Hilltop Holdings, Inc. :HTH-US: Earnings Analysis: Q2, 2016 By the Numbers : August 10, 2016

Hilltop Holdings, Inc. reports financial results for the quarter ended June 30, 2016.

We analyze the earnings along side the following peers of Hilltop Holdings, Inc. – Waterstone Financial, Inc., Flagstar Bancorp, Inc., Erie Indemnity Company Class A, Travelers Companies, Inc., Cincinnati Financial Corporation, HomeStreet, Inc., Endurance Specialty Holdings Ltd., Arch Capital Group Ltd. and Allstate Corporation (WSBF-US, FBC-US, ERIE-US, TRV-US, CINF-US, HMST-US, ENH-US, ACGL-US and ALL-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 446.40 million, Net Earnings of USD 31.07 million.
  • Net interest income margins narrowed from 24.77% to 22.49% compared to the same period last year.
  • Net loan assets changed 6.17% compared to same period last year and 1.41% from previous period, total deposits changed 4.86% compared to same period last year and 2.04% from previous period.
  • Year-on-year change in operating cash flow of -222.99% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings grew despite decline in operating margins and pre-tax margins compared to same period last year.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income (See complete table at the end of this report):

2015-06-30 2015-09-30 2015-12-31 2016-03-31 2016-06-30
Relevant Numbers (Quarterly)
Revenues (mil) 406.37 411.68 376.24 371.23 446.4
Revenue Growth (%YOY) 34.5 38.2 23.23 -18.96 9.85
Earnings (mil) 29.91 46.68 20.64 27.44 31.07
Earnings Growth (%YOY) 5.43 89.05 -37.42 -75.98 3.87
Net Margin (%) 7.36 11.34 5.48 7.39 6.96
EPS 0.3 0.47 0.21 0.28 0.32
Return on Equity (%) 6.82 11.01 4.78 6.28 6.99
Return on Assets (%) 0.96 1.5 0.68 0.93 1

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Market Share Versus Profits

Revenues History
Earnings History

HTH-US‘s change in revenue this period compared to the same period last year of 9.85% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that HTH-US is holding onto its market share. Also, for comparison purposes, revenues changed by 20.25% and earnings by 13.22% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Earnings Growth Analysis

HTH-US‘s earnings rose year-on-year. But this growth has not come as a result of improvement in net interest income margins or any loan loss improvement activities in its operations. Net interest income margins were 22.49% compared to 25.20% in the immediate last period. Net interest income after provisions margins were 16.02% this period compared to 24.28% in the previous period. In addition, loan loss provisions as a percentage of net interest income were 28.76% this period and 0.16% a year ago.

Net Interest Income Margin Versus Loan Loss Provisions Margin
Net Interest Income Margin History
Loan Loss Provisions Margin History

Net Loans and Total Deposits

A financial institution’s core operations represented by Net Interest Income and Net Interest Income after Provisions are dependent on both the growth and quality of its deposits as well as the growth and quality of its loans. A firm could boost its interest income in the short-term by just increasing its loan assets with less concern about their quality – but this would eventually lead to greater loan loss provisions. Similarly a drive to increase deposits could result in higher interest expenses and eventually effect the firm’s equity. It is thus important to understand net interest income performance in context to loan loss provisions, loan assets and deposits.

Loan Assets Growth Rate History (Qtr YOY)
Total Deposits Growth Rate History (Qtr YOY)

The firm’s decline in net interest income margins was influenced by both the relative drops in the levels of net loan assets and the level of total deposits as a percentage of equity. On an absolute basis, net loan assets changed 6.17% compared to the same period last year and 1.41% from the previous period. Total deposits changed 4.86% compared to the same period last year and 2.04% from the previous period.

Cash Versus Earnings – Sustainable Performance?

HTH-US‘s change in operating cash flow of -222.99% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Margins

Despite a decline in operating’s margins as well as a decline in pretax margins, the company’s earnings rose.

EBIT Margin History
PreTax Margin History
EBIT Margin Versus PreTax Margin

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Company Profile

Hilltop Holdings, Inc. engages in the provision of banking, mortgage origination, financial advisory, and insurance services. It operates through the following segments: Banking, Broker-Dealer, Mortgage Origination, and Insurance. The Banking segment includes business banking, personal banking, and wealth and investment management. The Broker-Dealer segment includes the following lines of business: public finance, capital markets, retail, structured finance, clearing services, and securities lending. The Mortgage Origination segment, through the Bank’s subsidiary, PrimeLending, handles loan processing, underwriting and closings in-house. The Insurance segment operates through NLC, which provides fire and limited homeowners insurance for low value dwellings and manufactured homes. The company was founded in July 1998 and is headquartered in Dallas, TX.

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