Hilltop Holdings Inc. — 2014 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014. The filing reports full-year results; quarterly data are included, but the filing is not a standalone fourth-quarter report. Hilltop is a financial holding company with banking, broker-dealer, mortgage origination and property-and-casualty insurance operations, concentrated primarily in Texas.
Financial performance and condition
| Metric | 2014 | 2013 |
|---|---|---|
| Net interest income | $361.1 million | $296.2 million |
| Noninterest income | $799.3 million | $850.1 million |
| Net income | $112.6 million | $126.7 million |
| Income applicable to common stockholders | $105.9 million | $121.0 million |
| Diluted EPS | $1.17 | $1.40 |
| Net interest margin, taxable equivalent | 4.74% | 4.47% |
| Return on average assets / equity | 1.26% / 8.01% | 1.66% / 10.48% |
- Net interest income plus noninterest income was $1.16 billion, versus $1.15 billion in 2013. The 22% increase in net interest income was partly offset by lower noninterest income.
- Noninterest income fell 6%, primarily because mortgage origination income declined $83.9 million and 2013 included a $12.6 million pretax bargain-purchase gain on the FNB transaction.
- Provision for loan losses decreased to $16.9 million from $37.2 million. Total noninterest expense rose to $965.4 million from $911.7 million; reported efficiency ratio increased to 61.17% from 42.58%.
- Mortgage originations declined 12.1% to $10.36 billion; mortgage segment pretax income fell to $12.4 million from $27.4 million. Home-purchase originations were about 80% of volume, versus 69% in 2013.
- Insurance segment pretax income improved to $25.7 million from $7.6 million; its combined ratio improved to 89.3% from 102.6%, reflecting lower weather-related claims severity and earned-premium growth.
- At year-end, total assets were $9.24 billion, deposits $6.37 billion, total loans including loans held for sale about $5.8 billion, and stockholders’ equity $1.46 billion. Cash and cash equivalents were $813.1 million; Hilltop parent-only freely available cash was $146.0 million.
- Cash from operating activities was negative $91.4 million, compared with positive $396.7 million in 2013, mainly reflecting lower cash generated by mortgage-loan origination and sale activity. Investing activities provided $259.8 million and financing activities used $101.4 million.
- Year-end short-term borrowings were $762.7 million; notes payable were $56.7 million and junior subordinated debentures $67.0 million. Bank and holding-company capital ratios were strong: Hilltop Tier 1 risk-based 19.02%, total risk-based 19.69%, and leverage 14.17%; the Bank was classified as well-capitalized.
Material changes and unusual items
- Results are affected by acquisitions: PlainsCapital was acquired in 2012 and FNB in September 2013, so comparisons with earlier periods are not like-for-like. FNB was included for a full year in 2014, versus only part of 2013.
- Acquisition-related loan discount accretion contributed materially to reported margins. Management said purchase-accounting items increased consolidated 2014 net interest margin by about 125 basis points; the banking-segment effect was about 143 basis points.
- Covered other real estate owned generated $19.7 million of 2014 valuation write-downs. Covered nonperforming loans rose to $34.2 million from $1.8 million, while covered nonperforming assets totaled $171.2 million. The FDIC loss-share asset declined to $130.4 million from $188.3 million.
- Hilltop completed the SWS acquisition on January 1, 2015, after year-end. The reported preliminary purchase price was $349.0 million, including $78.2 million cash and 10.0 million Hilltop shares; acquisition-date fair values and consideration remained subject to change, including appraisal proceedings. SWS results are not included in 2014 operations.
- Hilltop recorded a $6.0 million net gain in 2014 related to its SWS investment and fair-value accounting election. No common dividends were paid in either 2013 or 2014; preferred dividends were $5.7 million in 2014.
Outlook, risks and contingencies
- No numerical earnings or revenue guidance is provided. Management expected mortgage refinancing to increase into the first quarter of 2015 following subsequent mortgage-rate declines, while noting that origination volumes and margins are sensitive to rates, competition and seasonality.
- Management anticipated integrating the acquired SWS bank operations, with back-office integration expected to be substantially complete by April 2015. Realizing acquisition benefits depends on successful integration and retaining employees and customers.
- Key exposures include Texas economic and real-estate concentration, energy-sector weakness (energy loans were 6.5% of the Bank’s loan portfolio), interest-rate sensitivity, credit losses, deposit concentration, mortgage repurchase and indemnification claims, catastrophe losses, reinsurance recoverability, and regulatory change.
- The FDIC loss-share agreements cover specified FNB losses at 80% in defined tiers, but provide no reimbursement for losses between $240.4 million and $365.7 million. The Bank may owe a later true-up if realized losses are below the FDIC’s initial estimate.
- PrimeLending was responding to a Department of Justice investigation concerning FHA mortgage origination and underwriting practices; no allegations had been asserted, and the company said it could not estimate potential liability. SWS-related shareholder litigation and appraisal actions were also pending. Management did not expect pending matters to materially affect the company overall, but outcomes were uncertain.
- Basel III capital requirements began phasing in January 2015. Hilltop noted that the SWS acquisition could put its assets above $10 billion and, if maintained, trigger additional regulatory stress-testing requirements.
Important facts for investors to verify
- Whether earnings remain solid after separating recurring operating performance from acquisition-related accretion, bargain gains and other fair-value items.
- Trends in covered and non-covered credit quality, especially rising covered nonperforming loans, OREO valuations, allowance adequacy and FDIC reimbursements.
- Post-acquisition SWS results, final purchase accounting, integration costs, appraisal-rights outcomes and realization of expected synergies.
- Mortgage origination volumes, gain-on-sale margins, servicing-rights valuations and the adequacy of the $17.6 million indemnification reserve.
- Deposit stability, reliance on short-term borrowings, parent-company liquidity and constraints on subsidiary dividends and common-stock distributions.
- Developments in the FHA investigation, SWS litigation and other legal matters, and any resulting financial or regulatory impact.