Hilltop Holdings Inc. (HTH): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report


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We are downgrading our recommendation on Hilltop to Neutral due to lower estimate revisions after a dismal third-quarter earnings that lagged both the Zacks Consensus Estimate and the year-ago quarter figures. Low non-interest income and high expenses from FNB deal led the downside. Nevertheless, high interest income drove the top line, while interest expenses and loan loss provisions declined, although ROE and cash flow deteriorated. Healthy balance sheet, free cash flow, capital ratios and investment portfolio are notable and support book value. The company has maintained stability despite a series of acquisitions. While execution risks from recent acquisitions prevail, we believe prudent capital management should mitigate market risks to strengthen operating and competitive efficiencies.


Founded in 1998 and headquartered in Dallas, Texas, Hilltop Holdings Inc., formerly Affordable Residential Communities, Inc. (ARC), engages in the acquisition, renovation, repositioning and operation of all-age manufactured home communities, retail sale, financing of manufactured homes, rental of manufactured homes as well as other related businesses.

Previously founded as ARV IV REIT Inc., the company changed its name to ARC and finally to Hilltop Holdings. In Jul 2004, Hilltop completed its initial public offering (IPO).

Hilltop also operates as a property and casualty insurance company in the U.S., through its subsidiary, National Lloyds Corp. (NLC). On Jan 31, 2007, ARC acquired NLC, a privately-held property and casualty insurance holding company, for about $122 million. NLC is a Delaware corporation that specializes in providing fire and homeowners' insurance to low-value dwellings and manufactured homes primarily in Texas and other areas of the south, southeastern, and southwestern U.S. NLC operates through its wholly owned subsidiaries, National Lloyds Insurance Co. (NLIC) and American Summit Insurance Co. (ASIC).

As of Jul 31, 2007, ARC sold off all these businesses except NLC. After the sale, NLC transferred all its rights to ARC, which then changed its name to Hilltop Holdings Inc. and moved its headquarters to Dallas, Texas. Hilltop's insurance operations are headquartered in Waco, Texas. Hilltop operates largely in Texas apart from Arizona, Tennessee, Oklahoma, Georgia and Louisiana, among other states.

Additionally, in Nov 2012, Hilltop acquired the U.S.-based financial services company PlainsCapital Corp. for $813.5 million. PlainsCapital operated in about 330 locations across 42 states at the time of acquisition. Following the acquisition, Hilltop became a financial bank holding company.

Currently, Hilltop's total revenue primarily comprises net premiums earned from its property and casualty subsidiary (NLC) as well as net interest and non-interest income from the PlainsCapital banking and financial operations. As of Dec 31, 2013, the company had 4,550 full-time equivalent employees across the U.S., including the PlainsCapital employees.

Post the acquisition of PlainsCapital, Hilltop operates through four segments, which are incorporated under net interest income and non-interest income. These segments include Banking, Mortgage Origination, Insurance and Financial Advisory.

On Sep 13, 2013, Hilltop's PlainsCapital acquired Texas-based First National Bank (FNB) from the Federal Deposit Insurance Corporation (FDIC) for about $2.2 billion. This included $1.1 billion in covered loans, $286.2 million in securities, $121.0 million in covered other real estate owned and $45.9 million in non-covered loans. The bank also assumed $2.2 billion in liabilities, consisting primarily deposits.

With the inclusion of FNB's 51 branches, the deal increased PlainsCapital Bank's retail network to 84 branches. The FDIC and PlainsCapital entered into the deal through a loss-share agreement on $1.8 billion of First National's assets. This means the FDIC will share potential losses on those assets.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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