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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 March 31, 2019

 

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)

 

 

 

 

 

2323 Victory Avenue, Suite 1400

 

 

Dallas, TX

 

75219

(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 every Interactive Data File required to be submitted 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 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 ☐

 

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 April 25, 2019 was 93,983,247.

 

 

 

 

 


 

Table of Contents

HILLTOP HOLDINGS INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2019

 

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

49

 

 

 

Item 2. 

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

50

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

81

 

 

 

Item 4. 

Controls and Procedures

84

 

 

 

 

 

 

PART II — OTHER INFORMATION 

 

 

 

Item 1. 

Legal Proceedings

85

 

 

 

Item 1A. 

Risk Factors

85

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

85

 

 

 

Item 6. 

Exhibits

86

2


 

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2019

    

2018

 

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

313,192

 

$

644,073

 

Federal funds sold

 

 

438

 

 

400

 

Assets segregated for regulatory purposes

 

 

156,851

 

 

133,993

 

Securities purchased under agreements to resell

 

 

65,205

 

 

61,611

 

Securities:

 

 

 

 

 

 

 

Trading, at fair value

 

 

703,295

 

 

745,466

 

Available for sale, at fair value (amortized cost of $1,021,221 and $886,799, respectively)

 

 

1,019,851

 

 

875,658

 

Held to maturity, at amortized cost (fair value of $365,781 and $341,124, respectively)

 

 

369,865

 

 

351,012

 

Equity, at fair value

 

 

19,343

 

 

19,679

 

 

 

 

2,112,354

 

 

1,991,815

 

 

 

 

 

 

 

 

 

Loans held for sale

 

 

1,059,280

 

 

1,393,246

 

Loans held for investment, net of unearned income

 

 

7,011,679

 

 

6,930,458

 

Allowance for loan losses

 

 

(58,809)

 

 

(59,486)

 

Loans held for investment, net

 

 

6,952,870

 

 

6,870,972

 

 

 

 

 

 

 

 

 

Broker-dealer and clearing organization receivables

 

 

1,651,199

 

 

1,440,287

 

Premises and equipment, net

 

 

210,333

 

 

237,373

 

Operating lease right-of-use assets

 

 

108,806

 

 

 —

 

Other assets

 

 

591,442

 

 

580,362

 

Goodwill

 

 

291,435

 

 

291,435

 

Other intangible assets, net

 

 

35,965

 

 

38,005

 

Total assets

 

$

13,549,370

 

$

13,683,572

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing

 

$

2,490,144

 

$

2,560,750

 

Interest-bearing

 

 

5,807,975

 

 

5,975,406

 

Total deposits

 

 

8,298,119

 

 

8,536,156

 

 

 

 

 

 

 

 

 

Broker-dealer and clearing organization payables

 

 

1,490,227

 

 

1,294,925

 

Short-term borrowings

 

 

914,525

 

 

1,065,807

 

Securities sold, not yet purchased, at fair value

 

 

69,354

 

 

81,667

 

Notes payable

 

 

225,372

 

 

228,872

 

Operating lease liabilities

 

 

118,452

 

 

 —

 

Junior subordinated debentures

 

 

67,012

 

 

67,012

 

Other liabilities

 

 

351,178

 

 

435,240

 

Total liabilities

 

 

11,534,239

 

 

11,709,679

 

Commitments and contingencies (see Notes 13 and 14)

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Hilltop stockholders' equity:

 

 

 

 

 

 

 

Common stock, $0.01 par value, 125,000,000 shares authorized; 93,821,450 and 93,610,217 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

938

 

 

936

 

Additional paid-in capital

 

 

1,491,585

 

 

1,489,816

 

Accumulated other comprehensive loss

 

 

(1,062)

 

 

(8,627)

 

Retained earnings

 

 

499,452

 

 

466,737

 

Deferred compensation employee stock trust, net

 

 

827

 

 

825

 

Employee stock trust (10,683 and 11,672 shares, at cost, at March 31, 2019 and December 31, 2018, respectively)

 

 

(213)

 

 

(217)

 

Total Hilltop stockholders' equity

 

 

1,991,527

 

 

1,949,470

 

Noncontrolling interests

 

 

23,604

 

 

24,423

 

Total stockholders' equity

 

 

2,015,131

 

 

1,973,893

 

Total liabilities and stockholders' equity

 

$

13,549,370

 

$

13,683,572

 

 

See accompanying notes.

3


 

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2019

    

2018

 

Interest income:

 

 

 

 

 

 

 

Loans, including fees

 

$

110,870

 

$

99,944

 

Securities borrowed

 

 

16,859

 

 

16,300

 

Securities:

 

 

 

 

 

 

 

Taxable

 

 

15,616

 

 

10,953

 

Tax-exempt

 

 

1,498

 

 

1,772

 

Other

 

 

5,197

 

 

4,391

 

Total interest income

 

 

150,040

 

 

133,360

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

Deposits

 

 

17,106

 

 

8,675

 

Securities loaned

 

 

14,738

 

 

13,739

 

Short-term borrowings

 

 

5,471

 

 

4,043

 

Notes payable

 

 

2,641

 

 

2,497

 

Junior subordinated debentures

 

 

1,001

 

 

822

 

Other

 

 

152

 

 

164

 

Total interest expense

 

 

41,109

 

 

29,940

 

 

 

 

 

 

 

 

 

Net interest income

 

 

108,931

 

 

103,420

 

Provision (recovery) for loan losses

 

 

951

 

 

(1,807)

 

Net interest income after provision (recovery) for loan losses

 

 

107,980

 

 

105,227

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

Net gains from sale of loans and other mortgage production income

 

 

96,139

 

 

105,767

 

Mortgage loan origination fees

 

 

21,873

 

 

20,626

 

Securities commissions and fees

 

 

35,969

 

 

38,717

 

Investment and securities advisory fees and commissions

 

 

20,160

 

 

18,354

 

Net insurance premiums earned

 

 

33,203

 

 

34,315

 

Other

 

 

45,124

 

 

17,364

 

Total noninterest income

 

 

252,468

 

 

235,143

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

Employees' compensation and benefits

 

 

189,898

 

 

182,600

 

Occupancy and equipment, net

 

 

28,023

 

 

27,830

 

Professional services

 

 

22,942

 

 

24,704

 

Loss and loss adjustment expenses

 

 

14,926

 

 

15,532

 

Other

 

 

53,296

 

 

57,536

 

Total noninterest expense

 

 

309,085

 

 

308,202

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

51,363

 

 

32,168

 

Income tax expense

 

 

11,586

 

 

7,488

 

 

 

 

 

 

 

 

 

Net income

 

 

39,777

 

 

24,680

 

Less: Net income attributable to noncontrolling interest

 

 

991

 

 

239

 

Income attributable to Hilltop

 

$

38,786

 

$

24,441

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

Basic

 

$

0.41

 

$

0.25

 

Diluted

 

$

0.41

 

$

0.25

 

 

 

 

 

 

 

 

 

Weighted average share information:

 

 

 

 

 

 

 

Basic

 

 

93,669

 

 

95,985

 

Diluted

 

 

93,669

 

 

96,146

 

 

See accompanying notes.

 

 

4


 

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2019

    

2018

    

Net income

 

$

39,777

 

$

24,680

 

Other comprehensive income:

 

 

 

 

 

 

 

Net unrealized gains (losses) on securities available for sale, net of tax of $2,208 and $(1,893), respectively

 

 

7,549

 

 

(6,703)

 

Reclassification adjustment for gains (losses) included in net income, net of tax of $5 and $0, respectively

 

 

16

 

 

 —

 

Comprehensive income

 

 

47,342

 

 

17,977

 

Less: comprehensive income attributable to noncontrolling interest

 

 

991

 

 

239

 

 

 

 

 

 

 

 

 

Comprehensive income applicable to Hilltop

 

$

46,351

 

$

17,738

 

 

See accompanying notes.

 

 

5


 

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

 

Loss

 

Earnings

 

Trust, Net

 

Shares

 

Amount

 

Equity

 

Interest

 

Equity

Balance, December 31, 2017

95,982

 

$

960

 

$

1,526,369

 

$

(394)

 

$

384,545

 

$

848

 

12

 

$

(247)

 

$

1,912,081

 

$

2,726

 

$

1,914,807

Net income

 —

 

 

 —

 

 

 —

 

 

 —

 

 

24,441

 

 

 —

 

 —

 

 

 —

 

 

24,441

 

 

239

 

 

24,680

Other comprehensive loss

 —

 

 

 —

 

 

 —

 

 

(6,703)

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(6,703)

 

 

 —

 

 

(6,703)

Stock-based compensation expense

 —

 

 

 —

 

 

2,164

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

2,164

 

 

 —

 

 

2,164

Common stock issued to board members

 5

 

 

 —

 

 

124

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

124

 

 

 —

 

 

124

Issuance of common stock related to share-based awards, net

129

 

 

 1

 

 

(693)

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(692)

 

 

 —

 

 

(692)

Repurchase of common stock

(68)

 

 

(1)

 

 

(1,097)

 

 

 —

 

 

(608)

 

 

 —

 

 —

 

 

 —

 

 

(1,706)

 

 

 —

 

 

(1,706)

Dividends on common stock ($0.07 per share)

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(6,719)

 

 

 —

 

 —

 

 

 —

 

 

(6,719)

 

 

 —

 

 

(6,719)

Deferred compensation plan

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 9

 

(1)

 

 

(7)

 

 

 2

 

 

 —

 

 

 2

Adoption of accounting standards

 —

 

 

 —

 

 

 —

 

 

(2,601)

 

 

2,601

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Net cash distributed to noncontrolling interest

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(501)

 

 

(501)

Balance, March 31, 2018

96,048

 

$

960

 

$

1,526,867

 

$

(9,698)

 

$

404,260

 

$

857

 

11

 

$

(254)

 

$

1,922,992

 

$

2,464

 

$

1,925,456

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018

93,610

 

$

936

 

$

1,489,816

 

$

(8,627)

 

$

466,737

 

$

825

 

11

 

$

(217)

 

$

1,949,470

 

$

24,423

 

$

1,973,893

Net income

 —

 

 

 —

 

 

 —

 

 

 —

 

 

38,786

 

 

 —

 

 —

 

 

 —

 

 

38,786

 

 

991

 

 

39,777

Other comprehensive loss

 —

 

 

 —

 

 

 —

 

 

7,565

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

7,565

 

 

 —

 

 

7,565

Stock-based compensation expense

 —

 

 

 —

 

 

2,354

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

2,354

 

 

 —

 

 

2,354

Common stock issued to board members

 8

 

 

 —

 

 

140

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

140

 

 

 —

 

 

140

Issuance of common stock related to share-based awards, net

203

 

 

 2

 

 

(725)

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(723)

 

 

 —

 

 

(723)

Dividends on common stock ($0.08 per share)

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(7,464)

 

 

 —

 

 —

 

 

 —

 

 

(7,464)

 

 

 —

 

 

(7,464)

Deferred compensation plan

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 2

 

 —

 

 

 4

 

 

 6

 

 

 —

 

 

 6

Adoption of accounting standards (Note 2)

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,393

 

 

 —

 

 —

 

 

 —

 

 

1,393

 

 

 —

 

 

1,393

Net cash distributed to noncontrolling interest

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(1,810)

 

 

(1,810)

Balance, March 31, 2019

93,821

 

$

938

 

$

1,491,585

 

$

(1,062)

 

$

499,452

 

$

827

 

11

 

$

(213)

 

$

1,991,527

 

$

23,604

 

$

2,015,131

 

See accompanying notes.

 

 

6


 

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2019

    

2018

    

Operating Activities

 

 

 

 

 

 

 

Net income

 

$

39,777

 

$

24,680

 

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

 

 

 

 

 

 

 

Provision (recovery) for loan losses

 

 

951

 

 

(1,807)

 

Depreciation, amortization and accretion, net

 

 

(1,563)

 

 

1,577

 

Net change in fair value of equity securities

 

 

(1,256)

 

 

572

 

Deferred income taxes

 

 

527

 

 

(534)

 

Other, net

 

 

2,616

 

 

2,590

 

Net change in securities purchased under agreements to resell

 

 

(3,594)

 

 

(58,441)

 

Net change in trading securities

 

 

42,171

 

 

(25,466)

 

Net change in broker-dealer and clearing organization receivables

 

 

(124,407)

 

 

(164,957)

 

Net change in other assets

 

 

(8,824)

 

 

(2,949)

 

Net change in broker-dealer and clearing organization payables

 

 

119,673

 

 

217,443

 

Net change in other liabilities

 

 

(43,919)

 

 

(108,306)

 

Net change in securities sold, not yet purchased

 

 

(12,313)

 

 

22,730

 

Net gains from sales of loans

 

 

(96,139)

 

 

(105,767)

 

Loans originated for sale

 

 

(2,596,880)

 

 

(3,021,516)

 

Proceeds from loans sold

 

 

3,009,282

 

 

3,405,633

 

Net cash provided by operating activities

 

 

326,102

 

 

185,482

 

Investing Activities

 

 

 

 

 

 

 

Proceeds from maturities and principal reductions of securities held to maturity

 

 

6,340

 

 

14,095

 

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

 

 

37,604

 

 

44,925

 

Proceeds from sales, maturities and principal reductions of equity securities

 

 

1,815

 

 

15

 

Purchases of securities held to maturity

 

 

(25,243)

 

 

(14,848)

 

Purchases of securities available for sale

 

 

(172,511)

 

 

(116,393)

 

Purchases of equity securities

 

 

(223)

 

 

(217)

 

Net change in loans held for investment

 

 

(159,202)

 

 

48,859

 

Purchases of premises and equipment and other assets

 

 

(8,454)

 

 

(4,271)

 

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

 

 

5,892

 

 

4,487

 

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

 

 

7,172

 

 

9,716

 

Net cash used in investing activities

 

 

(306,810)

 

 

(13,632)

 

Financing Activities

 

 

 

 

 

 

 

Net change in deposits

 

 

(162,408)

 

 

(19,231)

 

Net change in short-term borrowings

 

 

(151,282)

 

 

(142,099)

 

Proceeds from notes payable

 

 

134,639

 

 

69,808

 

Payments on notes payable

 

 

(138,160)

 

 

(75,799)

 

Payments to repurchase common stock

 

 

 —

 

 

(1,706)

 

Dividends paid on common stock

 

 

(7,464)

 

 

(6,719)

 

Net cash distributed to noncontrolling interest

 

 

(1,810)

 

 

(501)

 

Taxes paid on employee stock awards netting activity

 

 

(723)

 

 

(689)

 

Other, net

 

 

(69)

 

 

(177)

 

Net cash used in financing activities

 

 

(327,277)

 

 

(177,113)

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(307,985)

 

 

(5,263)

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

778,466

 

 

673,960

 

Cash, cash equivalents and restricted cash, end of period

 

$

470,481

 

$

668,697

 

 

 

 

 

 

 

 

 

Reconciliation of Cash, Cash Equivalents and Restricted Cash to Consolidated Balance Sheets

 

 

 

 

 

 

 

Cash and due from banks

 

$

313,192

 

$

470,127

 

Federal funds sold

 

 

438

 

 

400

 

Assets segregated for regulatory purposes

 

 

156,851

 

 

198,170

 

Total cash, cash equivalents and restricted cash

 

$

470,481

 

$

668,697

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

 

Cash paid for interest

 

$

39,297

 

$

28,294

 

Cash paid for income taxes, net of refunds

 

$

(270)

 

$

542

 

Supplemental Schedule of Non-Cash Activities

 

 

 

 

 

 

 

Derecognition of construction in progress related to build-to-suit lease obligations

 

$

29,195

 

$

 —

 

Conversion of loans to other real estate owned

 

$

1,578

 

$

2,496

 

Additions to mortgage servicing rights

 

$

1,861

 

$

6,661

 

 

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. 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, 2018 (“2018 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, 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 Hilltop Opportunity Partners LLC, formerly known as PlainsCapital Equity, LLC, a merchant bank utilized to facilitate investments in companies engaged in non-financial activities. 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”), which holds an ownership interest in and is the managing member of certain affiliated business arrangements (“ABAs”).

 

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

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Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

(“VIE”) 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 Hilltop Securities Asset Management, LLC. Hilltop Securities is a broker-dealer registered with 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 Hilltop Securities 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”).

 

In addition, Hilltop owns 100% of the membership interest in each of HTH Hillcrest Project LLC (“HTH Project LLC”) and Hilltop Investments I, LLC. Hilltop Investments I, LLC owns 50% of the membership interest in HTH Diamond Hillcrest Land LLC (“Hillcrest Land LLC”) which is consolidated under the aforementioned VIE Subsections of the ASC. These entities are related to the Hilltop Plaza investment discussed in detail in Note 13 to the consolidated financial statements and are collectively referred to as the “Hilltop Plaza Entities.” 

 

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, including reclassifications due to the adoption of new accounting pronouncements. As previously disclosed in the Company’s Form 10-Q for the period ended September 30, 2018, filed with the SEC on October 25, 2018, the quarterly report on Form 10-Q for the period ended March 31, 2018, filed with the SEC on April 26, 2018, incorrectly included the change in assets segregated for regulatory purposes in the operating section of the statements of cash flows. Previously disclosed net changes in assets segregated for regulatory purposes of ($11.6) million for the three months ended March 31, 2018, should have been excluded from the cash flows from operating activities and the beginning-of-period and end-of-period balances of assets segregated for regulatory purposes are included in total cash, cash equivalents and restricted cash in accordance with Accounting Standards Update (“ASU”) 2016-18. Accordingly, net cash provided by operating activities for the three months ended March 31, 2018, originally reported as $173.9 million, is $185.5 million. 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.

 

Significant accounting policies are detailed in Note 1 to the consolidated financial statements included in the Company’s 2018 Form 10-K. As a result of the adoption of ASU 2016-02 and related amendments and technical corrections (collectively, the “Leasing Standard”), the Company has included a new significant accounting policy related to lease accounting as summarized below. 

 

Leases

 

The Company determines if an arrangement is a lease at inception. Operating leases with a term of greater than one year are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities on the Company’s consolidated balance sheets. Finance leases are included in premises and equipment and other liabilities on the Company’s consolidated balance sheets. The Company has lease agreements with lease and nonlease components, which are generally accounted for as a single lease component. Leases of low-value assets are assessed on a lease-by-lease basis to determine the need for balance sheet capitalization.

 

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Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized on the lease commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses the incremental borrowing rate commensurate with the lease term based on the information available at the lease commencement date in determining the present value of lease payments. No significant judgments or assumptions were involved in developing the estimated operating lease liabilities as the Company’s operating lease liabilities largely represent the future rental expenses associated with operating leases, and the incremental borrowing rates are based on publicly available interest rates. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease. These options to extend or terminate are assessed on a lease-by-lease basis, and the ROU assets and lease liabilities are adjusted when it is reasonably certain that an option will be exercised. Rental expense for lease payments is recognized on a straight-line basis over the lease term and is included in occupancy and equipment, net within our consolidated statements of operations.

 

 

 

2. Recently Issued Accounting Standards

 

Accounting Standards Adopted During 2019

 

In July 2018, the FASB issued ASU 2018-09 which clarifies, corrects and makes minor improvements to a wide variety of topics in the ASC. The amendments make the ASC easier to understand and apply by eliminating inconsistencies and providing clarifications. The transition and effective dates are based on the facts and circumstances of each amendment, with some amendments becoming effective upon issuance of the ASU, and others becoming effective for annual periods beginning after December 15, 2018. The Company adopted the amendments as of January 1, 2019, which did not have a material effect on the Company’s consolidated financial statements.

 

In August 2017, the FASB issued ASU 2017-12 which provides targeted improvements to accounting for hedging activities. The purpose of the amendment is to better align a company’s risk management activities with its financial reporting for hedging relationships, to simplify the hedge accounting requirements and to improve the disclosures of hedging arrangements. The amendment is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. The Company adopted the standard on January 1, 2019. The Company has not historically applied hedge accounting to its derivative transactions, so the provisions of the amendment did not have a material effect on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued the Leasing Standard, which is codified in ASC 842, Leases, and is intended to increase transparency and comparability among organizations and require lessees to record an ROU asset and a liability representing the obligation to make lease payments for long-term leases. Accounting by lessors remains largely unchanged. The Company adopted the standard on January 1, 2019, using the modified retrospective transition under the option to apply the Leasing Standard at its effective date without adjusting the prior period comparative financial statements. The Company elected the package of practical expedients to not reassess: (i) whether any existing contracts are or contain a lease, (ii) the lease classification of any existing leases and (iii) initial direct costs related to existing leases. The Company also elected to apply an additional practical expedient to include both the lease and nonlease components of all leases as a single component and account for it as a lease. The Company implemented internal controls and key system functionality to enable the preparation of financial information upon adoption. The implementation of the Leasing Standard had a material impact on our consolidated balance sheets but did not have a material impact on our consolidated statements of operations. On January 1, 2019, the Company recorded operating lease liabilities of $121.8 million and ROU assets of $111.9 million upon adoption of the Leasing Standard. The lease liabilities (at their present value) represent predominantly all of the future minimum lease payments required under operating leases. The balance sheet effects of the new lease accounting standard also impacted regulatory capital ratios, performance ratios and other measures which are dependent upon asset or liability balances. In addition, the Company reassessed its accounting ownership of the Hilltop Plaza assets under construction as of January 1, 2019, under the build-to-suit provisions of ASC 842 and concluded it is not the accounting owner. As such, the assets and liabilities of the project were derecognized during the first quarter of 2019, with the $1.4 million offset representing deferred expenses

10


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

recognized on the project to date through January 1, 2019, recorded as an increase to retained earnings. Refer to Note 13 for more details regarding the Hilltop Plaza transaction.

 

Accounting Standards Issued But Not Yet Adopted

 

In August 2018, the FASB issued ASU 2018-15 which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software licenses). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The amendment also includes presentation and disclosure provisions regarding capitalized implementation costs. The amendment is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the provisions of the amendment and the impact on its future consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13 which includes various removals, modifications and additions to existing guidance regarding fair value disclosures. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the provisions of the amendments but does not expect the amendments to have a material impact on its future consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13 which sets forth a “current expected credit loss” (CECL) model which requires entities to measure all credit losses expected over the life of an exposure (or pool of exposures) for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The new standard, which is codified in ASC 326, Financial Instruments – Credit Losses, replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. The new standard also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. The new standard is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2019 with a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption. The Company does not intend to adopt the provisions of the new standard early. The Company’s cross-functional team is continuing the implementation and testing of new credit forecasting models and a credit scoring system that will be utilized to estimate the likelihood of default and loss severity as a part of its credit loss estimation methodology in accordance with the new standard. In addition, the Company continues to identify and assess key interpretive policy issues, as well as design and build new or modified policies and procedures that will be used to calculate its credit loss reserves. However, the magnitude of the change in allowance for loan losses and other credit losses upon adoption will depend on, among other things, the portfolio composition and quality at the adoption date, as well as economic conditions and forecasts at that time.

 

 

 

 

3. Acquisition

 

BORO Acquisition

 

On August 1, 2018, in an effort to expand its Houston-area banking operations, the Company acquired privately-held The Bank of River Oaks (“BORO”) in an all-cash transaction (the “BORO Acquisition”). Pursuant to the terms of the definitive agreement, the Company paid cash in the aggregate amount of $85 million to the shareholders and option holders of BORO. The operations of BORO are included in the Bank’s operating results beginning August 1, 2018. BORO’s results of operations prior to the acquisition date are not included in the Company’s consolidated operating results. 

 

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Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

The BORO Acquisition 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 resulting fair values of the identifiable assets acquired and liabilities assumed from BORO at August 1, 2018 are summarized in the following table (in thousands).

 

 

 

 

 

 

Cash and due from banks

    

$

21,756

 

Securities

 

 

60,477

 

Loans held for investment

 

 

326,618

 

Other assets

 

 

25,912

 

Total identifiable assets acquired

 

 

434,763