer and clearing organization receivables

    145,564         145,564         145,564  

Other assets

    59,094         59,094         59,094  

Financial liabilities:

   
 
   
 
   
 
   
 
   
 
 

Deposits

    4,700,461         4,698,848         4,698,848  

Broker-dealer and clearing organization payables

    187,990         187,990         187,990  

Short-term borrowings

    728,250         728,250         728,250  

Debt

    208,551         217,092         217,092  

Other liabilities

    4,400         4,400         4,400  

        The deferred income amounts arising from unrecognized financial instruments are not significant. These financial instruments also have contractual interest rates at or above current market rates. Therefore, no fair value disclosure is provided for these items.

4. Securities

        The amortized cost and fair value of available for sale securities are summarized as follows (in thousands).

December 31, 2013
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair Value  

U.S. Treasury securities

  $ 43,684   $ 82   $ (238 ) $ 43,528  

U.S. government agencies:

                         

Bonds

    717,909     550     (55,727 )   662,732  

Residential mortgage-backed securities

    59,936     735     (584 )   60,087  

Collateralized mortgage obligations

    124,502     349     (4,390 )   120,461  

Corporate debt securities

    72,376     4,610     (378 )   76,608  

States and political subdivisions

    162,955     388     (6,508 )   156,835  

Commercial mortgage-backed securities

    691     69         760  

Equity securities

    20,067     2,012         22,079  

Note receivable

    42,674     5,235         47,909  

Warrant

    12,068     76         12,144  
                   

Totals

  $ 1,256,862   $ 14,106   $ (67,825 ) $ 1,203,143  
                   
                   

F-36


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

4. Securities (Continued)

 

December 31, 2012
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair Value  

U.S. Treasury securities

  $ 7,046   $ 141   $ (2 ) $ 7,185  

U.S. government agencies:

                         

Bonds

    524,888     1,663     (314 )   526,237  

Residential mortgage-backed securities

    18,473     490     (70 )   18,893  

Collateralized mortgage obligations

    97,812     191     (79 )   97,924  

Corporate debt securities

    79,716     7,461         87,177  

States and political subdivisions

    177,701     196     (2,138 )   175,759  

Commercial mortgage-backed securities

    1,001     72         1,073  

Equity securities

    19,289     1,139         20,428  

Note receivable

    40,508     3,652         44,160  

Warrant

    12,068     49         12,117  
                   

Totals

  $ 978,502   $ 15,054   $ (2,603 ) $ 990,953  
                   
                   

        Available for sale equity securities includes 1,475,387 shares of SWS common stock, a $50.0 million aggregate principal amount note issued by SWS and a warrant to purchase 8,695,652 shares of SWS common stock. SWS issued the note in July 2011 under a credit agreement pursuant to a senior unsecured loan from Hilltop. The note bears interest at a rate of 8.0% per annum, is prepayable by SWS subject to certain conditions after three years, and has a maturity of five years. The warrant provides for the purchase of 8,695,652 shares of SWS common stock at an exercise price of $5.75 per share, subject to anti-dilution adjustments. If the warrant was fully exercised, Hilltop would beneficially own 24.4% of SWS.

F-37


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

4. Securities (Continued)

        Information regarding available for sale securities that were in an unrealized loss position is shown in the following table (dollars in thousands).

 
  December 31, 2013   December 31, 2012  
 
  Number of
Securities
  Fair Value   Unrealized
Losses
  Number of
Securities
  Fair Value   Unrealized
Losses
 

U.S. treasury securities:

                                     

Unrealized loss for less than twelve months

    6   $ 12,748   $ 238     2   $ 2,427   $ 2  

Unrealized loss for twelve months or longer

                         
                           

    6     12,748     238     2     2,427     2  

U.S. government agencies:

                                     

Bonds:

                                     

Unrealized loss for less than twelve months

    35     526,817     45,274     14     236,305     314  

Unrealized loss for twelve months or longer

    5     90,931     10,453              
                           

    40     617,748     55,727     14     236,305     314  

Residential mortgage-backed securities:

                                     

Unrealized loss for less than twelve months

    2     2,194     54     7     12,279     70  

Unrealized loss for twelve months or longer

    3     9,309     530              
                           

    5     11,503     584     7     12,279     70  

Collateralized mortgage obligations:

                                     

Unrealized loss for less than twelve months

    7     84,054     4,320     8     38,887     79  

Unrealized loss for twelve months or longer

    2     4,995     70              
                           

    9     89,049     4,390     8     38,887     79  

Corporate debt securities:

                                     

Unrealized loss for less than twelve months

    7     10,754     378              

Unrealized loss for twelve months or longer

                         
                           

    7     10,754     378              

States and political subdivisions:

                                     

Unrealized loss for less than twelve months

    46     30,245     669     225     156,664     2,138  

Unrealized loss for twelve months or longer

    150     96,882     5,839              
                           

    196     127,127     6,508     225     156,664     2,138  

Total available for sale:

                                     

Unrealized loss for less than twelve months

    103     666,812     50,933     256     446,562     2,603  

Unrealized loss for twelve months or longer

    160     202,117     16,892              
                           

    263   $ 868,929   $ 67,825     256   $ 446,562   $ 2,603  
                           
                           

        During 2013, 2012 and 2011, the Company did not record any other-than-temporary impairments. While all of the investments are monitored for potential other-than-temporary impairment, the Company's analysis and experience indicate that these available for sale investments generally do not present a great risk of other-than-temporary-impairment, as fair value should recover over time. Factors considered in the Company's analysis include the reasons for the unrealized loss position, the severity and duration of the unrealized loss position, credit worthiness, and forecasted performance of the investee. While some of the securities held in the investment portfolio have decreased in value since the date of acquisition, the severity of loss and the duration of the loss position are not believed to be significant enough to warrant other-than-temporary impairment of the securities. The Company does not intend, nor is it likely that the Company will be required, to sell these securities before the recovery of the cost basis. Therefore, management does not believe any other-than-temporary impairments exist at December 31, 2013.

        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

F-38


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

4. Securities (Continued)

securities, excluding trading and available for sale equity securities and the available for sale warrant, at December 31, 2013 are shown by contractual maturity below (in thousands).

 
  Amortized
Cost
  Fair Value  

Due in one year or less

  $ 125,804   $ 125,881  

Due after one year through five years

    115,950     125,245  

Due after five years through ten years

    70,173     70,280  

Due after ten years

    727,671     666,206  
           

    1,039,598     987,612  

Residential mortgage-backed securities

   
59,936
   
60,087
 

Collateralized mortgage obligations

    124,502     120,461  

Commercial mortgage-backed securities

    691     760  
           

  $ 1,224,727   $ 1,168,920  
           
           

        The Company realized net losses from its trading securities portfolio of $2.8 million and $0.7 million during the year ended December 31, 2013 and the month of December 31, 2012, respectively, which are recorded as a component of other noninterest income within the consolidated statements of operations.

        Securities with a carrying amount of $1.0 billion and $635.2 million (with a fair value of $938.1 million and $633.4 million) at December 31, 2013 and 2012, respectively, were pledged to secure public and trust deposits, federal funds purchased and securities sold under agreements to repurchase, and for other purposes as required or permitted by law.

        Mortgage-backed securities and collateralized mortgage obligations consist principally of Government National Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") pass-through and participation certificates. GNMA securities are guaranteed by the full faith and credit of the United States, while FNMA and FHLMC securities are fully guaranteed by those respective United States government-sponsored agencies, and conditionally guaranteed by the full faith and credit of the United States.

        At December 31, 2013 and 2012, NLC had investments on deposit in custody for various state insurance departments with carrying values of $9.4 million and $9.3 million, respectively.

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses

        Non-covered loans refer to loans not covered by the FDIC loss-share agreements. The non-covered loan portfolio at December 31, 2013 includes loans acquired as a part of the FNB Transaction totaling $53.4 million, of which $7.2 million are categorized as non-covered PCI loans. Covered loans are

F-39


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses (Continued)

discussed in Note 6 to the consolidated financial statements. Non-covered loans summarized by portfolio segment are as follows (in thousands).

 
  December 31,  
 
  2013   2012  

Commercial and industrial

  $ 1,637,266   $ 1,660,293  

Real estate

    1,457,253     1,184,914  

Construction and land development

    364,551     280,483  

Consumer

    55,576     26,706  
           

    3,514,646     3,152,396  

Allowance for non-covered loan losses

    (33,241 )   (3,409 )
           

Total non-covered loans, net of allowance

  $ 3,481,405   $ 3,148,987  
           
           

        The Bank has lending policies in place with the goal of establishing an asset portfolio that will provide a return on stockholders' equity sufficient to maintain capital to assets ratios that meet or exceed established regulations. Loans are underwritten with careful consideration of the borrower's financial condition, the specific purpose of the loan, the primary sources of repayment and any collateral pledged to secure the loan.

        Underwriting procedures address financial components based on the size or complexity of the credit. The financial components include, but are not limited to, current and projected cash flows, shock analysis and/or stress testing, and trends in appropriate balance sheet and statement of operations ratios. Collateral analysis includes a complete description of the collateral, as well as determining values, monitoring requirements, loan to value ratios, concentration risk, appraisal requirements and other information relevant to the collateral being pledged. Guarantor analysis includes liquidity and cash flow analysis based on the significance the guarantors are expected to serve as secondary repayment sources. The Bank's underwriting standards are governed by adherence to its loan policy. The loan policy provides for specific guidelines by portfolio segment, including commercial and industrial, real estate, construction and land development, and consumer loans. Within each individual portfolio segment, permissible and impermissible loan types are explicitly outlined. Within the loan types, minimum requirements for the underwriting factors listed above are provided.

        The Bank maintains a loan review department that reviews credit risk in response to both external and internal factors that potentially impact the performance of either individual loans or the overall loan portfolio. The loan review process reviews the creditworthiness of borrowers and determines compliance with the loan policy. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel. Results of these reviews are presented to management and the Bank's Board of Directors.

F-40


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses (Continued)

        In connection with the PlainsCapital Merger and the FNB Transaction, the Company acquired non-covered loans both with and without evidence of credit quality deterioration since origination. The following table presents the carrying values and the outstanding balances of the non-covered PCI loans (in thousands).

 
  December 31,  
 
  2013   2012  

Carrying amount

  $ 100,392   $ 166,780  

Outstanding balance

    141,983     222,674  

        Changes in the accretable yield for the non-covered PCI loans were as follows (in thousands).

 
  Year Ended
December 31, 2013
  Month Ended
December 31, 2012
 

Balance, beginning of period

  $ 17,553   $ 18,427  

Additions

    622      

Increases in expected cash flows

    18,793      

Disposals of loans

    (3,692 )   (22 )

Accretion

    (15,675 )   (852 )
           

Balance, end of period

  $ 17,601   $ 17,553  
           
           

        Impaired loans exhibit a clear indication that the borrower's cash flow may not be sufficient to meet principal and interest payments, which is generally when a loan is 90 days past due unless the asset is both well secured and in the process of collection. Non-covered impaired loans include non-accrual loans, troubled debt restructurings ("TDRs"), PCI loans and partially charged-off loans.

        Non-covered PCI loans are summarized by class in the following tables (in thousands). In addition to the non-covered PCI loans, there were $4.1 million of additional non-covered impaired loans at December 31, 2013. There were no impaired loans at December 31, 2012 other than PCI loans.

December 31, 2013
  Unpaid
Contractual
Principal Balance
  Recorded
Investment with
No Allowance
  Recorded
Investment with
Allowance
  Total
Recorded
Investment
  Related
Allowance
 

Commercial and industrial:

                               

Secured

  $ 60,309   $ 19,280   $ 16,092   $ 35,372   $ 2,705  

Unsecured

    11,772     240     1,204     1,444     15  

Real estate:

                               

Secured by commercial properties

    49,306     20,185     16,070     36,255     339  

Secured by residential properties

    5,013     1,347     1,648     2,995     39  

Construction and land development:

                               

Residential construction loans

    33                  

Commercial construction loans and land development

    48,515     15,225     4,592     19,817     39  

Consumer

    7,946     4,509         4,509      
                       

  $ 182,894   $ 60,786   $ 39,606   $ 100,392   $ 3,137  
                       
                       

F-41


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses (Continued)

 

December 31, 2012
  Unpaid
Contractual
Principal Balance
  Recorded
Investment with
No Allowance
  Recorded
Investment with
Allowance
  Total
Recorded
Investment
 

Commercial and industrial:

                         

Secured

  $ 102,642   $ 67,967   $   $ 67,967  

Unsecured

    17,133     3,419         3,419  

Real estate:

                         

Secured by commercial properties

    70,284     55,519         55,519  

Secured by residential properties

    10,164     6,728         6,728  

Construction and land development:

                         

Residential construction loans

    1,137     708         708  

Commercial construction loans and land development

    60,425     32,362         32,362  

Consumer

    92     77         77  
                   

  $ 261,877   $ 166,780   $   $ 166,780  
                   
                   

        Average investment in non-covered PCI loans for the year ended December 31, 2013 is summarized by class in the following table (in thousands).

Commercial and industrial:

       

Secured

  $ 51,670  

Unsecured

    2,432  

Real estate:

       

Secured by commercial properties

    45,887  

Secured by residential properties

    4,862  

Construction and land development:

       

Residential construction loans

    354  

Commercial construction loans and land development

    26,090  

Consumer

    2,293  
       

  $ 133,588  
       
       

        Non-covered non-accrual loans at December 31, 2013, excluding those classified as held for sale, are summarized by class in the following table (in thousands).

Commercial and industrial:

       

Secured

  $ 15,430  

Unsecured

    1,300  

Real estate:

       

Secured by commercial properties

    2,638  

Secured by residential properties

    398  

Construction and land development:

       

Residential construction loans

     

Commercial construction loans and land development

    112  

Consumer

     
       

  $ 19,878  
       
       

F-42


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses (Continued)

        At December 31, 2013, non-covered non-accrual loans included non-covered PCI loans of $15.8 million for which discount accretion has been suspended because the extent and timing of cash flows from these non-covered PCI loans can no longer be reasonably estimated. All non-covered PCI loans at December 31, 2012 were considered to be performing due to the application of the accretion method. In addition to the non-covered non-accrual loans in the table above, $3.5 million and $1.8 million of real estate loans secured by residential properties and classified as held for sale were in non-accrual status at December 31, 2013 and 2012, respectively.

        Interest income recorded on accruing impaired loans was $17.7 million and $0.9 million for the year ended December 31, 2013 and the month ended December 31, 2012, respectively. Interest income recorded on non-accrual loans in 2013 and 2012 was nominal.

        The Bank classifies loan modifications as TDRs when it concludes that it has both granted a concession to a debtor and that the debtor is experiencing financial difficulties. Loan modifications are typically structured to create affordable payments for the debtor and can be achieved in a variety of ways. The Bank modifies loans by reducing interest rates and/or lengthening loan amortization schedules. The Bank also reconfigures a single loan into two or more loans ("A/B Note"). The typical A/B Note restructure results in a "bad" loan which is charged off and a "good" loan or loans the terms of which comply with the Bank's customary underwriting policies. The debt charged off on the "bad" loan is not forgiven to the debtor.

        Information regarding TDRs granted is shown in the following table (in thousands). All TDRs granted relate to non-covered PCI loans. There were no TDRs granted during the month ended December 31, 2012. At December 31, 2013, the Bank had $0.5 million in unadvanced commitments to borrowers whose loans have been restructured in TDRs.

 
  Recorded Investment in Loans Modified by  
Year ended December 31, 2013
  A/B Note   Interest Rate
Adjustment
  Payment Term
Extension
  Total
Modification
 

Commercial and industrial:

                         

Secured

  $   $   $ 10,390   $ 10,390  

Unsecured

                 

Real estate:

                         

Secured by commercial properties

            279     279  

Secured by residential properties

            777     777  

Construction and land development:

                         

Residential construction loans

                 

Commercial construction loans and land development

                 

Consumer

                 
                   

  $   $   $ 11,446   $ 11,446  
                   
                   

F-43


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses (Continued)

        An analysis of the aging of the Bank's non-covered loan portfolio is shown in the following tables (in thousands).

December 31, 2013
  Loans Past
Due
30 - 59 Days
  Loans Past
Due
60 - 89 Days
  Loans Past
Due 90 Days
or More
  Total
Past Due
Loans
  Current
Loans
  PCI
Loans
  Total
Loans
  Accruing
Loans Past
Due 90 Days
or More
 

Commercial and industrial:

                                                 

Secured

  $ 2,171   $ 277   $ 1,354   $ 3,802   $ 1,492,793   $ 35,372   $ 1,531,967   $ 272  

Unsecured

    333     9     60     402     103,453     1,444     105,299     59  

Real estate:

                                                 

Secured by commercial properties

    192         132     324     1,044,437     36,255     1,081,016      

Secured by residential properties

    1,045     36     203     1,284     371,958     2,995     376,237     203  

Construction and land development:

                                                 

Residential construction loans

    415             415     64,664         65,079      

Commercial construction loans and land development

    41     881     112     1,034     278,621     19,817     299,472      

Consumer

    201     60         261     50,806     4,509     55,576      
                                   

  $ 4,398   $ 1,263   $ 1,861   $ 7,522   $ 3,406,732   $ 100,392   $ 3,514,646   $ 534  
                                   
                                   

 

December 31, 2012
  Loans Past
Due
30 - 59 Days
  Loans Past
Due
60 - 89 Days
  Loans Past
Due 90 Days
or More
  Total
Past Due
Loans
  Current
Loans
  PCI
Loans
  Total
Loans
  Accruing
Loans Past
Due 90 Days
or More
 

Commercial and industrial:

                                                 

Secured

  $ 7,844   $ 348   $ 2,131   $ 10,323   $ 1,473,242   $ 67,967   $ 1,551,532   $ 2,000  

Unsecured

    3             3     105,339     3,419     108,761      

Real estate:

                                                 

Secured by commercial properties

    714             714     868,070     55,519     924,303      

Secured by residential properties

    755     101         856     253,027     6,728     260,611      

Construction and land development:

                                                 

Residential construction loans

                    47,461     708     48,169      

Commercial construction loans and land development

    63             63     199,889     32,362     232,314      

Consumer

    84             84     26,545     77     26,706      
                                   

  $ 9,463   $ 449   $ 2,131   $ 12,043   $ 2,973,573   $ 166,780   $ 3,152,396   $ 2,000  
                                   
                                   

        Management tracks credit quality trends on a quarterly basis related to: (i) past due levels, (ii) non-performing asset levels, (iii) classified loan levels, (iv) net charge-offs, and (v) general economic conditions in the state and local markets.

        The Bank utilizes a risk grading matrix to assign a risk grade to each of the loans in its portfolio. A risk rating is assigned based on an assessment of the borrower's management, collateral position, financial capacity, and economic factors. The general characteristics of the various risk grades are described below.

F-44


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses (Continued)

        Pass—"Pass" loans present a range of acceptable risks to the Bank. Loans that would be considered virtually risk-free are rated Pass—low risk. Loans that exhibit sound standards based on the grading factors above and present a reasonable risk to the Bank are rated Pass—normal risk. Loans that exhibit a minor weakness in one or more of the grading criteria but still present an acceptable risk to the Bank are rated Pass—high risk.

        Special Mention—"Special Mention" loans have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in a deterioration of the repayment prospects for the loans and weaken the Bank's credit position at some future date. Special Mention loans are not adversely classified and do not expose the Bank to sufficient risk to require adverse classification.

        Substandard—"Substandard" loans are inadequately protected by the current sound worth and paying capacity of the obligor or the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Many substandard loans are considered impaired.

        PCI—"PCI" loans exhibited evidence of credit deterioration at acquisition that made it probable that all contractually required principal payments would not be collected.

        The following tables present the internal risk grades of non-covered loans, as previously described, in the portfolio by class (in thousands).

December 31, 2013
  Pass   Special Mention   Substandard   PCI   Total  

Commercial and industrial:

                               

Secured

  $ 1,450,734   $ 16,840   $ 29,021   $ 35,372   $ 1,531,967  

Unsecured

    103,674     12     169     1,444     105,299  

Real estate:

                               

Secured by commercial properties

    1,038,930     4,436     1,395     36,255     1,081,016  

Secured by residential properties

    367,758         5,484     2,995     376,237  

Construction and land development:

                               

Residential construction loans

    65,079                 65,079  

Commercial construction loans and land development          

    275,808     3,384     463     19,817     299,472  

Consumer

    51,052     1     14     4,509     55,576  
                       

  $ 3,353,035   $ 24,673   $ 36,546   $ 100,392   $ 3,514,646  
                       
                       

F-45


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses (Continued)

 

December 31, 2012
  Pass   Special Mention   Substandard   PCI   Total  

Commercial and industrial:

                               

Secured

  $ 1,476,420   $ 2,515   $ 4,630   $ 67,967   $ 1,551,532  

Unsecured

    105,142     200         3,419     108,761  

Real estate:

                               

Secured by commercial properties

    868,784             55,519     924,303  

Secured by residential properties

    253,883             6,728     260,611  

Construction and land development:

                               

Residential construction loans

    47,461             708     48,169  

Commercial construction loans and land development          

    199,952             32,362     232,314  

Consumer

    26,629             77     26,706  
                       

  $ 2,978,271   $ 2,715   $ 4,630   $ 166,780   $ 3,152,396  
                       
                       

        The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management's best estimate of probable losses inherent in the existing portfolio of loans. Management has responsibility for determining the level of the allowance for loan losses, subject to review by the Audit Committee of the Company's board of directors and the Loan Review Committee of the Bank's board of directors.

        It is management's responsibility at the end of each quarter, or more frequently as deemed necessary, to analyze the level of the allowance for loan losses to ensure that it is appropriate for the estimated credit losses in the portfolio consistent with the Interagency Policy Statement on the Allowance for Loan and Lease Losses and the Receivables and Contingencies Topics of the ASC. Estimated credit losses are the probable current amount of loans that the Company will be unable to collect given facts and circumstances as of the evaluation date. When management determines that a loan or portion thereof is uncollectible, the loan, or portion thereof, is charged off against the allowance for loan losses, or for acquired loans accounted for in pools, charged against the pool discount. Recoveries on charge-offs that occurred prior to the PlainsCapital Merger represent contractual cash flows not expected to be collected and are recorded as accretion income. Recoveries on loans charged-off subsequent to the PlainsCapital Merger are credited to the allowance for loan loss, except for recoveries on loans accounted for in pools, which are credited to the pool discount. Commencing with the PlainsCapital Merger on November 30, 2012, the Bank's loan portfolio is designated into two populations: acquired loans and originated loans. The allowance for loan losses is calculated separately for the acquired and originated loans.

Originated Loans

        The Company has developed a methodology that seeks to determine an allowance within the scope of the Receivables and Contingencies Topics of the ASC. Each of the loans that has been determined to be impaired is within the scope of the Receivables Topic. Impaired loans that are equal to or greater than $0.5 million are individually evaluated for impairment using one of three impairment measurement methods as of the evaluation date: (1) the present value of expected future discounted cash flows on the loan, (2) the loan's observable market price, or (3) the fair value of the collateral if the loan is collateral dependent. Specific reserves are provided in the estimate of the allowance based on the measurement of impairment under these three methods, except for collateral dependent loans,

F-46


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses (Continued)

which require the fair value method. All non-impaired loans are within the scope of the Contingencies Topic. Estimates of loss for the Contingencies Topic are calculated based on historical loss, adjusted for qualitative or environmental factors. The Bank uses a rolling three year average net loss rate to calculate historical loss factors. The analysis is conducted by call report category, and further disaggregates commercial and industrial loans by collateral type. The analysis considers charge-offs and recoveries in determining the loss rate; therefore net charge-off experience is used. The historical loss calculation for the quarter is calculated by dividing the current quarter net charge-offs for each loan category by the quarter ended loan category balance. The Bank utilizes a weighted average loss rate to better represent recent trends. The Bank weights the most recent four quarter average at 120% versus the oldest four quarters at 80%.

        While historical loss experience provides a reasonable starting point for the analysis, historical losses are not the sole basis upon which to determine the appropriate level for the allowance for loan losses. Management considers recent qualitative or environmental factors that are likely to cause estimated credit losses associated with the existing portfolio to differ from historical loss experience, including but not limited to:

        Changes in the volume and severity of past due, nonaccrual and classified loans, as well as changes in the nature, volume and terms of loans in the portfolio are key indicators of changes in the portfolio that could indicate a necessary adjustment to the historical loss factors. The magnitude of the impact of these factors on our qualitative assessment of the allowance for loan loss changes from quarter to quarter.

        The loan review program is designed to identify and monitor problem loans by maintaining a credit grading process, requiring that timely and appropriate changes be made to reviewed loans and coordinating the delivery of the information necessary to assess the appropriateness of the allowance for loan losses. Loans are evaluated for impaired status when: (i) payments on the loan are delayed, typically by 90 days or more (unless the loan is both well secured and in the process of collection), (ii) the loan becomes classified, (iii) the loan is being reviewed in the normal course of the loan review scope, or (iv) the loan is identified by the servicing officer as a problem.

        Homogeneous loans, such as consumer installment loans, residential mortgage loans and home equity loans, are not individually reviewed and are generally risk graded at the same levels. The risk grade and reserves are established for each homogeneous pool of loans based on the expected net charge-offs from current trends in delinquencies, losses or historical experience and general economic conditions. At December 31, 2013 and 2012, there were no material delinquencies in these types of loans.

F-47


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses (Continued)

Acquired Loans

        Loans acquired in a business combination are recorded at their estimated fair value on their purchase date and with no carryover of the related allowance for loan losses. Loans without evidence of credit impairment at acquisition are subsequently evaluated for any required allowance at each reporting date. An allowance for loan losses is calculated using a methodology similar to that described above for originated loans. The allowance as determined for each loan collateral type is compared to the remaining fair value discount for that loan collateral type. If greater, the excess is recognized as an addition to the allowance through a provision for loan losses. If less than the discount, no additional allowance is recorded. Charge-offs and losses first reduce any remaining fair value discount for the loan and once the discount is depleted, losses are applied against the allowance established for that loan.

        PCI loans acquired in the PlainsCapital Merger are accounted for on an individual loan basis, while PCI loans acquired in the FNB Transaction are accounted for both in pools and at the individual loan level. Cash flows expected to be collected are recast quarterly for each loan or pool. These evaluations require the continued use and updating of key assumptions and estimates such as default rates, loss severity given default and prepayment speed assumptions, similar to those used for the initial fair value estimate. Management judgment must be applied in developing these assumptions. If expected cash flows for a loan or pool decreases, an increase in the allowance for loan losses is made through a charge to the provision for loan losses. If expected cash flows for a loan or pool increase, any previously established allowance for loan losses is reversed and any remaining difference increases the accretable yield which will be taken into income over the remaining life of the loan.

        The allowance is subject to regulatory examinations and determinations as to appropriateness, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance.

        Changes in the allowance for non-covered loan losses, distributed by portfolio segment, are shown below (in thousands).

Year ended December 31, 2013
  Commercial and
Industrial
  Real Estate   Construction and
Land Development
  Consumer   Total  

Balance, beginning of period

  $ 1,845   $ 977   $ 582   $ 5   $ 3,409  

Provision charged to operations

    20,940     7,281     7,634     238     36,093  

Loans charged off

    (9,359 )   (209 )   (524 )   (216 )   (10,308 )

Recoveries on charged off loans

    3,439     282     265     61     4,047  
                       

Balance, end of period

  $ 16,865   $ 8,331   $ 7,957   $ 88   $ 33,241  
                       
                       

 

Month ended December 31, 2012
  Commercial and
Industrial
  Real Estate   Construction and
Land Development
  Consumer   Total  

Balance, beginning of period

  $   $   $   $   $  

Provision charged to operations

    2,236     977     582     5     3,800  

Loans charged off

    (391 )               (391 )

Recoveries on charged off loans

                     
                       

Balance, end of period

  $ 1,845   $ 977   $ 582   $ 5   $ 3,409  
                       
                       

F-48


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses (Continued)

        The non-covered loan portfolio was distributed by portfolio segment and impairment methodology as shown below (in thousands).

December 31, 2013
  Commercial and
Industrial
  Real Estate   Construction and
Land Development
  Consumer   Total  

Loans individually evaluated for impairment

  $ 2,273   $ 373   $ 112   $   $ 2,758  

Loans collectively evaluated for impairment

    1,598,177     1,417,630     344,622     51,067     3,411,496  

PCI Loans

    36,816     39,250     19,817     4,509     100,392  
                       

  $ 1,637,266   $ 1,457,253   $ 364,551   $ 55,576   $ 3,514,646  
                       
                       

 

December 31, 2012
  Commercial and
Industrial
  Real Estate   Construction and
Land Development
  Consumer   Total  

Loans individually evaluated for impairment

  $   $   $   $   $  

Loans collectively evaluated for impairment

    1,588,907     1,122,667     247,413     26,629     2,985,616  

PCI Loans

    71,386     62,247     33,070     77     166,780  
                       

  $ 1,660,293   $ 1,184,914   $ 280,483   $ 26,706   $ 3,152,396  
                       
                       

        The allowance for non-covered loan losses was distributed by portfolio segment and impairment methodology as shown below (in thousands).

December 31, 2013
  Commercial and
Industrial
  Real Estate   Construction and
Land Development
  Consumer   Total  

Loans individually evaluated for impairment

  $ 421   $   $   $   $ 421  

Loans collectively evaluated for impairment

    13,724     7,953     7,918     88     29,683  

PCI Loans

    2,720     378     39         3,137  
                       

  $ 16,865   $ 8,331   $ 7,957   $ 88   $ 33,241  
                       
                       

 

December 31, 2012
  Commercial and
Industrial
  Real Estate   Construction and
Land Development
  Consumer   Total  

Loans individually evaluated for impairment

  $   $   $   $   $  

Loans collectively evaluated for impairment

    1,845     977     582     5     3,409  

PCI Loans

                     
                       

  $ 1,845   $ 977   $ 582   $ 5   $ 3,409  
                       
                       

F-49


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

6. Covered Assets and Indemnification Asset

        As discussed in Note 2 to the consolidated financial statements, the Bank assumed substantially all of the liabilities, including all of the deposits, and acquired substantially all of the assets of FNB in an FDIC-assisted transaction on September 13, 2013. As part of the loss-share agreements entered into by the Bank with the FDIC in connection therewith, the Bank and the FDIC agreed to share the losses on loans and OREO covered under the agreements. The asset arising from the loss-share agreements, which we refer to as the "FDIC Indemnification Asset," is measured separately from the covered loan portfolio because the agreements are not contractually embedded in the covered loans and are not transferable should the Bank choose to dispose of the covered loans.

        In accordance with the loss-share agreements, the Bank may be required to make a "true-up" payment to the FDIC, approximately ten years following the Bank Closing Date, if the FDIC's initial estimate of losses on covered assets is greater than the actual realized losses. The "true-up" payment is calculated using a defined formula set forth in the P&A Agreement.

Covered Loans and Allowance for Covered Loan Losses

        Loans acquired in a FDIC-assisted acquisition that are subject to a loss-share agreement are referred to as "covered loans" and reported separately in the consolidated balance sheets. Covered loans are reported exclusive of the cash flow reimbursements that may be received from the FDIC.

        Based on purchase date valuations, the Bank's portfolio of acquired covered loans had a fair value of $1.1 billion as of the Bank Closing Date, with no carryover of any allowance for loan losses. Acquired covered loans were preliminarily segregated between those considered to be PCI loans and those without credit impairment at acquisition.

        In connection with the FNB Transaction, the Bank acquired loans both with and without evidence of credit quality deterioration since origination. The Company's accounting policies for acquired covered loans, including covered PCI loans, are consistent with that of acquired non-covered loans, as described in Note 5 to the consolidated financial statements. The Company has established under its PCI accounting policy a framework to aggregate certain acquired covered loans into various loan pools based on a minimum of two layers of common risk characteristics for the purpose of determining their respective fair values as of their acquisition dates, and for applying the subsequent recognition and measurement provisions for income accretion and impairment testing.

        The following table presents the carrying value of the covered loans summarized by portfolio segment at December 31, 2013 (in thousands).

Commercial and industrial

  $ 66,943  

Real estate

    787,982  

Construction and land development

    151,444  

Consumer

     
       

Total covered loans

    1,006,369  

Allowance for covered loans

    (1,061 )
       

Total covered loans, net of allowance

  $ 1,005,308  
       
       

F-50


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

6. Covered Assets and Indemnification Asset (Continued)

        The following table presents the carrying value and the outstanding balance of the covered PCI loans at December 31, 2013 (in thousands).

Carrying amount

  $ 729,156  

Outstanding balance

    1,022,514  

        Changes in the accretable yield for the covered PCI loans for the period from September 14, 2013 through December 31, 2013 were as follows (in thousands).

Balance, beginning of year

  $  

Additions

    167,974  

Increases in expected cash flows

    3,492  

Disposals of loans

    4,407  

Accretion

    (19,325 )
       

Balance, end of year

  $ 156,548  
       
       

        Covered PCI loans at December 31, 2013 are summarized by class in the following table (in thousands). In addition to the covered PCI loans, there were $0.9 million of additional covered impaired loans at December 31, 2013.

 
  Unpaid
Contractual
Principal Balance
  Recorded
Investment with
No Allowance
  Recorded
Investment with
Allowance
  Total
Recorded
Investment
  Related
Allowance
 

Commercial and industrial:

                               

Secured

  $ 43,867   $ 28,520   $   $ 28,520   $  

Unsecured

    16,280     9,008     882     9,890     882  

Real estate:

                               

Secured by commercial properties

    528,785     365,306         365,306      

Secured by residential properties

    288,859     199,372         199,372      

Construction and land development:

                               

Residential construction loans

    8,341     4,705         4,705      

Commercial construction loans and land development

    183,117     121,363         121,363      

Consumer

                     
                       

  $ 1,069,249   $ 728,274   $ 882   $ 729,156   $ 882  
                       
                       

F-51


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

6. Covered Assets and Indemnification Asset (Continued)

        Average investment in covered PCI loans for the year ended December 31, 2013 is summarized by class in the following table (in thousands).

Commercial and industrial:

       

Secured

  $ 14,260  

Unsecured

    4,945  

Real estate:

       

Secured by commercial properties

    182,653  

Secured by residential properties

    99,686  

Construction and land development:

       

Residential construction loans

    2,353  

Commercial construction loans and land development

    60,682  

Consumer

     
       

  $ 364,579  
       
       

        Covered non-accrual loans at December 31, 2013, excluding those classified as held for sale, are summarized by class in the following table (in thousands).

Commercial and industrial:

       

Secured

  $ 91  

Unsecured

    882  

Real estate:

       

Secured by commercial properties

    40  

Secured by residential properties

    209  

Construction and land development:

       

Residential construction loans

    575  

Commercial construction loans and land development

     

Consumer

     
       

  $ 1,797  
       
       

        Interest income recorded on non-accrual covered loans during 2013 was nominal. All covered PCI loans are considered to be performing due to the application of the accretion method. Additionally, no acquired covered performing loans have been modified in a TDR.

F-52


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

6. Covered Assets and Indemnification Asset (Continued)

        An analysis of the aging of the Bank's covered loan portfolio at December 31, 2013 is shown in the following table (in thousands).

 
  Loans Past
Due
30 - 59
Days
  Loans Past
Due
60 - 89
Days
  Loans Past
Due
90 Days
or More
  Total
Past Due
Loans
  Current
Loans
  PCI
Loans
  Total
Loans
  Accruing
Loans
Past Due
90 Days
or More
 

Commercial and industrial:

                                                 

Secured

  $ 3,904   $ 10   $ 81   $ 3,995   $ 20,918   $ 28,520   $ 53,433   $  

Unsecured

    10     259         269     3,351     9,890     13,510      

Real estate:

                                                 

Secured by commercial properties

    999         40     1,039     63,780     365,306     430,125      

Secured by residential properties

    1,679     678     209     2,566     155,919     199,372     357,857      

Construction and land development:

                                                 

Residential construction loans

    1,861         576     2,437     5,026     4,705     12,168      

Commercial construction loans and land development

    244     20         264     17,649     121,363     139,276      

Consumer

                                 
                                   

  $ 8,697   $ 967   $ 906   $ 10,570   $ 266,643   $ 729,156   $ 1,006,369   $  
                                   
                                   

        The Bank assigns a risk grade to each of its covered loans in a manner consistent with the existing loan review program and risk grading matrix used for non-covered loans, as described in Note 5 to the consolidated financial statements. The following table presents the internal risk grades of covered loans in the portfolio at December 31, 2013 by class (in thousands).

 
  Pass   Special Mention   Substandard   PCI   Total  

Commercial and industrial:

                               

Secured

  $ 24,152   $   $ 761   $ 28,520   $ 53,433  

Unsecured

    3,040         580     9,890     13,510  

Real estate:

                               

Secured by commercial properties

    59,343     3,310     2,166     430,125     419,449  

Secured by residential properties

    155,439         3,046     357,857     368,533  

Construction and land development:

                               

Residential construction loans

    6,087         1,376     4,705     12,168  

Commercial construction loans and land development

    17,806         107     121,363     139,276  

Consumer

                     
                       

  $ 265,867   $ 3,310   $ 8,036   $ 729,156   $ 1,006,369  
                       
                       

F-53


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

6. Covered Assets and Indemnification Asset (Continued)

        The Bank's impairment methodology for the covered loans is consistent with that of non-covered loans as discussed in Note 5 to the consolidated financial statements. To the extent there is experienced or projected credit deterioration on the acquired covered loan pools subsequent to amounts estimated at the previous quarterly recast date, this deterioration will be measured, and a provision for credit losses will be charged to earnings. Additionally, provision for credit losses will be recorded on advances on covered loans subsequent to the acquisition date in a manner consistent with the allowance for non-covered loan losses. These provisions will be partially offset by an increase to the FDIC Indemnification Asset in an amount equal to the FDIC's loss sharing percentage under the loss-share agreements, which is recognized in noninterest income within the consolidated statement of operations.

        Changes in the allowance for covered loan losses for the period from September 14, 2013 through December 31, 2013, distributed by portfolio segment, are shown below (in thousands).

 
  Commercial and
Industrial
  Real Estate   Construction and
Land
Development
  Consumer   Total  

Balance, September 14, 2013

  $   $   $   $   $  

Provision charged to operations

    1,057     8             1,065  

Loans charged off

    (4 )               (4 )

Recoveries on charged off loans

                     
                       

Balance, end of period

  $ 1,053   $ 8   $   $   $ 1,061  
                       
                       

        At December 31, 2013, the covered loan portfolio was distributed by portfolio segment and impairment methodology as shown below (in thousands).

 
  Commercial and
Industrial
  Real Estate   Construction and
Land
Development
  Consumer   Total  

Loans individually evaluated for impairment

  $   $   $   $   $  

Loans collectively evaluated for impairment

    28,533     223,304     25,376         277,213  

PCI Loans

    38,410     564,678     126,068         729,156  
                       

  $ 66,943   $ 787,982   $ 151,444   $   $ 1,006,369  
                       
                       

        At December 31, 2013, the allowance for covered loan losses was distributed by portfolio segment and impairment methodology as shown below (in thousands).

 
  Commercial and
Industrial
  Real Estate   Construction and
Land
Development
  Consumer   Total  

Loans individually evaluated for impairment

  $   $   $   $   $  

Loans collectively evaluated for impairment

    171     8             179  

PCI Loans

    882                 882  
                       

  $ 1,053   $ 8   $   $   $ 1,061  
                       
                       

F-54


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

6. Covered Assets and Indemnification Asset (Continued)

Covered Other Real Estate Owned

        A summary of the activity in covered OREO for the period from September 14, 2013 through December 31, 2013 is as follows (in thousands).

Balance, September 14, 2013

  $ 135,187  

Additions to covered OREO

    19,185  

Dispositions of covered OREO

    (11,539 )

Valuation adjustments in the period

     
       

Balance, end of period

  $ 142,833  
       
       

FDIC Indemnification Asset

        A summary of the activity in the FDIC Indemnification Asset for the period from September 14, 2013 through December 31, 2013 is as follows (in thousands).

Balance, September 14, 2013

  $ 185,680  

FDIC Indemnification Asset accretion (amortization)

    1,699  

Transfers to due from FDIC and other

    912  
       

Balance, end of period

  $ 188,291  
       
       

7. Cash and Due from Banks

        Cash and due from banks consisted of the following (in thousands).

 
  December 31,  
 
  2013   2012  

Cash on hand

  $ 59,451   $ 20,201  

Clearings and collection items

    64,193     95,424  

Deposits at Federal Reserve Bank

    364,709     312,667  

Deposits at Federal Home Loan Bank

    1,500     1,499  

Deposits in FDIC-insured institutions

    223,246     292,248  
           

  $ 713,099   $ 722,039  
           
           

        The amounts above include interest-bearing deposits of $565.3 million and $581.2 million at December 31, 2013 and 2012, respectively. Cash on hand and deposits at the Federal Reserve Bank satisfy regulatory reserve requirements at December 31, 2013.

F-55


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

8. Premises and Equipment

        The components of premises and equipment are summarized as follows (in thousands).

 
  December 31,  
 
  2013   2012  

Land and premises

  $ 121,211   $ 48,902  

Furniture and equipment

    107,644     66,182  
           

    228,855     115,084  

Less accumulated depreciation and amortization

    (28,149 )   (3,703 )
           

  $ 200,706   $ 111,381  
           
           

        The amounts shown above include assets recorded under capital leases of $7.1 million and $7.7 million, net of accumulated amortization of $0.6 million and $0.1 million at December 31, 2013 and 2012, respectively.

        Occupancy expense was reduced by rental income of $1.8 million and $0.1 million in 2013 and 2012, respectively. Depreciation and amortization expense on premises and equipment, which includes amortization of capital leases, amounted to $24.8 million, $1.9 million and $1.7 million in 2013, 2012 and 2011, respectively.

9. Goodwill and Other Intangible Assets

        The carrying amount of goodwill was $251.8 million and $253.8 million at December 31, 2013 and 2012, respectively. As discussed in Note 2 to the consolidated financial statements, the Company initially recorded $230.1 million of goodwill in connection with the PlainsCapital Merger, and used significant estimates and assumptions to value the identifiable assets acquired and liabilities assumed. The amount of goodwill recorded in connection with the PlainsCapital Merger is not deductible for tax purposes. During the three months ended March 31, 2013, the Company reduced goodwill related to the PlainsCapital Merger by $2.0 million for a purchase accounting adjustment related to the valuation of a capital lease obligation. The Company made no further adjustments to its purchase price allocation.

        Other intangible assets of $70.9 million and $77.7 million at December 31, 2013 and 2012, respectively, include an indefinite lived intangible asset with an estimated fair value of $3.0 million related to state licenses acquired as a part of the NLC acquisition in January 2007.

        The Company tests goodwill and other intangible assets having an indefinite useful life for impairment on an annual basis, or more often if events or circumstances indicate there may be impairment. Goodwill impairment testing is performed at the reporting unit level, which is one level below an operating segment. Goodwill is assigned to reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the value of the goodwill. The Company performs required annual impairment tests of its goodwill and other intangible assets as of October 1st for each of its reporting units.

        The goodwill impairment analysis is a two-step test. The first step, used to identify potential impairment, involves comparing each reporting unit's estimated fair value to its carrying value,

F-56


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

9. Goodwill and Other Intangible Assets (Continued)

including goodwill. If the estimated fair value of a reporting unit exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment. The Company has estimated fair values of reporting units based on both a market and income approach using historic, normalized actual and forecast results.

        The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated impairment. The implied fair value of goodwill is determined in a manner similar to the amount of goodwill calculated in a business combination, by measuring the excess of the estimated fair value of the reporting unit, as determined in the first step, over the aggregate estimated fair values of the individual assets, liabilities and identifiable intangibles as if the reporting unit was being acquired in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill assigned to the reporting unit, there is no impairment. If the carrying value of goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss cannot exceed the carrying value of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subsequent reversal of goodwill impairment losses is not permitted.

        At October 1, 2013, the Company determined that the estimated fair value of each of its reporting units exceeded its carrying value and therefore the second step as described above was not performed. Based on this evaluation, the Company concluded that the goodwill and other identifiable intangible assets were fully realizable at December 31, 2013.

        The Company's evaluation includes multiple assumptions, including estimated discounted cash flows and other estimates that may change over time. If future discounted cash flows become less than those projected by the Company, future impairment charges may become necessary that could have a materially adverse impact on the Company's results of operations and financial condition. As quoted market prices in active stock markets are relevant evidence of fair value, a significant decline in the Company's common stock trading price may indicate an impairment of goodwill.

        The carrying value of intangible assets subject to amortization was as follows (in thousands).

December 31, 2013
  Estimated
Useful Life
(Years)
  Gross
Intangible
Assets
  Accumulated
Amortization
  Net
Intangible
Assets
 

Core deposits

  7 - 12   $ 38,770   $ (6,159 ) $ 32,611  

Trademarks and trade names

  10 - 20     20,000     (2,589 )   17,411  

Noncompete agreements

  4 - 6     11,650     (2,492 )   9,158  

Customer contracts and relationships

  8 - 12     14,100     (6,210 )   7,890  

Agent relationships

  13     3,600     (2,749 )   851  
                   

      $ 88,120   $ (20,199 ) $ 67,921  
                   
                   

F-57


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

9. Goodwill and Other Intangible Assets (Continued)

 

December 31, 2012
  Estimated
Useful Life
(Years)
  Gross
Intangible
Assets
  Accumulated
Amortization
  Net
Intangible
Assets
 

Core deposits

  10 - 12   $ 34,500   $ (452 ) $ 34,048  

Trademarks and trade names

  10 - 20     20,000     (1,487 )   18,513  

Noncompete agreements

  4 - 6     11,650     (192 )   11,458  

Customer contracts and relationships

  8 - 12     14,100     (4,515 )   9,585  

Agent relationships

  13     3,600     (2,466 )   1,134  

Technology

  5     1,500     (1,500 )    
                   

      $ 85,350   $ (10,612 ) $ 74,738  
                   
                   

        Amortization expense related to intangible assets during 2013, 2012 and 2011 was $11.1 million, $2.0 million and $1.5 million, respectively.

        The estimated aggregate future amortization expense for intangible assets at December 31, 2013 is as follows (in thousands).

2014

  $ 11,138  

2015

    10,300  

2016

    9,372  

2017

    7,546  

2018

    6,607  

Thereafter

    22,958  
       

  $ 67,921  
       
       

10. Mortgage Servicing Rights

        The following table presents the change in fair value of the Company's MSR (dollars in thousands).

 
  Year Ended
December 31, 2013
  Month Ended
December 31, 2012
 

Balance, beginning of period

  $ 2,080   $  

Additions

    13,886     2,204  

Sales

         

Changes in fair value:

             

Due to changes in model inputs or assumptions(1)

    4,782     (51 )

Due to customer payments

    (599 )   (73 )
           

Balance, end of period

  $ 20,149   $ 2,080  
           
           

Mortgage loans serviced for others

  $ 1,965,883   $ 352,753  
           
           

MSR as a percentage of serviced mortgage loans

    1.02 %   0.59 %
           
           

(1)
Principally represents changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates.

F-58


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

10. Mortgage Servicing Rights (Continued)

        The key assumptions used in measuring the fair value of the Company's MSR were as follows.

 
  Year Ended
December 31, 2013
  Month Ended
December 31, 2012
 

Weighted average constant prepayment rate

    9.72 %   15.71 %

Weighted average discount rate

    12.37 %   20.67 %

Weighted average life (in years)

    7.6     5.7  

        A sensitivity analysis of the fair value of the Company's MSR to certain key assumptions is presented in the following table (in thousands).

 
  December 31,  
 
  2013   2012  

Constant prepayment rate:

             

Impact of 10% adverse change

  $ (601 ) $ (80 )

Impact of 20% adverse change

    (1,170 )   (155 )

Discount rate:

             

Impact of 100 basis point adverse change

    (631 )   (34 )

Impact of 200 basis point adverse change

    (1,236 )   (66 )

        The sensitivity analysis presents the hypothetical effect on fair value of the MSR. The effect of such hypothetical change in assumptions generally cannot be extrapolated because the relationship of the change in one key assumption to the change in the fair value of the MSR is not linear. In addition, in the analysis, the impact of an adverse change in one key assumption is calculated independent of any impact on other assumptions. In reality, changes in one assumption may change another assumption.

        During the year ended December 31, 2013 and the month ended December 31, 2012, contractually specified servicing fees, late fees and ancillary fees earned of $3.2 million and $0.4 million, respectively, were included in other noninterest income within the consolidated statements of operations.

11. Deposits

        Deposits are summarized as follows (in thousands).

 
  December 31,  
 
  2013   2012  

Noninterest-bearing demand

  $ 1,773,749   $ 1,349,584  

Interest-bearing:

             

NOW accounts

    1,083,596     809,605  

Money market

    878,578     627,849  

Brokered—money market

    276,760     263,193  

Demand

    47,636     75,308  

Savings

    357,325     180,367  

Time

    2,110,947     1,175,432  

Brokered—time

    194,327     219,123  
           

  $ 6,722,918   $ 4,700,461  
           
           

F-59


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

11. Deposits (Continued)

        The significant increase in deposits at December 31, 2013 as compared to December 31, 2012 is primarily due to the inclusion of $2.2 billion of deposits assumed as a part of the FNB Transaction.

        At December 31, 2013, the scheduled maturities of interest-bearing time deposits are as follows (in thousands).

2014

  $ 1,690,804  

2015

    333,193  

2016

    122,654  

2017

    122,988  

2018 and thereafter

    35,635  
       

  $ 2,305,274  
       
       

12. Short-term Borrowings

        Short-term borrowings are summarized as follows (in thousands).

 
  December 31,  
 
  2013   2012  

Federal funds purchased

  $ 137,225   $ 269,625  

Securities sold under agreements to repurchase

    107,462     85,725  

Federal Home Loan Bank notes

        250,000  

Short-term bank loans

    97,400     122,900  
           

  $ 342,087   $ 728,250  
           
           

        Federal funds purchased and securities sold under agreements to repurchase generally mature daily, on demand, or on some other short-term basis. The Bank and FSC execute transactions to sell securities under agreements to repurchase with both customers and broker-dealers. Securities involved in these transactions are held by the Bank, FSC or the dealer.

        Information concerning federal funds purchased and securities sold under agreements to repurchase is shown in the following table (dollars in thousands).

 
  Year Ended
December 31, 2013
  Month Ended
December 31, 2012
 

Average balance during the period

  $ 281,067   $ 277,470  

Average interest rate during the period

    0.19 %   0.25 %

Maximum month-end balance during the period

  $ 415,730   $ 355,350  

 

 
  December 31,  
 
  2013   2012  

Average interest rate at end of period

    0.16 %   0.22 %

Securities underlying the agreements at end of period

             

Carrying value

  $ 144,991   $ 122,153  

Estimated fair value

  $ 138,719   $ 122,435  

F-60


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

12. Short-term Borrowings (Continued)

        Federal Home Loan Bank ("FHLB") notes mature over terms not exceeding 365 days and are collateralized by FHLB Dallas stock, nonspecified real estate loans and certain specific commercial real estate loans. At December 31, 2013, the Bank had available collateral of $1.7 billion, substantially all of which was blanket collateral. Other information regarding FHLB notes is shown in the following tables (dollars in thousands).

 
  Year Ended
December 31, 2013
  Month Ended
December 31, 2012
 

Average balance during the period

  $ 106,415   $ 301,613  

Average interest rate during the period

    0.13 %   0.14 %

Maximum month-end balance during the period

  $ 525,000   $ 250,000  

 

 
  December 31,  
 
  2013   2012  

Average interest rate at end of period

        0.07 %

        FSC uses short-term bank loans periodically to finance securities owned, customers' margin accounts and underwriting activities. Interest on the borrowings varies with the federal funds rate. The weighted average interest rate on the borrowings at December 31, 2013 and 2012 was 1.15% and 1.16%, respectively.

13. Notes Payable

        Notes payable consisted of the following (in thousands).

 
  December 31,  
 
  2013   2012  

Senior exchangeable notes due 2025, 7.50% per annum

  $   $ 83,950  

NLIC note payable due May 2033, three-month LIBOR plus 4.10% (4.35% at December 31, 2013) with interest payable quarterly

    10,000     10,000  

NLIC note payable due September 2033, three-month LIBOR plus 4.05% (4.30% at December 31, 2013) with interest payable quarterly

    10,000     10,000  

ASIC note payable due April 2034, three-month LIBOR plus 4.05% (4.30% at December 31, 2013) with interest payable quarterly

    7,500     7,500  

First Southwest nonrecourse notes, due January 2035 with interest payable quarterly

    6,827     10,089  

Insurance company note payable due March 2035, three-month LIBOR plus 3.40% (3.65% at December 31, 2013) with interest payable quarterly

    20,000     20,000  

Insurance company line of credit due September 2014, 3.25% plus a calculated index rate (4.00% at December 31, 2013) with interest payable quarterly

    2,000      
           

  $ 56,327   $ 141,539  
           
           

F-61


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

13. Notes Payable (Continued)

Senior Exchangeable Notes Due 2025

        In August 2005, HTH Operating Partnership LP, a wholly owned subsidiary of Hilltop ("OP"), entered into an Indenture under which OP issued $96.6 million aggregate principal amount of 7.5% Senior Exchangeable Notes due 2025, or the Notes, to qualified institutional buyers in a private transaction. On October 15, 2013, OP called for redemption all outstanding Notes on November 14, 2013 (the "Redemption Date"). The outstanding Notes at October 15, 2013 of $90.9 million, including $6.9 million aggregate principal amount held by the Company's insurance company subsidiaries, were redeemed at a redemption price equal to the principal amount of the Notes, plus accrued and unpaid interest up to, but excluding, the Redemption Date. At any time prior to the Redemption Date, holders of the Notes could exchange the Notes for shares of Hilltop common stock at the rate of 73.94998 shares per $1,000 principal amount of the Notes (or approximately $13.52 per share). In lieu of delivery of Hilltop common stock upon the exercise by a holder of its exchange right, OP could elect to pay such holder of the Notes an amount in cash (or a combination of Hilltop common stock and cash) in respect of all or a portion of such holder's Notes equal to the closing price of Hilltop's common stock for the five consecutive trading days commencing on and including the third business day following the exercise of such exchange right. As of the closing of the redemption, the Notes held by third party investors were exchanged for 6,208,005 shares of Hilltop common stock and an aggregate cash payment of $11.1 million was made in exchange for the Notes held by the Company's insurance company subsidiaries.

        The Notes were senior unsecured obligations of OP and were exchangeable, at the option of the holders, into shares of Hilltop common stock at an initial exchange rate of 69.8812 shares per $1,000 principal amount of the Notes (equal to an initial exchange price of approximately $14.31 per share), subject to adjustment and, in the event of specified corporate transactions involving Hilltop or OP, an additional make-whole premium. Upon exchange, OP had the option to deliver, in lieu of shares of common stock, cash or a combination of cash and shares of common stock. The Notes were treated as a combined instrument at the date of issuance and not bifurcated to separately account for any embedded derivative instruments principally because, in accordance with ASC 815, Derivatives and Hedging, (i) the conversion feature is indexed to Hilltop's common stock and would be classified in stockholders' equity if it were a freestanding derivative and (ii) the put and call option features were clearly and closely related to the Notes at fixed conversion amounts.

        According to the terms of the Notes, their initial exchange rate was adjustable for certain events, including the issuance to all holders of Hilltop common stock of rights entitling them to purchase Hilltop common stock at less than their current market price. Accordingly, as a result of a rights offering in January 2007, in which all holders of Hilltop common stock were offered the right to purchase shares at $8.00 per share, the initial exchange rate of the Notes was adjusted to 73.94998 shares per $1,000 principal amount of the Notes (equal to an exchange rate of $13.52 per share).

        In November 2011, Hilltop's insurance company subsidiaries purchased $6.9 million, par value, of the Notes in open market transactions at an average cost of 107.26% of par.

        On October 15, 2013, Hilltop entered into a First Supplemental Indenture pursuant to which Hilltop guaranteed the obligations of OP under the Indenture.

F-62


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

13. Notes Payable (Continued)

Notes Payable

        The NLIC and ASIC notes payable to unaffiliated companies are each subordinated in right of payment to all policy claims and other indebtedness of NLIC and ASIC, respectively. Further, all payments of principal and interest require the prior approval of the Insurance Commissioner of the State of Texas and are only payable to the extent that the statutory surplus of NLIC exceeds $30 million and ASIC exceeds $15 million.

        The NLIC, ASIC and Insurance Company loan agreements relating to the notes payable contain various covenants pertaining to limitations on additional debt, dividends, officer and director compensation, and minimum capital requirements. The Company was in compliance with the covenants at December 31, 2013.

        NLC has entered into an indenture relating to the NLIC, ASIC and Insurance Company notes payable which provides that (i) if a person or group becomes the beneficial owner directly or indirectly of 50% or more of its equity securities and (ii) if NLC's ratings are downgraded by a nationally recognized statistical rating organization (as defined in the Exchange Act), then each holder of the notes governed by such indenture has the right to require that NLC purchase such holder's notes in whole or in part at a price equal to 100% of the outstanding principal amount.

First Southwest Nonrecourse Notes

        In 2005, First Southwest participated in a monetization of future cash flows totaling $95.3 million from several tobacco companies owed to a law firm under a settlement agreement ("Fee Award"). In connection with the transaction, a special purpose entity that is consolidated with First Southwest issued $30.3 million of nonrecourse notes to finance the purchase of the Fee Award, to establish a reserve account and to fund issuance costs. Cash flows from the settlement are the sole source of payment for the notes. The notes carry an interest rate of 8.58% that can increase to 10.08% under certain credit conditions.

Insurance Company Line of Credit

        The Company's insurance subsidiary has a line of credit with a financial institution which allows for borrowings by NLC of up to $5.0 million and is collateralized by substantially all of NLC's assets. The line of credit bears interest equal to 3.25% plus a calculated index rate (4.00% at December 31, 2013), which is due quarterly. This line is scheduled to mature in September 2014.

Principal Maturities

        At December 31, 2013, notes payable outstanding of $56.3 million includes scheduled maturities of $2.0 million during 2014 and $54.3 million during 2033 and thereafter.

14. Junior Subordinated Debentures and Trust Preferred Securities

        PlainsCapital has four statutory Trusts, three of which were formed under the laws of the state of Connecticut and one of which, PCC Statutory Trust IV, was formed under the laws of the state of Delaware. The Trusts were created for the sole purpose of issuing and selling preferred securities and common securities, using the resulting proceeds to acquire junior subordinated debentures issued by PlainsCapital (the "Debentures"). Accordingly, the Debentures are the sole assets of the Trusts, and

F-63


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

14. Junior Subordinated Debentures and Trust Preferred Securities (Continued)

payments under the Debentures are the sole revenue of the Trusts. All of the common securities are owned by PlainsCapital; however, PlainsCapital is not the primary beneficiary of the Trusts. Accordingly, the Trusts are not included in PlainsCapital's consolidated financial statements.

        The Trusts have issued $65,000,000 of floating rate preferred securities and $2,012,000 of common securities and have invested the proceeds from the securities in floating rate Debentures of PlainsCapital. Information regarding the PlainsCapital Debentures is shown in the following table (in thousands).

Investor
  Issue Date   Amount  

PCC Statutory Trust I

  July 31, 2001   $ 18,042  

PCC Statutory Trust II

  March 26, 2003   $ 18,042  

PCC Statutory Trust III

  September 17, 2003   $ 15,464  

PCC Statutory Trust IV

  February 22, 2008   $ 15,464  

        The stated term of the Debentures is 30 years with interest payable quarterly. The rate on the Debentures, which resets quarterly, is 3-month LIBOR plus an average spread of 3.22%. The total average interest rate at December 31, 2013 was 3.47%. The term, rate and other features of the preferred securities are the same as the Debentures. PlainsCapital's obligations under the Debentures and related documents, taken together, constitute a full and unconditional guarantee of the Trust's obligations under the preferred securities.

15. Income Taxes

        The significant components of the income tax provision (benefit) are as follows (in thousands).

 
  Year Ended December 31,  
 
  2013   2012   2011  

Current:

                   

Federal

  $ 51,441   $ 4,346   $ (966 )

State

    3,414     935      
               

    54,855     5,281     (966 )

Deferred:

                   

Federal

    14,573     (5,649 )   (4,043 )

State

    1,256     (777 )    
               

    15,829     (6,426 )   (4,043 )
               

  $ 70,684   $ (1,145 ) $ (5,009 )
               
               

F-64


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

15. Income Taxes (Continued)

        The income tax provision (benefit) differs from the amount that would be computed by applying the statutory Federal income tax rate of 35% to income (loss) before income taxes as a result of the following (in thousands).

 
  Year Ended December 31,  
 
  2013   2012   2011  

Computed tax at federal statutory rate

  $ 69,088   $ (2,185 ) $ (4,039 )

Tax effect of:

                   

Life insurance

    (114 )   (18 )    

Tax-exempt income, net

    (2,042 )   (151 )    

State income taxes

    3,035     103      

Nondeductible expenses

    2,363     352     (970 )

Minority interest

    (479 )   (174 )    

Nondeductible transaction costs

        1,151      

Prior year return to provision adjustment

    (1,141 )   (150 )    

Other

    (26 )   (73 )    
               

  $ 70,684   $ (1,145 ) $ (5,009 )
               
               

        The components of the tax effects of temporary differences that give rise to the net deferred tax asset included in other assets within the consolidated balance sheet are as follows (in thousands).

 
  December 31,  
 
  2013   2012  

Deferred tax assets:

             

Net operating loss carryforward

  $ 15,919   $ 16,377  

Covered loans

    47,770      

Purchase accounting adjustment—loans

    27,997     50,752  

Allowance for loan losses

    12,383     1,235  

Compensation and benefits

    16,946     15,246  

Indemnification agreements

    8,308     8,242  

Foreclosed property

    13,589     3,701  

Net unrealized change in securities

    19,428      

Other

    16,216     12,916  
           

    178,556     108,469  

Deferred tax liabilities:

   
 
   
 
 

Premises and equipment

    13,269     10,109  

FDIC Indemnification Asset

    67,841      

Intangible assets

    22,708     30,068  

Derivatives

    9,428     12,213  

Net unrealized change in securities

        4,337  

Loan servicing

    7,480     774  

Other

    17,972     17,935  
           

    138,698     75,436  
           

Net deferred tax asset

  $ 39,858   $ 33,033  
           
           

F-65


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

15. Income Taxes (Continued)

        At December 31, 2013 and 2012, the Company had net operating loss carryforwards for Federal income tax purposes of $45.5 million and $46.8 million, respectively. The net operating loss carryforwards are subject to separate return limitations on their usage. These net operating loss carry-forwards expire in 2023 and later years. The net operating loss carry-forwards for alternative minimum Federal income taxes generally are limited to offsetting 90% of the alternative minimum taxable earnings for a taxable year. The Company expects to realize its current deferred tax assets, including these net operating loss carryforwards, through the implementation of certain tax planning strategies surrounding the PlainsCapital Merger, core earnings, and reversal of timing differences. Therefore, the Company has no valuation allowance on its deferred tax assets at December 31, 2013 or 2012.

        GAAP requires the measurement of uncertain tax positions. Uncertain tax positions are the difference between a tax position taken, or expected to be taken in a tax return, and the benefit recognized for accounting purposes. There were no uncertain tax positions at December 31, 2013 and 2012. The Company does not anticipate any significant liabilities for uncertain tax positions to arise in the next twelve months.

        The Company files income tax returns in U.S. federal and several U.S. state jurisdictions. The Company is subject to tax audits in numerous jurisdictions in the U.S. until the applicable statute of limitations expires. Excluding those entities acquired as a part of the PlainsCapital Merger, the Company has been examined by U.S. tax authorities for U.S. federal income tax years prior to 2010, and is under no federal or state tax audits at December 31, 2013. PlainsCapital has been examined by U.S. tax authorities for U.S. federal income tax years prior to 2010, and is under no federal or state tax audits at December 31, 2013.

        For the majority of tax jurisdictions, the Company is no longer subject to federal, state or local income tax examinations by tax authorities for years prior to 2010.

16. Employee Benefits

        Hilltop and its subsidiaries have benefit plans that provide for elective deferrals by employees under Section 401(k) of the Internal Revenue Code. Employee contributions are determined by the level of employee participation and related salary levels per Internal Revenue Service regulations. Hilltop and its subsidiaries match a portion of employee contributions to the plan based on entity-specific factors including the level of normal operating earnings and the amount of eligible employees' contributions and salaries. The amount charged to operating expense for this matching contribution totaled $6.2 million, $0.7 million and $0.2 million during 2013, 2012 and 2011, respectively.

        In connection with the PlainsCapital Merger, PlainsCapital is in the process of terminating its employee stock ownership plan ("ESOP") and distributing the assets held by the ESOP (consisting of cash and shares of Hilltop common stock) to ESOP participants.

        Effective upon the completion of the PlainsCapital Merger, the Company recorded a liability of $8.9 million associated with separate retention agreements entered into between Hilltop and two executive officers of PlainsCapital.

        The Bank purchased $15.0 million of flexible premium universal life insurance in 2001 to help finance the annual expense incurred in providing various employee benefits. At December 31, 2013 and 2012, the carrying value of the policies included in other assets was $24.5 million and $24.1 million, respectively. For the year ended December 31, 2013 and the month ended December 31, 2012, the

F-66


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

16. Employee Benefits (Continued)

Bank recorded income of $0.4 million and $0.1 million, respectively, related to the policies that was reported in other noninterest income within the consolidated statement of operations.

17. Related Party Transactions

        Pursuant to a Management Services Agreement, as amended, Diamond A Administration Company LLC, or Diamond A, an affiliate of Gerald J. Ford, the current Chairman of the Board of Hilltop and the beneficial owner of 17.2% of Hilltop common stock at December 31, 2013, provided certain management services to the Company, including, among others, financial and acquisition evaluation, and office space to Hilltop. The services and office space were provided at a cost of $91,500 per month, plus reasonable out-of-pocket expenses. The services provided under this agreement include those of Hilltop directors, including Gerald J. Ford, Kenneth Russell and Carl B. Webb. Prior to Jeremy Ford assuming the role of Chief Executive Officer of Hilltop, he provided services to Hilltop under the Management Services Agreement. Hilltop also agreed to indemnify and hold harmless Diamond A for its performance or provision of these services, except for gross negligence and willful misconduct. Further, Diamond A's maximum aggregate liability for damages under this agreement is limited to the amounts paid to Diamond A under this agreement during twelve months prior to that cause of action. In connection with the PlainsCapital Merger on November 30, 2012, the Management Services Agreement was terminated. However, pursuant to a Sublease Agreement, Diamond A currently provides office space to Hilltop at a cost of $21,478 per month. This Sublease Agreement continues in effect until July 31, 2018 or such earlier date that the base lease expires.

        Jeremy B. Ford, a director and the Chief Executive Officer of Hilltop, is the beneficiary of a trust that owns a 49% limited partnership interest in Diamond A Financial, L.P. Diamond A Financial, L.P. owned 17.2% of the outstanding Hilltop common stock at December 31, 2013. He also is a director and the Secretary of Diamond A Administration Company, LLC, which has provided management services and office space to Hilltop as described the preceding paragraph. Diamond A Administration Company, LLC is owned by Hunter's Glen/Ford, Ltd., a limited partnership in which a trust for the benefit of Jeremy B. Ford is a 46% limited partner.

        Jeremy B. Ford is the son of Gerald J. Ford. Corey G. Prestidge, Hilltop's General Counsel and Secretary, is the son-in-law of Gerald J. Ford. Accordingly, Messrs. Jeremy Ford and Corey Prestidge are brothers-in-law.

        In the ordinary course of business, the Bank has granted loans to certain directors, executive officers and their affiliates (collectively referred to as related parties) totaling $8.0 million and $23.2 million at December 31, 2013 and 2012, respectively. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other unaffiliated persons and do not involve more than normal risk of collectability. For such loans during 2013, total principal additions were $6.8 million and total principal payments were $8.7 million and reductions due to changes in status as a related party were $13.3 million.

        At December 31, 2013 and 2012, the Bank held deposits of related parties of $154.0 million and $173.5 million, respectively.

        A related party is the lessor in an operating lease with the Bank. The Bank's minimum payment under the lease is $0.5 million annually through 2028, for an aggregate remaining obligation of $7.5 million.

F-67


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

17. Related Party Transactions (Continued)

        The Bank purchases loans from a company for which a related party serves as a director, president and chief executive officer. At both December 31, 2013 and 2012, the outstanding balance of the purchased loans was $6.0 million. The loans were purchased with recourse to the company in the ordinary course of business and the related party had no direct financial interest in the transactions.

        PlainsCapital Equity, LLC is a limited partner in certain limited partnerships that have received loans from the Bank. The Bank made those loans in the normal course of business, using underwriting standards and offering terms that are substantially the same as those used or offered to non-affiliated borrowers. At December 31, 2013 and 2012, the Bank had outstanding loans of $3.0 million and $4.2 million, respectively, in which PlainsCapital Equity, LLC had a limited partnership interest. The investment of PlainsCapital Equity, LLC in these limited partnerships was $3.7 million at both December 31, 2013 and 2012.

18. Commitments and Contingencies

        The Bank acts as agent on behalf of certain correspondent banks in the purchase and sale of federal funds that aggregated $7.5 million and $16.0 million at December 31, 2013 and 2012, respectively.

Legal Matters

        The Company is subject to loss contingencies related to litigation, claims, investigations and legal and administrative cases and proceedings arising in the ordinary course of business. The Company evaluates these contingencies based on information currently available, including advice of counsel. The Company establishes accruals for those matters when a loss contingency is considered probable and the related amount is reasonably estimable. Any accruals are periodically reviewed and may be adjusted as circumstances change. Some of the Company's exposure with respect to loss contingencies may be offset by applicable insurance coverage. In determining the amounts of any accruals or estimates of possible loss contingencies however, the Company does not take into account the availability of insurance coverage. When it is practicable, the Company estimates loss contingencies for possible litigation and claims, whether or not there is an accrued probable loss. When the Company is able to estimate such possible losses, and when it estimates that it is reasonably possible it could incur losses, in excess of amounts accrued, the Company is required to make a disclosure of the aggregate estimation. However, as available information changes, the matters for which the Company is able to estimate, as well as the estimates themselves will be adjusted, accordingly.

        Assessments of litigation and claims exposures are difficult due to many factors that involve inherent unpredictability. Those factors include the following: the varying stages of the proceedings, particularly in the early stages; unspecified, unsupported, or uncertain damages; damages other than compensatory, such as punitive damages; a matter presenting meaningful legal uncertainties, including novel issues of law; multiple defendants and jurisdictions; whether discovery has begun or not or discovery is not complete; meaningful settlement discussions have not commenced; and whether the claim involves a class action and if so, how the class is defined. As a result of some of these factors, the Company may be unable to estimate reasonably possible losses with respect to some or all of the pending and threatened litigation and claims asserted against the Company. The aggregated estimated amount provided above therefore may not include an estimate for every such matter.

F-68


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

18. Commitments and Contingencies (Continued)

        The Company is involved in information-gathering requests and investigations (both formal and informal), as well as reviews, examinations and proceedings (collectively, "Inquiries") by various governmental regulatory agencies, law enforcement authorities and self-regulatory bodies regarding its business, business practices and policies, as well as the conduct of persons with whom it does business. Additional Inquiries will arise from time to time. In connection with those Inquiries, the Company receives document requests, subpoenas and other requests for information. The Inquiries, including those described below, could develop into administrative, civil or criminal proceedings or enforcement actions that could result in consequences that have a material effect on the Company's consolidated financial position, results of operations or cash flows as a whole. Such consequences could include adverse judgments, findings, settlements, penalties, fines, orders, injunctions, restitution, or alterations in the Company's business practices, and could result in additional expenses and collateral costs, including reputational damage.

        As a part of an industry-wide inquiry, PrimeLending has received a subpoena from the Office of Inspector General of the U. S. Department of Housing and Urban Development regarding mortgage-related practices, including those relating to origination practices for loans insured by the Federal Housing Administration. PrimeLending is cooperating with this Inquiry.

        While the final outcome of litigation and claims exposures or of any Inquiries is inherently unpredictable, management is currently of the opinion that the outcome of pending and threatened litigation and Inquiries will not have a material effect on the Company's business, consolidated financial position, results of operations or cash flows as a whole. However, in the event of unexpected future developments, it is reasonably possible that an adverse outcome in any of the matters discussed above could be material to the Company's business, consolidated financial position, results of operations or cash flows for any particular reporting period of occurrence.

Other Contingencies

        The mortgage origination segment may be responsible for errors or omissions relating to its representations and warranties that each loan sold meets certain requirements, including representations as to underwriting standards and the validity of certain borrower representations in connection with the loan. If determined to be at fault, the mortgage origination segment either repurchases the affected loan from the investor or reimburses the investor's losses. The mortgage origination segment has established an indemnification liability reserve for such probable losses.

        Generally, the mortgage origination segment first becomes aware that an investor believes a loss has been incurred on a sold loan when it receives a written request from the investor to repurchase the loan or reimburse the investor's losses. Upon completing its review of the investor's request, the mortgage origination segment establishes a specific claims reserve for the loan if it concludes its obligation to the investor is both probable and reasonably estimable.

        An additional reserve has been established for probable investor losses that may have been incurred, but not yet reported to the mortgage origination segment based upon a reasonable estimate of such losses. Factors considered in the calculation of this reserve include, but are not limited to, the total volume of loans sold exclusive of specific investor requests, actual investor claim settlements and the severity of estimated losses resulting from future claims, and the mortgage origination segment's history of successfully curing defects identified in investor claim requests. While the mortgage origination segment's sales contracts typically include borrower early payment default repurchase

F-69


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

18. Commitments and Contingencies (Continued)

provisions, these provisions have not been a primary driver of investor claims to date, and therefore, are not a primary factor considered in the calculation of this reserve.

        At December 31, 2013 and 2012, the mortgage origination segment's indemnification liability reserve totaled $21.1 million and $19.0 million, respectively. The provision for indemnification losses was $3.5 million and $0.4 million during the year ended December 31, 2013 and the month ended December 31, 2012, respectively.

        The following tables provide for a roll-forward of claims activity for loans put-back to the mortgage origination segment based upon an alleged breach of a representation or warranty with respect to a loan sold and related indemnification liability reserve activity (in thousands).

 
  Representation and Warranty Specific
Claims Activity—Origination Loan
Balance
 
 
  Year Ended
December 31, 2013
  Month Ended
December 31, 2012
 

Balance, beginning of period

  $ 39,693   $ 35,217  

Claims made

    40,001     6,463  

Claims resolved with no payment

    (17,746 )   (1,565 )

Repurchases

    (6,255 )   (422 )

Indemnification payments

    (3,781 )    
           

Balance, end of period

  $ 51,912   $ 39,693  
           
           

 

 
  Indemnification Liability Reserve Activity  
 
  Year Ended
December 31, 2013
  Month Ended
December 31, 2012
 

Balance, beginning of period

  $ 18,964   $ 18,544  

Additions for new sales

    3,539     420  

Repurchases

    (251 )   (31 )

Early payment defaults

    (528 )   (51 )

Indemnification payments

    (1,003 )    

Change in estimate

    400     82  
           

Balance, end of period

  $ 21,121   $ 18,964  
           
           

Reserve for Indemnification Liability:

             

Specific claims

  $ 12,179        

Incurred but not reported claims

    8,942        
             

Total

  $ 21,121        
             
             

        Although management considers the total indemnification liability reserve to be appropriate, there may be changes in the reserve over time to address incurred losses, due to unanticipated adverse changes in the economy and historical loss patterns, discrete events adversely affecting specific borrowers or industries, and/or actions taken by institutions or investors. The impact of such matters is considered in the reserving process when probable and estimable.

F-70


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

18. Commitments and Contingencies (Continued)

        In connection with the FNB Transaction, the Bank entered into two loss-share agreements with the FDIC that collectively cover $1.2 billion of loans and OREO acquired in the FNB Transaction. Pursuant to the loss-share agreements, the FDIC has agreed to reimburse the Bank the following amounts with respect to the covered assets: (i) 80% of losses on the first $240.4 million of losses incurred; (ii) 0% of losses in excess of $240.4 million up to and including $365.7 million of losses incurred; and (iii) 80% of losses in excess of $365.7 million of losses incurred. The Bank has also agreed to reimburse the FDIC for any subsequent recoveries. The loss-share agreements for commercial and single family residential loans are in effect for 5 years and 10 years, respectively, from the Bank Closing Date and the loss recovery provisions to the FDIC are in effect for 8 years and 10 years, respectively, from the Bank Closing Date. In accordance with the loss-share agreements, the Bank may be required to make a "true-up" payment to the FDIC, approximately ten years following the Bank Closing Date, if the FDIC's initial estimate of losses on covered assets is greater than the actual realized losses. The "true-up" payment is calculated using a defined formula set forth in the P&A Agreement.

        As discussed in Note 16 to the consolidated financial statements, effective upon completion of the PlainsCapital Merger, Hilltop entered into separate retention agreements with two executive officers of PlainsCapital, one having an initial term of three years (with automatic one-year renewals at the end of two years and each anniversary thereof) and the other having an initial term of two years (with automatic one-year renewals at the end of the first year and each anniversary thereof). Each of these retention agreements provides for severance pay benefits if the executive officer's employment is terminated without "cause".

        In addition to these retention agreements, PlainsCapital and its subsidiaries maintain employment contracts with certain executive officers and severance agreements with certain other senior officers that provide severance pay benefits in the event of a "change in control" as defined in these agreements. Each of these agreements will expire on the second anniversary following the effective date of the PlainsCapital Merger. Given that the PlainsCapital Merger constitutes a "change in control" of PlainsCapital, severance pay benefits will be payable if an officer subject to one of these employment or severance agreements is terminated without cause prior to the second anniversary of the effective date of the PlainsCapital Merger. Prior to expiration of these agreements, similar severance pay benefits will be payable in the event of termination of such officer without "cause" following a change in control of Hilltop.

        Hilltop and its subsidiaries lease space, primarily for branch facilities and automated teller machines, under noncancelable operating leases with remaining terms, including renewal options, of 1 to 15 years and under capital leases with remaining terms of 11 to 15 years. Rental expense under the

F-71


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

18. Commitments and Contingencies (Continued)

operating leases was $29.2 million, $2.9 million and $0.5 million in 2013, 2012 and 2011, respectively. Future minimum lease payments under these agreements follow (in thousands).

 
  Operating Leases   Capital Leases  

2014

  $ 25,541   $ 1,080  

2015

    22,815     1,090  

2016

    16,496     1,103  

2017

    12,019     1,129  

2018

    11,222     1,167  

Thereafter

    30,041     9,514  
           

Total minimum lease payments

  $ 118,134     15,083  
           
           

Amount representing interest

          (6,824 )
             

Present value of minimum lease payments

        $ 8,259  
             
             

19. Financial Instruments with Off-Balance Sheet Risk

        The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit that involve varying degrees of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received. The contract amounts of those instruments reflect the extent of involvement (and therefore the exposure to credit loss) the Bank has in particular classes of financial instruments.

        Commitments to extend credit are agreements to lend to a customer provided that the terms established in the contract are met. Commitments generally have fixed expiration dates and may require payment of fees. Because some commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.

        In the aggregate, the Bank had outstanding unused commitments to extend credit of $1.1 billion at December 31, 2013 and outstanding standby letters of credit of $41.7 million at December 31, 2013.

        The Bank uses the same credit policies in making commitments and standby letters of credit as it does for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary, in these transactions is based on management's credit evaluation of the borrower. Collateral held varies but may include real estate, accounts receivable, marketable securities, interest-bearing deposit accounts, inventory, and property, plant and equipment.

        In the normal course of business, FSC executes, settles, and finances various securities transactions that may expose FSC to off-balance sheet risk in the event that a customer or counterparty does not fulfill its contractual obligations. Examples of such transactions include the sale of securities not yet purchased by customers or for the account of FSC, clearing agreements between FSC and various

F-72


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

19. Financial Instruments with Off-Balance Sheet Risk (Continued)

clearinghouses and broker-dealers, secured financing arrangements that involve pledged securities, and when-issued underwriting and purchase commitments.

20. Stock-Based Compensation

        Pursuant to the Hilltop Holdings 2012 Equity Incentive Plan (the "2012 Plan"), the Company may grant nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights and other awards to employees of the Company, its subsidiaries and outside directors of the Company. Upon the approval by stockholders and effectiveness of the 2012 Plan in September 2012, no additional awards were permissible under the 2003 Equity Incentive Plan (the "2003 Plan"). In the aggregate, 4,000,000 shares of common stock may be delivered pursuant to awards granted under the 2012 Plan. At December 31, 2013, 3,519,657 shares of common stock remain available for issuance pursuant to the 2012 Plan.

        During 2013, the Compensation Committee of the Board of Directors of the Company awarded certain executives and key employees a total of 471,000 restricted shares of common stock ("Restricted Stock Awards") pursuant to the 2012 Plan. These Restricted Stock Awards are subject to service conditions set forth in the grant agreements with associated costs recognized on a straight-line basis over the respective vesting periods. The weighted average grant date fair value related to these Restricted Stock Awards was $13.32 per share. At December 31, 2013, unrecognized compensation expense related to these Restricted Stock Awards was $4.9 million, which will be amortized through September 2016. These Restricted Stock Awards provide for accelerated vesting under certain conditions.

        During 2013, 2012 and 2011, Hilltop granted 9,343, 5,183 and 5,418 common shares, respectively, to independent members of the Company's Board of Directors for service rendered to the Company during the respective periods.

        Stock options granted on November 2, 2011 to two senior executives pursuant to the 2003 Plan to purchase an aggregate of 600,000 shares of the Company's common stock (the "Stock Option Awards") at an exercise price of $7.70 per share were outstanding at December 31, 2013. These Stock Option Awards vest in five equal installments beginning on the grant date, with the remainder vesting on each grant date anniversary through 2015. Compensation expense related to these Stock Option Awards was $0.9 million. At December 31, 2013, unrecognized compensation expense related to these Stock Option Awards was $0.2 million, which will be amortized on a straight-line basis through October 2015. Additionally, these Stock Option Awards expire on November 2, 2016. The fair value for these Stock Option Awards granted was estimated using the Black-Scholes option pricing model with an expected volatility of 25%, a risk-free interest rate of 0.96%, a dividend yield rate of zero, a five-year expected life of the options and a forfeiture rate of 15%.

        Compensation expense related to the plans was $1.7 million, $0.5 million and $0.1 million for the years ended December 31, 2013, 2012 and 2011, respectively.

21. Regulatory Matters

Bank

        The Bank and Hilltop are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain

F-73


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

21. Regulatory Matters (Continued)

mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct, material effect on the consolidated financial statements. The regulations require us to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

        Quantitative measures established by regulation to ensure capital adequacy require the companies to maintain minimum amounts and ratios (set forth in the following table) of Tier 1 capital (as defined in the regulations) to total average assets (as defined), and minimum ratios of Tier 1 and total capital (as defined) to risk-weighted assets (as defined). The Tier 1 Capital (to average assets) ratio at December 31, 2012 was calculated using the average assets for the month of December 2012.

        During September 2013, Hilltop and PlainsCapital contributed capital of $35.0 million and $25.0 million, respectively, to the Bank to provide additional capital in connection with the FNB Transaction.

        The following table shows the Bank's and Hilltop's consolidated actual capital amounts and ratios compared to the regulatory minimum capital requirements and the Bank's regulatory minimum capital requirements needed to qualify as a "well-capitalized" institution (dollars in thousands), without giving effect to the final Basel III capital rules adopted by the Federal Reserve Board on July 2, 2013.

 
  Actual   Minimum Capital
Requirements
  To Be Well
Capitalized
Minimum Capital
Requirements
 
 
  Amount   Ratio   Amount   Ratio   Amount   Ratio  

December 31, 2013

                                     

Tier 1 capital (to average assets):

                                     

Bank

  $ 762,364     9.29 % $ 328,275     4 % $ 410,344     5 %

Hilltop

    1,112,424     12.81 %   347,480     4 %   N/A     N/A  

Tier 1 capital (to risk-weighted assets):          

                                     

Bank

    762,364     13.38 %   227,984     4 %   341,976     6 %

Hilltop

    1,112,424     18.53 %   240,159     4 %   N/A     N/A  

Total capital (to risk-weighted assets):

                                     

Bank

    797,771     14.00 %   455,968     8 %   569,960     10 %

Hilltop

    1,148,736     19.13 %   480,318     8 %   N/A     N/A  

December 31, 2012

   
 
   
 
   
 
   
 
   
 
   
 
 

Tier 1 capital (to average assets):          

                                     

Bank

  $ 542,307     8.84 % $ 245,495     4 % $ 306,869     5 %

Hilltop

    871,379     13.08 %   266,514     4 %   N/A     N/A  

Tier 1 capital (to risk-weighted assets):

                                     

Bank

    542,307     11.83 %   183,308     4 %   274,961     6 %

Hilltop

    871,379     17.72 %   196,670     4 %   N/A     N/A  

Total capital (to risk-weighted assets):

                                     

Bank

    546,598     11.93 %   366,615     8 %   458,269     10 %

Hilltop

    875,670     17.81 %   393,340     8 %   N/A     N/A  

F-74


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

21. Regulatory Matters (Continued)

        To be considered "adequately capitalized" (as defined) under regulatory requirements, the Bank must maintain minimum Tier 1 capital to total average assets and Tier 1 capital to risk-weighted assets ratios of 4%, and a total capital to risk-weighted assets ratio of 8%. Based on the actual capital amounts and ratios shown in the previous table, the Bank's ratios place it in the "well capitalized" (as defined) capital category under regulatory requirements.

        A reconciliation of equity capital to Tier 1 and total capital (as defined) is as follows (in thousands).

 
  December 31, 2013   December 31, 2012  
 
  Bank   Hilltop   Bank   Hilltop  

Total equity capital

  $ 985,519   $ 1,311,141   $ 831,677   $ 1,144,496  

Add:

                         

Minority interests

    781     781     2,054     2,054  

Trust preferred securities

        65,000         65,000  

Net unrealized holding losses on securities available for sale and held in trust

    42,901     34,863     1,125     (8,094 )

Deduct:

                         

Goodwill and other disallowed intangible assets

    (264,822 )   (297,174 )   (292,341 )   (331,508 )

Other

    (2,015 )   (2,187 )   (208 )   (569 )
                   

Tier 1 capital (as defined)

    762,364     1,112,424     542,307     871,379  

Add: Allowable Tier 2 capital

                         

Allowance for loan losses

    35,407     35,407     4,291     4,291  

Net unrealized holding losses on equity securities

        905          
                   

Total capital (as defined)

  $ 797,771   $ 1,148,736   $ 546,598   $ 875,670  
                   
                   

        Management continues to evaluate the final Basel III capital rules and their impact, which would apply to reporting periods beginning after January 1, 2015.

Financial Advisory

        Pursuant to the net capital requirements of the Exchange Act, FSC has elected to determine its net capital requirements using the alternative method. Accordingly, FSC is required to maintain minimum net capital, as defined in Rule 15c3-1 promulgated under the Exchange Act, equal to the greater of $250,000 or 2% of aggregate debit balances, as defined in Rule 15c3-3 promulgated under the Exchange Act. At December 31, 2013, FSC had net capital of $74.3 million (the minimum net capital requirement was $3.4 million), net capital maintained by FSC was 43% of aggregate debits, and net capital in excess of the minimum requirement was $70.8 million.

Mortgage Origination

        As a mortgage originator, PrimeLending is subject to minimum net worth requirements established by the United States Department of Housing and Urban Development ("HUD") and the Government National Mortgage Association ("GNMA"). On an annual basis, PrimeLending submits audited financial statements to HUD and GNMA documenting PrimeLending's compliance with its minimum net worth requirements. In addition, PrimeLending monitors compliance on an ongoing basis and, as of

F-75


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

21. Regulatory Matters (Continued)

December 31, 2013, PrimeLending's net worth exceeded the amounts required by both HUD and GNMA.

Insurance

        The statutory financial statements of the Company's insurance subsidiaries, which are domiciled in the State of Texas, are presented on the basis of accounting practices prescribed or permitted by the Texas Department of Insurance. Texas has adopted the National Association of Insurance Commissioners' ("NAIC") statutory accounting practices as the basis of its statutory accounting practices with certain differences that are not significant to the insurance company subsidiaries' statutory equity.

        A summary of statutory capital and surplus and statutory net income (loss) of each insurance subsidiary is as follows (in thousands).

 
  December 31,  
 
  2013   2012  

Capital and surplus:

             

National Lloyds Insurance Company

  $ 98,602   $ 94,558  

American Summit Insurance Company

    26,452     25,761  

 

 
  Year Ended December 31,  
 
  2013   2012   2011  

Statutory net income (loss):

                   

National Lloyds Insurance Company

  $ 3,583   $ (3,858 ) $ (133 )

American Summit Insurance Company

    521     972     (541 )

        Regulations of the Texas Department of Insurance require insurance companies to maintain minimum levels of statutory surplus to ensure their ability to meet their obligations to policyholders. At December 31, 2013, the Company's insurance subsidiaries had statutory surplus in excess of the minimum required.

        The NAIC has adopted a risk based capital ("RBC") formula for insurance companies that establishes minimum capital requirements indicating various levels of available regulatory action on an annual basis relating to insurance risk, asset credit risk, interest rate risk and business risk. The RBC formula is used by the NAIC and certain state insurance regulators as an early warning tool to identify companies that require additional scrutiny or regulatory action. At December 31, 2013, the Company's insurance subsidiaries' RBC ratio exceeded the level at which regulatory action would be required.

22. Stockholders' Equity

        The Bank is subject to certain restrictions on the amount of dividends it may declare without prior regulatory approval. At December 31, 2013, $148.7 million of its earnings was available for dividend declaration without prior regulatory approval.

        At December 31, 2013, the maximum aggregate dividend that may be paid to NLC from its insurance company subsidiaries in 2014 without regulatory approval is approximately $12.5 million.

F-76


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

22. Stockholders' Equity (Continued)

Hilltop Series B Preferred Stock

        On November 29, 2012, Hilltop filed with the State Department of Assessments and Taxation of the State of Maryland articles supplementary for the Hilltop Series B Preferred Stock, setting forth its terms. Holders of the Hilltop Series B Preferred Stock are entitled to noncumulative cash dividends at a fluctuating dividend rate based on Hilltop's level of qualified small business lending. The Hilltop Series B Preferred Stock is non-voting, except in limited circumstances, and ranks senior to Hilltop's common stock with respect to the payment of dividends and distribution of assets upon any liquidation, dissolution or winding up of Hilltop.

        As discussed in Note 2, and as a result of the PlainsCapital Merger, each outstanding share of PlainsCapital Non-Cumulative Perpetual Preferred Stock, Series C, all of which were held by the U.S. Treasury, was converted into one share of Hilltop Series B Preferred Stock.

        The terms of the Hilltop Series B Preferred Stock restrict Hilltop's ability to pay dividends on, make distributions with respect to, or redeem, purchase or acquire, or make a liquidation payment on its common stock and other Hilltop capital stock ranking junior to the Hilltop Series B Preferred Stock, and on other preferred stock and other stock ranking on a parity with the Hilltop Series B Preferred Stock, in the event that Hilltop does not declare dividends on the Hilltop Series B Preferred Stock during any dividend period.

        The terms of the Hilltop Series B Preferred Stock provide for the payment of non-cumulative dividends on a quarterly basis. The dividend rate, as a percentage of the liquidation amount, fluctuated until December 31, 2013 based upon changes in the level of "qualified small business lending" ("QSBL") by the Bank.

        The shares of Hilltop Series B Preferred Stock are senior to shares of the Company's common stock with respect to dividends and liquidation preference, and qualify as Tier 1 Capital for regulatory purposes. At December 31, 2013 and 2012, $114.1 million of Hilltop Series B Preferred Stock was outstanding.

        The dividend rate on the Hilltop Series B Preferred Stock was 4.706% at December 31, 2013. From January 1, 2014 until March 26, 2016, the dividend rate is fixed at 5.0% based upon our level of QSBL at September 30, 2013. Beginning March 27, 2016, the dividend rate on any outstanding shares of Hilltop Series B Preferred Stock will be fixed at nine percent (9%) per annum.

        As long as shares of Hilltop Series B Preferred Stock remain outstanding, Hilltop may not pay dividends to its common stockholders (nor may Hilltop repurchase or redeem any shares of its common stock) during any quarter in which the Company fails to declare and pay dividends on the Hilltop Series B Preferred Stock and for the next three quarters following such failure. In addition, under the terms of the Hilltop Series B Preferred Stock, Hilltop may only declare and pay dividends on its common stock (or repurchase shares of Hilltop common stock), if, after payment of such dividend, the dollar amount of Hilltop's Tier 1 capital would be at least ninety percent (90%) of Tier 1 capital as of September 27, 2011, excluding any charge-offs and redemptions of the Hilltop Series B Preferred Stock.

        The Company may redeem the Hilltop Series B Preferred Stock at any time at its option, at a redemption price of 100% of the liquidation amount plus accrued but unpaid dividends, subject to the approval of the Company's federal banking regulator.

F-77


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

23. Other Noninterest Income and Expense

        The following tables show the components of other noninterest income and expense (in thousands).

 
  Year Ended December 31,  
 
  2013   2012   2011  

Other noninterest income:

                   

Revenue from check and stored value cards

  $ 4,250   $ 275   $  

Net loss from trading securities portfolio

    (2,773 )   (646 )    

Change in fair value of FSC derivatives

    11,427     238      

Trust fees

    5,050     411      

Service charges on depositor accounts

    11,376     724      

Commission and insurance agency income

    2,765     2,159     2,645  

Direct bill fees and insurance service fee income

    4,613     4,109     4,140  

Other

    7,962     1,303      
               

  $ 44,670   $ 8,573   $ 6,785  
               
               

Other noninterest expense:

                   

Marketing

  $ 17,257   $ 2,245   $  

Data processing

    17,922     4,033     434  

Printing, stationery and supplies

    4,583     4,033      

Funding fees

    4,403     735      

Unreimbursed loan closing costs

    30,095     5,944      

Amortization of intangible assets

    11,087     1,986     1,525  

Acquisition costs

    117     6,570     2,603  

Management fees

        1,025     1,098  

Accounting fees

    5,455     2,269     852  

Other professional services

    37,806     5,004     412  

Other

    59,222     524     2,869  
               

  $ 187,947   $ 34,368   $ 9,793  
               
               

24. Derivative Financial Instruments

        The Company uses various derivative financial instruments to mitigate interest rate risk. The Bank's interest rate risk management strategy involves effectively modifying the re-pricing characteristics of certain assets and liabilities so that changes in interest rates do not adversely affect the net interest margin. PrimeLending has interest rate risk relative to IRLCs and its inventory of mortgage loans held for sale. PrimeLending is exposed to such rate risk from the time an IRLC is made to an applicant to the time the related mortgage loan is sold. To mitigate interest rate risk, PrimeLending executes forward commitments to sell mortgage-backed securities ("MBSs"). FSC uses forward commitments to both purchase and sell MBSs to facilitate customer transactions and as a means to hedge related exposure to interest rate risk in certain inventory positions.

F-78


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

24. Derivative Financial Instruments (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 produced a net gain of $8.2 million for the year ended December 31, 2013 and a net loss of $5.9 million the month ended December 31, 2012, which were recorded as a component of net gains from sale of loans and other mortgage production income. Changes in fair value are attributable to changes in the volume of IRLCs, mortgage loans held for sale, commitments to purchase and sell MBSs and changes in market interest rates. Changes in market interest rates also conversely affect the value of PrimeLending's mortgage loans held for sale, which are measured at fair value under the Fair Value Option. The effect of the change in market interest rates on PrimeLending's loans held for sale is discussed in Note 3 to the consolidated financial statements. The fair values of FSC's derivative instruments are recorded in other assets or other liabilities, as appropriate, and changes in the fair values of FSC's derivatives produced net gains of $11.4 million and $0.2 million for the year ended December 31, 2013 and the month ended December 31, 2012, respectively, which were recorded as a component of other noninterest income.

        Derivative positions are presented in the following table (in thousands).

 
  December 31, 2013   December 31, 2012  
 
  Notional
Amount
  Estimated
Fair Value
  Notional
Amount
  Estimated
Fair Value
 

Derivative instruments:

                         

IRLCs

  $ 602,467   $ 12,151   $ 968,083   $ 15,150  

Commitments to purchase MBSs

    236,305     (109 )   165,128     466  

Interest rate swaps

            1,969     25  

Commitments to sell MBSs

    1,645,332     11,383     1,586,930     (1,025 )

Fee Award Option

    20,432     (5,600 )   20,432     (4,490 )

25. Balance Sheet Offsetting

        Certain financial instruments, including resale and repurchase agreements, securities lending arrangements and derivatives, may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or similar agreements. The following tables present the assets and

F-79


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

25. Balance Sheet Offsetting (Continued)

liabilities subject to an enforceable master netting arrangement, repurchase agreements, or similar agreements with offsetting rights (in thousands).

 
   
   
   
  Gross Amounts Not
Offset in
the Balance Sheet
   
 
 
   
   
  Net Amounts
of Assets
Presented in the
Balance Sheet
   
 
 
  Gross Amounts
of Recognized
Assets
  Gross Amounts
Offset in the
Balance Sheet
  Financial
Instruments
  Cash
Collateral
Pledged
  Net
Amount
 

December 31, 2013

                                     

Securities borrowed:

                                     

Institutional counterparties

  $ 107,365   $   $ 107,365   $ (107,365 ) $   $  

Forward MBS sale derivatives:

   
 
   
 
   
 
   
 
   
 
   
 
 

Institutional counterparties

    11,489     (76 )   11,413         (286 )   11,127  
                           

  $ 118,854   $ (76 ) $ 118,778   $ (107,365 ) $ (286 ) $ 11,127  
                           
                           

December 31, 2012

                                     

Securities Borrowed:

                                     

Institutional counterparties

  $ 103,936   $   $ 103,936   $ (103,936 ) $   $  
                           

  $ 103,936   $   $ 103,936   $ (103,936 ) $   $  
                           
                           

 

 
   
   
   
  Gross Amounts Not
Offset in
the Balance Sheet
   
 
 
   
   
  Net Amounts
of Liabilities
Presented in the
Balance Sheet
   
 
 
  Gross Amounts
of Recognized
Liabities
  Gross Amounts
Offset in the
Balance Sheet
  Financial
Instruments
  Cash
Collateral
Pledged
  Net
Amount
 

December 31, 2013

                                     

Securities Loaned:

                                     

Institutional counterparties

  $ 74,913   $   $ 74,913   $ (74,913 ) $   $  

Repurchase Agreements:

   
 
   
 
   
 
   
 
   
 
   
 
 

Customer counterparties

    107,462         107,462     (107,462 )        

Forward MBS Sale Derivatives:

   
 
   
 
   
 
   
 
   
 
   
 
 

Institutional counterparties

    30         30         (17 )   13  
                           

  $ 182,405   $   $ 182,405   $ (182,375 ) $ (17 ) $ 13  
                           
                           

December 31, 2012

                                     

Securities Loaned:

                                     

Institutional counterparties

  $ 115,102   $   $ 115,102   $ (115,102 ) $   $  

Repurchase Agreements:

   
 
   
 
   
 
   
 
   
 
   
 
 

Customer counterparties

    85,726         85,726     (85,726 )        

Forward MBS Sale Derivatives:

   
 
   
 
   
 
   
 
   
 
   
 
 

Institutional counterparties

    2,000     (975 )   1,025         (249 )   776  
                           

  $ 202,828   $ (975 ) $ 201,853   $ (200,828 ) $ (249 ) $ 776  
                           
                           

F-80


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

26. Broker-Dealer and Clearing Organization Receivables and Payables

        Broker-dealer and clearing organization receivables and payables consisted of the following (in thousands).

 
  December 31,  
 
  2013   2012  

Receivables:

             

Securities borrowed

  $ 107,365   $ 103,936  

Securities failed to deliver

    7,160     33,045  

Clearing organizations

    4,698     8,543  

Due from dealers

    94     40  
           

  $ 119,317   $ 145,564  
           
           

Payables:

             

Securities loaned

  $ 74,913   $ 115,102  

Correspondents

    44,852     41,414  

Securities failed to receive

    5,523     31,474  

Clearing organizations

    4,390      
           

  $ 129,678   $ 187,990  
           
           

27. Deferred Policy Acquisition Cost

        Policy acquisition expenses, primarily commissions, premium taxes and underwriting expenses related to the successful issuance of a new or renewal policy incurred by NLC are deferred and charged against income ratably over the terms of the related policies. A summary of the activity in deferred policy acquisition costs is as follows (in thousands).

 
  Year Ended
December 31,
 
 
  2013   2012  

Balance, beginning of year

  $ 19,812   $ 19,182  

Acquisition expenses capitalized

    41,771     39,387  

Amortization charged to income

    (40,592 )   (38,757 )
           

Balance, end of year

  $ 20,991   $ 19,812  
           
           

        Amortization is included in policy acquisition and other underwriting expenses in the accompanying consolidated statements of operations.

F-81


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

28. Reserves for Unpaid Losses and Loss Adjustment Expenses

        Information regarding the reserve for unpaid losses and LAE are as follows (in thousands).

 
  Year Ended December 31,  
 
  2013   2012   2011  

Balance, beginning of year

  $ 34,012   $ 44,835   $ 58,882  

Less reinsurance recoverables

    (10,385 )   (25,083 )   (43,773 )
               

Net balance, beginning of year

    23,627     19,752     15,109  

Incurred related to:

   
 
   
 
   
 
 

Current year

    110,096     109,328     97,742  

Prior years

    659     (169 )   (1,008 )
               

Total incurred

    110,755     109,159     96,734  

Payments related to:

   
 
   
 
   
 
 

Current year

    (96,284 )   (90,743 )   (83,266 )

Prior years

    (15,138 )   (14,541 )   (8,825 )
               

Total payments

    (111,422 )   (105,284 )   (92,091 )

Net balance, end of year

   
22,960
   
23,627
   
19,752
 

Plus reinsurance recoverables

    4,508     10,385     25,083  
               

Balance, end of year

  $ 27,468   $ 34,012   $ 44,835  
               
               

        The decrease in reserves at December 31, 2013 as compared to December 31, 2012 of $6.5 million is primarily due recovery of reinsurance recoverables outstanding at December 31, 2012 and increased loss payments. The decrease in reserves at December 31, 2012 as compared to December 31, 2011 of $10.8 million is primarily due to the significant subsequent payment and recovery of those reinsurance recoverables outstanding at December 31, 2011.

29. Reinsurance Activity

        NLC limits the maximum net loss that can arise from large risks or risks in concentrated areas of exposure by reinsuring (ceding) certain levels of risk. Substantial amounts of business are ceded, and these reinsurance contracts do not relieve NLC from its obligations to policyholders. Such reinsurance includes quota share, excess of loss, catastrophe, and other forms of reinsurance on essentially all property and casualty lines of insurance. Net insurance premiums earned, losses and LAE and policy acquisition and other underwriting expenses are reported net of the amounts related to reinsurance ceded to other companies. Amounts recoverable from reinsurers related to the portions of the liability for losses and LAE and unearned insurance premiums ceded to them are reported as assets. Failure of reinsurers to honor their obligations could result in losses to NLC; consequently, allowances are established for amounts deemed uncollectible as NLC evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. At December 31, 2013, reinsurance receivables have a carrying value of $5.2 million, which is included in other assets within the consolidated balance sheet. There was no allowance for uncollectible accounts at December 31, 2013, based on NLC's quality requirements.

F-82


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

29. Reinsurance Activity (Continued)

        Reinsurers with a balance in excess of 5% of the Company's outstanding reinsurance receivables at December 31, 2013 are listed below (in thousands).

 
  Balances
Due From
Reinsurers
  A.M. Best
Rating

Federal Emergency Management Agency

  $ 3,875   N/A

General Reinsurance

    1,119   A++

Lloyd's Syndicate # 2001

    409   A+

Hannover Rueckversicherung

    295   A+

R+V Versicherung AG

    360   N/A
         

  $ 6,058    
         
         

        The effects of reinsurance on premiums written and earned are summarized as follows (in thousands).

 
  Year Ended December 31,  
 
  2013   2012   2011  
 
  Written   Earned   Written   Earned   Written   Earned  

Premiums from direct business

  $ 173,982   $ 168,942   $ 163,780   $ 162,383   $ 155,054   $ 147,419  

Reinsurance assumed

    7,987     7,202     6,422     5,882     5,388     5,176  

Reinsurance ceded

    (18,528 )   (18,611 )   (19,751 )   (21,564 )   (18,705 )   (18,547 )
                           

Net premiums

  $ 163,441   $ 157,533   $ 150,451   $ 146,701   $ 141,737   $ 134,048  
                           
                           

        The effects of reinsurance on incurred losses are as follows (in thousands).

 
  Year Ended December 31,  
 
  2013   2012   2011  

Loss and LAE incurred

  $ 117,089   $ 115,347   $ 92,655  

Reinsurance recoverables

    (6,334 )   (6,188 )   4,079  
               

Net loss and LAE incurred

  $ 110,755   $ 109,159   $ 96,734  
               
               

Multi-line excess of loss coverage

        In addition to the catastrophe reinsurance noted below, both NLIC and ASIC participate in an excess of loss program with General Reinsurance Corporation. The General Reinsurance Corporation program is limited to each risk with respect to property and liability in the amount of $700,000 for each of NLIC and ASIC. Each of NLIC and ASIC retain $300,000 in this program. Effective January 1, 2014, the program limited each risk for property and liability in the amount of $500,000 for each of NLIC and ASIC, with the retention increasing to $500,000.

Catastrophic coverage

        NLC's liabilities for losses and loss adjustment expenses include liabilities for reported losses, liabilities for incurred but not reported, or IBNR, losses and liabilities for loss adjustment expenses, or LAE, less a reduction for reinsurance recoverables related to those liabilities. The amount of liabilities

F-83


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

29. Reinsurance Activity (Continued)

for reported claims is based primarily on a claim-by-claim evaluation of coverage, liability, injury severity or scope of property damage, and any other information considered relevant to estimating exposure presented by the claim. The amounts of liabilities for IBNR losses and LAE are estimated on the basis of historical trends, adjusted for changes in loss costs, underwriting standards, policy provisions, product mix and other factors. Estimating the liability for unpaid losses and LAE is inherently judgmental and is influenced by factors that are subject to significant variation. Liabilities for LAE are intended to cover the ultimate cost of settling claims, including investigation and defense of lawsuits resulting from such claims. Based upon the contractual terms of the reinsurance agreements, reinsurance recoverables offset, in part, NLC's gross liabilities.

        At December 31, 2013, NLC has catastrophic excess of loss reinsurance coverage of losses per event in excess of $8 million retention by NLIC and $1.5 million retention by ASIC. ASIC maintains an underlying layer of coverage, providing $6.5 million in excess of its $1.5 million retention to bridge to the primary program. The reinsurance in excess of $8 million is comprised of four layers of protection: $17 million in excess of $8 million retention; $25 million in excess of $25 million loss; $50 million in excess of $50 million loss and $40 million ($70 million through June 30, 2013) in excess of $100 million loss. NLIC and ASIC retain no participation in any of the layers, beyond the first $8 million and $1.5 million, respectively. At December 31, 2013, total retention for any one catastrophe that affects both NLIC and ASIC was limited to $8 million in the aggregate.

        Effective July 1, 2013, NLC renewed its catastrophic reinsurance contract for its third and fourth layers of reinsurance for a two year period. In the contract renewal, the coverage provided by the fourth layer changed to reflect the reduction of exposure in Texas primarily as a result of NLIC exiting the Texas coast and reducing its exposure in Harris County, Texas. The coverage provides $40 million in excess of $100 million loss, resulting in catastrophic excess of loss reinsurance coverage up to $140 million.

        Effective January 1, 2014, NLC renewed its reinsurance contract for its first and second layers of reinsurance for an eighteen month period. The projected premiums on these treaties for NLIC and ASIC are $2.7 million and $1.6 million, respectively, in 2014. Additionally, NLC purchased an underlying excess of loss contract that provides $10 million aggregate coverage for sub-catastrophic events. The contract has a 66% subscription level, with a projected premium of $2.4 million in 2014.

        During 2013, NLC experienced two significant catastrophes that resulted in losses in excess of retention at NLIC, as compared to one significant catastrophe during 2012 and none during 2011. NLC did not experience any significant catastrophe that resulted in losses in excess of retention at ASIC during 2013, 2012 or 2011. The two tornado, hail and wind storms that exceeded retention in 2013 had incurred losses of $18.3 million. The Texas hail storm that exceeded retention in 2012 had incurred losses of $8.3 million. Gross losses from other prior year catastrophic events, including Hurricanes Ike and Dolly, was $0.8 million, as compared to favorable development of $7.0 million in 2011. These losses have no effect on net loss and LAE incurred because the catastrophic events exceeded retention levels and are fully recoverable. The primary financial effect beyond the reinsurance retention is additional reinstatement premium payable to the affected reinsurers. Reinstatement premiums during 2013, 2012 and 2011 of $0.3 million, $0.5 million and $0.1 million, respectively, are recorded as ceded premiums.

F-84


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

30. Segment and Related Information

        The Company currently has four reportable business segments that are organized primarily by the core products offered to the segments' respective customers. These segments reflect the manner in which operations are managed and the criteria used by the Company's chief operating decision maker function to evaluate segment performance, develop strategy and allocate resources. The chief operating decision maker function consists of the President and Chief Executive Officer of the Company and the Chief Executive Officer of PlainsCapital. During the fourth quarter of 2013, we began presenting certain amounts previously allocated to the four reportable business segments within Corporate to better reflect our internal organizational structure. This change had no impact on the Company's consolidated results of operations. The Company's historical segment disclosures have been revised to conform to the current presentation.

        The banking segment includes the operations of the Bank, which, since September 14, 2013, includes the operations acquired in the FNB Transaction. The mortgage origination segment is comprised of PrimeLending. The insurance segment is composed of NLC. The financial advisory segment is composed of First Southwest.

        Corporate includes certain activities not allocated to specific business segments. These activities include holding company financing and investing activities, and management and administrative services to support the overall operations of the Company including, but not limited to, certain executive management, corporate relations, legal, finance, and acquisition costs not allocated to business segments.

        Balance sheet amounts for remaining subsidiaries not discussed previously and the elimination of intercompany transactions are included in "All Other and Eliminations." The following tables present certain information about reportable segment revenues, operating results, goodwill and assets (in thousands).

Year Ended December 31, 2013
  Banking   Mortgage
Origination
  Insurance   Financial
Advisory
  Corporate   All Other and
Eliminations
  Hilltop
Consolidated
 

Net interest income (expense)

  $ 293,254   $ (37,840 ) $ 7,442   $ 12,064   $ (1,597 ) $ 22,878   $ 296,201  

Provision for loan losses

    37,140             18             37,158  

Noninterest income

    71,045     537,497     166,163     102,714         (27,334 )   850,085  

Noninterest expense

    155,102     472,284     166,006     112,360     10,439     (4,456 )   911,735  
                               

Income (loss) before income taxes

  $ 172,057   $ 27,373   $ 7,599   $ 2,400   $ (12,036 ) $   $ 197,393  
                               
                               

 

Year Ended December 31, 2012
  Banking   Mortgage
Origination
  Insurance   Financial
Advisory
  Corporate   All Other and
Eliminations
  Hilltop
Consolidated
 

Net interest income (expense)

  $ 24,885   $ (4,987 ) $ 4,730   $ 1,191   $ 39   $ 2,984   $ 28,842  

Provision for loan losses

    3,670             130             3,800  

Noninterest income

    4,601     57,618     154,147     10,909         (3,043 )   224,232  

Noninterest expense

    16,130     50,296     163,585     11,078     14,487     (59 )   255,517  
                               

Income (loss) before income taxes

  $ 9,686   $ 2,335   $ (4,708 ) $ 892   $ (14,448 ) $   $ (6,243 )
                               
                               

F-85


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

30. Segment and Related Information (Continued)

 

Year Ended December 31, 2011
  Banking   Mortgage
Origination
  Insurance   Financial
Advisory
  Corporate   All Other and
Eliminations
  Hilltop
Consolidated
 

Net interest income (expense)

  $   $   $ 4,915   $   $ (2,851 ) $   $ 2,064  

Provision for loan losses

                             

Noninterest income

            141,650                 141,650  

Noninterest expense

            146,386         8,868         155,254  
                               

Income (loss) before income taxes

  $   $   $ 179   $   $ (11,719 ) $   $ (11,540 )
                               
                               

December 31, 2013

                                           

Goodwill

  $ 207,741   $ 13,071   $ 23,988   $ 7,008   $   $   $ 251,808  
                               
                               

Total assets

  $ 7,981,517   $ 1,249,091   $ 308,160   $ 520,412   $ 1,316,398   $ (2,471,456 ) $ 8,904,122  
                               
                               

December 31, 2012

                                           

Goodwill

  $ 209,703   $ 13,071   $ 23,988   $ 7,008   $   $   $ 253,770  
                               
                               

Total assets

  $ 6,195,775   $ 1,548,384   $ 305,699   $ 592,017   $ 1,241,125   $ (2,596,135 ) $ 7,286,865  
                               
                               

F-86


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

31. Earnings (Loss) per Common Share

        The following table presents the computation of basic and diluted earnings (loss) per common share (in thousands, except per share data).

 
  Year Ended December 31,  
 
  2013   2012   2011  

Basic earnings (loss) per share:

                   

Income (loss) applicable to Hilltop common stockholders

  $ 121,015   $ (5,851 ) $ (6,531 )

Less: income applicable to participating shares

    (672 )        
               

Net earnings (loss) available to Hilltop common stockholders

  $ 120,343   $ (5,851 ) $ (6,531 )
               
               

Weighted average shares outstanding—basic

    84,382     58,754     56,499  

Basic earnings (loss) per common share

 
$

1.43
 
$

(0.10

)

$

(0.12

)

Diluted earnings (loss) per share:

   
 
   
 
   
 
 

Income (loss) applicable to Hilltop common stockholders

  $ 121,015   $ (5,851 ) $ (6,531 )

Add: interest expense on senior exchangeable notes (net of tax)

    5,059          
               

Net earnings (loss) available to Hilltop common stockholders

  $ 126,074   $ (5,851 ) $ (6,531 )
               
               

Weighted average shares outstanding—basic

    84,382     58,754     56,499  

Effect of potentially dilutive securities

    5,949          
               

Weighted average shares outstanding—diluted

    90,331     58,754     56,499  
               
               

Diluted earnings (loss) per common share

  $ 1.40   $ (0.10 ) $ (0.12 )

        For each of the years ended December 31, 2012 and 2011, the computation of diluted loss per common share did not include 6,208,000 equivalent shares of the Notes as the equivalent exchange rate per share was in excess of the average stock prices for the noted periods. Additionally, options to purchase 688,000 and 199,000 weighted average outstanding shares, respectively, of Hilltop's common stock were not included in the computation of diluted loss per common share for the years ended December 31, 2012 and 2011, as their inclusion would have been anti-dilutive.

32. Condensed Financial Statements of Parent

        Condensed financial statements of Hilltop (parent only) follow (in thousands). Investments in subsidiaries are determined using the equity method of accounting.

F-87


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

32. Condensed Financial Statements of Parent (Continued)

 
  Year Ended December 31,  
 
  2013   2012   2011  

Investment income

  $ 6,635   $ 7,035   $ 4,284  

Interest expense

    8,232     6,996     7,135  

General and administrative expense

    10,439     14,488     8,868  
               

Loss before income taxes, equity in undistributed earnings of subsidiaries and preferred stock activity

    (12,036 )   (14,449 )   (11,719 )

Income tax expense (benefit)

    (4,680 )   (3,313 )   (5,138 )

Equity in undistributed earnings of subsidiaries

    134,065     6,038     50  
               

Net income (loss)

  $ 126,709   $ (5,098 ) $ (6,531 )
               
               

 
  Year Ended December 31,  
 
  2013   2012   2011  

Net income (loss)

  $ 126,709   $ (5,098 ) $ (6,531 )

Other comprehensive income (loss), net of tax

    (43,418 )   (4,900 )   8,581  
               

Comprehensive income (loss)

  $ 83,291   $ (9,998 ) $ 2,050  
               
               

 
  December 31,  
 
  2013   2012   2011  

Assets

                   

Cash and cash equivalents

  $ 163,856   $ 204,754   $ 533,374  

Securities, available for sale

    69,023     64,082     70,513  

Investment in subsidiaries

    1,069,226     944,546     126,017  

Other assets

    14,293     27,743     24,884  
               

Total assets

  $ 1,316,398   $ 1,241,125   $ 754,788  
               
               

Liabilities and Stockholders' Equity

                   

Accounts payable and accrued expenses

  $ 5,257   $ 5,779   $ 8,555  

Notes payable

        90,850     90,850  

Stockholders' equity

    1,311,141     1,144,496     655,383  
               

Total liabilities and stockholders' equity

  $ 1,316,398   $ 1,241,125   $ 754,788  
               
               

F-88


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

32. Condensed Financial Statements of Parent (Continued)

 
  Year Ended December 31,  
 
  2013   2012   2011  

Operating Activities

                   

Net income (loss)

  $ 126,709   $ (5,098 ) $ (6,531 )

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

                   

Equity in undistributed earnings of subsidiaries

    (134,065 )   (6,038 )   (50 )

Deferred income taxes

    8,850     (1,011 )   (3,756 )

Loss on redemption of senior exchangeable notes

    3,733          

Other, net

    132     (3,370 )   (204 )
               

Net cash provided by (used in) operating activities

    5,359     (15,517 )   (10,541 )
               

Investing Activities

                   

Capital contribution

    (35,000 )        

Cash paid for acquisition

        (311,805 )    

Purchases of securities available for sale

            (57,489 )
               

Net cash used in investing activities

    (35,000 )   (311,805 )   (57,489 )
               

Financing Activities

                   

Payments to repurchase common stock

        (1,298 )    

Redemption of senior exchangeable notes

    (11,088 )        

Dividends paid on preferred stock

    (2,985 )        

Other, net

    2,816          
               

Net cash used in financing activities

    (11,257 )   (1,298 )    
               

Net change in cash and cash equivalents

    (40,898 )   (328,620 )   (68,030 )

Cash and cash equivalents, beginning of year

    204,754     533,374     601,404  
               

Cash and cash equivalents, end of year

  $ 163,856   $ 204,754   $ 533,374  
               
               

        During September 2013, Hilltop contributed capital of $35.0 million to the Bank to provide additional capital in connection with the FNB Transaction.

33. Recently Issued Accounting Standards

        In July 2013, the FASB issued ASU No. 2013-11 to require an entity to present an unrecognized tax benefit, or portion thereof, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such

F-89


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

33. Recently Issued Accounting Standards (Continued)

purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendment is effective for the Company on January 1, 2014 and is to be applied prospectively to all unrecognized tax benefits that exist at the balance sheet date, although retrospective adoption is permitted. Adoption of the amendment is not expected to have a significant effect on the Company's consolidated financial statements.

        In February 2013, the FASB issued an amendment to the Comprehensive Income Topic to improve the reporting of reclassifications out of comprehensive income (loss). The amendments require entities to present, either parenthetically on the face of the financial statements or in a single footnote, the effect of significant reclassifications out of each component of accumulated other comprehensive income (loss) by the respective line items of net income (loss) affected by the reclassification. The amendment became effective for the Company on January 1, 2013, and its adoption did not have any effect on the Company's consolidated financial statements as the Company had no such reclassifications during the periods presented.

        In October 2012, the FASB issued ASU No. 2012-06 to clarify that when an entity recognizes an indemnification asset as a result of a government-assisted acquisition of a financial institution and subsequently, a change in the cash flows expected to be collected on the indemnification asset occurs, as a result of a change in cash flows expected to be collected on the assets subject to indemnification, the reporting entity should subsequently account for the change in the measurement of the indemnification asset on the same basis as the change in the assets subject to indemnification. Any amortization of changes in value should be limited to the contractual term of the indemnification agreement. The amendment became effective for the Company on January 1, 2013, which was prior to the FNB Transaction, and its adoption did not have a material impact on the Company's consolidated financial statements.

        In December 2011, the FASB amended the Balance Sheet Topic of the ASC to require enhanced disclosures about the nature and effect or potential effect of an entity's rights of setoff associated with its financial and derivative instruments. In January 2013, the FASB issued an update to the amendments, which narrowed the scope of the financial instruments for which the enhanced disclosures are applicable. The amendments became effective for the Company on January 1, 2013, and its adoption did not have a significant effect on the Company's financial position, results of operations or cash flows. See Note 25 to the consolidated financial statements for the disclosures required by this Topic.

F-90


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

34. Selected Quarterly Financial Information (Unaudited)

        Selected quarterly financial information is summarized as follows (in thousands, except per share data).

 
  Year Ended December 31, 2013    
 
 
  Fourth
Quarter
  Third
Quarter
  Second
Quarter
  First
Quarter
  Full
Year
 
 
   
  (revised)
   
   
   
 

Interest income

  $ 98,601   $ 79,702   $ 76,168   $ 74,604   $ 329,075  

Interest expense

    10,002     7,786     7,743     7,343     32,874  
                       

Net interest income

    88,599     71,916     68,425     67,261     296,201  

Provision for loan losses

    2,206     10,658     11,289     13,005     37,158  

Noninterest income

    182,479     215,095     239,233     213,278     850,085  

Noninterest expense

    219,752     216,592     260,400     214,991     911,735  
                       

Income before income taxes

    49,120     59,761     35,969     52,543     197,393  

Income tax provision

    18,090     20,115     13,309     19,170     70,684  
                       

Net income

    31,030     39,646     22,660     33,373     126,709  

Less: Net income attributable to noncontrolling interest

    160     339     568     300     1,367  
                       

Income attributable to Hilltop

  $ 30,870   $ 39,307   $ 22,092   $ 33,073   $ 125,342  

Dividends on preferred stock

    1,342     1,133     1,149     703     4,327  
                       

Income applicable to Hilltop common stockholders

  $ 29,528   $ 38,174   $ 20,943   $ 32,370   $ 121,015  
                       
                       

Earnings per common share:

                               

Basic

  $ 0.34   $ 0.45   $ 0.25   $ 0.39   $ 1.43  
                       
                       

Diluted

  $ 0.34   $ 0.43   $ 0.24   $ 0.39   $ 1.40  
                       
                       

F-91


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

34. Selected Quarterly Financial Information (Unaudited) (Continued)

 

 
  Year Ended December 31, 2012    
 
 
  Fourth
Quarter
  Third
Quarter
  Second
Quarter
  First
Quarter
  Full
Year
 

Interest income

  $ 28,954   $ 3,379   $ 3,349   $ 3,356   $ 39,038  

Interest expense

    3,786     2,140     2,131     2,139     10,196  
                       

Net interest income

    25,168     1,239     1,218     1,217     28,842  

Provision for loan losses

    3,800                 3,800  

Noninterest income

    109,691     39,591     38,063     36,887     224,232  

Noninterest expense

    115,934     46,792     55,233     37,558     255,517  
                       

Income (loss) before income taxes

    15,125     (5,962 )   (15,952 )   546     (6,243 )

Income tax provision (benefit)

    5,809     (1,914 )   (5,243 )   203     (1,145 )
                       

Net income (loss)

    9,316     (4,048 )   (10,709 )   343     (5,098 )

Less: Net income attributable to noncontrolling interest

    494                 494  
                       

Income (loss) attributable to Hilltop

  $ 8,822   $ (4,048 ) $ (10,709 ) $ 343   $ (5,592 )

Dividends on preferred stock

    259                 259  
                       

Income (loss) applicable to Hilltop common stockholders

  $ 8,563   $ (4,048 ) $ (10,709 ) $ 343   $ (5,851 )
                       
                       

Earnings (loss) per common share:

                               

Basic

  $ 0.13   $ (0.07 ) $ (0.19 ) $ 0.01   $ (0.10 )
                       
                       

Diluted

  $ 0.13   $ (0.07 ) $ (0.19 ) $ 0.01   $ (0.10 )
                       
                       

        Management made significant estimates and exercised significant judgment in estimating fair values and accounting associated with the FNB Transaction during the third quarter of 2013 due to the short time period between the Bank Closing Date and September 30, 2013. The Bank Closing Date valuations related to loans, FDIC Indemnification Asset, covered OREO, other intangible assets, assumed liabilities and taxes were considered preliminary at September 30, 2013. The operations of FNB were included in the Company's operating results beginning September 14, 2013 and such operations included a preliminary pre-tax bargain purchase gain of $3.3 million as disclosed in the Company's Quarterly Report on Form 10-Q filed with the SEC on November 8, 2013. During the quarter ended December 31, 2013, the estimated fair values of certain identifiable assets acquired and liabilities assumed as of the Bank Closing Date were adjusted as a result of additional information obtained primarily related to the fair values of loans, covered OREO, FDIC Indemnification Asset, premises and equipment and other intangible assets. These adjustments resulted in an increase in the preliminary bargain purchase gain associated with the FNB Transaction to $12.6 million, before taxes of $4.5 million. This change is reflected in the above table within noninterest income during the third quarter of the year ended December 31, 2013. In the aggregate, the adjustments to the preliminary bargain purchase gain and revisions to the accretion of discount on loans and other items increased net income for the quarter ended September 30, 2013 by $6.3 million as compared to amounts previously reported in the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2013. As discussed in Note 2 to the consolidated financial statements, due to the short time period between the Bank Closing Date and December 31, 2013, the real estate appraisal validation exercise remains

F-92


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

34. Selected Quarterly Financial Information (Unaudited) (Continued)

outstanding and the Bank Closing Date valuations related to covered OREO and FDIC Indemnification Asset are considered preliminary and could differ significantly when finalized.

        As discussed in Note 2 to the consolidated financial statements, the operating results of Hilltop for the fourth quarter ended December 31, 2012 include the results from the operations acquired in the PlainsCapital Merger for the month ended December 31, 2012. PlainsCapital contributed $8.4 million of net earnings during the fourth quarter of 2012.

35. Subsequent Event

        On January 9, 2014, the Company delivered to the President and Chief Executive Officer of SWS a letter in which the Company proposed to acquire all of the outstanding shares of SWS common stock that it does not already own for $7.00 per share in 50% cash and 50% Company common stock. The cash portion of the offer would be funded through available cash. There is no assurance that the Company will enter into a merger agreement with SWS or that any transaction will be consummated.

36. Events (Unaudited) Subsequent to the Date of the Independent Auditor's Report

        On March 31, 2014, the Company entered into a definitive merger agreement with SWS providing for the merger of SWS with and into a wholly owned subsidiary of Hilltop formed for the purpose of facilitating this transaction. SWS stockholders will receive per share consideration of 0.2496 shares of Hilltop common stock and $1.94 of cash, equating to $7.88 per share based on Hilltop's closing price on March 31, 2014. The Company intends to fund the cash portion of the consideration through available cash. The merger is subject to customary closing conditions, including regulatory approvals and approval of the stockholders of SWS, and is expected to be completed prior to the end of 2014.

        On April 1, 2014, Hilltop filed Articles of Amendment to Hilltop's charter, as approved by the Board of Directors, increasing the number of authorized shares of common stock from 100,000,000 to 125,000,000.

F-93


Table of Contents


HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 
  June 30,
2014
  December 31,
2013
 
 
  (Unaudited)
   
 

Assets

             

Cash and due from banks

  $ 673,972   $ 713,099  

Federal funds sold and securities purchased under agreements to resell

    14,813     32,924  

Securities:

             

Trading, at fair value

    61,663     58,846  

Available for sale, at fair value (amortized cost of $1,205,912 and $1,256,862, respectively)

    1,201,778     1,203,143  

Held to maturity, at amortized cost (fair value of $65,631)

    65,275      
           

    1,328,716     1,261,989  

Loans held for sale

   
1,410,873
   
1,089,039
 

Non-covered loans, net of unearned income

    3,714,837     3,514,646  

Allowance for non-covered loan losses

    (36,431 )   (33,241 )
           

Non-covered loans, net

    3,678,406     3,481,405  

Covered loans, net of allowance of $4,115 and $1,061, respectively

   
840,898
   
1,005,308
 

Broker-dealer and clearing organization receivables

    190,764     119,317  

Insurance premiums receivable

    27,957     25,597  

Deferred policy acquisition costs

    22,027     20,991  

Premises and equipment, net

    201,545     200,706  

FDIC indemnification asset

    175,114     188,291  

Covered other real estate owned

    142,174     142,833  

Mortgage servicing rights

    35,877     20,149  

Other assets

    336,199     279,745  

Goodwill

    251,808     251,808  

Other intangible assets, net

    65,305     70,921  
           

Total assets

  $ 9,396,448   $ 8,904,122  
           
           

Liabilities and Stockholders' Equity

             

Deposits:

             

Noninterest-bearing

  $ 1,829,072   $ 1,773,749  

Interest-bearing

    4,326,238     4,949,169  
           

Total deposits

    6,155,310     6,722,918  

Broker-dealer and clearing organization payables

   
227,891
   
129,678
 

Reserve for losses and loss adjustment expenses

    35,146     27,468  

Unearned insurance premiums

    94,611     88,422  

Short-term borrowings

    1,187,193     342,087  

Notes payable

    55,584     56,327  

Junior subordinated debentures

    67,012     67,012  

Other liabilities

    176,539     158,288  
           

Total liabilities

    7,999,286     7,592,200  

Commitments and contingencies (see Notes 11 and 12)

             

Stockholders' equity:

             

Hilltop stockholders' equity:

             

Preferred stock, $0.01 par value, 10,000,000 shares authorized; Series B, liquidation value per share of $1,000; 114,068 shares issued and outstanding

    114,068     114,068  

Common stock, $0.01 par value, 125,000,000 and 100,000,000 shares authorized; 90,180,699 and 90,175,688 shares issued and outstanding, respectively

    902     902  

Additional paid-in capital

    1,387,883     1,388,641  

Accumulated other comprehensive loss

    (2,501 )   (34,863 )

Accumulated deficit

    (103,910 )   (157,607 )
           

Total Hilltop stockholders' equity

    1,396,442     1,311,141  

Noncontrolling interest

    720     781  
           

Total stockholders' equity

    1,397,162     1,311,922  
           

Total liabilities and stockholders' equity

  $ 9,396,448   $ 8,904,122  
           
           

   

See accompanying notes.

F-94


Table of Contents


HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

 
  Three Months
Ended June 30,
  Six Months Ended
June 30,
 
 
  2014   2013   2014   2013  

Interest income:

                         

Loans, including fees

  $ 92,204   $ 65,213   $ 171,948   $ 130,099  

Securities:

                         

Taxable

    7,618     6,480     15,206     12,392  

Tax-exempt

    1,187     1,189     2,429     2,536  

Federal funds sold and securities purchased under agreements to resell

    14     35     33     56  

Interest-bearing deposits with banks

    317     242     912     575  

Other

    3,068     3,009     5,708     5,114  
                   

Total interest income

    104,408     76,168     196,236     150,772  

Interest expense:

   
 
   
 
   
 
   
 
 

Deposits

    3,096     3,406     6,855     6,856  

Short-term borrowings

    539     591     934     1,104  

Notes payable

    632     2,308     1,280     4,630  

Junior subordinated debentures

    587     612     1,171     1,220  

Other

    1,108     826     2,129     1,276  
                   

Total interest expense

    5,962     7,743     12,369     15,086  
                   

Net interest income

    98,446     68,425     183,867     135,686  

Provision for loan losses

    5,533     11,289     8,775     24,294  
                   

Net interest income after provision for loan losses

    92,913     57,136     175,092     111,392  

Noninterest income:

   
 
   
 
   
 
   
 
 

Net gains from sale of loans and other mortgage production income

    106,054     142,531     185,165     270,127  

Mortgage loan origination fees

    16,983     22,695     29,327     41,588  

Net insurance premiums earned

    40,777     38,590     81,096     76,063  

Investment and securities advisory fees and commissions

    22,264     25,964     43,599     47,973  

Other

    17,203     9,453     34,194     16,760  
                   

Total noninterest income

    203,281     239,233     373,381     452,511  

Noninterest expense:

   
 
   
 
   
 
   
 
 

Employees' compensation and benefits

    124,445     132,715     230,874     248,905  

Loss and loss adjustment expenses

    35,275     48,160     53,612     69,345  

Policy acquisition and other underwriting expenses

    11,652     11,627     23,339     22,430  

Occupancy and equipment, net

    25,762     20,154     52,100     39,566  

Other

    54,078     47,744     103,916     95,145  
                   

Total noninterest expense

    251,212     260,400     463,841     475,391  
                   

Income before income taxes

    44,982     35,969     84,632     88,512  

Income tax expense

    16,294     13,309     30,648     32,479  
                   

Net income

    28,688     22,660     53,984     56,033  

Less: Net income attributable to noncontrolling interest

    177     568     287     868  
                   

Income attributable to Hilltop

    28,511     22,092     53,697     55,165  

Dividends on preferred stock

    1,426     1,149     2,852     1,852  
                   

Income applicable to Hilltop common stockholders

  $ 27,085   $ 20,943   $ 50,845   $ 53,313  
                   
                   

Earnings per common share:

                         

Basic

  $ 0.30   $ 0.25   $ 0.56   $ 0.64  
                   
                   

Diluted

  $ 0.30   $ 0.24   $ 0.56   $ 0.61  
                   
                   

Weighted average share information:

                         

Basic

    89,709     83,490     89,708     83,489  
                   
                   

Diluted

    90,569     90,294     90,576     90,125  
                   
                   

   

See accompanying notes.

F-95


Table of Contents


HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(Unaudited)

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2014   2013   2014   2013  

Net income

  $ 28,688   $ 22,660   $ 53,984   $ 56,033  

Other comprehensive income (loss):

                         

Unrealized gains (losses) on securities available for sale, net of tax of $7,638, $(15,249), $17,221 and $(14,776)

    13,553     (28,320 )   32,362     (27,441 )
                   

Comprehensive income (loss)

    42,241     (5,660 )   86,346     28,592  

Less: comprehensive income attributable to noncontrolling interest

    177     568     287     868  
                   

Comprehensive income (loss) applicable to Hilltop

  $ 42,064   $ (6,228 ) $ 86,059   $ 27,724  
                   
                   

   

See accompanying notes.

F-96


Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
(Unaudited)

 
  Preferred Stock   Common Stock    
  Accumulated
Other
Comprehensive
Income (Loss)
   
  Total
Hilltop
Stockholders'
Equity
   
   
 
 
  Additional
Paid-in
Capital
  Accumulated
Deficit
  Noncontrolling
Interest
  Total
Stockholders'
Equity
 
 
  Shares   Amount   Shares   Amount  

Balance, December 31, 2012

    114   $ 114,068     83,487   $ 835   $ 1,304,448   $ 8,094   $ (282,949 ) $ 1,144,496   $ 2,054   $ 1,146,550  

Net income

                            55,165     55,165     868     56,033  

Other comprehensive loss

                        (27,441 )       (27,441 )       (27,441 )

Stock-based compensation expense

                    480             480         480  

Common stock issued to board members

            4         47             47         47  

Issuance of restricted common stock

            465     5     (5 )                    

Dividends on preferred stock

                    (1,852 )           (1,852 )       (1,852 )

Cash distributions to noncontrolling interest

                                    (2,017 )   (2,017 )
                                           

Balance, June 30, 2013

    114   $ 114,068     83,956   $ 840   $ 1,303,118   $ (19,347 ) $ (227,784 ) $ 1,170,895   $ 905   $ 1,171,800  
                                           
                                           

Balance, December 31, 2013

    114   $ 114,068     90,176   $ 902   $ 1,388,641   $ (34,863 ) $ (157,607 ) $ 1,311,141   $ 781   $ 1,311,922  

Net income

                            53,697     53,697     287     53,984  

Other comprehensive income

                        32,362         32,362         32,362  

Stock-based compensation expense

                    1,979             1,979         1,979  

Common stock issued to board members

            5         115             115         115  

Dividends on preferred stock

                    (2,852 )           (2,852 )       (2,852 )

Cash distributions to noncontrolling interest

                                    (348 )   (348 )
                                           

Balance, June 30, 2014

    114   $ 114,068     90,181   $ 902   $ 1,387,883   $ (2,501 ) $ (103,910 ) $ 1,396,442   $ 720   $ 1,397,162  
                                           
                                           

See accompanying notes.

F-97


Table of Contents


HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 
  Six Months Ended
June 30,
 
 
  2014   2013  

Operating Activities

             

Net income

  $ 53,984   $ 56,033  

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

             

Provision for loan losses

    8,775     24,294  

Depreciation, amortization and accretion, net

    (48,612 )   (18,032 )

Deferred income taxes

    4,842     (11,528 )

Other, net

    2,191     533  

Net change in securities purchased under resale agreements

        (3,237 )

Net change in trading securities

    (2,817 )   57,256  

Net change in broker-dealer and clearing organization receivables

    (146,643 )   (76,430 )

Net change in other assets

    (28,818 )   34,972  

Net change in broker-dealer and clearing organization payables

    177,748     17,281  

Net change in loss and loss adjustment expense reserve

    7,678     8,446  

Net change in unearned insurance premiums

    6,189     7,813  

Net change in other liabilities

    4,645     (37,247 )

Net gains from sale of loans

    (185,165 )   (270,127 )

Loans originated for sale

    (4,927,983 )   (6,545,177 )

Proceeds from loans sold

    4,782,239     6,769,795  
           

Net cash provided by (used in) operating activities

    (291,747 )   14,645  
           

Investing Activities

             

Proceeds from maturities and principal reductions of securities held to maturity

    911      

Proceeds from sales, maturities and principal reductions of securities available for sale

    97,867     96,069  

Purchases of securities held to maturity

    (66,207 )    

Purchases of securities available for sale

    (47,557 )   (223,570 )

Net change in loans

    68,552     (51,027 )

Purchases of premises and equipment and other assets

    (19,815 )   (11,417 )

Proceeds from sales of premises and equipment and other real estate owned

    38,281     4,859  

Net cash paid for Federal Home Loan Bank and Federal Reserve Bank stock

    (31,440 )   (21,219 )
           

Net cash provided by (used in) investing activities

    40,592     (206,305 )
           

Financing Activities

             

Net change in deposits

    (647,143 )   (179,826 )

Net change in short-term borrowings

    845,106     275,554  

Proceeds from notes payable

    1,000      

Payments on notes payable

    (1,743 )   (1,601 )

Dividends paid on preferred stock

    (2,768 )   (703 )

Net cash distributed to noncontrolling interest

    (348 )   (2,017 )

Other, net

    (187 )   (154 )
           

Net cash provided by financing activities

    193,917     91,253  
           

Net change in cash and cash equivalents

    (57,238 )   (100,407 )

Cash and cash equivalents, beginning of period

    746,023     726,460  
           

Cash and cash equivalents, end of period

  $ 688,785   $ 626,053  
           
           

Supplemental Disclosures of Cash Flow Information

             

Cash paid for interest

  $ 13,046   $ 14,889  
           
           

Cash paid for income taxes, net of refunds

  $ 5,582   $ 40,949  
           
           

Supplemental Schedule of Non-Cash Activities

             

Conversion of loans to other real estate owned

  $ 34,391   $ 1,718  
           
           

   

See accompanying notes.

F-98


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

1. Summary of Significant Accounting and Reporting Policies

Nature of Operations

        Hilltop Holdings Inc. ("Hilltop" and, collectively with its subsidiaries, the "Company") is a financial holding company registered under the Bank Holding Company Act of 1956, as amended by the Gramm-Leach-Bliley Act of 1999. On November 30, 2012, Hilltop acquired PlainsCapital Corporation pursuant to a plan of merger whereby PlainsCapital Corporation merged with and into a wholly owned subsidiary of Hilltop (the "PlainsCapital Merger"), which continued as the surviving entity under the name "PlainsCapital Corporation" ("PlainsCapital").

        The Company has two primary operating business units, PlainsCapital and National Lloyds Corporation ("NLC"). PlainsCapital is a financial holding company, headquartered in Dallas, Texas, that provides, through its subsidiaries, an array of financial products and services. In addition to traditional banking services, PlainsCapital provides residential mortgage lending, investment banking, public finance advisory, wealth and investment management, treasury management, capital equipment leasing, fixed income sales, asset management, and correspondent clearing services. NLC is a property and casualty insurance holding company that provides, through its subsidiaries, fire and homeowners insurance to low value dwellings and manufactured homes primarily in Texas and other areas of the southern United States.

        On September 13, 2013 (the "Bank Closing Date"), PlainsCapital Bank (the "Bank") assumed substantially all of the liabilities, including all of the deposits, and acquired substantially all of the assets of Edinburg, Texas-based First National Bank ("FNB") from the Federal Deposit Insurance Corporation (the "FDIC"), as receiver, and reopened former FNB branches acquired from the FDIC under the "PlainsCapital Bank" name (the "FNB Transaction"). Pursuant to the Purchase and Assumption Agreement (the "P&A Agreement"), the Bank and the FDIC entered into loss-share agreements whereby the FDIC agreed to share in the losses of certain covered loans and covered other real estate owned ("OREO") that the Bank acquired, as further described in Note 2 to the consolidated financial statements. The fair value of the assets acquired was $2.2 billion, including $1.1 billion in covered loans, $286.2 million in securities, $135.2 million in covered OREO and $42.9 million in non-covered loans. The Bank also assumed $2.2 billion in liabilities, consisting primarily of deposits. The acquisition of FNB's expansive branch network allowed the Bank to increase its presence in Texas to include the Rio Grande Valley, Houston, Corpus Christi, Laredo and El Paso markets, among others.

        On March 31, 2014, the Company entered into a definitive merger agreement with SWS Group, Inc. ("SWS") providing for the merger of SWS with and into Peruna LLC, a wholly owned subsidiary of Hilltop formed for the purpose of facilitating this transaction. SWS stockholders will receive per share consideration of 0.2496 shares of Hilltop common stock and $1.94 of cash, equating to $7.25 per share based on Hilltop's closing price on June 30, 2014. The value of the merger consideration will fluctuate with the market price of Hilltop common stock. The Company intends to fund the cash portion of the consideration through available cash. The merger is subject to customary closing conditions, including regulatory approvals and approval of the stockholders of SWS, and is expected to be completed prior to the end of 2014.

F-99


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

1. Summary of Significant Accounting and Reporting Policies (Continued)


Basis of Presentation

        The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States ("GAAP"), and in conformity with the rules and regulations of the Securities and Exchange Commission (the "SEC"). In the opinion of management, these financial statements contain all adjustments necessary for a fair statement of the results of the interim periods presented. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013. Results for interim periods are not necessarily indicative of results to be expected for a full year or any future period.

        The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates regarding the allowance for loan losses, the fair values of financial instruments, the amounts receivable under the loss-share agreements with the FDIC ("FDIC Indemnification Asset"), reserves for losses and loss adjustment expenses, the mortgage loan indemnification liability, and the potential impairment of assets are particularly subject to change. The Company has applied its critical accounting policies and estimation methods consistently in all periods presented in these consolidated financial statements.

        Certain reclassifications have been made to the prior period consolidated financial statements to conform with the current period presentation.

        Hilltop owns 100% of the outstanding stock of PlainsCapital. PlainsCapital owns 100% of the outstanding stock of the Bank and 100% of the membership interest in PlainsCapital Equity, LLC. The Bank owns 100% of the outstanding stock of PrimeLending, a PlainsCapital Company ("PrimeLending"), PCB-ARC, Inc. and RGV-ARC, Inc. The Bank has a 100% membership interest in First Southwest Holdings, LLC ("First Southwest") and PlainsCapital Securities, LLC.

        Hilltop also owns 100% of NLC, which operates through its wholly owned subsidiaries, National Lloyds Insurance Company ("NLIC") and American Summit Insurance Company ("ASIC").

        PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC, the controlling and sole managing member of PrimeLending Ventures, LLC ("Ventures").

        The principal subsidiaries of First Southwest are First Southwest Company ("FSC"), a broker-dealer registered with the SEC and the Financial Industry Regulatory Authority and a member of the New York Stock Exchange, and First Southwest Asset Management, Inc., a registered investment advisor under the Investment Advisors Act of 1940.

        The consolidated financial statements include the accounts of the above-named entities. All significant intercompany transactions and balances have been eliminated. Noncontrolling interests have been recorded for minority ownership in entities that are not wholly owned and are presented in compliance with the provisions of Noncontrolling Interest in Subsidiary Subsections of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC").

F-100


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

1. Summary of Significant Accounting and Reporting Policies (Continued)

        PlainsCapital also owns 100% of the outstanding common securities of PCC Statutory Trusts I, II, III and IV (the "Trusts"), which are not included in the consolidated financial statements under the requirements of the Variable Interest Entities Subsections of the ASC, because the primary beneficiaries of the Trusts are not within the consolidated group.

2. Acquisitions

FNB Transaction

        On the Bank Closing Date, the Bank assumed substantially all of the liabilities, including all of the deposits, and acquired substantially all of the assets of FNB from the FDIC in an FDIC-assisted transaction. As part of the P&A Agreement, the Bank and the FDIC entered into loss-share agreements covering future losses incurred on certain acquired loans and OREO. The Company refers to acquired commercial and single family residential loan portfolios and OREO that are subject to the loss-share agreements as "covered loans" and "covered OREO", respectively, and these assets are presented as separate line items in the Company's consolidated balance sheet. Collectively, covered loans and covered OREO are referred to as "covered assets".

        In accordance with the loss-share agreements, the Bank may be required to make a "true-up" payment to the FDIC approximately ten years following the Bank Closing Date if the FDIC's initial estimate of losses on covered assets is greater than the actual realized losses. The "true-up" payment is calculated using a defined formula set forth in the P&A Agreement.

        The FNB Transaction was accounted for using the purchase method of accounting and, accordingly, purchased assets, including identifiable intangible assets and assumed liabilities, were recorded at their respective fair values as of the Bank Closing Date using significant estimates and assumptions to value certain identifiable assets acquired and liabilities assumed. The amounts are subject to adjustments based upon final settlement with the FDIC. The terms of the P&A Agreement provide for the FDIC to indemnify the Bank against claims with respect to liabilities and assets of FNB or any of its affiliates not assumed or otherwise purchased by the Bank and with respect to certain other claims by third parties.

        The operations acquired in the FNB Transaction are included in the Company's operating results beginning September 14, 2013. The purchase of assets and assumption of certain liabilities of FNB from the FDIC, as receiver, was sufficiently significant to require disclosure of historical financial statements and related pro forma financial disclosure. Due to the nature and magnitude of the FNB Transaction, coupled with the federal assistance and protection resulting from the FDIC loss-share agreements, historical financial information of FNB is not relevant to future operations. The Company has omitted certain historical financial information and the related pro forma financial information of FNB pursuant to the guidance provided in Staff Accounting Bulletin Topic 1.K, Financial Statements of Acquired Troubled Financial Institutions ("SAB 1:K"), and a request for relief granted by the SEC. SAB 1:K provides relief from the requirements of Rule 3-05 of Regulation S-X in certain instances, such as the FNB Transaction, where a registrant engages in an acquisition of a significant amount of assets of a troubled financial institution for which audited financial statements are not reasonably

F-101


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

2. Acquisitions (Continued)

available and in which federal assistance is so persuasive as to substantially reduce the relevance of such information to an assessment of future operations.

3. Fair Value Measurements

Fair Value Measurements and Disclosures

        The Company determines fair values in compliance with The Fair Value Measurements and Disclosures Topic of the ASC (the "Fair Value Topic"). The Fair Value Topic defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. The Fair Value Topic defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Fair Value Topic assumes that transactions upon which fair value measurements are based occur in the principal market for the asset or liability being measured. Further, fair value measurements made under the Fair Value Topic exclude transaction costs and are not the result of forced transactions.

        The Fair Value Topic creates a fair value hierarchy that classifies fair value measurements based upon the inputs used in valuing the assets or liabilities that are the subject of fair value measurements. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs, as indicated below.

Fair Value Option

        The Company has elected to measure substantially all of PrimeLending's mortgage loans held for sale and retained mortgage servicing rights ("MSR") at fair value, under the provisions of the Fair Value Option. The Company elected to apply the provisions of the Fair Value Option to these items so that it would have the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company determines the fair value of the financial instruments accounted for under the provisions of the Fair Value Option in compliance with the provisions of the Fair Value Topic of the ASC discussed above.

        At June 30, 2014, the aggregate fair value of PrimeLending's mortgage loans held for sale accounted for under the Fair Value Option was $1.41 billion, and the unpaid principal balance of those

F-102


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

3. Fair Value Measurements (Continued)

loans was $1.35 billion. At December 31, 2013, the aggregate fair value of PrimeLending's mortgage loans held for sale accounted for under the Fair Value Option was $1.09 billion, and the unpaid principal balance of those loans was $1.07 billion. 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. Those inputs include quotes from mortgage loan investors and derivatives dealers and data from independent pricing services.

        The following tables present information regarding financial assets and liabilities measured at fair value on a recurring basis (in thousands).

June 30, 2014
  Level 1
Inputs
  Level 2
Inputs
  Level 3
Inputs
  Total
Fair Value
 

Trading securities

  $ 35   $ 61,628   $   $ 61,663  

Available for sale securities

    24,653     1,113,306     63,819     1,201,778  

Loans held for sale

        1,400,464     10,409     1,410,873  

Derivative assets

        35,454         35,454  

Mortgage servicing rights asset

            35,877     35,877  

Trading liabilities

        48         48  

Derivative liabilities

        13,847     6,300     20,147  

 

December 31, 2013
  Level 1
Inputs
  Level 2
Inputs
  Level 3
Inputs
  Total
Fair Value
 

Trading securities

  $ 33   $ 58,813   $   $ 58,846  

Available for sale securities

    22,079     1,121,011     60,053     1,203,143  

Loans held for sale

        1,061,310     27,729     1,089,039  

Derivative assets

        23,564         23,564  

Mortgage servicing rights asset

            20,149     20,149  

Trading liabilities

        46         46  

Derivative liabilities

        139     5,600     5,739  

F-103


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

3. Fair Value Measurements (Continued)

        The following tables include a roll forward for those financial instruments measured at fair value using Level 3 inputs (in thousands).

 
   
   
   
  Total Gains or Losses
(Realized or Unrealized)
   
 
 
  Balance at
Beginning
of Period
  Purchases/
Additions
  Sales/
Reductions
  Included
in Net
Income
  Included in
Other
Comprehensive
Income (Loss)
  Balance at
End of
Period
 

Three months ended June 30, 2014

                                     

Available for sale securities

  $ 64,098   $   $   $ 616   $ (895 ) $ 63,819  

Loans held for sale

    26,826     5,522     (24,009 )   2,070         10,409  

Mortgage servicing rights asset

    29,939     7,376         (1,438 )       35,877  

Derivative liabilities

    (5,950 )           (350 )       (6,300 )
                           

Total

  $ 114,913   $ 12,898   $ (24,009 ) $ 898   $ (895 ) $ 103,805  
                           
                           

Six months ended June 30, 2014

                                     

Available for sale securities

  $ 60,053   $   $   $ 1,209   $ 2,557   $ 63,819  

Loans held for sale

    27,729     10,422     (29,603 )   1,861         10,409  

Mortgage servicing rights asset

    20,149     14,808         920         35,877  

Derivative liabilities

    (5,600 )           (700 )       (6,300 )
                           

Total

  $ 102,331   $ 25,230   $ (29,603 ) $ 3,290   $ 2,557   $ 103,805  
                           
                           

Three months ended June 30, 2013

                                     

Available for sale securities

  $ 58,801   $   $   $ 531   $ (3,822 ) $ 55,510  

Mortgage servicing rights asset

    4,430     2,180         501         7,111  

Derivative liabilities

    (4,714 )           (225 )       (4,939 )
                           

Total

  $ 58,517   $ 2,180   $   $ 807   $ (3,822 ) $ 57,682  
                           
                           

Six months ended June 30, 2013

                                     

Available for sale securities

  $ 56,277   $   $   $ 1,043   $ (1,810 ) $ 55,510  

Mortgage servicing rights asset

    2,080     4,305         726         7,111  

Derivative liabilities

    (4,490 )           (449 )       (4,939 )
                           

Total

  $ 53,867   $ 4,305   $   $ 1,320   $ (1,810 ) $ 57,682  
                           
                           

        All net realized and unrealized gains (losses) in the tables above are reflected in the accompanying consolidated financial statements. The unrealized gains (losses) relate to financial instruments still held at June 30, 2014. The available for sale securities noted in the table above reflect Hilltop's note receivable and warrant to purchase common stock of SWS as discussed in Note 4 to the consolidated financial statements.

F-104


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

3. Fair Value Measurements (Continued)

        For Level 3 financial instruments measured at fair value on a recurring basis at June 30, 2014, the significant unobservable inputs used in the fair value measurements were as follows.

Financial instrument
  Valuation Technique   Unobservable Input   Weighted
Average / Range

Available for sale securities—note receivable

  Discounted cash flow   Discount rate   8.3%

Available for sale securities—warrant

  Binomial model   SWS common stock price volatility   24.0%

Loans held for sale

  Discounted cash flow /
Market comparable
  Projected price   86 - 90%

Mortgage servicing rights asset

  Discounted cash flow   Constant prepayment rate   10.32%

      Discount rate   11.11%

Derivative liabilities

  Discounted cash flow   Discount rate   14 - 28%

      Time to receive full payment of cash flows   10.75 - 14.0 years

        Hilltop's note receivable is valued using a cash flow model that estimates yield based on comparable securities in the market. The interest rate used to discount cash flows is the most significant unobservable input. An increase or decrease in the discount rate would result in a corresponding decrease or increase, respectively, in the fair value measurement of the note receivable.

        The warrant is valued utilizing a binomial model. The underlying SWS common stock price and its related volatility, an unobservable input, are the most significant inputs into the model, and, therefore, decreases or increases to the SWS common stock price would result in a significant change in the fair value measurement of the warrant.

        The fair value of certain loans held for sale that are either non-standard (i.e. loans that cannot be sold through normal sale channels) or non-performing is measured using unobservable inputs. The fair value of such loans is generally based upon estimates of expected cash flows using unobservable inputs including listing prices of comparable assets, uncorroborated expert opinions, and/or management's knowledge of underlying collateral.

        The MSR asset 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 7 to the consolidated financial statements.

        Derivative liabilities in the tables above include a derivative option agreement ("Fee Award Option") entered into by First Southwest and valued using discounted cash flows and probability of exercise.

        The Company had no transfers between Levels 1 and 2 during the periods presented.

F-105


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

3. Fair Value Measurements (Continued)

        The following tables present the changes in fair value for instruments that are reported at fair value under the Fair Value Option (in thousands).

 
  Changes in Fair Value for Assets and Liabilities Reported at Fair Value under
Fair Value Option
 
 
  Three Months Ended June 30, 2014   Three Months Ended June 30, 2013  
 
  Net
Gains (Losses)
  Other
Noninterest
Income
  Total
Changes in
Fair Value
  Net
Gains (Losses)
  Other
Noninterest
Income
  Total
Changes in
Fair Value
 

Loans held for sale

  $ 35,651   $   $ 35,651   $ (36,203 ) $   $ (36,203 )

Mortgage servicing rights asset

    (1,438 )       (1,438 )   501         501  

Time deposits

                    4     4  

 

 
  Changes in Fair Value for Assets and Liabilities Reported at Fair Value under
Fair Value Option
 
 
  Six Months Ended June 30, 2014   Six Months Ended June 30, 2013  
 
  Net
Gains (Losses)
  Other
Noninterest
Income
  Total
Changes in
Fair Value
  Net
Gains (Losses)
  Other
Noninterest
Income
  Total
Changes in
Fair Value
 

Loans held for sale

  $ 40,169   $   $ 40,169   $ (41,641 ) $   $ (41,641 )

Mortgage servicing asset

    920         920     726         726  

Time deposits

                    12     12  

        The Company also determines the fair value of certain assets and liabilities on a non-recurring basis. In addition, facts and circumstances may dictate a fair value measurement when there is evidence of impairment. Assets and liabilities measured on a non-recurring basis include the items discussed below.

        Impaired Loans—The Company reports impaired loans based on the underlying fair value of the collateral through specific allowances within the allowance for loan losses. Purchased credit impaired ("PCI") loans with a fair value of $172.9 million and $822.8 million were acquired by the Company upon completion of the PlainsCapital Merger and the FNB Transaction, respectively. Substantially all PCI loans acquired in the FNB Transaction are covered by FDIC loss-share agreements. The fair value of PCI loans was determined using Level 3 inputs, including estimates of expected cash flows that incorporated significant unobservable inputs regarding default rates, loss severity rates assuming default, prepayment speeds and estimated collateral values. At June 30, 2014, these inputs included estimated weighted average default rates, loss severity rates and prepayment speed assumptions of 51%, 45% and 0%, respectively, for those PCI loans acquired in the PlainsCapital Merger and 62%, 39% and 7%, respectively, for those PCI loans acquired in the FNB Transaction. The resulting weighted average expected loss on PCI loans associated with the PlainsCapital Merger and the FNB Transaction was 23% and 24%, respectively.

        The Company obtains updated appraisals of the fair value of collateral securing impaired collateral dependent loans at least annually, in accordance with regulatory guidelines. The Company also reviews the fair value of such collateral on a quarterly basis. If the quarterly review indicates that the fair value of the collateral may have deteriorated, the Company will order an updated appraisal of the fair value

F-106


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

3. Fair Value Measurements (Continued)

of the collateral. Since the Company obtains updated appraisals when evidence of a decline in the fair value of collateral exists, it typically does not adjust appraised values.

        Other Real Estate Owned—The Company reports OREO at fair value less estimated cost to sell. Any excess of recorded investment over fair value, less cost to sell, is charged against either the allowance for loan losses or the related PCI pool discount when property is initially transferred to OREO. Subsequent to the initial transfer to OREO, downward valuation adjustments are charged against earnings. The Company determines fair value primarily using independent appraisals of OREO properties. The resulting fair value measurements are classified as Level 2 or Level 3 inputs, depending upon the extent to which unobservable inputs determine the fair value measurement. The Company considers a number of factors in determining the extent to which specific fair value measurements utilize unobservable inputs, including, but not limited to, the inherent subjectivity in appraisals, the length of time elapsed since the receipt of independent market price or appraised value, and current market conditions. At June 30, 2014, the most significant unobservable input used in the determination of fair value of OREO was a discount to independent appraisals for estimated holding periods of OREO properties. Such discount was 1% per month for estimated holding periods of 6 to 24 months. Level 3 inputs were used to determine the fair value of a large group of smaller balance properties that were acquired in the FNB Transaction. In the FNB Transaction, the Bank acquired OREO of $135.2 million, all of which is covered by FDIC loss-share agreements. At June 30, 2014 and December 31, 2013, the estimated fair value of covered OREO was $142.2 million and $142.8 million, respectively, and the underlying fair value measurements utilize Level 2 and Level 3 inputs. The fair value of non-covered OREO at June 30, 2014 and December 31, 2013 was $4.4 million and $4.8 million, respectively, and is included in other assets within the consolidated balance sheets. During the reported periods, all fair value measurements for non-covered OREO utilized Level 2 inputs.

        The following table presents information regarding certain assets and liabilities measured at fair value on a non-recurring basis for which a change in fair value has been recorded during reporting periods subsequent to initial recognition (in thousands).

 
   
   
   
   
  Total Gains
(Losses) for the
Three Months
Ended June 30,
  Total Gains
(Losses) for the
Six Months
Ended June 30,
 
 
  Level 1
Inputs
  Level 2
Inputs
  Level 3
Inputs
  Total
Fair Value
 
June 30, 2014
  2014   2013   2014   2013  

Non-covered impaired loans

  $   $   $ 29,993   $ 29,993   $ (222 ) $ (228 ) $ (437 ) $ (659 )

Covered impaired loans

            133,325     133,325     (1,341 )       (3,032 )    

Non-covered other real estate owned

                    (9 )   (30 )   (111 )   (190 )

Covered other real estate owned

        18,186     34,126     52,312     (2,528 )       (2,959 )    

        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 is described in detail in Note 3 to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.

F-107


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

3. Fair Value Measurements (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).

 
   
  Estimated Fair Value  
June 30, 2014
  Carrying
Amount
  Level 1
Inputs
  Level 2
Inputs
  Level 3
Inputs
  Total  

Financial assets:

                               

Cash and cash equivalents

  $ 688,785   $ 688,785   $   $   $ 688,785  

Held to maturity securities

    65,275         65,631         65,631  

Non-covered loans, net

    3,678,406         356,907     3,346,987     3,703,894  

Covered loans, net

    840,898             902,588     902,588  

Broker-dealer and clearing organization receivables

    190,764         190,764         190,764  

FDIC indemnification asset

    175,114             175,114     175,114  

Other assets

    63,843         42,383     21,460     63,843  

Financial liabilities:

   
 
   
 
   
 
   
 
   
 
 

Deposits

    6,155,310         6,160,913         6,160,913  

Broker-dealer and clearing organization payables

    227,891         227,891         227,891  

Short-term borrowings

    1,187,193         1,187,193         1,187,193  

Debt

    122,596         115,856         115,856  

Other liabilities

    2,834         2,834         2,834  

 

 
   
  Estimated Fair Value  
December 31, 2013
  Carrying
Amount
  Level 1
Inputs
  Level 2
Inputs
  Level 3
Inputs
  Total  

Financial assets:

                               

Cash and cash equivalents

  $ 746,023   $ 746,023   $   $   $ 746,023  

Non-covered loans, net

    3,481,405         281,712     3,119,319     3,401,031  

Covered loans, net

    1,005,308             997,371     997,371  

Broker-dealer and clearing organization receivables

    119,317         119,317         119,317  

FDIC indemnification asset

    188,291             188,291     188,291  

Other assets

    66,055         43,946     22,109     66,055  

Financial liabilities:

   
 
   
 
   
 
   
 
   
 
 

Deposits

    6,722,019         6,722,909         6,722,909  

Broker-dealer and clearing organization payables

    129,678         129,678         129,678  

Short-term borrowings

    342,087         342,087         342,087  

Debt

    123,339         114,671         114,671  

Other liabilities

    3,362         3,362         3,362  

F-108


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4. Securities

        The amortized cost and fair value of securities, excluding trading securities, are summarized as follows (in thousands).

 
  Available for Sale  
June 30, 2014
  Amortized
Cost
  Gross
Unrealized
Gains
  Gross
Unrealized
Losses
  Fair Value  

U.S. Treasury securities

  $ 63,692   $ 164   $ (34 ) $ 63,822  

U.S. government agencies:

                         

Bonds

    654,513     1,485     (20,899 )   635,099  

Residential mortgage-backed securities

    55,895     2,008     (399 )   57,504  

Collateralized mortgage obligations

    110,909     302     (4,081 )   107,130  

Corporate debt securities

    95,704     5,659     (108 )   101,255  

States and political subdivisions

    148,255     1,470     (1,894 )   147,831  

Commercial mortgage-backed securities

    597     68         665  

Equity securities

    20,396     4,257         24,653  

Note receivable

    43,883     6,038         49,921  

Warrant

    12,068     1,830         13,898  
                   

Totals

  $ 1,205,912   $ 23,281   $ (27,415 ) $ 1,201,778  
                   
                   

 

 
  Available for Sale  
December 31, 2013
  Amortized
Cost
  Unrealized
Gains
  Unrealized
Losses
  Fair Value  

U.S. Treasury securities

  $ 43,684   $ 82   $ (238 ) $ 43,528  

U.S. government agencies:

                         

Bonds

    717,909     550     (55,727 )   662,732  

Residential mortgage-backed securities

    59,936     735     (584 )   60,087  

Collateralized mortgage obligations

    124,502     349     (4,390 )   120,461  

Corporate debt securities

    72,376     4,610     (378 )   76,608  

States and political subdivisions

    162,955     388     (6,508 )   156,835  

Commercial mortgage-backed securities

    691     69         760  

Equity securities

    20,067     2,012         22,079  

Note receivable

    42,674     5,235         47,909  

Warrant

    12,068     76         12,144  
                   

Totals

  $ 1,256,862   $ 14,106   $ (67,825 ) $ 1,203,143  
                   
                   

F-109


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4. Securities (Continued)


 
  Held to Maturity  
June 30, 2014
  Amortized
Cost
  Unrealized
Gains
  Unrealized
Losses
  Fair Value  

U.S. government agencies:

                         

Residential mortgage-backed securities

  $ 31,048   $ 384   $ (1 ) $ 31,431  

Collateralized mortgage obligations

    29,821         (14 )   29,807  

States and political subdivisions

    4,406     7     (20 )   4,393  
                   

Totals

  $ 65,275   $ 391   $ (35 ) $ 65,631  
                   
                   

        Available for sale securities includes 1,475,387 shares of SWS common stock, a $50.0 million aggregate principal amount note issued by SWS and a warrant to purchase 8,695,652 shares of SWS common stock. SWS issued the note in July 2011 under a credit agreement pursuant to a senior unsecured loan from Hilltop. The note bears interest at a rate of 8.0% per annum, is prepayable by SWS subject to certain conditions after three years, and has a maturity of five years. The warrant provides for the purchase of 8,695,652 shares of SWS common stock at an exercise price of $5.75 per share, subject to anti-dilution adjustments. If the warrant was fully exercised, Hilltop would beneficially own 24.4% of SWS.

F-110


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4. Securities (Continued)

        Information regarding securities that were in an unrealized loss position is shown in the following tables (dollars in thousands).

 
  June 30, 2014   December 31, 2013  
 
  Number of
Securities
  Fair Value   Unrealized
Losses
  Number of
Securities
  Fair Value   Unrealized
Losses
 

Available for Sale

                                     

U.S. treasury securities:

                                     

Unrealized loss for less than twelve months

    3   $ 6,396   $ 26     6   $ 12,748   $ 238  

Unrealized loss for twelve months or longer

    1     2,010     8              
                           

    4     8,406     34     6     12,748     238  

U.S. government agencies:

                                     

Bonds:

                                     

Unrealized loss for less than twelve months

    1     9,987     13     35     526,817     45,274  

Unrealized loss for twelve months or longer

    31     487,164     20,886     5     90,931     10,453  
                           

    32     497,151     20,899     40     617,748     55,727  

Residential mortgage-backed securities:

                                     

Unrealized loss for less than twelve months

    1     1,593     58     2     2,194     54  

Unrealized loss for twelve months or longer

    3     9,356     341     3     9,309     530  
                           

    4     10,949     399     5     11,503     584  

Collateralized mortgage obligations:

                                     

Unrealized loss for less than twelve months

    2     13,128     24     7     84,054     4,320  

Unrealized loss for twelve months or longer

    8     68,301     4,057     2     4,995     70  
                           

    10     81,429     4,081     9     89,049     4,390  

Corporate debt securities:

                                     

Unrealized loss for less than twelve months

                7     10,754     378  

Unrealized loss for twelve months or longer

    1     1,889     108              
                           

    1     1,889     108     7     10,754     378  

States and political subdivisions:

                                     

Unrealized loss for less than twelve months

    12     8,846     49     46     30,245     669  

Unrealized loss for twelve months or longer

    119     80,555     1,845     150     96,882     5,839  
                           

    131     89,401     1,894     196     127,127     6,508  

Total available for sale:

                                     

Unrealized loss for less than twelve months

    19     39,950     170     103     666,812     50,933  

Unrealized loss for twelve months or longer

    163     649,275     27,245     160     202,117     16,892  
                           

    182   $ 689,225   $ 27,415     263   $ 868,929   $ 67,825  
                           
                           

F-111


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4. Securities (Continued)


 
  June 30, 2014   December 31, 2013  
 
  Number of
Securities
  Fair Value   Unrealized
Losses
  Number of
Securities
  Fair Value   Unrealized
Losses
 

Held to Maturity

                                     

U.S. government agencies:

                                     

Residential mortgage-backed securities:

                                     

Unrealized loss for less than twelve months

    1   $ 2,029   $ 1       $   $  

Unrealized loss for twelve months or longer

                         
                           

    1     2,029     1              

Collateralized mortgage obligations:

                                     

Unrealized loss for less than twelve months

    1     29,807     14              

Unrealized loss for twelve months or longer

                         
                           

    1     29,807     14              

States and political subdivisions:

                                     

Unrealized loss for less than twelve months

    6     3,327     20              

Unrealized loss for twelve months or longer

                         
                           

    6     3,327     20              

Total held to maturity:

                                     

Unrealized loss for less than twelve months

    8     35,163     35              

Unrealized loss for twelve months or longer

                         
                           

    8   $ 35,163   $ 35       $   $  
                           
                           

        During the three and six months ended June 30, 2014 and 2013, the Company did not record any other-than-temporary impairments. While all of the investments are monitored for potential other-than-temporary impairment, the Company's analysis and experience indicate that these available for sale investments generally do not present a significant risk of other-than-temporary-impairment, as fair value should recover over time. Factors considered in the Company's analysis include the reasons for the unrealized loss position, the severity and duration of the unrealized loss position, credit worthiness, and forecasted performance of the investee. While some of the securities held in the investment portfolio have decreased in value since the date of acquisition, the severity of loss and the duration of the loss position are not believed to be significant enough to warrant other-than-temporary impairment of the securities. The Company does not intend, nor is it likely that the Company will be required, to sell these securities before the recovery of the cost basis. Therefore, management does not believe any other-than-temporary impairments exist at June 30, 2014.

        Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties. The amortized cost and fair value of

F-112


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

4. Securities (Continued)

securities, excluding trading and available for sale equity securities and the available for sale warrant, at June 30, 2014 are shown by contractual maturity below (in thousands).

 
  Available for Sale   Held to Maturity  
 
  Amortized
Cost
  Fair Value   Amortized
Cost
  Fair Value  

Due in one year or less

  $ 133,456   $ 133,611   $   $  

Due after one year through five years

    120,411     130,803          

Due after five years through ten years

    71,929     74,513     264     264  

Due after ten years

    680,251     659,001     4,142     4,129  
                   

    1,006,047     997,928     4,406     4,393  

Residential mortgage-backed securities

   
55,895
   
57,504
   
31,048
   
31,431
 

Collateralized mortgage obligations

    110,909     107,130     29,821     29,807  

Commercial mortgage-backed securities

    597     665          
                   

  $ 1,173,448   $ 1,163,227   $ 65,275   $ 65,631  
                   
                   

        The Company realized net gains from its trading securities portfolio of $0.8 million and $1.4 million during the three and six months ended June 30, 2014, respectively, and net losses of $1.5 million and $2.7 million during the three and six months ended June 30, 2013, respectively, which are recorded as a component of other noninterest income within the consolidated statements of operations.

        Securities with a carrying amount of $1.0 billion (with a fair value of $983.1 million and $938.1 million, respectively) at both June 30, 2014 and December 31, 2013, were pledged to secure public and trust deposits, federal funds purchased and securities sold under agreements to repurchase, and for other purposes as required or permitted by law.

        Mortgage-backed securities and collateralized mortgage obligations consist principally of Government National Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") pass-through and participation certificates. GNMA securities are guaranteed by the full faith and credit of the United States, while FNMA and FHLMC securities are fully guaranteed by those respective United States government-sponsored agencies, and conditionally guaranteed by the full faith and credit of the United States.

        At June 30, 2014 and December 31, 2013, NLC had investments on deposit in custody for various state insurance departments with carrying values of $8.6 million and $9.4 million, respectively.

F-113


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses

        Non-covered loans refer to loans not covered by the FDIC loss-share agreements. Covered loans are discussed in Note 6 to the consolidated financial statements. Non-covered loans summarized by portfolio segment are as follows (in thousands).

 
  June 30,
2014
  December 31,
2013
 

Commercial and industrial

  $ 1,681,655   $ 1,637,266  

Real estate

    1,586,535     1,457,253  

Construction and land development

    391,611     364,551  

Consumer

    55,036     55,576  
           

    3,714,837     3,514,646  

Allowance for non-covered loan losses

    (36,431 )   (33,241 )
           

Total non-covered loans, net of allowance

  $ 3,678,406   $ 3,481,405  
           
           

        The Bank has lending policies in place with the goal of establishing an asset portfolio that will provide a return on stockholders' equity sufficient to maintain capital to assets ratios that meet or exceed established regulations. Loans are underwritten with careful consideration of the borrower's financial condition, the specific purpose of the loan, the primary sources of repayment and any collateral pledged to secure the loan.

        Underwriting procedures address financial components based on the size or complexity of the credit. The financial components include, but are not limited to, current and projected cash flows, shock analysis and/or stress testing, and trends in appropriate balance sheet and statement of operations ratios. Collateral analysis includes a complete description of the collateral, as well as determining values, monitoring requirements, loan to value ratios, concentration risk, appraisal requirements and other information relevant to the collateral being pledged. Guarantor analysis includes liquidity and cash flow analysis based on the significance the guarantors are expected to serve as secondary repayment sources. The Bank's underwriting standards are governed by adherence to its loan policy. The loan policy provides for specific guidelines by portfolio segment, including commercial and industrial, real estate, construction and land development, and consumer loans. Within each individual portfolio segment, permissible and impermissible loan types are explicitly outlined. Within the loan types, minimum requirements for the underwriting factors listed above are provided.

        The Bank maintains a loan review department that reviews credit risk in response to both external and internal factors that potentially impact the performance of either individual loans or the overall loan portfolio. The loan review process reviews the creditworthiness of borrowers and determines compliance with the loan policy. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel. Results of these reviews are presented to management and the Bank's board of directors.

        In connection with the PlainsCapital Merger and the FNB Transaction, the Company acquired non-covered loans both with and without evidence of credit quality deterioration since origination. The

F-114


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses (Continued)

following table presents the carrying values and the outstanding balances of the non-covered PCI loans (in thousands).

 
  June 30,
2014
  December 31,
2013
 

Carrying amount

  $ 60,787   $ 100,392  

Outstanding balance

    83,534     141,983  

        Changes in the accretable yield for the non-covered PCI loans were as follows (in thousands).

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2014   2013   2014   2013  

Balance, beginning of period

  $ 17,713   $ 26,246   $ 17,601   $ 17,553  

Increases in expected cash flows

    6,141     141     9,616     12,137  

Disposals of loans

    (3,581 )   (1,806 )   (4,184 )   (1,832 )

Accretion

    (8,369 )   (4,463 )   (11,129 )   (7,740 )
                   

Balance, end of period

  $ 11,904   $ 20,118   $ 11,904   $ 20,118  
                   
                   

        The remaining nonaccretable difference for non-covered PCI loans was $24.0 million and $38.6 million at June 30, 2014 and December 31, 2013, respectively.

        Impaired loans exhibit a clear indication that the borrower's cash flow may not be sufficient to meet principal and interest payments, which is generally when a loan is 90 days past due unless the asset is both well secured and in the process of collection.

        Non-covered impaired loans include non-accrual loans, troubled debt restructurings ("TDRs"), PCI loans and partially charged-off loans. The amounts shown in following tables include loans accounted for on an individual basis, as well as acquired loans accounted for in pools ("Pooled Loans"). For Pooled Loans, the recorded investment with allowance and the related allowance consider

F-115


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses (Continued)

impairment measured at the pool level. Non-covered impaired loans are summarized by class in the following tables (in thousands).

June 30, 2014
  Unpaid
Contractual
Principal Balance
  Recorded
Investment with
No Allowance
  Recorded
Investment with
Allowance
  Total
Recorded
Investment
  Related
Allowance
 

Commercial and industrial:

                               

Secured

  $ 50,056   $ 9,060   $ 15,514   $ 24,574   $ 3,268  

Unsecured

    5,411     504         504      

Real estate:

                               

Secured by commercial properties

    31,715     10,286     14,116     24,402     492  

Secured by residential properties

    5,896     2,898     1,199     4,097     59  

Construction and land development:

                               

Residential construction loans

                     

Commercial construction loans and land development

    17,731     10,313     553     10,866     65  

Consumer

    6,852     483     2,606     3,089     111  
                       

  $ 117,661   $ 33,544   $ 33,988   $ 67,532   $ 3,995  
                       
                       

 

December 31, 2013
  Unpaid
Contractual
Principal Balance
  Recorded
Investment with
No Allowance
  Recorded
Investment with
Allowance
  Total
Recorded
Investment
  Related
Allowance
 

Commercial and industrial:

                               

Secured

  $ 63,636   $ 21,540   $ 17,147   $ 38,687   $ 3,126  

Unsecured

    11,865     336     1,204     1,540     15  

Real estate:

                               

Secured by commercial properties

    49,437     20,317     16,070     36,387     339  

Secured by residential properties

    5,407     1,745     1,648     3,393     39  

Construction and land development:

                               

Residential construction loans

    33                  

Commercial construction loans and land development

    48,628     15,337     4,592     19,929     39  

Consumer

    7,946     4,509         4,509      
                       

  $ 186,952   $ 63,784   $ 40,661   $ 104,445   $ 3,558  
                       
                       

F-116


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses (Continued)

        Average investment in non-covered impaired loans is summarized by class in the following table (in thousands).

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2014   2013   2014   2013  

Commercial and industrial:

                         

Secured

  $ 29,852   $ 61,715   $ 31,631   $ 61,365  

Unsecured

    865     2,385     1,022     2,697  

Real estate:

                         

Secured by commercial properties

    27,120     49,687     30,395     51,835  

Secured by residential properties

    4,541     7,131     3,745     6,446  

Construction and land development:

                         

Residential construction loans

                354  

Commercial construction loans and land development

    13,313     26,681     15,398     29,776  

Consumer

    3,410     69     3,799     72  
                   

  $ 79,101   $ 147,668   $ 85,990   $ 152,545  
                   
                   

        Non-covered non-accrual loans, excluding those classified as held for sale, are summarized by class in the following table (in thousands).

 
  June 30,
2014
  December 31,
2013
 

Commercial and industrial:

             

Secured

  $ 14,258   $ 15,430  

Unsecured

    504     1,300  

Real estate:

             

Secured by commercial properties

    485     2,638  

Secured by residential properties

    1,887     398  

Construction and land development:

             

Residential construction loans

         

Commercial construction loans and land development

    863     112  

Consumer

         
           

  $ 17,997   $ 19,878  
           
           

        At June 30, 2014 and December 31, 2013, non-covered non-accrual loans included non-covered PCI loans of $11.3 million and $15.8 million, respectively, for which discount accretion has been suspended because the extent and timing of cash flows from these non-covered PCI loans can no longer be reasonably estimated. In addition to the non-covered non-accrual loans in the table above, $3.9 million and $3.5 million of real estate loans secured by residential properties and classified as held for sale were in non-accrual status at June 30, 2014 and December 31, 2013, respectively.

        Interest income recorded on non-covered accruing impaired loans and on non-covered non-accrual loans was $1.1 million and $2.5 million for the three and six months ended June 30, 2014, respectively.

F-117


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses (Continued)

Interest income recorded on non-covered accruing impaired loans and on non-covered non-accrual loans for the three and six months ended June 30, 2013 was nominal.

        The Bank classifies loan modifications as TDRs when it concludes that it has both granted a concession to a debtor and that the debtor is experiencing financial difficulties. Loan modifications are typically structured to create affordable payments for the debtor and can be achieved in a variety of ways. The Bank modifies loans by reducing interest rates and/or lengthening loan amortization schedules. The Bank also reconfigures a single loan into two or more loans ("A/B Note"). The typical A/B Note restructure results in a "bad" loan which is charged off and a "good" loan or loans the terms of which comply with the Bank's customary underwriting policies. The debt charged off on the "bad" loan is not forgiven to the debtor.

        Information regarding TDRs granted is shown in the following tables (in thousands). There were no TDRs granted for the three months ended June 30, 2014. At June 30, 2014, the Bank had no unadvanced commitments to borrowers whose loans have been restructured in TDRs. At December 31, 2013, the Bank had $0.5 million in such unadvanced commitments.

 
  Recorded Investment in Loans Modified by  
Six months ended June 30, 2014
  A/B Note   Interest Rate
Adjustment
  Payment Term
Extension
  Total
Modification
 

Commercial and industrial:

                         

Secured

  $   $   $   $  

Unsecured

                 

Real estate:

                         

Secured by commercial properties

            336     336  

Secured by residential properties

            258     258  

Construction and land development:

                         

Residential construction loans

                 

Commercial construction loans and land development

            138     138  

Consumer

                 
                   

  $   $   $ 732   $ 732  
                   
                   

F-118


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses (Continued)


 
  Recorded Investment in Loans Modified by  
Three months ended June 30, 2013
  A/B Note   Interest Rate
Adjustment
  Payment Term
Extension
  Total
Modification
 

Commercial and industrial:

                         

Secured

  $   $   $ 9,853   $ 9,853  

Unsecured

                 

Real estate:

                         

Secured by commercial properties

                 

Secured by residential properties

                 

Construction and land development:

                         

Residential construction loans

                 

Commercial construction loans and land development

                 

Consumer

                 
                   

  $   $   $ 9,853   $ 9,853  
                   
                   

 

 
  Recorded Investment in Loans Modified by  
Six months ended June 30, 2013
  A/B Note   Interest Rate
Adjustment
  Payment Term
Extension
  Total
Modification
 

Commercial and industrial:

                         

Secured

  $   $   $ 9,858   $ 9,858  

Unsecured

                 

Real estate:

                         

Secured by commercial properties

            272     272  

Secured by residential properties

            1,047     1,047  

Construction and land development:

                         

Residential construction loans

                 

Commercial construction loans and land development

            603     603  

Consumer

                 
                   

  $   $   $ 11,780   $ 11,780  
                   
                   

F-119


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses (Continued)

        There were no TDRs granted in the twelve months preceding June 30, 2014 and 2013, for which a payment was at least 30 days past due in the three and six months ended June 30, 2014 and 2013, respectively.

        An analysis of the aging of the Bank's non-covered loan portfolio is shown in the following tables (in thousands).

June 30, 2014
  Loans Past Due
30 - 59 Days
  Loans Past Due
60 - 89 Days
  Loans Past Due
90 Days or More
  Total
Past Due Loans
  Current
Loans
  PCI
Loans
  Total
Loans
  Accruing Loans
Past Due
90 Days or More
 

Commercial and industrial:

                                                 

Secured

  $ 14,705   $ 891   $ 1,690   $ 17,286   $ 1,545,510   $ 21,086   $ 1,583,882   $ 1  

Unsecured

    236     45         281     97,104     388     97,773      

Real estate:

                                                 

Secured by commercial properties

                    1,103,126     23,917     1,127,043      

Secured by residential properties

    482     1,090     467     2,039     455,149     2,304     459,492      

Construction and land development:

                                                 

Residential construction loans

    2,176             2,176     68,280         70,456      

Commercial construction loans and land development

    998             998     310,154     10,003     321,155      

Consumer

    241     55         296     51,651     3,089     55,036      
                                   

  $ 18,838   $ 2,081   $ 2,157   $ 23,076   $ 3,630,974   $ 60,787   $ 3,714,837   $ 1  
                                   
                                   

 

December 31, 2013
  Loans Past Due
30 - 59 Days
  Loans Past Due
60 - 89 Days
  Loans Past Due
90 Days or More
  Total
Past Due Loans
  Current
Loans
  PCI
Loans
  Total
Loans
  Accruing Loans
Past Due
90 Days or More
 

Commercial and industrial:

                                                 

Secured

  $ 2,171   $ 277   $ 1,354   $ 3,802   $ 1,492,793   $ 35,372   $ 1,531,967   $ 272  

Unsecured

    333     9     60     402     103,453     1,444     105,299     59  

Real estate:

                                                 

Secured by commercial properties

    192         132     324     1,044,437     36,255     1,081,016      

Secured by residential properties

    1,045     36     203     1,284     371,958     2,995     376,237     203  

Construction and land development:

                                                 

Residential construction loans

    415             415     64,664         65,079      

Commercial construction loans and land development

    41     881     112     1,034     278,621     19,817     299,472      

Consumer

    201     60         261     50,806     4,509     55,576      
                                   

  $ 4,398   $ 1,263   $ 1,861   $ 7,522   $ 3,406,732   $ 100,392   $ 3,514,646   $ 534  
                                   
                                   

        Management tracks credit quality trends on a quarterly basis related to: (i) past due levels, (ii) non-performing asset levels, (iii) classified loan levels, (iv) net charge-offs, and (v) general economic conditions in the state and local markets.

        The Bank utilizes a risk grading matrix to assign a risk grade to each of the loans in its portfolio. A risk rating is assigned based on an assessment of the borrower's management, collateral position, financial capacity, and economic factors. The general characteristics of the various risk grades are described below.

        Pass—"Pass" loans present a range of acceptable risks to the Bank. Loans that would be considered virtually risk-free are rated Pass—low risk. Loans that exhibit sound standards based on the grading factors above and present a reasonable risk to the Bank are rated Pass—normal risk. Loans that exhibit a minor weakness in one or more of the grading criteria but still present an acceptable risk to the Bank are rated Pass—high risk.

        Special Mention—"Special Mention" loans have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in a deterioration of the

F-120


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses (Continued)

repayment prospects for the loans and weaken the Bank's credit position at some future date. Special Mention loans are not adversely classified and do not expose the Bank to sufficient risk to require adverse classification.

        Substandard—"Substandard" loans are inadequately protected by the current sound worth and paying capacity of the obligor or the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Many substandard loans are considered impaired.

        PCI—"PCI" loans exhibited evidence of credit deterioration at acquisition that made it probable that all contractually required principal payments would not be collected.

        The following tables present the internal risk grades of non-covered loans, as previously described, in the portfolio by class (in thousands).

June 30, 2014
  Pass   Special Mention   Substandard   PCI   Total  

Commercial and industrial:

                               

Secured

  $ 1,522,487   $ 18,277   $ 22,032   $ 21,086   $ 1,583,882  

Unsecured

    97,118         267     388     97,773  

Real estate:

                               

Secured by commercial properties

    1,097,299     4,369     1,458     23,917     1,127,043  

Secured by residential properties

    451,931         5,257     2,304     459,492  

Construction and land development:

                               

Residential construction loans

    70,456                 70,456  

Commercial construction loans and land development

    309,614     274     1,264     10,003     321,155  

Consumer

    51,898         49     3,089     55,036  
                       

  $ 3,600,803   $ 22,920   $ 30,327   $ 60,787   $ 3,714,837  
                       
                       

 

December 31, 2013
  Pass   Special Mention   Substandard   PCI   Total  

Commercial and industrial:

                               

Secured

  $ 1,450,734   $ 16,840   $ 29,021   $ 35,372   $ 1,531,967  

Unsecured

    103,674     12     169     1,444     105,299  

Real estate:

                               

Secured by commercial properties

    1,038,930     4,436     1,395     36,255     1,081,016  

Secured by residential properties

    367,758         5,484     2,995     376,237  

Construction and land development:

                               

Residential construction loans

    65,079                 65,079  

Commercial construction loans and land development

    275,808     3,384     463     19,817     299,472  

Consumer

    51,052     1     14     4,509     55,576  
                       

  $ 3,353,035   $ 24,673   $ 36,546   $ 100,392   $ 3,514,646  
                       
                       

        The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management's best estimate of probable losses inherent in the existing

F-121


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses (Continued)

portfolio of loans. Management has responsibility for determining the level of the allowance for loan losses, subject to review by the Audit Committee of the Company's Board of Directors and the Loan Review Committee of the Bank's board of directors.

        It is management's responsibility at the end of each quarter, or more frequently as deemed necessary, to analyze the level of the allowance for loan losses to ensure that it is appropriate for the estimated credit losses in the portfolio consistent with the Interagency Policy Statement on the Allowance for Loan and Lease Losses and the Receivables and Contingencies Topics of the ASC. Estimated credit losses are the probable current amount of loans that the Company will be unable to collect given facts and circumstances as of the evaluation date. When management determines that a loan or portion thereof is uncollectible, the loan, or portion thereof, is charged off against the allowance for loan losses, or for acquired loans accounted for in pools, charged against the pool discount. Recoveries on charge-offs that occurred prior to the PlainsCapital Merger represent contractual cash flows not expected to be collected and are recorded as accretion income. Recoveries on loans charged-off subsequent to the PlainsCapital Merger are credited to the allowance for loan loss, except for recoveries on loans accounted for in pools, which are credited to the pool discount. The Bank's loan portfolio is designated into two populations: acquired loans and originated loans. The allowance for loan losses is calculated separately for acquired and originated loans.

Originated Loans

        The Company has developed a methodology that seeks to determine an allowance within the scope of the Receivables and Contingencies Topics of the ASC. Each of the loans that has been determined to be impaired is within the scope of the Receivables Topic. Impaired loans that are equal to or greater than $0.5 million are individually evaluated for impairment using one of three impairment measurement methods as of the evaluation date: (1) the present value of expected future discounted cash flows on the loan, (2) the loan's observable market price, or (3) the fair value of the collateral if the loan is collateral dependent. Specific reserves are provided in the estimate of the allowance based on the measurement of impairment under these three methods, except for collateral dependent loans, which require the fair value method. All non-impaired loans are within the scope of the Contingencies Topic. Estimates of loss for the Contingencies Topic are calculated based on historical loss, adjusted for qualitative or environmental factors. The Bank uses a rolling three year average net loss rate to calculate historical loss factors. The analysis is conducted by call report category, and further disaggregates commercial and industrial loans by collateral type. The analysis considers charge-offs and recoveries in determining the loss rate; therefore net charge-off experience is used. The historical loss calculation for the quarter is calculated by dividing the current quarter net charge-offs for each loan category by the quarter ended loan category balance. The Bank utilizes a weighted average loss rate to better represent recent trends. The Bank weights the most recent four quarter average at 120% versus the oldest four quarters at 80%.

        While historical loss experience provides a reasonable starting point for the analysis, historical losses are not the sole basis upon which the Company determines the appropriate level for the allowance for loan losses. Management considers recent qualitative or environmental factors that are

F-122


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses (Continued)

likely to cause estimated credit losses associated with the existing portfolio to differ from historical loss experience, including but not limited to:

        Changes in the volume and severity of past due, nonaccrual and classified loans, as well as changes in the nature, volume and terms of loans in the portfolio are key indicators of changes that could indicate a necessary adjustment to the historical loss factors. The magnitude of the impact of these factors on our qualitative assessment of the allowance for loan loss changes from quarter to quarter.

        The loan review program is designed to identify and monitor problem loans by maintaining a credit grading process, requiring that timely and appropriate changes be made to reviewed loans and coordinating the delivery of the information necessary to assess the appropriateness of the allowance for loan losses. Loans are evaluated for impaired status when: (i) payments on the loan are delayed, typically by 90 days or more (unless the loan is both well secured and in the process of collection), (ii) the loan becomes classified, (iii) the loan is being reviewed in the normal course of the loan review scope, or (iv) the loan is identified by the servicing officer as a problem.

        Homogeneous loans, such as consumer installment loans, residential mortgage loans and home equity loans, are not individually reviewed and are generally risk graded at the same levels. The risk grade and reserves are established for each homogeneous pool of loans based on the expected net charge-offs from current trends in delinquencies, losses or historical experience and general economic conditions. At June 30, 2014 and December 31, 2013, there were no material delinquencies in these types of loans.

Acquired Loans

        Loans acquired in a business combination are recorded at their estimated fair value on their purchase date and with no carryover of the related allowance for loan losses. Loans without evidence of credit impairment at acquisition are subsequently evaluated for any required allowance at each reporting date. An allowance for loan losses is calculated using a methodology similar to that described above for originated loans. The allowance as determined for each loan collateral type is compared to the remaining fair value discount for that loan collateral type. If greater, the excess is recognized as an addition to the allowance through a provision for loan losses. If less than the discount, no additional

F-123


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses (Continued)

allowance is recorded. Charge-offs and losses first reduce any remaining fair value discount for the loan and once the discount is depleted, losses are applied against the allowance established for that loan.

        PCI loans acquired in the PlainsCapital Merger are accounted for on an individual loan basis, while PCI loans acquired in the FNB Transaction are accounted for both in pools and at the individual loan level. Cash flows expected to be collected are recast quarterly for each loan or pool. These evaluations require the continued use and updating of key assumptions and estimates such as default rates, loss severity given default and prepayment speed assumptions, similar to those used for the initial fair value estimate. Management judgment must be applied in developing these assumptions. If expected cash flows for a loan or pool decreases, an increase in the allowance for loan losses is made through a charge to the provision for loan losses. If expected cash flows for a loan or pool increase, any previously established allowance for loan losses is reversed and any remaining difference increases the accretable yield which will be taken into income over the remaining life of the loan.

        The allowance is subject to regulatory examinations and determinations as to appropriateness, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance.

        Changes in the allowance for non-covered loan losses, distributed by portfolio segment, are shown below (in thousands).

Three months ended June 30, 2014
  Commercial and
Industrial
  Real Estate   Construction and
Land Development
  Consumer   Total  

Balance, beginning of period

  $ 16,726   $ 9,682   $ 8,096   $ 141   $ 34,645  

Provision charged to operations

    3,631     306     (51 )   197     4,083  

Loans charged off

    (2,924 )   (72 )       (85 )   (3,081 )

Recoveries on charged off loans

    629     82     41     32     784  
                       

Balance, end of period

  $ 18,062   $ 9,998   $ 8,086   $ 285   $ 36,431  
                       
                       

 

Six months ended June 30, 2014
  Commercial and
Industrial
  Real Estate   Construction and
Land Development
  Consumer   Total  

Balance, beginning of period

  $ 16,865   $ 8,331   $ 7,957   $ 88   $ 33,241  

Provision charged to operations

    3,574     1,625     (34 )   306     5,471  

Loans charged off

    (3,731 )   (72 )       (159 )   (3,962 )

Recoveries on charged off loans

    1,354     114     163     50     1,681  
                       

Balance, end of period

  $ 18,062   $ 9,998   $ 8,086   $ 285   $ 36,431  
                       
                       

F-124


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses (Continued)

Three months ended June 30, 2013
  Commercial and
Industrial
  Real Estate   Construction and
Land Development
  Consumer   Total  

Balance, beginning of period

  $ 8,812   $ 3,522   $ 4,286   $ 17   $ 16,637  

Provision charged to operations

    6,729     1,820     2,720     20     11,289  

Loans charged off

    (3,656 )   (65 )       (15 )   (3,736 )

Recoveries on charged off loans

    1,921     62     44     20     2,047  
                       

Balance, end of period

  $ 13,806   $ 5,339   $ 7,050   $ 42   $ 26,237  
                       
                       

 

Six months ended June 30, 2013
  Commercial and
Industrial
  Real Estate   Construction and
Land Development
  Consumer   Total  

Balance, beginning of period

  $ 1,845   $ 977   $ 582   $ 5   $ 3,409  

Provision charged to operations

    13,640     4,257     6,317     80     24,294  

Loans charged off

    (4,094 )   (96 )       (71 )   (4,261 )

Recoveries on charged off loans

    2,415     201     151     28     2,795  
                       

Balance, end of period

  $ 13,806   $ 5,339   $ 7,050   $ 42   $ 26,237  
                       
                       

        The non-covered loan portfolio was distributed by portfolio segment and impairment methodology as shown below (in thousands).

June 30, 2014
  Commercial and
Industrial
  Real Estate   Construction and
Land Development
  Consumer   Total  

Loans individually evaluated for impairment

  $ 2,487   $ 1,973   $ 863   $   $ 5,323  

Loans collectively evaluated for impairment

    1,657,694     1,558,341     380,745     51,947     3,648,727  

PCI Loans

    21,474     26,221     10,003     3,089     60,787  
                       

  $ 1,681,655   $ 1,586,535   $ 391,611   $ 55,036   $ 3,714,837  
                       
                       

 

December 31, 2013
  Commercial and
Industrial
  Real Estate   Construction and
Land Development
  Consumer   Total  

Loans individually evaluated for impairment

  $ 2,273   $ 373   $ 112   $   $ 2,758  

Loans collectively evaluated for impairment

    1,598,177     1,417,630     344,622     51,067     3,411,496  

PCI Loans

    36,816     39,250     19,817     4,509     100,392  
                       

  $ 1,637,266   $ 1,457,253   $ 364,551   $ 55,576   $ 3,514,646  
                       
                       

F-125


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses (Continued)

        The allowance for non-covered loan losses was distributed by portfolio segment and impairment methodology as shown below (in thousands).

June 30, 2014
  Commercial and
Industrial
  Real Estate   Construction and
Land Development
  Consumer   Total  

Loans individually evaluated for impairment

  $ 421   $   $   $   $ 421  

Loans collectively evaluated for impairment

    14,794     9,447     8,021     174     32,436  

PCI Loans

    2,847     551     65     111     3,574  
                       

  $ 18,062   $ 9,998   $ 8,086   $ 285   $ 36,431  
                       
                       

 

December 31, 2013
  Commercial and
Industrial
  Real Estate   Construction and
Land Development
  Consumer   Total  

Loans individually evaluated for impairment

  $ 421   $   $   $   $ 421  

Loans collectively evaluated for impairment

    13,724     7,953     7,918     88     29,683  

PCI Loans

    2,720     378     39         3,137  
                       

  $ 16,865   $ 8,331   $ 7,957   $ 88   $ 33,241  
                       
                       

6. Covered Assets and Indemnification Asset

        As discussed in Note 2 to the consolidated financial statements, the Bank assumed substantially all of the liabilities, including all of the deposits, and acquired substantially all of the assets of FNB in an FDIC-assisted transaction on September 13, 2013. Pursuant to the loss-share agreements, the FDIC has agreed to reimburse the Bank the following amounts with respect to the covered assets: (i) 80% of losses on the first $240.4 million of losses incurred; (ii) 0% of losses in excess of $240.4 million up to and including $365.7 million of losses incurred; and (iii) 80% of losses in excess of $365.7 million of losses incurred. The Bank has also agreed to reimburse the FDIC for any subsequent recoveries. The loss-share agreements for commercial and single family residential loans are in effect for 5 years and 10 years, respectively, from the Bank Closing Date, and the loss recovery provisions to the FDIC are in effect for 8 years and 10 years, respectively, from the Bank Closing Date. The asset arising from the loss-share agreements, which we refer to as the "FDIC Indemnification Asset," is measured separately from the covered loan portfolio because the agreements are not contractually embedded in the covered loans and are not transferable should the Bank choose to dispose of the covered loans.

        In accordance with the loss-share agreements, the Bank may be required to make a "true-up" payment to the FDIC approximately ten years following the Bank Closing Date if the FDIC's initial estimate of losses on covered assets is greater than the actual realized losses. The "true-up" payment is calculated using a defined formula set forth in the P&A Agreement.

F-126


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

6. Covered Assets and Indemnification Asset (Continued)

Covered Loans and Allowance for Covered Loan Losses

        Loans acquired in a FDIC-assisted acquisition that are subject to a loss-share agreement are referred to as "covered loans" and reported separately in the consolidated balance sheets. Covered loans are reported exclusive of the cash flow reimbursements that may be received from the FDIC.

        The Bank's portfolio of acquired covered loans had a fair value of $1.1 billion as of the Bank Closing Date, with no carryover of any allowance for loan losses. Acquired covered loans were preliminarily segregated between those considered to be PCI loans and those without credit impairment at acquisition.

        In connection with the FNB Transaction, the Bank acquired loans both with and without evidence of credit quality deterioration since origination. The Company's accounting policies for acquired covered loans, including covered PCI loans, are consistent with that of acquired non-covered loans, as described in Note 5 to the consolidated financial statements. The Company has established under its PCI accounting policy a framework to aggregate certain acquired covered loans into various loan pools based on a minimum of two layers of common risk characteristics for the purpose of determining their respective fair values as of their acquisition dates, and for applying the subsequent recognition and measurement provisions for income accretion and impairment testing.

        The following table presents the carrying value of the covered loans summarized by portfolio segment (in thousands).

 
  June 30,
2014
  December 31,
2013
 

Commercial and industrial

  $ 50,016   $ 66,943  

Real estate

    698,225     787,982  

Construction and land development

    96,772     151,444  

Consumer

         
           

Total covered loans

    845,013     1,006,369  

Allowance for covered loans

    (4,115 )   (1,061 )
           

Total covered loans, net of allowance

  $ 840,898   $ 1,005,308  
           
           

        The following table presents the carrying value and the outstanding contractual balance of the covered PCI loans (in thousands).

 
  June 30,
2014
  December 31,
2013
 

Carrying amount

  $ 595,218   $ 729,156  

Outstanding balance

    874,589     1,022,514  

F-127


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

6. Covered Assets and Indemnification Asset (Continued)

        Changes in the accretable yield for the covered PCI loans were as follows (in thousands).

 
  Three Months Ended
June 30, 2014
  Six Months Ended
June 30, 2014
 

Balance, beginning of period

  $ 176,469   $ 156,548  

Increases in expected cash flows

    26,871     57,581  

Transfer of loans to covered OREO

    111     5,372  

Accretion

    (17,310 )   (33,360 )
           

Balance, end of period

  $ 186,141   $ 186,141  
           
           

        The remaining nonaccretable difference for covered PCI loans was $389.7 million and $517.9 million at June 30, 2014 and December 31, 2013, respectively.

        Covered impaired loans include non-accrual loans, TDRs, PCI loans and partially charged-off loans. Substantially all covered impaired loans are PCI loans. The amounts shown in following tables include Pooled Loans, as well as loans accounted for on an individual basis. For Pooled Loans, the recorded investment with allowance and the related allowance consider impairment measured at the pool level. Covered impaired loans are summarized by class in the following tables (in thousands).

June 30, 2014
  Unpaid
Contractual
Principal Balance
  Recorded
Investment with
No Allowance
  Recorded
Investment with
Allowance
  Total
Recorded
Investment
  Related
Allowance
 

Commercial and industrial:

                               

Secured

  $ 32,119   $ 11,877   $ 7,051   $ 18,928   $ 108  

Unsecured

    16,091     3,124     5,284     8,408     883  

Real estate:

                               

Secured by commercial properties

    480,651     221,909     93,668     315,577     1,186  

Secured by residential properties

    269,049     159,048     16,820     175,868     1,355  

Construction and land development:

                               

Residential construction loans

    4,929     1,905     1,170     3,075     5  

Commercial construction loans and land development

    137,053     65,337     13,246     78,583     377  

Consumer

                     
                       

  $ 939,892   $ 463,200   $ 137,239   $ 600,439   $ 3,914  
                       
                       

F-128


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

6. Covered Assets and Indemnification Asset (Continued)


December 31, 2013
  Unpaid
Contractual
Principal Balance
  Recorded
Investment with
No Allowance
  Recorded
Investment with
Allowance
  Total
Recorded
Investment
  Related
Allowance
 

Commercial and industrial:

                               

Secured

  $ 43,957   $ 28,611   $   $ 28,611   $  

Unsecured

    16,280     9,008     882     9,890     882  

Real estate:

                               

Secured by commercial properties

    528,825     365,346         365,346      

Secured by residential properties

    289,094     199,581         199,581      

Construction and land development:

                               

Residential construction loans

    8,920     5,280         5,280      

Commercial construction loans and land development

    183,117     121,363         121,363      

Consumer

                     
                       

  $ 1,070,193   $ 729,189   $ 882   $ 730,071   $ 882  
                       
                       

        Average investment in covered impaired loans is summarized by class in the following table (in thousands).

 
  Three Months Ended
June 30, 2014
  Six Months Ended
June 30, 2014
 

Commercial and industrial:

             

Secured

  $ 20,585   $ 23,770  

Unsecured

    8,688     9,149  

Real estate:

             

Secured by commercial properties

    327,508     340,462  

Secured by residential properties

    182,264     187,725  

Construction and land development:

             

Residential construction loans

    3,669     4,178  

Commercial construction loans and land development

    84,800     99,973  

Consumer

         
           

  $ 627,514   $ 665,257  
           
           

F-129


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

6. Covered Assets and Indemnification Asset (Continued)

        Covered non-accrual loans, excluding those classified as held for sale, are summarized by class in the following table (in thousands).

 
  June 30,
2014
  December 31,
2013
 

Commercial and industrial:

             

Secured

  $ 1,141   $ 91  

Unsecured

    954     882  

Real estate:

             

Secured by commercial properties

    10,910     40  

Secured by residential properties

    1,710     209  

Construction and land development:

             

Residential construction loans

    1,905     575  

Commercial construction loans and land development

    14      

Consumer

         
           

  $ 16,634   $ 1,797  
           
           

        At June 30, 2014, covered non-accrual loans included covered PCI loans of $11.4 million for which discount accretion has been suspended because the extent and timing of cash flows from these covered PCI loans can no longer be reasonably estimated.

        Interest income recorded on covered accruing impaired loans and on covered non-accrual loans for the three and six months ended June 30, 2014 was nominal. Except as noted above, covered PCI loans are considered to be performing due to the application of the accretion method. Additionally, no acquired covered performing loans have been modified in a TDR.

F-130


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

6. Covered Assets and Indemnification Asset (Continued)

        An analysis of the aging of the Bank's covered loan portfolio is shown in the following tables (in thousands).

June 30, 2014
  Loans Past
Due
30 - 59 Days
  Loans Past
Due
60 - 89 Days
  Loans Past
Due
90 Days
or More
  Total Past
Due
Loans
  Current
Loans
  PCI
Loans
  Total
Loans
  Accruing
Loans
Past Due
90 Days
or More
 

Commercial and industrial:

                                                 

Secured

  $   $ 915   $ 226   $ 1,141   $ 21,293   $ 17,787   $ 40,221   $  

Unsecured

    1,000         71     1,071     387     8,337     9,795      

Real estate:

                                                 

Secured by commercial properties

    580     100     609     1,289     56,520     315,197     373,006     229  

Secured by residential properties

    1,298     764     1,137     3,199     147,862     174,158     325,219     43  

Construction and land development:

                                                 

Residential construction loans

            1,905     1,905     1,093     1,170     4,168      

Commercial construction loans and land development

    57     227         284     13,751     78,569     92,604      

Consumer

                                 
                                   

  $ 2,935   $ 2,006   $ 3,948   $ 8,889   $ 240,906   $ 595,218   $ 845,013   $ 272  
                                   
                                   

 

December 31, 2013
  Loans Past
Due
30 - 59 Days
  Loans Past
Due
60 - 89 Days
  Loans Past
Due
90 Days
or More
  Total Past
Due
Loans
  Current
Loans
  PCI
Loans
  Total
Loans
  Accruing
Loans
Past Due
90 Days
or More
 

Commercial and industrial:

                                                 

Secured

  $ 3,904   $ 10   $ 81   $ 3,995   $ 20,918   $ 28,520   $ 53,433   $  

Unsecured

    10     259         269     3,351     9,890     13,510      

Real estate:

                                                 

Secured by commercial properties

    999         40     1,039     63,780     365,306     430,125      

Secured by residential properties

    1,679     678     209     2,566     155,919     199,372     357,857      

Construction and land development:

                                                 

Residential construction loans

    1,861         576     2,437     5,026     4,705     12,168      

Commercial construction loans and land development

    244     20         264     17,649     121,363     139,276      

Consumer

                                 
                                   

  $ 8,697   $ 967   $ 906   $ 10,570   $ 266,643   $ 729,156   $ 1,006,369   $  
                                   
                                   

        The Bank assigns a risk grade to each of its covered loans in a manner consistent with the existing loan review program and risk grading matrix used for non-covered loans, as described in Note 5 to the

F-131


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

6. Covered Assets and Indemnification Asset (Continued)

consolidated financial statements. The following tables present the internal risk grades of covered loans in the portfolio by class (in thousands).

June 30, 2014
  Pass   Special Mention   Substandard   PCI   Total  

Commercial and industrial:

                               

Secured

  $ 15,233   $   $ 7,201   $ 17,787   $ 40,221  

Unsecured

    156         1,302     8,337     9,795  

Real estate:

                               

Secured by commercial properties

    47,299     1,681     8,829     315,197     373,006  

Secured by residential properties

    143,451         7,610     174,158     325,219  

Construction and land development:

                               

Residential construction loans

    1,093         1,905     1,170     4,168  

Commercial construction loans and land development

    11,527         2,508     78,569     92,604  

Consumer

                     
                       

  $ 218,759   $ 1,681   $ 29,355   $ 595,218   $ 845,013  
                       
                       

 

December 31, 2013
  Pass   Special Mention   Substandard   PCI   Total  

Commercial and industrial:

                               

Secured

  $ 24,152   $   $ 761   $ 28,520   $ 53,433  

Unsecured

    3,040         580     9,890     13,510  

Real estate:

                               

Secured by commercial properties

    59,343     3,310     2,166     365,306     430,125  

Secured by residential properties

    155,439         3,046     199,372     357,857  

Construction and land development:

                               

Residential construction loans

    6,087         1,376     4,705     12,168  

Commercial construction loans and land development

    17,806         107     121,363     139,276  

Consumer

                     
                       

  $ 265,867   $ 3,310   $ 8,036   $ 729,156   $ 1,006,369  
                       
                       

        The Bank's impairment methodology for the covered loans is consistent with that of non-covered loans as discussed in Note 5 to the consolidated financial statements. To the extent there is experienced or projected credit deterioration on the acquired covered loan pools subsequent to amounts estimated at the previous quarterly recast date and expected cash flows for a loan or pool decreases, an increase in the allowance for loan losses is made through a charge to the provision for loan losses. If expected cash flows for a loan or pool increase, any previously established allowance for loan losses is reversed and any remaining difference increases the accretable yield which will be taken into income over the remaining life of the loan. Additionally, provision for credit losses will be recorded on advances on covered loans subsequent to the acquisition date in a manner consistent with the allowance for non-covered loan losses.

F-132


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

6. Covered Assets and Indemnification Asset (Continued)

        Changes in the allowance for covered loan losses, distributed by portfolio segment, are shown below (in thousands).

Three months ended June 30, 2014
  Commercial
and
Industrial
  Real Estate   Construction
and Land
Development
  Consumer   Total  

Balance, beginning of period

  $ 932   $ 1,696   $ 37   $   $ 2,665  

Provision charged to operations

    214     855     381         1,450  

Loans charged off

                     

Recoveries on charged off loans

                     
                       

Balance, end of period

  $ 1,146   $ 2,551   $ 418   $   $ 4,115  
                       
                       

 

Six months ended June 30, 2014
  Commercial
and
Industrial
  Real Estate   Construction
and Land
Development
  Consumer   Total  

Balance, beginning of period

  $ 1,053   $ 8   $   $   $ 1,061  

Provision charged to operations

    184     2,587     533         3,304  

Loans charged off

    (91 )   (44 )   (115 )       (250 )

Recoveries on charged off loans

                     
                       

Balance, end of period

  $ 1,146   $ 2,551   $ 418   $   $ 4,115  
                       
                       

        The covered loan portfolio was distributed by portfolio segment and impairment methodology as shown below (in thousands).

June 30, 2014
  Commercial
and
Industrial
  Real Estate   Construction
and Land
Development
  Consumer   Total  

Loans individually evaluated for impairment

  $ 915   $   $ 801   $   $ 1,716  

Loans collectively evaluated for impairment

    22,977     208,870     16,232         248,079  

PCI Loans

    26,124     489,355     79,739         595,218  
                       

  $ 50,016   $ 698,225   $ 96,772   $   $ 845,013  
                       
                       

 

December 31, 2013
  Commercial
and
Industrial
  Real Estate   Construction
and Land
Development
  Consumer   Total  

Loans individually evaluated for impairment

  $   $   $   $   $  

Loans collectively evaluated for impairment

    28,533     223,304     25,376         277,213  

PCI Loans

    38,410     564,678     126,068         729,156  
                       

  $ 66,943   $ 787,982   $ 151,444   $   $ 1,006,369  
                       
                       

F-133


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

6. Covered Assets and Indemnification Asset (Continued)

        The allowance for covered loan losses was distributed by portfolio segment and impairment methodology as shown below (in thousands).

June 30, 2014
  Commercial
and
Industrial
  Real Estate   Construction
and Land
Development
  Consumer   Total  

Loans individually evaluated for impairment

  $   $   $   $   $  

Loans collectively evaluated for impairment

    155     10     36         201  

PCI Loans

    991     2,541     382         3,914  
                       

  $ 1,146   $ 2,551   $ 418   $   $ 4,115  
                       
                       

 

December 31, 2013
  Commercial
and
Industrial
  Real Estate   Construction
and Land
Development
  Consumer   Total  

Loans individually evaluated for impairment

  $   $   $   $   $  

Loans collectively evaluated for impairment

    171     8             179  

PCI Loans

    882                 882  
                       

  $ 1,053   $ 8   $   $   $ 1,061  
                       
                       

Covered Other Real Estate Owned

        A summary of the activity in covered OREO is as follows (in thousands).

 
  Three Months Ended
June 30, 2014
  Six Months Ended
June 30, 2014
 

Balance, beginning of period

  $ 152,310   $ 142,833  

Additions to covered OREO

    8,802     31,992  

Dispositions of covered OREO

    (16,410 )   (29,692 )

Valuation adjustments in the period

    (2,528 )   (2,959 )
           

Balance, end of period

  $ 142,174   $ 142,174  
           
           

FDIC Indemnification Asset

        A summary of the activity in the FDIC Indemnification Asset is as follows (in thousands).

 
  Three Months Ended
June 30, 2014
  Six Months Ended
June 30, 2014
 

Balance, beginning of period

  $ 188,736   $ 188,291  

FDIC Indemnification Asset accretion (amortization)

    490     1,847  

Transfers to due from FDIC and other

    (14,112 )   (15,024 )
           

Balance, end of period

  $ 175,114   $ 175,114  
           
           

F-134


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

7. Mortgage Servicing Rights

        The following tables present the changes in fair value of the Company's MSR and other information related to our serviced portfolio (dollars in thousands).

 
  Three Months
Ended
June 30,
  Six Months
Ended
June 30,
 
 
  2014   2013   2014   2013  

Balance, beginning of period

  $ 29,939   $ 4,430   $ 20,149   $ 2,080  

Additions

    7,376     2,180     14,808     4,305  

Sales

                 

Changes in fair value:

                         

Due to changes in model inputs or assumptions(1)

    (1,113 )   608     1,651     907  

Due to customer payments

    (325 )   (107 )   (731 )   (181 )
                   

Balance, end of period

  $ 35,877   $ 7,111   $ 35,877   $ 7,111  
                   
                   

 

 
  June 30,
2014
  December 31,
2013
 

Mortgage loans serviced for others

  $ 3,300,871   $ 1,965,883  

MSR as a percentage of serviced mortgage loans

    1.09 %   1.02 %

(1)
Primarily represents changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates and the refinement of other MSR model assumptions.

        The key assumptions used in measuring the fair value of the Company's MSR were as follows.

 
  June 30,
2014
  December 31,
2013
 

Weighted average constant prepayment rate

    10.32 %   9.72 %

Weighted average discount rate

    11.11 %   12.37 %

Weighted average life (in years)

    7.2     7.6  

        A sensitivity analysis of the fair value of the Company's MSR to certain key assumptions is presented in the following table (in thousands).

 
  June 30,
2014
  December 31,
2013
 

Constant prepayment rate:

             

Impact of 10% adverse change

  $ (961 ) $ (601 )

Impact of 20% adverse change

    (1,855 )   (1,170 )

Discount rate:

             

Impact of 100 basis point adverse change

    (1,039 )   (631 )

Impact of 200 basis point adverse change

    (1,994 )   (1,236 )

F-135


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

7. Mortgage Servicing Rights (Continued)

        This sensitivity analysis presents the effect of hypothetical changes in key assumptions on the fair value of the MSR. The effect of such hypothetical change in assumptions generally cannot be extrapolated because the relationship of the change in one key assumption to the change in the fair value of the MSR is not linear. In addition, in the analysis, the impact of an adverse change in one key assumption is calculated independent of any impact on other assumptions. In reality, changes in one assumption may change another assumption.

        Contractually specified servicing fees, late fees and ancillary fees earned of $2.8 million and $0.6 million during the three months ended June 30, 2014 and 2013, respectively, and $5.0 million and $0.9 million during the six months ended June 30, 2014 and 2013, respectively, were included in other noninterest income within the consolidated statements of operations.

8. Deposits

        Deposits are summarized as follows (in thousands).

 
  June 30,
2014
  December 31,
2013
 

Noninterest-bearing demand

  $ 1,829,072   $ 1,773,749  

Interest-bearing:

             

NOW accounts

    1,143,753     1,083,596  

Money market

    857,208     878,578  

Brokered—money market

    102,228     276,760  

Demand

    78,133     47,636  

Savings

    259,540     357,325  

Time

    1,753,292     2,110,947  

Brokered—time

    132,084     194,327  
           

  $ 6,155,310   $ 6,722,918  
           
           

9. Short-term Borrowings

        Short-term borrowings are summarized as follows (in thousands).

 
  June 30,
2014
  December 31,
2013
 

Federal funds purchased

  $ 205,425   $ 137,225  

Securities sold under agreements to repurchase

    129,768     107,462  

Federal Home Loan Bank notes

    750,000      

Short-term bank loans

    102,000     97,400  
           

  $ 1,187,193   $ 342,087  
           
           

        Federal funds purchased and securities sold under agreements to repurchase generally mature daily, on demand, or on some other short-term basis. The Bank and FSC execute transactions to sell securities under agreements to repurchase with both customers and broker-dealers. Securities involved in these transactions are held by the Bank, FSC or the dealer.

F-136


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

9. Short-term Borrowings (Continued)

        Information concerning federal funds purchased and securities sold under agreements to repurchase is shown in the following tables (dollars in thousands).

 
  Six Months Ended
June 30,
 
 
  2014   2013  

Average balance during the period

  $ 331,142   $ 304,418  

Average interest rate during the period

    0.17 %   0.20 %

 

 
  June 30,
2014
  December 31,
2013
 

Average interest rate at end of period

    0.11 %   0.16 %

Securities underlying the agreements at end of period:

             

Carrying value

  $ 174,772   $ 144,991  

Estimated fair value

  $ 171,946   $ 138,719  

        Federal Home Loan Bank ("FHLB") notes mature over terms not exceeding 365 days and are collateralized by FHLB Dallas stock, nonspecified real estate loans and certain specific commercial real estate loans. Other information regarding FHLB notes is shown in the following tables (dollars in thousands).

 
  Six Months Ended
June 30,
 
 
  2014   2013  

Average balance during the period

  $ 137,159   $ 147,241  

Average interest rate during the period

    0.14 %   0.12 %

 

 
  June 30,
2014
  December 31,
2013
 

Average interest rate at end of period

    0.15 %    

        FSC uses short-term bank loans periodically to finance securities owned, margin loans to customers and correspondents, and underwriting activities. Interest on the borrowings varies with the federal funds rate. The weighted average interest rate on the borrowings at June 30, 2014 and December 31, 2013 was 1.12% and 1.15%, respectively.

10. Income Taxes

        The Company applies an estimated annual effective rate to interim period pre-tax income to calculate the income tax provision for the quarter in accordance with the principal method prescribed by the accounting guidance established for computing income taxes in interim periods. The Company's effective rate was 36.2% and 37.0% for the three months ended June 30, 2014 and 2013, respectively, and 36.2% and 36.7% for the six months ended June 30, 2014 and 2013, respectively.

        GAAP requires the measurement of uncertain tax positions. Uncertain tax positions are the difference between a tax position taken, or expected to be taken in a tax return, and the benefit recognized for accounting purposes. There were no uncertain tax positions at June 30, 2014 and December 31, 2013.

F-137


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

10. Income Taxes (Continued)

        The Company files income tax returns in U.S. federal and several U.S. state jurisdictions. The Company is subject to tax audits in numerous jurisdictions in the U.S. until the applicable statute of limitations expires. Excluding those entities acquired as a part of the PlainsCapital Merger, the Company has been examined by U.S. tax authorities for U.S. federal income tax years prior to 2010, and is under no federal or state tax audits at June 30, 2014. PlainsCapital has been examined by U.S. tax authorities for U.S. federal income tax years prior to 2011, and is under no federal or state tax audits at June 30, 2014.

        For the majority of tax jurisdictions, the Company is no longer subject to federal, state or local income tax examinations by tax authorities for years prior to 2010.

11. Commitments and Contingencies

Legal Matters

        The Company is subject to loss contingencies related to litigation, claims, investigations and legal and administrative cases and proceedings arising in the ordinary course of business. The Company evaluates these contingencies based on information currently available, including advice of counsel. The Company establishes accruals for those matters when a loss contingency is considered probable and the related amount is reasonably estimable. Any accruals are periodically reviewed and may be adjusted as circumstances change. Some of the Company's exposure with respect to loss contingencies may be offset by applicable insurance coverage. In determining the amounts of any accruals or estimates of possible loss contingencies however, the Company does not take into account the availability of insurance coverage. When it is practicable, the Company estimates loss contingencies for possible litigation and claims, whether or not there is an accrued probable loss. When the Company is able to estimate such possible losses, and when it estimates that it is reasonably possible it could incur losses, in excess of amounts accrued, the Company is required to make a disclosure of the aggregate estimation. However, as available information changes, the matters for which the Company is able to estimate, as well as the estimates themselves will be adjusted, accordingly.

        Assessments of litigation and claims exposures are difficult due to many factors that involve inherent unpredictability. Those factors include the following: the varying stages of the proceedings, particularly in the early stages; unspecified, unsupported, or uncertain damages; damages other than compensatory, such as punitive damages; a matter presenting meaningful legal uncertainties, including novel issues of law; multiple defendants and jurisdictions; whether discovery has begun or not or discovery is not complete; meaningful settlement discussions have not commenced; and whether the claim involves a class action and if so, how the class is defined. As a result of some of these factors, the Company may be unable to estimate reasonably possible losses with respect to some or all of the pending and threatened litigation and claims asserted against the Company.

        Each of Hilltop, Peruna LLC (wholly owned subsidiary of Hilltop), SWS and the individual members of the board of directors of SWS have been named as defendants in two purported stockholder class action lawsuits arising out of the pending merger. Both lawsuits were filed in Delaware Chancery Court (Joseph Arceri v. SWS Group, Inc. et al and Chaile Steinberg v. SWS Group, Inc. et al filed April 8, 2014 and April 11, 2014, respectively). On May 13, 2014, the Delaware Chancery Court consolidated the two actions for all purposes. On June 10, 2014, plaintiffs filed a

F-138


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

11. Commitments and Contingencies (Continued)

consolidated amended complaint. The complaint generally alleges, among other things, that the SWS board of directors breached its fiduciary duties to stockholders by failing to take steps to maximize stockholder value or to engage in a fair sale process before approving the merger and by making incomplete or misleading disclosures, and that the other defendants aided and abetted such breaches of fiduciary duty. The complaints allege, among other things, that the SWS board of directors labored under conflicts of interest, and that certain provisions of the merger agreement unduly restrict SWS's ability to negotiate with other potential bidders. The complaints seek relief that includes, among other things, an injunction prohibiting the consummation of the merger, rescission to the extent the merger terms have already been implemented, damages for the alleged breaches of fiduciary duty, and the payment of plaintiffs' attorneys' fees and costs. On June 16, 2014, plaintiffs moved for a preliminary injunction prohibiting the consummation of the merger, and for expedited proceedings in connection therewith. Hilltop believes that the claims are without merit and intends to vigorously defend against these actions.

        The Company is involved in information-gathering requests and investigations (both formal and informal), as well as reviews, examinations and proceedings (collectively, "Inquiries") by various governmental regulatory agencies, law enforcement authorities and self-regulatory bodies regarding its business, business practices and policies, as well as the conduct of persons with whom it does business. Additional Inquiries will arise from time to time. In connection with those Inquiries, the Company receives document requests, subpoenas and other requests for information. The Inquiries, including the Inquiry described below, could develop into administrative, civil or criminal proceedings or enforcement actions that could result in consequences that have a material effect on the Company's consolidated financial position, results of operations or cash flows as a whole. Such consequences could include adverse judgments, findings, settlements, penalties, fines, orders, injunctions, restitution, or alterations in the Company's business practices, and could result in additional expenses and collateral costs, including reputational damage.

        As a part of an industry-wide inquiry, PrimeLending received a subpoena from the Office of Inspector General of the U.S. Department of Housing and Urban Development regarding mortgage-related practices, including those relating to origination practices for loans insured by the Federal Housing Administration. PrimeLending is cooperating with this Inquiry.

        While the final outcome of litigation and claims exposures or of any Inquiries is inherently unpredictable, management is currently of the opinion that the outcome of pending and threatened litigation and Inquiries will not have a material effect on the Company's business, consolidated financial position, results of operations or cash flows as a whole. However, in the event of unexpected future developments, it is reasonably possible that an adverse outcome in any of the matters discussed above could be material to the Company's business, consolidated financial position, results of operations or cash flows for any particular reporting period of occurrence.

Other Contingencies

        The mortgage origination segment may be responsible for errors or omissions relating to its representations and warranties that each loan sold meets certain requirements, including representations as to underwriting standards and the validity of certain borrower representations in connection with the loan. If determined to be at fault, the mortgage origination segment either

F-139


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

11. Commitments and Contingencies (Continued)

repurchases the affected loan from the investor or reimburses the investor's losses. The mortgage origination segment has established an indemnification liability reserve for such probable losses.

        Generally, the mortgage origination segment first becomes aware that an investor believes a loss has been incurred on a sold loan when it receives a written request from the investor to repurchase the loan or reimburse the investor's losses. Upon completing its review of the investor's request, the mortgage origination segment establishes a specific claims reserve for the loan if it concludes its obligation to the investor is both probable and reasonably estimable.

        An additional reserve has been established for probable investor losses that may have been incurred, but not yet reported to the mortgage origination segment based upon a reasonable estimate of such losses. Factors considered in the calculation of this reserve include, but are not limited to, the total volume of loans sold exclusive of specific investor requests, actual investor claim settlements and the severity of estimated losses resulting from future claims, and the mortgage origination segment's history of successfully curing defects identified in investor claim requests. While the mortgage origination segment's sales contracts typically include borrower early payment default repurchase provisions, these provisions have not been a primary driver of investor claims to date, and therefore, are not a primary factor considered in the calculation of this reserve.

        At June 30, 2014 and December 31, 2013, the mortgage origination segment's indemnification liability reserve totaled $19.7 million and $21.1 million, respectively. The provision for indemnification losses was $0.9 million and $1.0 million during the three months ended June 30, 2014 and 2013, respectively, and $1.4 million and $2.0 million during the six months ended June 30, 2014 and 2013, respectively.

        The following tables provide for a roll-forward of claims activity for loans put-back to the mortgage origination segment based upon an alleged breach of a representation or warranty with respect to a loan sold and related indemnification liability reserve activity (in thousands).

 
  Representation
and Warranty
Specific Claims
Activity—Origination
Loan Balance
  Representation
and Warranty
Specific Claims
Activity—Origination
Loan Balance
 
 
  Three Months
Ended June 30,
  Six Months
Ended June 30,
 
 
  2014   2013   2014   2013  

Balance, beginning of period

  $ 51,929   $ 41,230   $ 51,912   $ 39,693  

Claims made

    11,799     8,034     17,873     19,654  

Claims resolved with no payment

    (4,873 )   (593 )   (9,331 )   (8,413 )

Repurchases

    (4,360 )   (1,248 )   (5,268 )   (2,899 )

Indemnification payments

    (1,372 )   (1,333 )   (2,063 )   (1,945 )
                   

Balance, end of period

  $ 53,123   $ 46,090   $ 53,123   $ 46,090  
                   
                   

F-140


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

11. Commitments and Contingencies (Continued)


 
  Indemnification
Liability
Reserve Activity
  Indemnification
Liability
Reserve Activity
 
 
  Three Months
Ended June 30,
  Six Months
Ended June 30,
 
 
  2014   2013   2014   2013  

Balance, beginning of period

  $ 20,975   $ 19,701   $ 21,121   $ 18,964  

Additions for new sales

    852     956     1,412     1,956  

Repurchases

    (524 )   (82 )   (1,028 )   (135 )

Early payment defaults

    (56 )   (137 )   (77 )   (232 )

Indemnification payments

    (931 )   (219 )   (1,112 )   (524 )

Change in estimate

    (628 )   178     (628 )   368  
                   

Balance, end of period

  $ 19,688   $ 20,397   $ 19,688   $ 20,397  
                   
                   

Reserve for Indemnification Liability:

                         

Specific claims

  $ 12,761                    

Incurred but not reported claims

    6,927                    
                         

Total

  $ 19,688                    
                         
                         

        Although management considers the total indemnification liability reserve to be appropriate, there may be changes in the reserve over time to address incurred losses, due to unanticipated adverse changes in the economy and historical loss patterns, discrete events adversely affecting specific borrowers or industries, and/or actions taken by institutions or investors. The impact of such matters is considered in the reserving process when probable and estimable.

        In connection with the FNB Transaction, the Bank entered into two loss-share agreements with the FDIC that collectively cover $1.2 billion of loans and OREO acquired in the FNB Transaction. Pursuant to the loss-share agreements, the FDIC has agreed to reimburse the Bank the following amounts with respect to the covered assets: (i) 80% of losses on the first $240.4 million of losses incurred; (ii) 0% of losses in excess of $240.4 million up to and including $365.7 million of losses incurred; and (iii) 80% of losses in excess of $365.7 million of losses incurred. The Bank has also agreed to reimburse the FDIC for any subsequent recoveries. The loss-share agreements for commercial and single family residential loans are in effect for 5 years and 10 years, respectively, from the Bank Closing Date and the loss recovery provisions to the FDIC are in effect for 8 years and 10 years, respectively, from the Bank Closing Date. In accordance with the loss-share agreements, the Bank may be required to make a "true-up" payment to the FDIC approximately ten years following the Bank Closing Date if the FDIC's initial estimate of losses on covered assets is greater than the actual realized losses. The "true-up" payment is calculated using a defined formula set forth in the P&A Agreement.

12. 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

F-141


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

12. Financial Instruments with Off-Balance Sheet Risk (Continued)

in excess of the amount recognized in the consolidated financial statements. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received. The contract amounts of those instruments reflect the extent of involvement (and therefore the exposure to credit loss) the Bank has in particular classes of financial instruments.

        Commitments to extend credit are agreements to lend to a customer provided that the terms established in the contract are met. Commitments generally have fixed expiration dates and may require payment of fees. Because some commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.

        In the aggregate, the Bank had outstanding unused commitments to extend credit of $1.2 billion at June 30, 2014 and outstanding financial and performance standby letters of credit of $40.6 million at June 30, 2014.

        The Bank uses the same credit policies in making commitments and standby letters of credit as it does for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary, in these transactions is based on management's credit evaluation of the borrower. Collateral held varies but may include real estate, accounts receivable, marketable securities, interest-bearing deposit accounts, inventory, and property, plant and equipment.

        In the normal course of business, FSC executes, settles, and finances various securities transactions that may expose FSC to off-balance sheet risk in the event that a customer or counterparty does not fulfill its contractual obligations. Examples of such transactions include the sale of securities not yet purchased by customers or for the account of FSC, clearing agreements between FSC and various clearinghouses and broker-dealers, secured financing arrangements that involve pledged securities, and when-issued underwriting and purchase commitments.

13. Stock-Based Compensation

        Pursuant to the Hilltop Holdings 2012 Equity Incentive Plan (the "2012 Plan"), the Company may grant nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights and other awards to employees of the Company, its subsidiaries and outside directors of the Company. Upon the approval by stockholders and effectiveness of the 2012 Plan in September 2012, no additional awards were permissible under the 2003 Equity Incentive Plan (the "2003 Plan"). In the aggregate, 4,000,000 shares of common stock may be delivered pursuant to awards granted under the 2012 Plan. At June 30, 2014, 3,167,928 shares of common stock remain available for issuance pursuant to the 2012 Plan.

        During the six months ended June 30, 2014, the Compensation Committee of the Board of Directors of the Company awarded certain executives and key employees an aggregate of 346,718 restricted stock units ("RSUs") pursuant to the 2012 Plan. A total of 276,681 of these RSUs are subject to time-based vesting conditions and generally cliff vest on the third anniversary of the grant date, and the remaining RSUs vest based upon the achievement of certain performance goals over a

F-142


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

13. Stock-Based Compensation (Continued)

three-year period. These RSUs are subject to service conditions set forth in the award agreements, with associated costs recognized on a straight-line basis over the respective vesting periods. The weighted average grant date fair value related to these RSUs was $23.92 per share. At June 30, 2014, unrecognized compensation expense related to these RSUs was $7.7 million, which will be amortized through March 2017. The RSUs are not transferable, and the shares of common stock issuable upon conversion of vested RSUs are generally subject to transfer restrictions for a period of one year following conversion, subject to certain exceptions. In addition, the applicable RSU award agreements provide for accelerated vesting under certain conditions.

        During 2013, the Compensation Committee of the Board of Directors of the Company awarded certain executives and key employees a total of 471,000 restricted shares of common stock ("Restricted Stock Awards") pursuant to the 2012 Plan. These Restricted Stock Awards generally cliff vest on the third anniversary of the grant date and are subject to service conditions set forth in the award agreements, with associated costs recognized on a straight-line basis over the respective vesting periods. The weighted average grant date fair value related to these Restricted Stock Awards was $13.32 per share. At June 30, 2014, unrecognized compensation expense related to these Restricted Stock Awards was $3.8 million, which will be amortized through September 2016. The award agreements governing these Restricted Stock Awards provide for accelerated vesting under certain conditions.

        During the six months ended June 30, 2014 and 2013, Hilltop granted 5,011 and 3,530 shares of common stock to independent members of the Company's Board of Directors for services rendered to the Company pursuant to the 2012 Plan.

        Stock options granted on November 2, 2011 to two senior executives pursuant to the 2003 Plan to purchase an aggregate of 600,000 shares of the Company's common stock (the "Stock Option Awards") at an exercise price of $7.70 per share were outstanding at June 30, 2014. These Stock Option Awards vest in five equal installments beginning on the grant date, with the remainder vesting on each grant date anniversary through 2015. At June 30, 2014, unrecognized compensation expense related to these Stock Option Awards was $0.1 million, which will be amortized through October 2015. Additionally, these Stock Option Awards expire on November 2, 2016.

        Compensation expense related to the plans was $1.3 million and $0.4 million for the three months ended June 30, 2014 and 2013, respectively, and $2.0 million and $0.5 million for the six months ended June 30, 2014 and 2013, respectively.

14. Regulatory Matters

Bank

        The Bank and Hilltop are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possibly additional discretionary—actions by regulators that, if undertaken, could have a direct, material effect on the consolidated financial statements. The regulations require us to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

F-143


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

14. Regulatory Matters (Continued)

        Quantitative measures established by regulation to ensure capital adequacy require the companies to maintain minimum amounts and ratios (set forth in the following table) of Tier 1 capital (as defined in the regulations) to total average assets (as defined), and minimum ratios of Tier 1 and total capital (as defined) to risk-weighted assets (as defined).

        In July 2013, federal banking regulators released final rules for the regulation of capital and liquidity for U.S. banking organizations, establishing a new comprehensive capital framework ("Basel III") for U.S. banking organizations that will become effective for reporting periods beginning after January 1, 2015 (subject to a phase-in period through January 2019).

        In addition, under the final rules, bank holding companies with less than $15 billion in assets as of December 31, 2009 are allowed to continue to include junior subordinated debentures in Tier 1 capital, subject to certain restrictions. However, if an institution grows to above $15 billion in assets as a result of an acquisition, or organically grows to above $15 billion in assets and then makes an acquisition, the combined trust preferred issuances must be phased out of Tier 1 and into Tier 2 capital (75% in 2015 and 100% in 2016). It is possible that the Company may accelerate redemption of the existing junior subordinated debentures. All of the debentures issued to the Trusts, less the common stock of the Trusts, qualified as Tier 1 capital as of June 30, 2014, under guidance issued by the Board of Governors of the Federal Reserve System.

        Management believes that, as of June 30, 2014, Hilltop and the Bank would meet all applicable capital adequacy requirements under the Basel III capital rules for banks with less than $15 billion in assets on a fully phased-in basis as if such requirements were currently in effect.

        The following table shows the Bank's and Hilltop's consolidated actual capital amounts and ratios compared to the regulatory minimum capital requirements and the Bank's regulatory minimum capital

F-144


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

14. Regulatory Matters (Continued)

requirements needed to qualify as a "well-capitalized" institution (dollars in thousands), without giving effect to the final Basel III capital rules.

 
  Actual   Minimum Capital
Requirements
  To Be Well
Capitalized
Minimum Capital
Requirements
 
 
  Amount   Ratio   Amount   Ratio   Amount   Ratio  

June 30, 2014

                                     

Tier 1 capital (to average assets):

                                     

Bank

  $ 811,068     9.97 % $ 325,381     4 % $ 406,726     5 %

Hilltop

    1,167,323     13.51 %   345,651     4 %   N/A     N/A  

Tier 1 capital (to risk-weighted assets):          

                                     

Bank

    811,068     13.22 %   245,444     4 % $ 368,166     6 %

Hilltop

    1,167,323     18.11 %   257,816     4 %   N/A     N/A  

Total capital (to risk-weighted assets):

                                     

Bank

    852,846     13.90 %   490,888     8 % $ 613,610     10 %

Hilltop

    1,211,017     18.79 %   515,632     8 %   N/A     N/A  

December 31, 2013

   
 
   
 
   
 
   
 
   
 
   
 
 

Tier 1 capital (to average assets):          

                                     

Bank

  $ 762,364     9.29 % $ 328,275     4 % $ 410,344     5 %

Hilltop

    1,112,424     12.81 %   347,480     4 %   N/A     N/A  

Tier 1 capital (to risk-weighted assets):          

                                     

Bank

    762,364     13.38 %   227,984     4 %   341,976     6 %

Hilltop

    1,112,424     18.53 %   240,159     4 %   N/A     N/A  

Total capital (to risk-weighted assets):

                                     

Bank

    797,771     14.00 %   455,968     8 %   569,960     10 %

Hilltop

    1,148,736     19.13 %   480,318     8 %   N/A     N/A  

        To be considered "adequately capitalized" (as defined) under regulatory requirements, the Bank must maintain minimum Tier 1 capital to total average assets and Tier 1 capital to risk-weighted assets ratios of 4%, and a total capital to risk-weighted assets ratio of 8%. Based on the actual capital amounts and ratios shown in the previous table, the Bank's ratios place it in the "well capitalized" (as defined) capital category under regulatory requirements.

Financial Advisory

        Pursuant to the net capital requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), FSC has elected to determine its net capital requirements using the alternative method. Accordingly, FSC is required to maintain minimum net capital, as defined in Rule 15c3-1 promulgated under the Exchange Act, equal to the greater of $250,000 or 2% of aggregate debit balances, as defined in Rule 15c3-3 promulgated under the Exchange Act. At June 30, 2014, FSC had net capital of $60.3 million (the minimum net capital requirement was $5.8 million), net capital maintained by FSC was 21% of aggregate debits, and net capital in excess of the minimum requirement was $54.5 million.

F-145


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

14. Regulatory Matters (Continued)

        Under certain conditions, FSC may be required to segregate cash and securities in a special reserve account for the benefit of customers under Rule 15c3-3 promulgated under the Exchange Act. Assets segregated under the provisions of the Exchange Act are not available for general corporate purposes. FSC was required to segregate $4.0 million in cash and securities at June 30, 2014, which is included in other assets within the consolidated balance sheet. At December 31, 2013, FSC was not required to segregate cash and securities.

        FSC was not required to segregate cash or securities in a special reserve account for the benefit of proprietary accounts of introducing broker-dealers at June 30, 2014 and December 31, 2013.

Mortgage Origination

        As a mortgage originator, PrimeLending is subject to minimum net worth requirements established by the United States Department of Housing and Urban Development ("HUD") and the GNMA. On an annual basis, PrimeLending submits audited financial statements to HUD and GNMA documenting PrimeLending's compliance with its minimum net worth requirements. In addition, PrimeLending monitors compliance on an ongoing basis and, as of June 30, 2014, PrimeLending's net worth exceeded the amounts required by both HUD and GNMA.

Insurance

        The statutory financial statements of the Company's insurance subsidiaries, which are domiciled in the State of Texas, are presented on the basis of accounting practices prescribed or permitted by the Texas Department of Insurance. Texas has adopted the National Association of Insurance Commissioners' ("NAIC") statutory accounting practices as the basis of its statutory accounting practices with certain differences that are not significant to the insurance company subsidiaries' statutory equity.

        A summary of statutory capital and surplus and statutory net income (loss) of each insurance subsidiary is as follows (in thousands).

 
  June 30,
2014
  December 31,
2013
 

Capital and surplus:

             

National Lloyds Insurance Company

  $ 100,479   $ 98,602  

American Summit Insurance Company

    28,004     26,452  

 

 
  Three Months
Ended June 30,
  Six Months Ended
June 30,
 
 
  2014   2013   2014   2013  

Statutory net income (loss):

                         

National Lloyds Insurance Company

  $ (4,664 ) $ (13,331 ) $ 1,322   $ (9,940 )

American Summit Insurance Company

    245     (1,380 )   1,376     (1,129 )

        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

F-146


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

14. Regulatory Matters (Continued)

June 30, 2014, the Company's insurance subsidiaries had statutory surplus in excess of the minimum required.

        The NAIC has adopted a risk based capital ("RBC") formula for insurance companies that establishes minimum capital requirements indicating various levels of available regulatory action on an annual basis relating to insurance risk, asset credit risk, interest rate risk and business risk. The RBC formula is used by the NAIC and certain state insurance regulators as an early warning tool to identify companies that require additional scrutiny or regulatory action. At December 31, 2013, the most recent date for which the RBC calculation was performed, the Company's insurance subsidiaries' RBC ratio exceeded the level at which regulatory action would be required. As of June 30, 2014, management was not aware of any changes in financial condition or structure that would cause the Company's insurance subsidiaries to not be in compliance with the required RBC ratio.

15. Derivative Financial Instruments

        The Company uses various derivative financial instruments to mitigate interest rate risk. The Bank's interest rate risk management strategy involves effectively modifying the re-pricing characteristics of certain assets and liabilities so that changes in interest rates do not adversely affect the net interest margin. PrimeLending has interest rate risk relative to interest rate lock commitments ("IRLCs") and its inventory of mortgage loans held for sale. PrimeLending is exposed to such rate risk from the time an IRLC is made to an applicant to the time the related mortgage loan is sold. To mitigate interest rate risk, PrimeLending executes forward commitments to sell mortgage-backed securities ("MBSs"). FSC uses forward commitments to both purchase and sell MBSs to facilitate customer transactions and as a means to hedge related exposure to interest rate risk in certain inventory positions.

Non-Hedging Derivative Instruments and the Fair Value Option

        As discussed in Note 3 to the consolidated financial statements, the Company has elected to measure substantially all mortgage loans held for sale at fair value under the provisions of the Fair Value Option. The election provides the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without applying complex hedge accounting provisions. The fair values of PrimeLending's IRLCs and forward commitments are recorded in other assets or other liabilities, as appropriate, and changes in the fair values of these derivative instruments produced a net loss of $3.6 million for the three months ended June 30, 2014, as compared to a net gain of $32.0 million during the same period in 2013, and a net loss of $5.2 million for the six months ended June 30, 2014, as compared to a net gain of $34.0 million during the same period in 2013. The changes in the fair values of these derivative instruments were recorded as a component of net gains from sale of loans and other mortgage production income. Changes in fair value are attributable to changes in the volume of IRLCs, mortgage loans held for sale, commitments to purchase and sell MBSs and changes in market interest rates. Changes in market interest rates also conversely affect the value of PrimeLending's mortgage loans held for sale, which are measured at fair value under the Fair Value Option. The effect of the change in market interest rates on PrimeLending's loans held for sale is discussed in Note 3 to the consolidated financial statements. The fair values of FSC's derivative instruments are recorded in other assets or other liabilities, as appropriate, and changes in the fair

F-147


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

15. Derivative Financial Instruments (Continued)

values of FSC's derivatives produced net gains of $3.2 million and $3.8 million for the three months ended June 30, 2014 and 2013, respectively, and net gains of $6.1 million and $5.6 million for the six months ended June 30, 2014 and 2013, respectively, which were recorded as a component of other noninterest income.

        Derivative positions are presented in the following table (in thousands).

 
  June 30, 2014   December 31, 2013  
 
  Notional
Amount
  Estimated
Fair Value
  Notional
Amount
  Estimated
Fair Value
 

Derivative instruments:

                         

IRLCs

  $ 981,330   $ 28,584   $ 602,467   $ 12,151  

Commitments to purchase MBSs

    416,294     6,870     236,305     (109 )

Commitments to sell MBSs

    2,303,071     (13,847 )   1,645,332     11,383  

Fee Award Option

    20,432     (6,300 )   20,432     (5,600 )

16. Balance Sheet Offsetting

        Certain financial instruments, including resale and repurchase agreements, securities lending arrangements and derivatives, may be eligible for offset in the consolidated balance sheets and/or subject to master netting arrangements or similar agreements. The following tables present the assets and liabilities subject to enforceable master netting arrangements, repurchase agreements, or similar agreements with offsetting rights (in thousands).

 
   
   
   
  Gross Amounts Not
Offset in
the Balance Sheet
   
 
 
   
   
  Net Amounts
of Assets
Presented in the
Balance Sheet
   
 
 
  Gross Amounts
of Recognized
Assets
  Gross Amounts
Offset in the
Balance Sheet
  Financial
Instruments
  Cash
Collateral
Pledged
  Net
Amount
 

June 30, 2014

                                     

Securities borrowed:

                                     

Institutional counterparties

  $ 163,682   $   $ 163,682   $ (163,682 ) $   $  
                           

  $ 163,682   $   $ 163,682   $ (163,682 ) $   $  
                           
                           

December 31, 2013

                                     

Securities borrowed:

                                     

Institutional counterparties

  $ 107,365   $   $ 107,365   $ (107,365 ) $   $  

Forward MBS derivatives:

   
 
   
 
   
 
   
 
   
 
   
 
 

Institutional counterparties

    11,489     (76 )   11,413         (286 )   11,127  
                           

  $ 118,854   $ (76 ) $ 118,778   $ (107,365 ) $ (286 ) $ 11,127  
                           
                           

F-148


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

16. Balance Sheet Offsetting (Continued)

 
   
   
   
  Gross Amounts Not
Offset in the
Balance Sheet
   
 
 
   
   
  Net Amounts
of Liabilities
Presented in the
Balance Sheet
   
 
 
  Gross Amounts
of Recognized
Liabities
  Gross Amounts
Offset in the
Balance Sheet
  Financial
Instruments
  Cash
Collateral
Pledged
  Net
Amount
 

June 30, 2014

                                     

Securities loaned:

                                     

Institutional counterparties

  $ 133,162   $   $ 133,162   $ (133,162 ) $   $  

Repurchase agreements:

   
 
   
 
   
 
   
 
   
 
   
 
 

Customer counterparties

    123,856         123,856     (123,856 )        

Institutional counterparties

    5,912         5,912     (5,912 )        

Forward MBS derivatives:

   
 
   
 
   
 
   
 
   
 
   
 
 

Institutional counterparties

    13,938     (91 )   13,847         (7,845 )   6,002  
                           

  $ 276,868   $ (91 ) $ 276,777   $ (262,930 ) $ (7,845 ) $ 6,002  
                           
                           

December 31, 2013

                                     

Securities loaned:

                                     

Institutional counterparties

  $ 74,913   $   $ 74,913   $ (74,913 ) $   $  

Repurchase agreements:

   
 
   
 
   
 
   
 
   
 
   
 
 

Customer counterparties

    107,462         107,462     (107,462 )        

Forward MBS derivatives:

   
 
   
 
   
 
   
 
   
 
   
 
 

Institutional counterparties

    30         30         (17 )   13  
                           

  $ 182,405   $   $ 182,405   $ (182,375 ) $ (17 ) $ 13  
                           
                           

F-149


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

17. Broker-Dealer and Clearing Organization Receivables and Payables

        Broker-dealer and clearing organization receivables and payables consisted of the following (in thousands).

 
  June 30,
2014
  December 31,
2013
 

Receivables:

             

Securities borrowed

  $ 163,682   $ 107,365  

Securities failed to deliver

    26,974     7,160  

Clearing organizations

    80     4,698  

Due from dealers

    28     94  
           

  $ 190,764   $ 119,317  
           
           

Payables:

             

Securities loaned

  $ 133,162   $ 74,913  

Correspondents

    49,885     44,852  

Securities failed to receive

    28,002     5,523  

Clearing organizations

    16,842     4,390  
           

  $ 227,891   $ 129,678  
           
           

18. Reserves for Unpaid Losses and Loss Adjustment Expenses

        Information regarding the reserve for unpaid losses and losses and loss adjustment expenses ("LAE") are as follows (in thousands).

 
  Six Months Ended
June 30,
 
 
  2014   2013  

Balance, beginning of period

  $ 27,468   $ 34,012  

Less reinsurance recoverables

    (4,508 )   (10,385 )
           

Net balance, beginning of period

    22,960     23,627  

Incurred related to:

   
 
   
 
 

Current period

    48,750     68,602  

Prior periods

    4,862     743  
           

Total incurred

    53,612     69,345  

Payments related to:

   
 
   
 
 

Current period

    (33,171 )   (44,678 )

Prior periods

    (11,980 )   (11,604 )
           

Total payments

    (45,151 )   (56,282 )

Net balance, end of period

   
31,421
   
36,690
 

Plus reinsurance recoverables

    3,725     5,768  
           

Balance, end of period

  $ 35,146   $ 42,458  
           
           

F-150


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

18. Reserves for Unpaid Losses and Loss Adjustment Expenses (Continued)

        The decrease in the reserves at June 30, 2014 as compared to June 30, 2013 of $7.3 million is primarily due to decreased reserves attributable to the decreased year-over-year severity of incurred tornado, wind and hail losses. Prior period adverse development of $4.9 million during the six months ended June 30, 2014 was primarily related to litigation emerging from a series of hail storms within the 2012 accident year.

19. 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 June 30, 2014, reinsurance receivables have a carrying value of $4.1 million, which is included in other assets within the consolidated balance sheet. There was no allowance for uncollectible accounts at June 30, 2014, based on NLC's quality requirements.

        The effects of reinsurance on premiums written and earned are summarized as follows (in thousands).

 
  Three Months Ended June 30,   Six Months Ended June 30,  
 
  2014   2013   2014   2013  
 
  Written   Earned   Written   Earned   Written   Earned   Written   Earned  

Premiums from direct business

  $ 47,999   $ 43,534   $ 47,950   $ 41,943   $ 91,770   $ 86,293   $ 89,807   $ 82,490  

Reinsurance assumed

    2,677     2,178     2,120     1,748     4,910     4,198     3,873     3,378  

Reinsurance ceded

    (5,295 )   (4,935 )   (5,224 )   (5,101 )   (9,481 )   (9,395 )   (9,779 )   (9,805 )
                                   

Net premiums

  $ 45,381   $ 40,777   $ 44,846   $ 38,590   $ 87,199   $ 81,096   $ 83,901   $ 76,063  
                                   
                                   

        The effects of reinsurance on incurred losses are as follows (in thousands).

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2014   2013   2014   2013  

Loss and LAE incurred

  $ 36,455   $ 49,537   $ 54,207   $ 70,949  

Reinsurance recoverables

    (1,180 )   (1,377 )   (595 )   (1,604 )
                   

Net loss and LAE incurred

  $ 35,275   $ 48,160   $ 53,612   $ 69,345  
                   
                   

F-151


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

19. Reinsurance Activity (Continued)

Multi-line excess of loss coverage

        In addition to the catastrophe reinsurance noted below, both NLIC and ASIC participate in an excess of loss program placed with various reinsurers. This program is limited to each risk with respect to property and liability in the amount of $500,000 for each of NLIC and ASIC. Each of NLIC and ASIC retain $500,000 in this program.

Catastrophic coverage

        At June 30, 2014, NLC had catastrophic excess of loss reinsurance coverage of losses per event in excess of $8 million retention by NLIC and $1.5 million retention by ASIC. ASIC maintained an underlying layer of coverage, providing $6.5 million in excess of its $1.5 million retention to bridge to the primary program. The reinsurance in excess of $8 million is comprised of four layers of protection: $17 million in excess of $8 million retention; $25 million in excess of $25 million loss; $50 million in excess of $50 million loss and $40 million in excess of $100 million loss. NLIC and ASIC retain no participation in any of the layers, beyond the first $8 million and $1.5 million, respectively. At June 30, 2014, total retention for any one catastrophe that affects both NLIC and ASIC was limited to $8 million in the aggregate.

        Additionally, NLC purchased an underlying excess of loss contract that provides $10 million aggregate coverage for sub-catastrophic events. NLC retains a 34% participation in this coverage.

20. Segment and Related Information

        The Company currently has four reportable business segments that are organized primarily by the core products offered to the segments' respective customers. These segments reflect the manner in which operations are managed and the criteria used by the Company's chief operating decision maker function to evaluate segment performance, develop strategy and allocate resources. The chief operating decision maker function consists of the President and Chief Executive Officer of the Company and the Chief Executive Officer of PlainsCapital. During the fourth quarter of 2013, we began presenting certain amounts previously allocated to the four reportable business segments under the heading Corporate to better reflect our internal organizational structure. This change had no impact on the Company's consolidated results of operations. The Company's historical segment disclosures have been revised to conform to the current presentation.

        The banking segment includes the operations of the Bank, which, since September 14, 2013, includes the operations acquired in the FNB Transaction. The mortgage origination segment is composed of PrimeLending. The insurance segment is composed of NLC. The financial advisory segment is composed of First Southwest.

        Corporate includes certain activities not allocated to specific business segments. These activities include holding company financing and investing activities, and management and administrative services to support the overall operations of the Company including, but not limited to, certain executive management, corporate relations, legal, finance, and acquisition costs not allocated to business segments.

F-152


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

20. Segment and Related Information (Continued)

        Balance sheet amounts for remaining subsidiaries not discussed previously and the elimination of intercompany transactions are included in "All Other and Eliminations." The following tables present certain information about reportable segment revenues, operating results, goodwill and assets (in thousands).

Three Months Ended June 30, 2014
  Banking   Mortgage
Origination
  Insurance   Financial
Advisory
  Corporate   All Other and
Eliminations
  Hilltop
Consolidated
 

Net interest income (expense)

  $ 90,828   $ (2,389 ) $ 838   $ 3,178   $ 1,695   $ 4,296   $ 98,446  

Provision for loan losses

    5,516             17             5,533  

Noninterest income

    16,392     122,820     43,123     25,838         (4,892 )   203,281  

Noninterest expense

    60,240     111,224     49,420     28,359     2,565     (596 )   251,212  
                               

Income (loss) before income taxes

  $ 41,464   $ 9,207   $ (5,459 ) $ 640   $ (870 ) $   $ 44,982  
                               
                               

 

Six Months Ended June 30, 2014
  Banking   Mortgage
Origination
  Insurance   Financial
Advisory
  Corporate   All Other and
Eliminations
  Hilltop
Consolidated
 

Net interest income (expense)

  $ 170,401   $ (6,528 ) $ 1,817   $ 5,808   $ 3,387   $ 8,982   $ 183,867  

Provision for loan losses

    8,744             31             8,775  

Noninterest income

    32,621     214,583     85,896     50,435         (10,154 )   373,381  

Noninterest expense

    120,917     201,857     81,762     55,724     4,753     (1,172 )   463,841  
                               

Income (loss) before income taxes

  $ 73,361   $ 6,198   $ 5,951   $ 488   $ (1,366 ) $   $ 84,632  
                               
                               

 

Three Months Ended June 30, 2013
  Banking   Mortgage
Origination
  Insurance   Financial
Advisory
  Corporate   All Other and
Eliminations
  Hilltop
Consolidated
 

Net interest income (expense)

  $ 68,597   $ (11,847 ) $ 873   $ 3,511   $ (105 ) $ 7,396   $ 68,425  

Provision for loan losses

    11,300             (11 )           11,289  

Noninterest income

    11,928     165,257     40,777     28,863         (7,592 )   239,233  

Noninterest expense

    31,919     134,487     62,144     30,373     1,673     (196 )   260,400  
                               

Income (loss) before income taxes

  $ 37,306   $ 18,923   $ (20,494 ) $ 2,012   $ (1,778 ) $   $ 35,969  
                               
                               

 

Six Months Ended June 30, 2013
  Banking   Mortgage
Origination
  Insurance   Financial
Advisory
  Corporate   All Other and
Eliminations
  Hilltop
Consolidated
 

Net interest income (expense)

  $ 136,268   $ (23,850 ) $ 1,886   $ 6,754   $ (236 ) $ 14,864   $ 135,686  

Provision for loan losses

    24,266             28             24,294  

Noninterest income

    24,132     311,785     80,202     51,641         (15,249 )   452,511  

Noninterest expense

    62,599     256,758     96,410     56,099     3,910     (385 )   475,391  
                               

Income (loss) before income taxes

  $ 73,535   $ 31,177   $ (14,322 ) $ 2,268   $ (4,146 ) $   $ 88,512  
                               
                               

 

June 30, 2014
   
   
   
   
   
   
   
 

Goodwill

  $ 207,741   $ 13,071   $ 23,988   $ 7,008   $   $   $ 251,808  
                               
                               

Total assets

  $ 8,223,370   $ 1,574,401   $ 326,478   $ 712,693   $ 1,402,816   $ (2,843,310 ) $ 9,396,448  
                               
                               

 

December 31, 2013
   
   
   
   
   
   
   
 

Goodwill

  $ 207,741   $ 13,071   $ 23,988   $ 7,008   $   $   $ 251,808  
                               
                               

Total assets

  $ 7,981,517   $ 1,249,091   $ 308,160   $ 520,412   $ 1,316,398   $ (2,471,456 ) $ 8,904,122  
                               
                               

F-153


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

21. Earnings per Common Share

        Nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and are included in the computation of earnings per share pursuant to the two-class method prescribed by the Earnings Per Share Topic of the ASC. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In May 2013, as discussed in Note 13 to the consolidated financial statements, Hilltop issued Restricted Stock Awards which qualify as participating securities.

        Net earnings, less any preferred dividends accumulated for the period (whether or not declared), is allocated between the common stock and participating securities pursuant to the two-class method. Basic earnings per common share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during the period, excluding participating nonvested restricted shares.

        Diluted earnings per common share is computed in a similar manner, except that first the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares, excluding the participating securities, were issued using the treasury stock method. For the three and six months ended June 30, 2014, stock options and RSUs are the only potentially dilutive non-participating instruments issued by Hilltop, while potentially dilutive non-participating instruments for the three and six months ended June 30, 2013 included stock options, RSUs and the 7.50% Senior Exchangeable Notes due 2025 (the "Notes"), which were called for redemption during the fourth quarter of 2013. Next, we determine and include in the diluted earnings per common share calculation the more dilutive effect of the participating securities using the treasury stock method or the two-class method. Undistributed losses are not allocated to the nonvested share-based payment awards (the participating securities) under the two-class method as the holders are not contractually obligated to share in the losses of the Company.

F-154


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

21. Earnings per Common Share (Continued)

        The following table presents the computation of basic and diluted earnings per common share (in thousands, except per share data).

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2014   2013   2014   2013  

Basic earnings per share:

                         

Income applicable to Hilltop common stockholders

  $ 27,085   $ 20,943   $ 50,845   $ 53,313  

Less: income applicable to participating shares

    (141 )   (116 )   (266 )   (295 )
                   

Net earnings available to Hilltop common stockholders

  $ 26,944   $ 20,827   $ 50,579   $ 53,018  
                   
                   

Weighted average shares outstanding—basic

    89,709     83,490     89,708     83,489  

Basic earnings per common share

 
$

0.30
 
$

0.25
 
$

0.56
 
$

0.64
 

Diluted earnings per share:

   
 
   
 
   
 
   
 
 

Income applicable to Hilltop common stockholders

  $ 27,085   $ 20,943   $ 50,845   $ 53,313  

Add: interest expense on senior exchangeable notes (net of tax)

        1,053         2,105  
                   

Net earnings available to Hilltop common stockholders

  $ 27,085   $ 21,996   $ 50,845   $ 55,418  
                   
                   

Weighted average shares outstanding—basic

    89,709     83,490     89,708     83,489  

Effect of potentially dilutive securities

    860     6,804     868     6,636  
                   

Weighted average shares outstanding—diluted

    90,569     90,294     90,576     90,125  
                   
                   

Diluted earnings per common share

  $ 0.30   $ 0.24   $ 0.56   $ 0.61  

22. Recently Issued Accounting Standards

        In May 2014, the FASB issued ASU No. 2014-09 which clarifies the principles for recognizing revenue from contracts with customers. The amendment outlines a single comprehensive model for entities to depict the transfer of goods or services to customers in amounts that reflect the payment to which a company expects to be entitled in exchange for those goods or services. The amendment also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The amendment is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2016 and may be adopted using either a full retrospective transition method or a modified retrospective transition method. Early adoption is not permitted. The Company is currently evaluating the provisions of the amendment and the impact on its future consolidated financial statements.

        In April 2014, the FASB issued ASU No. 2014-08 which raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The amendment is intended to reduce the frequency of disposals reported as discontinued operations by focusing on strategic shifts that have or will have a major effect on an entity's operations and financial results and

F-155


Table of Contents


Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(Unaudited)

22. Recently Issued Accounting Standards (Continued)

will permit companies to have continuing cash flows and significant continuing involvement with the disposed component. The amendment is effective for disposals (or classifications as held for sale) and acquired businesses or nonprofit activities that are classified as held for sale upon acquisition that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. As such, the Company will evaluate the provisions of the amendment as it relates to any potential disposals or acquisitions beginning on or after January 1, 2015.

        In January 2014, the FASB issued ASU No. 2014-04 to clarify that an in substance repossession or foreclosure occurs upon either the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014 and may be adopted using either a modified retrospective transition method or a prospective transition method. Early adoption is permitted. The Company is currently evaluating this guidance, but adoption of the amendments is not expected to have a significant effect on its future consolidated financial statements.

        In July 2013, the FASB issued ASU No. 2013-11 to require an entity to present an unrecognized tax benefit, or portion thereof, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. However, to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendment became effective for the Company on January 1, 2014, and its adoption did not have any effect on the Company's consolidated financial statements as the amendment is to be applied prospectively to all unrecognized tax benefits that exist at the balance sheet date.

F-156


Table of Contents


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Hilltop Holdings Inc.:

        In our opinion, the accompanying statement of assets acquired and liabilities assumed by PlainsCapital Bank (the "Company"), a wholly-owned subsidiary of Hilltop Holdings Inc., presents fairly, in all material respects, the statement of assets acquired and liabilities assumed by the Company at September 13, 2013 in conformity with accounting principles generally accepted in the United States of America. The statement of assets acquired and liabilities assumed is the responsibility of the Company's management. Our responsibility is to express an opinion on the statement of assets acquired and liabilities assumed based on our audit. We conducted our audit of this statement in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of assets acquired and liabilities assumed is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statement of assets acquired and liabilities assumed, assessing the accounting principles used and significant estimates made by management, and evaluating the overall statement presentation. We believe that our audit of the statement of assets acquired and liabilities assumed provides a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Dallas, Texas
May 5, 2014

F-157


Table of Contents


STATEMENT OF ASSETS ACQUIRED AND LIABILITIES ASSUMED

by PlainsCapital Bank

(a wholly-owned subsidiary of Hilltop Holdings Inc.)

(in thousands)

 
  September 13,
2013
 

Cash and due from banks

  $ 362,695  

Securities:

       

Available for sale, at fair value

    286,214  

Non-covered loans, net of unearned income

    42,884  

Covered loans

    1,116,583  

Premises and equipment, net

    78,399  

FDIC indemnification asset

    185,680  

Covered other real estate owned

    135,187  

Other assets

    26,300  

Core deposit intangible

    4,270  
       

Total assets acquired, at fair value

    2,238,212  

Deposits

   
2,211,740
 

Other liabilities

    13,887  
       

Total liabilities assumed

    2,225,627  

Commitments and contingencies

       
       

Net assets acquired, at fair value

  $ 12,585  
       
       

   

See accompanying notes.

F-158


Table of Contents


NOTES TO STATEMENT OF ASSETS ACQUIRED
AND LIABILITIES ASSUMED

1. Summary of Significant Accounting and Reporting Policies

Nature of Operations

        Hilltop Holdings Inc. ("Hilltop" and, collectively with its subsidiaries, the "Company") was organized in July 1998 as a Maryland corporation. Hilltop is a financial holding company registered under the Bank Holding Company Act of 1956, as amended by the Gramm-Leach-Bliley Act of 1999. On November 30, 2012, Hilltop acquired PlainsCapital Corporation through 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" ("PlainsCapital").

        PlainsCapital is a financial holding company, headquartered in Dallas, Texas, that provides, through its subsidiaries, an array of financial products and services. In addition to traditional banking services, PlainsCapital provides residential mortgage lending, investment banking, public finance advisory, wealth and investment management, treasury management, capital equipment leasing, fixed income sales, asset management, and correspondent clearing services.

        On September 13, 2013 (the "Bank Closing Date"), PlainsCapital Bank (the "Bank") assumed substantially all of the liabilities, including all of the deposits, and acquired substantially all of the assets of Edinburg, Texas-based First National Bank ("FNB") from the Federal Deposit Insurance Corporation (the "FDIC"), as receiver, and reopened former FNB branches acquired from the FDIC under the "PlainsCapital Bank" name (the "FNB Transaction"). Pursuant to the Purchase and Assumption Agreement (the "P&A Agreement"), the Bank and the FDIC entered into loss-share agreements whereby the FDIC agreed to share in the losses of certain covered loans and covered other real estate owned ("OREO") that the Bank acquired, as further described in Note 2. The acquisition of FNB's expansive branch network allowed the Bank to increase its presence in Texas to include the Rio Grande Valley, Houston, Corpus Christi, Laredo and El Paso markets, among others.

        The terms of the P&A Agreement provide for the FDIC to indemnify the Bank against claims with respect to liabilities and assets of FNB or any of its affiliates not assumed or otherwise purchased by the Bank and with respect to certain other claims by third parties.


Basis of Presentation

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the statement of assets acquired and liabilities assumed. Actual results could differ from those estimates. The FNB Transaction was accounted for using the purchase method of accounting, and accordingly, purchased assets, including identifiable intangible assets and assumed liabilities, were recorded at their respective fair values as of the Bank Closing Date. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. In some cases, the estimation of fair values requires management to make estimates about discount rates, future expected cash flows, market conditions, deposit attrition and other future events that are highly subjective in nature and subject to change. The methods used to determine the fair values of the significant assets acquired and liabilities assumed are described below.

F-159


Table of Contents


NOTES TO STATEMENT OF ASSETS ACQUIRED
AND LIABILITIES ASSUMED (Continued)

1. Summary of Significant Accounting and Reporting Policies (Continued)


Cash and Due from Banks

        Cash and due from banks include interest bearing deposits with banks and the Federal Reserve Bank with a maturity of 90 days or less at the time of purchase. The fair value of financial instruments that are short-term or re-price frequently and that have little or no risk are considered to have a fair value equal to carrying value.


Securities

        The fair value for each purchased security was the quoted market price at the close of the trading day effective on September 13, 2013.


Loans

        Management has defined the loans purchased in the FNB Transaction as acquired loans. As part of the P&A Agreement, the Bank and the FDIC entered into loss-share agreements covering future losses incurred on certain acquired loans. The Company refers to acquired commercial and single family residential loan portfolios that are subject to the loss-share agreements as "covered loans". Non-covered loans refer to loans not covered by the FDIC loss-share agreements.

        Acquired loans are recorded at estimated fair value on their purchase date with no carryover of the related allowance for loan losses. Acquired loans were segregated between those considered to be credit impaired and those without credit impairment at acquisition. To make this determination, management considered such factors as past due status, nonaccrual status and credit risk ratings. The estimated fair value of the loan portfolio acquired was determined based on expected cash flows from the portfolio that considered the estimated life of the underlying loans or the value of the collateral on the loans. The estimated cash flows include the effects of estimated prepayments, expected credit losses, adjustments related to market liquidity and prevailing interest rates at the acquisition date.

        Purchased credit impaired ("PCI") acquired in the FNB Transaction are accounted for both in pools and on an individual loan basis. The Company has established under its PCI accounting policy a framework to aggregate certain acquired loans into various loan pools based on a minimum of two layers of common risk characteristics for the purpose of determining their respective fair values as of their acquisition dates, and for applying the subsequent recognition and measurement provisions for income accretion and impairment testing. The common risk characteristics used for the pooling of the FNB PCI loans are risk grade and loan collateral type.


Premises and Equipment

        Premises and equipment is presented at its estimated fair value. The fair values were determined using appraisals performed by independent third parties.


FDIC Indemnification Asset

        The Company has elected to account for amounts receivable under the loss-share agreements with the FDIC as an indemnification asset, or FDIC Indemnification Asset, in accordance with Financial Accounting Standards Board Accounting Standards Codification ("ASC") 805. The FDIC Indemnification Asset is initially recorded at fair value, based on the discounted value of expected future cash flows under the loss-share agreements. The estimates of expected losses used in valuation

F-160


Table of Contents


NOTES TO STATEMENT OF ASSETS ACQUIRED
AND LIABILITIES ASSUMED (Continued)

1. Summary of Significant Accounting and Reporting Policies (Continued)

of this asset are consistent with the loss estimates used in the valuation of the covered assets. These cash flows were discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC.


Covered Other Real Estate Owned

        Acquired OREO subject to FDIC loss-share agreements is referred to as "covered OREO". Covered OREO at the Bank Closing Date of $135.2 million is reported exclusive of expected reimbursement cash flows from the FDIC. Foreclosed covered loan collateral is transferred into covered OREO at the collateral's fair value, less selling costs. Covered OREO was initially recorded at its estimated fair value based on similar market comparable valuations, less estimated selling costs.


Core Deposit Intangible

        In determining the estimated life and fair value of the core deposit intangible, deposits were analyzed based on factors such as type of deposit, deposit retention, interest rates, and age of the deposit relationships. Based on this valuation, the core deposit intangible asset of $4.3 million will be amortized over the projected useful lives of the related deposits on an accelerated basis over 7 years.


Deposits

        The fair value of deposits with no stated maturity, such as non-interest bearing deposits, savings and interest checking accounts, and money market accounts, is equal to the amount payable on demand. The fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates being offered to similar time deposits.


Deferred Taxes

        Deferred taxes relate to temporary differences between the financial accounting basis and income tax bases of the assets acquired and liabilities assumed in the FNB Transaction. Deferred taxes are reported in accordance with ASC 740, and are measured using the enacted statutory income tax rate to be in effect for the Bank at the time the deferred tax is expected to reverse, which is 35.5%.

2. FNB Transaction

        On the Bank Closing Date, the Bank assumed substantially all of the liabilities, including all of the deposits, and acquired substantially all of the assets of FNB from the FDIC in an FDIC-assisted transaction. As part of the P&A Agreement, the Bank and the FDIC entered into loss-share agreements covering future losses incurred on certain acquired loans and OREO. The Company refers to acquired commercial and single family residential loan portfolios and OREO that are subject to the loss-share agreements as "covered loans" and "covered OREO", respectively, and these assets are presented as separate line items in the Company's consolidated balance sheet. Collectively, covered loans and covered OREO are referred to as "covered assets". Pursuant to the loss-share agreements, the FDIC has agreed to reimburse the Bank the following amounts with respect to the covered assets pursuant to the loss-share agreements: (i) 80% of losses on the first $240.4 million of losses incurred; (ii) 0% of losses in excess of $240.4 million up to and including $365.7 million of losses incurred; and (iii) 80% of losses in excess of $365.7 million of losses incurred. The Bank has also agreed to reimburse the FDIC for any subsequent recoveries. The loss-share agreements for commercial and single family

F-161


Table of Contents


NOTES TO STATEMENT OF ASSETS ACQUIRED
AND LIABILITIES ASSUMED (Continued)

2. FNB Transaction (Continued)

residential loans are in effect for 5 years and 10 years, respectively, from the Bank Closing Date, and the loss recovery provisions to the FDIC are in effect for 8 years and 10 years, respectively, from the Bank Closing Date.

        In accordance with the loss-share agreements, the Bank may be required to make a "true-up" payment to the FDIC, approximately ten years following the Bank Closing Date, if the FDIC's initial estimate of losses on covered assets is greater than the actual realized losses. The "true-up" payment is calculated using a defined formula set forth in the P&A Agreement.

        A summary of the net assets received from the FDIC and the estimated fair value adjustments resulting in the bargain purchase gain are presented below (in thousands).

Cost basis net assets on September 13, 2013

  $ 215,000  

Cash payment received from the FDIC

    45,000  

Fair value adjustments:

       

Securities

    (3,341 )

Loans

    (343,068 )

Premises and equipment

    3,565  

Other real estate owned

    (79,273 )

FDIC Indemnification Asset

    185,680  

Other intangible assets

    4,270  

Deposits

    (8,282 )

Other

    (6,966 )
       

Bargain purchase gain

  $ 12,585  
       
       

        In FDIC-assisted transactions, only certain assets and liabilities are transferred to the acquirer and, depending on the nature and amount of the acquirer's bid, the FDIC may be required to make a cash payment to the acquirer or the acquirer may be required to make payment to the FDIC. In the FNB Transaction, cost basis net assets of $215.0 million and an initial cash payment received from the FDIC of $45.0 million were transferred to the Bank. This initial cash payment from the FDIC is subject to adjustment and settlement. The bargain purchase gain represents the excess of the estimated fair value of the assets acquired over the estimated fair value of the liabilities assumed.

        The FDIC bid form provided a list of properties (branches and support facilities) owned by FNB for sale at fixed prices. The Bank purchased 44 properties owned by FNB in connection with its bid for an aggregate purchase price of $59.5 million. For those properties owned by FNB that the Bank declined to purchase in its bid, the Bank had exclusive options to purchase those properties following the Bank Closing Date. In connection with those options, the Bank purchased an additional seven properties owned by FNB, for an aggregate purchase price of $4.9 million. The Bank also had an option to assume the leases of properties leased by FNB. The Bank was required to purchase all data management equipment and, other certain special assets, furniture, fixtures and equipment, in each case at an appraised value at any properties purchased or leased by the Bank. The Bank paid $10.3 million to the FDIC for furniture, fixtures and data management equipment. The Bank is required to pay rent to the FDIC on properties owned or leased by FNB and furniture and equipment at such properties until it surrenders such properties to the FDIC.

F-162


Table of Contents


NOTES TO STATEMENT OF ASSETS ACQUIRED
AND LIABILITIES ASSUMED (Continued)

3. Fair Value Measurements

Fair Value Measurements and Disclosures

        Fair Value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants and 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 exclude transaction costs and are not the result of forced transactions.

        Accounting principles utilize 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.

        Cash and Due from Banks—For cash and due from banks, the carrying amount is a reasonable estimate of fair value.

        Available For Sale Securities—The available for sale securities are reported at fair value using Level 2 inputs. The Company evaluates fair value measurements by considering observable data that may include independent pricing services, dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, and the financial instruments' terms and conditions, among other things.

        Loans—Substantially all loans acquired in the FNB Transaction are covered by FDIC loss-share agreements. The fair value of non-covered and covered loans was determined using Level 3 inputs, including estimates of expected cash flows that incorporated assumptions regarding default rates, loss severity rates assuming default, prepayment speeds and estimated collateral values.

        FDIC Indemnification Asset—The fair value of the FDIC Indemnification Asset is based on Level 3 inputs, including the discounted value of expected future cash flows under the loss-share agreements. The discount rate contemplates the credit worthiness of the FDIC as counterparty to this asset, and considers an incremental discount rate risk premium reflective of the inherent uncertainty associated with the timing of the cash flows.

        Other Real Estate Owned—Acquired OREO subject to FDIC loss-share agreements was initially recorded at its estimated fair value less estimated selling costs. The Company determines fair value primarily using independent appraisals of OREO properties. Further, the Company considered a

F-163


Table of Contents


NOTES TO STATEMENT OF ASSETS ACQUIRED
AND LIABILITIES ASSUMED (Continued)

3. Fair Value Measurements (Continued)

number of factors in determining the extent to which specific fair value measurements utilize unobservable inputs, including, but not limited to, the inherent subjectivity in appraisals, the length of time elapsed since the receipt of independent market price or appraised value, and current market conditions. In the FNB Transaction, the Bank acquired OREO of $135.2 million, all of which is covered by FDIC loss-share agreements. The estimated fair value of covered OREO at the Bank Closing Date and the underlying fair value measurements utilize Level 3 inputs.

        Deposits—The estimated fair value of demand deposits, savings accounts and negotiable order of withdrawal ("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.

        The following table presents the carrying values and estimated fair values of financial instruments (in thousands).

 
  Estimated Fair Value  
 
  Carrying
Amount
  Level 1
Inputs
  Level 2
Inputs
  Level 3
Inputs
  Total  

Financial assets:

                               

Cash and due from banks

  $ 362,695   $ 362,695   $   $   $ 362,695  

Available for sale securities

    286,214         286,214         286,214  

Non-covered loans

    42,884             42,884     42,884  

Covered loans

    1,116,583             1,116,583     1,116,583  

FDIC indemnification asset

    185,680             185,680     185,680  

Covered other real estate owned

    135,187             135,187     135,187  

Other assets

    4,197         4,197         4,197  

Financial liabilities:

   
 
   
 
   
 
   
 
   
 
 

Deposits

    2,211,740         2,211,740         2,211,740  

Other liabilities

    2,064         2,064         2,064  

4. Securities

        The Bank acquired investment securities with an estimated fair value of $286.2 million in the FNB Transaction. The acquired securities consisted of securities available for sale. The following table presents the composition of the investment securities portfolio acquired at the Bank Closing Date (in thousands).

U.S. Treasury securities

  $ 28,000  

U.S. government agencies:

       

Bonds

    212,963  

Residential mortgage-backed securities

    45,251  
       

Total

  $ 286,214  
       
       

F-164


Table of Contents


NOTES TO STATEMENT OF ASSETS ACQUIRED
AND LIABILITIES ASSUMED (Continued)

4. Securities (Continued)

        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 at the Bank Closing Date are shown by contractual maturity below (in thousands).

 
  Amortized
Cost
  Fair Value  

Due in one year or less

  $ 43,000   $ 43,000  

Due after one year through five years

         

Due after five years through ten years

    37,647     37,647  

Due after ten years

    160,316     160,316  
           

    240,963     240,963  

Residential mortgage-backed securities

   
45,251
   
45,251
 
           

Total

  $ 286,214   $ 286,214  
           
           

5. Loans

        The Bank acquired loans both with and without evidence of credit quality deterioration since origination. The Bank's portfolio of acquired loans had a fair value of $1.2 billion as of the Bank Closing Date, with no carryover of any allowance for loan losses. Acquired loans were segregated between those considered to be PCI loans and those without credit impairment at acquisition. The following table presents details on acquired covered and non-covered loans at the Bank Closing Date (in thousands).

 
  Loans, excluding
PCI Loans
  PCI
Loans
  Total
Loans
 

Commercial and industrial

  $ 47,874   $ 47,751   $ 95,625  

Real estate

    242,998     611,219     854,217  

Construction and land development

    26,669     158,247     184,916  

Consumer

    19,095     5,614     24,709  
               

Total

  $ 336,636   $ 822,831   $ 1,159,467  
               
               

        The following table presents information about the acquired covered and non-covered PCI loans at the Bank Closing Date (in thousands).

Contractually required principal and interest payments

  $ 1,533,667  

Nonaccretable difference

    542,241  
       

Cash flows expected to be collected

    991,426  

Accretable difference

    168,595  
       

Fair value of loans acquired with a deterioration of credit quality

  $ 822,831  
       
       

F-165


Table of Contents


NOTES TO STATEMENT OF ASSETS ACQUIRED
AND LIABILITIES ASSUMED (Continued)

5. Loans (Continued)

        The following table presents information about the acquired loans without credit impairment at the Bank Closing Date (in thousands).

Contractually required principal and interest payments

  $ 466,754  

Contractual cash flows not expected to be collected

    43,783  

Fair value at acquisition

    336,636  

        As part of the P&A Agreement, the Bank and the FDIC entered into loss-share agreements covering future losses incurred on certain acquired loans. The Company refers to acquired commercial and single family residential loan portfolios that are subject to the loss-share agreements as "covered loans". Non-covered loans refer to loans not covered by the FDIC loss-share agreements. The Bank's portfolio of acquired covered loans had a fair value of $1.1 billion as of the Bank Closing Date, with no carryover of any allowance for loan losses. Acquired covered loans were segregated between those considered to be PCI loans and those without credit impairment at acquisition. The non-covered loan portfolio at the Bank Closing Date includes loans acquired as a part of the FNB Transaction totaling $42.9 million, of which $8.6 million are categorized as non-covered PCI loans.

        In accordance with the loss-share agreements, the Bank may be required to make a "true-up" payment to the FDIC, approximately ten years following the Bank Closing Date, if the FDIC's initial estimate of losses on covered assets is greater than the actual realized losses. The "true-up" payment is calculated using a defined formula set forth in the P&A Agreement.

        The Company has established under its PCI accounting policy a framework to aggregate certain acquired covered loans into various loan pools based on a minimum of two layers of common risk characteristics for the purpose of determining their respective fair values as of their acquisition dates, and for applying the subsequent recognition and measurement provisions for income accretion and impairment testing.

        The following table presents the carrying value of the covered and non-covered loans summarized by portfolio segment at the Bank Closing Date (in thousands).

 
  Covered
Loans
  Non-Covered
Loans
  Total
Loans
 

Commercial and industrial

  $ 77,998   $ 17,627   $ 95,625  

Real estate

    853,669     548     854,217  

Construction and land development

    184,916         184,916  

Consumer

        24,709     24,709  
               

Total

  $ 1,116,583   $ 42,884   $ 1,159,467  
               
               

        The following table presents the carrying value and the outstanding contractual balance of the covered and non-covered PCI loans at the Bank Closing Date (in thousands).

 
  Covered
Loans
  Non-Covered
Loans
 

Carrying amount

  $ 814,269   $ 8,562  

Oustanding balance

    1,123,342     12,635  

F-166


Table of Contents


NOTES TO STATEMENT OF ASSETS ACQUIRED
AND LIABILITIES ASSUMED (Continued)

5. Loans (Continued)

        At the Bank Closing Date, the total nonaccretable difference and accretable yield for covered PCI loans were $537.4 million and $168.0 million, respectively, and $4.8 million and $0.6 million, respectively, for non-covered PCI loans.

6. Deposits

        The following table presents a summary of the deposits assumed at the Bank Closing Date (in thousands).

Noninterest-bearing demand

  $ 376,474  

Interest-bearing:

       

NOW accounts

    57,700  

Money market

    236,720  

Savings

    78,019  

Time

    1,462,827  
       

Total

  $ 2,211,740  
       
       

        At the Bank Closing Date, the scheduled maturities of interest-bearing time deposits were as follows (in thousands).

2013

  $ 389,233  

2014

    587,687  

2015

    164,932  

2016

    63,599  

2017

    24,267  

Thereafter

    233,109  
       

Total

  $ 1,462,827  
       
       

7. Income Taxes

        The temporary differences between the financial accounting basis and income tax bases of assets acquired and liabilities assumed in this transaction result in a net deferred tax liability. For income tax purposes, the FNB Transaction will be accounted for as an asset purchase and the tax bases of assets acquired will be allocated based on fair values using a modified residual method. Under this method, the purchase price is allocated among the assets in order of liquidity (the most liquid first) up to its fair market value. The assets acquired and liabilities assumed resulted in a deferred tax liability of $4.5 million for the Bank. The Bank did not acquire any of the tax attributes of FNB's assets and liabilities.

F-167


Table of Contents


ANNEX A

EXECUTION VERSION

AGREEMENT AND PLAN OF MERGER

by and among

SWS GROUP, INC.

HILLTOP HOLDINGS INC.

and

PERUNA LLC



Dated as of March 31, 2014


Table of Contents


TABLE OF CONTENTS

 
   
  Page  

ARTICLE I

 

THE MERGER

 

1.1

 

The Merger

   
A-1
 

1.2

 

Effective Time

    A-1  

1.3

 

Effects of the Merger

    A-1  

1.4

 

Conversion of Stock

    A-2  

1.5

 

Bank Merger

    A-3  

1.6

 

Restricted Shares and Deferred Shares

    A-3  

1.7

 

Warrants

    A-4  

1.8

 

Organizational Documents of the Surviving Company

    A-4  

1.9

 

Directors and Officers

    A-4  

1.10

 

Effect on Purchaser Common Stock

    A-4  

ARTICLE II

 

DELIVERY OF MERGER CONSIDERATION

 

2.1

 

Delivery of Merger Consideration

   
A-5
 

2.2

 

Exchange Procedures

    A-5  

ARTICLE III

 

REPRESENTATIONS AND WARRANTIES OF COMPANY

 

3.1

 

Organization and Authority

   
A-7
 

3.2

 

Company's Subsidiaries

    A-8  

3.3

 

Capitalization

    A-9  

3.4

 

Authorization; No Violation

    A-10  

3.5

 

Company Information

    A-12  

3.6

 

Financial Statements and Reports

    A-12  

3.7

 

Properties and Leases

    A-14  

3.8

 

Taxes

    A-14  

3.9

 

Absence of Certain Changes

    A-15  

3.10

 

Related Party Transactions

    A-16  

3.11

 

Litigation and Other Proceedings

    A-16  

3.12

 

No Undisclosed Liabilities

    A-16  

3.13

 

Compliance with Laws

    A-16  

3.14

 

Labor

    A-18  

3.15

 

Company Benefit Plans

    A-18  

3.16

 

Risk Management; Derivatives

    A-20  

3.17

 

Environmental Liabilities

    A-21  

3.18

 

Intellectual Property

    A-21  

3.19

 

Brokers and Finders

    A-22  

3.20

 

Material Contracts

    A-22  

3.21

 

Broker-Dealer and Other Regulated Subsidiaries

    A-24  

3.22

 

Loan Matters

    A-25  

3.23

 

Opinion of Financial Advisor

    A-28  

3.24

 

Vote Required

    A-28  

3.25

 

Insurance

    A-28  

3.26

 

Community Reinvestment Act Compliance

    A-28  

A-i


Table of Contents

 
   
  Page  

3.27

 

Investment Securities

    A-28  

3.28

 

No Other Representations or Warranties

    A-29  

ARTICLE IV

 

REPRESENTATIONS AND WARRANTIES OF PURCHASER AND MERGER SUB

 

4.1

 

Organization and Authority

   
A-29
 

4.2

 

Purchaser's Subsidiaries

    A-30  

4.3

 

Capitalization

    A-31  

4.4

 

Authorization; No Violation

    A-31  

4.5

 

Purchaser Information

    A-32  

4.6

 

Financial Statements and Reports. 

    A-33  

4.7

 

Taxes

    A-34  

4.8

 

Absence of Certain Changes

    A-35  

4.9

 

Litigation and Other Proceedings

    A-35  

4.10

 

No Undisclosed Liabilities

    A-35  

4.11

 

Compliance with Laws

    A-35  

4.12

 

Brokers and Finders

    A-37  

4.13

 

Risk Management; Derivatives

    A-37  

4.14

 

No Vote Required

    A-37  

4.15

 

Reorganization

    A-37  

4.16

 

Community Reinvestment Act Compliance

    A-37  

4.17

 

Broker-Dealer and Other Regulated Subsidiaries

    A-38  

4.18

 

Financing

    A-38  

4.19

 

No Other Representations or Warranties

    A-38  

ARTICLE V

 

COVENANTS RELATING TO CONDUCT OF BUSINESS

 

5.1

 

Conduct of Business Prior to the Effective Time

   
A-38
 

5.2

 

Company Forbearances

    A-38  

5.3

 

Purchaser Forbearances

    A-42  

ARTICLE VI

 

ADDITIONAL AGREEMENTS

 

6.1

 

Regulatory Matters

   
A-42
 

6.2

 

Access to Information; Cooperation

    A-44  

6.3

 

Stockholder Approval

    A-45  

6.4

 

Voting of Shares

    A-46  

6.5

 

Obligations of Merger Sub

    A-46  

6.6

 

NYSE Listing

    A-46  

6.7

 

Employee Matters

    A-46  

6.8

 

Indemnification; Directors' and Officers' Insurance

    A-48  

6.9

 

Exemption from Liability Under Section 16(b)

    A-49  

6.10

 

No Solicitation

    A-49  

6.11

 

Takeover Laws

    A-52  

6.12

 

Financial Statements and Other Current Information

    A-52  

6.13

 

Notification of Certain Matters

    A-52  

6.14

 

Stockholder Litigation

    A-53  

6.15

 

Transition

    A-53  

A-ii


Table of Contents

 
   
  Page  

6.16

 

Purchaser Consent

    A-53  

ARTICLE VII

 

CONDITIONS PRECEDENT

 

7.1

 

Conditions to Each Party's Obligation to Effect the Merger

   
A-53
 

7.2

 

Conditions to Obligations of Purchaser and Merger Sub

    A-54  

7.3

 

Conditions to Obligations of Company

    A-55  

ARTICLE VIII

 

TERMINATION AND AMENDMENT

 

8.1

 

Termination

   
A-55
 

8.2

 

Effect of Termination

    A-56  

8.3

 

Fees and Expenses

    A-57  

8.4

 

Amendment

    A-57  

8.5

 

Extension; Waiver

    A-58  

ARTICLE IX

 

GENERAL PROVISIONS

 

9.1

 

Closing

   
A-58
 

9.2

 

Nonsurvival of Representations, Warranties and Agreements

    A-58  

9.3

 

Notices

    A-58  

9.4

 

Interpretation

    A-59  

9.5

 

Disclosure Schedule and SEC Document References

    A-59  

9.6

 

Counterparts

    A-59  

9.7

 

Entire Agreement

    A-60  

9.8

 

Governing Law; Jurisdiction

    A-60  

9.9

 

Waiver of Jury Trial

    A-60  

9.10

 

Publicity

    A-60  

9.11

 

Assignment; Third-Party Beneficiaries

    A-60  

9.12

 

Specific Performance

    A-61  

9.13

 

Defined Terms

    A-61  

A-iii


Table of Contents


INDEX OF DEFINED TERMS

 
  Section

Advisers Act

  3.21(h)

affiliate

  9.13(a)

Agreement

  Preamble

Alternative Acquisition Agreement

  6.10(b)

Bank

  3.2(b)

Bank Merger

  1.5

Bank Merger Agreement

  1.5

Bank Merger Certificates

  1.5

Bankruptcy and Equity Exception

  3.4(a)

Beneficially Own

  3.10

Book-Entry Shares

  1.4(d)

Broker-Dealer Entity

  3.21(a)

Broker-Dealer Merger

  6.1(d)

business day

  9.13(b)

capital stock

  9.13(c)

Capitalization Date

  3.3(a)

Certificate

  1.4(d)

Certificate of Merger

  1.2

Change in Company Recommendation

  6.10(b)

Closing

  9.1

Closing Date

  9.1

Code

  Recitals

Company

  Preamble

Company 10-Ks

  3.6(a)

Company 10-Q

  3.6(a)

Company 401(k) Plan

  6.7(c)

Company Benefit Plans

  3.15(a)

Company Common Stock

  1.4(b)

Company Deferred Compensation Plans

  1.6(b)

Company Deferred Shares

  1.6(b)

Company Disclosure Schedule

  Article III Preamble

Company Financial Statements

  3.6(a)

Company Material Adverse Effect

  3.1(a)

Company Preferred Stock

  3.3(a)

Company Recommendation

  6.3(a)

Company Restricted Shares

  1.6(a)

Company SEC Reports

  3.6(c)

Company Stock Plans

  1.6(a)

Company Stockholder Approval

  3.24

Company Stockholders' Meeting

  6.3(a)

Company Warrants

  1.7

Confidentiality Agreement

  6.2(b)

Covered Employee

  6.7(a)

Credit Agreement

  9.13(d)

Delaware Secretary

  1.2

DGCL

  1.1

Dissenting Shares

  1.4(f)

DLLCA

  1.1

A-iv


Table of Contents

 
  Section

DPC Common Shares

  1.4(b)

Effective Time

  1.2

Environmental Laws

  3.17

ERISA

  3.15(a)

ERISA Affiliate

  3.15(a)

Exchange Act

  3.5

Exchange Agent

  2.1

Exchange Agent Agreement

  2.1

Exchange Fund

  2.1

FDIC

  3.2(b)

Federal Reserve

  3.4(d)

FHLMC

  3.22(h)

FINRA

  3.21(c)

FNMA

  3.22(h)

Form S-4

  3.4(d)

GAAP

  3.1(a)

GNMA

  3.22(h)

Governmental Entity

  3.4(d)

HSR Act

  3.4(d)

Indemnified Parties

  6.8(a)

Intellectual Property

  3.18(e)(i)

Intervening Event

  6.10(e)

Investment Company Act

  3.21(f)

Investor

  3.22(h)

IRS

  3.15(b)

IT Assets

  3.18(e)(ii)

knowledge

  9.13(e)

Letter of Transmittal

  2.2(a)

Letter Agreement

  1.7

Licensed Intellectual Property

  3.18(e)(iii)

Liens

  3.2(a)

Loans

  3.22(a)

Material Contracts

  3.20(a)

Materially Burdensome Regulatory Condition

  6.1(e)

Merger

  Recitals

Merger Consideration

  1.4(c)

Merger Sub

  Preamble

Mortgage Loans

  3.22(h)

Mortgage Vendor

  3.22(d)

Mortgage Vendor Agreement

  3.22(d)

Nonqualified Deferred Compensation Plan

  3.15(d)

Oak Hill Warrants

  1.7

OCC

  3.4(d)

OREO

  3.7

Outside Date

  8.1(b)(ii)

Owned Intellectual Property

  3.18(e)(iv)

Per Share Cash Consideration

  1.4(c)

Per Share Stock Consideration

  1.4(c)

Permitted Liens

  3.7

person

  9.13(f)

A-v


Table of Contents

 
  Section

Premium Cap

  6.8(c)

Proxy Statement

  3.4(d)

Purchaser

  Preamble

Purchaser 401(k) Plan

  6.7(c)

Purchaser Bank

  4.2(b)

Purchaser Capitalization Date

  4.3(a)

Purchaser Closing Price

  2.2(f)

Purchaser Common Stock

  1.4(b)

Purchaser Disclosure Schedule

  Article IV Preamble

Purchaser Material Adverse Effect

  4.1(a)

Purchaser Preferred Stock

  4.3(a)

Purchaser SEC Reports

  4.6(c)

Purchaser Stock Plans

  4.3(a)

Purchaser Warrant

  1.7

Qualified Plan

  3.15(e)

Record Date

  6.3(a)

Regulatory Agencies

  3.6(b)

Regulatory Agreement

  3.13(c)

Regulatory Approvals

  3.4(d)

Requisite Regulatory Approvals

  7.1(e)

RIA Entity

  3.21(a)

SEC

  3.4(d)

Securities Act

  3.6(c)

SOX

  3.6(c)

Special Committee

  8.4

Special Mention Loan

  3.22(e)

Special Voting Stock

  4.3(a)

SRO

  3.4(d)

Submission

  3.5

subsidiary

  9.13(g)

Superior Proposal

  6.10(d)

Surviving Company

  Recitals

Take-Out Letter

  3.22(h)

Takeover Law

  3.4(b)

Tax

  3.8(j)

Termination Fee

  8.3

Third Party

  6.10(c)

Third Party Acquisition

  6.10(c)

Trade Secrets

  3.18(e)(i)

Trust Account Common Shares

  1.4(b)

A-vi


Table of Contents

        AGREEMENT AND PLAN OF MERGER, dated as of March 31, 2014 (this "Agreement"), by and among HILLTOP HOLDINGS INC., a Maryland corporation ("Purchaser"), PERUNA LLC, a Delaware limited liability company and a direct, wholly owned subsidiary of Purchaser ("Merger Sub") and SWS GROUP, INC., a Delaware corporation ("Company").


RECITALS

        A.    The Board of Directors of Company has (i) determined that it is in the best interests of Company and its stockholders (other than Purchaser), and declared it advisable, to enter into this Agreement, (ii) approved the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby, including the business combination transaction in which Company will, on the terms and subject to the conditions set forth in this Agreement, merge with and into Merger Sub (the "Merger"), with Merger Sub as the surviving entity in the Merger (sometimes referred to in such capacity as the "Surviving Company") and (iii) resolved to recommend, subject to the terms of this Agreement, adoption of this Agreement by the stockholders of Company.

        B.    The Board of Directors of Purchaser has (i) determined that it is in the best interests of Purchaser and its stockholders, and declared it advisable, to enter into this Agreement and (ii) approved the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby, including the Merger.

        C.    Purchaser, as the sole member of Merger Sub, has adopted this Agreement and approved the execution, delivery and performance of this Agreement and the transactions contemplated hereby, including the Merger, on the terms and subject to the conditions set forth in this Agreement.

        D.    The parties intend the Merger to qualify as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and intend for this Agreement to constitute a "plan of reorganization" for purposes of Sections 354 and 361 of the Code.

        E.    The parties desire to make certain representations, warranties and agreements in connection with the Merger and also to prescribe certain conditions to the Merger.

        NOW, THEREFORE, in consideration of the mutual covenants, representations, warranties and agreements contained in this Agreement, and intending to be legally bound hereby, the parties agree as follows:

ARTICLE I

THE MERGER

        1.1    The Merger.     Subject to the terms and conditions of this Agreement, in accordance with (i) the General Corporation Law of the State of Delaware (the "DGCL") and (ii) the Delaware Limited Liability Company Act (the "DLLCA"), at the Effective Time, Company shall merge with and into Merger Sub. Merger Sub shall be the Surviving Company in the Merger and shall continue its existence under the laws of the State of Delaware. As of the Effective Time, the separate corporate existence of Company shall cease.


        1.2
    Effective Time.     Subject to the terms and conditions of this Agreement, on or before the Closing Date, Purchaser and Company shall cause to be filed a certificate of merger (the "Certificate of Merger") with the Secretary of State of the State of Delaware (the "Delaware Secretary") executed in accordance with, and containing such information as is required by, the relevant provisions of the DGCL and the DLLCA in order to effect the Merger. The Merger shall become effective as of the date and time specified in the Certificate of Merger (the "Effective Time").


        1.3
    Effects of the Merger.     At and after the Effective Time, the Merger shall have the effects set forth in the applicable provisions of the DLLCA and DGCL.

A-1


Table of Contents


        1.4
    Conversion of Stock.     At the Effective Time, by virtue of the Merger and without any action on the part of Purchaser, Merger Sub, Company or the holder of any of the following securities:

A-2


Table of Contents


        1.5
    Bank Merger.     On the Closing Date and immediately following the Effective Time, Southwest Securities, FSB, a federally chartered savings bank and a wholly-owned subsidiary of Company, will merge (the "Bank Merger") with and into PlainsCapital Bank, a Texas banking association and an indirect wholly-owned subsidiary of Purchaser. PlainsCapital Bank shall be the surviving entity in the Bank Merger and shall continue its corporate existence under the name PlainsCapital Bank, and, following the Bank Merger, the separate corporate existence of Southwest Securities, FSB shall cease. The parties agree that the Bank Merger shall become effective immediately after the Effective Time. The Bank Merger shall be implemented pursuant to an agreement and plan of merger, in a form to be specified by Purchaser and reasonably acceptable to Company (the "Bank Merger Agreement"). In order to obtain the necessary state and federal regulatory approvals for the Bank Merger, the parties hereto shall cause the following to be accomplished prior to the filing of applications for regulatory approval: (i) Company shall cause Southwest Securities, FSB to adopt the Bank Merger Agreement, Company, as the sole shareholder of Southwest Securities, FSB, shall approve the Bank Merger Agreement, and Company shall cause the Bank Merger Agreement to be duly executed by Southwest Securities, FSB and delivered to PlainsCapital Bank and (ii) Purchaser shall cause PlainsCapital Bank to adopt the Bank Merger Agreement, Purchaser shall cause PlainsCapital Corporation, as the sole shareholder of PlainsCapital Bank, to approve the Bank Merger Agreement and Purchaser shall cause the Bank Merger Agreement to be duly executed by PlainsCapital Bank and delivered to Southwest Securities, FSB. Company shall cause Southwest Securities, FSB, and Purchaser shall cause PlainsCapital Bank, to execute such certificates of merger and articles of combination and such other documents and certificates (in each case in form and substance reasonably satisfactory to Purchaser and Company) as are necessary to make the Bank Merger effective (the "Bank Merger Certificates") immediately following the Effective Time.


        1.6
    Restricted Shares and Deferred Shares.     

A-3


Table of Contents

        1.7    Warrants.    At and conditioned upon the occurrence of the Effective Time, the warrants issued by Company to Purchaser on July 29, 2011 (the "Purchaser Warrant" and together with the warrants issued by Company to, respectively, Oak Hill Capital Partners III, L.P. and Oak Hill Capital Management Partners III, L.P. on July 29, 2011 (the "Oak Hill Warrants"), the "Company Warrants"), if outstanding, shall be cancelled. At and conditioned upon the occurrence of the Effective Time, and in connection with the Merger, Oak Hill shall deliver to Company the certificates evidencing the Oak Hill Warrants and the Loans, if any, and Company shall issue and deliver to Oak Hill, in exchange for the Oak Hill Warrants and the Loans held by Oak Hill, the following consideration: (i) the Merger Consideration that the holders of the Oak Hill Warrants would have been entitled to receive upon consummation of the Merger if the Oak Hill Warrants had been exercised immediately prior to the Effective Time (with cash paid in lieu of fractional shares of Purchaser Common Stock, calculated in the manner provided in Section 2.2(f)) and (ii) an amount equal to the Applicable Premium (as defined in the Credit Agreement) calculated as if the Loans held by Oak Hill were prepaid in full as of the Closing Date. Concurrently with the execution of this Agreement, Oak Hill and Company entered into the agreement dated March 31, 2014 in the form provided by Company to Purchaser prior to the execution of this Agreement (the "Letter Agreement").


        1.8
    Organizational Documents of the Surviving Company.     The certificate of formation and limited liability company agreement of the Surviving Company shall be the certificate of formation and limited liability company agreement of Merger Sub as in effect immediately prior to the Effective Time, until duly amended in accordance with the terms thereof and applicable law.


        1.9
    Directors and Officers.     The directors of Merger Sub immediately prior to the Effective Time shall be the initial directors of the Surviving Company and shall hold office until their respective successors are duly appointed, or their earlier death, resignation or removal. The officers of Merger Sub immediately prior to the Effective Time shall be the initial officers of the Surviving Company and shall hold office until their respective successors are duly appointed and qualified, or their earlier death, resignation or removal.


        1.10
    Effect on Purchaser Common Stock.     Each share of Purchaser Common Stock outstanding immediately prior to the Effective Time will remain outstanding.

A-4


Table of Contents

ARTICLE II

DELIVERY OF MERGER CONSIDERATION

        2.1    Delivery of Merger Consideration.    Prior to the Effective Time, Purchaser shall (a) authorize an exchange agent, which person shall be a bank or trust company selected by Purchaser and reasonably acceptable to Company (the "Exchange Agent"), pursuant to an agreement (the "Exchange Agent Agreement") entered into prior to the Effective Time in form and substance reasonably acceptable to Company, to deliver an aggregate number of shares of Purchaser Common Stock and an amount in cash which together are equal to the aggregate Merger Consideration (excluding, for avoidance of doubt, the aggregate Merger Consideration in respect of Company Restricted Shares and Company Deferred Shares, which shall be paid by the Surviving Company or one of its subsidiaries promptly following the Effective Time (in the case of the Company Restricted Shares) or the time elected under the applicable Company Deferred Compensation Plan (in the case of Company Deferred Shares), less such amounts as are required to be withheld or deducted under the Code or any provision of state, local or foreign law) and (b) deposit, or cause to be deposited with, the Exchange Agent sufficient cash required to pay the Merger Consideration and, to the extent then determinable, any cash payable in lieu of fractional shares pursuant to Section 2.2(f) (the "Exchange Fund"). The Exchange Fund shall not be used for any other purpose.


        2.2
    Exchange Procedures.     

A-5


Table of Contents

A-6


Table of Contents

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF COMPANY

        Subject to Section 9.5, except as set forth in the Disclosure Schedule previously delivered by Company to Purchaser (the "Company Disclosure Schedule") or in the Company SEC Reports (but disregarding risk factor disclosures contained under the heading "Risk Factors," or disclosures of risks set forth in any "forward-looking statements" disclaimer or any other statements that are similarly non-specific or cautionary, predictive or forward-looking in nature), Company hereby represents and warrants to Purchaser and Merger Sub as follows:


        3.1
    Organization and Authority.     

A-7


Table of Contents


        3.2
    Company's Subsidiaries.     

A-8


Table of Contents

        3.3    Capitalization.    

A-9


Table of Contents


        3.4
    Authorization; No Violation.     

A-10


Table of Contents

A-11


Table of Contents


        3.5
    Company Information.     The information relating to Company and its subsidiaries that is provided by Company or its representatives for inclusion in the Proxy Statement and Form S-4, or in any application, notification or other document filed with any other Regulatory Agency or other Governmental Entity in connection with the transactions contemplated by this Agreement (each a "Submission"), will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they are made, not misleading. The portions of the Proxy Statement relating to Company and its subsidiaries and other portions within the reasonable control of Company and its subsidiaries will comply in all material respects with the provisions of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules and regulations thereunder. The representations and warranties contained in this Section 3.5 will not apply to statements or omissions based upon information furnished to Company by Purchaser expressly for inclusion in any Submission.


        3.6
    Financial Statements and Reports.     

A-12


Table of Contents

A-13


Table of Contents


        3.7
    Properties and Leases.     Except for any (i) Liens for taxes and other governmental charges and assessments which are not yet due and payable, (ii) Liens of landlords and Liens of carriers, warehousemen, mechanics and materialmen and other like Liens arising in the ordinary course of business for sums not yet due and payable, and (iii) other Liens or imperfections on property which are not material in amount or do not materially detract from the value of or materially impair the existing use of the property affected by such Lien or imperfection ("Permitted Liens"), Company and each subsidiary of Company have good and marketable title in fee simple (in the case of owned real property) free and clear of any material Liens to all the real and personal property reflected in Company's consolidated balance sheet as of June 30, 2013 included in the Company 10-K for the period then ended, and all owned real and personal property acquired since such date, except such owned real and personal property as has been disposed of in the ordinary course of business. Except as would not reasonably be expected to result in a Company Material Adverse Effect, (i) all leases of real property and all other leases material to Company or any subsidiary of Company pursuant to which Company or such subsidiary of Company, as lessee, leases real or personal property are valid and effective in accordance with their respective terms, and (ii) there is not, under any such lease, any existing default by Company or such subsidiary of Company or any event which, with notice or lapse of time or both, would constitute such a default. The Company Disclosure Schedule sets forth a listing as of the date of this Agreement of the Other Real Estate Owned ("OREO") acquired by foreclosure or by deed-in-lieu thereof, including the book value thereof. Other than OREO, and except for ordinary wear and tear, all of the buildings, structures, and appurtenances owned, leased, or occupied by Company or any subsidiary of Company are in good operating condition and in a state of good maintenance and repair and comply with applicable zoning and other municipal laws and regulations, and there are no latent defects therein, except to the extent that failure to satisfy this representation would not reasonably be expected to have a Company Material Adverse Effect.

        3.8    Taxes.    

A-14


Table of Contents


        3.9
    Absence of Certain Changes.     

A-15


Table of Contents


        3.10    Related Party Transactions.     Except (i) as set forth in Section 3.10 of the Company Disclosure Schedule, (ii) for "compensation" as defined in Item 402 of the SEC's Regulation S-K and disclosed in Company's proxy statement on Schedule 14A filed with the SEC on October 3, 2013, (iii) for ordinary course bank deposit, trust and asset management services on arms' length terms, (iv) for other transactions or arrangements of a type available to employees of Company or its subsidiaries generally, and (v) for transactions, agreements, arrangements or understandings between Company and one or more of its wholly-owned subsidiaries or among wholly-owned subsidiaries of Company, there are no material transactions or series of related transactions, agreements, arrangements or understandings between Company or any of its subsidiaries, on the one hand, and Company, any current or former director or executive officer of Company or any of its subsidiaries or any person other than Purchaser who Beneficially Owns 5% or more of the Shares (or, to the knowledge of Company as of the date hereof, any of such person's immediate family members or affiliates) (other than subsidiaries of Company), on the other hand. For purposes of this Agreement, "Beneficially Own" and correlative terms are used as defined in Rules 13d-3 and 13d-5 of the Exchange Act.


        3.11
    Litigation and Other Proceedings.     Except as would not reasonably be expected to have a Company Material Adverse Effect or would not reasonably be expected to prevent, impair or materially delay the ability of Company to consummate the Merger, there is no suit, action, investigation, claim, proceeding or review pending, or to the knowledge of Company, threatened against it or any of its subsidiaries or any of the current or former directors or executive officers of it or any of its subsidiaries. There is no material injunction, order, award, judgment, settlement, decree or regulatory restriction (other than regulatory restrictions of general application that apply to similarly situated companies) imposed upon or entered into by Company, any of its subsidiaries or the assets of it or any of its subsidiaries.


        3.12
    No Undisclosed Liabilities.     Except as would not reasonably be expected to have a Company Material Adverse Effect, and except for (i) those liabilities that are reflected or reserved against on the balance sheet of the Company 10-Q for the quarterly period ended December 31, 2013 (including any notes thereto), (ii) that were incurred or arose since December 31, 2013 in the ordinary course of business consistent with past practice of Company, or (iii) liabilities incurred in connection with this Agreement and the transactions contemplated hereby, neither Company nor any subsidiary of Company has any liabilities of any nature (absolute, accrued, contingent, known, unknown or otherwise).


        3.13
    Compliance with Laws.     

A-16


Table of Contents

A-17


Table of Contents

        3.14    Labor.    Neither Company nor any of its subsidiaries is a party to or bound by any labor or collective bargaining agreement and, to the knowledge of Company, there are no organizational campaigns or petitions of any labor union, workers' council or labor organization seeking recognition of a collective bargaining unit with respect to, or otherwise attempting to represent, any of the employees of Company or any of its subsidiaries or compel Company or any of its subsidiaries to bargain with any such labor union, works council or labor organization. There are no material labor related controversies, strikes, slowdowns, walkouts or other work stoppages pending or, to the knowledge of Company, threatened. Each of Company and its subsidiaries are in material compliance with all applicable laws relating to labor, employment or termination of employment, including but not limited to laws relating to discrimination, disability, labor relations, hours of work, payment of wages and overtime wages, immigration, workers compensation, working conditions, employee scheduling, occupational safety and health, family and medical leave, and employee terminations, and are and have not since December 31, 2010 engaged in any unfair labor practices. Except as would not reasonably be expected to have a Company Material Adverse Effect, there are no complaints, lawsuits, arbitrations or administrative proceedings pending or, to the knowledge of Company, threatened against Company or any of its subsidiaries brought by or on behalf of any applicant for employment, any current or former employee, any person alleging to be a current or former employee, any class of the foregoing, or any Governmental Entity, relating to any law described in the preceding sentence, or alleging breach of any express or implied contract of employment, wrongful termination of employment, or alleging any other discriminatory, wrongful or tortious conduct in connection with the employment relationship.


        3.15
    Company Benefit Plans.     

A-18


Table of Contents

A-19


Table of Contents


        3.16
    Risk Management; Derivatives.     Except as would not reasonably be expected to result in a Company Material Adverse Effect:

A-20


Table of Contents


        3.17
    Environmental Liabilities.     Except as would not reasonably be expected, individually or in the aggregate, to have a Company Material Adverse Effect on (a) Company, Company and its subsidiaries have complied with any and all applicable federal, state or local law, regulation, order, decree, permit, authorization, common law or Governmental Entity requirement governing: (i) the protection or restoration of the environment, health and safety (to the extent relating to hazardous substance exposure) or natural resources; (ii) the handling, use, presence, disposal, release or threatened release of, or exposure to, any hazardous substance; or (iii) noise, odor, wetlands, indoor air, pollution, contamination or any injury or threat of injury to persons or property involving any hazardous substance (collectively, "Environmental Laws"); (b) there are no proceedings, claims, actions, or investigations of any kind, pending or threatened in writing, by any person, court, agency, or other Governmental Entity or any arbitral body, against Company or its subsidiaries arising under any Environmental Law and, to the knowledge of Company, there is no reasonable basis for any such proceeding, claim, action or investigation; (c) there are no agreements, orders, judgments, indemnities or decrees by or with any person, court, regulatory agency or other Governmental Entity, that could impose any liabilities or obligations under or in respect of any Environmental Law; and (d) to the knowledge of Company, there are, and have been, no hazardous substances or other environmental conditions at any property (currently or formerly owned, operated, or otherwise used by Company or any of its subsidiaries) under circumstances which could reasonably be expected to result in liability to or claims against Company or its subsidiaries under any Environmental Law.


        3.18
    Intellectual Property.     Except as would not reasonably be expected, individually or in the aggregate, to have a Company Material Adverse Effect:

A-21


Table of Contents


        3.19
    Brokers and Finders.     There is no investment banker, broker or finder retained by or authorized to act on behalf of Company, any of its subsidiaries or any of Company's stockholders or affiliates who is entitled to any fee, commission or reimbursement of expenses from Company or any of its subsidiaries in connection with the transactions contemplated hereby, other than Sandler O'Neill & Partners, L.P.


        3.20
    Material Contracts.     

A-22


Table of Contents

A-23


Table of Contents


        3.21
    Broker-Dealer and Other Regulated Subsidiaries.     Except as would not reasonably be expected to have a Company Material Adverse Effect:

A-24


Table of Contents


        3.22
    Loan Matters.     

A-25


Table of Contents

A-26


Table of Contents

A-27


Table of Contents


        3.23
    Opinion of Financial Advisor.     Sandler O'Neill & Partners, L.P. has delivered to the Board of Directors of Company its written opinion to the effect that, as of the date of such opinion, and based upon and subject to the assumptions, qualifications and limitations included in the opinion, the consideration to be received by the holders of the Company Common Stock in the Merger is fair to the holders of Company Common Stock from a financial point of view.


        3.24
    Vote Required.     The only vote of the holders of any class or series of capital stock of Company necessary or required in order to adopt this Agreement or approve the transactions contemplated hereby, including the Merger, is the adoption of this Agreement by the holders of a majority of the outstanding shares of Company Common Stock entitled to vote on such matter (the "Company Stockholder Approval").

        3.25    Insurance.    Except as would not reasonably be expected, either individually or in the aggregate, to have a Company Material Adverse Effect, (a) Company and its subsidiaries are insured with reputable insurers against such risks and in such amounts as the management of Company reasonably has determined to be prudent and consistent with industry practice, (b) Company and its subsidiaries are in compliance in all material respects with their insurance policies and are not in default under any of the terms thereof, (c) each such policy is outstanding and in full force and effect and, except for policies insuring against potential liabilities of officers, directors and employees of Company and its subsidiaries, Company or the relevant subsidiary thereof is the sole beneficiary of such policies, and (d) all premiums and other payments due under any such policy have been paid, and all claims thereunder have been filed in due and timely fashion.


        3.26
    Community Reinvestment Act Compliance.     Company and each of its subsidiaries that is an insured depositary institution is in compliance in all material respects with the applicable provisions of the Community Reinvestment Act of 1977 and the regulations promulgated thereunder and has received a Community Reinvestment Act rating of "satisfactory" in its most recently completed exam, and Company has no knowledge of the existence of any fact or circumstance or set of facts or circumstances which would reasonably be expected to result in Company or any such subsidiary having its current rating lowered.


        3.27
    Investment Securities.     Each of Company and its subsidiaries has good and valid title to all securities held by it in a principal capacity (except securities sold under repurchase agreements or held in any fiduciary or agency capacity) free and clear of any Liens, except to the extent such securities are pledged in the ordinary course of business consistent with prudent business practices to secure obligations of Company or any of its subsidiaries and except for such defects in title or Liens that would not be material to Company and its subsidiaries as a whole, and such securities are valued on

A-28


Table of Contents

the books of Company and its subsidiaries in accordance with GAAP except as would not reasonably be expected to have a Company Material Adverse Effect.


        3.28
    No Other Representations or Warranties.     Except for the representations and warranties made by Company in this Article III, neither Company nor any other person makes any express or implied representation or warranty with respect to Company, its subsidiaries, or their respective businesses, operations, assets, liabilities, conditions (financial or otherwise) or prospects, and Company hereby disclaims any such other representations or warranties. In particular, without limiting the foregoing disclaimer, neither Company nor any other person makes or has made any representation or warranty to Purchaser or any of its affiliates or representatives with respect to (i) any financial projection, forecast, estimate, budget or prospect information relating to Company, any of its subsidiaries or their respective businesses or (ii) except for the representations and warranties made by Company in this Article III, any oral or written information presented to Purchaser or any of its affiliates or representatives in the course of their due diligence investigation of Company, the negotiation of this Agreement or in the course of the transactions contemplated hereby.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF PURCHASER AND MERGER SUB

        Subject to Section 9.5, except as set forth in the Disclosure Schedule previously delivered by Purchaser to Company (the "Purchaser Disclosure Schedule") or in the Purchaser SEC Reports (but disregarding risk factor disclosures contained under the heading "Risk Factors," or disclosures of risks set forth in any "forward-looking statements" disclaimer or any other statements that are similarly non-specific or cautionary, predictive or forward-looking in nature), Purchaser and Merger Sub hereby represent and warrant to Company as follows:


        4.1
    Organization and Authority.     

A-29


Table of Contents


        4.2
    Purchaser's Subsidiaries.     

A-30


Table of Contents

        4.3    Capitalization.    


        4.4
    Authorization; No Violation.     

A-31


Table of Contents


        4.5
    Purchaser Information.     The information relating to Purchaser and its subsidiaries that is provided by Purchaser or its representatives for inclusion in the Proxy Statement and the Form S-4, or in any application, notification or other document filed with any other Regulatory Agency or other Governmental Entity in connection with the transactions contemplated by this Agreement, will not

A-32


Table of Contents

contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they are made, not misleading. The portions of the Proxy Statement relating to Purchaser and its subsidiaries and other portions within the reasonable control of Purchaser and its subsidiaries will comply in all material respects with the provisions of the Exchange Act and the rules and regulations thereunder. The Form S-4 will comply in all material respects with the provisions of the Securities Act and the rules and regulations thereunder.


        4.6
    Financial Statements and Reports.     

A-33


Table of Contents

        4.7    Taxes.    

A-34


Table of Contents


        4.8
    Absence of Certain Changes.     


        4.9
    Litigation and Other Proceedings.     Except as would not reasonably be expected to have a Purchaser Material Adverse Effect or would not reasonably be expected to prevent, impair or materially delay the ability of Purchaser to consummate the Merger, there is no suit, action, investigation, claim, proceeding or review pending, or to the knowledge of Purchaser, threatened against it or any of its subsidiaries or any of the current or former directors or executive officers of it or any of its subsidiaries. There is no material injunction, order, award, judgment, settlement, decree or regulatory restriction (other than regulatory restrictions of general application that apply to similarly situated companies) imposed upon or entered into by Purchaser, any of its subsidiaries or the assets of it or any of its subsidiaries.


        4.10
    No Undisclosed Liabilities.     Except as would not reasonably be expected to have a Purchaser Material Adverse Effect, and except for (i) those liabilities that are reflected or reserved against on the balance sheet of the Purchaser 10-K for the year ended December 31, 2013 (including any notes thereto), (ii) that were incurred or arose since December 31, 2013 in the ordinary course of business consistent with past practice of Purchaser, or (iii) liabilities incurred in connection with this Agreement and the transactions contemplated hereby, neither Purchaser nor any subsidiary of Purchaser has any liabilities of any nature (absolute, accrued, contingent, known, unknown or otherwise).


        4.11
    Compliance with Laws.     

A-35


Table of Contents

A-36


Table of Contents


        4.12
    Brokers and Finders.     There is no investment banker, broker or finder retained by or authorized to act on behalf of Purchaser, any of its subsidiaries or any of Purchaser's stockholders or affiliates who is entitled to any fee, commission or reimbursement of expenses from Purchaser or any of its subsidiaries in connection with the transactions contemplated hereby, other than Stephens Inc.


        4.13
    Risk Management; Derivatives.     Except as would not reasonably be expected to result in a Purchaser Material Adverse Effect:


        4.14
    No Vote Required.     No vote is required by the holders of any class or series of Purchaser's capital stock to approve and adopt this Agreement or the transactions contemplated hereby under applicable law or pursuant to the rules of any national securities exchange as a result of this Agreement or the transactions contemplated hereby.

        4.15    Reorganization.    Purchaser has not taken or agreed to take any action, and has no knowledge of any facts or circumstances, that would prevent or impede, or could reasonably be expected to prevent or impede, the Merger from qualifying as a "reorganization" within the meaning of Section 368(a) of the Code.


        4.16
    Community Reinvestment Act Compliance.     Purchaser and each of its subsidiaries that is an insured depositary institution is in compliance in all material respects with the applicable provisions of the Community Reinvestment Act of 1977 and the regulations promulgated thereunder and has received a Community Reinvestment Act rating of "satisfactory" in its most recently completed exam, and Purchaser has no knowledge of the existence of any fact or circumstance or set of facts or circumstances which would reasonably be expected to result in Purchaser or any such subsidiary having its current rating lowered.

A-37


Table of Contents


        4.17    Broker-Dealer and Other Regulated Subsidiaries.     Except as would not reasonably be expected to have a Purchaser Material Adverse Effect and except as disclosed on Forms ADV or BD filed with the SEC prior to the date of this Agreement, none of Purchaser, any of its subsidiaries nor to the knowledge of Purchaser any of their current directors, officers, employees, "associated persons" (as defined in the Exchange Act) or "associated persons" within the meaning of the Advisers Act is or within the past five years has been ineligible to serve as an investment adviser under the Advisers Act or as a broker-dealer or an associated person of a broker-dealer under Section 15(b) of the Exchange Act (including being subject to any "statutory disqualification" as defined in Section 3(a)(39) of the Exchange Act) or ineligible to serve in, or subject to any disqualification which would be the basis for any limitation on serving in, any of the capacities specified in Section 9(a) or 9(b) of the Investment Company Act.

        4.18    Financing.    Purchaser has, or will have at the Effective Time, sufficient cash, available lines of credit or other sources of immediately available funds to enable it to consummate the Merger pursuant to the terms of this Agreement, including to pay the Merger Consideration and to pay all related fees and expenses of Parent, Merger Sub and their respective representatives pursuant to this Agreement.


        4.19
    No Other Representations or Warranties.     Except for the representations and warranties made by Purchaser in this Article IV, neither Purchaser nor any other person makes any express or implied representation or warranty with respect to Purchaser, its subsidiaries, or their respective businesses, operations, assets, liabilities, conditions (financial or otherwise) or prospects, and Purchaser hereby disclaims any such other representations or warranties. In particular, without limiting the foregoing disclaimer, neither Purchaser nor any other person makes or has made any representation or warranty to Company or any of its affiliates or representatives with respect to (i) any financial projection, forecast, estimate, budget or prospect information relating to Purchaser, any of its subsidiaries or their respective businesses or (ii) except for the representations and warranties made by Purchaser in this Article IV, any oral or written information presented to Company or any of its affiliates or representatives in the course of their due diligence investigation of Purchaser, the negotiation of this Agreement or in the course of the transactions contemplated hereby.

ARTICLE V

COVENANTS RELATING TO CONDUCT OF BUSINESS

        5.1    Conduct of Business Prior to the Effective Time.     Except as expressly contemplated by or permitted by this Agreement, as set forth on Section 5.1 of the Company Disclosure Schedule, as required by applicable law, or with the prior written consent of Purchaser (such consent not to be unreasonably withheld, delayed or conditioned), during the period from the date of this Agreement to the earlier of the Effective Time and the termination of this Agreement in accordance with Article VIII, Company shall, and shall cause each of its subsidiaries to, (a) in all material respects conduct its business in the ordinary course consistent with past practice and (b) use commercially reasonable efforts to maintain and preserve intact its business organization and advantageous business relationships.


        5.2
    Company Forbearances.     Without limiting the generality of Section 5.1, except as described in Section 5.2 of the Company Disclosure Schedule, as required by applicable law or as expressly permitted or required by this Agreement, prior to the Effective Time or earlier termination of this Agreement, neither Company nor any subsidiary of Company will, without the prior written consent of Purchaser (such consent not to be unreasonably withheld, delayed or conditioned):

A-38


Table of Contents

A-39


Table of Contents

A-40


Table of Contents

A-41


Table of Contents


        5.3
    Purchaser Forbearances.     Except as described in Section 5.3 of the Purchaser Disclosure Schedule, as required by applicable law or as required by this Agreement, prior to the Effective Time or earlier termination of this Agreement, neither Purchaser nor any subsidiary of Purchaser will, without the prior written consent of Company:

ARTICLE VI

ADDITIONAL AGREEMENTS

        6.1    Regulatory Matters.     

A-42


Table of Contents

A-43


Table of Contents


        6.2
    Access to Information; Cooperation.     

A-44


Table of Contents


        6.3
    Stockholder Approval.     

A-45


Table of Contents


        6.4
    Voting of Shares.     Purchaser shall vote all shares of Company Stock owned by it on the Record Date (for avoidance of doubt, excluding any unissued shares that would be issuable pursuant to Purchaser's exercise of all or a portion of the Purchaser Warrant) or any of its affiliates in favor of adoption of this Agreement at the Company Stockholder Meeting.


        6.5
    Obligations of Merger Sub.     Purchaser shall take all action necessary to cause Merger Sub to perform its obligations under this Agreement and to consummate the Merger on the terms and conditions set forth in this Agreement.


        6.6
    NYSE Listing.     Purchaser shall use its reasonable best efforts to cause the shares of Purchaser Common Stock to be issued in the Merger to have been authorized for listing on the NYSE, subject to official notice of issuance, prior to the Effective Time.


        6.7
    Employee Matters.     

A-46


Table of Contents

A-47


Table of Contents


        6.8    Indemnification; Directors' and Officers' Insurance     

A-48


Table of Contents


        6.9
    Exemption from Liability Under Section 16(b).     Prior to the Effective Time, Purchaser and Company shall each take all such steps as may be necessary or appropriate to cause any disposition of shares of Company Common Stock or conversion of any derivative securities in respect of such shares of Company Common Stock, or any acquisition of shares of Purchaser Common Stock (including derivative securities with respect to shares of Purchaser Common Stock) in connection with the consummation of the transactions contemplated by this Agreement to be exempt under Rule 16b-3 promulgated under the Exchange Act.


        6.10
    No Solicitation.     

A-49


Table of Contents

A-50


Table of Contents

A-51


Table of Contents


        6.11
    Takeover Laws.     No party will take any action that would cause the transactions contemplated by this Agreement to be subject to requirements imposed by any Takeover Law or similar law and each of them will take all necessary steps within its control to exempt (or ensure the continued exemption of) those transactions from, or if necessary challenge the validity or applicability of, any applicable Takeover Law, as now or hereafter in effect.


        6.12
    Financial Statements and Other Current Information.     As soon as reasonably practicable after they become available, but in no event more than 15 days after the end of each calendar month ending after the date hereof, Company will furnish to Purchaser (a) consolidated financial statements (including balance sheets, statements of operations and stockholders' equity) of Company and its subsidiaries as of and for such month then ended, (b) internal management reports showing actual financial performance against plan and previous period, and (c) to the extent permitted by applicable law, any reports provided to Company's Board of Directors or any committee thereof relating to the financial performance and risk management of Company and any subsidiaries.


        6.13
    Notification of Certain Matters.     Company and Purchaser will give prompt notice to the other of any fact, event or circumstance known to it that (a) has had or is reasonably likely, individually or taken together with all other facts, events and circumstances known to it, to have a Company Material Adverse Effect, in the case of Company, or Purchaser Material Adverse Effect, in the case of Purchaser or (b) would cause or constitute a material breach of any of its representations, warranties,

A-52


Table of Contents

covenants or agreements contained herein that reasonably could be expected to give rise, individually or in the aggregate, to the failure of a condition in Article VII; provided, that any failure to give notice in accordance with the foregoing with respect to any change or event shall not be deemed to constitute a violation of this Section 6.13 or the failure of any condition set forth in Section 7.2 or 7.3 to be satisfied, or otherwise constitute a breach of this Agreement by the party failing to give such notice, in each case unless the underlying change or event would independently result in a failure of the conditions set forth in Section 7.2 or 7.3 to be satisfied.


        6.14
    Stockholder Litigation.     Except in connection with any litigation between Company and Purchaser or their respective affiliates, Company shall cooperate and consult with Purchaser in the defense or settlement of any shareholder litigation against Company and/or its directors or affiliates relating to the transactions contemplated by this Agreement and shall give due consideration to Purchaser's advice with respect to such litigation, and no such settlement shall be offered or agreed to without Purchaser's prior written consent. In furtherance of and without in any way limiting the foregoing, Company shall use reasonable best efforts to prevail in any such litigation so as to permit the consummation of the Merger in the manner contemplated by this Agreement.

        6.15    Transition.    Commencing following the date hereof, and in all cases subject to applicable law, Company shall, and shall cause its subsidiaries to reasonably cooperate with Purchaser and its subsidiaries to facilitate the integration of the parties and their respective businesses effective as of the Closing Date or such later date as may be determined by Purchaser; provided, that such integration process shall not in any way delay, impede or be a condition to the consummation of the Merger.


        6.16
    Purchaser Consent.     Purchaser hereby agrees that promptly following satisfaction of each of the conditions set forth in Section 7.1 and Section 7.2 it shall waive, in accordance with Section 9.1 of the Credit Agreement, compliance by Company with the terms of Section 6.4 of the Credit Agreement solely to the extent required to permit the Merger and the Bank Merger to be consummated without constituting a default of Company thereunder.


        6.17
    Letter Agreement.     The failure of the Letter Agreement to be in full force and effect in the form provided by Company to Purchaser prior to the execution of this Agreement at any time between the date of this Agreement and the Effective Time shall be deemed to be a failure of the closing condition set forth in Section 7.2(b). For the avoidance of doubt, this Section 6.17 shall not be interpreted to prevent, and shall not prevent, the Company from effecting a Change in Company Recommendation in accordance with Section 6.10(b) or the termination of the Letter Agreement in accordance with its terms.

ARTICLE VII

CONDITIONS PRECEDENT

        7.1    Conditions to Each Party's Obligation to Effect the Merger.     The respective obligations of the parties to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following conditions:

A-53


Table of Contents


        7.2
    Conditions to Obligations of Purchaser and Merger Sub.     The obligation of Purchaser and Merger Sub to effect the Merger is also subject to the satisfaction, or waiver by Purchaser, at or prior to the Effective Time, of the following conditions:

A-54


Table of Contents


        7.3
    Conditions to Obligations of Company.     The obligation of Company to effect the Merger is also subject to the satisfaction or waiver by Company at or prior to the Effective Time of the following conditions:

ARTICLE VIII

TERMINATION AND AMENDMENT

        8.1    Termination.    This Agreement may be terminated at any time prior to the Effective Time, whether before or after the Company Stockholder Approval is obtained:

A-55


Table of Contents

The party desiring to terminate this Agreement pursuant to clause (b), (c) or (d) of this Section 8.1 shall give written notice of such termination to the other party in accordance with Section 9.3, specifying the provision or provisions hereof pursuant to which such termination is effected.


        8.2
    Effect of Termination.     In the event of termination of this Agreement by either Company or Purchaser as provided in Section 8.1, this Agreement shall forthwith become void and have no effect, and none of Company, Purchaser, any of their respective affiliates or any of the officers or directors of any of them shall have any liability of any nature whatsoever under this Agreement, or in connection with the transactions contemplated by this Agreement, except that (i) Sections 6.2(b), 8.2, 8.3, 9.2, 9.3, 9.4, 9.6, 9.7, 9.8, 9.9, 9.10, 9.11 and 9.12 to the extent it relates to surviving provisions, shall survive any termination of this Agreement, and (ii) notwithstanding anything in this Agreement to the contrary, except Section 8.3(c), neither Company nor Purchaser shall be relieved or released from any liabilities or damages arising out of its willful breach of any provision of this Agreement (which the parties acknowledge and agree shall not be limited to reimbursement of expenses and out-of-pocket costs, and may include, to the extent proven, the benefit of the bargain lost by Company's stockholders (taking into consideration relevant matters, including other combination opportunities and the time value of money), which shall be deemed in such event to be damages of Company).

A-56


Table of Contents


        8.3    Fees and Expenses.     

        8.4    Amendment.    This Agreement may be amended by the parties, by action taken or authorized by their respective Boards of Directors and the special committee of the the Board of Directors of Company appointed to evaluate the terms of the transactions contemplated by this Agreement (the "Special Committee"), at any time before or after the Company Stockholder Approval; provided, however, that after the Company Stockholder Approval, there may not be, without further approval of such stockholders, any amendment of this Agreement that requires further approval under applicable law. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties.

A-57


Table of Contents


        8.5
    Extension; Waiver.     At any time prior to the Effective Time, the parties, by action taken or authorized by their respective Boards of Directors, and in the case of Company, the Special Committee, may, to the extent legally allowed, (a) extend the time for the performance of any of the obligations or other acts of the other party, (b) waive any inaccuracies in the representations and warranties contained in this Agreement or (c) waive compliance with any of the agreements or conditions contained in this Agreement; provided, however, that after the Company Stockholder Approval, there may not be, without further approval of such stockholders, any extension or waiver of this Agreement or any portion thereof that reduces the amount of or changes the form of consideration to be delivered to the holders of Company Common Stock hereunder or that otherwise required the approval of such shareholders under applicable law. Any agreement on the part of a party to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party, but such extension or waiver or failure to insist on strict compliance with an obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure.

ARTICLE IX

GENERAL PROVISIONS

        9.1    Closing.    On the terms and subject to conditions set forth in this Agreement, the closing of the Merger (the "Closing") shall take place at 10:00 a.m., New York City time, at the offices of Wachtell, Lipton, Rosen & Katz, counsel to Purchaser, on a date which shall be no later than three business days after satisfaction or waiver (subject to applicable law) of the latest to be so satisfied or waived of the conditions set forth in Article VII (other than those conditions that by their nature are to be satisfied or waived at the Closing but subject to the satisfaction or waiver of those conditions), unless extended by mutual agreement of the parties (the "Closing Date").


        9.2
    Nonsurvival of Representations, Warranties and Agreements.     None of the representations, warranties, covenants and agreements set forth in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time, except for Section 6.8 and for those other covenants and agreements contained in this Agreement that by their terms apply or are to be performed in whole or in part after the Effective Time.

        9.3    Notices.    All notices and other communications in connection with this Agreement shall be in writing and shall be deemed given if delivered personally, sent via facsimile (with confirmation), mailed by registered or certified mail (return receipt requested) or delivered by an express courier (with confirmation) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice):

A-58


Table of Contents

        9.4    Interpretation.    When a reference is made in this Agreement to Articles, Sections, Exhibits or Schedules, such reference shall be to an Article or Section of or Exhibit or Schedule to this Agreement unless otherwise indicated. The table of contents and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the words "include," "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation." All schedules and exhibits hereto shall be deemed part of this Agreement and included in any reference to this Agreement. If any term, provision, covenant or restriction contained in this Agreement is held by a court or a federal or state regulatory agency of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions and covenants and restrictions contained in this Agreement shall remain in full force and effect, and shall in no way be affected, impaired or invalidated. If for any reason such court or regulatory agency determines that any provision, covenant or restriction is invalid, void or unenforceable, it is the express intention of the parties that such provision, covenant or restriction be enforced to the maximum extent permitted.


        9.5
    Disclosure Schedule and SEC Document References.     The parties hereto agree that any reference in a particular Section of either the Company Disclosure Schedule or the Purchaser Disclosure Schedule shall only be deemed to be an exception to (or, as applicable, a disclosure for purposes of) (i) the representations and warranties (or covenants, as applicable) of the relevant party that are contained in the corresponding Section of this Agreement and (ii) any other representations and warranties (or covenants, as applicable) of such party that is contained in this Agreement, but only if the relevance of that reference as an exception to (or a disclosure for purposes of) such representations and warranties (or covenants, as applicable) would be readily apparent to a reasonable person who has read that reference and such representations and warranties (or covenants, as applicable), without any independent knowledge on the part of the reader regarding the matter(s) so disclosed. The mere inclusion of an item in either the Company Disclosure Schedule or the Purchaser Disclosure Schedule as an exception to a representation or warranty (or covenants, as applicable) shall not be deemed an admission that such item represents a material exception or material fact, event or circumstance or that such item has had or would reasonably be expected to have a Company Material Adverse Effect or Purchaser Material Adverse Effect, as applicable.

        9.6    Counterparts.    This Agreement may be executed in two or more counterparts (including by facsimile or other electronic means), all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each of the parties and delivered to the other party, it being understood that each party need not sign the same counterpart.

A-59


Table of Contents


        9.7
    Entire Agreement.     This Agreement (including the documents and the instruments referred to in this Agreement), together with the Confidentiality Agreement, constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, between the parties with respect to the subject matter of this Agreement, other than the Confidentiality Agreement.


        9.8
    Governing Law; Jurisdiction.     This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflicts of law rules of such state. The parties hereto agree that any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby (whether brought by any party or any of its affiliates or against any party or any of its affiliates) shall be brought in the Delaware Chancery Court or, if such court shall not have jurisdiction, any federal court located in the State of Delaware or other Delaware state court, and each of the parties hereby irrevocably consents to the jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. Without limiting the foregoing, each party agrees that service of process on such party as provided in Section 9.3 shall be deemed effective service of process on such party.


        9.9
    Waiver of Jury Trial.     Each party hereto acknowledges and agrees that any controversy that may arise under this Agreement is likely to involve complicated and difficult issues, and therefore each party hereby irrevocably and unconditionally waives any right such party may have to a trial by jury in respect of any litigation, directly or indirectly, arising out of, or relating to, this Agreement, or the transactions contemplated by this Agreement. Each party certifies and acknowledges that (a) no representative, agent or attorney of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver, (b) each party understands and has considered the implications of this waiver, (c) each party makes this waiver voluntarily, and (d) each party has been induced to enter into this Agreement by, among other things, the mutual waivers and certifications in this Section 9.9.

        9.10    Publicity.    Neither Company nor Purchaser shall, and neither Company nor Purchaser shall permit any of its subsidiaries to, issue or cause the publication of any press release or other public announcement with respect to, or otherwise make any public statement, or, except as otherwise specifically provided in this Agreement, any disclosure of nonpublic information to a third party, concerning the transactions contemplated by this Agreement without the prior consent (which shall not be unreasonably withheld or delayed) of Purchaser, in the case of a proposed announcement, statement or disclosure by Company, or Company, in the case of a proposed announcement, statement or disclosure by Purchaser; provided, however, that either party may, without the prior consent of the other party (but after prior consultation with the other party to the extent practicable under the circumstances) issue or cause the publication of any press release or other public announcement to the extent required by law or by the rules and regulations of the NYSE.


        9.11
    Assignment; Third-Party Beneficiaries.     Neither this Agreement nor any of the rights, interests or obligations under this Agreement shall be assigned by either of the parties (whether by operation of law or otherwise) without the prior written consent of the other party (which shall not be unreasonably withheld or delayed), provided that after the Effective Date each of Purchaser and Merger Sub may assign any of its rights or obligations to any controlled affiliate of Purchaser provided that the assignor remains liable for all of its obligations hereunder. Any purported assignment in contravention hereof shall be null and void. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of and be enforceable by each of the parties and their respective successors and permitted assigns. Except for Section 6.8, which is intended to benefit each Indemnified

A-60


Table of Contents

Party and his or her heirs and representatives, this Agreement (including the documents and instruments referred to in this Agreement) is not intended to and does not confer upon any person other than the parties hereto any rights or remedies under this Agreement.


        9.12
    Specific Performance.     The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms. It is accordingly agreed that the parties shall be entitled to an injunction or injunction to prevent breaches of this Agreement to enforce specifically the performance of the terms hereof (including the parties' obligations to consummate the Merger) specific performance of the terms hereof, this being in addition to any other remedies to which they are entitled at law or equity. The parties hereto further agree to waive any requirement for the securing or posting of any bond in connection with any such remedy.


        9.13
    Defined Terms.     For purposes of this Agreement the term:

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

A-61


Table of Contents

        IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written.

 
   
   
   

  HILLTOP HOLDINGS INC.

 

By:

 

/s/ JEREMY B. FORD


      Name:   Jeremy B. Ford

      Title:   President and Chief Executive Officer

 

PERUNA LLC

 

By:

 

/s/ JEREMY B. FORD


      Name:   Jeremy B. Ford

      Title:   President

 

SWS GROUP, INC.

 

By:

 

/s/ JAMES H. ROSS


      Name:   James H. Ross

      Title:   President and Chief Executive Officer

   

[Signature Page to Agreement and Plan of Merger]

A-62


Table of Contents


Annex B

[Letterhead of Sandler O'Neill & Partners, L.P.]

March 31, 2014

Special Committee of the Board of Directors
SWS Group, Inc.
1201 Elm Street, Suite 3500
Dallas, TX 75270

Ladies and Gentlemen:

        SWS Group Inc. (the "Company"), Hilltop Holdings Inc. ("Purchaser"), and Peruna LLC ("Merger Sub") are proposing to enter into an Agreement and Plan of Merger dated as of March 31, 2014 (the "Agreement"), pursuant to which the Company will be merged with and into Merger Sub (the "Merger"), with Merger Sub surviving the Merger as a subsidiary of Purchaser. Pursuant to the terms of the Agreement, upon the effective date of the Merger, each share of Company Common Stock (except for certain shares of Company Common Stock as specified in the Agreement), shall be converted into the right to receive, without interest, (i) .2496 shares of Purchaser Common Stock and (ii) an amount in cash equal to $1.94 (the right to receive the consideration described in clauses (i) and (ii) above, together with any cash to be paid in lieu of fractional Purchaser Common Stock, the "Merger Consideration"). Capitalized terms used herein without definition shall have the meanings assigned to them in the Agreement. The other terms and conditions of the Merger are more fully set forth in the Agreement. You have requested our opinion as to the fairness, from a financial point of view, of the Merger Consideration to the holders of Company Common Stock (other than Purchaser and Merger Sub).

        Sandler O'Neill & Partners, L.P., as part of its investment banking business, is regularly engaged in the valuation of financial institutions and their securities in connection with mergers and acquisitions and other corporate transactions. In connection with this opinion, we have reviewed, among other things: (i) the Agreement; (ii) certain publicly available financial statements and other historical financial information of the Company that we deemed relevant; (iii) certain publicly available financial statements and other historical financial information of Purchaser that we deemed relevant; (iv) certain internal financial information and other data relating to the business and financial prospects of the Company that were provided to us by the management of the Company and not publicly available, including financial forecasts and estimates prepared by the management of the Company (such forecasts, the "Company Forecasts"); (v) median publicly available analyst earnings estimates for Purchaser for the years ending December 31, 2014 through December 31, 2015, and a consensus long-term earnings growth rate for the years thereafter (vi) the pro forma financial impact of the Merger on Purchaser, based on assumptions relating to transaction expenses, purchase accounting adjustments and cost savings as discussed with senior management of Purchaser; (vii) the publicly reported historical price and trading activity for the Company's and Purchaser's common stock, including a comparison of certain financial and stock market information for the Company and Purchaser and similar publicly available information for certain other similar companies the securities of which are publicly traded; (viii) the financial terms of certain recent business combinations among other similar companies and related party transactions in the financial services industry, to the extent publicly available; (ix) the current market environment generally and the financial services environment in particular; and (x) such other information, financial studies, analyses and investigations and financial, economic and market criteria as we considered relevant. We also discussed with certain members of senior management of the Company the business, financial condition, results of operations and prospects of the Company and held similar discussions with certain members of senior management of Purchaser regarding the business, financial condition, results of operations and prospects of Purchaser.

B-1


Table of Contents

        In performing our review, we have relied upon the accuracy and completeness of all of the financial and other information that was available to us from public sources, that was provided to us by the Company or Purchaser or their respective representatives or that was otherwise reviewed by us and have assumed such accuracy and completeness for purposes of rendering this opinion without any independent verification or investigation. We have relied, at the direction of the Company, without independent verification or investigation, on the assessments of the management of the Company as to the Company's existing and future relationships with key employees and partners, clients, products and services and we have assumed, with your consent, that there will be no developments with respect to any such matters that would affect our analyses or opinion. We have further relied on the assurances of the respective managements of the Company and Purchaser that they are not aware of any facts or circumstances that would make any of such information inaccurate or misleading. We have been informed by the Company that certain provisions of a credit agreement to which the Company is a party may place significant constraints on the Company's ability to sell itself or certain of its assets. With respect to the Company Forecasts, we have assumed that they have been reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of the Company as to the future financial performance of the Company. We have not been asked to and have not undertaken an independent verification of any of such information and we do not assume any responsibility or liability for the accuracy or completeness thereof. We did not make an independent evaluation or appraisal of the specific assets, the collateral securing assets or the liabilities (contingent or otherwise) of the Company, Purchaser or any of their respective subsidiaries, or the collectability of any such assets, nor have we been furnished with any such evaluations or appraisals. We have assumed, with your consent, that the allowance for loan losses of Purchaser are adequate to cover such losses.

        We have also assumed that there has been no material change in the Company's assets, financial condition, results of operations, business or prospects since the date of the most recent financial statements made available to us. We have assumed in all respects material to our analysis that the Company will remain as a going concern for all periods relevant to our analyses. We express no opinion as to any of the legal, accounting and tax matters relating to the Merger or any other related transactions contemplated by the Company.

        Sandler O'Neill used median publicly available earnings estimates and long-term growth rates for Purchaser in its analyses. The management of Purchaser confirmed to us that they reflected the best currently available estimates and judgments of the future financial performance of Purchaser, and we assumed that such performance would be achieved. With respect to the projections of transaction expenses, purchase accounting adjustments and cost savings discussed with the senior management of Purchaser, the management of Purchaser confirmed to us that they reflected the best currently available estimates and judgments of such management and we assumed that such performances would be achieved. We express no opinion as to such financial projections or the assumptions on which they are based. We have also assumed that there has been no material change in Purchaser's assets, financial condition, results of operations, business or prospects since the date of the most recent financial statements made available to us. We have assumed in all respects material to our analysis that Purchaser will remain as a going concern for all periods relevant to our analyses. We have also assumed, with your consent, that (i) each of the parties to the Agreement will comply in all material respects with all material terms of the Agreement and all related agreements, that all of the representations and warranties contained in such agreements are true and correct in all material respects, that each of the parties to such agreements will perform in all material respects all of the covenants required to be performed by such party under the agreements and that the conditions precedent in such agreements are not waived, (ii) in the course of obtaining the necessary regulatory or third party approvals, consents and releases with respect to the Merger, no delay, limitation, restriction or condition will be imposed that would have an adverse effect on the Company, Purchaser or the Merger and (iii) the Merger and any related transaction will be consummated in accordance with the

B-2


Table of Contents

terms of the Agreement without any waiver, modification or amendment of any material term, condition or agreement thereof and in compliance with all applicable laws and other requirements.

        Our opinion is necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to us as of, the date hereof. Events occurring after the date hereof could materially affect this opinion. We have not undertaken to update, revise, reaffirm or withdraw this opinion or otherwise comment upon events occurring after the date hereof. We express no opinion as to the trading values of Company Common Stock and Purchaser Common Stock after the date of this opinion or what the value of Company Common Stock will be once it is actually received by the holders of Purchaser Common Stock.

        We have acted as financial advisor to the Special Committee of the Board of Directors of the Company in connection with the Merger and will receive a fee for our services, a substantial portion of which may be contingent upon consummation of the Merger. We will also receive a fee in connection with this fairness opinion. The Company has also agreed to indemnify us against certain liabilities arising out of our engagement. In the ordinary course of our business as a broker-dealer, we may purchase securities from and sell securities to the Company and Purchaser and their affiliates. We may also actively trade the equity and debt securities of the Company and Purchaser or their affiliates for our own account and for the accounts of our customers.

        This letter is directed to the Special Committee of the Board of Directors of the Company in connection with its consideration of the Merger and may also be relied on by the Board of Directors of the Company. This letter does not constitute a recommendation to any shareholder of the Company as to how such shareholder should vote at any meeting of shareholders called to consider and vote upon the Merger. Our opinion addresses the fairness of the Merger Consideration to the holders of Company Common Stock (other than Purchaser and Merger Sub), from a financial point of view. Our opinion does not address the underlying business decision of the Company to engage in the Merger, the form or structure of the Merger, the relative merits of the Merger as compared to any other alternative business strategies that might exist for the Company or the effect of any other transaction in which the Company might engage. This opinion has been approved by Sandler O'Neill's fairness opinion committee and does not address the amount of compensation to be received in the Merger by any Company officer, director or employee, if any, relative to the amount of compensation to be received by any other shareholder. Except as set forth in the letter agreement dated February 3, 2014, as amended, between the Company and Sandler O'Neill, our opinion is not to be quoted or referred to, in whole or in part, in a registration statement, prospectus or in any other document, nor shall this opinion be used for any other purposes, without Sandler O'Neill's prior written consent, which will not be unreasonably withheld.

        Based upon and subject to the foregoing, it is our opinion that, as of the date hereof, the Merger Consideration to be exchanged in the Merger is fair to the holders of Company Common Stock (other than Purchaser and Merger Sub) from a financial point of view.

Very truly yours,
/s/ Sandler O'Neill & Partners, L.P.

B-3


Table of Contents


Annex C

Section 262 of the General Corporation Law of the State of Delaware

§ 262. Appraisal rights.

        (a)   Any stockholder of a corporation of this State who holds shares of stock on the date of the making of a demand pursuant to subsection (d) of this section with respect to such shares, who continuously holds such shares through the effective date of the merger or consolidation, who has otherwise complied with subsection (d) of this section and who has neither voted in favor of the merger or consolidation nor consented thereto in writing pursuant to § 228 of this title shall be entitled to an appraisal by the Court of Chancery of the fair value of the stockholder's shares of stock under the circumstances described in subsections (b) and (c) of this section. As used in this section, the word "stockholder" means a holder of record of stock in a corporation; the words "stock" and "share" mean and include what is ordinarily meant by those words; and the words "depository receipt" mean a receipt or other instrument issued by a depository representing an interest in 1 or more shares, or fractions thereof, solely of stock of a corporation, which stock is deposited with the depository.

        (b)   Appraisal rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation to be effected pursuant to § 251 (other than a merger effected pursuant to § 251(g) of this title and, subject to paragraph (b)(3) of this section, § 251(h) of this title), § 252, § 254, § 255, § 256, § 257, § 258, § 263 or § 264 of this title:

C-1


Table of Contents

        (c)   Any corporation may provide in its certificate of incorporation that appraisal rights under this section shall be available for the shares of any class or series of its stock as a result of an amendment to its certificate of incorporation, any merger or consolidation in which the corporation is a constituent corporation or the sale of all or substantially all of the assets of the corporation. If the certificate of incorporation contains such a provision, the procedures of this section, including those set forth in subsections (d) and (e) of this section, shall apply as nearly as is practicable.

        (d)   Appraisal rights shall be perfected as follows:

C-2


Table of Contents

        (e)   Within 120 days after the effective date of the merger or consolidation, the surviving or resulting corporation or any stockholder who has complied with subsections (a) and (d) of this section hereof and who is otherwise entitled to appraisal rights, may commence an appraisal proceeding by filing a petition in the Court of Chancery demanding a determination of the value of the stock of all such stockholders. Notwithstanding the foregoing, at any time within 60 days after the effective date of the merger or consolidation, any stockholder who has not commenced an appraisal proceeding or joined that proceeding as a named party shall have the right to withdraw such stockholder's demand for appraisal and to accept the terms offered upon the merger or consolidation. Within 120 days after the effective date of the merger or consolidation, any stockholder who has complied with the requirements of subsections (a) and (d) of this section hereof, upon written request, shall be entitled to receive from the corporation surviving the merger or resulting from the consolidation a statement setting forth the aggregate number of shares not voted in favor of the merger or consolidation and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such written statement shall be mailed to the stockholder within 10 days after such stockholder's written request for such a statement is received by the surviving or resulting corporation or within 10 days after expiration of the period for delivery of demands for appraisal under subsection (d) of this section hereof, whichever is later. Notwithstanding subsection (a) of this section, a person who is the beneficial owner of shares of such stock held either in a voting trust or by a nominee on behalf of such person may, in such person's own name, file a petition or request from the corporation the statement described in this subsection.

        (f)    Upon the filing of any such petition by a stockholder, service of a copy thereof shall be made upon the surviving or resulting corporation, which shall within 20 days after such service file in the office of the Register in Chancery in which the petition was filed a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by the surviving or resulting corporation. If the petition shall be filed by the surviving or resulting corporation, the petition shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to

C-3


Table of Contents

the surviving or resulting corporation and to the stockholders shown on the list at the addresses therein stated. Such notice shall also be given by 1 or more publications at least 1 week before the day of the hearing, in a newspaper of general circulation published in the City of Wilmington, Delaware or such publication as the Court deems advisable. The forms of the notices by mail and by publication shall be approved by the Court, and the costs thereof shall be borne by the surviving or resulting corporation.

        (g)   At the hearing on such petition, the Court shall determine the stockholders who have complied with this section and who have become entitled to appraisal rights. The Court may require the stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Court may dismiss the proceedings as to such stockholder.

        (h)   After the Court determines the stockholders entitled to an appraisal, the appraisal proceeding shall be conducted in accordance with the rules of the Court of Chancery, including any rules specifically governing appraisal proceedings. Through such proceeding the Court shall determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors. Unless the Court in its discretion determines otherwise for good cause shown, interest from the effective date of the merger through the date of payment of the judgment shall be compounded quarterly and shall accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the effective date of the merger and the date of payment of the judgment. Upon application by the surviving or resulting corporation or by any stockholder entitled to participate in the appraisal proceeding, the Court may, in its discretion, proceed to trial upon the appraisal prior to the final determination of the stockholders entitled to an appraisal. Any stockholder whose name appears on the list filed by the surviving or resulting corporation pursuant to subsection (f) of this section and who has submitted such stockholder's certificates of stock to the Register in Chancery, if such is required, may participate fully in all proceedings until it is finally determined that such stockholder is not entitled to appraisal rights under this section.

        (i)    The Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving or resulting corporation to the stockholders entitled thereto. Payment shall be so made to each such stockholder, in the case of holders of uncertificated stock forthwith, and the case of holders of shares represented by certificates upon the surrender to the corporation of the certificates representing such stock. The Court's decree may be enforced as other decrees in the Court of Chancery may be enforced, whether such surviving or resulting corporation be a corporation of this State or of any state.

        (j)    The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a stockholder, the Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, to be charged pro rata against the value of all the shares entitled to an appraisal.

        (k)   From and after the effective date of the merger or consolidation, no stockholder who has demanded appraisal rights as provided in subsection (d) of this section shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the effective date of the merger or consolidation); provided, however, that if no petition for an appraisal shall be filed within the time provided in subsection (e) of this section, or if such stockholder shall deliver to the surviving or resulting corporation a written withdrawal of such stockholder's demand for

C-4


Table of Contents

an appraisal and an acceptance of the merger or consolidation, either within 60 days after the effective date of the merger or consolidation as provided in subsection (e) of this section or thereafter with the written approval of the corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed as to any stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just; provided, however that this provision shall not affect the right of any stockholder who has not commenced an appraisal proceeding or joined that proceeding as a named party to withdraw such stockholder's demand for appraisal and to accept the terms offered upon the merger or consolidation within 60 days after the effective date of the merger or consolidation, as set forth in subsection (e) of this section.

        (l)    The shares of the surviving or resulting corporation to which the shares of such objecting stockholders would have been converted had they assented to the merger or consolidation shall have the status of authorized and unissued shares of the surviving or resulting corporation.

C-5


Table of Contents

ANNEX D

    EFiled: Jun 10 2014 06:56PM
Transaction ID 55574317
Case No. 9516-VCG
 
LOGO


IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

    IN RE SWS GROUP, INC.                          )
    STOCKHOLDER LITIGATION                )
  CONSOLIDATED
C.A. No. 9516-VCG
   


VERIFIED CONSOLIDATED AMENDED CLASS ACTION COMPLAINT

        Plaintiffs Joseph Arceri and Chaile Steinberg, by their undersigned attorneys, for this Verified Consolidated Amended Class Action Complaint against defendants, allege upon personal knowledge with respect to themselves, and upon information and belief based upon, inter alia, the investigation of counsel as to all other allegations herein, as follows:


NATURE OF THE ACTION

        1.     This is a class action brought on behalf of the public stockholders of SWS Group Inc. ("SWS" or the "Company") against SWS and its Board of Directors (the "Board" or the "Individual Defendants"), to enjoin a proposed transaction announced on April 1, 2014 (the "Proposed Transaction"), pursuant to which SWS will be acquired by Hilltop Holdings Inc. ("Parent") that already owns 24% of the Company's outstanding shares, and Hilltop's direct, wholly-owned subsidiary, Peruna LLC ("Merger Sub," and collectively with Parent, "Hilltop").

        2.     On March 31, 2014, the Board caused SWS to enter into a definitive agreement and plan of merger (the "Merger Agreement"), pursuant to which SWS will merge with and into Merger Sub to become a wholly-owned subsidiary of Parent (the "Merger"). At the effective time of the Merger, each outstanding share of SWS common stock will be converted into the right to receive 0.2496 shares of Parent common stock and $1.94 in cash (the "Merger Consideration"), in a transaction valued at only $7.88 per share based on Parent's closing price on March 31, 2014.

        3.     The portion of the Merger Consideration that includes Parent stock also did not include any type of "collar" or limitation on the value of Parent's stock for SWS stockholders. Therefore, the value to SWS stockholders remains uncertain, and SWS stockholders may in fact receive even less than the $7.88 per share value, or already meager 4% premium, if Parent's stock price declines from its March 31, 2014 price before the stockholder vote.

        4.     The Proposed Transaction was announced at a time when SWS, the largest full-service brokerage firm headquartered in the southwestern United States, is on the brink of renewed and substantial growth. Despite the Company's prospects for future growth and success, the Company entered into the Merger Agreement with Hilltop following a flawed process that was tilted in favor Hilltop and the inadequate Proposed Transaction.

        5.     Importantly, in May 2011, SWS entered into a funding agreement with Hilltop, Oak Hill Capital Partners III, L.P., and Oak Hill Capital Management Partners III, L.P (collectively, "Oak Hill"), pursuant to which Hilltop and Oak Hill agreed to loan SWS $50 million (the "2011 Loan"). In exchange for the loan, SWS issued Hilltop and Oak Hill a warrant to purchase 8,695,652 Company shares at an exercise price of $5.75, and SWS agreed to appoint a representative from each of Hilltop and Oak Hill to the Board and to provide each company with the right to appoint a non-voting observer to the Board. Defendants Gerald J. Ford ("Ford") and J. Taylor Crandall ("Crandall") subsequently were appointed to the Board by Hilltop and Oak Hill, respectively. In addition, Hilltop's President and Chief Executive Officer ("CEO"), Jeremy Ford (Ford's son), and Oak Hill partner, Scott Kaufman, were appointed as non-voting Board overseers.

D-1


Table of Contents

        6.     The terms of the 2011 Loan Credit Agreement (the "Credit Agreement") include a covenant prohibiting SWS from undergoing a "Fundamental Change," which includes any merger, amalgamation, or consolidation, and which SWS would breach by engaging in a merger, amalgamation, or consolidation unless compliance was waived by each of Hilltop and Oak Hill ("Merger Covenant").1

        7.     As discussed herein, Hilltop has refused to waive this Fundamental Change provision, would not meet with any third parties to even discuss it or any other potential transaction, and threatened to publicly withdraw its offer and its Board representative, defendant Ford, unless the Board agreed to its offer by March 31, 2014, even though the Company was in discussions with other parties that made higher offers for SWS and which had not been granted and completed due diligence. Hilltop's bullying tactics and coercive influence over the Board resulted in a fundamentally flawed sales process and an unfair and inadequate Proposed Transaction that deprives SWS stockholders of the value of their stock.

        8.     Remarkably, the Board agreed to the meager Merger Consideration, despite the fact that Esposito Global, LLC ("Esposito Global") along with Party B made a higher offer to acquire the Company at $8.00 per share in cash, which remained in play until the Board agreed to the Proposed Transaction. Also, according to the Form S-4 filed by defendants with the United States Securities and Exchange Commission ("SEC") on May 29, 2014 (the "S-4"), an unidentified, strategic Party A made an offer for as much as $8.65 on March 27, 2014. Neither of these parties, however, received the same due diligence or inside information about SWS that Hilltop did through its representation on the Board and through the lending agreement that likely also required the Company to provide its lenders with certain non-public information.

        9.     The 2011 Loan, its Fundamental Change covenant which Hilltop refused to waive, the Hilltop and Oak Hill appointments to the SWS Board, the "force the vote" provision, the lack of support from SWS's large stockholders (Hilltop), the "no solicitation" provision that prevented SWS from seeking alternative to the Proposed Transaction, "matching rights" to Hilltop that granted Hilltop the ability to match (not top) a "superior proposal," and Hilltop's refusal to accept a possible two-tier termination fee all worked to lock in control for Hilltop and created a chilling effect on potential competing and superior offers.

        10.   In fact, according to the S-4, the CEO of Party A indicated that Party A would not agree to a transaction with SWS if Hilltop did not agree to waive the merger covenant because Party A was concerned about the risk of litigation in the event Party A executed a definitive agreement with SWS without such waiver. Party A also requested an extension of time from the deadline Hilltop imposed on the Board of March 31, 2014, particularly with respect to exploring possible transaction structures that would eliminate the need for a waiver from Hilltop and in order to complete due diligence as it had only been granted access to certain confidential information days earlier. However, the Special Committee indicated that any alternative structure would require Party A to raise its offer to $9.00 per share of SWS, and the Board refused to extend the deadline for any third parties beyond March 31, 2014.

        11.   The chilling effect of these agreements are further explicitly stated in the Background of the Merger section of the S-4:


1
All emphasis added unless otherwise indicated.

D-2


Table of Contents

        12.   In fact, the Proposed Transaction's "force the vote" provision requires SWS to submit the Merger Agreement to a vote of SWS's stockholders even if the SWS Board changes its recommendation with respect to the Merger—and would therefore not have a standalone termination right in the event it wished to enter into an agreement with a third party with respect to a superior proposal.

        13.   In addition, Hilltop refused to include in the Proposed Transaction a possible two-tier termination fee that would provide for a lower payment in the event that the fee became payable because SWS executed an agreement with Party A.

        14.   The Proposed Transaction is the product of a flawed process that resulted in the Board's failure to maximize stockholder value and deprives SWS's public stockholders of the ability to participate in the Company's long-term prospects. Furthermore, in approving the Merger Agreement, the Individual Defendants breached their fiduciary duties to plaintiffs and the Class (defined herein). Moreover, as alleged herein, SWS and Hilltop aided and abetted the Individual Defendants' breaches of fiduciary duties.

        15.   Compounding the unfairness of the Proposed Transaction is defendants' attempt to obtain stockholder approval of the Proposed Transaction through materially incomplete and misleading disclosures in the S-4. The S-4 is deficient and misleading in that it fails to provide adequate disclosure of all material information related to the Proposed Transaction.

        16.   Plaintiffs seek enjoinment of the Proposed Transaction or, alternatively, rescission of the Proposed Transaction in the event defendants are able to consummate it.


PARTIES

        17.   Plaintiffs are, and have been continuously throughout all times relevant hereto, the owner of SWS common stock.

        18.   Defendant SWS is a Delaware corporation and maintains its principal executive offices at 1201 Elm Street, Suite 3500, Dallas, Texas 75270. SWS's common stock is traded on the NYSE under the ticker symbol "SWS."

        19.   Defendant Ford has served as a SWS director since 2011. Ford is a member of the Nominating/Corporate Governance Committee. Ford has served as a director of Hilltop since 2005 and as Chairman of Hilltop's board of directors since 2007. In addition, Ford served as interim CEO of Hilltop from January 1, 2010 to March 11, 2010.

        20.   Defendant James H. Ross has served as a SWS director and as President and Chief Executive Officer ("CEO") since 2010.

D-3


Table of Contents

        21.   Defendant J. Taylor Crandall has served as a SWS director since 2011. Crandall is a member of the Nominating/Corporate Governance Committee. Crandall is a founding managing partner of Oak Hill Capital Management, LLC and has been with Oak Hill and its predecessors since 1986. Crandall was appointed to the Board by Oak Hill in connection with Oak Hill's investment in the Company in 2011, as described more fully herein.

        22.   Defendant Joel T. William III ("Williams") has served as a SWS director since 2009 and is Chairman of the Board. Williams is a member of the Audit Committee and the Nominating/Corporate Governance Committee.

        23.   Defendant Brodie L. Cobb ("Cobb") has served as a SWS director since 1999. Cobb is a member of the Compensation Committee.

        24.   Defendant Mike Moses ("Moses") has served as a SWS director since 2006.

        25.   Defendant Christie S. Flanagan ("Flanagan") has served as a SWS director since 2011. Flanagan is a member of the Audit Committee and the Compensation Committee. Flanagan was executive vice president and general counsel of California Federal Bank and its predecessor, First Nationwide Bank, which was owned by a consortium led by Individual Defendant Ford.

        26.   Defendant Tyree B. Miller ("Miller") has served as a SWS director since 2011 and is a member of the Audit Committee.

        27.   Defendant Robert A. Buchholz ("Buchholz") has served as a SWS director since 2008.

        28.   Defendant Larry A. Jobe ("Jobe") has served as a SWS director since 2005. Jobe is a member of the Audit Committee and the Compensation Committee.

        29.   The defendants identified in paragraphs seventeen through twenty-six are collectively referred to herein as the "Individual Defendants." By virtue of their positions as directors and/or officers of SWS, the Individual Defendants are in a fiduciary relationship with plaintiffs and the other public stockholders of SWS.

        30.   Each of the Individual Defendants at all relevant times had the power to control and direct SWS to engage in the misconduct alleged herein. The Individual Defendants' fiduciary obligations required them to act in the best interest of plaintiffs and all SWS stockholders.

        31.   Each of the Individual Defendants owes fiduciary duties of loyalty, good faith, due care, and full and fair disclosure to plaintiffs and the other members of the Class. The Individual Defendants are acting in concert with one another in violating their fiduciary duties as alleged herein, and, specifically, in connection with the Proposed Transaction.

        32.   The Company's public stockholders must receive the maximum value for their shares through the Proposed Transaction. Plaintiffs allege herein that the Individual Defendants, separately and together, in connection with the Proposed Transaction, violated, and are continuing to violate, the fiduciary duties they owe to plaintiffs and the Company's other public stockholders, due to the fact that they have engaged in all or part of the unlawful acts, plans, schemes, or transactions complained of herein.

        33.   Defendant Parent is a Maryland corporation with its corporate headquarters located at 200 Crescent Court, Dallas, Texas 75201. Ford serves as Chairman of Parent's board of directors and Ford's son, Jeremy Ford, serves as Parent's President and CEO.

        34.   Defendant Merger Sub is a Delaware corporation and a direct, wholly-owned subsidiary of Parent.

D-4


Table of Contents


CLASS ACTION ALLEGATIONS

        35.   Plaintiffs bring this action as a class action, pursuant to Court of Chancery Rule 23, on behalf of themselves and the other public stockholders of SWS (the "Class"). Excluded from the Class are defendants herein and any person, firm, trust, corporation, or other entity related to or affiliated with any defendant.

        36.   This action is properly maintainable as a class action.

        37.   The Class is so numerous that joinder of all members is impracticable. As of February 3, 2014, there were approximately 33,068,118 shares of SWS common stock outstanding, held by hundreds, if not thousands, of individuals and entities scattered throughout the country.

        38.   Questions of law and fact are common to the Class, including, among others: (i) whether defendants have breached their fiduciary duties owed to plaintiffs and the Class; and (ii) whether defendants will irreparably harm plaintiffs and the other members of the Class if defendants' conduct complained of herein continues.

        39.   Plaintiffs are committed to prosecuting this action and have retained competent counsel experienced in litigation of this nature. Plaintiffs' claims are typical of the claims of the other members of the Class and plaintiffs have the same interests as the other members of the Class. Accordingly, plaintiffs are adequate representatives of the Class and will fairly and adequately protect the interests of the Class.

        40.   The prosecution of separate actions by individual members of the Class would create the risk of inconsistent or varying adjudications that would establish incompatible standards of conduct for defendants, or adjudications that would, as a practical matter, be dispositive of the interests of individual members of the Class who are not parties to the adjudications or would substantially impair or impede those non-party Class members' ability to protect their interests.

        41.   Defendants have acted, or refused to act, on grounds generally applicable to the Class as a whole, and are causing injury to the entire Class. Therefore, final injunctive relief on behalf of the Class is appropriate.


SUBSTANTIVE ALLEGATIONS

        42.   SWS is a diversified financial services holding company that provides a range of investment banking, commercial banking, and related financial services in the United States. It was founded in 1972 and is headquartered in Dallas, Texas, and serves corporate, individual, and institutional investors; broker/dealers; governmental entities; and financial intermediaries.

D-5


Table of Contents

        43.   The Company operates through four segments: Clearing, Retail, Institutional, and Banking. The Clearing segment provides clearing and execution services for other broker/dealers comprising general securities broker/dealers and firms specializing in high-volume trading. It also offers tailored services, including recordkeeping, trade reporting, accounting, general back-office support, securities and margin lending, reorganization assistance, and custody of securities. The Retail segment 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. It also sells insurance and annuity products to its retail customers; managed accounts; and margin lending programs. The Institutional segment serves institutional customers in the areas of securities borrowing and lending, municipal finance, investment banking, and fixed income sales and equity trading. The Banking segment provides traditional banking products and services through nine full-service banking centers located in Texas. It also offers checking, savings, money market, and certificates of deposit products; business and consumer loans; Internet banking and online bill payment services; and commercial, commercial real estate, and residential mortgage loans.

        44.   During 2010, as a result of the recession, the Company's Banking segment performed poorly. On March 15, 2011, Sterne Agee Group, Inc. ("Sterne Agee") submitted an unsolicited offer to acquire the Company for $6.25 per share. The Board rejected this proposal, and instead, elected to enter into a funding agreement with Hilltop and Oak Hill, pursuant to which Hilltop and Oak Hill agreed to loan SWS $50 million. In connection with the loan, SWS was likely required to provide Hilltop and Oak Hill certain non-public information about SWS in order for them to perform their due diligence in agreeing to lend SWS money, and in order for them to continue to be apprised regularly of the Company's financial viability to pay back the loan. In exchange for the loan, SWS issued Hilltop and Oak Hill a warrant to purchase 8,695,652 Company shares at an exercise price of $5.75, and SWS agreed to appoint a representative from each of Hilltop and Oak Hill to the Board and to provide each company with the right to appoint a non-voting observer to the Board.

        45.   On April 28, 2011, Sterne Agee increased its offer price to $7.50 per share. The Board again rejected Sterne Agee's proposal and publically announced that Sterne Agee's offer was "opportunistic" and was "a substantial discount to SWS's book value."

        46.   On May 18, 2011, the funding agreement with Hilltop and Oak Hill was approved, and Ford and Crandall subsequently were appointed to the Board by Hilltop and Oak Hill, respectively. In addition, Hilltop's President and CEO, Jeremy Ford (Ford's son), and Oak Hill partner, Scott Kaufman, were appointed as non-voting Board overseers.

        47.   On July 29, 2011, SWS completed the following transactions:

        48.   Hilltop's warrant to acquire SWS common stock is exercisable for five years from the date of issuance and has a fixed exercise price of $5.75 per share, subject to anti-dilution adjustments. In addition to the 8,695,652 shares of SWS issuable to Hilltop upon exercise of its warrant, Hilltop holds an additional 1,475,387 shares of SWS common stock as of the date of this proxy statement/prospectus. Hilltop currently beneficially owns 24% of SWS common stock, inclusive of the warrant.

D-6


Table of Contents

        49.   The Merger Covenant of the Credit Agreement prohibits SWS from undergoing a "Fundamental Change" including any merger, amalgamation or consolidation unless compliance is waived by both Hilltop and Oak Hill. The Credit Agreement also prohibits SWS from prepaying the loan other than following a period during which the closing price for SWS common stock exceeds 150% of the exercise price of the warrants (or $8.625) for twenty out of any thirty consecutive trading days.

        50.   Since receiving the $50 million loan from Hilltop and Oak Hill, the Company has performed well.

        51.   On November 5, 2013, the Company issued a press release announcing its financial results for the first quarter of fiscal year 2014. There, the Company reported that net income of $323,000, or $0.01 per diluted share, for its first quarter of fiscal 2014 on net revenues of $69.0 million.

        52.   The Company also posted a 17% decrease in operating expenses, or $14.3 million, as compared to the same quarter last fiscal year, primarily due to a $10.2 million decrease in the change in value of the Company's outstanding warrants, a $2.2 million decrease in other expenses, and a $1.7 million decrease in commissions and other employee compensation expense. In addition, for the three months ended September 30, 2013, the Company recorded a $2.0 million gain on the warrant valuation, as compared to an $8.2 million loss on the warrant valuation for the three months ended September 28, 2012.

        53.   After reducing its staff by seven percent during the quarter, the CEO of SWS, Individual Defendant Ross, stated that "[w]e took action in the first quarter by reducing staffing levels across all of our business lines to better align expenses with current revenues, while still allowing us to provide clients with the superior service they have come to expect." Ross went on to state that "[w]e are focused on enhancing our shareholder returns and will continue to pursue additional opportunities to achieve this objective, through both targeted cost-cutting efforts and revenue growth initiatives."

        54.   On February 5, 2014, the Company issued a press release announcing its financial results for the second quarter of fiscal 2014. There, the Company reported that it achieved net revenues of $68.5 million. With respect to the Company's Clearing segment, SWS reported pre-tax income of $1.3 million on net revenues of $5.3 million in the fiscal 2014 second quarter, as compared to a pre-tax loss of $115,000 on net revenues of $4.7 million in the second quarter of fiscal 2013. With respect to the Company's Retail segment, SWS reported pre-tax income of $3.0 million on net revenues of $28.1 million, as compared to pre-tax income of $528,000 on net revenues of $26.1 million in the second quarter of fiscal 2013. With respect to the Company's Institutional segment, SWS reported pre-tax income of $5.9 million on net revenues of $27.3 million in the fiscal 2014 second quarter. With respect to the Company's Banking segment, SWS reported pre-tax income of $5.3 million on net revenues of $10.5 million in the fiscal 2014 second quarter, as compared to net income of $3.0 million on net revenues of $11.8 million in the second quarter of fiscal 2013.

        55.   With respect to the Company's positive financial results, Ross stated:

D-7


Table of Contents

The Board Acquiesces to Hilltop's Coercive Tactics and Conducts a Flawed Sales Process

        56.   Despite the Company's prospects for future growth and success, the Board was bullied by Hilltop throughout the process and was forced into accepting Hilltop's unfair and inadequate Proposed Transaction.

        57.   On January 9, 2014, Hilltop's President and CEO, Jeremy Ford (the Hilltop-appointed observer of the Board), sent a letter to Ross expressing Hilltop's interest in acquiring the Company for $7.00 per share, split equally in cash and Hilltop stock. Hilltop publicized its offer in a press release and in a Schedule 13D.

        58.   On January 13, 2014, Lone Star Value Management, LLC (together with its affiliates, "Lone Star"), which currently owns 800,000 shares of SWS, sent a critical letter to the Board expressing its opinion that the consideration offered by Hilltop was well below the Company's book value and did not take into consideration the synergies that would result from the merger. Lone Star also expressed its concern that Hilltop would exert its significant leverage, through its 24% equity stake in SWS, to force the Board to accept the deal. Lone Star then requested that the Board establish a special committee to consider Hilltop's proposal as well as to explore other alternatives.

        59.   On February 3, 2014, the Company announced that the Board established a special committee (the "Special Committee"), comprised of defendants Buchholz, Williams, and Miller in a press release.

        60.   On February 12, 2014, Esposito Global submitted an offer to the Board to acquire the Company for $8.00 per share in cash, $1.00 per share more than Hilltop's initial offer and $0.12 more than the Merger Consideration offered in the Proposed Transaction. Later on February 18, 2014, Esposito Global publicized its offer and stated that it was contingent on third party financing.

        61.   Despite the publicized Hilltop offer and the fact that the Board had formed a special committee to review it, the Board determined that its financial advisor, Sandler O'Neill & Partners, L.P. ("Sander O'Neill"), should conduct a non-public process. Sander O'Neill contacted seventeen parties, including Party A, beginning on February 13, 2014, and received various unsolicited expressions of interest from third parties. However, not until the first of March, did the Special Committee amend its engagement with Sandler O'Neill to provide for an incentive fee to be paid to them if the price per share exceeded $7.75.

        62.   On February 14, 2014, the Special Committee requested that its legal counsel contact counsel to Hilltop to request a waiver of the Merger Covenant. On February 21, 2014, Hilltop responded that it would not grant a waiver of the Merger Covenant to permit a third party transaction.

        63.   On February 24, 2014, Esposito Global indicated to the Special Committee's counsel that it was in the process of assembling the resources to meet the applicable regulatory requirements and to pay the purchase price. Just a few days later, it was teaming up with established bank holding company, Party B.

        64.   On February 26, 2014, Oak Hill indicated that, provided it was made whole in accordance with the Credit Agreement without payment of any addition consideration, it would likely waive the Merger Covenant.

        65.   In late February, Party A stated it would be making an offer approximate to the Company's book value of $8.15 per share, which it confirmed.

        66.   However, even after the Special Committee informed Hilltop that its $7.00 offer was too low and that SWS had received offers equal to its fully diluted book value of $8.15 per share, Hilltop still refused to waive the Merger Covenant with respect to a transaction with a third party at that value and rejected that type of valuation for the Company.

D-8


Table of Contents

        67.   On March 5, 2014, Esposito Global and Party B indicated that they could not confirm their offer until they received due diligence and arranged the required financing, which would require several weeks. However, they were still not granted access to due diligence. Similarly, when Party A requested due diligence, the Special Committee determined that it should only have access to a select group of SWS employees and representatives due to competitive concerns. By contrast, however, on March 15, 2014, Hilltop executed a non-disclosure agreement ("NDA") with SWS to provide for the sharing of confidential information in connection with a proposed offer.

        68.   On March 17, 2014, Party A specifically inquired whether Hilltop would waive the Merger Covenant. Sandler O'Neill informed it that Hilltop would not and this was subsequently confirmed by Hilltop's financial advisor directly to Party A. At this time, Party A stated that its offer would be for $8.00 per share but could be potentially higher.

        69.   On March 19, 2014, Hilltop submitted a revised offer to SWS to acquire all of the outstanding common stock of SWS that Hilltop did not already own at a price of $7.50 per share, composed of 25% cash and 75% Hilltop common stock and stated its impatience with the process and that it was anxious to move quickly with a potential transaction.

        70.   On March 19, 2014, the Special Committee held a meeting discussing the Fundamental Change provision and concluding that while there might be possible ways to address the Fundamental Change provision in connection with a transaction involving a party other than Hilltop, it was recognized that these approaches entailed litigation risk and therefore that any such structures would involve closing risk.

        71.   Based on the fear that Hilltop may withdraw its offer, the Special Committee pressed Hilltop to raise its offer to $7.75 per share, which it did on March 20, 2014, composed of 25% cash and 75% Hilltop common stock. The Special Committee determined at this time, even though the $8.00 offers were still looming from Party A and Esposito Global/Party B, that it was in "the best interests of SWS stockholders to move forward" with Hilltop.

        72.   On March 20, 2014, despite weeks of Esposito Global/Party B reiterating that it would need a certain amount of time to conduct due diligence and secure financing before affirming their offer, the Special Committee informed Party B that it was not comfortable with the uncertainty surrounding their timeline.

        73.   On March 24, 2014, after the Special Committee informed Hilltop that it intended to sign a NDA with another party that was making a higher offer, Hilltop again stated that it would not waive the Merger Covenant, and threatened that if a definitive agreement was not reached by March 31, 2014, Hilltop would withdraw its offer and Ford would resign from the Board. The Special Committee discussed how the withdrawal of Hilltop's was a risk and held potentially negative and significant consequences for SWS stockholders.

        74.   At the end of March, the Special Committee determined that, although Party had indicated its resistance to signing a NDA with standstill provisions that would restrict its ability to make alternative proposals and transactions with the Company, it would only move forward with Party A on a parallel track to Hilltop if it signed such a NDA with these provisions. On March 25, 2014, Party A relented and signed the NDA containing the standstill provision.

        75.   On March 26, 2014, the Special Committee considered various structures including regarding the exchange ratio for the shares, a force the vote provision and a requirement of a majority of SWS disinterested stockholders approving the transaction ("majority of the minority"). Hilltop later insisted on the force the vote provision and rejected a majority of the provision. It also rejected the Special Committee's suggestion of a two-tier termination that would provide for a lower termination fee payable if SWS executed an agreement with Party A.

D-9


Table of Contents

        76.   On March 27, 2014, Party A increased its offer to acquire SWS for $8.65 per share, subject to its satisfactory completion of due diligence, and requested that the Company extend its March 31, 2014 deadline. Party A also sought that certain employee retention agreements be in place ahead of a definitive agreement, but the Special Committee rejected this and additional due diligence that Party A requested relating to this.

        77.   On March 29, 2014, Oak Hill's counsel stated that it would waive the Merger Covenant.

        78.   On March 30, 2014, the Special Committee inquired whether Party A would be willing to agree to a transaction for $9.00 per share which would be sufficient to avoid a need to Hilltop's waiver of the Merger Covenant. However, the Chief Executive Officer of Party A stated that it would not and indicated that Party A would not agree to a transaction with SWS if Hilltop did not agree to waive the Fundamental Change provision because Party A was concerned about the risk of litigation in the event Party A executed a definitive agreement with SWS.

        79.   On March 31, 2014, the Special Committee received a letter from Party A confirming that Party A would not be able to execute a definitive agreement with SWS that day because Party A was concerned about the need for Hilltop to waive the Merger Covenant, the risk of litigation in the event that Party A executed a definitive agreement with SWS without such a waiver, the lack of support from large stockholders, such as Hilltop and Oak Hill, and additional time needed to complete its due diligence

        80.   Based on this letter and prior conversations with Party A, the Special Committee concluded that there was no possibility that Party A would be able to enter into a definitive agreement by Hilltop's deadline of March 31, 2014. In addition, the Special Committee believed that Party A would not enter into a definitive agreement to acquire SWS without an explicit waiver by Hilltop of the Merger Covenant, which Hilltop had indicated repeatedly that it would refuse to grant. The Special Committee asked Hilltop to extend its deadline and to meet with Party A about a possible waiver of the Merger Agreement, but again Hilltop rejected both requests.

        81.   Later on March 31, 2014, the Special Committee unanimously adopted resolutions recommending that the SWS Board adopt and approve the Merger Agreement and Proposed Transaction with Hilltop. That same day the SWS Board approved and adopted the Merger Agreement and approved the Proposed Transaction.

        82.   The glaring inadequacies of the process and resulting Proposed Transaction, immediately caught the ire of certain of SWS large stockholders, including Lone Star, who has expressed concern over entire process leading to Proposed Transaction in letter to the Board referring to the "deeply flawed process," and stating:

The Proposed Transaction and Inadequate Price

        83.   On April 3, 2014, SWS filed a Form 8-K with the U.S. Securities and Exchange Commission ("SEC"), attaching as Exhibit 2.1 the Merger Agreement.

        84.   Despite the fact that the Company received a higher all-cash offer from both Esposito Global and Party A to acquire the Company, the Company entered into the Merger Agreement on March 31, 2014, pursuant to which SWS will merge with and into Merger Sub and thereby become a wholly-owned subsidiary of Parent with the Company's stockholders receiving only 0.2496 shares of Hilltop common stock and $1.94 in cash.

D-10


Table of Contents

        85.   The consideration to be paid to plaintiffs and the Class in the Proposed Transaction is unfair and inadequate because, among other things, the intrinsic value of SWS is materially in excess of the amount offered in the Proposed Transaction.

        86.   The Proposed Transaction is valued at only $7.88 per share based on Hilltop's closing price on March 31, 2014. This price is significantly below both the $8.00 offer by Esposito Global and almost a full dollar below the $8.65 offer by Party A. The meager premium, which at the time of the announcement of the Proposed Transaction was only 15% compared to the stock price the day before the announcement, is very minimal compared to the 30% premium for comparable acquisitions.

        87.   In addition, an analyst at Keefe, Buyette & Woods also set a price target for the Company at $8.00 per share on January 12, 2014. Further, the Company's stock price closed at $8.19 per share on February 20, 2014.

        88.   Hilltop's book value is significantly in excess to the Proposed Transaction, which Party A estimated around $8.15 per share as part of its offer and ahead of receiving confidential due diligence that it had not completed at time of the announcement of the Proposed Transaction. According to Bloomberg, with respect to the two main metrics used to evaluate the value of transactions, SWS stockholders are receiving only 6.16x EBITDA and 0.82x Book Value, as compared to the average of 22.18x EBITDA and 2.52x Book Value multiples obtained in recent comparable transactions with the past 12 months in the same industry. SWS ahead of the Proposed Transaction was trading at nearly a 40% discount to its book value.

        89.   Moreover, the majority of consideration paid to SWS stockholders will be in the form of Hilltop stock. Hilltop has far worse price-to-book and price-to-tangible book ratios than SWS. By paying in stock, Hilltop is using its expensive shares, laden with $343 million in worthless intangibles, to acquire undervalued SWS shares. Furthermore, the Proposed Transaction does not provide a collar or any limitation protection for SWS stockholders in the event that Hilltop's stock tumbles ahead of the vote on the Proposed Transaction.

        90.   In a letter to the Board dated April 7, 2014, Lone Star expressed its disappointment with the Board's decision to enter into the Proposed Transaction. In the letter, Lone Star stated: "after failing to run a proper auction process, it is clear that the Board has not fulfilled its fiduciary duty and has failed, for the second time in three years, to obtain maximum value for the long-suffering shareholders of SWS." Lone Star further stated that "SWS should at least be worth its book value per share, which, as of December 31, 2013, stood at $8.25 on a fully-diluted basis (assuming the exercise of warrants owned by Hilltop and Oak Hill [)]." The letter went on to state:

        91.   As such, the Proposed Transaction will deny Class members their right to share proportionately and equitably in the true value of the Company's valuable and profitable business, and future growth in profits and earnings.

        92.   As a result, defendants have breached their fiduciary duties they owe to the Company's public stockholders because the stockholders will not receive adequate or fair value for their SWS common stock in the Proposed Transaction.

D-11


Table of Contents

SWS's Board and Management Are Conflicted

        93.   The Board and the Company's executive officers have material conflicts of interest and are acting to better their own personal interests through the Proposed Transaction at the expense of SWS' public stockholders.

        94.   The Proposed Transaction was agreed to by the Special Committee and the Board, which are beholden to Ford and Hilltop. As a result of the 2011 Loan from Hilltop and Oak Hill, Hilltop currently beneficially owns 24% of SWS's common stock, inclusive of the warrant. In addition, Ford joined the Board and Hilltop's President and CEO, Jeremy Ford, became a non-voting observer to the Board. As a result of these conflicts of interest with respect to the 2011 Loan with Hilltop and its Board representation, the Board was beholden to Hilltop's interests. This was evident throughout the sales process when Hilltop refused to waive the Merger Covenant and threatened to withdraw its offer and Ford from the Board, unless the Board accepted its inadequate Proposed Transaction by March 31, 2014, which it did despite the pending higher offers from Party A and Esposito Global/Party B.

        95.   In addition, each member of the Special Committee suffers from a conflict of interest as a result of their close ties to Ford and his family.

        96.   For example, Buchholz's father co-founded the Company, which was saved by Hilltop's $50 million loan. In addition, Buchholz serves as the Chief Financial Officer of the Episcopal School of Dallas, where Jeremy Ford is a director and the Ford family has donated hundreds of thousands of dollars. Further, Buchholz is a graduate of the Cox School of Business of the Southern Methodist University ("SMU") where Ford is a large donor.

        97.   Defendant Williams also has close ties to the Ford family. For example, Williams serves on the Executive Committee of Children's Medical Center Foundation, where Ford is a trustee and Ford's wife is a director. Jeremy Ford is a director of the Children's Medical Center of Dallas. In addition, Williams is mayor of Highland Park, Texas where Ford lives and Williams and Ford both earned undergraduate and law degrees from SMU.

        98.   Defendant Miller also has close ties to the Ford family. Specifically, Miller is a former director of the Children's Medical Center of Dallas, received his undergraduate and MBA degrees from SMU, and serves as a director of the Cox School of Business at SMU where Ford was a former director and a large donor.

        99.   The SWS management is also conflicted due to additional benefits from the Proposed Transaction not available to plaintiffs and other public stockholders of SWS.

        100. The S-4 reveals that at the effective time of the merger, each restricted share of SWS common stock that was granted to the SWS directors and executive officers prior to the date of the merger agreement will vest in full; the SWS compensation committee may grant up to 350,000 more restricted shares of SWS common stock to certain executive officers and key employees of SWS in satisfaction of the fiscal 2014 annual bonuses; and SWS may grant restricted shares of SWS common stock to non-employee directors of SWS of up to $35,000 per director.

        101. Moreover, under SWS's Golden Parachute Compensation arrangements, the executive officers (and other SWS employees) are entitled to cash severance in accordance with SWS's severance practice. The amount of such severance is equal to two weeks of base salary for each year of service. Certain executives may also receive retention agreements in connection with the Proposed Transaction, which will permit them to secure their lucrative positions.

        102. Together, these arrangements create an incentive for SWS's Board and management to enter into the unfair Proposed Transaction, to the detriment of plaintiffs and the Class.

D-12


Table of Contents

Oak Hill Will Receive a Benefit Under the Proposed Transaction Which is Not Available to Other SWS Stockholders

        103. Notably, the terms of the Proposed Transaction call for Oak Hill's warrants to be canceled yet Oak Hill will still receive the same deal consideration that it would if it had exercised its warrants and Oak Hill will be paid an "Applicable Premium," which is simply a pre-payment penalty that Oak Hill would not be eligible for under the credit agreement which granted the warrants. As a result, Oak Hill will receive a benefit under the Proposed Transaction which is not available to other SWS stockholders.

The Terms of the 2011 Loan Credit Agreement Unreasonably Dissuade Potential Suitors From Making Competing Offers

        104. As discussed above, the terms of the Credit Agreement include a Merger Covenant prohibiting SWS from undergoing a "Fundamental Change," which includes any merger, amalgamation or consolidation, and which SWS would breach by engaging in a merger, amalgamation or consolidation unless compliance were waived by each of Hilltop and Oak Hill. Hilltop repeatedly refused to waive this Fundamental Change provision.

        105. This Fundamental Change provision, and Hilltop's refusal to waive it, unreasonably dissuaded Party A and Esposito Global/Party B from moving forward with their superior offer. Specifically, the Chief Executive Officer of Party A indicated that Party A would not agree to a transaction with SWS if Hilltop did not agree to waive the merger covenant because Party A was concerned about the risk of litigation in the event Party A executed a definitive agreement with SWS without such waiver.

The Proposed Transaction's Preclusive Deal Provisions Unreasonably Dissuade Potential Suitors From Making Competing Offers

        106. In addition to the chilling provisions of the Merger Covenant in the 2011 Loan Credit Agreement, to the detriment of the Company's stockholders, the terms of the Merger Agreement substantially favor Hilltop and are calculated to unreasonably dissuade potential suitors from making competing offers.

        107. The Proposed Transaction includes a "force the vote" provision whereby SWS would be required to submit the merger agreement to a vote of SWS's stockholders even if the SWS Board changed its recommendation with respect to the merger—and would therefore not have a standalone termination right in the event it wished to enter into an agreement with a third party with respect to a superior proposal.

        108. In addition, Hilltop refused to include in the Proposed Transaction a possible two-tier termination fee that would provide for a lower payment in the event that the fee became payable because SWS executed an agreement with a competing suitor, in particular Party A which at the time of the announcement of the Proposed Transaction made an offer for $8.65 per share.

        109. Hilltop also rejected the inclusion of a "majority of the minority" provision that would protect the non-insider stockholders by requiring the majority of their approval of the Proposed Transaction.

        110. In contrast to insisting on a "Go Shop" provision that would have allowed the Board to continue speaking and negotiating with third parties, including Party A and Esposito Global/Party B, to achieve a higher offer for the Company, the Individual Defendants instead have all but ensured that another entity will not emerge with a competing proposal by agreeing to a "No Solicitation" provision in Section 6.10 of the Merger Agreement. This provision prohibits the Individual Defendants from soliciting alternative proposals and severely constrains their ability to communicate and negotiate with

D-13


Table of Contents

potential buyers who wish to submit or have submitted unsolicited alternative proposals. Section 6.10(a) of the Merger Agreement states, in relevant part:

        111. Further, pursuant to Section 6.10(g) of the Merger Agreement, the Company must advise Hilltop, within twenty-four hours, of any proposals or inquiries received from other parties, including, inter alia, the material terms and conditions of the proposal and the identity of the party making the proposal. Section 6.10(g) of the Merger Agreement states:

        112. Moreover, the Merger Agreement contains a highly restrictive, illusory "fiduciary out" provision permitting the Board to withdraw its approval of the Proposed Transaction under extremely limited circumstances, and grants Hilltop a "matching right" with respect to any "Superior Proposal" made to the Company. Section 6.10(b) of the Merger Agreement provides, in relevant part:

D-14


Table of Contents

        113. Further locking up control of the Company in favor of Hilltop is Section 8.3 of the Merger Agreement, which contains a provision for a "Termination Fee" of up to $8 million, 4.4% of the value of the Proposed Transaction, payable by the Company to Hilltop if the Individual Defendants cause the Company to terminate the Merger Agreement pursuant to the lawful exercise of their fiduciary duties.

        114. Additionally, the Special Committee conditioned Party A's participation in the sales process on it signing a NDA that contained certain standstill provisions that prevented it from purchasing certain amounts of the Company's stock and from making certain alternative proposals. Although the S-4 states that the NDA included a "fallaway" provision, it is unclear if any other parties, including Esposito Global/Party B, were similar prohibited by any such agreements and to extent of which Party A may still have been restricted from continuing to pursue its higher offer for SWS.

        115. By agreeing to all of the deal protection devices and the NDAs, the Individual Defendants have locked up the Proposed Transaction and have precluded other bidders, including Party A and Esposito Global/Party B, from making successful competing offers for the Company.

The S-4 is Materially Misleading

        116. On May 29, 2014 the S-4 was jointly filed with the SEC to solicit stockholders to vote their shares in favor of the Proposed Transaction. As alleged below and elsewhere herein, the S-4 omits material information about the Proposed Transaction that must be disclosed to SWS's stockholders to enable them to render an informed decision with respect to the Proposed Transaction. The S-4 omits material information with respect to the process and events leading up to the Proposed Transaction, as well as the opinions and analyses of SWS's financial advisor, Sandler O'Neill. This omitted information, if disclosed, would significantly alter the total mix of information available to SWS's stockholders.

        117. For example, the S-4 is materially misleading in that it fails to disclose all projections in appropriate detail, including, among other things:

        118. The S-4 is also materially misleading in that it fails to provide information regarding the "Background of the Merger" regarding the process of the Proposed Transaction, including:

D-15


Table of Contents

        119. In connection with the Proposed Transaction, Sandler O'Neill delivered to the Board a written opinion, dated March 31, 2014, as to the fairness, from a financial point of view of the merger consideration to be received by holders of SWS common stock (the "Fairness Opinion"). The full text of the Fairness Opinion, which describes, among other things, the assumptions made, procedures followed, matters considered and limitations on the review undertaken, is attached as Annex B to the S-4 and was incorporated by reference in its entirety.

        120. With regard to the financial analysis conducted by Sandler O'Neill, the S-4 fails to provide certain underlying data and key inputs necessary for stockholders to have a fair summary of the work performed.

        121. For example, with respect to Sandler O'Neill's Comparable Companies Analysis, the S-4 is materially misleading in that it fails to disclose:

        122. With respect to Sandler O'Neill's Net Present Value Analyses for both SWS and Hilltop, the S-4 is materially misleading in that it fails to disclose:

D-16


Table of Contents

        123. With respect to Sandler O'Neill's Selected Merger Transactions Analysis, the S-4 is materially misleading in that it fails to disclose the individually observed multiples for each of the selected transactions.

        124. The S-4 does not disclose any sum of the parts analyses that were performed to determine the valuation of SWS and details regarding valuations of its specific divisions and segments, which is important here, since certain parties may have sought to purchase certain assets, as initially suggested by Esposito Global, and may have also been considered as strategic alternatives, including standalone options, by the Special Committee and Board. Also because of SWS's structure this information is particularly important in order for SWS stockholders to gain an understanding of the Company's true value since it trades below its book value in connection with the Proposed Transaction.

        125. The S-4 also does not disclose any synergies that Hilltop may enjoy as a result of the Proposed Transaction and to which SWS stockholders are entitled to be compensated for as part of the Merger Consideration.

        126. Moreover, the S-4 is materially misleading in that it fails to disclose the specific services Sandler O'Neil has provided to any of the parties involved in the transaction, or any of their affiliates, in the last two years and how much compensation was received for services rendered.

        127. The 2011 Loan, its Merger Covenant, which Hilltop adamantly refused to waive, the Hilltop's Board representatives, the "force the vote," "no solicitation" and "matching rights" provisions in the Merger Agreement, the lack of support from SWS's stop stockholder (Hilltop), Hilltop's threat to publicly withdraw its offer and its Board representation unless the Company accepted the Proposed Transaction by March 31, 2014, and Hilltop's refusal to accept a possible two-tier termination fee all worked to unfairly and unreasonably lock in control for Hilltop and created a chilling effect on potential competing and superior offers for SWS.

        128. Furthermore, at least two other bidders, with substantially higher offers for the Company, were denied complete due diligence, not informed of the deadline for making a final offer, and were not provided from the beginning with Hilltop's position regarding the Merger Covenant so that they could have immediately explored alternatives to a waiver of the Merger Covenant. This created a further advantage to Hilltop since it was already an insider by virtue of the Loan Agreement and its Board representatives and already therefore had access to confidential, non-public information of SWS. Furthermore, the Special Committee was apprised of Hilltop's desire to close a potential transaction quickly and later its threats to pull its offer and its Board representatives unless the Company agreed to the Proposed Transaction by imposed deadline of March 31, 2014.

        129. Unless the Proposed Transaction is enjoined by this Court, the defendants will continue to breach and/or aid the breaches of fiduciary duties owed to plaintiffs and the Class, will consummate and close the Proposed Transaction complained of, and will deny Class members their fair proportionate share of SWS's valuable assets and businesses, all to the irreparable harm of the Class.

        130. The Proposed Transaction will deny Class members their right to share proportionately and equitably in the true value of the Company's valuable and profitable business and future growth in profits and earnings.

        131. As a result, defendants have breached their fiduciary duties they owe to the Company's public stockholders because the stockholders will not receive adequate or fair value for their SWS common stock in the Proposed Transaction.

D-17


Table of Contents


THE FIDUCIARY DUTIES OF THE INDIVIDUAL DEFENDANTS

        132. By reason of the Individual Defendants' positions with the Company as officers and/or directors, said individuals are in a fiduciary relationship with plaintiffs and the other public stockholders of SWS and owe plaintiffs and the other members of the Class duties of due care and loyalty.

        133. By virtue of their positions as directors and/or officers of SWS, the Individual Defendants, at all relevant times, had the power to control and influence, and did control and influence and cause SWS to engage in the practices complained of herein.

        134. In a situation where the directors of a Delaware company undertake a transaction that may result in a change in corporate control, the directors must take all steps reasonably required to maximize the value stockholders will receive rather than use a change of control to wrongfully benefit themselves.


COUNT I

(Breach of Fiduciary Duties Against the Individual Defendants)

        135. Plaintiffs repeat and reallege the preceding allegations as if fully set forth herein.

        136. As members of the Company's Board, the Individual Defendants have fiduciary obligations to: (a) undertake an appropriate evaluation of SWS's net worth as a merger/acquisition candidate; (b) take all appropriate steps to enhance SWS's value and attractiveness as a merger/acquisition candidate; (c) act independently to protect the interests of the Company's public stockholders; (d) adequately ensure that no conflicts of interest exist between the Individual Defendants' own interests and their fiduciary obligations, and, if such conflicts exist, to ensure that all conflicts are resolved in the best interests of SWS's public stockholders; (e) actively evaluate the Proposed Transaction and engage in a meaningful auction with third parties in an attempt to obtain the best value on any sale of SWS; and (f) disclose all material information to the Company's stockholders. Given the lock-ups with the Company and its significant control over both the Board and the Company's ability to consider other offers, the Individual Defendants also had an obligation to make the process leading to, and the price agreed in, the proposed transaction was entirely fair to the Company's stockholder. Here, neither the Individual Defendants nor Hilltop conditioned the Proposed Transaction on approval by a disinterested Special Committee or a majority of the Company's minority stockholders.

        137. The Individual Defendants have breached their fiduciary duties to plaintiffs and the Class.

        138. As alleged herein, the Individual Defendants have initiated a process to sell SWS that undervalues the Company. In addition, by agreeing to the Proposed Transaction, the Individual Defendants have capped the price of SWS at a price that does not adequately reflect the Company's true value. The Individual Defendants also failed to sufficiently inform themselves of SWS's value, or disregarded the true value of the Company. Furthermore, any alternate acquirer will be faced with engaging in discussions with a management team and Board that are committed to the Proposed Transaction.

        139. As such, unless the Individual Defendants' conduct is enjoined by the Court, they will continue to breach their fiduciary duties to plaintiffs and the other members of the Class, and will further a process that inhibits the maximization of stockholder value.

        140. Plaintiffs and the members of the Class have no adequate remedy at law.

D-18


Table of Contents


COUNT II

(Aiding and Abetting the Board's Breaches of Fiduciary Duties Against SWS and Hilltop)

        141. Plaintiffs repeat and reallege the preceding allegations as if fully set forth herein.

        142. Defendants SWS and Hilltop knowingly assisted the Individual Defendants' breaches of fiduciary duties in connection with the Proposed Transaction, which, without such aid, would not have occurred. In connection with discussions regarding the Proposed Transaction, SWS provided, and Hilltop obtained, sensitive non-public information concerning SWS and thus had unfair advantages that are enabling it to acquire the Company for unfair and inadequate consideration.

        143. As a result of this conduct, plaintiffs and the other members of the Class have been and will be damaged in that they have been and will be prevented from obtaining fair consideration for their SWS shares.

        144. Plaintiffs and the members of the Class have no adequate remedy at law.


PRAYER FOR RELIEF

        WHEREFORE, plaintiffs pray for judgment and relief as follows:

        A.    Ordering that this action may be maintained as a class action and certifying plaintiffs as the Class representative and plaintiffs' counsel as Class counsel;

        B.    Preliminarily and permanently enjoining defendants and all persons acting in concert with them from proceeding with, consummating, or closing the Proposed Transaction;

        C.    In the event defendants consummate the Proposed Transaction, rescinding it and setting it aside or awarding rescissory damages to plaintiffs and the Class;

        D.    Directing defendants to account to plaintiffs and the Class for their damages sustained because of the wrongs complained of herein;

        E.    Awarding plaintiffs the costs of this action, including reasonable allowance for plaintiffs' attorneys' and experts' fees; and

D-19


Table of Contents

        F.     Granting such other and further relief as this Court may deem just and proper.

Dated: June 10, 2014       RIGRODSKY & LONG, P.A.

 

 

By:

 

/s/ BRIAN D. LONG

Seth D. Rigrodsky (#3147)
Brian D. Long (#4347)
Gina M. Serra (#5387)
Jeremy J. Riley (#5791)
2 Righter Parkway, Suite 120
Wilmington, DE 19803
OF COUNSEL:       (302) 295-5310
       
MILBERG LLP       Co-Lead Counsel for Plaintiffs
Kent A. Bronson        
Jessica Sleater       ANDREWS & SPRINGER, LLC
One Pennsylvania Plaza       Peter B. Andrews (#4623)
New York, NY 10119       Craig Springer (#5529)
(212) 594-5300       3801 Kennett Pike
        Building C, Suite 305
MORGAN & MORGAN, P.A.       Wilmington, DE 19807
Peter Safirstein       (302) 504-4957
Domenico Minerva (#5125)        
Elizabeth Metcalf
28 West 44th Street, Suite
2001
New York, NY 10036
(212) 564-1637

Co-Lead Counsel for Plaintiffs
      Delaware Counsel for Plaintiffs

D-20


Table of Contents


PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 20.    Indemnification of Directors and Officers.

        The Hilltop bylaws provide for indemnification and advancement of expenses by Hilltop, to the fullest extent permitted by Maryland law, of Hilltop directors and officers who are made or threatened to be made a party to a proceeding by reason of his or her service in that capacity.

        Under Maryland law, directors' and officers' liability to the corporation or its stockholders for money damages may be expanded or limited, except that liability of a director or officer may not be limited: (1) to the extent that it is proved that the person actually received an improper benefit or profit in money, property or services for the amount of the benefit or profit in money, property or services actually received; or (2) to the extent that a judgment or other final adjudication adverse to the person is entered in a proceeding based on a finding in the proceeding that the person's action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding.

        Under Maryland law, a corporation may not indemnify a director or officer who is made party to any proceeding by reason of service in that capacity if it is established that: (1) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (A) was committed in bad faith or (B) was the result of active and deliberate dishonesty; or (2) the director or officer actually received an improper personal benefit in money, property or services; or (3) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful.

        Under Maryland law, a corporation may not indemnify a director or officer who has been adjudged liable in a suit by or in the right of the corporation or in which the director or officer was adjudged liable to the corporation or on the basis that a personal benefit was improperly received. A court may order indemnification if it determines that the director or officer is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, even though the director or officer did not meet the prescribed standard of conduct, was adjudged liable to the corporation or was adjudged liable on the basis that personal benefit was improperly received; however, indemnification for an adverse judgment in a suit by or in the right of the corporation, or for a judgment of liability on the basis that personal benefit was improperly received, is limited to expenses. Except for a proceeding brought to enforce indemnification or where a resolution of the board of directors or an agreement approved by the board expressly provides otherwise, a corporation may not indemnify a director or officer for a proceeding brought by the director against the corporation.

        Maryland law further provides that, unless limited by the charter of a corporation, a director or officer who is successful on the merits or otherwise in defense of any proceeding must be indemnified against reasonable expenses. Under Maryland law, a corporation may advance reasonable expenses to a director or an officer upon the corporation's receipt of (1) a written affirmation by the director or officer of his or her good faith belief that he or she has met the standard of conduct necessary for indemnification by the corporation and (2) a written undertaking by the director or officer or on his or her behalf to repay the amount paid or reimbursed by the corporation if it is ultimately determined that the standard of conduct was not met.

II-1


Table of Contents


Item 21.    Exhibits and Financial Statement Schedules.

(a)
Exhibits.

Exhibit No.   Description
  2.1   Agreement and Plan of Merger by and among SWS Group, Inc., Hilltop Holdings Inc. and Peruna LLC, dated March 31, 2014 (attached as Annex A to the proxy statement/prospectus contained in this Registration Statement).
        
  2.2   Purchase and Assumption Agreement—Whole Bank, All Deposits, dated as of September 13, 2013, by and among the Federal Deposit Insurance Corporation, receiver of First National Bank, Edinburg, Texas, PlainsCapital Bank and the Federal Deposit Insurance Corporation (filed as Exhibit 2.1 to the Hilltop Holdings Inc.'s Current Report on Form 8-K filed on September 19, 2013 (File No. 001-31987) and incorporated herein by reference).
        
  3.1   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 relating to Non-Cumulative Perpetual Preferred Stock, Series B, of Hilltop Holdings Inc.; and Articles of Amendment, dated March 31, 2014 (filed as Exhibit 3.1 to Hilltop Holdings Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, and incorporated herein by reference).
        
  3.2   Second Amended and Restated Bylaws of Hilltop Holdings Inc. (filed as Exhibit 3.2 to Hilltop Holdings Inc.'s Current Report on Form 8-K filed on March 16, 2009, and incorporated herein by reference).
        
  4.1   Form of Certificate of Common Stock of Hilltop Holdings Inc. (filed as Exhibit 4.1 to Hilltop Holdings Inc.'s Annual Report on Form 10-K for the year ended December 31, 2007, and incorporated herein by reference).
        
  4.2   Form of Certificate of Non-Cumulative Perpetual Preferred Stock, Series B, of Hilltop Holdings Inc. (filed as Exhibit 4.2 to the Hilltop Holdings Inc.'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).
        
  4.3   Corporate Charter Certificate of Notice, dated June 6, 2005 (filed as Exhibit 3.2 to the Hilltop Holdings Inc.'s Registration Statement on Form S-3 (File No. 333-125854) and incorporated herein by reference).
        
  4.4.1   Amended and Restated Declaration of Trust, dated as of July 31, 2001, by and among U.S. Bank National Association (successor in interest to State Street Bank and Trust Company of Connecticut, National Association), as Institutional Trustee, PlainsCapital Corporation (successor by merger to Plains Capital Corporation), and Alan B. White, George McCleskey, and Jeff Isom, as Administrators (filed as Exhibit 4.2 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
 
   

II-2


Table of Contents

Exhibit No.   Description
  4.4.2   First Amendment to Amended and Restated Declaration of Trust, dated as of August 7, 2006, by and between PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and U.S. Bank National Association, as Institutional Trustee (filed as Exhibit 4.3 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.4.3   Indenture, dated as of July 31, 2001, by and between PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and U.S. Bank National Association (successor in interest to State Street Bank and Trust Company of Connecticut, National Association), as Trustee (filed as Exhibit 4.4 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.4.4   First Supplemental Indenture, dated as of August 7, 2006, by and between PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and U.S. Bank National Association, as Trustee (filed as Exhibit 4.5 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.4.5   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 Hilltop Holdings Inc.'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).
        
  4.4.6   Amended and Restated Floating Rate Junior Subordinated Deferrable Interest Debenture of Plains Capital Corporation, dated as of August 7, 2006, by PlainsCapital Corporation (successor by merger to Plains Capital Corporation) in favor of U.S. Bank National Association, as Institutional Trustee for PCC Statutory Trust I (filed as Exhibit 4.6 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.4.7   Guarantee Agreement, dated as of July 31, 2001, by and between PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and U.S. Bank National Association (successor in interest to State Street Bank and Trust Company of Connecticut, National Association), as Trustee (filed as Exhibit 4.7 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.4.8   First Amendment to Guarantee Agreement, dated as of August 7, 2006, by and between PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and U.S. Bank National Association, as Guarantee Trustee (filed as Exhibit 4.8 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.5.1   Amended and Restated Declaration of Trust, dated as of March 26, 2003, by and among U.S. Bank National Association, as Institutional Trustee, PlainsCapital Corporation (successor by merger to Plains Capital Corporation), and Alan B. White, George McCleskey, and Jeff Isom, as Administrators (filed as Exhibit 4.9 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
 
   

II-3


Table of Contents

Exhibit No.   Description
  4.5.2   Indenture, dated as of March 26, 2003, by and between PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and U.S. Bank National Association, as Trustee (filed as Exhibit 4.10 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.5.3   First Supplemental Indenture, dated as of November 30, 2012, by and among U.S. Bank National Association, as Trustee, PlainsCapital Corporation (f/k/a Meadow Corporation) and PlainsCapital Corporation (filed as Exhibit 4.6.3 to the Hilltop Holdings Inc.'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).
        
  4.5.4   Floating Rate Junior Subordinated Deferrable Interest Debenture of Plains Capital Corporation, dated as of March 26, 2003, by PlainsCapital Corporation (successor by merger to Plains Capital Corporation) in favor of U.S. Bank National Association, as Institutional Trustee for PCC Statutory Trust II (filed as Exhibit 4.11 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.5.5   Guarantee Agreement, dated as of March 26, 2003, by and between PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and U.S. Bank National Association, as Guarantee Trustee (filed as Exhibit 4.12 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.6.1   Amended and Restated Declaration of Trust, dated as of September 17, 2003, by and among U.S. Bank National Association, as Institutional Trustee, PlainsCapital Corporation (successor by merger to Plains Capital Corporation), and Alan B. White, George McCleskey, and Jeff Isom, as Administrators (filed as Exhibit 4.13 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.6.2   Indenture, dated as of September 17, 2003, by and between PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and U.S. Bank National Association, as Trustee (filed as Exhibit 4.14 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.6.3   First Supplemental Indenture, dated as of November 30, 2012, by and among U.S. Bank National Association, as Trustee, PlainsCapital Corporation (f/k/a Meadow Corporation) and PlainsCapital Corporation (filed as Exhibit 4.7.3 to the Hilltop Holdings Inc.'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).
        
  4.6.4   Floating Rate Junior Subordinated Deferrable Interest Debenture of Plains Capital Corporation, dated as of September 17, 2003, by PlainsCapital Corporation (successor by merger to Plains Capital Corporation) in favor of U.S. Bank National Association, as Institutional Trustee for PCC Statutory Trust III (filed as Exhibit 4.15 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
 
   

II-4


Table of Contents

Exhibit No.   Description
  4.6.5   Guarantee Agreement, dated as of September 17, 2003, by and between PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and U.S. Bank National Association, as Guarantee Trustee (filed as Exhibit 4.16 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.7.1   Amended and Restated Trust Agreement, dated as of February 22, 2008, by and among PlainsCapital Corporation (successor by merger to Plains Capital Corporation), Wells Fargo Bank, N.A., as Property Trustee, Wells Fargo Delaware Trust Company, as Delaware Trustee, and Alan B. White, DeWayne Pierce, and Jeff Isom, as Administrative Trustees (filed as Exhibit 4.17 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.7.2   Junior Subordinated Indenture, dated as of February 22, 2008, by and between PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and Wells Fargo Bank, N.A., as Trustee (filed as Exhibit 4.18 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.7.3   First Supplemental Indenture, dated as of November 30, 2012, by and between PlainsCapital Corporation and Wells Fargo Bank, National Association, as Trustee. (filed as Exhibit 4.8.3 to the Hilltop Holdings Inc.'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).
        
  4.7.4   Plains Capital Corporation Floating Rate Junior Subordinated Note due 2038, dated as of February 22, 2008, by PlainsCapital Corporation (successor by merger to Plains Capital Corporation) in favor of Wells Fargo Bank, N.A., as Property Trustee of PCC Statutory Trust IV (filed as Exhibit 4.19 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.7.5   Guarantee Agreement, dated as of February 22, 2008, by and between PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and Wells Fargo Bank, N.A., as Guarantee Trustee (filed as Exhibit 4.20 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  5.1   Opinion of Wachtell, Lipton, Rosen & Katz as to the validity of the shares of Hilltop Holdings Inc. common stock to be issued in the merger.*
        
  8.1   Opinion of Wachtell, Lipton, Rosen & Katz as to tax matters.
        
  8.2   Opinion of Davis Polk & Wardwell LLP as to tax matters.
        
  10.1.1   First Amended and Restated Agreement of Limited Partnership of Affordable Residential Communities LP, dated February 11, 2004 (filed as Exhibit 10.1.1 to the Hilltop Holdings Inc.'s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 001-31987) and incorporated herein by reference).
        
  10.1.2   Amendment to the First Amended and Restated Agreement of Limited Partnership of Affordable Residential Communities LP, dated July 3, 2007 (filed as Exhibit 10.1 to the Hilltop Holdings Inc.'s Current Report on Form 8-K filed on July 6, 2007 (File No. 001-31987) and incorporated herein by reference).

II-5


Table of Contents

Exhibit No.   Description
        
  10.2.1 Affordable Residential Communities Inc. 2003 Equity Incentive Plan (filed as Exhibit 10.5 to the Hilltop Holdings Inc.'s Registration Statement on Form S-11 (File No. 333-109816) and incorporated herein by reference).
        
  10.2.2 Form of Affordable Residential Communities Inc. 2003 Equity Incentive Plan Non-Qualified Stock Option Agreement (filed as Exhibit 10.2.3 to the Hilltop Holdings Inc.'s Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-31987) and incorporated herein by reference).
        
  10.3   Registration Rights Agreement, dated January 31, 2007, by and between Affordable Residential Communities Inc. and C. Clifton Robinson. (filed as Exhibit 10.1 to the Hilltop Holdings Inc.'s Current Report on Form 8-K filed on February 5, 2007 (File No. 001-31987) and incorporated herein by reference).
        
  10.4 Compensation arrangement with Jeremy B. Ford (filed as Exhibit 10.3 to the Hilltop Holdings Inc.'s Current Report on Form 8-K filed on February 28, 2014 (File No. 001-31987) and incorporated herein by reference).
        
  10.5.1   Funding Agreement, dated as of March 20, 2011, by and among SWS Group, Inc., Hilltop Holdings Inc., Oak Hill Capital Partners III, L.P. and Oak Hill Capital Management Partners III, L.P. (filed as Exhibit 10.1 to the Hilltop Holdings Inc.'s Current Report on Form 8-K filed on March 21, 2011 (File No. 001-31987) and incorporated herein by reference).
        
  10.5.2   Credit Agreement, dated as of July 29, 2011, by and among SWS Group, Inc., Hilltop Holdings Inc., Oak Hill Capital Partners III, L.P. and Oak Hill Capital Management Partners III, L.P. (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by SWS Group, Inc. on August 1, 2011 (File No. 000-19483) and incorporated herein by reference).
        
  10.5.3   Investor Rights Agreement, dated as of July 29, 2011, by and among SWS Group, Inc., Hilltop Holdings Inc., Oak Hill Capital Partners III, L.P. and Oak Hill Capital Management Partners III, L.P. (filed as Exhibit 4.4 to the Current Report on Form 8-K filed by SWS Group, Inc. on August 1, 2011 (File No. 000-19483) and incorporated herein by reference).
        
  10.5.4   Warrant to purchase up to 8,695,652 shares of SWS Group, Inc. common stock issued to Hilltop Holdings Inc. on July 29, 2011 (filed as Exhibit 4.1 to the Current Report on Form 8-K filed by SWS Group, Inc. on August 1, 2011 (File No. 000-19483) and incorporated herein by reference).
        
  10.6 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 Hilltop Holdings Inc.'s Current Report on Form 8-K filed on May 11, 2012 (File No. 001-31987) and incorporated herein by reference).
        
  10.7.1 Employment Agreement, dated December 18, 2008, but effective as of December 31, 2008, by and among First Southwest Holdings, LLC, PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and Hill A. Feinberg (filed as Exhibit 10.6 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
 
   

II-6


Table of Contents

Exhibit No.   Description
  10.7.2 First Amendment to Employment Agreement, dated as of March 2, 2009, by and among First Southwest Holdings, LLC, PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and Hill A. Feinberg (filed as Exhibit 10.7 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  10.7.3 Waiver of Executive's 2011 Bonus, dated as of March 7, 2012, by Hill A. Feinberg in favor of First Southwest Holdings, LLC (filed as Exhibit 10.8 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 filed by PlainsCapital Corporation (File No. 000-53629) and incorporated herein by reference).
        
  10.7.4 Second Amendment to Employment Agreement, dated as of September 12, 2012, by and among First Southwest Holdings, LLC, PlainsCapital Corporation (successor by merger to PlainsCapital Corporation) and Hill A. Feinberg (filed as Exhibit 10.14.4 to the Hilltop Holdings Inc.'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).
        
  10.8 Retention Agreement, dated May 8, 2012, but effective as of November 30, 2012, by and among Jerry L. Schaffner, Hilltop Holdings Inc. and PlainsCapital Corporation (f/k/a Meadow Corporation) (filed as Exhibit 10.2 to the Hilltop Holdings Inc.'s Current Report on Form 8-K filed on May 11, 2012 (File No. 001-31987) and incorporated herein by reference).
        
  10.9.1 Employment Agreement, dated as of January 1, 2009, by and between James R. Huffines and PlainsCapital Corporation (successor by merger to PlainsCapital Corporation) (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PlainsCapital Corporation on November 16, 2010 (File No. 000-53629) and incorporated herein by reference).
        
  10.9.2 First Amendment to Employment Agreement, dated as of March 2, 2009, by and between James R. Huffines and PlainsCapital Corporation (successor by merger to PlainsCapital Corporation) (filed as Exhibit 10.2 to the Current Report on Form 8-K filed by PlainsCapital Corporation on November 16, 2010 (File No. 000-53629) and incorporated herein by reference).
        
  10.9.3 Second Amendment to Employment Agreement, dated as of November 15, 2010, by and between James R. Huffines and PlainsCapital Corporation (successor by merger to PlainsCapital Corporation) (filed as Exhibit 10.3 to the Current Report on Form 8-K filed by PlainsCapital Corporation on November 16, 2010 (File No. 000-53629) and incorporated herein by reference).
        
  10.10.1 Employment Agreement, dated as of April 1, 2010, by and between Todd Salmans and PlainsCapital Corporation (successor by merger to PlainsCapital Corporation) (filed as Exhibit 10.21 to the Annual Report on Form 10-K for the year ended December 31, 2010, filed by PlainsCapital Corporation (File No. 000-53629) and incorporated herein by reference).
        
  10.10.2 First Amendment to Employment Agreement, dated as of September 11, 2012, by and between PlainsCapital Corporation (successor by merger to PlainsCapital Corporation) and Todd Salmans (filed as Exhibit 10.17.2 to the Hilltop Holdings Inc.'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).
 
   

II-7


Table of Contents

Exhibit No.   Description
  10.11 Hilltop Holdings Inc. 2012 Equity Incentive Plan, effective September 20, 2012 (filed as Exhibit 10.18 to the Hilltop Holdings Inc.'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).
        
  10.12 Hilltop Holdings Inc. Annual Incentive Plan, effective September 20, 2012 (filed as Exhibit 10.19 to the Hilltop Holdings Inc.'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).
        
  10.13   Securities Purchase Agreement, dated as of September 27, 2011, by and between PlainsCapital Corporation (successor by merger to PlainsCapital Corporation) and the Secretary of the Treasury (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PlainsCapital Corporation on September 28, 2011 (File No. 000-53629) and incorporated herein by reference).
        
  10.14   Repurchase Letter, dated as of September 27, 2011, by and between PlainsCapital Corporation (successor by merger to PlainsCapital Corporation) and the United States Department of the Treasury (filed as Exhibit 10.2 to the Current Report on Form 8-K filed by PlainsCapital Corporation on September 28, 2011 (File No. 000-53629) and incorporated herein by reference).
        
  10.15 Form of Restricted Stock Award Agreement (filed as Exhibit 10.1 to the Hilltop Holdings Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 filed on May 6, 2013 (File No. 001-31987) and incorporated herein by reference).
        
  10.16 Form of Restricted Stock Unit Award Agreement (Time-Based Vesting) (filed as Exhibit 10.1 to the Hilltop Holdings Inc.'s Current Report on Form 8-K filed on February 28, 2014 (File No. 001-31987) and incorporated herein by reference).
        
  10.17 Form of Restricted Stock Unit Award Agreement (Performance-Based Vesting) (filed as Exhibit 10.2 to the Hilltop Holdings Inc.'s Current Report on Form 8-K filed on February 28, 2014 (File No. 001-31987) and incorporated herein by reference).
        
  10.18 Compensation arrangement of Darren Parmenter (filed as Exhibit 10.4 to the Hilltop Holdings Inc.'s Current Report on Form 8-K filed on February 28, 2014 (File No. 001-31987) and incorporated herein by reference).
        
  10.19 Sublease, dated December 1, 2012, by and between Hunter's Glen/Ford, LTD and Hilltop Holdings Inc. (filed as Exhibit 10.19 to Hilltop Holdings Inc.'s Annual Report on Form 10-K for the year ended December 31, 2013 filed on March 3, 2014 (File No. 001-31987) and incorporated herein by reference).
        
  10.20 First Amendment to Sublease, dated February 28, 2014, by and between Hunter's Glen/Ford, LTD and Hilltop Holdings Inc. (filed as Exhibit 10.20 to Hilltop Holdings Inc.'s Annual Report on Form 10-K for the year ended December 31, 2013 filed on March 3, 2014 (File No. 001-31987) and incorporated herein by reference).
        
  21.1   List of subsidiaries of Hilltop Holdings Inc.*
        
  23.1   Consent of Wachtell, Lipton, Rosen & Katz for legality opinion (included in the opinion filed as Exhibit 5.1 to this Registration Statement).*
        
  23.2   Consent of Wachtell, Lipton, Rosen & Katz for tax opinion (included in the opinion filed as Exhibit 8.1 to this Registration Statement).
 
   

II-8


Table of Contents

Exhibit No.   Description
  23.3   Consent of Davis Polk & Wardwell LLP for tax opinion (included in the opinion filed as Exhibit 8.2 to this Registration Statement).
        
  23.4   Consent of Grant Thornton LLP, independent registered public accounting firm for SWS.
        
  23.5   Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm for Hilltop.
        
  23.6   Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm, with respect to the Statement of Assets Acquired and Liabilities Assumed at September 13, 2013 by PlainsCapital Bank.
        
  23.7   Consent of Ernst & Young LLP.
        
  24.1   Powers of Attorney.*
        
  99.1   Consent of Sandler O'Neill & Partners, L.P.
        
  99.2   Form of Proxy Card of SWS.*
        
  101.INS   XBRL Instance Document*
        
  101.SCH   XBRL Instance Taxonomy Extension Schema*
        
  101.CAL   XBRL Taxonomy Extension Calculation Linkbase*
        
  101.DEF   XBRL Taxonomy Extension Definition Linkbase*
        
  101.LAB   XBRL Taxonomy Extension Label Linkbase*
        
  101.PRE   XBRL Taxonomy Extension Presentation Linkbase*

*
Previously filed

Exhibit is a management contract or compensatory plan.

Item 22.    Undertakings.

(a)
The undersigned Registrant hereby undertakes:

(1)
To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(i)
To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

(ii)
To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and

II-9


Table of Contents

(b)
The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange Act (and, when applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.


(c)


(1)
The undersigned Registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form.

(2)
The Registrant undertakes that every prospectus (i) that is filed pursuant to paragraph (1) immediately preceding or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(d)
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

(e)
The undersigned Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed

II-10


Table of Contents

(f)
The undersigned Registrant hereby undertakes to supply by means of post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective.

[Remainder of Page Intentionally Left Blank]

II-11


Table of Contents


SIGNATURES

        Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement on Form S-4 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Dallas, State of Texas on October 14, 2014.

    HILLTOP HOLDINGS INC.,
a Maryland corporation

 

 

By:

 

/s/ JEREMY B. FORD

        Name:   Jeremy B. Ford
        Title:   President, Chief Executive Officer and Director

        Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities indicated on October 14, 2014.

Signature
 
Title

 

 

 
/s/ JEREMY B. FORD

Jeremy B. Ford
  President, Chief Executive Officer and Director (Principal Executive Officer)

/s/ DARREN PARMENTER

Darren Parmenter

 

Executive Vice President—Principal Financial and Accounting Officer

*

Charlotte Jones Anderson

 

Director

*

Rhodes R. Bobbitt

 

Director

*

Tracy A. Bolt

 

Director

*

W. Joris Brinkerhoff

 

Director

*

Charles R. Cummings

 

Director

S-1


Table of Contents

Signature
 
Title

 

 

 
*

Hill A. Feinberg
  Director

*

Gerald J. Ford

 

Director

*

J. Markham Green

 

Director

  

Jess T. Hay

 

Director

 

William T. Hill Jr.

 

Director

*

James R. Huffines

 

Director

*

Lee Lewis

 

Director

*

Andrew J. Littlefair

 

Director

 

W. Robert Nichols III

 

Director

*

C. Clifton Robinson

 

Director

*

Kenneth D. Russell

 

Director

S-2


Table of Contents

Signature
 
Title

 

 

 
*

A. Haag Sherman
  Director

*

Robert C. Taylor Jr.

 

Director

 

Carl B. Webb

 

Director

*

Alan B. White

 

Director

 

*By:   /s/ COREY G. PRESTIDGE

   
    Name:   Corey G. Prestidge,    
        Attorney-in-Fact    

S-3


Table of Contents


EXHIBIT INDEX

Exhibit No.   Description
  2.1   Agreement and Plan of Merger by and among SWS Group, Inc., Hilltop Holdings Inc. and Peruna LLC, dated March 31, 2014 (attached as Annex A to the proxy statement/prospectus contained in this Registration Statement).
        
  2.2   Purchase and Assumption Agreement—Whole Bank, All Deposits, dated as of September 13, 2013, by and among the Federal Deposit Insurance Corporation, receiver of First National Bank, Edinburg, Texas, PlainsCapital Bank and the Federal Deposit Insurance Corporation (filed as Exhibit 2.1 to the Hilltop Holdings Inc.'s Current Report on Form 8-K filed on September 19, 2013 (File No. 001-31987) and incorporated herein by reference).
        
  3.1   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 relating to Non-Cumulative Perpetual Preferred Stock, Series B, of Hilltop Holdings Inc.; and Articles of Amendment, dated March 31, 2014 (filed as Exhibit 3.1 to Hilltop Holdings Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, and incorporated herein by reference).
        
  3.2   Second Amended and Restated Bylaws of Hilltop Holdings Inc. (filed as Exhibit 3.2 to Hilltop Holdings Inc.'s Current Report on Form 8-K filed on March 16, 2009, and incorporated herein by reference).
        
  4.1   Form of Certificate of Common Stock of Hilltop Holdings Inc. (filed as Exhibit 4.1 to Hilltop Holdings Inc.'s Annual Report on Form 10-K for the year ended December 31, 2007, and incorporated herein by reference).
        
  4.2   Form of Certificate of Non-Cumulative Perpetual Preferred Stock, Series B, of Hilltop Holdings Inc. (filed as Exhibit 4.2 to the Hilltop Holdings Inc.'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).
        
  4.3   Corporate Charter Certificate of Notice, dated June 6, 2005 (filed as Exhibit 3.2 to the Hilltop Holdings Inc.'s Registration Statement on Form S-3 (File No. 333-125854) and incorporated herein by reference).
        
  4.4.1   Amended and Restated Declaration of Trust, dated as of July 31, 2001, by and among U.S. Bank National Association (successor in interest to State Street Bank and Trust Company of Connecticut, National Association), as Institutional Trustee, PlainsCapital Corporation (successor by merger to Plains Capital Corporation), and Alan B. White, George McCleskey, and Jeff Isom, as Administrators (filed as Exhibit 4.2 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
 
   

i


Table of Contents

Exhibit No.   Description
  4.4.2   First Amendment to Amended and Restated Declaration of Trust, dated as of August 7, 2006, by and between PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and U.S. Bank National Association, as Institutional Trustee (filed as Exhibit 4.3 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.4.3   Indenture, dated as of July 31, 2001, by and between PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and U.S. Bank National Association (successor in interest to State Street Bank and Trust Company of Connecticut, National Association), as Trustee (filed as Exhibit 4.4 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.4.4   First Supplemental Indenture, dated as of August 7, 2006, by and between PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and U.S. Bank National Association, as Trustee (filed as Exhibit 4.5 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.4.5   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 Hilltop Holdings Inc.'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).
        
  4.4.6   Amended and Restated Floating Rate Junior Subordinated Deferrable Interest Debenture of Plains Capital Corporation, dated as of August 7, 2006, by PlainsCapital Corporation (successor by merger to Plains Capital Corporation) in favor of U.S. Bank National Association, as Institutional Trustee for PCC Statutory Trust I (filed as Exhibit 4.6 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.4.7   Guarantee Agreement, dated as of July 31, 2001, by and between PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and U.S. Bank National Association (successor in interest to State Street Bank and Trust Company of Connecticut, National Association), as Trustee (filed as Exhibit 4.7 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.4.8   First Amendment to Guarantee Agreement, dated as of August 7, 2006, by and between PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and U.S. Bank National Association, as Guarantee Trustee (filed as Exhibit 4.8 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.5.1   Amended and Restated Declaration of Trust, dated as of March 26, 2003, by and among U.S. Bank National Association, as Institutional Trustee, PlainsCapital Corporation (successor by merger to Plains Capital Corporation), and Alan B. White, George McCleskey, and Jeff Isom, as Administrators (filed as Exhibit 4.9 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
 
   

ii


Table of Contents

Exhibit No.   Description
  4.5.2   Indenture, dated as of March 26, 2003, by and between PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and U.S. Bank National Association, as Trustee (filed as Exhibit 4.10 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.5.3   First Supplemental Indenture, dated as of November 30, 2012, by and among U.S. Bank National Association, as Trustee, PlainsCapital Corporation (f/k/a Meadow Corporation) and PlainsCapital Corporation (filed as Exhibit 4.6.3 to the Hilltop Holdings Inc.'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).
        
  4.5.4   Floating Rate Junior Subordinated Deferrable Interest Debenture of Plains Capital Corporation, dated as of March 26, 2003, by PlainsCapital Corporation (successor by merger to Plains Capital Corporation) in favor of U.S. Bank National Association, as Institutional Trustee for PCC Statutory Trust II (filed as Exhibit 4.11 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.5.5   Guarantee Agreement, dated as of March 26, 2003, by and between PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and U.S. Bank National Association, as Guarantee Trustee (filed as Exhibit 4.12 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.6.1   Amended and Restated Declaration of Trust, dated as of September 17, 2003, by and among U.S. Bank National Association, as Institutional Trustee, PlainsCapital Corporation (successor by merger to Plains Capital Corporation), and Alan B. White, George McCleskey, and Jeff Isom, as Administrators (filed as Exhibit 4.13 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.6.2   Indenture, dated as of September 17, 2003, by and between PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and U.S. Bank National Association, as Trustee (filed as Exhibit 4.14 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.6.3   First Supplemental Indenture, dated as of November 30, 2012, by and among U.S. Bank National Association, as Trustee, PlainsCapital Corporation (f/k/a Meadow Corporation) and PlainsCapital Corporation (filed as Exhibit 4.7.3 to the Hilltop Holdings Inc.'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).
        
  4.6.4   Floating Rate Junior Subordinated Deferrable Interest Debenture of Plains Capital Corporation, dated as of September 17, 2003, by PlainsCapital Corporation (successor by merger to Plains Capital Corporation) in favor of U.S. Bank National Association, as Institutional Trustee for PCC Statutory Trust III (filed as Exhibit 4.15 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
 
   

iii


Table of Contents

Exhibit No.   Description
  4.6.5   Guarantee Agreement, dated as of September 17, 2003, by and between PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and U.S. Bank National Association, as Guarantee Trustee (filed as Exhibit 4.16 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.7.1   Amended and Restated Trust Agreement, dated as of February 22, 2008, by and among PlainsCapital Corporation (successor by merger to Plains Capital Corporation), Wells Fargo Bank, N.A., as Property Trustee, Wells Fargo Delaware Trust Company, as Delaware Trustee, and Alan B. White, DeWayne Pierce, and Jeff Isom, as Administrative Trustees (filed as Exhibit 4.17 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.7.2   Junior Subordinated Indenture, dated as of February 22, 2008, by and between PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and Wells Fargo Bank, N.A., as Trustee (filed as Exhibit 4.18 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.7.3   First Supplemental Indenture, dated as of November 30, 2012, by and between PlainsCapital Corporation and Wells Fargo Bank, National Association, as Trustee (filed as Exhibit 4.8.3 to the Hilltop Holdings Inc.'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).
        
  4.7.4   Plains Capital Corporation Floating Rate Junior Subordinated Note due 2038, dated as of February 22, 2008, by PlainsCapital Corporation (successor by merger to Plains Capital Corporation) in favor of Wells Fargo Bank, N.A., as Property Trustee of PCC Statutory Trust IV (filed as Exhibit 4.19 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  4.7.5   Guarantee Agreement, dated as of February 22, 2008, by and between PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and Wells Fargo Bank, N.A., as Guarantee Trustee (filed as Exhibit 4.20 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  5.1   Opinion of Wachtell, Lipton, Rosen & Katz as to the validity of the shares of Hilltop Holdings Inc. common stock to be issued in the merger.*
        
  8.1   Opinion of Wachtell, Lipton, Rosen & Katz as to tax matters.
        
  8.2   Opinion of Davis Polk & Wardwell LLP as to tax matters.
        
  10.1.1   First Amended and Restated Agreement of Limited Partnership of Affordable Residential Communities LP, dated February 11, 2004 (filed as Exhibit 10.1.1 to the Hilltop Holdings Inc.'s Annual Report on Form 10-K for the year ended December 31, 2007 (File No. 001-31987) and incorporated herein by reference).
        
  10.1.2   Amendment to the First Amended and Restated Agreement of Limited Partnership of Affordable Residential Communities LP, dated July 3, 2007 (filed as Exhibit 10.1 to the Hilltop Holdings Inc.'s Current Report on Form 8-K filed on July 6, 2007 (File No. 001-31987) and incorporated herein by reference).

iv


Table of Contents

Exhibit No.   Description
  10.2.1 Affordable Residential Communities Inc. 2003 Equity Incentive Plan (filed as Exhibit 10.5 to the Hilltop Holdings Inc.'s Registration Statement on Form S-11 (File No. 333-109816) and incorporated herein by reference).
        
  10.2.2 Form of Affordable Residential Communities Inc. 2003 Equity Incentive Plan Non-Qualified Stock Option Agreement (filed as Exhibit 10.2.3 to the Hilltop Holdings Inc.'s Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 001-31987) and incorporated herein by reference).
        
  10.3   Registration Rights Agreement, dated January 31, 2007, by and between Affordable Residential Communities Inc. and C. Clifton Robinson (filed as Exhibit 10.1 to the Hilltop Holdings Inc.'s Current Report on Form 8-K filed on February 5, 2007 (File No. 001-31987) and incorporated herein by reference).
        
  10.4 Compensation arrangement with Jeremy B. Ford (filed as Exhibit 10.3 to the Hilltop Holdings Inc.'s Current Report on Form 8-K filed on February 28, 2014 (File No. 001-31987) and incorporated herein by reference).
        
  10.5.1   Funding Agreement, dated as of March 20, 2011, by and among SWS Group, Inc., Hilltop Holdings Inc., Oak Hill Capital Partners III, L.P. and Oak Hill Capital Management Partners III, L.P. (filed as Exhibit 10.1 to the Hilltop Holdings Inc.'s Current Report on Form 8-K filed on March 21, 2011 (File No. 001-31987) and incorporated herein by reference).
        
  10.5.2   Credit Agreement, dated as of July 29, 2011, by and among SWS Group, Inc., Hilltop Holdings Inc., Oak Hill Capital Partners III, L.P. and Oak Hill Capital Management Partners III, L.P. (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by SWS Group, Inc. on August 1, 2011 (File No. 000-19483) and incorporated herein by reference).
        
  10.5.3   Investor Rights Agreement, dated as of July 29, 2011, by and among SWS Group, Inc., Hilltop Holdings Inc., Oak Hill Capital Partners III, L.P. and Oak Hill Capital Management Partners III, L.P. (filed as Exhibit 4.4 to the Current Report on Form 8-K filed by SWS Group, Inc. on August 1, 2011 (File No. 000-19483) and incorporated herein by reference).
        
  10.5.4   Warrant to purchase up to 8,695,652 shares of SWS Group, Inc. common stock issued to Hilltop Holdings Inc. on July 29, 2011 (filed as Exhibit 4.1 to the Current Report on Form 8-K filed by SWS Group, Inc. on August 1, 2011 (File No. 000-19483) and incorporated herein by reference).
        
  10.6 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 Hilltop Holdings Inc.'s Current Report on Form 8-K filed on May 11, 2012 (File No. 001-31987) and incorporated herein by reference).
        
  10.7.1 Employment Agreement, dated December 18, 2008, but effective as of December 31, 2008, by and among First Southwest Holdings, LLC, PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and Hill A. Feinberg (filed as Exhibit 10.6 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
 
   

v


Table of Contents

Exhibit No.   Description
  10.7.2 First Amendment to Employment Agreement, dated as of March 2, 2009, by and among First Southwest Holdings, LLC, PlainsCapital Corporation (successor by merger to Plains Capital Corporation) and Hill A. Feinberg (filed as Exhibit 10.7 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
        
  10.7.3 Waiver of Executive's 2011 Bonus, dated as of March 7, 2012, by Hill A. Feinberg in favor of First Southwest Holdings, LLC (filed as Exhibit 10.8 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 filed by PlainsCapital Corporation (File No. 000-53629) and incorporated herein by reference).
        
  10.7.4 Second Amendment to Employment Agreement, dated as of September 12, 2012, by and among First Southwest Holdings, LLC, PlainsCapital Corporation (successor by merger to PlainsCapital Corporation) and Hill A. Feinberg (filed as Exhibit 10.14.4 to the Hilltop Holdings Inc.'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).
        
  10.8 Retention Agreement, dated May 8, 2012, but effective as of November 30, 2012, by and among Jerry L. Schaffner, Hilltop Holdings Inc. and PlainsCapital Corporation (f/k/a Meadow Corporation) (filed as Exhibit 10.2 to the Hilltop Holdings Inc.'s Current Report on Form 8-K filed on May 11, 2012 (File No. 001-31987) and incorporated herein by reference).
        
  10.9.1 Employment Agreement, dated as of January 1, 2009, by and between James R. Huffines and PlainsCapital Corporation (successor by merger to PlainsCapital Corporation) (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PlainsCapital Corporation on November 16, 2010 (File No. 000-53629) and incorporated herein by reference).
        
  10.9.2 First Amendment to Employment Agreement, dated as of March 2, 2009, by and between James R. Huffines and PlainsCapital Corporation (successor by merger to PlainsCapital Corporation) (filed as Exhibit 10.2 to the Current Report on Form 8-K filed by PlainsCapital Corporation on November 16, 2010 (File No. 000-53629) and incorporated herein by reference).
        
  10.9.3 Second Amendment to Employment Agreement, dated as of November 15, 2010, by and between James R. Huffines and PlainsCapital Corporation (successor by merger to PlainsCapital Corporation) (filed as Exhibit 10.3 to the Current Report on Form 8-K filed by PlainsCapital Corporation on November 16, 2010 (File No. 000-53629) and incorporated herein by reference).
        
  10.10.1 Employment Agreement, dated as of April 1, 2010, by and between Todd Salmans and PlainsCapital Corporation (successor by merger to PlainsCapital Corporation) (filed as Exhibit 10.21 to the Annual Report on Form 10-K for the year ended December 31, 2010, filed by PlainsCapital Corporation (File No. 000-53629) and incorporated herein by reference).
        
  10.10.2 First Amendment to Employment Agreement, dated as of September 11, 2012, by and between PlainsCapital Corporation (successor by merger to PlainsCapital Corporation) and Todd Salmans (filed as Exhibit 10.17.2 to the Hilltop Holdings Inc.'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).
 
   

vi


Table of Contents

Exhibit No.   Description
  10.11 Hilltop Holdings Inc. 2012 Equity Incentive Plan, effective September 20, 2012 (filed as Exhibit 10.18 to the Hilltop Holdings Inc.'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).
        
  10.12 Hilltop Holdings Inc. Annual Incentive Plan, effective September 20, 2012 (filed as Exhibit 10.19 to the Hilltop Holdings Inc.'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).
        
  10.13   Securities Purchase Agreement, dated as of September 27, 2011, by and between PlainsCapital Corporation (successor by merger to PlainsCapital Corporation) and the Secretary of the Treasury (filed as Exhibit 10.1 to the Current Report on Form 8-K filed by PlainsCapital Corporation on September 28, 2011 (File No. 000-53629) and incorporated herein by reference).
        
  10.14   Repurchase Letter, dated as of September 27, 2011, by and between PlainsCapital Corporation (successor by merger to PlainsCapital Corporation) and the United States Department of the Treasury (filed as Exhibit 10.2 to the Current Report on Form 8-K filed by PlainsCapital Corporation on September 28, 2011 (File No. 000-53629) and incorporated herein by reference).
        
  10.15 Form of Restricted Stock Award Agreement (filed as Exhibit 10.1 to the Hilltop Holdings Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 filed on May 6, 2013 (File No. 001-31987) and incorporated herein by reference).
        
  10.16 Form of Restricted Stock Unit Award Agreement (Time-Based Vesting) (filed as Exhibit 10.1 to the Hilltop Holdings Inc.'s Current Report on Form 8-K filed on February 28, 2014 (File No. 001-31987) and incorporated herein by reference).
        
  10.17 Form of Restricted Stock Unit Award Agreement (Performance-Based Vesting) (filed as Exhibit 10.2 to the Hilltop Holdings Inc.'s Current Report on Form 8-K filed on February 28, 2014 (File No. 001-31987) and incorporated herein by reference).
        
  10.18 Compensation arrangement of Darren Parmenter (filed as Exhibit 10.4 to the Hilltop Holdings Inc.'s Current Report on Form 8-K filed on February 28, 2014 (File No. 001-31987) and incorporated herein by reference).
        
  10.19 Sublease, dated December 1, 2012, by and between Hunter's Glen/Ford, LTD and Hilltop Holdings Inc. (filed as Exhibit 10.19 to Hilltop Holdings Inc.'s Annual Report on Form 10-K for the year ended December 31, 2013 filed on March 3, 2014 (File No. 001-31987) and incorporated herein by reference).
        
  10.20 First Amendment to Sublease, dated February 28, 2014, by and between Hunter's Glen/Ford, LTD and Hilltop Holdings Inc. (filed as Exhibit 10.20 to Hilltop Holdings Inc.'s Annual Report on Form 10-K for the year ended December 31, 2013 filed on March 3, 2014 (File No. 001-31987) and incorporated herein by reference).
        
  21.1   List of subsidiaries of Hilltop Holdings Inc.*
        
  23.1   Consent of Wachtell, Lipton, Rosen & Katz for legality opinion (included in the opinion filed as Exhibit 5.1 to this Registration Statement).*
        
  23.2   Consent of Wachtell, Lipton, Rosen & Katz for tax opinion (included in the opinion filed as Exhibit 8.1 to this Registration Statement).
 
   

vii


Table of Contents

Exhibit No.   Description
  23.3   Consent of Davis Polk & Wardwell LLP for tax opinion (included in the opinion filed as Exhibit 8.2 to this Registration Statement).
        
  23.4   Consent of Grant Thornton LLP, independent registered public accounting firm for SWS.
        
  23.5   Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm for Hilltop.
        
  23.6   Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm, with respect to the Statement of Assets Acquired and Liabilities Assumed at September 13, 2013 by PlainsCapital Bank.
        
  23.7   Consent of Ernst & Young LLP.
        
  24.1   Powers of Attorney.*
        
  99.1   Consent of Sandler O'Neill & Partners, L.P.
        
  99.2   Form of Proxy Card of SWS.*
        
  101.INS   XBRL Instance Document*
        
  101.SCH   XBRL Instance Taxonomy Extension Schema*
        
  101.CAL   XBRL Taxonomy Extension Calculation Linkbase*
        
  101.DEF   XBRL Taxonomy Extension Definition Linkbase*
        
  101.LAB   XBRL Taxonomy Extension Label Linkbase*
        
  101.PRE   XBRL Taxonomy Extension Presentation Linkbase*

*
Previously filed

Exhibit is a management contract or compensatory plan.

viii