Hilltop Holdings ? It's A Bank Holding Company, Not An Insurance ...

Based in Dallas Texas, Hilltop Holdings (HTH) used to be a large real estate investment trust (REIT). In 2007 it sold its assets (before the crash) and purchased NLASCO Group, a property and casualty insurance company for low-value dwellings and manufactured homes primarily in Texas and other areas of the south. It has two other assets, National Lloyds Insurance and American Summit Insurance, which are licensed in 18 states. National Lloyds underwrites fire and homeowner?s insurance. American Summit offers homeowners and property and casualty insurance primarily to manufactured homeowners.

Insurance is not a sexy business and Hilltop has been losing money for the past couple of years. The good news is it still has plenty of cash on hand to spend. In May 2012, Hilltop announced an agreement to buy Plains Capital Corporation. The deal didn?t close until November 30, 2012, but that initial news report transformed the stock and the company. Hilltop paid $318.0M in cash and 27.5M shares of Hilltop common stock. Each share of Plains Capital Corporation common stock will be converted into the right to receive $9.00 in cash and 0.776 shares of Hilltop common stock. The market price of HTH on November 30, 2012 was $13.51.

Plains Capital Corporation, founded by Chairman and CEO Alan B. White, is a Texas-based and Dallas-headquartered financial holding company. Plains Capital Corporation has an impressive 24-year track record of growth and success.

In addition to the Bank, it has three specialized subsidiaries that provide an array of financial products and services. The three subsidiaries are Plains Capital Bank, First Southwest and Prime Lending, and their operations are very diverse and profitable. As of September 30, 2012, on a consolidated basis, it had total assets of approximately $6.4B, total deposits of approximately $4.3B, and total loans, including loans held for sale, of approximately $4.6B.

Plains Capital Bank is a full-service bank and one of the largest independent banks headquartered in Texas. The Bank has a solid Texas footprint with 34 locations in Austin, Dallas, Lubbock, Fort Worth, San Antonio and Weatherford from which we provide business and consumer banking services.

Plains Capital Bank is the cornerstone of the Corporation. The Bank primarily serves the private sector specializing in middle market commercial businesses and high net worth individuals. The Bank?s loan and deposit growth, from 1988 to 1999 in its hometown of Lubbock, allowed the Corporation to expand to larger Texas markets. Since 1988, assets have grown by a compounded annual growth rate of 14.4 percent.

First Southwest Company is a diversified investment bank and a registered broker-dealer. As of September 30, 2012, First Southwest had 22 offices catering to more than 1,600 public sector clients. First Southwest specializes in public finance, correspondent clearing services, asset management and corporate finance.

Prime Lending is a Dallas-based residential mortgage originator licensed to originate and close loans in 50 states and the District of Columbia. Prime Lending offers a variety of loan products including 30-year and 15-year fixed rate conventional mortgages, adjustable rate mortgages, jumbo loans, Federal Housing Administration (FHA) and Veteran Affairs (VA) loans, permanent construction financing, relocation programs as well as refinancing options. As of September 30, 2012, Prime Lending operated more than 280 branches in 39 states.?

Valuation

Prior to the merger, insiders purchased 183,000 shares of stock at a cost of $2.4M. Upon completion of the merger on November 30, 2012, the stock has sold off (see chart below). Hilltop is a calendar year corporation, its 10K (annual report) is due out soon and will show the combined companies for the first time as of December 31, 2012. The financial statements (F/S) as of September 30, 2012 show Hilltop losing money for the last couple of years and Plains Capital Corporation making money. Once consolidated, Hilltop?s insurance business will account for 13% of total assets and the losses will be absorbed by the profitable banking business. Shortly after the year-end F/S are published and the conference call is completed, analysts will jump on board to initiate coverage. Currently, only two analysts follow this stock. The consolidated F/S will show total assets in the neighborhood of $7.3B. HTH will not show up as a property and casualty company, it will truly be a bank holding company.

Every year, the ABA Banking Journal publishes the top performing mid-sized banks (total assets between $1.0B to $10.0B). From this link, click on ?May issue top performer article? to see the list. A majority of the banks listed are between $1.0B to $4.0B, the average price to book value is 1.6, the average forward PE is 13, the average return on equity is 15.7% and return on assets is 1.4%. One of the banks I do own, which is Arrow Financial Corp. (AROW), is a local bank in Glens Falls NY, just north of Albany. It is a $2.2B bank holding company, pays a 4% dividend that grows every year. In 2012 it paid a 2% stock dividend and has a 1.7 price to book value ratio with a forward PE of 13. It is a well-run local bank; when the market sold off in 2008, AROW went up by 15%.

HTH is more than three times the size of AROW. It has an estimated PE of 11.4 ($12.72/$1.12 estimated EPS), estimated 2011 tangible book value of 22.3 and a growth rate of 14.4% for the banking business. The bank is well capitalized; its tier 1 risk based capital ratio is 13.1% and total risk based capital ratio is 14.6% as of September 30, 2012 (minimum requirements are 4% 8%, respectively). The risk-based capital requirements establish minimum liquid reserves for financial institutions. They exist to protect the firms, their investors, customers, and the economy as a whole.

The chart is from finviz.com

The worksheet below calculates earnings per share (EPS) and book value (BV) for Hilltop and Plains Capital per the 10Q as of September 30, 2012 and the 10K for prior years. The EPS calculation shows that the Plains Capital merger will transform Hilltop into a profitable bank holding company. The book value calculation provides a basis on how to value the company. Based on the ABA Banking Journal listing of mid-sized banks, the average price to book value ratio is 1.6. Since I do not know what the 2012 consolidated F/S will look like, I am using the 2011 tangible BV of 22.33 as a basis for what the business is worth. The current market price of HTH is $12.72, thus the price to BV ratio is .57.

Data per 2011 10K

Numbers in millions

Sept 30, 2012 10Q

Sept 30, 2012

2011

2010

2009

2008

EPS ? basic

Hilltop

Net Income for CS

$ (14.4)

$ (6.5)

$ (13.5)

$ (12.4)

$ (32.7)

Wtd avg shrs ? basic

56.4

56.5

56.5

56.5

56.5

EPS ? basic

$ (0.26)

$ (0.12)

$ (0.24)

$ (0.22)

$ (0.58)

Plains

Net Income for CS

$ 77.3

$ 44.0

$ 25.9

$ 24.7

$ 24.1

Capital

Wtd avg shrs ? basic

32.0

31.6

31.8

31.6

26.1

Corp

EPS ? basic

$ 2.42

$ 1.39

$ 0.81

$ 0.78

$ 0.92

BOOK VALUE CALC

Hilltop

Total Assets

$ 915.5

$ 925.4

$ 939.6

$ 1,040.8

$ 1,048.8

Total Liab

$ 274.7

$ 270.0

$ 286.6

$ 257.0

$ 257.3

Net Assets

$ 640.8

$ 655.4

$ 653.1

$ 783.8

$ 791.5

Preferred Stock

$ (119.0)

$ (119.0)

Adj. Net Assets

$ 640.8

$ 655.4

$ 653.1

$ 664.8

$ 672.5

Intangibles

$ (32.0)

$ (33.0)

$ (35.0)

$ (36.0)

$ (38.0)

Tangible Net Assets

$ 608.8

$ 622.4

$ 618.1

$ 628.8

$ 634.5

BV per CS

$ 11.36

$ 11.60

$ 11.56

$ 11.77

$ 11.91

Tangible BV per CS

$ 10.79

$ 11.02

$ 10.94

$ 11.13

$ 11.24

Series A Pfd div

$ -

$ -

$ 1.24

$ 2.06

$ 2.06

Plains

Total Assets

$ 6,350.0

$ 5,700.0

$ 5,316.7

$ 4,570.8

$ 3,952.0

Capital

Total Liab

$ 5,746.3

$ 5,180.7

$ 4,869.4

$ 4,146.6

$ 3,550.5

Corp

Net Assets

$ 603.7

$ 519.3

$ 447.3

$ 424.2

$ 401.5

Preferred Stock

$ (114.1)

$ (114.1)

$ (89.2)

$ (88.4)

$ (87.6)

Adj. Net Assets

$ 489.6

$ 405.2

$ 358.1

$ 335.8

$ 313.9

Intangibles

$ (41.8)

$ (47.3)

$ (49.3)

$ (51.5)

$ (36.6)

Tangible Net Assets

$ 447.8

$ 357.9

$ 308.8

$ 284.3

$ 277.3

BV per CS

$ 15.30

$ 12.80

$ 11.27

$ 10.62

$ 12.02

Tangible BV per CS

$ 13.99

$ 11.31

$ 9.72

$ 8.99

$ 10.62

Dividend per CS

$ 0.18

$ 0.24

$ 0.20

$ 0.20

$ 0.20

BV = book value

CS = common stock

EPS = earnings per share

For me, this is an undervalued stock. At this point, it is also misunderstood in that the market does not realize the value of Plains Capital Corp. and what it has to offer. HTH is now about a $7.2B bank holding company. Plains Capital Corp. has a steady 14% asset growth rate and accounts for 87% of the company. Based on history, it looks like it will pay a 2% dividend. There has not yet been an earnings announcement; earnings should be reported by the end of March. The stock is trading at $12.75 resistance; the risk reward is set up in your favor. The MACD is about to cross up and the 200-day moving average is $12.28. You could use a mental stop of $12.25, downside risk is about 50 cents, and upside target should be $15 to $17.

Disclosure: I am long AROW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More?)

Additional disclosure: All content is from Hilltop and Plains Capital websites and respective 10Qs and 10Ks.

Source: http://seekingalpha.com/article/1269201-hilltop-holdings-it-s-a-bank-holding-company-not-an-insurance-company?source=google_news

Source: http://valoanaftershortsale.org/2013/03/14/hilltop-holdings-its-a-bank-holding-company-not-an-insurance-company/

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