Hilltop Holdings Inc. — 2012 Form 10-K
Business context and reporting period. Fiscal year ended December 31, 2012. Hilltop acquired PlainsCapital Corporation on November 30, 2012, for approximately $813.5 million in cash, common stock and preferred stock. The 2012 consolidated results include PlainsCapital’s operations only for December; therefore, full-year comparisons with 2011 are not like-for-like. Hilltop’s business expanded from primarily property and casualty insurance to four segments: banking, mortgage origination, insurance and financial advisory.
Key financial metrics
| Metric | 2012 | Comparison / context |
|---|---|---|
| Interest income | $39.0 million | $11.0 million in 2011 |
| Net interest income | $28.8 million | $2.1 million in 2011; increase mainly reflects PlainsCapital’s December results |
| Noninterest income | $224.2 million | $141.7 million in 2011; includes mortgage and advisory businesses after acquisition |
| Noninterest expense | $255.5 million | $155.3 million in 2011; increased substantially with acquired operations |
| Net loss / loss applicable to common stockholders | $5.1 million / $5.9 million | Common-stockholder loss was $6.5 million in 2011 |
| Loss per diluted common share | $0.10 | $0.12 loss in 2011 |
| Operating cash flow | $113.9 million provided | $3.3 million used in 2011; acquisition affects comparability |
| Cash and cash equivalents | $725.2 million | Up from $578.5 million at year-end 2011 |
| Total assets / stockholders’ equity | $7.29 billion / $1.15 billion | Year-end 2011 assets were $925.4 million and equity $655.4 million |
| Loans held for investment, net | $3.15 billion | Loans held for sale were an additional $1.40 billion |
| Deposits | $4.70 billion | All attributable to PlainsCapital acquisition |
| Borrowings and debt | $728.3 million short-term borrowings; $141.5 million notes payable; $67.0 million junior subordinated debentures | Excludes deposits |
| Regulatory capital | Hilltop Tier 1 risk-based 17.72%; total risk-based 17.81%; leverage 13.08% | Bank ratios were 11.83%, 11.93% and 8.84%, respectively; Bank was classified well-capitalized |
The full-year taxable-equivalent net interest margin was 2.35%. The banking segment reported a 5.83% margin for December 2012, including purchase-accounting accretion that increased the margin by approximately 140 basis points. The filing reports a fourth-quarter net income of $9.3 million; PlainsCapital contributed $8.4 million of net earnings during the quarter.
Material changes versus prior periods
- The acquisition increased year-end assets from $925.4 million to $7.29 billion and added $4.70 billion of deposits, a $3.15 billion held-for-investment loan portfolio and substantial mortgage loans held for sale.
- Hilltop issued 27.1 million common shares and 114,068 shares of Series B Preferred Stock as part of the acquisition consideration. Common shares outstanding were 83.5 million at year-end.
- Insurance net premiums earned rose 9.4% to $146.7 million, but insurance underwriting loss widened to $15.0 million from $10.1 million in 2011. The combined ratio rose to 108.8% from 106.2% (a ratio above 100% indicates an underwriting loss).
- Cash provided by operations increased from $3.3 million used in 2011 to $113.9 million provided in 2012; the acquisition and the added segments materially affect this comparison.
Outlook, risks, contingencies and unusual items
- Outlook: No specific consolidated earnings or revenue guidance is provided. Management expects banking and mortgage origination to be the principal revenue drivers; mortgage results are expected to be more volatile than banking results. The filing highlights mortgage seasonality and interest-rate sensitivity.
- Acquisition and accounting items: 2012 included $6.6 million of merger-related expenses, $8.9 million of retention compensation for two PlainsCapital executives, $6.1 million of net purchase-accounting accretion and $0.8 million of acquired-intangible amortization. Management states these items increased the annual net loss by $7.7 million after tax. The acquired purchase-price allocation remained preliminary, subject to change for up to one year after closing.
- Credit and concentration risks: Banking activity is concentrated in Texas, including real-estate-related lending. At year-end, nonperforming loans were $1.8 million and other real estate owned was $11.1 million. The allowance for loan losses was $3.4 million; acquired loans were initially recorded at fair value without carrying over PlainsCapital’s prior allowance.
- Insurance risks: Increased wind and hail losses drove the higher 2012 loss ratio. The company reported $23.3 million of catastrophe losses below its reinsurance retention. Catastrophe coverage provided up to $170 million of losses per event above stated retentions; recovery remains subject to reinsurer performance. Net reinsurance recoverables were $18.6 million.
- Liquidity and funding: Brokered deposits were about 10.3% of total deposits, while the 15 largest depositors (excluding First Southwest) represented 19.2%. The $1.6 billion PrimeLending warehouse line had $1.3 billion drawn at year-end. Management says alternative funding sources are available, but deposit concentration and funding costs remain risks.
- Preferred stock: The $114.1 million Series B Preferred Stock carries a dividend rate tied to qualified small-business lending; the rate was 2.730% at year-end and 2.468% for the first quarter of 2013. The rate can rise, reaching 9% beginning March 27, 2016. Preferred-stock terms restrict common dividends and repurchases in specified circumstances; Hilltop had paid no common dividends in the prior two fiscal years.
- Other contingencies and risks: PrimeLending’s mortgage repurchase/indemnification reserve was $19.0 million. First Southwest faces 20 individual lawsuits connected to an industry-wide municipal investment-products investigation; class-action claims against it were dismissed. Management does not expect the disclosed legal matters, taken as a whole, to materially affect consolidated results, but the individual suits seek unspecified damages. Other principal risks include regulatory changes, interest-rate movements, integration execution, catastrophe losses, reserve estimates and goodwill impairment.
Most important facts for investors to verify
- Review the acquisition’s full-year pro forma results and subsequent segment performance: reported 2012 includes PlainsCapital for December only.
- Assess whether the 108.8% insurance combined ratio, catastrophe exposure and reinsurance protections improve or deteriorate in subsequent periods.
- Monitor loan performance, acquired-loan fair-value assumptions, allowance adequacy, Texas real-estate concentrations and the $11.1 million of other real estate owned.
- Track deposit concentration, brokered-deposit reliance, short-term borrowings and the draw on PrimeLending’s warehouse facility.
- Verify qualified small-business lending against the Series B baseline, including its effect on preferred dividends and constraints on common-stock distributions.
- Review the $19.0 million mortgage indemnification reserve, the municipal-products litigation and the final purchase-price allocation and goodwill assessment.
- Note that management and the external auditor excluded PlainsCapital from the 2012 internal-control assessment because it was acquired shortly before year-end; management concluded the assessed controls were effective.