Hilltop Holdings Inc (HTH)

[Enterprising Investor]

Hilltop Holdings Inc. Announces Financial Results for First Quarter 2014 (5/05/14)

DALLAS--(BUSINESS WIRE)--Hilltop Holdings Inc. (NYSE: HTH) (“Hilltop”), the parent company of PlainsCapital Corporation (“PlainsCapital”), announced financial results for the first quarter of 2014. PlainsCapital, through its operating subsidiaries PlainsCapital Bank (the “Bank”), PrimeLending and First Southwest, provides banking, mortgage origination and financial advisory services, respectively. Hilltop’s insurance subsidiary, National Lloyds Corporation (“NLC”), provides property and casualty insurance.

Hilltop produced income to common stockholders of $23.8 million, or $0.26 per diluted share, for the first quarter of 2014, compared to $32.4 million, or $0.39 per diluted share, for the first quarter of 2013. Hilltop’s annualized return on average assets and return on average equity for the first quarter of 2014 were 1.14% and 7.65%, respectively. The return on average assets and return on average equity for the first quarter of 2013 were 1.87% and 11.46%, respectively.

“Hilltop was able to achieve good results in the first quarter, even as we work through costs of the First National Bank integration and continue to face market pressures in our mortgage and financial advisory businesses. The Bank organically grew its loan portfolio, while favorably resolving problem assets acquired in the FNB Transaction. Origination volume of our mortgage segment was stronger than industry trends, and our insurance segment produced impressive results as we start to see the effects of initiatives put in place in the second half of 2013,” said Jeremy Ford, CEO of Hilltop.

“We also continue to be excited about our proposed acquisition of SWS and the ability to combine its respected employees and customers with our strong platform. This transaction is part of our focused strategy to build a premier Texas-based bank and prominent diversified financial services company.”

First Quarter 2014 Highlights for Hilltop:

• Hilltop’s total assets increased to $9.0 billion at March 31, 2014, compared to $8.9 billion at December 31, 2013;

• Total stockholders’ equity increased by $43.3 million from December 31, 2013 to $1.4 billion at March 31, 2014;

• Non-covered loans1 held for investment, net of allowance for loan losses, increased by 3.8% to $3.6 billion, and covered loans1, net of allowance for loan losses, decreased by 9.5% to $909.8 million from December 31, 2013 to March 31, 2014;

• Loans held for sale decreased by 18.5% to $887.2 million, from December 31, 2013 to March 31, 2014;

• Total deposits decreased by $59.7 million from December 31, 2013 to $6.7 billion at March 31, 2014;

• Hilltop was well-capitalized with a Tier 1 Leverage Ratio2 of 13.12% and Total Capital Ratio of 19.32% at March 31, 2014; and

• Hilltop continues to retain approximately $157 million of freely usable cash, as well as excess capital at our subsidiaries, at March 31, 2014.

1 “Covered loans” refers to loans acquired in the FNB Transaction that are subject to loss-share agreements with the FDIC, while all other loans are referred to as “non-covered loans.”
2 Based on the end of period Tier 1 capital divided by total average assets during the first quarter of 2014, excluding goodwill and intangible assets.

For the first quarter of 2014, consolidated taxable equivalent net interest income was $86.0 million compared with $67.9 million in the first quarter of 2013, a 26.7% increase primarily due to the inclusion of operations acquired in the FNB Transaction. The consolidated taxable equivalent net interest margin was 4.62% for the first quarter of 2014, a ten basis point increase from 4.52% in the fourth quarter of 2013. During the first quarter of 2014, the consolidated taxable equivalent net interest margin was impacted by accretion of discount on loans of $18.0 million, amortization of premium on acquired securities of $1.0 million and amortization of premium on acquired time deposits of $2.5 million.

For the first quarter of 2014, noninterest income was $170.1 million compared to $213.3 million in the first quarter of 2013, a 20.2% decrease. The decline was driven mainly by lower mortgage origination volumes, offset by growth in net insurance premiums earned and other noninterest income. Net gains from sale of loans, other mortgage production income and mortgage loan origination fees declined $55.0 million from the first quarter of 2013 to $91.5 million in the first quarter of 2014. Mortgage loan originations totaled $1.9 billion in the first quarter of 2014, versus $3.0 billion in the first quarter of 2013, due to rising interest rates and the resulting drop-off in refinancing volume. Net insurance premiums earned increased to $40.3 million in the first quarter of 2014 from $37.5 million in the first quarter of 2013, which was primarily attributable to volume and rate increases in our core homeowners and mobile home products. Advisory fees and commissions from our financial advisory segment were $21.3 million in the first quarter of 2014 compared to $22.0 million in the first quarter of 2013, as depressed municipal bond volume and prolonged low short term interest rates continue to pressure advisory fees and fixed income sales.

For the first quarter of 2014, noninterest expense was $212.6 million compared to $215.0 million in the first quarter of 2013, a 1.1% decrease. Employees’ compensation and benefits declined $9.8 million, or 8.4%, to $106.4 million in the first quarter of 2014, primarily due to lower variable compensation tied to mortgage origination volume, offset by the addition of FNB compensation expense. Reductions in staff were carried out at the bank as part of the FNB integration in late first quarter 2014; such reductions resulted in $801.6 thousand of severance and are expected to reduce compensation by $2.7 million on an annualized basis. Loss and loss adjustment expenses declined to $18.3 million in the first quarter of 2014 from $21.2 million in the first quarter of 2013. This was driven by improvement in the claims loss experience and our exposure management initiatives. Primarily due to the FNB Transaction, occupancy and equipment expense increased by $6.9 million from the first quarter of 2013 to $26.3 million in the first quarter of 2014, and other noninterest expense increased to $49.8 million in the first quarter of 2014 from $47.4 million in the first quarter of 2013. Amortization of identifiable intangibles from purchase accounting was $2.6 million for the first quarter of 2014.

For the first quarter of 2014, the provision for loan losses was $3.2 million, compared to $13.0 million for the first quarter of 2013. The first quarter of 2014 provision included provisions for loan losses related to newly originated loans and acquired loans without credit impairment at acquisition of $1.3 million and purchased credit impaired (“PCI”) loans of $1.9 million. Net recoveries on non-covered loans for the first quarter of 2014 were $16 thousand, and the allowance for non-covered loan losses was $34.6 million, or 0.95% of total non-covered loans at March 31, 2014. Non-covered, non-performing assets at March 31, 2014 were $29.0 million, or 0.32% of total assets, compared to $28.2 million, or 0.32% of total assets, at December 31, 2013.

SWS Group Transaction

On March 31, 2014, Hilltop entered into a definitive merger agreement with SWS Group, Inc. (“SWS”) providing for the merger of SWS with and into a wholly owned subsidiary of Hilltop formed for the purpose of facilitating this transaction. SWS stockholders will receive per share consideration of 0.2496 shares of Hilltop common stock and $1.94 of cash, equating to $7.88 per share based on Hilltop’s closing price on March 31, 2014. The Company intends to fund the cash portion of the consideration through available cash. The merger is subject to customary closing conditions, including regulatory approvals and approval of the stockholders of SWS, and is expected to be completed prior to the end of 2014.

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