Hilltop Holdings Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context and comparability
Hilltop acquired PlainsCapital Corporation on November 30, 2012, adding banking, mortgage origination and financial advisory businesses to its existing insurance operations. Q1 2013 includes the acquired businesses; Q1 2012 largely reflects the pre-acquisition insurance business. Accordingly, the large year-over-year increases are not like-for-like measures of organic growth.
Financial results and condition
| Metric | Q1 2013 / March 31, 2013 | Comparable / prior date |
|---|---|---|
| Net interest income | $67.2 million | $1.2 million in Q1 2012 |
| Noninterest income | $213.3 million | $36.9 million in Q1 2012 |
| Income before taxes | $52.5 million | $0.5 million in Q1 2012 |
| Net income attributable to Hilltop common stockholders | $32.4 million; $0.39 per diluted share | $0.3 million; $0.01 per diluted share in Q1 2012 |
| Consolidated net interest margin | 4.35% taxable-equivalent | Prior-period comparison not provided as useful after the acquisition |
| Cash and cash equivalents | $609.3 million | $726.5 million at December 31, 2012 |
| Total assets / stockholders’ equity | $7.22 billion / $1.18 billion | $7.29 billion / $1.15 billion at December 31, 2012 |
| Deposits | $4.76 billion | $4.70 billion at December 31, 2012 |
| Short-term borrowings | $576.7 million | $728.3 million at December 31, 2012 |
| Notes payable and junior subordinated debentures | $140.7 million and $67.0 million | $141.5 million and $67.0 million at December 31, 2012 |
Net cash provided by operating activities was $159.9 million, investing activities used $192.1 million, and financing activities used $85.0 million. Cash declined by $117.2 million during the quarter. Operating cash flow includes substantial mortgage-loan origination and sale activity.
The banking segment reported a 5.30% taxable-equivalent net interest margin and $34.9 million of pretax income. Mortgage origination reported $11.8 million of pretax income on $146.5 million of noninterest income; loan originations were $3.0 billion. Insurance pretax income was $5.9 million, with an 88.7% combined ratio, compared with 99.6% in Q1 2012. The financial advisory segment’s revenues equaled its costs in Q1.
The company reported $13.0 million of loan-loss provision; the allowance for loan losses was $16.6 million, or 0.51% of loans held for investment, versus $3.4 million and 0.11% at year-end. Nonperforming assets were $11.4 million, or 0.16% of assets. The Bank’s total risk-based capital ratio was 12.59% and it was classified as well-capitalized.
Material changes and unusual items
- Results expanded substantially with the inclusion of PlainsCapital’s banking, mortgage and advisory operations. Management attributed most of the revenue and expense increases versus Q1 2012 to this acquisition.
- Purchase-accounting effects included $16.0 million of net accretion on acquired earning assets and liabilities, partly offset by $2.5 million of intangible amortization. The filing says these items, together with acquired-loan provision effects, increased net income by $3.3 million after tax.
- The $13.0 million loan-loss provision included $8.3 million relating to acquired performing loans. Management recorded $0.2 million of net loan recoveries for the quarter.
- Insurance results improved year over year, principally reflecting higher earned premiums and lower losses and underwriting expenses; management cited less severe wind and hail activity than in Q1 2012.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management expects banking and mortgage origination to be the primary future revenue drivers, while noting mortgage results are more volatile and affected by interest rates and seasonal home-purchase activity. The company’s interest-rate simulations projected lower banking net interest income under the modeled rate increases: down 3.61% for a 100-basis-point increase and 3.65% for a 300-basis-point increase. Management also warned that loan-rate floors may cause asset yields to rise more slowly than market rates.
- Credit risks include changes in loan defaults and the banking segment’s commercial real estate exposure; non-construction commercial real estate was 28.5% of banking-segment loans.
- Liquidity risks include deposit concentration: the 15 largest external depositors represented approximately 22.20% of deposits. The company reported no liquidity issues to date and cited alternative funding sources.
- Off-balance-sheet exposures included $1.0 billion of unused credit commitments and $35.0 million of standby letters of credit.
- The mortgage indemnification reserve for loan-sale representations and warranties was $19.7 million, up from $19.0 million at year-end. Management cautioned that actual repurchase losses could exceed estimates.
- Insurance risks include catastrophe losses and the possibility that reinsurers may not meet their obligations. Reinsurance receivables were $18.2 million.
- Management said ordinary-course legal matters were not expected to materially affect consolidated results or financial condition. The filing also identifies regulatory, competitive, economic and interest-rate risks.
As a subsequent event, the company awarded 465,000 restricted shares to executives and key employees effective May 2, 2013, with estimated grant-date fair value of $6.2 million.
Important facts for investors to verify
- Assess post-acquisition performance on a comparable basis; Q1 2012 does not include the acquired PlainsCapital businesses.
- Review the sustainability of mortgage production income and volumes, and the impact of interest rates on originations and margins.
- Track loan-loss provision, allowance coverage, criticized and nonperforming loans, and commercial real estate concentrations.
- Monitor deposit concentration, funding mix, short-term borrowings and the use of available liquidity.
- Evaluate mortgage repurchase claims and the adequacy of the indemnification reserve, as well as catastrophe exposure and reinsurance recoverability.
- Review the effect of acquisition accounting, including loan discount accretion and other purchase-accounting estimates, on reported earnings.