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, 2015
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 |
|
(I.R.S. Employer Identification No.) |
200 Crescent Court, Suite 1330 |
|
|
Dallas, TX |
|
75201 |
(Address of principal executive offices) |
|
(Zip Code) |
(214) 855-2177
(Registrants 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 x |
|
Accelerated filer o |
|
|
|
Non-accelerated filer o |
|
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 registrants common stock outstanding at May 6, 2015 was 100,289,492.
HILLTOP HOLDINGS INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2015
PART I FINANCIAL INFORMATION |
| |
|
|
|
Item 1. |
Financial Statements |
|
|
3 | |
|
4 | |
|
5 | |
|
6 | |
|
7 | |
|
8 | |
|
|
|
Managements Discussion and Analysis of Financial Condition and Results of Operations |
54 | |
|
|
|
86 | ||
|
|
|
88 | ||
|
|
|
|
|
|
| ||
|
| |
88 | ||
|
|
|
88 | ||
|
|
|
90 | ||
|
|
|
90 |
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
(in thousands, except share and per share data)
(Unaudited)
|
|
March 31, |
|
December 31, |
| ||
|
|
2015 |
|
2014 |
| ||
Assets |
|
|
|
|
| ||
Cash and due from banks |
|
$ |
694,108 |
|
$ |
782,473 |
|
Federal funds sold |
|
14,425 |
|
30,602 |
| ||
Securities purchased under agreements to resell |
|
67,227 |
|
|
| ||
Assets segregated for regulatory purposes |
|
278,280 |
|
76,013 |
| ||
Securities: |
|
|
|
|
| ||
Trading, at fair value |
|
320,153 |
|
65,717 |
| ||
Available for sale, at fair value (amortized cost of $850,430 and $924,755, respectively) |
|
859,212 |
|
925,535 |
| ||
Held to maturity, at amortized cost (fair value of $186,032 and $118,345, respectively) |
|
183,792 |
|
118,209 |
| ||
|
|
1,363,157 |
|
1,109,461 |
| ||
|
|
|
|
|
| ||
Loans held for sale |
|
1,215,308 |
|
1,309,693 |
| ||
Non-covered loans, net of unearned income |
|
4,834,687 |
|
3,920,476 |
| ||
Allowance for non-covered loan losses |
|
(39,365 |
) |
(37,041 |
) | ||
Non-covered loans, net |
|
4,795,322 |
|
3,883,435 |
| ||
|
|
|
|
|
| ||
Covered loans, net of allowance of $1,388 and $4,611, respectively |
|
550,626 |
|
638,029 |
| ||
Broker-dealer and clearing organization receivables |
|
2,222,517 |
|
167,884 |
| ||
Premises and equipment, net |
|
215,684 |
|
206,991 |
| ||
FDIC indemnification asset |
|
107,567 |
|
130,437 |
| ||
Covered other real estate owned |
|
137,703 |
|
136,945 |
| ||
Other assets |
|
581,210 |
|
458,862 |
| ||
Goodwill |
|
251,808 |
|
251,808 |
| ||
Other intangible assets, net |
|
67,952 |
|
59,783 |
| ||
Total assets |
|
$ |
12,562,894 |
|
$ |
9,242,416 |
|
|
|
|
|
|
| ||
Liabilities and Stockholders Equity |
|
|
|
|
| ||
Deposits: |
|
|
|
|
| ||
Noninterest-bearing |
|
$ |
2,259,790 |
|
$ |
2,076,385 |
|
Interest-bearing |
|
4,869,487 |
|
4,293,507 |
| ||
Total deposits |
|
7,129,277 |
|
6,369,892 |
| ||
|
|
|
|
|
| ||
Broker-dealer and clearing organization payables |
|
1,951,040 |
|
179,042 |
| ||
Short-term borrowings |
|
999,476 |
|
762,696 |
| ||
Securities sold, not yet purchased, at fair value |
|
139,481 |
|
48 |
| ||
Notes payable |
|
108,682 |
|
56,684 |
| ||
Junior subordinated debentures |
|
67,012 |
|
67,012 |
| ||
Other liabilities |
|
385,607 |
|
345,803 |
| ||
Total liabilities |
|
10,780,575 |
|
7,781,177 |
| ||
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 |
|
114,068 |
|
114,068 |
| ||
Common stock, $0.01 par value, 125,000,000 shares authorized; 100,286,330 and 90,181,888 shares issued and outstanding, respectively |
|
1,003 |
|
902 |
| ||
Additional paid-in capital |
|
1,592,585 |
|
1,390,788 |
| ||
Accumulated other comprehensive income |
|
5,750 |
|
651 |
| ||
Retained earnings (accumulated deficit) |
|
67,445 |
|
(45,957 |
) | ||
Deferred compensation employee stock trust, net |
|
1,189 |
|
|
| ||
Employee stock trust (29,932 shares, at cost) |
|
(597 |
) |
|
| ||
Total Hilltop stockholders equity |
|
1,781,443 |
|
1,460,452 |
| ||
Noncontrolling interests |
|
876 |
|
787 |
| ||
Total stockholders equity |
|
1,782,319 |
|
1,461,239 |
| ||
Total liabilities and stockholders equity |
|
$ |
12,562,894 |
|
$ |
9,242,416 |
|
See accompanying notes.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
|
|
Three Months Ended March 31, |
| ||||
|
|
2015 |
|
2014 |
| ||
Interest income: |
|
|
|
|
| ||
Loans, including fees |
|
$ |
87,388 |
|
$ |
79,744 |
|
Securities borrowed |
|
10,018 |
|
1,464 |
| ||
Securities: |
|
|
|
|
| ||
Taxable |
|
7,049 |
|
7,588 |
| ||
Tax-exempt |
|
1,741 |
|
1,242 |
| ||
Other |
|
1,473 |
|
1,790 |
| ||
Total interest income |
|
107,669 |
|
91,828 |
| ||
|
|
|
|
|
| ||
Interest expense: |
|
|
|
|
| ||
Deposits |
|
4,315 |
|
3,759 |
| ||
Securities loaned |
|
7,506 |
|
838 |
| ||
Short-term borrowings |
|
1,024 |
|
397 |
| ||
Notes payable |
|
669 |
|
648 |
| ||
Junior subordinated debentures |
|
585 |
|
584 |
| ||
Other |
|
178 |
|
181 |
| ||
Total interest expense |
|
14,277 |
|
6,407 |
| ||
|
|
|
|
|
| ||
Net interest income |
|
93,392 |
|
85,421 |
| ||
Provision for loan losses |
|
2,687 |
|
3,242 |
| ||
Net interest income after provision for loan losses |
|
90,705 |
|
82,179 |
| ||
|
|
|
|
|
| ||
Noninterest income: |
|
|
|
|
| ||
Net realized gains on securities |
|
4,403 |
|
|
| ||
Net gains from sale of loans and other mortgage production income |
|
120,545 |
|
79,111 |
| ||
Mortgage loan origination fees |
|
14,589 |
|
12,344 |
| ||
Net insurance premiums earned |
|
39,567 |
|
40,319 |
| ||
Securities commissions and fees |
|
43,051 |
|
6,998 |
| ||
Investment banking and advisory fees |
|
24,922 |
|
14,337 |
| ||
Bargain purchase gain |
|
82,816 |
|
|
| ||
Other |
|
24,479 |
|
16,991 |
| ||
Total noninterest income |
|
354,372 |
|
170,100 |
| ||
|
|
|
|
|
| ||
Noninterest expense: |
|
|
|
|
| ||
Employees compensation and benefits |
|
182,573 |
|
106,429 |
| ||
Loss and loss adjustment expenses |
|
18,860 |
|
18,337 |
| ||
Policy acquisition and other underwriting expenses |
|
11,674 |
|
11,687 |
| ||
Occupancy and equipment, net |
|
29,185 |
|
26,338 |
| ||
Other |
|
72,184 |
|
49,838 |
| ||
Total noninterest expense |
|
314,476 |
|
212,629 |
| ||
|
|
|
|
|
| ||
Income before income taxes |
|
130,601 |
|
39,650 |
| ||
Income tax expense |
|
15,420 |
|
14,354 |
| ||
|
|
|
|
|
| ||
Net income |
|
115,181 |
|
25,296 |
| ||
Less: Net income attributable to noncontrolling interest |
|
353 |
|
110 |
| ||
|
|
|
|
|
| ||
Income attributable to Hilltop |
|
114,828 |
|
25,186 |
| ||
Dividends on preferred stock |
|
1,426 |
|
1,426 |
| ||
Income applicable to Hilltop common stockholders |
|
$ |
113,402 |
|
$ |
23,760 |
|
|
|
|
|
|
| ||
Earnings per common share: |
|
|
|
|
| ||
Basic |
|
$ |
1.13 |
|
$ |
0.26 |
|
Diluted |
|
$ |
1.13 |
|
$ |
0.26 |
|
|
|
|
|
|
| ||
Weighted average share information: |
|
|
|
|
| ||
Basic |
|
99,741 |
|
89,707 |
| ||
Diluted |
|
100,627 |
|
90,585 |
|
See accompanying notes.
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
|
|
Three Months Ended March 31, |
| ||||
|
|
2015 |
|
2014 |
| ||
Net income |
|
$ |
115,181 |
|
$ |
25,296 |
|
Other comprehensive income: |
|
|
|
|
| ||
Net unrealized gains on securities available for sale and other, net of tax of $4,454 and $9,583, respectively |
|
7,913 |
|
18,809 |
| ||
Reclassification adjustment for gains included in net income, net of tax of $(1,589) |
|
(2,814 |
) |
|
| ||
Comprehensive income |
|
120,280 |
|
44,105 |
| ||
Less: comprehensive income attributable to noncontrolling interest |
|
353 |
|
110 |
| ||
|
|
|
|
|
| ||
Comprehensive income applicable to Hilltop |
|
$ |
119,927 |
|
$ |
43,995 |
|
See accompanying notes.
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
Retained |
|
Deferred |
|
|
|
|
|
Total |
|
|
|
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
Additional |
|
Other |
|
Earnings |
|
Compensation |
|
Employee |
|
Hilltop |
|
|
|
Total |
| ||||||||||||
|
|
Preferred Stock |
|
Common Stock |
|
Paid-in |
|
Comprehensive |
|
(Accumulated |
|
Employee Stock |
|
Stock Trust |
|
Stockholders |
|
Noncontrolling |
|
Stockholders |
| ||||||||||||||||
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Capital |
|
Income (Loss) |
|
Deficit) |
|
Trust, Net |
|
Shares |
|
Amount |
|
Equity |
|
Interest |
|
Equity |
| ||||||||||
Balance, December 31, 2013 |
|
114 |
|
$ |
114,068 |
|
90,176 |
|
$ |
902 |
|
$ |
1,388,641 |
|
$ |
(34,863 |
) |
$ |
(157,607 |
) |
$ |
|
|
|
|
$ |
|
|
$ |
1,311,141 |
|
$ |
781 |
|
$ |
1,311,922 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
25,186 |
|
|
|
|
|
|
|
25,186 |
|
110 |
|
25,296 |
| ||||||||||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
18,809 |
|
|
|
|
|
|
|
|
|
18,809 |
|
|
|
18,809 |
| ||||||||||
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
735 |
|
|
|
|
|
|
|
|
|
|
|
735 |
|
|
|
735 |
| ||||||||||
Common stock issued to board members |
|
|
|
|
|
2 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
52 |
|
|
|
52 |
| ||||||||||
Dividends on preferred stock |
|
|
|
|
|
|
|
|
|
(1,426 |
) |
|
|
|
|
|
|
|
|
|
|
(1,426 |
) |
|
|
(1,426 |
) | ||||||||||
Cash distributions to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(175 |
) |
(175 |
) | ||||||||||
Balance, March 31, 2014 |
|
114 |
|
$ |
114,068 |
|
90,178 |
|
$ |
902 |
|
$ |
1,388,002 |
|
$ |
(16,054 |
) |
$ |
(132,421 |
) |
$ |
|
|
|
|
$ |
|
|
$ |
1,354,497 |
|
$ |
716 |
|
$ |
1,355,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Balance, December 31, 2014 |
|
114 |
|
$ |
114,068 |
|
90,182 |
|
$ |
902 |
|
$ |
1,390,788 |
|
$ |
651 |
|
$ |
(45,957 |
) |
$ |
|
|
|
|
$ |
|
|
$ |
1,460,452 |
|
$ |
787 |
|
$ |
1,461,239 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
114,828 |
|
|
|
|
|
|
|
114,828 |
|
353 |
|
115,181 |
| ||||||||||
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
5,099 |
|
|
|
|
|
|
|
|
|
5,099 |
|
|
|
5,099 |
| ||||||||||
Issuance of common stock |
|
|
|
|
|
10,102 |
|
101 |
|
199,932 |
|
|
|
|
|
|
|
|
|
|
|
200,033 |
|
|
|
200,033 |
| ||||||||||
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
1,814 |
|
|
|
|
|
|
|
|
|
|
|
1,814 |
|
|
|
1,814 |
| ||||||||||
Common stock issued to board members |
|
|
|
|
|
2 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
51 |
|
|
|
51 |
| ||||||||||
Dividends on preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,426 |
) |
|
|
|
|
|
|
(1,426 |
) |
|
|
(1,426 |
) | ||||||||||
Deferred compensation plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,189 |
|
30 |
|
(597 |
) |
592 |
|
|
|
592 |
| ||||||||||
Cash distributions to noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(264 |
) |
(264 |
) | ||||||||||
Balance, March 31, 2015 |
|
114 |
|
$ |
114,068 |
|
100,286 |
|
$ |
1,003 |
|
$ |
1,592,585 |
|
$ |
5,750 |
|
$ |
67,445 |
|
$ |
1,189 |
|
30 |
|
$ |
(597 |
) |
$ |
1,781,443 |
|
$ |
876 |
|
$ |
1,782,319 |
|
See accompanying notes.
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
|
|
Three Months Ended March 31, |
| ||||
|
|
2015 |
|
2014 |
| ||
Operating Activities |
|
|
|
|
| ||
Net income |
|
$ |
115,181 |
|
$ |
25,296 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
| ||
Provision for loan losses |
|
2,687 |
|
3,242 |
| ||
Depreciation, amortization and accretion, net |
|
(14,486 |
) |
(20,615 |
) | ||
Net realized gains on securities |
|
(4,403 |
) |
|
| ||
Bargain purchase gain |
|
(82,816 |
) |
|
| ||
Deferred income taxes |
|
(2,545 |
) |
4,878 |
| ||
Other, net |
|
(3,813 |
) |
1,435 |
| ||
Net change in securities purchased under agreements to resell |
|
(22,486 |
) |
|
| ||
Net change in assets segregated for regulatory purposes |
|
(20,657 |
) |
|
| ||
Net change in trading securities |
|
11,632 |
|
5,496 |
| ||
Net change in broker-dealer and clearing organization receivables |
|
(1,062,969 |
) |
(88,613 |
) | ||
Net change in FDIC Indemnification Asset |
|
23,376 |
|
912 |
| ||
Net change in other assets |
|
(34,554 |
) |
(458 |
) | ||
Net change in broker-dealer and clearing organization payables |
|
1,039,786 |
|
62,842 |
| ||
Net change in other liabilities |
|
(52,528 |
) |
(34,759 |
) | ||
Net gains from sales of loans |
|
(120,545 |
) |
(79,111 |
) | ||
Loans originated for sale |
|
(2,904,331 |
) |
(1,954,133 |
) | ||
Proceeds from loans sold |
|
3,094,705 |
|
2,227,917 |
| ||
Net cash provided by (used in) operating activities |
|
(38,766 |
) |
154,329 |
| ||
|
|
|
|
|
| ||
Investing Activities |
|
|
|
|
| ||
Proceeds from maturities and principal reductions of securities held to maturity |
|
6,329 |
|
351 |
| ||
Proceeds from sales, maturities and principal reductions of securities available for sale |
|
449,892 |
|
31,845 |
| ||
Purchases of securities held to maturity |
|
|
|
(31,334 |
) | ||
Purchases of securities available for sale |
|
(2,623 |
) |
(46,024 |
) | ||
Net change in loans |
|
267,275 |
|
(256 |
) | ||
Purchases of premises and equipment and other assets |
|
(5,565 |
) |
(8,710 |
) | ||
Proceeds from sales of premises and equipment and other real estate owned |
|
31,818 |
|
14,713 |
| ||
Net cash received for Federal Home Loan Bank and Federal Reserve Bank stock |
|
4,044 |
|
|
| ||
Net cash from acquisition |
|
41,097 |
|
|
| ||
Net cash provided by (used in) investing activities |
|
792,267 |
|
(39,415 |
) | ||
|
|
|
|
|
| ||
Financing Activities |
|
|
|
|
| ||
Net change in deposits |
|
(905,890 |
) |
(90,374 |
) | ||
Net change in short-term borrowings |
|
72,540 |
|
149,319 |
| ||
Proceeds from notes payable |
|
1,000 |
|
|
| ||
Payments on notes payable |
|
(23,904 |
) |
(862 |
) | ||
Dividends paid on preferred stock |
|
(1,426 |
) |
(1,342 |
) | ||
Net cash distributed to noncontrolling interest |
|
(264 |
) |
(175 |
) | ||
Other, net |
|
(99 |
) |
(93 |
) | ||
Net cash provided by (used in) financing activities |
|
(858,043 |
) |
56,473 |
| ||
|
|
|
|
|
| ||
Net change in cash and cash equivalents |
|
(104,542 |
) |
171,387 |
| ||
Cash and cash equivalents, beginning of period |
|
813,075 |
|
746,023 |
| ||
Cash and cash equivalents, end of period |
|
$ |
708,533 |
|
$ |
917,410 |
|
|
|
|
|
|
| ||
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
| ||
Cash paid for interest |
|
$ |
14,325 |
|
$ |
6,934 |
|
Cash paid for income taxes, net of refunds |
|
$ |
45,981 |
|
$ |
(1,845 |
) |
Supplemental Schedule of Non-Cash Activities |
|
|
|
|
| ||
Conversion of loans to other real estate owned |
|
$ |
26,211 |
|
$ |
25,588 |
|
Common stock issued in acquisition |
|
$ |
200,626 |
|
$ |
|
|
See accompanying notes.
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. The Companys primary line of business is to provide business and consumer banking services from offices located throughout Texas through PlainsCapital Bank (the Bank). In addition, the Company provides an array of financial products and services through its broker-dealer, mortgage origination and insurance subsidiaries.
The Company provides its products and services through three primary operating subsidiaries, PlainsCapital Corporation (PlainsCapital), Hilltop Securities Holdings LLC (Hilltop Securities) and National Lloyds Corporation (NLC). PlainsCapital is a financial holding company, headquartered in Dallas, Texas, that provides, through its subsidiaries, traditional banking services, wealth and investment management and treasury management primarily in Texas and residential mortgage lending throughout the United States. Hilltop Securities is a holding company, headquartered in Dallas, Texas, that provides, through its subsidiaries, investment banking and other related financial services, including municipal advisory, sales, trading and underwriting of taxable and tax-exempt fixed income securities, equity trading, clearing, securities lending, structured finance and retail brokerage services throughout the United States. NLC is a property and casualty insurance holding company, headquartered in Waco, Texas, that provides, through its subsidiaries, fire and homeowners insurance to low value dwellings and manufactured homes primarily in Texas and other areas of the southern United States.
On January 1, 2015, Hilltop completed its acquisition of SWS Group, Inc. (SWS) in a stock and cash transaction, whereby SWS merged with and into Hilltop Securities, a wholly owned subsidiary of Hilltop initially formed for the purpose of facilitating this transaction (the SWS Merger). SWSs broker-dealer subsidiaries, Southwest Securities (Southwest Securities) and SWS Financial Services, Inc. (SWS Financial), became subsidiaries of Hilltop Securities. Immediately following the SWS Merger, SWSs banking subsidiary, Southwest Securities, FSB (SWS FSB), was merged into the Bank, an indirect wholly owned subsidiary of Hilltop. As a result of the SWS Merger, each outstanding share of SWS common stock was converted into the right to receive 0.2496 shares of Hilltop common stock and $1.94 in cash, equating to $6.92 per share based on Hilltops closing price on December 31, 2014 and resulting in an aggregate purchase price of $349.1 million, consisting of 10.1 million shares of common stock, $78.2 million in cash and $70.3 million associated with Hilltops existing investment in SWS common stock. Additionally, due to appraisal rights proceedings filed in connection with the SWS Merger, the merger consideration is subject to change, and is therefore, preliminary as of the date of this report. Based on preliminary purchase date valuations, the fair value of the assets acquired was $3.3 billion, including $707.5 million in securities, $863.8 million in non-covered loans and $1.2 billion in broker-dealer and clearing organization receivables. The fair value of liabilities assumed was $2.9 billion, consisting primarily of deposits of $1.3 billion and $1.1 billion in broker-dealer and clearing organization payables.
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 Companys Annual Report on Form 10-K for the year ended December 31, 2014 (2014 Form 10-K). 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
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
financial instruments, the amounts receivable under the loss-share agreements with the Federal Deposit Insurance Corporation (the FDIC) (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 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 SWS Merger purchase date valuations associated with loans, intangibles and taxes are considered preliminary because managements review and approval of certain key assumptions is not complete.
Certain reclassifications have been made to the prior period consolidated financial statements to conform with the current period presentation.
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), PCB-ARC, Inc. and RGV-ARC, Inc. and has a 100% membership interest in PlainsCapital Securities, LLC.
PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC, the controlling and sole managing member of PrimeLending Ventures, LLC (Ventures).
Hilltop has a 100% membership interest in Hilltop Securities, which operates through its wholly-owned subsidiaries, First Southwest Holdings, LLC (First Southwest), Southwest Securities and SWS Financial (collectively, the Hilltop Broker-Dealers). The principal subsidiaries of First Southwest are First Southwest Company, LLC (FSC), a broker-dealer registered with the Securities and Exchange Commission (the SEC) and the Financial Industry Regulatory Authority (FINRA) and a member of the New York Stock Exchange (NYSE), and First Southwest Asset Management, LLC, a registered investment advisor under the Investment Advisors Act of 1940. Southwest Securities is a broker-dealer registered with the SEC and FINRA and a member of the NYSE, and SWS Financial is an introducing broker-dealer that is also registered with the SEC and FINRA.
Hilltop also owns 100% of NLC, which operates through its wholly owned subsidiaries, National Lloyds Insurance Company (NLIC) and American Summit Insurance Company (ASIC).
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 securities 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. Acquisition
SWS Merger
On January 1, 2015, Hilltop completed its acquisition of SWS in a stock and cash transaction as discussed in Note 1 to the consolidated financial statements. The operations of SWS are included in the Companys operating results beginning January 1, 2015. Such operating results include a preliminary bargain purchase gain of $82.8 million and are not indicative of future operating results. SWSs results of operations prior to the acquisition date are not included in the Companys consolidated operating results.
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The SWS Merger was accounted for using the acquisition method of accounting, and accordingly, purchased assets, including identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair values. The components of the consideration paid are shown in the following table (in thousands).
Fair value of preliminary consideration paid: |
|
|
| |
Common stock issued |
|
$ |
200,626 |
|
Cash |
|
78,217 |
| |
Fair value of Hilltops existing investment in SWS |
|
70,282 |
| |
Total preliminary consideration paid |
|
$ |
349,125 |
|
The resulting preliminary fair values of the identifiable assets acquired, and liabilities assumed, of SWS at January 1, 2015 are summarized in the following table (in thousands).
Cash and due from banks |
|
$ |
119,314 |
|
Securities purchased under agreements to resell |
|
44,741 |
| |
Assets segregated for regulatory purposes |
|
181,610 |
| |
Securities |
|
707,476 |
| |
Non-covered loans, net |
|
863,819 |
| |
Broker-dealer and clearing organization receivables |
|
1,221,793 |
| |
Other assets |
|
159,753 |
| |
Total identifiable assets acquired |
|
3,298,506 |
| |
|
|
|
| |
Deposits |
|
(1,287,509 |
) | |
Broker-dealer and clearing organization payables |
|
(1,109,978 |
) | |
Short-term borrowings |
|
(164,240 |
) | |
Securities sold, not yet purchased, at fair value |
|
(140,409 |
) | |
Notes payable |
|
(76,643 |
) | |
Other liabilities |
|
(87,786 |
) | |
Total liabilities assumed |
|
(2,866,565 |
) | |
Preliminary bargain purchase gain |
|
(82,816 |
) | |
|
|
349,125 |
| |
Less Hilltops existing investment in SWS |
|
(70,282 |
) | |
Net identifiable assets acquired |
|
$ |
278,843 |
|
The preliminary bargain purchase gain represents the excess of the preliminary estimated fair value of the underlying net tangible assets and intangible assets over the preliminary merger consideration. The SWS Merger was a tax-free reorganization under Section 368(a) of the Internal Revenue Code, therefore no income taxes were recorded in connection with the preliminary bargain purchase gain. The Company used significant estimates and assumptions to value certain identifiable assets acquired and liabilities assumed. Because of managements review and approval of certain key assumptions not being complete, the purchase date valuations related to loans, intangibles and taxes are considered preliminary and could differ significantly when finalized. The preliminary bargain purchase gain was primarily driven by the Companys ability to realize acquired deferred tax assets through its consolidated core earnings and the decline in the price of the Companys common stock between the date the fixed conversion ratio was agreed upon and the closing date.
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Included within the fair value of other assets in the table above are identifiable intangible assets recorded in connection with the SWS Merger. The preliminary allocation to intangible assets is as follows (in thousands).
|
|
Estimated Useful |
|
Gross Intangible |
| |
|
|
Life (Years) |
|
Assets |
| |
Customer relationships |
|
14 |
|
$ |
10,700 |
|
Core deposits |
|
4 |
|
160 |
| |
|
|
|
|
$ |
10,860 |
|
During the three months ended March 31, 2015, transaction and integration related expenses of $10.0 million associated with the SWS Merger are included in noninterest expense within the consolidated statement of operations. Such expenses were for professional services and other incremental employee costs associated with the integration of SWSs operations. SWS Merger-related transaction expenses during the three months ended March 31, 2014 were nominal.
In connection with the SWS 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. Acquired loans were segregated between those considered to be purchased credit impaired (PCI) loans and those without credit impairment at acquisition. The following table presents details on acquired loans at the acquisition date (in thousands).
|
|
Loans, excluding |
|
PCI |
|
Total |
| |||
|
|
PCI Loans |
|
Loans |
|
Loans |
| |||
Commercial and industrial (1) |
|
$ |
447,959 |
|
$ |
9,850 |
|
$ |
457,809 |
|
Real estate |
|
324,477 |
|
62,218 |
|
386,695 |
| |||
Construction and land development |
|
14,708 |
|
1,391 |
|
16,099 |
| |||
Consumer |
|
3,216 |
|
|
|
3,216 |
| |||
Total |
|
$ |
790,360 |
|
$ |
73,459 |
|
$ |
863,819 |
|
(1) Acquired loans include margin loans to customers and correspondents of $269.4 million associated with acquired broker-dealer operations, none of which are PCI loans.
The following table presents information about the PCI loans at acquisition (in thousands).
Contractually required principal and interest payments |
|
$ |
120,078 |
|
Nonaccretable difference |
|
32,040 |
| |
Cash flows expected to be collected |
|
88,038 |
| |
Accretable difference |
|
14,579 |
| |
Fair value of loans acquired with a deterioration of credit quality |
|
$ |
73,459 |
|
The following table presents information about the acquired loans without credit impairment at acquisition (in thousands).
Contractually required principal and interest payments |
|
$ |
901,672 |
|
Contractual cash flows not expected to be collected |
|
39,721 |
| |
Fair value at acquisition |
|
790,360 |
|
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Pro Forma Results of Operations
The results of operations acquired in the SWS Merger have been included in the Companys consolidated financial results since January 1, 2015. The following table discloses the impact of SWS on the Companys results of operations. The table presents pro forma results had the SWS Merger taken place on January 1, 2014 and includes the estimated impact of purchase accounting adjustments (in thousands). 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, 2014. The pro forma results do not include any potential operating cost savings as a result of the SWS Merger. Further, certain costs associated with any restructuring or integration activities are also not reflected in the pro forma results. Pro forma results exclude nonrecurring items resulting directly from the SWS Merger and that do not have a continuing impact on results of operations. The pro forma results are not indicative of what would have occurred had the SWS Merger taken place on the indicated date.
|
|
Three |
| |
|
|
Months Ended |
| |
|
|
March 31, 2014 |
| |
Net interest income |
|
$ |
99,842 |
|
Other revenues |
|
225,315 |
| |
Net income |
|
24,658 |
| |
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.
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 entitys 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.
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Fair Value Option
The Company has elected to measure substantially all of PrimeLendings mortgage loans held for sale and retained mortgage servicing rights (MSR) asset at fair value, under the provisions of the 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. At March 31, 2015, the aggregate fair value of PrimeLendings mortgage loans held for sale accounted for under the Fair Value Option was $1.19 billion, and the unpaid principal balance of those loans was $1.14 billion. At December 31, 2014, the aggregate fair value of PrimeLendings mortgage loans held for sale accounted for under the Fair Value Option was $1.27 billion, and the unpaid principal balance of those loans was $1.22 billion. The interest component of fair value is reported as interest income on loans in the accompanying consolidated statements of operations.
On October 2, 2014, Hilltop exercised its warrant to purchase 8,695,652 shares of SWS common stock at an exercise price of $5.75 per share (the SWS Warrant) and paid the aggregate exercise price by the automatic elimination of the $50.0 million aggregate principal amount note due to Hilltop under its credit agreement with SWS. Following the exercise of the SWS Warrant, Hilltop owned approximately 21% of the outstanding shares of SWS common stock as of October 2, 2014. Contemporaneous with the exercise of the SWS Warrant, Hilltop changed the accounting method for its investment in SWS common stock and elected to account for its investment in accordance with the provisions of the Fair Value Option as permitted by GAAP. Hilltop had previously accounted for its investment in SWS common stock as an available for sale security. Under the Fair Value Option, Hilltops investment in SWS common stock is recorded at fair value effective October 2, 2014, with changes in fair value being recorded in other noninterest income within the consolidated statement of operations rather than as a component of other comprehensive income. At December 31, 2014, the fair value of Hilltops investment in SWS common stock was $70.3 million and is included in other assets within the consolidated balance sheet.
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 and data from independent pricing services.
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, 2015 |
|
Inputs |
|
Inputs |
|
Inputs |
|
Fair Value |
| ||||
Trading securities |
|
$ |
40 |
|
$ |
314,181 |
|
$ |
5,932 |
|
$ |
320,153 |
|
Available for sale securities |
|
14,070 |
|
845,142 |
|
|
|
859,212 |
| ||||
Loans held for sale |
|
|
|
1,168,757 |
|
19,495 |
|
1,188,252 |
| ||||
Derivative assets |
|
|
|
49,649 |
|
|
|
49,649 |
| ||||
MSR asset |
|
|
|
|
|
31,648 |
|
31,648 |
| ||||
Trading liabilities |
|
|
|
139,481 |
|
|
|
139,481 |
| ||||
Derivative liabilities |
|
|
|
22,048 |
|
|
|
22,048 |
| ||||
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
| ||||
December 31, 2014 |
|
Inputs |
|
Inputs |
|
Inputs |
|
Fair Value |
| ||||
Trading securities |
|
$ |
39 |
|
$ |
65,678 |
|
$ |
|
|
$ |
65,717 |
|
Available for sale securities |
|
13,762 |
|
911,773 |
|
|
|
925,535 |
| ||||
Loans held for sale |
|
|
|
1,263,135 |
|
9,017 |
|
1,272,152 |
| ||||
Derivative assets |
|
|
|
23,805 |
|
|
|
23,805 |
| ||||
MSR asset |
|
|
|
|
|
36,155 |
|
36,155 |
| ||||
Investment in SWS common stock |
|
70,282 |
|
|
|
|
|
70,282 |
| ||||
Trading liabilities |
|
|
|
48 |
|
|
|
48 |
| ||||
Derivative liabilities |
|
|
|
12,849 |
|
|
|
12,849 |
| ||||
The following tables include a rollforward 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 |
|
Purchases/ |
|
Sales/ |
|
Included in |
|
Comprehensive |
|
Balance at |
| ||||||
|
|
Period |
|
Additions |
|
Reductions |
|
Net Income |
|
Income (Loss) |
|
End of Period |
| ||||||
Three months ended March 31, 2015 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Trading securities |
|
$ |
|
|
$ |
7,301 |
|
$ |
|
|
$ |
(1,369 |
) |
$ |
|
|
$ |
5,932 |
|
Loans held for sale |
|
9,017 |
|
11,136 |
|
(271 |
) |
(387 |
) |
|
|
19,495 |
| ||||||
Mortgage servicing rights asset |
|
36,155 |
|
2,690 |
|
|
|
(7,197 |
) |
|
|
31,648 |
| ||||||
Total |
|
$ |
45,172 |
|
$ |
21,127 |
|
$ |
(271 |
) |
$ |
(8,953 |
) |
$ |
|
|
$ |
57,075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Three months ended March 31, 2014 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Available for sale securities |
|
$ |
60,053 |
|
$ |
|
|
$ |
|
|
$ |
593 |
|
$ |
3,452 |
|
$ |
64,098 |
|
Loans held for sale |
|
27,729 |
|
4,900 |
|
(5,594 |
) |
(209 |
) |
|
|
26,826 |
| ||||||
Mortgage servicing rights asset |
|
20,149 |
|
7,432 |
|
|
|
2,358 |
|
|
|
29,939 |
| ||||||
Derivative liabilities |
|
(5,600 |
) |
|
|
|
|
(350 |
) |
|
|
(5,950 |
) | ||||||
Total |
|
$ |
102,331 |
|
$ |
12,332 |
|
$ |
(5,594 |
) |
$ |
2,392 |
|
$ |
3,452 |
|
$ |
114,913 |
|
All net realized and unrealized gains (losses) in the table above are reflected in the accompanying consolidated financial statements. The available for sale securities noted in the table above reflect Hilltops note receivable from SWS and the SWS Warrant. On October 2, 2014, as previously discussed, Hilltop exercised the SWS Warrant in full and paid the aggregate exercise price by the automatic elimination of the $50.0 million aggregate principal amount note due to Hilltop under the credit agreement.
For Level 3 financial instruments measured at fair value on a recurring basis at March 31, 2015, the significant unobservable inputs used in the fair value measurements were as follows.
|
|
|
|
|
|
Range (Weighted- |
Financial instrument |
|
Valuation Technique |
|
Unobservable Input |
|
Average) |
Trading securities |
|
Discounted cash flow |
|
Discount rate |
|
8 - 17% (10%) |
|
|
|
|
|
|
|
Loans held for sale |
|
Discounted cash flow / Market comparable |
|
Projected price |
|
90 - 94% (93%) |
|
|
|
|
|
|
|
Mortgage servicing rights asset |
|
Discounted cash flow |
|
Constant prepayment rate |
|
14.95% |
|
|
|
|
Discount rate |
|
10.98% |
The fair value of certain loans held for sale that are either non-standard (i.e. loans that cannot be sold through normal sale channels) or non-performing is measured using unobservable inputs. The fair value of such loans is generally based upon estimates of expected cash flows using unobservable inputs including listing prices of comparable assets, uncorroborated expert opinions, and/or managements knowledge of underlying collateral.
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Trading securities include corporate debt securities that are valued using a discounted cash flow model with observable market data; however, due to the distressed nature of these bonds, the Company has determined that these securities should be valued as a Level 3 financial instrument.
The MSR asset, which is included in other assets within the Companys consolidated balance sheets, is valued by projecting net servicing cash flows, which are then discounted to estimate the fair value. The fair value of the MSR asset is impacted by a variety of factors. Prepayment rates and discount rates, the most significant unobservable inputs, are discussed further in Note 7 to the consolidated financial statements.
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).
|
|
Three Months Ended March 31, 2015 |
|
Three Months Ended March 31, 2014 |
| ||||||||||||||
|
|
|
|
Other |
|
Total |
|
|
|
Other |
|
Total |
| ||||||
|
|
Net |
|
Noninterest |
|
Changes in |
|
Net |
|
Noninterest |
|
Changes in |
| ||||||
|
|
Losses |
|
Income |
|
Fair Value |
|
Gains |
|
Income |
|
Fair Value |
| ||||||
Loans held for sale |
|
$ |
(6,695 |
) |
$ |
|
|
$ |
(6,695 |
) |
$ |
4,518 |
|
$ |
|
|
$ |
4,518 |
|
Mortgage servicing rights asset |
|
(7,197 |
) |
|
|
(7,197 |
) |
2,358 |
|
|
|
2,358 |
| ||||||
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 SWS Merger was determined at the acquisition 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. PCI loans with a fair value of $172.9 million, $822.8 million and $73.5 million were acquired by the Company upon completion of the merger with PlainsCapital (the PlainsCapital Merger), the FDIC-assisted transaction (the FNB Transaction) whereby the Bank acquired certain assets and assumed certain liabilities of First National Bank (FNB) and the SWS Merger, respectively (collectively, the Bank Transactions). 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 significant unobservable inputs regarding default rates, loss severity rates assuming default, prepayment speeds on acquired loans accounted for in pools (Pooled Loans), and estimated collateral values.
At March 31, 2015, estimates for these significant unobservable inputs were as follows.
|
|
PCI Loans |
| ||||
|
|
PlainsCapital |
|
FNB |
|
SWS |
|
|
|
Merger |
|
Transaction |
|
Merger |
|
Weighted average default rate |
|
47 |
% |
60 |
% |
52 |
% |
Weighted average loss severity rate |
|
50 |
% |
39 |
% |
37 |
% |
Weighted average prepayment speed |
|
0 |
% |
4 |
% |
0 |
% |
The resulting weighted average expected loss on PCI loans associated with the PlainsCapital Merger, FNB Transaction and SWS Merger was 24%, 23% and 19%, respectively.
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The Company obtains updated appraisals of the fair value of collateral securing impaired collateral dependent loans at least annually, in accordance with regulatory guidelines. The Company also reviews the fair value of such collateral on a quarterly basis. If the quarterly review indicates that the fair value of the collateral may have deteriorated, the Company will order an updated appraisal of the fair value of the collateral. Since the Company obtains updated appraisals when evidence of a decline in the fair value of collateral exists, it typically does not adjust appraised values.
Other Real Estate Owned The Company reports other real estate owned (OREO) at fair value less estimated cost to sell. Any excess of recorded investment over fair value, less cost to sell, is charged against either the allowance for loan losses or the related PCI pool discount when property is initially transferred to OREO. Subsequent to the initial transfer to OREO, downward valuation adjustments are charged against earnings. The Company determines fair value primarily using independent appraisals of OREO properties. The resulting fair value measurements are classified as Level 2 or Level 3 inputs, depending upon the extent to which unobservable inputs determine the fair value measurement. The Company considers a number of factors in determining the extent to which specific fair value measurements utilize unobservable inputs, including, but not limited to, the inherent subjectivity in appraisals, the length of time elapsed since the receipt of independent market price or appraised value, and current market conditions. At March 31, 2015, the most significant unobservable input used in the determination of fair value of OREO was a discount to independent appraisals for estimated holding periods of OREO properties. Such discount was 1% per month for estimated holding periods of 6 to 24 months. Level 3 inputs were used to determine the initial fair value at acquisition of a large group of smaller balance properties that were acquired in the FNB Transaction. In the FNB Transaction, the Bank acquired OREO of $135.2 million, all of which is covered by FDIC loss-share agreements. At March 31, 2015 and December 31, 2014, the estimated fair value of covered OREO was $137.7 million and $136.9 million, respectively, and the underlying fair value measurements utilize Level 2 and Level 3 inputs. The fair value of non-covered OREO at March 31, 2015 and December 31, 2014 was $6.3 million and $0.8 million, respectively, and is included in other assets within the consolidated balance sheets. Level 3 inputs were used to determine the initial fair value at acquisition of properties totaling $5.6 million that were acquired in the SWS Merger. During the reported periods, all fair value measurements for non-covered OREO subsequent to initial recognition utilized Level 2 inputs.
The following table presents information regarding certain assets and liabilities measured at fair value on a non-recurring basis for which a change in fair value has been recorded during reporting periods subsequent to initial recognition (in thousands).
|
|
|
|
|
|
|
|
|
|
Total Gains (Losses) for the |
| ||||||||
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
Three Months Ended March 31, |
| ||||||||
March 31, 2015 |
|
Inputs |
|
Inputs |
|
Inputs |
|
Fair Value |
|
2015 |
|
2014 |
| ||||||
Non-covered impaired loans |
|
$ |
|
|
$ |
|
|
$ |
23,605 |
|
$ |
23,605 |
|
$ |
349 |
|
$ |
(215 |
) |
Covered impaired loans |
|
|
|
|
|
68,195 |
|
68,195 |
|
3,218 |
|
(1,691 |
) | ||||||
Non-covered other real estate owned |
|
|
|
382 |
|
|
|
382 |
|
(28 |
) |
(102 |
) | ||||||
Covered other real estate owned |
|
|
|
3,443 |
|
|
|
3,443 |
|
(950 |
) |
(431 |
) | ||||||
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 the Companys 2014 Form 10-K.
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 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 |
|
|
| |||||
March 31, 2015 |
|
Amount |
|
Inputs |
|
Inputs |
|
Inputs |
|
Total |
| |||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
|
$ |
708,533 |
|
$ |
708,533 |
|
$ |
|
|
$ |
|
|
$ |
708,533 |
|
Held to maturity securities |
|
183,792 |
|
|
|
186,032 |
|
|
|
186,032 |
| |||||
Loans held for sale |
|
27,056 |
|
|
|
27,056 |
|
|
|
27,056 |
| |||||
Non-covered loans, net |
|
4,795,322 |
|
|
|
608,554 |
|
4,605,859 |
|
5,214,413 |
| |||||
Covered loans, net |
|
550,626 |
|
|
|
|
|
704,848 |
|
704,848 |
| |||||
Broker-dealer and clearing organization receivables |
|
2,222,517 |
|
|
|
2,222,517 |
|
|
|
2,222,517 |
| |||||
FDIC indemnification asset |
|
107,567 |
|
|
|
|
|
107,567 |
|
107,567 |
| |||||
Other assets |
|
61,362 |
|
|
|
45,784 |
|
15,578 |
|
61,362 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Deposits |
|
7,129,277 |
|
|
|
7,138,613 |
|
|
|
7,138,613 |
| |||||
Broker-dealer and clearing organization payables |
|
1,951,040 |
|
|
|
1,951,040 |
|
|
|
1,951,040 |
| |||||
Short-term borrowings |
|
999,476 |
|
|
|
999,476 |
|
|
|
999,476 |
| |||||
Debt |
|
175,694 |
|
|
|
169,024 |
|
|
|
169,024 |
| |||||
Other liabilities |
|
2,095 |
|
|
|
2,095 |
|
|
|
2,095 |
| |||||
|
|
|
|
Estimated Fair Value |
| |||||||||||
|
|
Carrying |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
|
| |||||
December 31, 2014 |
|
Amount |
|
Inputs |
|
Inputs |
|
Inputs |
|
Total |
| |||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
|
$ |
813,075 |
|
$ |
813,075 |
|
$ |
|
|
$ |
|
|
$ |
813,075 |
|
Held to maturity securities |
|
118,209 |
|
|
|
118,345 |
|
|
|
118,345 |
| |||||
Loans held for sale |
|
37,541 |
|
|
|
37,541 |
|
|
|
37,541 |
| |||||
Non-covered loans, net |
|
3,883,435 |
|
|
|
378,425 |
|
3,528,769 |
|
3,907,194 |
| |||||
Covered loans, net |
|
638,029 |
|
|
|
|
|
767,751 |
|
767,751 |
| |||||
Broker-dealer and clearing organization receivables |
|
167,884 |
|
|
|
167,884 |
|
|
|
167,884 |
| |||||
FDIC indemnification asset |
|
130,437 |
|
|
|
|
|
130,437 |
|
130,437 |
| |||||
Other assets |
|
59,432 |
|
|
|
43,937 |
|
15,495 |
|
59,432 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Deposits |
|
6,369,892 |
|
|
|
6,365,555 |
|
|
|
6,365,555 |
| |||||
Broker-dealer and clearing organization payables |
|
179,042 |
|
|
|
179,042 |
|
|
|
179,042 |
| |||||
Short-term borrowings |
|
762,696 |
|
|
|
762,696 |
|
|
|
762,696 |
| |||||
Debt |
|
123,696 |
|
|
|
117,028 |
|
|
|
117,028 |
| |||||
Other liabilities |
|
2,144 |
|
|
|
2,144 |
|
|
|
2,144 |
| |||||
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
4. Securities
The amortized cost and fair value of available for sale and held to maturity securities are summarized as follows (in thousands).
|
|
Available for Sale |
| ||||||||||
|
|
|
|
Gross |
|
Gross |
|
|
| ||||
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
|
| ||||
March 31, 2015 |
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
| ||||
U.S. Treasury securities |
|
$ |
19,386 |
|
$ |
400 |
|
$ |
(6 |
) |
$ |
19,780 |
|
U.S. government agencies: |
|
|
|
|
|
|
|
|
| ||||
Bonds |
|
463,619 |
|
2,164 |
|
(1,804 |
) |
463,979 |
| ||||
Residential mortgage-backed securities |
|
54,374 |
|
1,612 |
|
(6 |
) |
55,980 |
| ||||
Collateralized mortgage obligations |
|
79,050 |
|
160 |
|
(1,515 |
) |
77,695 |
| ||||
Corporate debt securities |
|
89,076 |
|
5,748 |
|
(24 |
) |
94,800 |
| ||||
States and political subdivisions |
|
130,764 |
|
2,200 |
|
(699 |
) |
132,265 |
| ||||
Commercial mortgage-backed securities |
|
593 |
|
50 |
|
|
|
643 |
| ||||
Equity securities |
|
13,568 |
|
505 |
|
(3 |
) |
14,070 |
| ||||
Totals |
|
$ |
850,430 |
|
$ |
12,839 |
|
$ |
(4,057 |
) |
$ |
859,212 |
|
|
|
Available for Sale |
| ||||||||||
|
|
|
|
Gross |
|
Gross |
|
|
| ||||
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
|
| ||||
December 31, 2014 |
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
| ||||
U.S. Treasury securities |
|
$ |
19,382 |
|
$ |
264 |
|
$ |
(33 |
) |
$ |
19,613 |
|
U.S. government agencies: |
|
|
|
|
|
|
|
|
| ||||
Bonds |
|
522,008 |
|
1,749 |
|
(7,516 |
) |
516,241 |
| ||||
Residential mortgage-backed securities |
|
51,363 |
|
1,672 |
|
(137 |
) |
52,898 |
| ||||
Collateralized mortgage obligations |
|
89,291 |
|
133 |
|
(2,300 |
) |
87,124 |
| ||||
Corporate debt securities |
|
93,406 |
|
5,125 |
|
(59 |
) |
98,472 |
| ||||
States and political subdivisions |
|
135,419 |
|
2,083 |
|
(717 |
) |
136,785 |
| ||||
Commercial mortgage-backed securities |
|
593 |
|
47 |
|
|
|
640 |
| ||||
Equity securities |
|
13,293 |
|
469 |
|
|
|
13,762 |
| ||||
Totals |
|
$ |
924,755 |
|
$ |
11,542 |
|
$ |
(10,762 |
) |
$ |
925,535 |
|
|
|
Held to Maturity |
| ||||||||||
|
|
|
|
Gross |
|
Gross |
|
|
| ||||
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
|
| ||||
March 31, 2015 |
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
| ||||
U.S. Treasury securities |
|
$ |
25,006 |
|
$ |
|
|
$ |
|
|
$ |
25,006 |
|
U.S. government agencies: |
|
|
|
|
|
|
|
|
| ||||
Bonds |
|
22,348 |
|
192 |
|
|
|
22,540 |
| ||||
Residential mortgage-backed securities |
|
28,907 |
|
793 |
|
|
|
29,700 |
| ||||
Collateralized mortgage obligations |
|
98,767 |
|
1,188 |
|
|
|
99,955 |
| ||||
States and political subdivisions |
|
8,764 |
|
67 |
|
|
|
8,831 |
| ||||
Totals |
|
$ |
183,792 |
|
$ |
2,240 |
|
$ |
|
|
$ |
186,032 |
|
|
|
Held to Maturity |
| ||||||||||
|
|
|
|
Gross |
|
Gross |
|
|
| ||||
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
|
| ||||
December 31, 2014 |
|
Cost |
|