Hilltop Holdings Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are against December 31, 2023. Hilltop is a Texas-focused banking group with broker-dealer and nationwide mortgage origination businesses. Amounts below are in U.S. dollars; financial statement figures are unaudited.
Financial results and key metrics
| Metric | Q1 2024 | Q1 2023 / prior date |
|---|---|---|
| Net interest income | $103.6 million | $121.7 million |
| Net interest margin | 2.85% GAAP basis; 2.87% taxable-equivalent | 3.28% taxable-equivalent |
| Noninterest income | $181.6 million | $162.5 million |
| Noninterest expense | $250.0 million | $250.5 million |
| Income before taxes | $38.1 million | $31.4 million |
| Net income / income attributable to Hilltop | $29.5 million / $27.7 million | $27.8 million / $25.8 million |
| Diluted earnings per share | $0.42 | $0.40 |
| Operating cash flow | $70.8 million provided | $108.5 million used |
| Cash, cash equivalents and restricted cash | $1.78 billion at March 31 | $1.92 billion at December 31 |
| Total assets / stockholders’ equity | $16.21 billion / $2.16 billion | $16.47 billion / $2.15 billion at December 31 |
| Deposits | $10.88 billion | $11.06 billion at December 31 |
| Short-term borrowings / notes payable | $892.6 million / $347.3 million | $900.0 million / $347.1 million at December 31 |
- Profitability: Return on average equity was 5.23%, versus 5.12%; return on average assets was 0.74%, versus 0.69%. Book value per share was $32.66 and tangible book value per share was $28.44.
- Credit: The company recorded a $2.9 million reversal of credit losses, compared with a $2.3 million provision a year earlier. The allowance for loan losses was $104.2 million, or 1.29% of loans held for investment, at quarter-end. Net charge-offs were $4.3 million.
- Capital: Hilltop’s common equity Tier 1 ratio was 19.73% and PlainsCapital’s was 15.87%; PlainsCapital was categorized as well capitalized. Hilltop’s tangible common equity to tangible assets ratio was 11.65%.
- Liquidity: The Bank reported $7.17 billion of available liquidity from FHLB capacity, available investment portfolio and excess Fed deposits, excluding Federal Reserve discount-window capacity. It was not using FHLB borrowing capacity at quarter-end.
Material changes versus the comparable period
- Net income attributable to Hilltop rose 7% and diluted EPS increased from $0.40 to $0.42. Higher noninterest income and the credit-loss reversal more than offset lower net interest income and higher income taxes.
- Net interest income fell 15%, and consolidated taxable-equivalent net interest margin declined from 3.28% to 2.87%. Management attributed the pressure principally to higher deposit costs and a larger average balance of interest-bearing deposits. Average cost of interest-bearing deposits rose to 3.58% from 2.01%.
- Noninterest income increased 12%, led by broker-dealer activity; expenses were broadly flat. Broker-dealer pre-tax income increased to $18.9 million from $13.4 million. Banking pre-tax income declined to $50.3 million from $58.2 million, while the mortgage segment’s pre-tax loss narrowed to $16.5 million from $24.1 million.
- Mortgage originations declined 3.2% to $1.68 billion. Mortgage loan sales increased 5.3% to $1.75 billion; reported sale margin rose to 216 basis points from 186 basis points. The mortgage segment reduced expenses but remained loss-making.
- Nonaccrual loans held for investment were $28.7 million at March 31, down from $64.3 million at December 31, primarily reflecting a loan reclassified to held for sale and other repayments. Total nonperforming assets were $70.5 million, compared with $73.4 million at year-end.
- Deposits declined by $179.1 million from year-end. Cash and cash equivalents at the parent company declined $14.6 million to $177.0 million, while consolidated cash, cash equivalents and restricted cash fell $135.3 million during the quarter.
Outlook, risks and unusual items
- Management expects economic uncertainty, deposit competition and funding-cost pressure to persist through the remainder of 2024, alongside inflation-related increases in compensation, occupancy and software costs. It provided no consolidated earnings or EPS guidance in the supplied filing text.
- Management expects mortgage activity to improve slightly in the second and third quarters from Q1’s seasonal lows, but remain below historical levels; it expects Q4 production and results to more closely resemble Q1. Housing affordability, limited inventory and mortgage rates remain headwinds.
- The Bank’s deposit base includes estimated uninsured deposits of $4.8 billion, approximately 44% of deposits (or $4.5 billion, approximately 41%, excluding collateralized deposits). Approximately $150 million of brokered deposits matured in April 2024. Management cautions that deposit outflows could increase reliance on secondary funding sources.
- PrimeLending’s GNMA capital ratio was 5.56%, below the required 6%; its operating loss ratio was 22.6%. Both trends were reported to the relevant agencies. The filing says PrimeLending’s net worth and liquidity remained above applicable HUD and GNMA requirements. Continued mortgage losses could also prompt a goodwill impairment review.
- On April 9, 2024, PrimeLending signed a nonbinding letter of intent to sell MSR assets valued at $47 million and associated with $3.0 billion of serviced loans. The filing included a $4.8 million MSR fair-value adjustment reflecting the difference between carrying value and the indicated sale price. Completion and final terms are not established by the filing.
- Hilltop Securities voluntarily reported to the SEC on March 25, 2024 that off-channel communications may have occurred; its review was ongoing. Other disclosed matters include a FINRA claim alleging $13.0 million in losses, which the company intends to defend, and a U.S. Attorney investigative inquiry concerning PrimeLending’s float-down option. The company could not estimate potential losses for the FINRA matter.
- Interest-rate and credit risks remain material. Management’s credit-loss forecast assumes persistent inflation, further Federal Reserve tightening and a mild recession beginning in Q1 2025. Alternative modeled scenarios would change the allowance by approximately negative $28 million in an upside case or positive $46 million in a downside case; management cautions these are sensitivities, not forecasts.
- The Senior Notes have $150 million principal outstanding and mature April 15, 2025. Management expects access to funding to refinance or repay them but had not specified its chosen approach.
Most important facts for investors to verify
- Whether deposit balances, deposit pricing and uninsured-deposit trends stabilize, and whether the April brokered-deposit maturities were replaced without materially higher funding costs.
- Whether net interest margin and banking profitability continue to weaken, particularly as interest-bearing deposit costs and rate sensitivity evolve.
- Credit quality in commercial real estate, especially office exposure; the status of potential problem loans, charge-offs and allowance assumptions.
- PrimeLending’s path to profitability and compliance with GNMA capital requirements, as well as the outcome and terms of the proposed MSR sale and any resulting impairment assessment.
- Developments in the SEC off-channel communications review, the FINRA claim and the PrimeLending investigative inquiry, including any estimated financial exposure.
- Hilltop’s plan for the 2025 Senior Notes and its capacity to sustain dividends and share repurchases. The board declared a $0.17-per-share dividend for May 2024; the company repurchased $9.9 million of shares in Q1 under a $75 million authorization.