Hilltop Holdings Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Hilltop is a diversified financial holding company with banking, broker-dealer, mortgage origination and property-and-casualty insurance businesses. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net interest income | $107.9 | $104.8 | $216.8 | $208.3 |
| Noninterest income | $312.9 | $279.4 | $565.3 | $514.6 |
| Income before taxes | $77.7 | $45.4 | $129.1 | $77.6 |
| Net income attributable to Hilltop | $57.8 | $33.1 | $96.6 | $57.5 |
| Diluted EPS | $0.62 | $0.35 | $1.03 | $0.60 |
- Consolidated net interest margin was 3.49% in Q2 and 3.59% for the first six months, compared with 3.47% and 3.50%, respectively, in 2018. Q2 return on average assets was 1.74% and return on average equity was 11.63%.
- At June 30, total assets were $14.27 billion, deposits $8.46 billion, loans held for investment net of allowance $7.15 billion, and stockholders’ equity $2.05 billion. Total loans including loans held for sale were about $8.76 billion.
- Loans held for investment grew 4.0% from year-end to $7.20 billion before allowance; mortgage warehouse loans increased to $555 million from $244 million. The allowance was $55.2 million, or 0.77% of gross loans, versus $59.5 million and 0.86% at year-end. Nonperforming assets fell to $52.8 million from $61.6 million; nonperforming loans were 0.36% of total loans versus 0.41%.
- Cash, cash equivalents and restricted cash were $493.8 million at June 30, compared with $482.3 million at June 30, 2018. Balance-sheet cash and due from banks was $342.0 million, down from $644.1 million at December 31, 2018; $151.3 million was segregated for broker-dealer regulatory purposes.
- For the first six months, operating cash flow was negative $130.6 million, investing cash flow negative $410.9 million, and financing cash flow positive $256.9 million. Net cash decreased $284.7 million. Mortgage loan production and associated sale flows are substantial components of operating cash flow.
- At June 30, short-term borrowings were $1.34 billion, notes payable $231.9 million and junior subordinated debentures $67.0 million. Banking capital remained strong: Hilltop’s total risk-based capital ratio was 17.14%, and PlainsCapital’s was 14.48%; PlainsCapital was classified as well capitalized.
Material changes versus comparable periods
- Q2 income attributable to Hilltop increased 75% year over year; first-half income increased 68%. Growth reflected higher broker-dealer trading and derivative gains, stronger banking income and improved mortgage-segment profitability.
- Broker-dealer segment pretax income rose to $22.1 million in Q2 from $8.2 million. Trading gains benefited from a more favorable market, lower Treasury yields and higher structured-finance/TBA volumes. Higher variable compensation partly offset the gains.
- Banking pretax income increased to $46.6 million from $33.1 million in Q2. Higher loan volumes and yields and lower expenses contributed; deposit costs rose, and acquired-loan discount accretion declined.
- Mortgage origination pretax income rose to $21.8 million from $13.4 million in Q2 even as originations fell 3.6% to $3.96 billion. First-half originations fell 9.3% to $6.41 billion. Cost reductions and lower expenses supported profitability, while first-half mortgage noninterest income declined.
- Insurance recorded a Q2 pretax loss of $2.8 million, versus a $2.4 million loss a year earlier; first-half pretax income was $4.0 million. The six-month combined ratio increased to 99.8% from 98.1%.
- Hilltop acquired Bank of River Oaks in August 2018 for approximately $85 million; its results are included from that date, affecting comparability. The acquisition added $39.6 million of goodwill and $10.0 million of core-deposit intangibles.
Outlook, commentary, risks and unusual items
- No quantitative consolidated earnings guidance is provided. Management expected lower mortgage rates to increase refinancing’s share of mortgage volume during the remainder of 2019; ABA production was expected to reach 8%–10% of mortgage volume for 2019.
- Management said ongoing technology and core-system investments and back-office consolidation would increase near-term costs, with expected longer-term savings. First-half costs associated with leadership changes and other efficiency initiatives totaled $8.7 million pretax. The retirement of co-CEO Alan White generated $5.8 million of Q1 expense; broker-dealer leadership changes added $2.2 million.
- CECL was scheduled for adoption January 1, 2020. Hilltop expected a material increase in its credit-loss allowance but had not provided a clear dollar estimate; the impact would depend on portfolio quality, composition and economic conditions at adoption.
- Key risks include credit losses and real-estate concentration, interest-rate and yield-curve changes, mortgage volume and MSR valuation, catastrophic weather and insurance claims, reinsurer performance, cybersecurity, regulation, litigation, funding and capital access, and execution of acquisitions and technology initiatives.
- Off-balance-sheet exposures included $2.3 billion of unused credit commitments and $92.4 million of standby letters of credit. Management said pending litigation was not expected to materially affect the company overall, while noting an adverse development could be material in a particular period.
- Other notable items: Hilltop repurchased $25.0 million of stock during the first half under a $50 million authorization; it declared a $0.08-per-share quarterly dividend for payment in August. Adoption of lease accounting added $121.8 million of operating lease liabilities and $111.9 million of right-of-use assets at January 1, 2019.
Most important facts for investors to verify
- Whether broker-dealer earnings and trading gains remain strong under less favorable market conditions, and how much of reported growth is recurring.
- Mortgage-segment margins, originations, refinancing mix and MSR valuation sensitivity as interest rates change.
- Credit quality and allowance adequacy, especially real-estate concentrations, and the eventual CECL allowance increase.
- Insurance loss trends, catastrophe exposure, reinsurance protection and the effect of exiting non-core states.
- Funding and liquidity trends, including higher short-term borrowings, deposit pricing, restricted cash and the use of capital for dividends and repurchases.
- Progress and cost of technology initiatives, leadership-transition expenses, and any material changes in litigation or other contingencies.