Hilltop Holdings Inc. — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. Hilltop is a Texas-based financial holding company with banking, broker-dealer and mortgage origination segments. The filing is an annual report; it includes quarterly results but is not limited to Q4.
Financial performance and position
| Metric | 2022 | 2021 |
|---|---|---|
| Net interest income | $459.0 million | $423.0 million |
| Noninterest income | $832.5 million | $1,410.3 million |
| Income before taxes | $156.1 million | $504.1 million |
| Net income attributable to Hilltop | $113.1 million | $374.5 million |
| Diluted EPS from continuing operations | $1.60 | $4.61 |
| Net interest margin | 2.87% | 2.57% |
| Return on average assets / equity | 0.69% / 5.11% | 2.17% / 15.38% |
| Total assets | $16.26 billion | $18.69 billion |
| Deposits | $11.32 billion | $12.82 billion |
| Stockholders’ equity | $2.06 billion | $2.55 billion |
Net interest income increased 9%, but total noninterest income fell 41%, principally because mortgage revenue contracted. Net income attributable to Hilltop declined about 70%. The 2022 provision for credit losses was $8.3 million, compared with a $58.2 million reversal in 2021. Total noninterest expense decreased 19% to $1.13 billion, mainly reflecting lower variable compensation in mortgage and broker-dealer operations; management also noted inflation-driven increases in compensation, occupancy and software costs.
Cash provided by operating activities was $1.19 billion; investing activities used $877.3 million and financing activities used $1.71 billion. Cash, cash equivalents and restricted cash ended at $1.65 billion, down from $3.05 billion. The cash-flow result includes substantial movements in mortgage loans and broker-dealer receivables and payables. At year-end, Hilltop reported $8.09 billion of loans held for investment and $983 million of loans held for sale. Total consolidated deposits were $11.32 billion; notes payable were $346.7 million and short-term borrowings were $970.1 million. Management described Hilltop’s standalone liquidity as sufficient for the foreseeable future.
Capital ratios remained above regulatory minimums: Hilltop’s common equity Tier 1 ratio was 18.23% and total capital ratio 20.98%; PlainsCapital was classified as well capitalized. The Bank reported $7.08 billion of available collateralized liquidity and borrowing capacity at year-end, against a stated target range of approximately $5–$6 billion.
Material changes and segment results
- Mortgage origination: Pre-tax loss of $36.5 million, versus $235.5 million pre-tax income in 2021. Originations fell 44.2% to $12.66 billion; refinancing share dropped to 14.5% from 36.3%. Home inventory shortages, affordability concerns, higher rates and lower margins weighed on results.
- Banking: Pre-tax income declined 22% to $219.5 million. Net interest income rose modestly, but the result compared unfavorably with 2021’s credit-loss reversal; 2022 included an $8.3 million provision. Nonperforming loans fell to $30.3 million from $51.1 million.
- Broker-dealer: Pre-tax income declined 13% to $37.8 million. Revenue was affected by lower public finance issuance, weaker fixed-income demand and reduced structured-finance activity amid rate volatility.
- Deposits and securities: Deposits declined about 12% year over year as management reported deposit runoff and intensifying competition for funding. Rising rates drove substantial securities valuation losses: available-for-sale securities had $129.8 million of net unrealized losses at year-end. Hilltop transferred approximately $782 million of securities from available-for-sale to held-to-maturity in March 2022; their market value at transfer was about $708 million, and the related unrealized loss is being amortized over the remaining term.
- Capital returns: Hilltop repurchased 14.87 million shares for $442.3 million in a Dutch auction tender offer and paid $43.0 million in common dividends during 2022. Year-end shares outstanding were about 64.7 million, versus 79.0 million a year earlier. In January 2023, the board authorized a new repurchase program of up to $75 million and raised the quarterly dividend to $0.16 per share.
Outlook, risks and contingencies
Management expects the 2022 headwinds to continue to adversely affect 2023 results, including mortgage-market weakness, funding-cost increases, inflation in operating expenses, labor-market conditions and supply-chain uncertainty. The mortgage segment expected production and operating trends similar to late 2022 to persist and was reviewing its cost structure. The allowance model’s year-end economic forecast incorporated slower growth and a mild U.S. recession in 2023; this is an assumption used in credit-loss estimates, not formal company earnings guidance.
Key risks include interest-rate and yield-curve changes, deposit competition and runoff, Texas and real-estate concentration, credit deterioration, mortgage volume and margin declines, broker-dealer market volatility, cybersecurity and technology risks, regulation, and the ability to fund debt service from subsidiary distributions. Management found no goodwill impairment at the October 2022 annual test, but warned that continued underperformance in mortgage origination or broker-dealer operations could trigger a future impairment. The $101.1 million mortgage servicing rights asset is sensitive to prepayment and discount-rate assumptions.
At year-end, the Bank had $2.5 billion of unused credit commitments and $75.8 million of standby letters of credit. PrimeLending’s mortgage indemnification reserve was $20.5 million. Hilltop Securities is defending a FINRA claim alleging a $13 million loss; it said it could not estimate the probability or amount of any loss. PrimeLending also received a U.S. Attorney investigative inquiry regarding its float-down option and is cooperating. Management stated that pending matters were not expected to have a material overall effect, while noting adverse outcomes could be material in a particular period.
PwC issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at December 31, 2022.
Important facts for investors to verify
- Whether deposit balances stabilize and the cost of deposits rises as expected in 2023, and how that affects net interest margin and liquidity.
- Mortgage origination volume, gain-on-sale margins, staffing/cost reductions and whether the segment returns to profitability.
- Credit quality and allowance adequacy under weaker economic conditions, particularly in Texas real estate and commercial lending.
- The economic and capital effects of securities valuation losses and the transfer of securities to held-to-maturity.
- Progress and potential financial exposure from the disclosed FINRA claim, the U.S. Attorney inquiry and mortgage repurchase/indemnification claims.
- Whether planned dividends and the new share repurchase authorization remain consistent with capital, liquidity and regulatory constraints.