Hilltop Holdings Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. Financial statements are unaudited. Hilltop is a financial holding company with banking, broker-dealer, mortgage origination and property-and-casualty insurance businesses.
Key financial results
Unless noted otherwise, dollar amounts are in millions.
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Net interest income | $92.1 | $93.8 |
| Noninterest income | $271.4 | $277.4 |
| Noninterest expense | $320.5 | $325.2 |
| Provision for loan losses | $1.7 | $3.4 |
| Income before income taxes | $41.3 | $42.6 |
| Net income, consolidated | $26.3 | $28.2 |
| Income attributable to Hilltop | $26.4 | $27.6 |
| Diluted earnings per share | $0.27 | $0.28 |
| Taxable-equivalent net interest margin | 3.54% | 3.70% |
| Return on average assets / equity | 0.88% / 5.73% | 0.96% / 6.32% |
- Net interest income and noninterest income declined year over year; lower insurance premiums and mortgage production income were partly offset by broker-dealer growth. Expenses fell, including lower SWS integration costs ($0.3 million versus $4.8 million in Q1 2016).
- Banking segment pretax income was $31.8 million (prior year $31.2 million); broker-dealer $9.5 million ($3.8 million); mortgage origination $9.9 million ($9.1 million); insurance $1.8 million ($6.2 million).
- Insurance underwriting weakened: combined ratio rose to 98.4% from 88.5%, reflecting premiums earned declining faster than losses and expenses. Net premiums earned fell 9.0% to $36.1 million.
Financial position, cash flow and capital
- Total assets were $12.34 billion, down from $12.74 billion at year-end. Deposits increased to $7.33 billion from $7.06 billion. Non-covered loans, net, were $5.73 billion; covered loans, net, were $234.7 million.
- Cash and cash equivalents were $570.3 million at quarter-end. Operating cash flow was $349.3 million, investing cash flow was negative $44.0 million and financing cash flow was negative $425.7 million; cash and cash equivalents decreased $120.4 million during the quarter. Hilltop separately reported $88.3 million of freely available holding-company cash.
- Short-term borrowings fell to $753.8 million from $1.42 billion, primarily reflecting lower bank borrowings associated with the mortgage warehouse line. Notes payable were $324.7 million and junior subordinated debentures were $67.0 million.
- Hilltop reported total capital to risk-weighted assets of 20.12%, common equity Tier 1 of 19.03%, and leverage ratio of 13.98%. PlainsCapital was classified as well capitalized. The filing states both exceeded applicable capital conservation buffer requirements.
- The board reauthorized a share repurchase program of up to $50 million through January 2018. Hilltop repurchased 261,608 shares for $7.2 million at an average $27.52 per share and declared a $0.06 quarterly dividend, payable May 31, 2017.
Material changes, outlook and risks
- Management attributed lower banking net interest income and margin primarily to reduced purchase-accounting loan accretion and interest-rate margin compression. It expects acquired-loan accretion to decline as loans repay, refinance or renew, and says compression may persist until loan rates reprice above floors.
- PrimeLending originations were $2.82 billion, down 3.6% year over year. Refinancing volume fell to $555 million (19.7% of originations) from $878 million (30.0%); home-purchase volume rose 10.6% to $2.27 billion. Management expected the year-over-year refinancing decline to continue for the remainder of 2017, but did not expect rate increases to significantly affect home-purchase volume. No quantified company-wide earnings guidance is provided.
- PrimeLending sold mortgage servicing rights for $17.5 million during the quarter. Its servicing portfolio declined to $3.79 billion from $5.48 billion at year-end; the MSR asset was $45.6 million at quarter-end.
- The FDIC indemnification asset declined to $47.9 million. Hilltop recorded a $14.9 million accrual for a possible FDIC loss-share “true-up”; the ultimate amount is uncertain. Management projected covered losses and reimbursable expenses would be below the $240.4 million first-loss threshold.
- Credit indicators warrant attention: non-covered nonperforming assets rose to $34.0 million from $30.1 million at year-end, and non-covered nonaccrual loans rose to $28.8 million from $24.4 million. The non-covered allowance was $55.2 million, or 0.95% of gross non-covered loans.
- Material contingencies include a DOJ investigation of PrimeLending FHA mortgage origination and underwriting practices; the company could not estimate liability. SWS appraisal petitions cover approximately 5.2 million shares. Mortgage representation-and-warranty indemnification reserves were $19.0 million. The filing says pending matters could have material consequences in particular periods, though management did not expect a material overall effect based on information then available.
- Other principal risks include real-estate loan concentrations, interest-rate movements, severe weather in the southern United States, mortgage repurchase claims, FDIC loss-share obligations, reinsurer performance, cybersecurity, regulatory changes and access to capital. The filing reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether net interest margin and loan yields stabilize as purchase-accounting accretion declines and loan floors reset.
- Trends in nonaccrual loans, nonperforming assets, charge-offs and allowance adequacy, including real-estate concentrations.
- PrimeLending’s purchase-versus-refinance mix, production profitability, MSR valuation and mortgage indemnification claims.
- Developments in the DOJ FHA inquiry and SWS appraisal litigation, and any resulting financial exposure.
- Future FDIC indemnification-asset amortization and the potential true-up payment; also confirm the planned $20 million insurance-company note repayment, subject to regulatory approval.