Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
HTH > SEC Filings for HTH > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for HILLTOP HOLDINGS INC.

Form 10-Q for HILLTOP HOLDINGS INC.


12-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the consolidated historical financial statements and notes appearing elsewhere in this Quarterly Report on Form 10-Q and the financial information set forth in the tables herein.

Unless the context otherwise indicates, in this Quarterly Report on Form 10-Q, references to the "Company," "we," "us," "our" or "ours" or similar words are to Hilltop Holdings Inc. and its direct and indirect wholly owned subsidiaries, references to "Hilltop" refer solely to Hilltop Holdings Inc., references to "PlainsCapital" refer to PlainsCapital Corporation (a wholly owned subsidiary of Hilltop), references to 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, formerly known as NLASCO, Inc., (a wholly owned subsidiary of Hilltop) and its subsidiaries as a whole.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q and the documents incorporated by reference into this report include "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, or the Securities Act, and
Section 21E of the Securities Exchange Act of 1934, or the Exchange Act, as amended by the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, included in this report that address results or developments that we expect or anticipate will or may occur in the future, and statements that are preceded by, followed by or include, words such as "anticipates," "believes," "could," "estimates," "expects," "forecasts," "intends," "may," "probable," "projects," "seeks," "should" or "would" or the negative of these words and phrases or similar words or phrases, including such things as our business strategy, our financial condition, our litigation, our efforts to make strategic acquisitions, our revenue, our liquidity and sources of funding, market trends, operations and business, expectations concerning mortgage loan origination volume, anticipated changes in our revenues or earnings, the effects of government regulation applicable to our operations, the appropriateness of our allowance for loan losses and provision for loan losses, and the collectability of loans are forward-looking statements.

These forward-looking statements are based on our beliefs, assumptions and expectations of our future performance taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If an event occurs, our business, business plan, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Certain factors that could cause actual results to differ include, among others:

changes in the default rate of our loans and risks associated with concentration in real estate related loans;

changes in general economic, market and business conditions in areas or markets where we compete;

changes in the interest rate environment;

cost and availability of capital;

changes in state and federal laws, regulations or policies affecting one or more of our business segments, including changes in regulatory fees, deposit insurance premiums, capital requirements and the Dodd-Frank Wall Street Reform and Consumer Protection Act;

our participation in governmental programs, including the Small Business Lending Fund;

severe catastrophic events in our geographic area;

failure of our insurance segment reinsurers to pay obligations under reinsurance contracts;

changes in key management;

approval of new, or changes in, accounting policies and practices;

our ability to estimate loan losses;


Table of Contents

our ability to use net operating loss carry forwards to reduce future tax payments;

competition in our banking, mortgage origination, financial advisory and insurance segments from other banks and financial institutions as well as insurance companies, mortgage bankers, investment banking and financial advisory firms, asset-based non-bank lenders and government agencies;

risks associated with merger and acquisition integration;

our ability to obtain reimbursements for losses on acquired loans under loss-share agreements with the Federal Deposit Insurance Corporation (the "FDIC"); and

our ability to use excess cash in an effective manner, including the execution of successful acquisitions.

For a more detailed discussion of these and other factors that may affect our business and that could cause the actual results to differ materially from those anticipated in these forward-looking statements, please refer to "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (the "SEC") on March 15, 2013, and other filings we have made with the SEC. Consequently, all of the forward-looking statements made in this Quarterly Report on Form 10-Q are qualified by these cautionary statements and those risk factors, and actual results or developments anticipated by us may not be realized, or even substantially realized, and they may not have the expected consequences to, or effects on, us and our business or operations. Forward-looking statements made in this report speak as of the date of this report or as of the date specifically referenced in any such statement set forth in this report. Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements in this report.

OUR GENERAL CORPORATE STRUCTURE

We are 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, the Company acquired PlainsCapital Corporation in a stock and cash transaction, whereby PlainsCapital Corporation merged with and into Meadow Corporation, a wholly owned subsidiary of Hilltop, with Meadow Corporation continuing 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 market 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 market value of the liabilities assumed was $5.9 billion, including $4.5 billion of deposits.

Prior to the consummation of the PlainsCapital Merger, our 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 our wholly owned property and casualty insurance holding company, NLC. NLC operates through its wholly owned subsidiaries, National Lloyds Insurance Company ("NLIC") and American Summit Insurance Company ("ASIC").

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 FNB from the FDIC, as receiver, and reopened acquired branches of FNB 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. Based on preliminary purchase date valuations, 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.

Following the PlainsCapital Merger on November 30, 2012, 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 Bank's subsidiaries have specialized areas of expertise that allow us to provide an array of financial products and services such as mortgage origination and financial advisory services. 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.


Table of Contents

OVERVIEW

As a result of the PlainsCapital Merger, the operating results of the Company 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 three and nine months ended September 30, 2013 are not comparable to prior periods. Additionally, the presentation of the Company's historical consolidated financial statements has been modified and certain items have been reclassified to conform to current period presentation, which is more consistent with that of a financial institution that provides an array of financial products and services.

The operations of FNB are included in the Company's operating results beginning September 14, 2013, and were not significant to the Company's consolidated statements of operations for the three and nine months ended September 30, 2013. FNB's results of operations prior to the Bank Closing Date are not included in the Company's consolidated operating results.

How We Generate Revenue

We generate revenue from net interest income and from noninterest income. Net interest income represents the difference between the income earned on our assets, including our loans and investment securities, and our cost of funds, including the interest paid on the deposits and borrowings that are used to support our assets. Net interest income is a significant contributor to our operating results. Fluctuations in interest rates, as well as the amounts and types of interest-earning assets and interest-bearing liabilities we hold, affect net interest income. We generated $207.1 million in net interest income during the nine months ended September 30, 2013, compared with net interest income of $3.7 million during the nine months ended September 30, 2012. The significant increase in net interest income during 2013 was primarily due to $204.6 million in net interest income during the nine months ended September 30, 2013 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:

(i) Income from mortgage operations. Through our wholly owned subsidiary, PrimeLending, we generate noninterest income by originating and selling mortgage loans. During the nine months ended September 30, 2013, we generated $439.1 million in net gains from the sale of loans, other mortgage production income, and mortgage loan origination fees.

(ii) Net insurance premiums earned. Through our wholly owned insurance subsidiary, NLC, we provide fire and limited homeowners insurance for low value dwellings and manufactured homes. We generated $116.0 million in net insurance premiums earned during the nine months ended September 30, 2013, compared with $109.0 million during the same period in the prior year.

(iii) Investment advisory fees and commissions and securities brokerage fees and commissions. Through our wholly owned subsidiary, First Southwest, we provide public finance advisory and various investment banking and brokerage services. We generated $70.3 million in investment advisory fees and commissions and securities brokerage fees and commissions during the nine months ended September 30, 2013.

In the aggregate, we generated $658.3 million in noninterest income during the nine months ended September 30, 2013, compared with $114.5 million during the same period in the prior year. The significant increase in noninterest income during 2013 was 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.

Segment Information

As a result of the PlainsCapital Merger, we have two primary operating business units, PlainsCapital (financial services and products) and NLC (insurance). Within the PlainsCapital unit are three primary wholly owned 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 that are organized primarily by the core products offered to the segments' respective customers: banking, mortgage origination, insurance and financial advisory. We anticipate that


Table of Contents

future revenues will be driven primarily from the banking and mortgage origination segments, with the remainder being generated by our insurance and financial advisory segments. Based on historical results of PlainsCapital Corporation, 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, which, since September 14, 2013, includes 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 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.

Additional information concerning our reportable segments is presented in Note 20, Segment and Related Information, in the notes to our consolidated financial statements. The following tables present certain information about the operating results of our reportable segments (in thousands).

                                                     Mortgage                     Financial     All Other and       Hilltop
Three Months Ended September 30, 2013   Banking     Origination     Insurance     Advisory      Eliminations      Consolidated
Net interest income (expense)           $ 70,230   $      (8,907 ) $       902   $     2,682   $         6,545   $       71,452
Provision for loan losses                 10,661               -             -            (3 )               -           10,658
Noninterest income                        17,156         127,460        42,162        25,709            (6,729 )        205,758
Noninterest expense                       34,474         115,135        38,795        28,324              (111 )        216,617
Income before income taxes              $ 42,251   $       3,418   $     4,269   $        70   $           (73 ) $       49,935




                                                     Mortgage                    Financial     All Other and       Hilltop
Nine Months Ended September 30, 2013    Banking     Origination    Insurance     Advisory      Eliminations      Consolidated
Net interest income (expense)          $ 206,661   $     (32,849 ) $    2,755   $     9,409   $        21,162   $      207,138
Provision for loan losses                 34,927               -            -            25                 -           34,952
Noninterest income                        41,041         439,246      122,365        77,349           (21,732 )        658,269
Noninterest expense                       98,484         373,405      135,729        84,887              (497 )        692,008
Income before income taxes             $ 114,291   $      32,992   $  (10,609 ) $     1,846   $           (73 ) $      138,447


Table of Contents

Operating Results

The net income applicable to common stockholders for the three months ended September 30, 2013 was $31.8 million, or $0.36 per diluted share, compared to net loss applicable to common stockholders of $4.0 million, or $0.07 per diluted share, for the three months ended September 30, 2012. The net income applicable to common stockholders for the nine months ended September 30, 2013 was $85.1 million, or $0.98 per diluted share, compared to net loss applicable to common stockholders of $14.4 million, or $0.26 per diluted share, for the nine months ended September 30, 2012.

As a result of the PlainsCapital Merger on November 30, 2012, the net income of PlainsCapital is included in the operating results of the Company for the three and nine months ended September 30, 2013. The operations acquired in the FNB Transaction are included in the Company's operating results beginning September 14, 2013, and were therefore not fully reflected in the Company's consolidated statement of operations for the three months ended September 30, 2013. FNB's results of operations prior to the Bank Closing Date are not included in the Company's consolidated operating results. However, we expect the operations acquired in the FNB Transaction to have a significant effect on the Bank's operating results beginning in the fourth quarter of 2013.

Certain items included in net income for 2013 resulted from purchase accounting associated with the PlainsCapital Merger and FNB Transaction. During the three months ended September 30, 2013, the pre-tax effects of these items include net accretion on acquired earning assets and liabilities of $15.2 million, offset by amortization of identifiable intangibles of $2.5 million. PlainsCapital also recorded provisions for loan losses related to acquired performing loans of approximately $2.6 million for the three months ended September 30, 2013. The aggregate after tax impact of these items was to increase net income by $6.4 million for the three months ended September 30, 2013. During the nine months ended September 30, 2013, the pre-tax effects of these items include net accretion on acquired earning assets and liabilities of $47.1 million, offset by amortization of identifiable intangibles of $7.4 million. PlainsCapital also recorded provisions for loan losses related to acquired performing loans of approximately $14.9 million for the nine months ended September 30, 2013. The aggregate after tax impact of these items was to increase net income by $15.5 million for the nine months ended September 30, 2013.

We consider the ratios shown in the table below to be key indicators of our performance.

                                                Three Months Ended    Nine Months Ended
                                                September 30, 2013    September 30, 2013
Performance Ratios (1):
Return on average stockholders' equity                       10.92 %                9.95 %
Return on average assets                                      1.73 %                1.63 %
Net interest margin (taxable equivalent) (2)                  4.45 %                4.38 %



(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) Annualized taxable equivalent net interest income divided by average interest-earning assets.

During the three months ended September 30, 2013, the consolidated taxable equivalent net interest margin of 4.45% was impacted by accretion of discount on loans of $15.7 million, amortization of premium on acquired securities of $1.2 million and amortization of premium on acquired time deposits of $0.8 million. The consolidated taxable equivalent net interest margin for the nine months ended September 30, 2013 of 4.38% was impacted by accretion of discount on loans of $49.3 million, amortization of premium on acquired securities of $4.6 million and amortization of premium on acquired time deposits of $2.4 million. As a result of these items, the consolidated taxable equivalent net interest margin increased by 92 basis points and 95 basis points during the three and nine months ended September 30, 2013, respectively.


Table of Contents

The table below provides additional details regarding our consolidated net interest income for the three and nine months ended September 30, 2013 (dollars in thousands).

                                    Three Months Ended                        Nine Months Ended
                                    September 30, 2013                        September 30, 2013
                            Average       Interest     Annualized     Average       Interest    Annualized
                          Outstanding     Earned or     Yield or    Outstanding    Earned or     Yield or
                            Balance         Paid          Rate        Balance         Paid         Rate
Assets
Interest-earning assets
Loans, gross (1)          $  4,451,589   $    68,121         6.03 % $  4,338,209   $  198,220         6.04 %
Investment securities -
taxable                        976,775         7,202         2.97 %      958,220       19,594         2.76 %
Investment securities -
non-taxable (2)                166,789         1,641         3.93 %      195,316        5,383         4.29 %
Federal funds sold and
securities purchased
under agreements to
resell                          36,762            35         0.38 %       27,281           91         0.45 %
Interest-bearing
deposits in other
financial institutions         591,581           282         0.19 %      636,203          857         0.18 %
Other                          166,559         2,546         5.66 %      162,001        7,660         5.86 %
Interest-earning
assets, gross                6,390,055        79,827         4.93 %    6,317,230      231,805         4.88 %
Allowance for
non-covered loan losses        (29,042 )                                 (18,884 )
Interest-earning
assets, net                  6,361,013                                 6,298,346
Noninterest-earning
assets                         985,793                                   905,077
Total assets              $  7,346,806                              $  7,203,423

Liabilities and
Stockholders' Equity
Interest-bearing
liabilities
Interest-bearing
deposits                  $  4,877,836   $     3,685         0.30 % $  4,621,094   $   10,541         0.30 %
Notes payable and other
borrowings                     696,472         4,101         2.02 %      773,656       12,331         1.82 %
Total interest-bearing
liabilities                  5,574,308         7,786         0.54 %    5,394,750       22,872         0.55 %
Noninterest-bearing
liabilities
Noninterest-bearing
deposits                       159,244                                   160,836
Other liabilities              431,529                                   472,648
Total liabilities            6,165,081                                 6,028,234
Stockholders' equity         1,181,165                                 1,174,512
Noncontrolling interest            560                                       677
Total liabilities and
stockholders' equity      $  7,346,806                              $  7,203,423

Net interest income (2)                  $    72,041                               $  208,933
Net interest spread (2)                                      4.39 %                                   4.33 %
Net interest margin (2)                                      4.45 %                                   4.38 %



(1) Average balance includes non-accrual loans.

(2) Annualized taxable equivalent adjustments are based on a 35% tax rate. The adjustment to interest income was $0.6 million and $1.8 million for the three and nine months ended September 30, 2013, respectively.

On a consolidated basis, net interest income increased $70.2 million and $203.4 million for the three and nine months ended September 30, 2013, respectively, . . .

  Add HTH to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for HTH - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.