Hilltop Holdings Inc. — Q2 2022 Form 10-Q
Business context and period. Hilltop is a financial holding company with banking operations primarily in Texas, a nationwide broker-dealer business and residential mortgage origination through PrimeLending. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are to the corresponding 2021 periods unless otherwise stated. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $112.1 million | $107.9 million | $212.0 million | $213.6 million |
| Noninterest income | $239.3 million | $339.9 million | $455.7 million | $757.5 million |
| Net income attributable to Hilltop | $33.3 million | $99.1 million | $55.5 million | $219.4 million |
| Diluted EPS | $0.45 | $1.21 | $0.73 | $2.66 |
| Net interest margin | 2.75% | 2.62% | 2.55% | 2.66% |
- Total revenue, calculated as net interest income plus noninterest income, was $351.3 million in Q2, down about 21% year over year; first-half revenue was $667.7 million, down about 31%.
- Q2 provision for credit losses was $5.3 million, versus a $28.7 million reversal in Q2 2021. First-half provision was $5.5 million, versus a $33.8 million reversal in 2021. Noninterest expense fell 13% in Q2 and 18% for the first half, partly reflecting lower mortgage-related compensation as production declined.
- For the first half, operating cash flow was $745.6 million, investing cash flow was negative $566.1 million and financing cash flow was negative $1.32 billion. Cash, cash equivalents and restricted cash ended at $1.90 billion, down $1.14 billion from year-end 2021.
- At June 30, total assets were $16.72 billion, deposits $11.92 billion, loans held for investment net of allowance $7.84 billion, and total stockholders’ equity $2.06 billion. Deposits declined about $897 million and assets about $1.97 billion from December 31, 2021.
- Notes payable were $389.7 million and short-term borrowings $822.6 million. The filing reports $393 million of total debt obligations for market-risk purposes, excluding short-term borrowings and debt issuance costs; this differs from the broader balance-sheet borrowing totals.
- Hilltop reported a 17.24% common equity Tier 1 ratio and a 19.90% total capital ratio at June 30; PlainsCapital was classified as well capitalized. The Bank reported $7.32 billion of available liquidity and borrowing capacity, while targeting approximately $5–$6 billion for the rest of 2022.
- Book value per share was $31.43 and tangible book value per share $27.08. The company’s capital and equity measures were affected by repurchases and accumulated other comprehensive losses.
Material changes and segment trends
- Mortgage origination: The main source of earnings decline. Q2 originations were $3.81 billion, down 35% year over year; first-half volume was $7.57 billion, down 37%. Segment pretax income fell to $5.6 million in Q2 from $49.0 million and to $12.1 million for the first half from $142.1 million. Management cited higher mortgage rates, fewer refinancings, home inventory and affordability constraints, and competitive pressure on loan-sale margins.
- Banking: Q2 pretax income was $51.4 million versus $87.0 million; first-half pretax income was $97.8 million versus $151.6 million. Lower net interest income and the shift from prior-year credit-loss reversals to current-year provisions weighed on results. Banking net interest margin was 2.97% in Q2 and 2.81% for the first half, compared with 3.19% and 3.25% in 2021.
- Broker-dealer: Q2 pretax income increased to $9.1 million from $6.9 million, but first-half pretax income fell to $0.5 million from $24.5 million. Management cited market volatility, weaker first-quarter customer demand and lower public finance issuance, partly offset by improved Q2 structured finance results.
- During the first half, the available-for-sale securities portfolio recorded $105.6 million of net unrealized losses, mainly attributed to higher market interest rates. Hilltop transferred securities with approximately $782 million book value and $708 million market value from available-for-sale to held-to-maturity in March; related pre-tax unrealized losses of about $74 million are being amortized over the securities’ remaining lives.
Outlook, risks and unusual items
- Management said mortgage headwinds, declining deposit balances, rising rates and funding costs, a weaker economic outlook, and inflation-related compensation, occupancy and software costs had adversely affected results and were expected to continue pressuring performance through the remainder of 2022. The filing provides no numerical earnings guidance.
- For its credit-loss estimate, the company used a Moody’s alternative economic scenario that anticipated persistent inflation, faster rate increases and a mild recession in the second half of 2023. Management noted that changes in economic forecasts and loan quality could materially affect future provisions. The reported allowance for credit losses on loans held for investment was $95.3 million.
- Interest-rate simulations estimated that a 100-basis-point increase would raise annual net interest income by 7.93% consolidated and 6.18% for banking; a 50-basis-point decline was estimated to reduce it by 6.66% and 4.71%, respectively. These are model estimates based on assumptions, not forecasts.
- On May 27, Hilltop completed a modified Dutch auction tender offer, repurchasing 14.87 million shares at $29.75 per share for $442.3 million, funded with cash on hand. The repurchase exceeded the originally announced $400 million maximum after the company exercised its right to buy additional shares. No capacity remained under the existing repurchase program. A quarterly dividend of $0.15 per share was declared July 21, 2022.
- On July 20, PrimeLending signed a letter of intent to sell servicing rights on $1.8 billion of loans for approximately $38 million, with completion expected in Q3 2022; this was a post-quarter development, not a completed sale as of June 30.
- Hilltop Securities faces a FINRA claim alleging a $13 million loss; the company considers the claim without merit but cannot estimate the probability or amount of any loss. PrimeLending is cooperating with a U.S. Attorney inquiry regarding its float-down option. Management said pending matters were not expected to materially affect the company as a whole, while noting outcomes remain uncertain.
- Other risks identified include credit and real-estate concentration, interest-rate and market volatility, deposit outflows, inflation, mortgage market weakness, cybersecurity, regulatory and legal matters, and transition from LIBOR. Management stated disclosure controls were effective and there were no material second-quarter changes to internal control over financial reporting.
Key facts for investors to verify
- Whether mortgage origination volumes and margins continue to contract, and how quickly costs adjust to lower production.
- Deposit trends, deposit pricing and the Bank’s liquidity position against its stated $5–$6 billion target; also assess the effect of the $442.3 million cash-funded tender offer.
- Credit quality, loan concentrations, nonaccrual trends and reserve adequacy under changing economic forecasts.
- Interest-rate exposure and the assumptions underlying the projected net interest income sensitivity, especially deposit behavior and cash-balance runoff.
- Realization and accounting impact of the proposed MSR sale, as well as the level and valuation sensitivity of retained servicing rights.
- Developments in the FINRA claim, the U.S. Attorney inquiry and mortgage indemnification claims; the filing does not provide a clear estimate of potential loss for the disclosed legal matters.