Hilltop Holdings Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. Amounts below are in millions of dollars unless otherwise stated.
Business context
Hilltop acquired PlainsCapital on November 30, 2012, expanding from a primarily insurance business into banking, mortgage origination and financial advisory services. The 2013 results include these acquired businesses; 2012 comparisons largely do not and are therefore not directly comparable. Hilltop reports banking, mortgage origination, insurance and financial advisory segments.
Key financial metrics
| Metric | Q2 2013 | Six months 2013 | Prior-year comparable |
|---|---|---|---|
| Net interest income | $68.4 | $135.7 | $1.2 Q2; $2.5 six months |
| Noninterest income | $239.2 | $452.5 | $38.0 Q2; $74.9 six months |
| Total revenue (net interest income plus noninterest income) | $307.7 | $588.2 | $39.3 Q2; $77.4 six months |
| Net income attributable to Hilltop common stockholders | $20.9 | $53.3 | Loss of $10.7 Q2; loss of $10.4 six months |
| Diluted earnings per common share | $0.24 | $0.61 | Loss per share of $0.19 Q2; $0.18 six months |
| Provision for loan losses | $11.3 | $24.3 | None reported in comparable periods |
Consolidated net interest margin was 4.33% for Q2 and 4.34% for the first half; acquired-loan discount accretion added approximately 96 and 97 basis points, respectively. The banking segment’s margin was 5.20% for Q2 and 5.21% for the first half. Q2 return on average assets was 1.24% and return on average equity was 7.29%.
At June 30, 2013, total assets were $7.40 billion, loans held for investment net of allowance were $3.23 billion, and loans held for sale were $1.41 billion. Deposits were $4.50 billion, down $204 million from year-end 2012. Short-term borrowings were $1.00 billion, up $276 million, primarily reflecting a $425 million increase in Federal Home Loan Bank funding; notes payable were $139.9 million and junior subordinated debentures were $67.0 million.
Cash and cash equivalents were $626.1 million, down $100.4 million from year-end. First-half operating cash flow was $14.6 million, investing cash flow was negative $206.3 million, and financing cash flow was positive $91.3 million. Hilltop reported approximately $205 million of freely available holding-company cash. The Bank was well capitalized, with a 9.74% Tier 1 leverage ratio and 13.35% total risk-based capital ratio; Hilltop’s corresponding ratios were 13.66% and 18.90%.
Material changes and segment performance
- Mortgage origination and financial advisory operations added substantial revenue following the acquisition. PrimeLending originated $3.55 billion of mortgages in Q2 and $6.60 billion in the first half. Management noted that higher mortgage rates, particularly the late-June increase, could affect refinancing and future origination volumes.
- The insurance segment recorded a Q2 pretax loss of $20.7 million, including $20.9 million of May tornado, wind and hail losses in Texas and Oklahoma. Its combined ratio rose to 158.2% for Q2 and 124.0% for the first half, versus 141.8% and 121.1%, respectively, a year earlier.
- Available-for-sale securities had net unrealized losses of $29.8 million at June 30, compared with net unrealized gains of $12.5 million at year-end 2012, primarily reflecting higher market interest rates. The first-half comprehensive result included $27.4 million of after-tax unrealized securities losses.
- The allowance for loan losses rose to $26.2 million from $3.4 million at year-end, largely reflecting the acquired banking portfolio and provisions. Nonperforming assets increased to $31.9 million from $13.4 million; nonperforming loans were 0.50% of total loans. The increase was primarily related to acquired purchased-credit-impaired loans.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management said future revenue would be driven primarily by banking and mortgage origination, with mortgage results more exposed to market conditions and more volatile than banking. It also noted that the Bank’s interest-rate sensitivity analysis indicated that a 100-basis-point increase would reduce projected next-12-month net interest income by 3.67%; loan-rate floors could cause asset yields to rise more slowly than market rates.
Material risks include credit losses and real-estate concentration, interest-rate and mortgage-volume changes, catastrophic insurance events and reinsurance collectability, deposit concentration and funding costs, and regulatory change. The filing identifies the CFPB ability-to-repay and qualified-mortgage rules effective January 2014 as a potential source of origination, compliance and foreclosure risk. Basel III capital requirements were scheduled to begin in 2015, with the capital conservation buffer phased in thereafter.
Mortgage representation-and-warranty indemnification reserves were $20.4 million at June 30, up from $19.0 million at year-end; management cautioned the reserve could prove insufficient. The Bank had $1.1 billion of unused credit commitments and $35.0 million of standby letters of credit. Ordinary-course legal matters were not expected to materially affect the company. Hilltop renewed portions of its catastrophe reinsurance program effective July 1, with maximum stated catastrophe coverage up to $140 million.
Important facts for investors to verify
- Assess earnings comparability and sustainability apart from the acquired operations and purchase-accounting effects; acquisition-related items increased net income by an estimated after-tax $5.8 million in Q2 and $9.0 million in the first half.
- Track mortgage rates, originations, gain-on-sale performance and the effect of changing refinancing demand on PrimeLending.
- Monitor insurance loss severity, combined ratios, reserve development and the adequacy and collectability of reinsurance.
- Review loan-quality trends, acquired-loan cash-flow assumptions, allowance adequacy and growth in nonperforming assets.
- Check deposit trends, reliance on short-term and FHLB funding, liquidity needs, and the effect of securities valuation losses on equity and capital.
- Evaluate the effect of CFPB rules and Basel III requirements on mortgage operations, capital, dividends and growth.