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HTH > SEC Filings for HTH > Form 10-Q on 30-Jul-2014All Recent SEC Filings

Show all filings for HILLTOP HOLDINGS INC.

Form 10-Q for HILLTOP HOLDINGS INC.


30-Jul-2014

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 (this "Quarterly Report") and the financial information set forth in the tables herein.

Unless the context otherwise indicates, all references in this Quarterly Report, 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 (a wholly owned subsidiary of Hilltop) and its subsidiaries as a whole.

FORWARD-LOOKING STATEMENTS

This Quarterly Report and the documents incorporated by reference into this report include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, 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 Quarterly Report that address results or developments that we expect or anticipate will or may occur in the future, and statements that are preceded by, followed by or include, words such as "anticipates," "believes," "could," "estimates," "expects," "forecasts," "goal," "intends," "may," "might," "probable," "projects," "seeks," "should," "target," "view" or "would" or the negative of these words and phrases or similar words or phrases, including such things as our business strategy, our financial condition, our litigation, our efforts to make strategic acquisitions, our pending acquisition of SWS Group, Inc. ("SWS"), 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:

risks related to our pending acquisition of SWS;

risks associated with merger and acquisition integration, including the assets and liabilities of FNB and SWS;

our ability to estimate loan losses;

changes in the default rate of our loans;

          risks associated with concentration in real estate related loans;



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

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

severe catastrophic events in our geographic area;

changes in the interest rate environment;

cost and availability of capital;


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

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

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

changes in key management;

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;

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

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

our participation in governmental programs, including the Small Business Lending Fund ("SBLF").

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 3, 2014, this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," Part II, Item 1A, "Risk Factors" herein and other filings we have made with the SEC. We caution that the foregoing list of factors is not exhaustive, and new factors may emerge, or changes to the foregoing factors may occur, that could impact our business. All subsequent written and oral forward-looking statements concerning our business attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements above. We do not undertake any obligation to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Quarterly Report except to the extent required by federal securities laws.

OVERVIEW

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. Our primary line of business is to provide business and consumer banking services from offices located throughout Texas. We also provide an array of financial products and services such as mortgage origination, insurance and financial advisory services.

On September 13, 2013 (the "Bank Closing Date"), the Bank assumed substantially all of the liabilities, including all of the deposits, and acquired substantially all of the assets of Edinburg, Texas-based FNB from the FDIC, as receiver, and reopened former branches of FNB acquired from the FDIC under the "PlainsCapital Bank" name (the "FNB Transaction"). Pursuant to the Purchase and Assumption Agreement by and among the FDIC as receiver for FNB, the FDIC and the Bank (the "P&A Agreement"), the Bank and the FDIC entered into loss-share agreements whereby the FDIC agreed to share in the losses of certain 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.

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. 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. Our banking operations include the operations acquired in the FNB Transaction since September 14, 2013.


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Segment Information

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, National Lloyds Insurance Company ("NLIC") and American Summit Insurance Company ("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."


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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
                             Banking     Origination     Insurance     Advisory      Corporate     Eliminations      Consolidated
Three Months Ended
June 30, 2014
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




                                                    Mortgage                       Financial                     All Other and        Hilltop
                                      Banking      Origination      Insurance      Advisory       Corporate      Eliminations       Consolidated
Six Months Ended June 30, 2014
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




                                          Mortgage                    Financial                   All Other and       Hilltop
                             Banking     Origination    Insurance     Advisory      Corporate     Eliminations      Consolidated
Three Months Ended
June 30, 2013
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




                                           Mortgage                    Financial                   All Other and       Hilltop
                              Banking     Origination    Insurance     Advisory      Corporate     Eliminations      Consolidated
Six Months Ended June 30,
2013
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

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 $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.

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 six months ended June 30, 2014 and 2013, we generated $214.5 million and $311.7 million, respectively, in net gains from the sale of loans, other mortgage production income (including income associated with retained mortgage servicing rights), 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 $81.1 million in net insurance premiums earned during the six months ended June 30, 2014, compared with $76.1 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 $43.6 million and $48.0 million in investment advisory fees and commissions and securities brokerage fees and commissions during the six months ended June 30, 2014 and 2013, respectively.


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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.

We also incur noninterest expenses in the operation of our businesses. Our businesses engage in labor intensive activities and, consequently, employees' compensation and benefits represent the majority of our noninterest expenses.

Consolidated Operating Results

Net income applicable to common stockholders 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
                                      2014             2013            2014             2013        December 31, 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.

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.


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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.

The tables below provide additional details regarding our consolidated net interest income (dollars in thousands).

                                                            Three Months Ended June 30,
                                                   2014                                     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
. . .
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