Hilltop Holdings Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing; quarterly information is included, but the filing does not present a separate “2015 Q4” annual-report period.
Business context
Hilltop is a Dallas-based financial holding company operating banking, broker-dealer, mortgage origination and property-and-casualty insurance businesses. Its January 1, 2015 acquisition of SWS expanded brokerage, clearing and banking operations. Banking is primarily Texas-based; mortgage lending operates nationally, while insurance is concentrated in Texas and other southern states.
Financial performance and condition
| Metric | 2015 | 2014 |
|---|---|---|
| Net interest income | $408.6 million | $361.1 million |
| Noninterest income | $1,227.6 million | $799.3 million |
| Noninterest expense | $1,340.0 million | $965.4 million |
| Income before taxes | $283.5 million | $178.2 million |
| Net income attributable to Hilltop common stockholders | $209.1 million | $105.9 million |
| Diluted earnings per share | $2.09 | $1.17 |
| Return on average assets / equity | 1.70% / 12.32% | 1.26% / 8.01% |
| Net interest margin, taxable-equivalent | 3.81% | 4.74% |
| Net cash from operating activities | $35.7 million | $(91.4) million |
Reported noninterest income includes an $81.3 million bargain-purchase gain from SWS; excluding that gain, it was approximately $1.15 billion. The 2015 effective tax rate was 25.0%, versus 36.8% in 2014, primarily reflecting the tax-free treatment of the SWS bargain-purchase gain.
At year-end, total assets were $11.87 billion, deposits $6.95 billion, stockholders’ equity $1.74 billion and total loans, including loans held for sale, approximately $7.1 billion. Consolidated cash and cash equivalents were $669.4 million, down from $813.1 million. Hilltop separately reported $55.5 million of freely available holding-company cash, versus $146.0 million a year earlier.
Borrowings totaled approximately $1.25 billion, including $947.4 million of short-term borrowings, $238.7 million of notes payable and $67.0 million of junior subordinated debentures. The company issued $150 million of 5% Senior Notes due 2025. Hilltop’s total risk-based capital ratio was 18.89%; the Bank’s was 16.99%, and the Bank was classified as well-capitalized.
Material changes versus the prior year
- Net income applicable to common stockholders rose to $209.1 million from $105.9 million, with SWS acquisition effects and the $81.3 million bargain-purchase gain contributing materially.
- Net interest income increased 13.1%, primarily reflecting SWS operations. The consolidated net interest margin fell 93 basis points to 3.81%; management cited securities-financing activity in the broker-dealer segment as a significant drag.
- Noninterest income rose 53.6%, reflecting acquired broker-dealer operations, higher mortgage production and the bargain-purchase gain. Noninterest expense rose 38.8%, including acquired SWS costs and merger-related costs.
- Mortgage originations increased 28.8% to $13.35 billion; mortgage segment pretax income increased to $47.5 million from $12.4 million. Home purchases were 74.1% of origination volume.
- Banking pretax income rose to $175.4 million from $139.1 million. Non-covered nonperforming loans were 0.37% of non-covered loans, down from 0.42%; covered nonperforming assets declined to $108.1 million from $171.2 million.
- Insurance pretax income declined to $15.7 million from $25.7 million. The combined ratio worsened to 94.9% from 89.3%, reflecting higher weather losses, adverse development on prior hail claims and lower earned premiums.
Outlook, commentary and key risks
- No specific consolidated earnings or revenue guidance is provided. Management expected cost savings from combining FSC and Hilltop Securities to begin in 2016, partly offset by integration costs anticipated in the first half of the year.
- SWS integration remained a central execution risk. The company recorded $31.6 million of 2015 pretax SWS transaction and integration costs. It completed the broker-dealer combination on January 22, 2016 and contributed $20 million of holding-company cash to Securities Holdings.
- Texas concentration exposes banking and insurance results to regional economic conditions, including low oil prices. Energy loans were 3.6% of the Bank’s loan portfolio; 70.5% of 2015 insurance gross written premiums came from Texas.
- Insurance results are exposed to severe weather, reserve-estimation uncertainty and reinsurance counterparty risk. Management reported $35.3 million of 2015 severe-weather claims before reinsurance and $26.2 million net of reinsurance.
- The FDIC loss-share agreements on acquired FNB assets involve reimbursement conditions and a potential future true-up payment. Hilltop accrued $5.5 million for a possible true-up; the ultimate amount is uncertain.
- Other significant exposures include interest-rate and market risk, real-estate collateral values, mortgage servicing rights, mortgage repurchase and indemnification claims, regulatory changes, cybersecurity, and reliance on regulated subsidiaries for dividends and funding.
- Legal matters include SWS appraisal litigation involving approximately 5.2 million shares, a Rhode Island case related to the 38 Studios financing, and a DOJ investigation of PrimeLending FHA origination and underwriting practices. The filing says outcomes are uncertain and potential liability for the DOJ investigation could not be reasonably estimated.
Important facts for investors to verify
- How much of 2015 earnings growth is sustainable after excluding the SWS bargain-purchase gain and acquired-loan discount accretion?
- Whether broker-dealer integration delivers the expected savings, and how its ongoing compensation and integration expenses affect profitability.
- Whether the lower consolidated net interest margin persists and how rate changes affect bank earnings, mortgage volume and mortgage servicing rights.
- Whether Texas energy and real-estate exposures, insurance weather claims and prior-period reserve development worsen.
- The ultimate FDIC true-up obligation, recoverability of the FDIC indemnification asset, and status of the cited litigation and DOJ inquiry.
- Cash available at the holding company versus cash held in regulated subsidiaries, debt-service needs, and restrictions on subsidiary dividends.