10-Q 1 a13-8637_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2013

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 1-31987

 

Hilltop Holdings Inc.

(Exact name of registrant as specified in its charter)

 

Maryland

 

84-1477939

(State or other jurisdiction of incorporation or
organization)

 

(I.R.S. Employer Identification No.)

 

 

 

200 Crescent Court, Suite 1330

 

 

Dallas, TX

 

75201

(Address of principal executive offices)

 

(Zip Code)

 

(214) 855-2177

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or 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 o

 

Accelerated filer x

 

 

 

Non-accelerated filer o
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x

 

The number of shares of the registrant’s common stock outstanding at May 3, 2013 was 83,955,870.

 

 

 



Table of Contents

 

HILLTOP HOLDINGS INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2013

 

TABLE OF CONTENTS

 

 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements.

 

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Operations

4

 

Consolidated Statements of Comprehensive Income (Loss)

5

 

Consolidated Statements of Stockholders’ Equity

6

 

Consolidated Statements of Cash Flows

7

 

Notes to Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

35

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

52

 

 

 

Item 4.

Controls and Procedures

55

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

55

 

 

 

Item 6.

Exhibits

55

 

2



Table of Contents

 

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

588,838

 

$

722,039

 

Federal funds sold and securities purchased under agreements to resell

 

23,691

 

4,421

 

Securities:

 

 

 

 

 

Trading, at fair value

 

60,769

 

90,113

 

Available for sale, at fair value (amortized cost of $1,132,701 and $978,502, respectively)

 

1,146,505

 

990,953

 

 

 

1,207,274

 

1,081,066

 

 

 

 

 

 

 

Loans held for sale

 

1,242,322

 

1,401,507

 

Loans, net of unearned income

 

3,248,367

 

3,152,396

 

Allowance for loan losses

 

(16,637

)

(3,409

)

Loans, net

 

3,231,730

 

3,148,987

 

 

 

 

 

 

 

Broker-dealer and clearing organization receivables

 

187,833

 

145,564

 

Insurance premiums receivable

 

24,924

 

24,615

 

Deferred policy acquisition costs

 

20,301

 

19,812

 

Reinsurance receivable, net of uncollectible amounts

 

18,210

 

18,567

 

Premises and equipment, net

 

111,894

 

111,381

 

Other assets

 

233,033

 

277,398

 

Goodwill

 

251,808

 

253,770

 

Other intangible assets, net

 

75,052

 

77,738

 

Total assets

 

$

7,216,910

 

$

7,286,865

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest-bearing

 

$

249,678

 

$

323,367

 

Interest-bearing

 

4,508,760

 

4,377,094

 

Total deposits

 

4,758,438

 

4,700,461

 

 

 

 

 

 

 

Broker-dealer and clearing organization payables

 

250,280

 

187,990

 

Reserve for losses and loss adjustment expenses

 

32,070

 

34,012

 

Unearned insurance premiums

 

84,032

 

82,598

 

Short-term borrowings

 

576,730

 

728,250

 

Notes payable

 

140,747

 

141,539

 

Junior subordinated debentures

 

67,012

 

67,012

 

Other liabilities

 

129,016

 

198,453

 

Total liabilities

 

6,038,325

 

6,140,315

 

Commitments and contingencies (see Notes 9 and 10)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Hilltop Holdings 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, respectively

 

114,068

 

114,068

 

Common stock, $0.01 par value, 100,000,000 shares authorized; 83,487,340 shares issued and outstanding, respectively

 

835

 

835

 

Additional paid-in capital

 

1,304,771

 

1,304,707

 

Accumulated other comprehensive income

 

8,973

 

8,094

 

Accumulated deficit

 

(250,838

)

(283,208

)

Total Hilltop Holdings stockholders’ equity

 

1,177,809

 

1,144,496

 

Noncontrolling interest

 

776

 

2,054

 

Total stockholders’ equity

 

1,178,585

 

1,146,550

 

Total liabilities and stockholders’ equity

 

$

7,216,910

 

$

7,286,865

 

 

See accompanying notes.

 

3



Table of Contents

 

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

Interest income:

 

 

 

 

 

Loans, including fees

 

$

64,886

 

$

 

Securities:

 

 

 

 

 

Taxable

 

5,863

 

3,355

 

Tax-exempt

 

1,347

 

 

Federal funds sold and securities purchased under agreements to resell

 

21

 

 

Interest-bearing deposits with banks

 

333

 

 

Other

 

2,105

 

 

Total interest income

 

74,555

 

3,355

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

Deposits

 

3,450

 

 

Short-term borrowings

 

513

 

 

Notes payable

 

2,322

 

2,139

 

Junior subordinated debentures

 

608

 

 

Other

 

450

 

 

Total interest expense

 

7,343

 

2,139

 

 

 

 

 

 

 

Net interest income

 

67,212

 

1,216

 

Provision for loan losses

 

13,005

 

 

Net interest income after provision for loan losses

 

54,207

 

1,216

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

Net gains from sale of loans and other mortgage production income

 

127,596

 

 

Mortgage loan origination fees

 

18,893

 

 

Net insurance premiums earned

 

37,473

 

35,155

 

Investment and securities advisory fees and commissions

 

22,009

 

 

Other

 

7,356

 

1,732

 

Total noninterest income

 

213,327

 

36,887

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

Employees’ compensation and benefits

 

116,190

 

2,226

 

Loss and loss adjustment expenses

 

21,185

 

22,542

 

Policy acquisition and other underwriting expenses

 

10,803

 

10,901

 

Occupancy and equipment, net

 

19,412

 

244

 

Other

 

47,401

 

1,644

 

Total noninterest expense

 

214,991

 

37,557

 

 

 

 

 

 

 

Income before income taxes

 

52,543

 

546

 

Income tax expense

 

19,170

 

203

 

 

 

 

 

 

 

Net income

 

33,373

 

343

 

Less: Net income attributable to noncontrolling interest

 

300

 

 

 

 

 

 

 

 

Income attributable to Hilltop Holdings

 

33,073

 

343

 

Dividends on preferred stock

 

703

 

 

Income applicable to Hilltop Holdings common stockholders

 

$

32,370

 

$

343

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

Basic

 

$

0.39

 

$

0.01

 

Diluted

 

$

0.39

 

$

0.01

 

 

 

 

 

 

 

Weighted average share information:

 

 

 

 

 

Basic

 

83,487

 

56,499

 

Diluted

 

83,743

 

56,555

 

 

See accompanying notes.

 

4



Table of Contents

 

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

Net income

 

$

33,373

 

$

343

 

Other comprehensive income (loss):

 

 

 

 

 

Unrealized gains (losses) on securities available for sale, net of tax of $473 and $(1,831)

 

879

 

(3,401

)

Comprehensive income (loss)

 

34,252

 

(3,058

)

Less: comprehensive income attributable to noncontrolling interest

 

300

 

 

 

 

 

 

 

 

Comprehensive income (loss) applicable to Hilltop Holdings

 

$

33,952

 

$

(3,058

)

 

See accompanying notes.

 

5



Table of Contents

 

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

 

 

Hilltop Holdings

 

 

 

Total

 

 

 

Preferred Stock

 

Common Stock

 

Paid-in

 

Comprehensive

 

Accumulated

 

Stockholders’

 

Noncontrolling

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Income

 

Deficit

 

Equity

 

Interest

 

Equity

 

Balance, December 31, 2011

 

 

$

 

56,501

 

$

565

 

$

918,192

 

$

13,983

 

$

(277,357

)

$

655,383

 

$

 

$

655,383

 

Net income

 

 

 

 

 

 

 

343

 

343

 

 

343

 

Other comprehensive loss

 

 

 

 

 

 

(3,401

)

 

(3,401

)

 

(3,401

)

Common stock issued to board members

 

 

 

1

 

 

12

 

 

 

12

 

 

12

 

Repurchase and retirement of common stock

 

 

 

(141

)

(1

)

(1,161

)

 

 

(1,162

)

 

(1,162

)

Stock-based compensation expense

 

 

 

 

 

122

 

 

 

122

 

 

122

 

Balance, March 31, 2012

 

 

$

 

56,361

 

$

564

 

$

917,165

 

$

10,582

 

$

(277,014

)

$

651,297

 

$

 

$

651,297

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

114

 

$

114,068

 

83,487

 

$

835

 

$

1,304,707

 

$

8,094

 

$

(283,208

)

$

1,144,496

 

$

2,054

 

$

1,146,550

 

Net income

 

 

 

 

 

 

 

33,073

 

33,073

 

300

 

33,373

 

Other comprehensive income

 

 

 

 

 

 

879

 

 

879

 

 

879

 

Stock-based compensation expense

 

 

 

 

 

64

 

 

 

64

 

 

64

 

Dividends on preferred stock

 

 

 

 

 

 

 

(703

)

(703

)

 

(703

)

Cash distributions to noncontrolling interest

 

 

 

 

 

 

 

 

 

(1,578

)

(1,578

)

Balance, March 31, 2013

 

114

 

$

114,068

 

83,487

 

$

835

 

$

1,304,771

 

$

8,973

 

$

(250,838

)

$

1,177,809

 

$

776

 

$

1,178,585

 

 

See accompanying notes.

 

6



Table of Contents

 

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2013

 

2012

 

Operating Activities

 

 

 

 

 

Net income

 

$

33,373

 

$

343

 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

Provision for loan losses

 

13,005

 

 

Depreciation, amortization and accretion, net

 

(9,548

)

339

 

Deferred income taxes

 

(7,067

)

174

 

Other, net

 

85

 

179

 

Net change in securities purchased under resale agreements

 

(3,254

)

 

Net change in trading securities

 

29,344

 

 

Net change in prepaid FDIC assessments

 

625

 

 

Net change in broker-dealer and clearing organization receivables

 

(77,077

)

 

Net change in assets segregated for regulatory purposes

 

19,000

 

 

Net change in other assets

 

27,937

 

(1,481

)

Net change in broker-dealer and clearing organization payables

 

34,075

 

 

Net change in loss and loss adjustment expense reserve

 

(1,942

)

3,026

 

Net change in unearned insurance premiums

 

1,434

 

2,135

 

Net change in other liabilities

 

(56,899

)

(2,161

)

Net gains from sale of loans

 

(127,596

)

 

Loans originated for sale

 

(3,025,709

)

 

Proceeds from loans sold

 

3,310,115

 

 

Net cash provided by operating activities

 

159,901

 

2,554

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

Proceeds from sales, maturities and principal reductions of securities available for sale

 

53,759

 

2,345

 

Purchases of securities available for sale

 

(209,507

)

(2,556

)

Net change in loans

 

(41,872

)

 

Purchases of premises and equipment and other assets

 

(5,041

)

(62

)

Proceeds from sales of premises and equipment and other real estate owned

 

3,880

 

 

Net cash received for Federal Home Loan Bank and Federal Reserve Bank stock

 

6,702

 

 

Net cash used in investing activities

 

(192,079

)

(273

)

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net change in deposits

 

68,948

 

 

Net change in short-term borrowings

 

(151,520

)

 

Payments on notes payable

 

(792

)

 

Payments to repurchase common stock

 

 

(1,162

)

Net cash distributed to noncontrolling interest

 

(1,578

)

 

Other, net

 

(65

)

 

Net cash used in financing activities

 

(85,007

)

(1,162

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

(117,185

)

1,119

 

Cash and cash equivalents, beginning of period

 

726,460

 

578,520

 

Cash and cash equivalents, end of period

 

$

609,275

 

$

579,639

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

Cash paid for interest

 

$

8,313

 

$

3,667

 

Cash paid for income taxes, net of refunds

 

$

2,205

 

$

 

Supplemental Schedule of Non-Cash Activities

 

 

 

 

 

Conversion of loans to other real estate owned

 

$

284

 

$

 

 

See accompanying notes.

 

7



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” or the “Company”) is a holding company that endeavors to make acquisitions or effect business combinations. In connection with this strategy, on November 30, 2012, Hilltop became a financial holding company registered under the Bank Holding Company Act of 1956, as amended by the Gramm-Leach-Bliley Act of 1999, and acquired PlainsCapital Corporation pursuant to an agreement and plan of merger whereby PlainsCapital Corporation merged with and into our wholly owned subsidiary (the “Merger”), which survived the Merger 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. 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 March 31, 2013 and December 31, 2012 and relating to the three months ended March 31, 2013.

 

Prior to the consummation of the Merger, Hilltop’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 Hilltop’s wholly owned property and casualty insurance holding company, NLASCO, Inc. (“NLASCO”).

 

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 (consisting primarily of normal recurring accruals) 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, 2012. 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, reserves for losses and loss adjustment expenses, the mortgage loan indemnification liability and the potential impairment of assets are particularly subject to change.

 

The presentation of Hilltop’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.

 

Hilltop owns 100% of the outstanding stock of PlainsCapital. PlainsCapital owns 100% of the outstanding stock of PlainsCapital Bank (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”), PNB Aero Services, Inc. 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.

 

8



Table of Contents

 

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

Hilltop also owns 100% of NLASCO, 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”). Through a series limited liability company structure, Ventures establishes one or more separate operating divisions with select business partners, such as home builders, to originate residential mortgage loans.

 

The principal subsidiaries of First Southwest are First Southwest Company (“FSC”), a broker-dealer registered with the SEC and the Financial Industry Regulatory Authority (“FINRA”), 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”).

 

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.

 

2. PlainsCapital Acquisition

 

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 Meadow Corporation, a wholly owned subsidiary of Hilltop, with Meadow Corporation continuing 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 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.

 

The 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 Company initially recorded $230.1 million of goodwill in connection with the Merger, representing the inherent long-term value expected from the business opportunities created from combining PlainsCapital with Hilltop. The amount of goodwill recorded in connection with the Company’s acquisition of PlainsCapital Corporation is not deductible for tax purposes. The Company used significant estimates and assumptions to value the identifiable assets acquired and liabilities assumed. The purchase date valuations are considered preliminary and are subject to change for up to one year after the acquisition date. During the three months ended March 31, 2013, the Company reduced goodwill related to the PlainsCapital acquisition by $2.0 million for a purchase accounting adjustment related to the valuation of a capital lease obligation.

 

The operations acquired in the Merger have been included in Hilltop’s financial results since December 1, 2012. The following table presents pro forma results for the three months ended March 31, 2012 had the acquisition taken place on January 1, 2011 (in thousands). The pro forma financial information combines the historical results of Hilltop and PlainsCapital Corporation 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 and related adjustments to PlainsCapital’s provision for loan losses. 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 Merger. Further, certain

 

9



Table of Contents

 

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

costs associated with any restructuring or integration activities are also not reflected in the pro forma results. Pro forma results include the acquisition-related merger and restructuring charges incurred during the period. The pro forma results are not indicative of what would have occurred had the acquisition taken place on the indicated date.

 

 

 

Three Months Ended

 

 

 

March 31, 2012

 

Net interest income

 

$

53,542

 

Other revenues

 

186,993

 

Net income

 

22,687

 

 

3. Fair Value Measurements

 

Fair Value Measurements and Disclosures

 

Hilltop 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.

 

·                  Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities that the Company can access at the measurement date.

 

·                  Level 2 Inputs: Observable inputs other than Level 1 prices. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, prepayment speeds, default rates, credit risks, loss severities, etc.), and inputs that are derived from or corroborated by market data, among others.

 

·                  Level 3 Inputs: Unobservable inputs that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities. Level 3 inputs include pricing models and discounted cash flow techniques, among others.

 

Fair Value Option

 

Hilltop has elected to measure substantially all of PrimeLending’s mortgage loans held for sale and certain time deposits at fair value under the provisions of the Fair Value Option. Hilltop 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. Hilltop 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 March 31, 2013, the aggregate fair value of PrimeLending’s mortgage loans held for sale accounted for under the Fair Value Option was $1.24 billion, while the unpaid principal balance of those loans was $1.20 billion. At December 31, 2012, the aggregate fair value of PrimeLending’s mortgage loans held for sale accounted for under the Fair Value Option

 

10



Table of Contents

 

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

was $1.40 billion, while 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.

 

Hilltop holds a number of financial instruments that are measured at fair value on a recurring basis, either by the application of 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, data from independent pricing services and rates paid in the brokered certificate of deposit market.

 

The following tables present information regarding financial assets and liabilities measured at fair value on a recurring basis (in thousands).

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

March 31, 2013

 

Inputs

 

Inputs

 

Inputs

 

Fair Value

 

Cash and cash equivalents

 

$

612,529

 

$

 

$

 

$

612,529

 

Trading securities

 

 

60,769

 

 

60,769

 

Available for sale securities

 

21,961

 

1,065,743

 

58,801

 

1,146,505

 

Loans held for sale

 

 

1,241,578

 

 

1,241,578

 

Derivative assets

 

 

22,600

 

 

22,600

 

Mortgage servicing asset

 

 

 

4,430

 

4,430

 

Time deposits

 

 

1,066

 

 

1,066

 

Trading liabilities

 

 

52

 

 

52

 

Derivative liabilities

 

 

7,481

 

 

7,481

 

 

 

 

 

 

 

 

 

 

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

December 31, 2012

 

Inputs

 

Inputs

 

Inputs

 

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

 

 

1,080

 

 

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

 

 

 

 

 

 

 

Included in Other

 

 

 

 

 

Beginning of

 

 

 

 

 

Included in

 

Comprehensive

 

Balance at

 

 

 

Period

 

Purchases

 

Issuances

 

Net Income (Loss)

 

Income (Loss)

 

End of Period

 

Three months ended March 31, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

 

$

56,277

 

$

 

$

 

$

 

$

2,524

 

$

58,801

 

Mortgage servicing asset

 

2,080

 

 

2,125

 

225

 

 

4,430

 

Total

 

$

58,357

 

$

 

$

2,125

 

$

225

 

$

2,524

 

$

63,231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended March 31, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

 

$

60,377

 

$

 

$

 

$

 

$

(3,817

)

$

56,560

 

Total

 

$

60,377

 

$

 

$

 

$

 

$

(3,817

)

$

56,560

 

 

11



Table of Contents

 

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

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 March 31, 2013. The available for sale securities noted in the tables above reflect Hilltop’s note receivable and warrant with 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 an increase or decrease 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 stock price would result in a significant change in the fair value measurement of the warrant.

 

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 variety of factors, including prepayment assumptions, discount rates, delinquency rates, contractually specified servicing fees, servicing costs and underlying portfolio characteristics.

 

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

 

 

 

Three Months Ended March 31, 2013

 

Three Months Ended March 31, 2012

 

 

 

 

 

Other

 

Total

 

 

 

Other

 

Total

 

 

 

Net Gains from

 

Noninterest

 

Changes in

 

Net Gains from

 

Noninterest

 

Changes in

 

 

 

Sale of Loans

 

Income

 

Fair Value

 

Sale of Loans

 

Income

 

Fair Value

 

Loans held for sale

 

$

(5,438

)

$

 

$

(5,438

)

$

 

$

 

$

 

Other assets

 

2,350

 

 

2,350

 

 

 

 

Time deposits

 

 

8

 

8

 

 

 

 

 

Hilltop also determines the fair value of certain assets and liabilities on a non-recurring basis. 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 — Hilltop reports impaired loans at fair value through specific allowances within the allowance for loan losses. Hilltop acquired impaired, or purchased credit impaired (“PCI”) loans with a fair value of $172.9 million at acquisition. 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 March 31, 2013, PCI loans with a carrying amount of $157.0 million had been reduced by specific allowances within the allowance for loan losses of $0.4 million, resulting in a reported fair value of $156.6 million.

 

Other Real Estate Owned — Hilltop reports other real estate owned 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 other real estate owned. Subsequent to the initial transfer to other real estate owned, downward valuation adjustments are charged against earnings. Hilltop primarily determines fair value using Level 2 inputs consisting of independent appraisals. At March 31, 2013, the estimated fair value of other real estate owned was $7.5 million.

 

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 filed with the SEC on March 15, 2013.

 

12



Table of Contents

 

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

The following tables present the carrying values and estimated fair values of financial instruments (in thousands).

 

 

 

 

 

Estimated Fair Value

 

 

 

Carrying

 

Level 1

 

Level 2

 

Level 3

 

 

 

March 31, 2013

 

Amount

 

Inputs

 

Inputs

 

Inputs

 

Total

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

 

$

612,529

 

$

612,529

 

$

 

$

 

$

612,529

 

Securities

 

1,207,274

 

21,961

 

1,126,512

 

58,801

 

1,207,274

 

Loans held for sale

 

1,242,322

 

 

1,242,322

 

 

1,242,322

 

Loans, net

 

3,231,730

 

 

 

3,267,917

 

3,267,917

 

Broker-dealer and clearing organization receivables

 

187,833

 

 

187,833

 

 

187,833

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee award receivable

 

18,091

 

 

18,091

 

 

18,091

 

Cash surrender value of life insurance policies

 

24,171

 

 

24,171

 

 

24,171

 

Interest rate swaps, interest rate lock commitments and forward purchase commitments

 

22,600

 

 

22,600

 

 

22,600

 

Mortgage servicing asset

 

4,430

 

 

 

4,430

 

4,430

 

Accrued interest receivable

 

17,428

 

 

17,428

 

 

17,428

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

4,758,438

 

 

4,762,428

 

 

4,762,428

 

Broker-dealer and clearing organization payables

 

250,280

 

 

250,280

 

 

250,280

 

Other trading liabilities

 

52

 

 

52

 

 

52

 

Short-term borrowings

 

576,730

 

 

576,730

 

 

576,730

 

Debt

 

207,759

 

 

215,886

 

 

215,886

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to sell mortgage-backed securities

 

7,481

 

 

7,481

 

 

7,481

 

Accrued interest payable

 

3,385

 

 

3,385

 

 

3,385

 

 

 

 

 

 

Estimated Fair Value

 

 

 

Carrying

 

Level 1

 

Level 2

 

Level 3

 

 

 

December 31, 2012

 

Amount

 

Inputs

 

Inputs

 

Inputs

 

Total

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and short-term investments

 

$

726,460

 

$

726,460

 

$

 

$

 

$

726,460

 

Securities

 

1,081,066

 

20,428

 

1,004,361

 

56,277

 

1,081,066

 

Loans held for sale

 

1,401,507

 

 

1,401,507

 

 

1,401,507

 

Loans, net

 

3,148,987

 

 

 

3,148,987

 

3,148,987

 

Broker-dealer and clearing organization receivables

 

145,564

 

 

145,564

 

 

145,564

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee award receivable

 

18,467

 

 

18,467

 

 

18,467

 

Cash surrender value of life insurance policies

 

24,086

 

 

24,086

 

 

24,086

 

Interest rate swaps, interest rate lock commitments and

 

 

 

 

 

 

 

 

 

 

 

forward purchase commitments

 

15,697

 

 

15,697

 

 

15,697

 

Mortgage servicing asset

 

2,080

 

 

 

2,080

 

2,080

 

Accrued interest receivable

 

16,541

 

 

16,541

 

 

16,541

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

4,700,461

 

 

4,698,848

 

 

4,698,848

 

Broker-dealer and clearing organization payables

 

187,990

 

 

187,990

 

 

187,990

 

Other trading liabilities

 

3,164

 

 

3,164

 

 

3,164

 

Short-term borrowings

 

728,250

 

 

728,250

 

 

728,250

 

Debt

 

208,551

 

 

217,092

 

 

217,092

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments to sell mortgage-backed securities

 

1,080

 

 

1,080

 

 

1,080

 

Accrued interest payable

 

4,400

 

 

4,400

 

 

4,400

 

 

13



Table of Contents

 

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

4. Securities

 

The amortized cost and fair value of available for sale securities are summarized as follows (in thousands).

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

March 31, 2013

 

Cost

 

Gains

 

Losses

 

Fair Value

 

U.S. Treasury securities

 

$

7,159

 

$

118

 

$

(3

)

$

7,274

 

U.S. government agencies:

 

 

 

 

 

 

 

 

 

Bonds

 

630,725

 

1,527

 

(956

)

631,296

 

Residential mortgage-backed securities

 

16,927

 

426

 

(150

)

17,203

 

Collateralized mortgage obligations

 

165,520

 

411

 

(243

)

165,688

 

Corporate debt securities

 

72,811

 

7,016

 

 

79,827

 

States and political subdivisions

 

166,057

 

416

 

(3,090

)

163,383

 

Commercial mortgage-backed securities

 

991

 

81

 

 

1,072

 

Equity securities

 

19,423

 

2,537

 

 

21,960

 

Note receivable

 

41,020

 

3,745

 

 

44,765

 

Warrant

 

12,068

 

1,969

 

 

14,037

 

Totals

 

$

1,132,701

 

$

18,246

 

$

(4,442

)

$

1,146,505

 

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

December 31, 2012

 

Cost

 

Gains

 

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

 

 

Included within the available for sale equity securities are 1,475,387 shares of SWS common stock. Furthermore, the available for sale securities include a senior unsecured loan to SWS in July 2011 in a principal amount of $50.0 million pursuant to a credit agreement, which loan 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. SWS issued Hilltop a warrant to purchase 8,695,652 shares of SWS common stock, $0.10 par value per share, exercisable at a price of $5.75 per share subject to anti-dilution adjustments. If the warrant was fully exercised, Hilltop would beneficially own 24.6% of SWS.

 

14



Table of Contents

 

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

Information regarding available for sale securities that were in an unrealized loss position is shown in the following table (dollars in thousands).

 

 

 

March 31, 2013

 

December 31, 2012

 

 

 

Number of

 

 

 

Unrealized

 

Number of

 

 

 

Unrealized

 

 

 

Securities

 

Fair Value

 

Losses

 

Securities

 

Fair Value

 

Losses

 

U.S. treasury securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

3

 

$

4,482

 

$

3

 

$

2

 

$

2,427

 

$

2

 

Unrealized loss for twelve months or longer

 

1

 

399

 

 

 

 

 

 

 

4

 

4,881

 

3

 

2

 

2,427

 

2

 

U.S. government agencies:

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

21

 

340,047

 

956

 

14

 

236,305

 

314

 

Unrealized loss for twelve months or longer

 

 

 

 

 

 

 

 

 

21

 

340,047

 

956

 

14

 

236,305

 

314

 

Residential mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

3

 

9,900

 

150

 

7

 

12,279

 

70

 

Unrealized loss for twelve months or longer

 

 

 

 

 

 

 

 

 

3

 

9,900

 

150

 

7

 

12,279

 

70

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

9

 

83,102

 

243

 

8

 

38,887

 

79

 

Unrealized loss for twelve months or longer

 

 

 

 

 

 

 

 

 

9

 

83,102

 

243

 

8

 

38,887

 

79

 

States and political subdivisions:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

199

 

131,527

 

3,090

 

225

 

156,664

 

2,138

 

Unrealized loss for twelve months or longer

 

 

 

 

 

 

 

 

 

199

 

131,527

 

3,090

 

225

 

156,664

 

2,138

 

Total available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

235

 

569,058

 

4,442

 

256

 

446,562

 

2,603

 

Unrealized loss for twelve months or longer

 

1

 

399

 

 

 

 

 

 

 

236

 

$

569,457

 

$

4,442

 

256

 

$

446,562

 

$

2,603

 

 

During the three months ended March 31, 2013 and 2012, the Company did not record any other-than-temporary impairments. While all of the investments are monitored for potential other-than-temporary impairment, our analysis and experience indicate that these 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 March 31, 2013.

 

15



Table of Contents

 

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties. The amortized cost and fair value of securities, excluding trading and available for sale equity securities, at March 31, 2013, are shown by contractual maturity below (in thousands).

 

 

 

Amortized

 

 

 

 

 

Cost

 

Fair Value

 

Due in one year or less

 

$

25,874

 

$

26,150

 

Due after one year through five years

 

82,885

 

87,836

 

Due after five years through ten years

 

45,284

 

48,011

 

Due after ten years

 

722,709

 

719,783

 

 

 

876,752

 

881,780

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

16,927

 

17,203

 

Collateralized mortgage obligations

 

165,520

 

165,688

 

Commercial mortgage-backed securities

 

991

 

1,072

 

 

 

$

1,060,190

 

$

1,065,743

 

 

FSC realized a net loss from its trading securities portfolio of $1.0 million during the three months ended March 31, 2013, which is recorded as a component of other noninterest income within the consolidated statement of operations.

 

Securities with a carrying amount of $783.0 million and $635.2 million (with a fair value of $786.7 million and $633.4 million) at March 31, 2013 and December 31, 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.

 

At both March 31, 2013 and December 31, 2012, NLASCO had investments on deposit in custody for various state insurance departments with carrying values of $9.3 million.

 

5. Loans and Allowance for Loan Losses

 

Loans summarized by category are as follows (in thousands).

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

Commercial and industrial

 

$

1,705,208

 

$

1,660,293

 

Real estate

 

1,237,352

 

1,184,914

 

Construction and land development

 

279,374

 

280,483

 

Consumer

 

26,433

 

26,706

 

 

 

3,248,367

 

3,152,396

 

Allowance for loan losses

 

(16,637

)

(3,409

)

Total loans, net of allowance

 

$

3,231,730

 

$

3,148,987

 

 

PlainsCapital 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 regulatory guidelines. 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.

 

16



Table of Contents

 

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

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 global 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 global cash flow analysis based on the significance the guarantors are expected to serve as secondary repayment sources. PlainsCapital’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.

 

PlainsCapital 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 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. The following table presents the outstanding contractual balance and the carrying value of the PCI loans at March 31, 2013 and December 31, 2012 (in thousands).

 

 

 

March 31,

 

December 31,

 

 

 

2013

 

2012

 

Carrying amount

 

$

157,024

 

$

166,780

 

Outstanding balance

 

210,416

 

222,674

 

 

Changes in the accretable yield for the PCI loans were as follows (in thousands).

 

 

 

Three Months Ended

 

 

 

March 31, 2013

 

Balance, beginning of period

 

$

17,553

 

Increases in expected cash flows

 

11,996

 

Disposals of loans

 

(26

)

Accretion

 

(3,277

)

Balance, end of period

 

$

26,246

 

 

Impaired loans exhibit a clear indication that the borrower’s cash flow may not be sufficient to meet principal and interest payments, which is generally when a loan is 90 days past due unless the asset is both well secured and in the process of collection. Impaired loans include non-accrual loans, troubled debt restructurings (“TDRs”), PCI loans and partially charged-off loans.

 

17



Table of Contents

 

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

Impaired loans are summarized by class in the following tables (in thousands). There were no impaired loans at December 31, 2012, other than PCI loans, and therefore no related allowance.

 

 

 

Unpaid

 

 

 

 

 

Total

 

 

 

 

 

Contractual

 

Nonaccretable

 

Accretable

 

Recorded

 

Related

 

March 31, 2013

 

Principal Balance

 

Difference

 

Yield

 

Investment

 

Allowance

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

Secured

 

$

91,154

 

$

23,380

 

$

7,264

 

$

68,666

 

$

228

 

Unsecured

 

11,664

 

6,355

 

5,649

 

2,794

 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

61,850

 

13,259

 

8,031

 

51,223

 

156

 

Secured by residential properties

 

10,180

 

1,853

 

892

 

8,098

 

18

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

29

 

5

 

24