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Hilltop Holdings Inc. Announces Financial Results for Fourth Quarter and Full Year 2014

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Hilltop Holdings Inc. (NYSE:HTH) (“Hilltop”) today announced financial results for the fourth quarter and full year 2014. Hilltop produced income to common stockholders of $31.7 million, or $0.35 per diluted share, for the fourth quarter of 2014, compared to $29.5 million, or $0.34 per diluted share, for the fourth quarter of 2013. Income to common stockholders for the full year 2014 was $105.9 million, or $1.17 per diluted share, compared to $121.0 million, or $1.40 per diluted share, for the full year 2013. Hilltop’s annualized return on average assets and return on average equity for the fourth quarter of 2014 were 1.42% and 8.55%, respectively, compared to 1.31% and 9.31% for the fourth quarter of 2013, respectively. The return on average assets and return on average equity for the full year 2014 were 1.26% and 8.01%, respectively, compared to 1.66% and 10.48% for the full year 2013, respectively.

“2014 was another strong and exciting year for Hilltop’s shareholders, employees and customers as every business segment reported profitable results during the year. PlainsCapital Bank continues to grow its legacy franchise, while rationalizing the platform acquired in the FNB Transaction. PrimeLending has successfully increased its market share in an environment of declining industry origination volumes. National Lloyds achieved its most profitable year since it was founded over 50 years ago. The recent investment grade rating Hilltop received from Fitch reflects the strength of our business segments,” said Jeremy Ford, CEO of Hilltop.

“With the closing of the SWS Transaction, we are excited about the prospects of building a dominant broker-dealer through the combination of Southwest Securities and First Southwest. We have a committed and capable leadership team working towards an effective and efficient integration. We look forward to entering 2015 with momentum and remain focused on delivering strong long-term results to our shareholders.”

Fourth Quarter 2014 Highlights for Hilltop:

  • Total assets remained flat at $9.2 billion at December 31, 2014 compared to September 30, 2014;
  • Total stockholders’ equity increased $37.5 million from September 30, 2014 to $1.5 billion at December 31, 2014;
  • Non-covered loans1 held for investment, net of allowance for loan losses, increased 4.1% to $3.9 billion, and covered loans1, net of allowance for loan losses, decreased 14.6% to $638.0 million from September 30, 2014 to December 31, 2014;
  • Loans held for sale increased 2.9% to $1.3 billion from September 30, 2014 to December 31, 2014;
  • Total deposits increased $133.6 million from September 30, 2014 to $6.4 billion at December 31, 2014;
  • Hilltop was well-capitalized with a Tier 1 Leverage Ratio2 of 14.17% and Total Capital Ratio of 19.69% at December 31, 2014; and
  • Hilltop had approximately $146.0 million of freely usable cash (although $78.2 million was used for SWS Group, Inc. (“SWS”) transaction consideration on January 1, 2015), as well as excess capital at its subsidiaries, at December 31, 2014.

1 Loan portfolio includes “covered 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 fourth quarter 2014 excluding goodwill and intangible assets.

For the fourth quarter of 2014, consolidated net interest income was $91.5 million compared with $88.6 million in the fourth quarter of 2013, a 3.3% increase. The consolidated taxable equivalent net interest margin was 4.72% for the fourth quarter of 2014, a 20 basis point increase from 4.52% in the fourth quarter of 2013. During the fourth quarter of 2014, the consolidated taxable equivalent net interest margin was impacted by accretion of discount on loans of $21.6 million, amortization of premium on acquired securities of $1.2 million and amortization of premium on acquired time deposits of $0.1 million.

For the fourth quarter of 2014, noninterest income was $213.8 million compared with $182.5 million in the fourth quarter of 2013, a 17.2% increase. The improvement was primarily driven by higher income related to mortgage origination volumes, as well as increased fees and commissions generated in our broker-dealer segment. Net gains from sale of loans, other mortgage production income and mortgage loan origination fees increased by $14.5 million from the fourth quarter of 2013 to $112.7 million in the fourth quarter of 2014. Mortgage loan originations totaled $2.7 billion in the fourth quarter of 2014, versus $2.3 billion in the fourth quarter of 2013, positively impacted by a decline in interest rates. Net premiums earned were relatively flat at $41.6 million in the fourth quarter of 2014 compared to $41.5 million in the fourth quarter of 2013, a result of higher rates, offset by a managed reduction in policies in force. For the fourth quarter of 2014, noninterest income in our broker-dealer segment was $34.2 million compared to $22.8 million in the fourth quarter of 2013, a 50.0% increase. Most of the increase was attributable to fees earned from advising its public finance clients on debt offerings due to lower interest rates and an improving economy.

For the fourth quarter of 2014, noninterest expense was $246.8 million compared with $219.8 million in the fourth quarter of 2013, a 12.3% increase. Employees’ compensation and benefits increased $21.0 million, or 18.7%, to $133.4 million in the fourth quarter of 2014, primarily due to higher variable compensation tied to higher mortgage origination volume and increased noninterest income in our broker-dealer segment. Loss and loss adjustment expenses (“LAE”) increased to $18.2 million in the fourth quarter of 2014 from $16.8 million in the fourth quarter of 2013. As a result, the loss and LAE ratio during the fourth quarter of 2014 increased by 3.3 percentage points to 43.7% compared to 40.4% in the fourth quarter of 2013. Occupancy and equipment expense declined by $1.5 million from the fourth quarter of 2013 to $24.3 million in the fourth quarter of 2014 and other noninterest expense increased to $58.9 million in the fourth quarter of 2014 from $52.7 million in the fourth quarter of 2013. Amortization of identifiable intangibles from purchase accounting was $2.5 million for the fourth quarter of 2014. During the full year 2014, noninterest expense included $1.4 million of transaction costs associated with the SWS transaction compared to $0.1 million for the full year 2013.

The fourth quarter of 2014 provision for loan losses of $4.1 million largely relates to purchased credit impaired (“PCI”) loans and was $1.9 million greater than the fourth quarter of 2013 provision for loan losses of $2.2 million. The allowance for non-covered loan losses was $37.0 million, or 0.94% of total non-covered loans at December 31, 2014. Non-covered, non-performing assets at December 31, 2014 were $23.2 million, or 0.25% of total assets, compared to $27.0 million, or 0.29% of total assets, at September 30, 2014.

SWS Group Transaction

On October 2, 2014, Hilltop exercised its warrant to purchase SWS common stock in full, acquiring 8,695,652 shares of SWS common stock at an exercise price of $5.75 per share (“SWS Warrant”). Pursuant to the terms of the warrant and a credit agreement with SWS, the aggregate exercise price was paid by the automatic elimination of the $50.0 million aggregate principal amount note due to Hilltop under the credit agreement. Following the exercise of the SWS Warrant, Hilltop (i) owned 10,171,039 shares of SWS common stock, representing approximately 21% of the outstanding shares of SWS common stock, and (ii) was no longer a lender under the credit agreement. Hilltop’s election to apply the provisions of the Fair Value Option resulted in Hilltop recording unrealized gains previously associated with its investment in SWS common stock of $7.2 million. For the period from October 3, 2014 through December 31, 2014, the change in fair value of Hilltop’s investment in SWS common stock resulted in a loss of $1.2 million. Accordingly, Hilltop recorded a $6.0 million net gain in other noninterest income during 2014. At December 31, 2014, Hilltop’s investment in SWS common stock is included in other assets within the consolidated balance sheet and is recorded at a fair value of $70.3 million.

On January 1, 2015, Hilltop completed its acquisition of SWS in a stock and cash transaction, whereby SWS merged with and into Hilltop Securities Holdings LLC (“Hilltop Securities”), a wholly owned subsidiary of Hilltop formed for the purpose of facilitating this transaction. SWS’s broker-dealer subsidiaries, Southwest Securities, Inc. (“Southwest Securities”) and SWS Financial Services, Inc. (“SWS Financial”), became subsidiaries of Hilltop Securities. Immediately following the SWS transaction, SWS’s banking subsidiary, Southwest Securities, FSB, was merged into PlainsCapital Bank, an indirect wholly owned subsidiary of Hilltop. As a result of the SWS transaction, each outstanding share of SWS common stock was converted into the right to receive 0.2496 shares of Hilltop common stock and $1.94 in cash, equating to $6.92 per share based on Hilltop’s closing price on December 31, 2014 and resulting in an aggregate purchase price of $349.0 million, consisting of 10.0 million shares of common stock, $78.2 million in cash and $70.3 million associated with Hilltop’s existing investment in SWS common stock.

Condensed Balance Sheet December 31, September 30, June 30, March 31,
($000s) 2014 2014 2014 2014
Cash and due from banks 782,473 635,933 673,972 889,950
Securities 1,109,461 1,332,342 1,328,716 1,329,690
Loans held for sale 1,309,693 1,272,813 1,410,873 887,200
Non-covered loans, net of unearned income 3,920,476 3,768,843 3,714,837 3,646,946
Allowance for non-covered loan losses (37,041 ) (39,027 ) (36,431 ) (34,645 )
Non-covered loans, net 3,883,435 3,729,816 3,678,406 3,612,301
Covered loans, net of allowance for loan losses 638,029 747,514 840,898 909,783
Covered other real estate owned 136,945 126,798 142,174 152,310
FDIC indemnification asset 130,437 149,788 175,114 188,736
Premises and equipment, net 206,991 205,734 201,545 202,155
Other assets 1,044,952 979,664 944,750 861,307
Total assets 9,242,416 9,180,402 9,396,448 9,033,432
Deposits 6,369,892 6,236,282 6,155,310 6,663,176
Short-term borrowings 762,696 845,984 1,187,193 491,406
Notes payable 56,684 55,684 55,584 55,465
Other liabilities 591,905 618,708 601,199 468,172
Total liabilities 7,781,177 7,756,658 7,999,286 7,678,219
Total Hilltop stockholders’ equity 1,460,452 1,422,975 1,396,442 1,354,497
Noncontrolling interest 787 769 720 716
Total liabilities & stockholders’ equity 9,242,416 9,180,402 9,396,448 9,033,432
Three Months Ended Year Ended
Condensed Income Statement December 31, September 30, June 30, March 31, December 31,
($000s) 2014 2014 2014 2014 2014
Interest income 99,316 93,217 104,408 91,828 388,769
Interest expense 7,802 7,457 5,962 6,407 27,628
Net interest income 91,514 85,760 98,446 85,421 361,141
Provision for loan losses 4,125 4,033 5,533 3,242 16,933
Net interest income after provision for loan losses 87,389 81,727 92,913 82,179 344,208
Noninterest income 213,795 212,135 203,281 170,100 799,311
Noninterest expense 246,768 254,744 251,212 212,629 965,353
Income before income taxes 54,416 39,118 44,982 39,650 178,166
Income tax expense 20,950 14,010 16,294 14,354 65,608
Net income 33,466 25,108 28,688 25,296 112,558
Less: Net income attributable to noncontrolling interest 325 296 177 110 908
Income attributable to Hilltop 33,141 24,812 28,511 25,186 111,650
Dividends on preferred stock 1,425 1,426 1,426 1,426 5,703
Income applicable to Hilltop common stockholders 31,716 23,386 27,085 23,760 105,947
Three Months Ended Year Ended
December 31, September 30, June 30, March 31, December 31,
Selected Financial Data 2014 2014 2014 2014 2014
Return on average stockholders’ equity 8.55 % 6.51 % 7.99 % 7.65 % 8.01 %
Return on average assets 1.42 % 1.03 % 1.24 % 1.14 % 1.26 %
Net interest margin (taxable equivalent) 4.72 % 4.38 % 5.18 % 4.62 % 4.74 %
Earnings per common share ($):
Basic 0.35 0.26 0.30 0.26 1.18
Diluted 0.35 0.26 0.30 0.26 1.17
Weighted average shares outstanding (000’s):
Basic 89,713 89,711 89,709 89,707 89,710
Diluted 90,560 90,558 90,569 90,585 90,573
Book value per share ($) 14.93 14.51 14.22 13.76 14.93
Shares outstanding (000’s) 90,182 90,180 90,181 90,178 90,182
December 31, September 30, June 30, March 31,
Capital Ratios 2014 2014 2014 2014
Tier 1 capital (to average quarterly assets):
Bank 10.31 % 9.95 % 9.97 % 9.53 %
Hilltop 14.17 % 13.63 % 13.51 % 13.12 %
Tier 1 capital (to risk-weighted assets):
Bank 13.74 % 13.48 % 13.22 % 13.47 %
Hilltop 19.02 % 18.57 % 18.11 % 18.66 %
Total capital (to risk-weighted assets):
Bank 14.45 % 14.21 % 13.90 % 14.14 %
Hilltop 19.69 % 19.28 % 18.79 % 19.32 %
Three Months Ended Twelve Months Ended
December 31, 2014 December 31, 2014
Average Interest Annualized Average Interest Annualized
Outstanding Earned or Yield or Outstanding Earned or Yield or
Balance Paid Rate Balance Paid Rate
Assets
Interest-earning assets
Loans, gross (1) $ 5,602,554 $ 88,791 6.25 % $ 5,461,611 $ 341,458 6.21 %
Investment securities – taxable 1,009,788 6,313 2.49 % 1,072,564 29,206 2.72 %
Investment securities – non-taxable (2) 177,487 1,654 3.73 % 182,881 7,028 3.84 %
Federal funds sold and securities purchased
under agreements to resell 11,579 9 0.31 % 18,120 52 0.29 %
Interest-bearing deposits in other
financial institutions 690,282 386 0.22 % 698,638 1,602 0.23 %
Other 251,819 2,715 4.27 % 229,461 11,770 5.16 %
Interest-earning assets, gross 7,743,509 99,868 5.09 % 7,663,275 391,116 5.08 %
Allowance for loan losses (45,263 ) (40,516 )
Interest-earning assets, net 7,698,246 7,622,759
Noninterest-earning assets 1,308,911 1,343,070
Total assets $ 9,007,157 $ 8,965,829
Liabilities and Stockholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits $ 4,235,895 $ 4,769 0.45 % $ 4,490,748 $ 15,742 0.35 %
Notes payable and other borrowings 931,924 3,032 1.28 % 934,031 11,886 1.27 %
Total interest-bearing liabilities 5,167,819 7,801 0.60 % 5,424,779 27,628 0.51 %
Noninterest-bearing liabilities
Noninterest-bearing deposits 2,070,772 1,862,277
Other liabilities 282,345 283,922
Total liabilities 7,520,936 7,570,978
Stockholders’ equity 1,485,680 1,394,351
Noncontrolling interest 541 500
Total liabilities and stockholders’ equity $ 9,007,157 $ 8,965,829
Net interest income(2) $ 92,067 $ 363,488
Net interest spread(2) 4.49 % 4.57 %
Net interest margin(2) 4.72 % 4.74 %
(1) Average balance includes non-accrual loans.
(2) Annualized taxable equivalent adjustments are based on a 35% tax rate. The adjustment to interest income was $0.6 million and $2.3 million for the three months ended December 31, 2014 and full year ended December 31, 2014, respectively.

Conference Call Information

Hilltop will host a live webcast and conference call at 8:00 AM Central (9:00 AM Eastern), Friday, February 27, 2015. Hilltop President and CEO Jeremy B. Ford and other key management members will discuss 2014 results. Interested parties can access the conference call by dialing 1-877-508-9457 (domestic) or 1-412-317-0789 (international). The conference call also will be webcast simultaneously on Hilltop’s Investor Relations website (http://ir.hilltop-holdings.com).

About Hilltop

Hilltop is a Dallas-based financial holding company. Through its wholly owned subsidiary, PlainsCapital Corporation, a regional commercial banking franchise, Hilltop has two operating subsidiaries: PlainsCapital Bank and PrimeLending. Under Hilltop Securities, First Southwest, Southwest Securities and SWS Financial provide a full complement of securities brokerage, institutional and investment banking services in addition to clearing services and retail financial advisory. Through Hilltop’s other wholly owned subsidiary, National Lloyds Corporation, it provides property and casualty insurance through two insurance companies, National Lloyds Insurance Company and American Summit Insurance Company. At January 1, 2015, Hilltop employed approximately 5,300 people and operated approximately 450 locations in 44 states. Hilltop’s common stock is listed on the New York Stock Exchange under the symbol “HTH.” Find more information at hilltop-holdings.com, plainscapital.com, firstsw.com, swst.com, primelending.com and natlloyds.com.

FORWARD-LOOKING STATEMENTS

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause Hilltop’s actual results, performance or achievements to be materially different from any expected future results, performance or achievements. Forward-looking statements speak only as of the date they are made and, except as required by law, Hilltop does not assume any duty to update forward-looking statements. Such forward-looking statements include, but are not limited to, statements about the future financial and operating results, our plans, objectives, expectations and intentions and other statements that are not historical facts. The following factors, among others, could cause actual results to differ from those set forth in the forward-looking statements: (i) risks associated with merger and acquisition integration; (ii) our ability to estimate loan losses; (iii) changes in the default rate of our loans; (iv) risks associated with concentration in real estate related loans; (v) our ability to obtain reimbursements for losses on acquired loans under loss-share agreements with the Federal Deposit Insurance Corporation; (vi) changes in general economic, market and business conditions in areas or markets where we compete; (vii) severe catastrophic events in our geographic area; (viii) changes in the interest rate environment; (ix) cost and availability of capital; (x) changes in state and federal laws, regulations or policies affecting one or more of our business segments, including changes in regulatory fees, deposit insurance premiums, capital requirements and the Dodd-Frank Wall Street Reform and Consumer Protection Act; (xi) our ability to use net operating loss carry forwards to reduce future tax payments; (xii) approval of new, or changes in, accounting policies and practices; (xiii) changes in key management; (xiv) competition in our banking, mortgage origination, broker-dealer and insurance segments from other banks and financial institutions, as well as insurance companies, mortgage bankers, investment banking and financial advisory firms, asset-based non-bank lenders and government agencies; (xv) failure of our insurance segment reinsurers to pay obligations under reinsurance contracts; and (xvi) our ability to use excess cash in an effective manner, including the execution of successful acquisitions. For more information, see the risk factors described in the Annual Report on Form 10-K for the year ended December 31, 2014 and other reports filed with the Securities and Exchange Commission.

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