Hilltop Holdings Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Hilltop is a diversified financial holding company with banking, broker-dealer, mortgage origination and property-and-casualty insurance businesses. The 2016 results include the ongoing integration of the SWS acquisition; FSC and Hilltop Securities were combined in January 2016.
Financial performance
| Metric | 2016 | 2015 |
|---|---|---|
| Total assets | $12.74 billion | $11.87 billion |
| Total deposits | $7.06 billion | $6.95 billion |
| Total loans, including loans held for sale | $7.8 billion | Not stated as a comparable total in the provided text |
| Net interest income | $397.5 million | $408.6 million |
| Noninterest income | $1.287 billion | $1.228 billion |
| Income before income taxes | $231.4 million | $283.5 million |
| Net income attributable to Hilltop common stockholders | $145.9 million; $1.48 diluted EPS | $209.1 million; $2.09 diluted EPS |
| Net interest margin | 3.74% | 3.78% |
| Return on average assets / equity | 1.21% / 8.13% | 1.70% / 12.32% |
| Cash and cash equivalents | $690.8 million | $669.4 million |
| Stockholders’ equity | $1.87 billion | $1.74 billion |
Consolidated cash flows were negative from operations at $183.3 million and from investing activities at $493.6 million; financing activities provided $698.2 million. Mortgage loan origination and sale flows are significant to operating cash flow, so this measure should be considered alongside the loan-sale activity and balance-sheet movements.
Other indebtedness was approximately $1.8 billion at year-end, including $1.42 billion of short-term borrowings, $317.9 million of notes payable and $67.0 million of junior subordinated debentures. The parent company reported $103.9 million of freely available cash and cash equivalents. Its $150 million 5% senior notes mature in 2025.
Material changes and business results
- Common-stockholder income fell 30% from 2015. The comparison is affected by the $81.3 million SWS bargain-purchase gain recorded in 2015; 2016 also included a $24.5 million charge-off on one non-covered commercial loan and a $16.0 million broker-dealer legal reserve.
- Provision for loan losses rose to $40.6 million from $12.7 million, primarily due to the $24.5 million loan charge-off. Net charge-offs were 0.57% of average loans versus 0.14%; nonperforming assets to loans and other real estate were 1.39% versus 2.34%.
- Mortgage origination volume increased 15.8% to $15.46 billion. Segment pretax income rose to $77.8 million from $47.5 million. Home purchases represented 72.9% of volume; refinancings were 27.1%.
- Broker-dealer pretax income was $39.5 million versus a $0.3 million loss. Trading gains, particularly in structured finance, contributed to the improvement; the segment also recorded the $16.0 million legal reserve.
- Banking pretax income declined to $130.3 million from $175.4 million, reflecting higher credit costs, lower loan-discount accretion and the absence of prior-year gains on securities acquired in the SWS transaction.
- Insurance pretax income increased to $21.4 million from $15.7 million. The combined ratio improved to 90.9% from 94.9%, while net premiums earned fell to $155.5 million from $162.1 million. The 2016 loss and LAE ratio was 57.4%.
Outlook, risks and contingencies
- Management expected mortgage refinancing volume and its share of originations to decline in 2017 following mortgage-rate increases, while it did not expect a significant effect on home-purchase volume. The filing provides no consolidated earnings or revenue guidance.
- Management expected to begin amortizing the FDIC indemnification asset in 2017 because projected covered losses are below the $240.4 million threshold. A $14.2 million accrual was recorded for a potential FDIC “true-up” payment, whose ultimate amount remains uncertain.
- Key exposures include Texas and regional economic concentration, real-estate collateral, interest-rate changes, mortgage-volume and MSR valuation sensitivity, severe weather and catastrophe risk, reinsurance recoverability, cybersecurity, regulation, and successful integration of SWS. Texas represented 70.1% of insurance gross written premiums; energy loans were 3.0% of the Bank’s loan portfolio.
- The Bank’s Basel III capital ratios exceeded fully phased-in requirements; Hilltop’s total risk-based capital ratio was 19.34% and PlainsCapital’s was 15.38%. Hilltop was required to submit its initial company-run stress test to the Federal Reserve by July 31, 2017.
- Hilltop began a quarterly dividend program in 2016, declaring $0.06 per share for the fourth quarter. The board reauthorized a stock-repurchase program of up to $50 million through January 2018; no shares were repurchased under that program in 2016. Dividends and repurchases remain subject to board discretion, capital needs and regulatory limits.
- PrimeLending faced a DOJ investigation concerning FHA mortgage origination and underwriting practices; the company said it could not estimate potential liability. Other disclosed matters included SWS appraisal litigation and ordinary-course legal proceedings. The $16.0 million Rhode Island matter was settled in the first quarter of 2017 and was fully reserved at year-end.
Most important facts for investors to verify
- Whether the 2016 loan charge-off was isolated, whether the Bank obtains recoveries, and whether credit quality or provisioning trends deteriorate further.
- The assumptions behind the $14.2 million FDIC true-up accrual and the timing and income impact of FDIC indemnification asset amortization.
- Whether mortgage production and profitability hold up as refinancing declines, and how MSR valuations respond to rates and prepayments.
- Whether broker-dealer integration savings persist and whether legal, regulatory or customer-related costs produce additional charges.
- The liquidity and funding implications of short-term borrowing growth, subsidiary dividend capacity, and the sustainability of shareholder distributions.
- The eventual outcome and financial exposure, if any, from the FHA investigation and other litigation or contingencies.