Hilltop Holdings Inc. — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports fourth-quarter results. FY 2013 comparisons are not like-for-like: 2012 included PlainsCapital only from December 1, while FNB operations were included from September 14, 2013.
Business context and key financial metrics
Hilltop is a financial holding company with four reportable segments: banking, mortgage origination, insurance and financial advisory. Its 2013 expansion included the FDIC-assisted acquisition of First National Bank (FNB), adding branches and markets across Texas.
| Metric | FY 2013 / Dec. 31, 2013 | Comparable period |
|---|---|---|
| Net interest income | $296.2 million | $28.8 million in 2012; 2012 includes only one month of PlainsCapital operations |
| Noninterest income | $850.1 million | $224.2 million in 2012; comparison is materially affected by acquired businesses |
| Income before taxes | $197.4 million | Loss of $6.2 million in 2012 |
| Net income / common diluted EPS | $126.7 million / $1.40 | Net loss of $5.1 million / diluted loss per share of $0.10 in 2012 |
| Net interest margin | 4.47% consolidated; 5.17% banking segment | 2012 consolidated margin of 4.64% was for December only |
| Cash flows | Operating +$396.7 million; investing +$223.9 million; financing −$601.1 million | Cash and cash equivalents ended at $746.0 million, up $19.6 million |
| Assets / deposits / loans | $8.90 billion / $6.72 billion / $5.6 billion, including loans held for sale | Assets $7.29 billion and deposits $4.70 billion at year-end 2012 |
| Stockholders’ equity | $1.31 billion | $1.15 billion at year-end 2012 |
| Borrowings and debt | $342.1 million short-term borrowings; $56.3 million notes payable; $67.0 million junior subordinated debentures | Short-term borrowings were $728.3 million and notes payable $141.5 million at year-end 2012 |
| Regulatory capital | Hilltop: 12.81% leverage, 18.53% Tier 1 risk-based, 19.13% total risk-based. Bank: 9.29%, 13.38%, and 14.00%, respectively | Bank classified as well capitalized |
The annual results include $12.6 million of preliminary, nonrecurring FNB bargain-purchase gain. Acquired-loan discount accretion and related purchase-accounting items increased the consolidated net interest margin by an estimated 103 basis points in 2013. The available-for-sale securities portfolio had a $53.7 million net unrealized loss at year-end, largely reflecting higher market interest rates; the filing reports no other-than-temporary impairment in 2013.
Fourth-quarter results
For Q4 2013, Hilltop reported net income of $31.0 million, income attributable to Hilltop common stockholders of $29.5 million, and diluted EPS of $0.34. Income before taxes was $49.1 million. Q4 2012 reported a net loss of $5.1 million and diluted loss per share of $0.10, but included only one month of PlainsCapital. The 2013 quarter included revisions to FNB acquisition accounting; the preliminary bargain-purchase gain was increased to $12.6 million and the filing says related revisions increased previously reported third-quarter net income by $6.3 million.
Segments and material changes
- Banking: FY 2013 income before taxes was $172.1 million. FNB added approximately $2.2 billion of assets and assumed deposits at acquisition. At year-end, the Bank had $8.0 billion of assets and $6.7 billion of deposits. Its covered portfolio included $1.0 billion of loans and $142.8 million of covered other real estate owned (OREO).
- Mortgage origination: PrimeLending originated $11.8 billion of mortgages and earned $27.4 million before taxes. Higher mortgage rates contributed to a 21.2% decline in originations in the second half versus the first half; refinancing volume fell while purchase volume rose modestly. The segment reduced non-origination headcount by about 22% in the second half.
- Insurance: Income before taxes was $7.6 million, versus a $4.7 million loss in 2012. Net premiums earned increased to $157.5 million. The combined ratio improved to 102.6% from 108.8%, but remained above 100%, indicating an underwriting loss. Texas storms produced estimated net losses of $22.1 million in 2013.
- Financial advisory: Income before taxes was $2.4 million. Management cited higher interest rates and fixed-income market volatility as pressures on security sales and advisory fees.
- Common shares increased to about 90.2 million from 83.5 million at year-end 2012, partly reflecting conversion of third-party exchangeable notes into 6.2 million shares. Hilltop redeemed the notes in 2013. It paid no common dividends in the two prior completed fiscal years.
Outlook, risks and contingencies
- Management anticipated that mortgage volume in 2014 could vary with interest rates and consumer confidence, and expected to begin realizing the full benefits of mortgage cost reductions in Q1 2014.
- Insurance management expected pricing, agent and geographic exposure actions to moderate premium growth in 2014, while anticipating improved loss experience from reduced weather exposure. Actual catastrophe losses and reserve estimates remain uncertain.
- Hilltop proposed in January 2014 to acquire the SWS shares it did not own for $7 per share, half cash and half Hilltop stock. The proposal was not a definitive agreement; completion, approvals, integration, funding and dilution were uncertain.
- The FNB purchase accounting remained preliminary, particularly for covered OREO and the FDIC indemnification asset. The FDIC loss-share terms reimburse 80% of losses in specified bands, but not losses in the band from $240.4 million to $365.7 million; the agreements also provide for potential later true-up payments.
- Key exposures include Texas and other regional real estate and weather concentrations, loan-loss estimation, interest-rate sensitivity, large-depositor concentration and brokered-deposit funding, mortgage investor repurchase claims, reinsurance collectability, regulatory change and acquisition integration. The Bank’s 15 largest depositors represented 15.49% of deposits; brokered deposits were 7.0%.
- Mortgage loan representation-and-warranty indemnification reserves were $21.1 million at year-end. PrimeLending had also received a HUD Inspector General subpoena concerning mortgage practices and said it was cooperating; management did not then expect pending litigation or inquiries to have a material overall effect.
- Basel III capital requirements were scheduled to begin transitioning in 2015, with the capital conservation buffer phased in through 2019. The filing does not provide a quantified estimate of the rules’ effect on Hilltop.
Most important facts for investors to verify
- Separate acquired-business contribution and purchase-accounting accretion from sustainable earnings; FY 2013 is not directly comparable with 2012.
- Track final FNB purchase-accounting valuations, FDIC reimbursements, covered OREO disposition and potential loss-share true-up exposure.
- Review loan quality trends, provision needs, real-estate concentrations and the adequacy of the acquired-loan discounts and allowance.
- Assess whether mortgage cost cuts offset weaker origination volumes and whether servicing-rights values and investor claims remain manageable.
- Monitor insurance catastrophe experience, reserve development, reinsurance recoveries and the effect of underwriting actions on premiums and combined ratio.
- Confirm the status, consideration, financing, regulatory approvals and potential dilution associated with the proposed SWS transaction.