Edgar Filing: Hilltop Holdings Inc.

hth_Current folio_10Q

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2017

☐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.)
organization)

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 ☒ No ☐

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 ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☒		Accelerated filer ☐

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


Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

The number of shares of the registrant's common stock outstanding at July 27, 2017 was 96,347,034.

Table of Contents

HILLTOP HOLDINGS INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2017

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	5
	Consolidated Statements of Stockholders’ Equity	6
	Consolidated Statements of Cash Flows	7
	Notes to Consolidated Financial Statements	8
	Schedule I - Insurance Incurred and Cumulative Paid Losses and Allocated Loss and Loss Adjustment Expenses, Net of Reinsurance	55

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	56

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	92

Item 4.	Controls and Procedures	95


PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	96

Item 1A.	Risk Factors	96

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	96

Item 6.	Exhibits	96

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(Unaudited)


	June 30,		December 31,
	2017		2016
Assets
Cash and due from banks	$	405,938	$	669,357
Federal funds sold		388		21,407
Securities purchased under agreements to resell		125,188		89,430
Assets segregated for regulatory purposes		167,565		180,993
Securities:
Trading, at fair value		471,485		265,534
Available for sale, at fair value (amortized cost of $761,217 and $598,198, respectively)		763,206		598,007
Held to maturity, at amortized cost (fair value of $355,860 and $345,088, respectively)		359,847		351,831
		1,594,538		1,215,372

Loans held for sale		2,000,257		1,795,463
Non-covered loans, net of unearned income		6,118,211		5,843,499
Allowance for non-covered loan losses		(59,208)		(54,186)
Non-covered loans, net		6,059,003		5,789,313

Covered loans, net of allowance of $1,359 and $413, respectively		205,877		255,714
Broker-dealer and clearing organization receivables		1,552,525		1,497,741
Premises and equipment, net		183,994		190,361
FDIC indemnification asset		40,304		71,313
Covered other real estate owned		42,304		51,642
Other assets		618,368		613,453
Goodwill		251,808		251,808
Other intangible assets, net		40,516		44,695
Total assets	$	13,288,573	$	12,738,062

Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing	$	2,251,208	$	2,199,483
Interest-bearing		5,323,414		4,864,328
Total deposits		7,574,622		7,063,811

Broker-dealer and clearing organization payables		1,395,314		1,347,128
Short-term borrowings		1,515,069		1,417,289
Securities sold, not yet purchased, at fair value		149,869		153,889
Notes payable		300,283		317,912
Junior subordinated debentures		67,012		67,012
Other liabilities		393,351		496,501
Total liabilities		11,395,520		10,863,542
Commitments and contingencies (see Notes 12 and 13)
Stockholders' equity:
Hilltop stockholders' equity:
Common stock, $0.01 par value, 125,000,000 shares authorized; 96,333,042 and 98,543,774 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively		963		985
Additional paid-in capital		1,529,903		1,572,877
Accumulated other comprehensive income		2,112		485
Retained earnings		356,564		295,568
Deferred compensation employee stock trust, net		845		903
Employee stock trust (12,455 and 15,492 shares, at cost, respectively)		(248)		(309)
Total Hilltop stockholders' equity		1,890,139		1,870,509
Noncontrolling interests		2,914		4,011
Total stockholders' equity		1,893,053		1,874,520
Total liabilities and stockholders' equity	$	13,288,573	$	12,738,062

See accompanying notes.

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Interest income:
Loans, including fees	$	113,793	$	98,468	$	203,784	$	190,001
Securities borrowed		9,597		6,326		17,650		13,915
Securities:
Taxable		9,539		6,834		16,566		13,201
Tax-exempt		1,375		1,537		2,619		3,174
Other		2,002		1,037		3,928		2,065
Total interest income		136,306		114,202		244,547		222,356

Interest expense:
Deposits		5,464		4,037		10,154		7,876
Securities loaned		7,481		4,916		13,821		10,903
Short-term borrowings		3,648		1,392		5,066		2,477
Notes payable		2,826		2,618		5,640		5,200
Junior subordinated debentures		744		655		1,455		1,300
Other		167		187		335		363
Total interest expense		20,330		13,805		36,471		28,119

Net interest income		115,976		100,397		208,076		194,237
Provision for loan losses		5,853		28,876		7,558		32,283
Net interest income after provision for loan losses		110,123		71,521		200,518		161,954

Noninterest income:
Net realized gains (losses) on securities		14		(46)		14		—
Net gains from sale of loans and other mortgage production income		153,688		167,012		277,838		294,309
Mortgage loan origination fees		25,976		25,797		45,532		44,610
Securities commissions and fees		37,804		40,442		76,861		78,759
Investment and securities advisory fees and commissions		25,537		29,354		47,739		53,173
Net insurance premiums earned		36,020		38,721		72,160		78,454
Other		65,653		44,725		95,987		74,075
Total noninterest income		344,692		346,005		616,131		623,380

Noninterest expense:
Employees' compensation and benefits		214,413		217,398		400,972		400,159
Occupancy and equipment, net		27,919		26,971		55,212		54,804
Loss and loss adjustment expenses		33,184		37,211		54,884		59,170
Policy acquisition and other underwriting expenses		11,251		11,316		22,480		22,568
Other		79,484		74,469		153,195		155,853
Total noninterest expense		366,251		367,365		686,743		692,554

Income before income taxes		88,564		50,161		129,906		92,780
Income tax expense		25,754		18,439		40,789		32,862

Net income		62,810		31,722		89,117		59,918
Less: Net income attributable to noncontrolling interest		334		648		207		1,277
Income attributable to Hilltop	$	62,476	$	31,074	$	88,910	$	58,641

Earnings per common share:
Basic	$	0.64	$	0.32	$	0.90	$	0.60
Diluted	$	0.63	$	0.32	$	0.90	$	0.60

Cash dividends declared per common share	$	0.06	$	—	$	0.12	$	—

Weighted average share information:
Basic		98,154		98,457		98,295		98,305
Diluted		98,414		98,586		98,576		98,619

See accompanying notes.

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)


	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Net income	$	62,810	$	31,722	$	89,117	$	59,918
Other comprehensive income:
Net unrealized gains on securities available for sale, net of tax of $696, $1,034, $927 and $3,424, respectively		1,224		1,874		1,636		6,153
Reclassification adjustment for gains (losses) included in net income, net of tax of $(5), $16, $(5) and $0, respectively		(9)		30		(9)		—
Comprehensive income		64,025		33,626		90,744		66,071
Less: comprehensive income attributable to noncontrolling interest		334		648		207		1,277

Comprehensive income applicable to Hilltop	$	63,691	$	32,978	$	90,537	$	64,794

See accompanying notes.

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(Unaudited)


						Accumulated				Deferred					Total
				Additional		Other				Compensation		Employee			Hilltop				Total
	Common Stock			Paid-in		Comprehensive		Retained		Employee Stock		Stock Trust			Stockholders’		Noncontrolling		Stockholders’
	Shares	Amount		Capital		Income		Earnings		Trust, Net		Shares	Amount		Equity		Interest		Equity
Balance, December 31, 2015	98,896	$	989	$	1,577,270	$	2,629	$	155,475	$	1,034	22	$	(443)	$	1,736,954	$	1,171	$	1,738,125
Net income	—		—		—		—		58,641		—	—		—		58,641		1,277		59,918
Other comprehensive income	—		—		—		6,153		—		—	—		—		6,153		—		6,153
Issuance of common stock	500		5		3,845		—		—		—	—		—		3,850		—		3,850
Stock-based compensation expense	—		—		4,768		—		—		—	—		—		4,768		—		4,768
Common stock issued to board members	12		—		217		—		—		—	—		—		217		—		217
Issuance of common stock related to share-based awards, net	(94)		(1)		(1,779)		—		—		—	—		—		(1,780)		—		(1,780)
Repurchases of common stock	(816)		(8)		(16,268)		—		—		—	—		—		(16,276)		—		(16,276)
Deferred compensation plan	—		—		—		—		—		(96)	(5)		96		—		—		—
Net cash distributed from noncontrolling interest	—		—		—		—		—		—	—		—		—		1,471		1,471
Balance, June 30, 2016	98,498	$	985	$	1,568,053	$	8,782	$	214,116	$	938	17	$	(347)	$	1,792,527	$	3,919	$	1,796,446

Balance, December 31, 2016	98,544	$	985	$	1,572,877	$	485	$	295,568	$	903	15	$	(309)	$	1,870,509	$	4,011	$	1,874,520
Net income	—		—		—		—		88,910		—	—		—		88,910		207		89,117
Other comprehensive income	—		—		—		1,627		—		—	—		—		1,627		—		1,627
Stock-based compensation expense	—		—		5,687		—		—		—	—		—		5,687		—		5,687
Common stock issued to board members	7		—		212		—		—		—	—		—		212		—		212
Issuance of common stock related to share-based awards, net	244		3		(2,134)		—		—		—	—		—		(2,131)		—		(2,131)
Repurchases of common stock	(2,462)		(25)		(46,739)		—		(16,311)		—	—		—		(63,075)		—		(63,075)
Dividends on common stock ($0.12 per share)	—		—		—		—		(11,603)		—	—		—		(11,603)		—		(11,603)
Deferred compensation plan	—		—		—		—		—		(58)	(3)		61		3		—		3
Net cash distributed to noncontrolling interest	—		—		—		—		—		—	—		—		—		(1,304)		(1,304)
Balance, June 30, 2017	96,333	$	963	$	1,529,903	$	2,112	$	356,564	$	845	12	$	(248)	$	1,890,139	$	2,914	$	1,893,053

See accompanying notes.

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Six Months Ended June 30,
	2017		2016
Operating Activities
Net income	$	89,117	$	59,918
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses		7,558		32,283
Depreciation, amortization and accretion, net		(14,436)		(26,686)
Net realized gains on securities		(14)		—
Deferred income taxes		2,615		2,421
Other, net		5,264		7,663
Net change in securities purchased under agreements to resell		(35,758)		(43,814)
Net change in assets segregated for regulatory purposes		13,428		38,399
Net change in trading securities		(205,951)		(91,273)
Net change in broker-dealer and clearing organization receivables		(45,566)		(796,440)
Net change in FDIC indemnification asset		22,824		17,344
Net change in other assets		(48,794)		(90,113)
Net change in broker-dealer and clearing organization payables		75,004		676,621
Net change in other liabilities		(132,731)		(45,653)
Net change in securities sold, not yet purchased		(4,020)		48,191
Proceeds from sale of mortgage servicing rights asset		17,499		7,586
Net gains from sales of loans		(277,838)		(294,309)
Loans originated for sale		(7,151,419)		(7,487,620)
Proceeds from loans sold		7,221,859		7,610,371
Net cash used in operating activities		(461,359)		(375,111)
Investing Activities
Proceeds from maturities and principal reductions of securities held to maturity		27,975		104,160
Proceeds from sales, maturities and principal reductions of securities available for sale		197,327		250,911
Purchases of securities held to maturity		(36,299)		(126,880)
Purchases of securities available for sale		(361,530)		(86,798)
Net change in loans		(195,832)		(281,489)
Purchases of premises and equipment and other assets		(13,771)		(19,097)
Proceeds from sales of premises and equipment and other real estate owned		18,071		51,192
Net cash received from Federal Home Loan Bank and Federal Reserve Bank stock		8,165		6,342
Net cash used in investing activities		(355,894)		(101,659)
Financing Activities
Net change in deposits		483,993		271,198
Net change in short-term borrowings		97,780		65,489
Proceeds from notes payable		173,052		132,460
Payments on notes payable		(190,631)		(51,458)
Proceeds from issuance of common stock		—		3,850
Payments to repurchase common stock		(16,009)		—
Dividends paid on common stock		(11,603)		—
Net cash distributed from (to) noncontrolling interest		(1,304)		1,471
Taxes paid on employee stock awards netting activity		(2,131)		(1,765)
Other, net		(332)		(259)
Net cash provided by financing activities		532,815		420,986

Net change in cash and cash equivalents		(284,438)		(55,784)
Cash and cash equivalents, beginning of period		690,764		669,445
Cash and cash equivalents, end of period	$	406,326	$	613,661

Supplemental Disclosures of Cash Flow Information
Cash paid for interest	$	36,299	$	28,206
Cash paid for income taxes, net of refunds	$	26,703	$	28,685
Supplemental Schedule of Non-Cash Activities
Conversion of loans to other real estate owned	$	5,644	$	11,615
Additions to mortgage servicing rights	$	2,490	$	9,893

See accompanying notes.

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. The Company’s 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, headquartered in Dallas, Texas, provides its products and services through three primary business units, PlainsCapital Corporation (“PCC”), Hilltop Securities Holdings LLC (“Securities Holdings”) and National Lloyds Corporation (“NLC”). PCC is a financial holding company that provides, through its subsidiaries, traditional banking, wealth and investment management and treasury management services primarily in Texas and residential mortgage lending throughout the United States. Securities Holdings is a holding company 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 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.

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, 2016 (“2016 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 financial instruments, the amounts receivable from the Federal Deposit Insurance Corporation (the “FDIC”) under loss-share agreements (the “FDIC Indemnification Asset”), reserves for losses and loss adjustment expenses (“LAE”), 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.

Hilltop owns 100% of the outstanding stock of PCC. PCC 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”).

PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC (“Ventures Management”). Ventures Management is the managing member and owns 51% of the membership interest in both PrimeLending Ventures, LLC (“Ventures”) and Mutual of Omaha Mortgage, LLC.

PCC 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

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Subsections of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), because the primary beneficiaries of the Trusts are not within the consolidated group.

Hilltop has a 100% membership interest in Securities Holdings, which operates through its wholly-owned subsidiaries, Hilltop Securities Inc. (“Hilltop Securities”), Hilltop Securities Independent Network Inc. (“HTS Independent Network”) (collectively, the “Hilltop Broker-Dealers”) and First Southwest Asset Management, LLC. Hilltop Securities is a broker-dealer registered with the Securities and Exchange Commission (the “SEC”) and Financial Industry Regulatory Authority (“FINRA”) and a member of the New York Stock Exchange (“NYSE”), HTS Independent Network is an introducing broker-dealer that is also registered with the SEC and FINRA, and First Southwest Asset Management, LLC is a registered investment adviser under the Investment Advisers Act of 1940.

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. 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 ASC.

Certain reclassifications have been made to the prior period consolidated financial statements to conform with the current period presentation. In preparing these consolidated financial statements, subsequent events were evaluated through the time the financial statements were issued. Financial statements are considered issued when they are widely distributed to all stockholders and other financial statement users, or filed with the SEC.

2. Recently Issued Accounting Standards

In May 2017, FASB issued ASU 2017-09 which provides clarity and reduces both diversity in practice and cost and complexity associated with changes to the terms or conditions of a share-based payment award and, specifically, which changes require an entity to apply modification accounting. The amendments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Adoption of the amendment is not expected to have a significant effect on the Company’s consolidated financial statements.

In April 2017, FASB issued ASU 2017-08 which shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. The amendment is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2018, using the using the modified retrospective transition method. As permitted within the amendment, the Company elected to early adopt and apply the provisions of this amendment as of January 1, 2017. This adoption had no effect on the Company’s consolidated financial statements.

In January 2017, FASB issued ASU 2017-01 which provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendment is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2017, using the prospective method. Early adoption is permitted. Adoption of the amendment is not expected to have a significant effect on the Company’s consolidated financial statements.