10-Q 1 a13-19768_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 September 30, 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 November 8, 2013 was 86,857,999.

 

 

 



Table of Contents

 

HILLTOP HOLDINGS INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 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

45

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

68

 

 

 

Item 4.

Controls and Procedures

71

 

 

 

 

 

 

PART II — OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

72

 

 

 

Item 1A.

Risk Factors

72

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

74

 

 

 

Item 6.

Exhibits

74

 

2



Table of Contents

 

HILLTOP HOLDINGS INC. AND SUBSIDIARIES 

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

 

 

 

September 30,

 

December 31,

 

 

 

2013

 

2012

 

 

 

(Unaudited)

 

 

 

Assets

 

 

 

 

 

Cash and due from banks

 

$

976,188

 

$

722,039

 

Federal funds sold and securities purchased under agreements to resell

 

40,086

 

4,421

 

Securities:

 

 

 

 

 

Trading, at fair value

 

43,254

 

90,113

 

Available for sale, at fair value (amortized cost of $1,305,903 and $978,502, respectively)

 

1,279,381

 

990,953

 

 

 

1,322,635

 

1,081,066

 

 

 

 

 

 

 

Loans held for sale

 

1,046,801

 

1,401,507

 

Non-covered loans, net of unearned income

 

3,310,224

 

3,152,396

 

Allowance for non-covered loan losses

 

(33,180

)

(3,409

)

Non-covered loans, net

 

3,277,044

 

3,148,987

 

 

 

 

 

 

 

Covered loans

 

1,096,590

 

 

Broker-dealer and clearing organization receivables

 

132,636

 

145,564

 

Insurance premiums receivable

 

27,006

 

24,615

 

Deferred policy acquisition costs

 

21,884

 

19,812

 

Reinsurance receivable, net of uncollectible amounts

 

7,656

 

18,567

 

Premises and equipment, net

 

187,857

 

111,381

 

FDIC indemnification asset

 

190,041

 

 

Covered other real estate owned

 

119,660

 

 

Other assets

 

319,758

 

277,398

 

Goodwill

 

251,808

 

253,770

 

Other intangible assets, net

 

75,942

 

77,738

 

Total assets

 

$

9,093,592

 

$

7,286,865

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest-bearing

 

$

392,404

 

$

323,367

 

Interest-bearing

 

6,543,758

 

4,377,094

 

Total deposits

 

6,936,162

 

4,700,461

 

 

 

 

 

 

 

Broker-dealer and clearing organization payables

 

142,411

 

187,990

 

Reserve for losses and loss adjustment expenses

 

31,267

 

34,012

 

Unearned insurance premiums

 

92,064

 

82,598

 

Short-term borrowings

 

305,297

 

728,250

 

Notes payable

 

140,111

 

141,539

 

Junior subordinated debentures

 

67,012

 

67,012

 

Other liabilities

 

172,915

 

198,453

 

Total liabilities

 

7,887,239

 

6,140,315

 

Commitments and contingencies (see Notes 11 and 12)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Hilltop stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.01 par value, 10,000,000 shares authorized;

 

 

 

 

 

Series B, liquidation value per share of $1,000; 114,068 shares issued and outstanding, respectively

 

114,068

 

114,068

 

Common stock, $0.01 par value, 100,000,000 shares authorized; 83,958,844 and 83,487,340 shares issued and outstanding, respectively

 

840

 

835

 

Additional paid-in capital

 

1,302,625

 

1,304,448

 

Accumulated other comprehensive income (loss)

 

(17,238

)

8,094

 

Accumulated deficit

 

(194,820

)

(282,949

)

Total Hilltop stockholders’ equity

 

1,205,475

 

1,144,496

 

Noncontrolling interest

 

878

 

2,054

 

Total stockholders’ equity

 

1,206,353

 

1,146,550

 

Total liabilities and stockholders’ equity

 

$

9,093,592

 

$

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 September 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Interest income:

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

68,121

 

$

 

$

198,220

 

$

 

Securities:

 

 

 

 

 

 

 

 

 

Taxable

 

7,202

 

3,387

 

19,594

 

10,129

 

Tax-exempt

 

1,052

 

 

3,588

 

 

Federal funds sold and securities purchased under agreements to resell

 

35

 

 

91

 

 

Interest-bearing deposits with banks

 

282

 

 

857

 

 

Other

 

2,546

 

 

7,660

 

 

Total interest income

 

79,238

 

3,387

 

230,010

 

10,129

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

Deposits

 

3,685

 

 

10,541

 

 

Short-term borrowings

 

384

 

 

1,488

 

 

Notes payable

 

2,294

 

2,140

 

6,924

 

6,410

 

Junior subordinated debentures

 

591

 

 

1,811

 

 

Other

 

832

 

 

2,108

 

 

Total interest expense

 

7,786

 

2,140

 

22,872

 

6,410

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

71,452

 

1,247

 

207,138

 

3,719

 

Provision for loan losses

 

10,658

 

 

34,952

 

 

Net interest income after provision for loan losses

 

60,794

 

1,247

 

172,186

 

3,719

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Net realized gains on securities

 

1,142

 

 

1,142

 

 

Net gains from sale of loans and other mortgage production income

 

105,337

 

 

375,464

 

 

Mortgage loan origination fees

 

22,091

 

 

63,679

 

 

Net insurance premiums earned

 

39,982

 

37,688

 

116,045

 

109,038

 

Investment and securities advisory fees and commissions

 

22,310

 

 

70,283

 

 

Bargain purchase gain

 

3,271

 

 

3,271

 

 

Other

 

11,625

 

1,895

 

28,385

 

5,457

 

Total noninterest income

 

205,758

 

39,583

 

658,269

 

114,495

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Employees’ compensation and benefits

 

119,176

 

1,906

 

368,081

 

6,404

 

Loss and loss adjustment expenses

 

24,631

 

30,136

 

93,976

 

91,749

 

Policy acquisition and other underwriting expenses

 

11,739

 

10,121

 

34,169

 

31,864

 

Occupancy and equipment, net

 

20,974

 

246

 

60,540

 

738

 

Other

 

40,097

 

4,383

 

135,242

 

8,827

 

Total noninterest expense

 

216,617

 

46,792

 

692,008

 

139,582

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

49,935

 

(5,962

)

138,447

 

(21,368

)

Income tax expense (benefit)

 

16,632

 

(1,914

)

49,111

 

(6,954

)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

33,303

 

(4,048

)

89,336

 

(14,414

)

Less: Net income attributable to noncontrolling interest

 

339

 

 

1,207

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) attributable to Hilltop

 

32,964

 

(4,048

)

88,129

 

(14,414

)

Dividends on preferred stock

 

1,133

 

 

2,985

 

 

Income (loss) applicable to Hilltop common stockholders

 

$

31,831

 

$

(4,048

)

$

85,144

 

$

(14,414

)

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.38

 

$

(0.07

)

$

1.01

 

$

(0.26

)

Diluted

 

$

0.36

 

$

(0.07

)

$

0.98

 

$

(0.26

)

 

 

 

 

 

 

 

 

 

 

Weighted average share information:

 

 

 

 

 

 

 

 

 

Basic

 

83,493

 

56,363

 

83,490

 

56,408

 

Diluted

 

90,460

 

56,363

 

90,251

 

56,408

 

 

See accompanying notes.

 

4



Table of Contents

 

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Net income (loss)

 

$

33,303

 

$

(4,048

)

$

89,336

 

$

(14,414

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Unrealized gains (losses) on securities available for sale, net of tax of $1,135, $3,225, $(13,641) and $319, respectively

 

2,109

 

5,990

 

(25,332

)

593

 

Comprehensive income (loss)

 

35,412

 

1,942

 

64,004

 

(13,821

)

Less: comprehensive income attributable to noncontrolling interest

 

339

 

 

1,207

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) applicable to Hilltop

 

$

35,073

 

$

1,942

 

$

62,797

 

$

(13,821

)

 

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

 

 

 

Total

 

 

 

Preferred Stock

 

Common Stock

 

Paid-in

 

Comprehensive

 

Accumulated

 

Stockholders’

 

Noncontrolling

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Income (Loss)

 

Deficit

 

Equity

 

Interest

 

Equity

 

Balance, December 31, 2011

 

 

$

 

56,501

 

$

565

 

$

918,192

 

$

13,983

 

$

(277,357

)

$

655,383

 

$

 

$

655,383

 

Net loss

 

 

 

 

 

 

 

(14,414

)

(14,414

)

 

(14,414

)

Other comprehensive income

 

 

 

 

 

 

593

 

 

593

 

 

593

 

Stock-based compensation expense

 

 

 

 

 

367

 

 

 

367

 

 

367

 

Common stock issued to board members

 

 

 

4

 

 

38

 

 

 

38

 

 

38

 

Repurchase and retirement of common stock

 

 

 

(141

)

(1

)

(1,161

)

 

 

(1,162

)

 

(1,162

)

Balance, September 30, 2012

 

 

$

 

56,364

 

$

564

 

$

917,436

 

$

14,576

 

$

(291,771

)

$

640,805

 

$

 

$

640,805

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

114

 

$

114,068

 

83,487

 

$

835

 

$

1,304,448

 

$

8,094

 

$

(282,949

)

$

1,144,496

 

$

2,054

 

$

1,146,550

 

Net income

 

 

 

 

 

 

 

88,129

 

88,129

 

1,207

 

89,336

 

Other comprehensive loss

 

 

 

 

 

 

(25,332

)

 

(25,332

)

 

(25,332

)

Stock-based compensation expense

 

 

 

 

 

1,071

 

 

 

1,071

 

 

1,071

 

Common stock issued to board members

 

 

 

7

 

 

96

 

 

 

96

 

 

96

 

Issuance of restricted common stock

 

 

 

465

 

5

 

(5

)

 

 

 

 

 

Dividends on preferred stock

 

 

 

 

 

(2,985

)

 

 

(2,985

)

 

(2,985

)

Cash distributions to noncontrolling interest

 

 

 

 

 

 

 

 

 

(2,383

)

(2,383

)

Balance, September 30, 2013

 

114

 

$

114,068

 

83,959

 

$

840

 

$

1,302,625

 

$

(17,238

)

$

(194,820

)

$

1,205,475

 

$

878

 

$

1,206,353

 

 

See accompanying notes.

 

6



Table of Contents

 

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2013

 

2012

 

Operating Activities

 

 

 

 

 

Net income (loss)

 

$

89,336

 

$

(14,414

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities

 

 

 

 

 

Provision for loan losses

 

34,952

 

 

Depreciation, amortization and accretion, net

 

(24,740

)

1,025

 

Net realized gains on securities

 

(1,142

)

 

Bargain purchase gain on acquisition

 

(3,271

)

 

Deferred income taxes

 

(11,423

)

(6,954

)

Other, net

 

3,914

 

495

 

Net change in trading securities

 

46,859

 

 

Net change in broker-dealer and clearing organization receivables

 

2,796

 

 

Net change in other assets

 

23,711

 

1,740

 

Net change in broker-dealer and clearing organization payables

 

(37,386

)

 

Net change in loss and loss adjustment expense reserve

 

(2,745

)

1,200

 

Net change in unearned insurance premiums

 

9,466

 

6,159

 

Net change in other liabilities

 

(21,993

)

(2,618

)

Net gains from sale of loans

 

(375,464

)

 

Loans originated for sale

 

(9,427,627

)

 

Proceeds from loans sold

 

10,157,410

 

 

Net cash provided by (used in) operating activities

 

462,653

 

(13,367

)

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

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

 

211,732

 

13,225

 

Purchases of securities available for sale

 

(255,142

)

(2,887

)

Net change in non-covered loans

 

(49,255

)

 

Purchases of premises and equipment and other assets

 

(20,264

)

(161

)

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

 

7,641

 

 

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

 

89

 

 

Net cash from FNB Transaction

 

362,695

 

 

Net cash provided by investing activities

 

257,496

 

10,177

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

Net change in deposits

 

(1,476

)

 

Net change in short-term borrowings

 

(422,953

)

 

Proceeds from notes payable

 

1,000

 

 

 

Payments on notes payable

 

(2,428

)

 

Payments to repurchase common stock

 

 

(1,162

)

Dividends paid

 

(1,852

)

 

Net cash distributed to noncontrolling interest

 

(2,383

)

 

Other, net

 

(243

)

 

Net cash used in financing activities

 

(430,335

)

(1,162

)

 

 

 

 

 

 

Net change in cash and cash equivalents

 

289,814

 

(4,352

)

Cash and cash equivalents, beginning of period

 

726,460

 

578,520

 

Cash and cash equivalents, end of period

 

$

1,016,274

 

$

574,168

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

Cash paid for interest

 

$

22,513

 

$

7,849

 

Cash paid for income taxes, net of refunds

 

$

52,752

 

$

 

Supplemental Schedule of Non-Cash Activities

 

 

 

 

 

Conversion of loans to other real estate owned

 

$

6,019

 

$

 

 

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” and, collectively with its subsidiaries, the “Company”) is a financial holding company registered under the Bank Holding Company Act of 1956, as amended by the Gramm-Leach-Bliley Act of 1999. On November 30, 2012, Hilltop acquired PlainsCapital Corporation pursuant to an agreement and plan of merger whereby PlainsCapital Corporation merged with and into our wholly owned subsidiary (the “PlainsCapital Merger”), which survived the PlainsCapital 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 September 30, 2013 and December 31, 2012 and relating to the three and nine months ended September 30, 2013.

 

Prior to the consummation of the PlainsCapital Merger, the Company’s primary operations were limited to providing fire and homeowners insurance to low value dwellings and manufactured homes primarily in Texas and other areas of the southern United States through the Company’s wholly owned property and casualty insurance holding company, National Lloyds Corporation (“NLC”), formerly known as NLASCO, Inc.

 

On September 13, 2013 (the “Bank Closing Date”), PlainsCapital Bank (the “Bank”) assumed substantially all of the liabilities, including all of the deposits, and acquired substantially all of the assets of Edinburg, Texas-based First National Bank (“FNB”) from the Federal Deposit Insurance Corporation (the “FDIC”), as receiver, and reopened 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, as further described in Note 2 to the consolidated financial statements. 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. FNB’s expansive branch network allows the Bank to further develop its Texas footprint through expansion into the Rio Grande Valley, Houston, Corpus Christi, Laredo and El Paso markets, among others.

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”), and in conformity with the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, these financial statements contain all adjustments necessary for a fair statement of the results of the interim periods presented. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 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, the FDIC Indemnification Asset, reserves for losses and loss adjustment expenses, the mortgage loan indemnification liability, and the potential impairment of assets are particularly subject to change. The Company has

 

8



Table of Contents

 

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

applied its critical accounting policies and estimation methods consistently in all periods presented in these consolidated financial statements. As discussed in Note 2 to the consolidated financial statements, the purchase date valuations for the FNB Transaction are considered preliminary because management made significant estimates and exercised significant judgment in estimating fair values and accounting due to the short time period between the Bank Closing Date and September 30, 2013.

 

The presentation of the Company’s historical consolidated financial statements has been modified and certain items in the prior period financial statements have been reclassified to conform to the current period presentation, which is more consistent with that of a financial institution that provides an array of financial products and services.

 

Hilltop owns 100% of the outstanding stock of PlainsCapital. PlainsCapital owns 100% of the outstanding stock of the Bank and 100% of the membership interest in PlainsCapital Equity, LLC. The Bank owns 100% of the outstanding stock of PrimeLending, a PlainsCapital Company (“PrimeLending”), 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.

 

Hilltop also owns 100% of NLC, which operates through its wholly owned subsidiaries, National Lloyds Insurance Company (“NLIC”) and American Summit Insurance Company (“ASIC”).

 

PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC, the controlling and sole managing member of PrimeLending Ventures, LLC (“Ventures”). 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, 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.

 

The following significant accounting policies are in addition to the significant accounting policies described in Note 1 to the consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on March 15, 2013.

 

FDIC Indemnification Asset

 

The Company has elected to account for amounts receivable under the loss-share agreements with the FDIC as an indemnification asset (“FDIC Indemnification Asset”) in accordance with FASB ASC 805. The FDIC Indemnification Asset is initially recorded at fair value, based on the discounted value of expected future cash flows under the loss-share agreements. The difference between the present value and the undiscounted cash flows the Company expects to collect from the FDIC will be accreted into noninterest income within the consolidated statements of operations over the life of the FDIC Indemnification Asset. The FDIC Indemnification Asset is reviewed quarterly and adjusted for any changes in expected cash flows based on recent performance and expectations for future performance of the covered portfolio. These adjustments are measured on the same basis as the related covered loans and covered OREO. Any increases in cash flow of the covered assets over those expected will reduce the FDIC Indemnification Asset and any decreases in cash flow of

 

9



Table of Contents

 

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

the covered assets under those expected will increase the FDIC Indemnification Asset. Any amortization of changes in value is limited to the contractual term of the loss-share agreements. Increases and decreases to the FDIC Indemnification Asset are recorded as adjustments to noninterest income within the consolidated statements of operations over the life of the loss-share agreements.

 

Covered Other Real Estate Owned

 

Acquired OREO subject to FDIC loss-share agreements is referred to as “covered OREO” and reported separately in our consolidated balance sheets. Covered OREO is reported exclusive of expected reimbursement cash flows from the FDIC. Foreclosed covered loan collateral is transferred into covered OREO at the collateral’s fair value, less selling costs. Covered OREO was initially recorded at its estimated fair value based on similar market comparable valuations, less estimated selling costs. Subsequently, loan collateral transferred to OREO is recorded at its net realizable value. Any subsequent valuation adjustments due to declines in fair value of the covered OREO will be charged to noninterest expense, and will be partially offset by noninterest income representing the corresponding increase to the FDIC Indemnification Asset for loss reimbursements. Any recoveries of previous valuation decreases will be credited to noninterest expense with a corresponding charge to noninterest income for the portion of the recovery that is due to the FDIC.

 

2. Acquisitions

 

FNB Transaction

 

On the Bank Closing Date, the Bank assumed substantially all of the liabilities, including all of the deposits, and acquired substantially all of the assets of FNB from the FDIC in an FDIC-assisted transaction. As part of the P&A Agreement, the Bank and the FDIC entered into loss-share agreements covering future losses incurred on certain acquired loans and OREO. The Company refers to acquired commercial and single family residential loan portfolios and OREO that are subject to the loss-share agreements as “covered loans” and “covered OREO”, respectively, and these assets are presented as separate line items in the Company’s consolidated balance sheet. Collectively, covered loans and covered OREO are referred to as “covered assets”. Pursuant to the loss-share agreements, the FDIC has agreed to reimburse the Bank the following amounts with respect to the covered assets pursuant to the loss-share agreements: (i) 80% of losses on the first $240.4 million of losses incurred; (ii) 0% of losses in excess of $240.4 million up to and including $365.7 million of losses incurred; and (iii) 80% of losses in excess of $365.7 million of losses incurred. The loss-share agreements for commercial and single family residential loans are in effect for 5 years and 10 years, respectively, from the Bank Closing Date and the loss recovery provisions to the FDIC are in effect for 8 years and 10 years, respectively, from the Bank Closing Date.

 

In accordance with the loss-share agreements, the Bank may be required to make a “true-up” payment to the FDIC, approximately ten years following the Bank Closing Date, if the FDIC’s initial estimate of losses on covered assets is greater than the actual realized losses. The “true-up” payment is calculated using a defined formula set forth in the P&A Agreement.

 

The operations of FNB are included in the Company’s operating results beginning September 14, 2013, but were not significant to the Company’s consolidated statements of operations for the three and nine months ended September 30, 2013. Such operating results include a preliminary pre-tax bargain purchase gain of $3.3 million and are not necessarily indicative of future operating results. FNB’s results of operations prior to the Bank Closing Date are not included in the Company’s consolidated operating results.

 

Transaction-related expenses of $0.2 million associated with the FNB Transaction are included in noninterest expense within the consolidated statements of operations for the three and nine months ended September 30, 2013. Such expenses were for professional services and other incremental costs associated with the integration of FNB’s operations.

 

10



Table of Contents

 

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

The FNB Transaction was accounted for using the purchase method of accounting, and accordingly, purchased assets, including identifiable intangible assets and assumed liabilities were recorded at their respective Bank Closing Date fair values. Because of the short time period between the Bank Closing Date and September 30, 2013, the Company used significant estimates and assumptions to value the identifiable assets acquired and liabilities assumed. The Bank Closing Date valuations related to loans, FDIC Indemnification Asset, covered OREO, other intangible assets, assumed liabilities and taxes are considered preliminary and could differ significantly when finalized. The amounts are also subject to adjustments based upon final settlement with the FDIC. In addition, the tax treatment of FDIC-assisted acquisitions is complex and subject to interpretations that may result in future adjustments of deferred taxes as of the Bank Closing Date. The terms of the P&A Agreement provide for the FDIC to indemnify the Bank against claims with respect to liabilities and assets of FNB or any of its affiliates not assumed or otherwise purchased by the Bank and with respect to certain other claims by third parties.

 

A summary of the net assets received from the FDIC and the estimated fair value adjustments resulting in the bargain purchase gain are presented below (in thousands).

 

Cost basis net assets on September 13, 2013

 

$

182,169

 

Cash payment received from the FDIC

 

45,000

 

Fair value adjustments:

 

 

 

Securities

 

(3,341

)

Loans

 

(337,572

)

Premises and equipment

 

(1,358

)

Other real estate owned

 

(69,456

)

FDIC indemnification asset

 

189,773

 

Other intangible assets

 

6,380

 

Deposits

 

(8,282

)

Other

 

(42

)

Bargain purchase gain

 

$

3,271

 

 

In FDIC-assisted transactions, only certain assets and liabilities are transferred to the acquirer and, depending on the nature and amount of the acquirer’s bid, the FDIC may be required to make a cash payment to the acquirer or the acquirer may be required to make payment to the FDIC. In the FNB Transaction, cost basis net assets of $182.2 million and an initial cash payment received from the FDIC of $45.0 million were transferred to the Bank. This initial cash payment from the FDIC is subject to adjustment and settlement. The bargain purchase gain represents the excess of the estimated fair value of the assets acquired over the estimated fair value of the liabilities assumed.

 

The FDIC bid form provided a list of premises owned by FNB for sale at fixed prices. The Bank purchased 44 premises owned by FNB in connection with its bid for an aggregate premise purchase price of $59.5 million. For those premises owned by FNB that the Bank declined to purchase in its bid, the Bank had an exclusive option to purchase those premises during the 30-day period following the Bank Closing Date. In connection with that option, the Bank purchased an additional five premises owned by FNB on October 15, 2013, for an aggregate purchase price of $3.8 million. The Bank has a 90-day exclusive option to purchase owned premises not listed on the bid form. The Bank also has a 90-day option to assume the leases of premises leased by FNB. The Bank is required to purchase all data management equipment and, other certain special assets, furniture, fixtures and equipment, in each case at an appraised value at any premises purchased or leased by the Bank. The Bank paid $9.8 million to the FDIC for furniture, fixtures and data management equipment. The Bank is required to pay rent to the FDIC on premises owned or leased by FNB and furniture and equipment at such premises until it surrenders such premises to the FDIC. These incremental assets are reflected at fair value in the table above and were recorded subsequent to September 30, 2013.

 

11



Table of Contents

 

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

The resulting fair values of the identifiable assets acquired, and liabilities assumed, of FNB at September 13, 2013 are summarized in the following table (in thousands).

 

Cash and due from banks

 

$

362,695

 

Securities

 

286,214

 

Non-covered loans

 

45,915

 

Covered loans

 

1,105,421

 

Premises and equipment

 

71,806

 

FDIC indemnification asset

 

189,773

 

Covered other real estate owned

 

120,985

 

Other assets

 

39,709

 

Other intangible assets

 

6,380

 

Total identifiable assets acquired

 

2,228,898

 

 

 

 

 

Deposits

 

(2,211,740

)

Other liabilities

 

(13,887

)

Total liabilities assumed

 

(2,225,627

)

Net identifiable assets acquired/bargain purchase gain

 

$

3,271

 

 

The Bank acquired loans both with and without evidence of credit quality deterioration since origination. Based on preliminary purchase date valuations, the Bank’s portfolio of acquired loans had a fair market value of $1.2 billion as of the Bank Closing Date, with no carryover of any allowance for loan losses. Acquired loans were preliminarily segregated between those considered to be credit impaired, or purchased credit impaired (“PCI”) loans, and those deemed performing. The following table presents preliminary details on acquired loans at the Bank Closing Date (in thousands).

 

 

 

Acquired

 

PCI

 

Total

 

 

 

Performing

 

Loans

 

Loans

 

Commercial and industrial

 

$

44,207

 

$

50,705

 

$

94,912

 

Real estate

 

245,746

 

595,732

 

841,478

 

Construction and land development

 

38,135

 

151,803

 

189,938

 

Consumer

 

15,800

 

9,208

 

25,008

 

Total

 

$

343,888

 

$

807,448

 

$

1,151,336

 

 

The following table presents information about the acquired PCI loans at the Bank Closing Date (in thousands).

 

Contractually required principal and interest payments

 

$

1,605,634

 

Nonaccretable difference

 

567,861

 

Cash flows expected to be collected

 

1,037,773

 

Accretable difference

 

230,325

 

Fair value of covered loans acquired with a deterioration of credit quality

 

$

807,448

 

 

The following table presents information about the acquired performing loans at the Bank Closing Date (in thousands).

 

Contractually required principal and interest payments

 

$

555,057

 

Contractual cash flows not expected to be collected

 

50,216

 

Fair value at acquisition

 

343,888

 

 

12



Table of Contents

 

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

PlainsCapital Merger

 

After the close of business on November 30, 2012, Hilltop acquired PlainsCapital Corporation in a stock and cash transaction. PlainsCapital Corporation merged with and into 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 PlainsCapital Merger was accounted for using the purchase method of accounting, and accordingly, purchased assets, including identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair values. For further information regarding goodwill recorded in connection with the PlainsCapital Merger, refer to Note 7, Goodwill and Other Intangible Assets.

 

The FNB Transaction is based on the purchase of assets and assumption of certain liabilities of FNB from the FDIC, as receiver. An essential part of the transaction is the Federal financial assistance governed by the P&A Agreement with the FDIC, which is not reflective of the previous operations of FNB. The nature and magnitude of the FNB Transaction, coupled with the Federal assistance, substantially reduces the relevance of historical financial information of FNB when considering the assessment of the historical financial information relative to future operations. Since the Company believes that the continuity of FNB’s historical operations is substantially lacking after the transaction, no additional historical pro forma information regarding FNB is being provided below.

 

The following table presents pro forma results for the three and nine months ended September 30, 2012 had the PlainsCapital Merger taken place on January 1, 2011 (in thousands). The pro forma financial information combines the historical results of Hilltop and PlainsCapital, and includes the estimated impact of purchase accounting adjustments. The purchase accounting adjustments reflect the impact of recording the acquired loans at fair value, including the estimated accretion of the purchase discount on the loan portfolio. Accretion estimates were based on the acquisition date purchase discount on the loan portfolio, as it was not practicable to determine the amount of discount that would have been recorded based on economic conditions that existed on January 1, 2011. The pro forma results do not include any potential operating cost savings as a result of the PlainsCapital Merger. Further, certain costs associated with any restructuring or integration activities are also not reflected in the pro forma results. Pro forma results include any acquisition-related merger and restructuring charges incurred during the period. The pro forma results are not indicative of what would have occurred had the PlainsCapital Merger taken place on the indicated date.

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 2012

 

September 30, 2012

 

Net interest income

 

$

57,212

 

$

164,980

 

Other revenues

 

247,764

 

641,201

 

Net income

 

33,764

 

72,494

 

 

3. Fair Value Measurements

 

Fair Value Measurements and Disclosures

 

The Company determines fair values in compliance with The Fair Value Measurements and Disclosures Topic of the ASC (the “Fair Value Topic”). The Fair Value Topic defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. The Fair Value Topic defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Fair Value Topic assumes that transactions upon which fair value measurements are based occur in the principal market for the asset or liability being measured. Further, fair value measurements made under the Fair Value Topic exclude transaction costs and are not the result of forced transactions.

 

13



Table of Contents

 

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

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

 

The Company has elected to measure substantially all of PrimeLending’s mortgage loans held for sale at fair value under the provisions of the Fair Value Option Subsections of the ASC (“Fair Value Option”). The Company elected to apply the provisions of the Fair Value Option to these items so that it would have the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company determines the fair value of the financial instruments accounted for under the provisions of the Fair Value Option in compliance with the provisions of the Fair Value Topic of the ASC discussed above.

 

At September 30, 2013, the aggregate fair value of PrimeLending’s mortgage loans held for sale accounted for under the Fair Value Option was $1.05 billion, and the unpaid principal balance of those loans was $1.00 billion. At December 31, 2012, the aggregate fair value of PrimeLending’s mortgage loans held for sale accounted for under the Fair Value Option was $1.40 billion, and the unpaid principal balance of those loans was $1.36 billion. The interest component of fair value is reported as interest income on loans in the accompanying consolidated statements of operations.

 

The Company holds a number of financial instruments that are measured at fair value on a recurring basis, either by the application of the Fair Value Option or other authoritative pronouncements. The fair values of those instruments are determined primarily using Level 2 inputs. 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

 

September 30, 2013

 

Inputs

 

Inputs

 

Inputs

 

Fair Value

 

Cash and cash equivalents

 

$

1,016,274

 

$

 

$

 

$

1,016,274

 

Trading securities

 

 

43,254

 

 

43,254

 

Available for sale securities

 

20,996

 

1,198,783

 

59,602

 

1,279,381

 

Loans held for sale

 

 

1,046,152

 

 

1,046,152

 

Derivative assets

 

 

32,967

 

 

32,967

 

Mortgage servicing asset

 

 

 

13,401

 

13,401

 

Trading liabilities

 

 

46

 

 

46

 

Derivative liabilities

 

 

28,375

 

 

28,375

 

 

14



Table of Contents

 

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

 

 

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 September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

 

$

55,510

 

$

 

$

 

$

 

$

4,092

 

$

59,602

 

Mortgage servicing asset

 

7,111

 

 

4,079

 

2,211

 

 

13,401

 

Total

 

$

62,621

 

$

 

$

4,079

 

$

2,211

 

$

4,092

 

$

73,003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

 

$

56,277

 

$

 

$

 

$

 

$

3,325

 

$

59,602

 

Mortgage servicing asset

 

2,080

 

 

8,384

 

2,937

 

 

13,401

 

Total

 

$

58,357

 

$

 

$

8,384

 

$

2,937

 

$

3,325

 

$

73,003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

 

$

54,577

 

$

 

$

 

$

 

$

7,491

 

$

62,068

 

Total

 

$

54,577

 

$

 

$

 

$

 

$

7,491

 

$

62,068

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2012

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

 

$

60,377

 

$

 

$

 

$

 

$

1,691

 

$

62,068

 

Total

 

$

60,377

 

$

 

$

 

$

 

$

1,691

 

$

62,068

 

 

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 September 30, 2013. The available for sale securities noted in the tables above reflect Hilltop’s note receivable and warrant to purchase common stock of SWS Group, Inc. (“SWS”) as discussed in Note 4 to the consolidated financial statements.

 

Hilltop’s note receivable is valued using a cash flow model that estimates yield based on comparable securities in the market. The interest rate used to discount cash flows is the most significant unobservable input. An increase or decrease in the discount rate would result in a corresponding decrease or increase, respectively, in the fair value measurement of the note receivable.

 

The warrant is valued utilizing a binomial model. The underlying SWS common stock price and its related volatility, an unobservable input, are the most significant inputs into the model, and, therefore, decreases or increases to the SWS common stock price would result in a significant change in the fair value measurement of the warrant.

 

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.

 

15



Table of Contents

 

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

The Company had no transfers between Levels 1 and 2 during the periods presented.

 

The following tables present the changes in fair value for instruments that are reported at fair value under the Fair Value Option (in thousands).

 

 

 

Changes in Fair Value for Assets and Liabilities Reported at Fair Value under Fair Value Option

 

 

 

Three Months Ended September 30, 2013

 

Three Months Ended September 30, 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

 

$

44,395

 

$

 

$

44,395

 

$

 

$

 

$

 

Mortgage servicing asset

 

6,290

 

 

6,290

 

 

 

 

Time deposits

 

 

 

 

 

 

 

 

 

 

Changes in Fair Value for Assets and Liabilities Reported at Fair Value under Fair Value Option

 

 

 

Nine Months Ended September 30, 2013

 

Nine Months Ended September 30, 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

 

$

2,754

 

$

 

$

2,754

 

$

 

$

 

$

 

Mortgage servicing asset

 

11,321

 

 

11,321

 

 

 

 

Time deposits

 

 

12

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company also determines the fair value of certain assets and liabilities on a non-recurring basis. In particular, the fair value of all of the assets acquired and liabilities assumed in the FNB Transaction was determined at the Bank Closing Date. In addition, facts and circumstances may dictate a fair value measurement when there is evidence of impairment. Assets and liabilities measured on a non-recurring basis include the items discussed below.

 

Impaired Loans — The Company reports impaired loans based on the underlying fair value of the collateral through specific allowances within the allowance for loan losses. The Company acquired PCI loans with a fair value of $172.9 million and $807.4 million upon completion of the PlainsCapital Merger and the FNB Transaction, respectively. Substantially all PCI loans acquired in the FNB Transaction are covered by FDIC loss-share agreements. The fair value of PCI loans was determined using Level 3 inputs, including estimates of expected cash flows that incorporated assumptions regarding default rates, loss severity rates assuming default, prepayment speeds and estimated collateral values. At September 30, 2013, non-covered PCI loans with a carrying amount of $139.2 million had been reduced by specific allowances within the allowance for non-covered loan losses of $3.0 million, resulting in a reported value of $136.2 million that approximates fair value. Covered PCI loans with a carrying amount of $782.6 million at September 30, 2013 approximated their fair value.

 

Other Real Estate Owned — The Company reports OREO at fair value less estimated cost to sell. Any excess of recorded investment over fair value less cost to sell is charged against the allowance for loan losses when property is initially transferred to OREO. Subsequent to the initial transfer to OREO, downward valuation adjustments are charged against earnings. The Company primarily determines fair value using Level 2 inputs consisting of independent appraisals. In the FNB Transaction, the Bank acquired OREO of $121.0 million, all of which is covered by an FDIC loss-share agreement. At September 30, 2013, the estimated fair value of covered OREO was $119.7 million. The fair value of non-covered OREO at September 30, 2013 was $7.0 million and is included in other assets within the consolidated balance sheet.

 

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, except as follows.

 

FDIC Indemnification Asset — The fair value of the FDIC Indemnification Asset is based on Level 3 inputs, including the discounted value of expected future cash flows under the loss-share agreements. The discount rate contemplates the credit worthiness of the FDIC as counterparty to this asset, and considers an incremental discount rate risk premium reflective of the inherent uncertainty associated with the timing of the cash flows.

 

16



Table of Contents

 

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

The fair value of the assets acquired and liabilities assumed in the FNB Transaction was determined at Bank Closing Date. Given the short period of time that has elapsed between the Bank Closing Date and September 30, 2013, the fair value of the financial assets and liabilities shown at September 30, 2013 approximates their carrying values.

 

The following tables present the carrying values and estimated fair values of financial instruments not measured at fair value on either a recurring or non-recurring basis (in thousands).

 

 

 

 

 

Estimated Fair Value

 

 

 

Carrying

 

Level 1

 

Level 2

 

Level 3

 

 

 

September 30, 2013

 

Amount

 

Inputs

 

Inputs

 

Inputs

 

Total

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Non-covered loans, net

 

$

3,277,044

 

$

 

$

286,663

 

$

3,018,250

 

$

3,304,913

 

Covered loans

 

1,096,590

 

 

 

1,096,590

 

1,096,590

 

Broker-dealer and clearing organization receivables

 

132,636

 

 

132,636

 

 

132,636

 

FDIC indemnification asset

 

190,041

 

 

 

190,041

 

190,041

 

Other assets

 

68,423

 

 

51,134

 

17,289

 

68,423

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

6,936,162

 

 

6,936,527

 

 

6,936,527

 

Broker-dealer and clearing organization payables

 

142,411

 

 

142,411

 

 

142,411

 

Short-term borrowings

 

305,297

 

 

305,297

 

 

305,297

 

Debt

 

207,123

 

 

231,416

 

 

231,416

 

Other liabilities

 

4,651

 

 

4,651

 

 

4,651

 

 

 

 

 

 

Estimated Fair Value

 

 

 

Carrying

 

Level 1

 

Level 2

 

Level 3

 

 

 

December 31, 2012

 

Amount

 

Inputs

 

Inputs

 

Inputs

 

Total

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

Non-covered loans, net

 

$

3,148,987

 

$

 

$

 

$

3,148,987

 

$

3,148,987

 

Broker-dealer and clearing organization receivables

 

145,564

 

 

145,564

 

 

145,564

 

Other assets

 

59,094

 

 

59,094

 

 

59,094

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

4,700,461

 

 

4,698,848

 

 

4,698,848

 

Broker-dealer and clearing organization payables

 

187,990

 

 

187,990

 

 

187,990

 

Short-term borrowings

 

728,250

 

 

728,250

 

 

728,250

 

Debt

 

208,551

 

 

217,092

 

 

217,092

 

Other liabilities

 

4,400

 

 

4,400

 

 

4,400

 

 

4. Securities

 

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

 

 

 

 

 

Gross

 

Gross

 

 

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

September 30, 2013

 

Cost

 

Gains

 

Losses

 

Fair Value

 

U.S. Treasury securities

 

$

23,746

 

$

86

 

$

(17

)

$

23,815

 

U.S. government agencies:

 

 

 

 

 

 

 

 

 

Bonds

 

773,723

 

6,431

 

(37,491

)

742,663

 

Residential mortgage-backed securities

 

62,825

 

1,462

 

(499

)

63,788

 

Collateralized mortgage obligations

 

132,563

 

720

 

(2,749

)

130,534

 

Corporate debt securities

 

73,566

 

5,071

 

(276

)

78,361

 

States and political subdivisions

 

164,813

 

498

 

(6,493

)

158,818

 

Commercial mortgage-backed securities

 

741

 

63

 

 

804

 

Equity securities

 

19,756

 

1,240

 

 

20,996

 

Note receivable

 

42,102

 

6,385

 

 

48,487

 

Warrant

 

12,068

 

 

(953

)

11,115

 

Totals

 

$

1,305,903

 

$

21,956

 

$

(48,478

)

$

1,279,381

 

 

17



Table of Contents

 

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

 

 

 

 

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

 

 

Available for sale equity securities includes 1,475,387 shares of SWS common stock, a note made by SWS in the aggregate principal amount of $50.0 million and a warrant to purchase 8,695,652 shares of SWS common stock. SWS issued the note in July 2011 under a credit agreement pursuant to a senior unsecured loan from Hilltop. The note bears interest at a rate of 8.0% per annum, is prepayable by SWS subject to certain conditions after three years, and has a maturity of five years. The warrant provides for the purchase of 8,695,652 shares of SWS common stock at an exercise price of $5.75 per share, subject to anti-dilution adjustments. If the warrant was fully exercised, Hilltop would beneficially own 24.4% of SWS.

 

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

 

 

 

September 30, 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

 

4

 

$

17,709

 

$

17