Hilltop Holdings Inc. Announces Financial Results for Third Quarter 2015

DALLAS--()--Hilltop Holdings Inc. (NYSE: HTH) (“Hilltop”) today announced financial results for the third quarter of 2015. Hilltop produced income to common stockholders of $46.9 million, or $0.47 per diluted share, for the third quarter of 2015, compared to $23.4 million, or $0.26 per diluted share, for the third quarter of 2014. Hilltop’s annualized return on average assets and return on average equity for the third quarter of 2015 were 1.49% and 10.97%, respectively. The return on average assets and return on average equity for the third quarter of 2014 were 1.03% and 6.51%, respectively.

Jeremy Ford, CEO of Hilltop, said, “We are excited to report another successful quarter as each of our operating segments contributed profitably. PlainsCapital Bank achieved an ROAA of 1.64%, driven by a strong net interest margin and improved efficiency ratio. The bank’s net interest margin was bolstered through continued favorable resolution of problem assets from the FNB Transaction. PrimeLending experienced a healthy 24% increase in its mortgage loan origination volume. National Lloyds improved its underwriting profitability with a 75.4% combined ratio.”

Mr. Ford continued, “We are pleased to report FINRA’s recent approval to merge our two broker-dealers, a critical milestone in our drive towards full integration. Additionally, Southwest Securities, Inc. was renamed Hilltop Securities Inc. in preparation of the merger with First Southwest. The executive team and employees of our broker-dealer segment have worked diligently throughout 2015 to build the foundation of a leading regional franchise.”

Third Quarter 2015 Highlights for Hilltop:

  • Hilltop’s total assets were $12.4 billion at September 30, 2015, compared to $12.5 billion at June 30, 2015;
  • Hilltop’s common equity increased by $41.5 million from June 30, 2015 to $1.7 billion at September 30, 2015;
  • Non-covered loans1 held for investment, net of allowance for loan losses, increased by 0.8% to $5.0 billion, and covered loans1, net of allowance for loan losses, decreased by 14.7% to $420.5 million from June 30, 2015 to September 30, 2015;
  • Loans held for sale were stable at $1.4 billion at September 30, 2015;
  • Total deposits increased by $24.3 million from June 30, 2015 to $6.8 billion at September 30, 2015;
  • Hilltop was well-capitalized with a Tier 1 Leverage Ratio2 of 12.01% and Total Capital Ratio of 19.29% at September 30, 2015; and
  • Hilltop continues to retain approximately $41.1 million of freely usable cash, as well as excess capital at its subsidiaries, at September 30, 2015.

For the third quarter of 2015, consolidated taxable equivalent net interest income was $116.0 million compared with $86.3 million in the third quarter of 2014, a 34.3% increase. The consolidated taxable equivalent net interest margin was 4.20% for the third quarter of 2015, an 18 basis point decrease from 4.38% in the third quarter of 2014. During the third quarter of 2015, the consolidated taxable equivalent net interest margin was 137 basis points greater due to the impact of purchase accounting, which was primarily related to accretion of discount on loans of $2.2 million, $25.7 million and $8.1 million associated with the PlainsCapital Merger, FNB Transaction, and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of $0.7 million. During the third quarter of 2014, the consolidated taxable equivalent net interest margin was 87 basis points greater due to the impact of purchase accounting, which was primarily related to accretion of discount on loans of $4.6 million and $11.0 million associated with PlainsCapital Merger and FNB Transaction, respectively, PlainsCapital Merger-related amortization of premium on acquired securities of $0.9 million, and FNB Transaction-related amortization of premium on acquired time deposits of $0.9 million. Moreover, the consolidated taxable equivalent net interest margin was 99 basis points lower due to the impact of securities financing operations within our broker-dealer segment during the three months ended September 30, 2015. During the third quarter of 2015, the banking segment’s taxable equivalent net interest margin of 5.79% was 210 basis points greater due to the impact of purchase accounting.

For the third quarter of 2015, noninterest income was $296.5 million compared to $212.1 million in the third quarter of 2014, a 39.8% increase. Net gains from sale of loans, other mortgage production income and mortgage loan origination fees increased $33.7 million from the third quarter of 2014 to $160.0 million in the third quarter of 2015. Total mortgage loan origination volume increased 23.5% to $3.6 billion during the three months ended September 30, 2015 compared to $2.9 billion during the three months ended September 30, 2014. Home purchases volume represented 80.9% of total mortgage loan origination volume during the third quarter of 2015. Net insurance premiums earned remained flat at $41.2 million in the third quarter of 2015 compared to $41.8 million in the third quarter of 2014. Advisory fees and commissions from our broker-dealer segment increased $42.7 million to $66.7 million in the third quarter of 2015 compared to the third quarter of 2014, primarily due to the operations acquired in the SWS Merger as well as increased volumes in our non-profit housing program (U.S. Agency to-be-announced, or TBA, business) and higher revenues from advising public finance clients.

For the third quarter of 2015, noninterest expense was $333.5 million compared to $254.7 million in the third quarter of 2014, a 30.9% increase. Employees’ compensation and benefits increased $74.1 million, or 58.6%, to $200.6 million in the third quarter of 2015, primarily due to operations acquired in the SWS Merger as well as increased variable compensation tied to the mortgage origination and broker-dealer segments. Loss and loss adjustment expenses decreased to $17.3 million in the third quarter of 2015 from $22.6 million in the third quarter of 2014, while policy acquisition and other underwriting expenses increased to $11.8 million during the third quarter of 2015 compared to $11.6 million in the same quarter a year ago. Occupancy and equipment expense increased by $4.0 million from the third quarter of 2014 to $29.3 million in the third quarter of 2015. Amortization of identifiable intangibles from purchase accounting was $2.7 million for the third quarter of 2015. In connection with the SWS Merger, during the nine months ended September 30, 2015, we incurred $17.2 million in pre-tax transaction and integration costs, consisting of $10.3 million in the broker-dealer segment, $3.0 million in the banking segment and $3.9 million within corporate.

For the third quarter of 2015, the provision for loan losses was $5.6 million, compared to $4.0 million for the third quarter of 2014. During the third quarter of 2015, the provision was comprised of charges relating to newly originated loans and acquired loans without credit impairment at acquisition of $5.1 million and purchased credit impaired loans of $0.5 million. Net charge-offs on non-covered loans for the third quarter of 2015 were $1.8 million, and the allowance for non-covered loan losses was $43.0 million, or 0.86% of total non-covered loans at September 30, 2015. Non-covered, non-performing assets at September 30, 2015 were $30.0 million, or 0.24% of total assets.

Stock Repurchase Program

During the second quarter of 2015, our Board of Directors approved a stock repurchase program under which it authorized us to repurchase, in the aggregate, up to $30.0 million of our outstanding common stock. Under the stock repurchase program authorized, we were allowed to repurchase shares in the open-market or through privately negotiated transactions as permitted under Rule 10b-18 promulgated under the Securities Exchange Act of 1934. As of September 30, 2015, we had repurchased an aggregate of $30.0 million of our outstanding common stock, and do not intend to make any future purchases of our common stock under this program. The extent to which we repurchased our shares and the timing of such repurchases depended upon market conditions and other corporate considerations, as determined by Hilltop’s management team. The purchases were funded from available cash balances. During the three and nine months ended September 30, 2015, we paid $13.0 million and $30.0 million, respectively, to repurchase and retire an aggregate of 1,390,977 shares of common stock at an average price of $21.56 per share. These retired shares were returned to our pool of authorized but unissued shares of common stock.

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 third quarter of 2015, excluding goodwill and intangible assets.

Condensed Financial and Other Information

                     
Condensed Balance Sheets September 30, June 30, March 31, December 31, September 30,
($000s)       2015     2015     2015     2014     2014
Cash and due from banks 526,692 583,043 694,108 782,473 635,933
Securities 1,323,866 1,341,852 1,363,157 1,109,461 1,332,342
Loans held for sale 1,354,107 1,397,617 1,215,308 1,309,693 1,272,813
Non-covered loans, net of unearned income 4,999,529 4,956,969 4,834,687 3,920,476 3,768,843
Allowance for non-covered loan losses (42,989 ) (40,484 ) (39,365 ) (37,041 ) (39,027 )
Non-covered loans, net 4,956,540 4,916,485 4,795,322 3,883,435 3,729,816
Covered loans, net of allowance for loan losses 420,547 493,299 550,626 638,029 747,514
Broker-dealer and clearing organization receivables 2,111,864 2,070,770 2,222,517 167,884 223,679
Covered other real estate owned 106,024 125,510 137,703 136,945 126,798
FDIC indemnification asset 92,902 102,381 107,567 130,437 149,788
Premises and equipment, net 204,273 206,411 215,684 206,991 205,734
Other assets 1,292,641   1,242,142   1,261,055   877,068   755,985  
Total assets 12,389,456   12,479,510   12,563,047   9,242,416   9,180,402  
 
Deposits 6,820,749 6,796,437 7,129,277 6,369,892 6,236,282
Broker-dealer and clearing organization payables 2,045,604 2,048,176 1,951,040 179,042 243,835
Short-term borrowings 910,490 1,100,025 999,476 762,696 845,984
Notes payable 243,556 245,420 108,682 56,684 55,684
Other liabilities 652,229   614,188   593,780   412,863   374,873  
Total liabilities 10,672,628 10,804,246 10,782,255 7,781,177 7,756,658
Total Hilltop stockholders' equity 1,715,690 1,674,145 1,779,916 1,460,452 1,422,975
Noncontrolling interest 1,138   1,119   876   787   769  
Total liabilities & stockholders' equity 12,389,456   12,479,510   12,563,047   9,242,416   9,180,402  
 
                     
Three Months Ended
Condensed Income Statements September 30, June 30, March 31, December 31, September 30,
($000s)       2015     2015     2015     2014     2014
Interest income 130,545 115,662 107,669 99,316 93,217
Interest expense 15,334 14,995 14,277 7,802 7,457
Net interest income 115,211 100,667 93,392 91,514 85,760
Provision for loan losses 5,593 158 2,687 4,125 4,033
Net interest income after provision for loan losses 109,618 100,509 90,705 87,389 81,727
Noninterest income 296,469 301,400 352,845 213,795 212,135
Noninterest expense 333,502 353,317 314,476 246,768 254,744
Income before income taxes 72,585 48,592 129,074 54,416 39,118
Income tax expense 25,338 18,137 15,420 20,950 14,010
Net income 47,247 30,455 113,654 33,466 25,108
Less: Net income attributable to noncontrolling interest 353 405 353 325 296
Income attributable to Hilltop 46,894 30,050 113,301 33,141 24,812
Dividends on preferred stock - 428 1,426 1,425 1,426
Income applicable to Hilltop common stockholders 46,894 29,622 111,875 31,716 23,386
 
                 
Three Months Ended
September 30,     June 30, March 31, December 31, September 30,
Selected Financial Data       2015     2015     2015     2014     2014
Return on average stockholders' equity 10.97 % 7.12 % 26.76 % 8.55 % 6.51 %
Return on average assets 1.49 % 0.97 % 3.64 % 1.42 % 1.03 %
Net interest margin (taxable equivalent) 4.20 % 3.75 % 3.53 % 4.72 % 4.38 %
Earnings per common share ($):
Basic 0.47 0.30 1.12 0.35 0.26
Diluted 0.47 0.30 1.11 0.35 0.26
Weighted average shares outstanding (000's):
Basic 98,676 99,486 99,741 89,713 89,711
Diluted 99,556 100,410 100,627 90,560 90,558
Book value per share ($) 17.35 16.82 16.61 14.93 14.51
Shares outstanding (000's) 98,893 99,515 100,286 90,182 90,180
 
                     
September 30, June 30, March 31, December 31, September 30,
Capital Ratios       2015     2015     2015     2014     2014
 
Tier 1 capital (to average quarterly assets):
Bank 12.77 % 12.17 % 11.34 % 10.31 % 9.95 %
Hilltop 12.01 % 11.87 % 12.68 % 14.17 % 13.63 %
Common Equity Tier 1 capital (to risk-weighted assets):
Bank 17.36 % 16.46 % 16.46 % NA NA
Hilltop 18.36 % 18.02 % 18.05 % NA NA
Tier 1 capital (to risk-weighted assets):
Bank 17.36 % 16.46 % 16.46 % 13.74 % 13.48 %
Hilltop 18.89 % 18.74 % 20.26 % 19.02 % 18.57 %
Total capital (to risk-weighted assets):
Bank 18.13 % 17.17 % 17.19 % 14.45 % 14.21 %
Hilltop 19.29 % 19.29 % 20.82 % 19.69 % 19.28 %
 
                             
 
Segment Results ($000s)

Mortgage

All Other and Hilltop
Three Months Ended September 30, 2015 Banking Broker-Dealer Origination Insurance Corporate Eliminations Consolidated
Net interest income (expense) $ 105,758 $ 8,301 $ (2,538 ) $ 838 $ (1,799 ) $ 4,651 $ 115,211
Provision for loan losses 5,615 (22 ) - - - - 5,593
Noninterest income 13,935 83,817 159,794 43,534 - (4,611 ) 296,469
Noninterest expense   60,518   90,683     145,113     32,366   6,028     (1,206 )   333,502
Income (loss) before income taxes $ 53,560 $ 1,457   $ 12,143   $ 12,006 $ (7,827 ) $ 1,246   $ 72,585
 
     
Three Months Ended September 30,
2015         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) $ 6,636,328 $ 111,315 6.64 % $ 5,641,750 $ 80,719 5.65 %
Investment securities - taxable 1,110,813 6,243 2.24 % 1,161,583 7,688 2.63 %
Investment securities - non-taxable (2) 253,170 2,439 3.85 % 185,394 1,731 3.74 %
Federal funds sold and securities purchased
under agreements to resell 122,826 20 0.07 % 14,459 10 0.29 %
Interest-bearing deposits in other
financial institutions 442,689 237 0.21 % 566,195 303 0.21 %
Other   2,381,905     11,047 1.82 %   258,325     3,347 5.13 %
Interest-earning assets, gross 10,947,731 131,301 4.74 % 7,827,706 93,798 4.74 %
Allowance for loan losses   (43,446 )   (40,934 )
Interest-earning assets, net 10,904,285 7,786,772
Noninterest-earning assets   1,706,720     1,290,543  
Total assets $ 12,611,005   $ 9,077,315  
 
Liabilities and Stockholders' Equity
Interest-bearing liabilities
Interest-bearing deposits $ 4,709,244 $ 3,719 0.31 % $ 4,265,012 $ 4,117 0.38 %
Notes payable and other borrowings   3,385,804     11,615 1.36 %   1,168,461     3,340 1.12 %
Total interest-bearing liabilities 8,095,048 15,334 0.75 % 5,433,473 7,457 0.54 %
Noninterest-bearing liabilities
Noninterest-bearing deposits 2,177,319 1,891,576
Other liabilities   641,456     338,825  
Total liabilities 10,913,823 7,663,874
Stockholders' equity 1,696,396 1,412,913
Noncontrolling interest   786     528  
Total liabilities and stockholders' equity $ 12,611,005   $ 9,077,315  
   
Net interest income (2) $ 115,967 $ 86,341
Net interest spread (2) 3.99 % 4.20 %
Net interest margin (2) 4.20 % 4.38 %
 

(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 $0.8 million and $0.6 million for the three months ended September 30, 2015 and 2014, respectively.

Conference Call Information

Hilltop will host a live webcast and conference call at 8:00 AM Central (9:00 AM Eastern), Tuesday, November 3, 2015. Hilltop President and CEO Jeremy B. Ford and other key management members will discuss results for the third quarter of 2015. 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 Holdings is a Dallas-based financial holding company. Through its wholly owned subsidiary, PlainsCapital Corporation, a regional commercial banking franchise, it has two operating subsidiaries: PlainsCapital Bank and PrimeLending. Under Hilltop Securities Holdings LLC, First Southwest, Hilltop Securities Inc. (formerly Southwest Securities) and Hilltop Securities Independent Network Inc. (formerly SWS Financial Services) provide a full complement of securities brokerage, institutional and investment banking services in addition to clearing services and retail financial advisory. Through Hilltop Holdings’ 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 September 30, 2015, Hilltop employed approximately 5,400 people and operated approximately 425 locations in 44 states. Hilltop Holdings' 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 and Hilltopsecurities.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 our actual results, performance or achievements to be materially different from any future results, performance or achievements anticipated in such statements. Forward-looking statements speak only as of the date they are made and, except as required by law, we do not assume any duty to update forward-looking statements. Such forward-looking statements include, but are not limited to, statements concerning such things as our business strategy, our financial condition, our litigation, our efforts to make strategic acquisitions, our recent acquisition of SWS Group, Inc. (“SWS”) and integration thereof, our revenue, our liquidity and sources of funding, market trends, operations and business, expectations concerning mortgage loan origination volume, expected losses on covered loans and related reimbursements from the Federal Deposit Insurance Corporation (“FDIC”), projected losses on mortgage loans originated, anticipated changes in our revenues or earnings, the effects of government regulation applicable to our operations, the appropriateness of our allowance for loan losses and provision for loan losses, the collectability of loans, our other plans, objectives, strategies, expectations and intentions and other statements that are not statements of historical fact, and may be identified by words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “goal,” “intends,” “may,” “might,” “probable,” “projects,” “seeks,” “should,” “view,” or “would” or the negative of these words and phrases or similar words or phrases. 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, including the diversion of management time on acquisition-related issues and our ability to promptly and effectively integrate our businesses with those of SWS and achieve the synergies and value creation contemplated by the acquisition; (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 FDIC; (vi) changes in general economic, market and business conditions in areas or markets where we compete; (vii) severe catastrophic events in Texas and other areas of the southern United States; (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 the 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, broker-dealer, mortgage origination, and insurance segments from other banks and financial institutions, as well as investment banking and financial advisory firms, mortgage bankers, asset-based non-bank lenders, government agencies and insurance companies; (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 further discussion of such factors, see the risk factors described in the Hilltop Annual Report on Form 10-K for the year ended December 31, 2014, Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2015, and other reports filed with the Securities and Exchange Commission. All forward-looking statements are qualified in their entirety by this cautionary statement.

Contacts

Hilltop Holdings Inc.
Isabell Novakov, 214-252-4029
inovakov@plainscapital.com

Contacts

Hilltop Holdings Inc.
Isabell Novakov, 214-252-4029
inovakov@plainscapital.com