Hilltop Holdings Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; financial statements are unaudited. Hilltop is a financial holding company with banking, mortgage origination, insurance and financial advisory operations. Comparisons below are with Q1 2013 unless otherwise noted; balance-sheet comparisons are with December 31, 2013.
Financial performance and condition
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior date |
|---|---|---|
| Net interest income | $85.4 million | $67.3 million |
| Noninterest income | $170.1 million | $213.3 million |
| Net interest income plus noninterest income | $255.5 million | $280.5 million |
| Provision for loan losses | $3.2 million | $13.0 million |
| Income before taxes | $39.7 million | $52.5 million |
| Net income | $25.3 million | $33.4 million |
| Income applicable to common stockholders; diluted EPS | $23.8 million; $0.26 | $32.4 million; $0.39 |
| Taxable-equivalent net interest margin | 4.62% | 4.35% |
| Return on average assets / equity | 1.14% / 7.65% | 1.87% / 11.46% |
| Cash from operating activities | $154.3 million | $160.0 million |
| Total assets / stockholders’ equity | $9.03 billion / $1.36 billion | $8.90 billion / $1.31 billion at Dec. 31, 2013 |
| Cash and cash equivalents | $917.4 million | $746.0 million at Dec. 31, 2013 |
| Deposits | $6.66 billion | $6.72 billion at Dec. 31, 2013 |
| Short-term borrowings | $491.4 million | $342.1 million at Dec. 31, 2013 |
| Notes payable and junior subordinated debentures | $122.5 million | $123.3 million at Dec. 31, 2013 |
Q1 2014 cash flows included $39.4 million used in investing and $56.5 million provided by financing. Total deposits declined about $59.7 million from year-end, while short-term borrowings increased $149.3 million. Hilltop reported approximately $157 million of freely available holding-company cash.
The Bank’s capital ratios were 14.14% total capital to risk-weighted assets, 13.47% Tier 1 capital to risk-weighted assets and 9.53% Tier 1 leverage; the Bank was classified as well capitalized under the rules then in effect.
Material changes and segment performance
- Mortgage origination: Originations fell 38.7% to $1.87 billion, and segment results shifted to a $3.0 million pretax loss from $12.3 million income. Refinancing volume fell to $397.4 million from $1.44 billion. Management cited higher mortgage rates, lower volumes and increased pricing competition; cost reductions lowered recurring quarterly operating costs by about $8 million since Q3 2013.
- Banking: Pretax income was $31.9 million versus $36.2 million. Net interest income increased, mainly reflecting the FNB acquisition, but banking expenses rose substantially with the acquired operations. The banking segment’s taxable-equivalent NIM was 4.80%, down from 5.30%; acquisition-related accretion added 106 basis points in Q1 2014.
- Insurance: Pretax income rose to $11.4 million from $6.2 million. The combined ratio improved to 77.5% from 88.7%, with higher earned premiums and improved claims experience. Net premiums earned increased to $40.3 million from $37.5 million.
- Financial advisory: The segment recorded a $0.2 million pretax loss versus $0.3 million income. Management cited higher interest rates and fixed-income market volatility as factors reducing institutional securities sales.
Consolidated net interest margin benefited from acquisition accounting: accretion and related purchase-accounting items increased the reported margin by 95 basis points in both Q1 2014 and Q1 2013. The decline in noninterest income was driven primarily by lower mortgage production income. Lower mortgage expenses and loan-loss provisions partly offset that decline.
Outlook, risks and unusual items
- Hilltop agreed to acquire SWS Group for 0.2496 Hilltop shares and $1.94 cash per SWS share, or $7.88 per share based on Hilltop’s March 31 closing price. The cash portion was estimated at approximately $78 million and was to be funded from available cash. Completion was expected before year-end 2014, subject to regulatory and SWS shareholder approvals and other closing conditions; no assurance was given that the transaction would close.
- Two shareholder lawsuits filed in April 2014 seek to enjoin the SWS merger. Hilltop said it considered the claims without merit and intended to defend them. PrimeLending also received a HUD Inspector General subpoena concerning mortgage practices and said it was cooperating.
- The mortgage segment’s investor indemnification reserve was $21.0 million. FDIC loss-share arrangements cover specified FNB-acquired loans and real estate; coverage is subject to tiered reimbursement terms, and a potential true-up payment to the FDIC may be due about ten years after the acquisition.
- Covered nonperforming assets increased to $166.4 million from $144.6 million at year-end, including covered non-accrual loans rising to $14.1 million from $1.8 million and covered OREO reaching $152.3 million. Non-covered nonperforming assets were $29.0 million, versus $28.2 million.
- Management anticipated that reduced refinancing activity would continue through 2014 and that mortgage originations would track more typical seasonal patterns. Insurance pricing and underwriting actions were expected to moderate premium growth but reduce exposure to volatile weather losses. The filing provides no consolidated earnings or EPS guidance.
- Key risks include credit losses and real-estate concentrations, FDIC reimbursement and true-up uncertainty, interest-rate and mortgage-volume sensitivity, severe weather and reinsurer performance, regulation, and successful completion and integration of acquisitions. Hilltop said rising rates could initially compress margins because loan yields may reprice more slowly than market rates.
Important facts for investors to verify
- Whether the SWS merger obtained required approvals, closed on the stated terms and realized expected benefits; monitor related litigation.
- Whether mortgage production, margins and cost savings stabilized as refinancing volume declined.
- Whether covered-loan credit quality, covered OREO and FDIC recoveries developed as expected, including the impact of loss-share terms.
- Whether deposit trends, short-term borrowing growth and available holding-company cash supported liquidity and the planned merger payment.
- Whether insurance claims, catastrophe exposure, pricing actions and reserve development remained consistent with management’s expectations.