Regulatory Matters

6 Months Ended

12 Months Ended

Jun. 30, 2014

Dec. 31, 2013

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.

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 requirements needed to qualify as a “well-capitalized” institution (dollars in thousands), without giving effect to the final Basel III capital rules.

									To Be Well Capitalized
					Minimum Capital				Minimum Capital
	Actual				Requirements				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.

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,		December 31,
	2014		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 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.

21. Regulatory Matters

Bank

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.

									To Be Well Capitalized
					Minimum Capital				Minimum Capital
	Actual				Requirements				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

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 December 31, 2013, PrimeLending’s net worth exceeded the amounts required by both HUD and GNMA.

Insurance

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.