Hilltop Holdings Inc. quarterly report, Q1 FY2022

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Hilltop Holdings Inc. — Q1 2022 Form 10-Q

Business context and reporting period

Hilltop is a financial holding company operating banking and mortgage origination businesses through PlainsCapital and PrimeLending, and broker-dealer businesses through Hilltop Securities. This unaudited report covers the three months ended March 31, 2022; comparisons are with Q1 2021 unless noted. Amounts below are in U.S. dollars.

Financial performance and position

  • Revenue: Net interest income of $100.0 million plus noninterest income of $216.4 million produced combined revenue of $316.4 million, down 39% from $523.3 million. Noninterest income fell 48%, mainly reflecting lower mortgage production revenue and weaker broker-dealer trading and structured-finance results.
  • Earnings: Net income was $24.1 million, versus $123.9 million; income attributable to Hilltop was $22.3 million versus $120.3 million. Diluted EPS was $0.28 versus $1.46. Pre-tax income declined 81% to $30.0 million. The effective tax rate was 19.4%, compared with 23.4%.
  • Margins and costs: Consolidated net interest margin was 2.36%, down from 2.69% (taxable-equivalent margin: 2.37% versus 2.69%). Noninterest expense decreased 22% to $286.4 million, primarily as lower mortgage and broker-dealer activity reduced variable compensation. Banking segment net interest margin declined to 2.65% from 3.30%.
  • Segments: Banking reported $46.5 million of pre-tax income, down 28%; mortgage origination reported $6.5 million, down 93%; broker-dealer reported a pre-tax loss of $8.6 million versus income of $17.7 million. Mortgage originations fell 39% to $3.76 billion, and refinance volume fell to 26.9% of production from 53.1%.
  • Cash flow: Operating activities provided $388.6 million, compared with $313.8 million. Investing activities used $282.5 million and financing activities used $135.8 million. Cash, cash equivalents and restricted cash decreased $29.7 million during the quarter to $3.016 billion.
  • Balance sheet and liquidity: Total assets were $18.36 billion at quarter-end, down from $18.69 billion at December 31, 2021. Deposits were $12.67 billion, versus $12.82 billion; loans held for investment, net, were $7.71 billion, versus $7.79 billion. Hilltop stockholders’ equity was $2.46 billion and total stockholders’ equity was $2.49 billion. The Bank reported available liquidity and borrowing capacity of $8.28 billion and targeted available liquidity of approximately $5–6 billion for the rest of 2022.
  • Debt: Short-term borrowings were $835.1 million and notes payable were $395.5 million at March 31. The filing reports $399 million of consolidated debt obligations excluding short-term borrowings and unamortized debt costs, mostly at fixed rates. Total deposits, rather than debt alone, are a key funding source for the banking business.
  • Credit and capital: The allowance for credit losses was $91.2 million, or 1.17% of total loans held for investment; non-accrual loans were $43.4 million, down from $50.2 million at year-end. PlainsCapital was categorized as well capitalized; its common equity Tier 1 ratio was 15.37%. Hilltop’s reported common equity Tier 1 ratio was 21.27%.

Material changes and unusual items

  • Net mortgage production income and origination fees declined substantially as production volumes and average sale margins fell. Mortgage loan originations were $3.76 billion, versus $6.18 billion.
  • Broker-dealer results weakened amid lower trading gains, market turbulence, reduced customer demand and a less favorable fixed-income environment. Banking income also declined, including due to lower loan yields, lower PPP fee income and reduced purchase-accounting loan discount accretion.
  • Hilltop transferred agency securities with approximately $782 million book value and $708 million market value from available-for-sale to held-to-maturity. The approximately $74 million pre-tax unrealized loss remains in accumulated other comprehensive loss and is to be amortized over the securities’ remaining terms. Total accumulated other comprehensive loss worsened to $80.6 million from $10.2 million at year-end, substantially reflecting securities valuation changes and the transfer.
  • The board authorized a stock repurchase program of up to $100 million through January 2023; no shares were repurchased in Q1. The quarterly dividend was $0.15 per share, and a further $0.15 dividend was declared in April.

Outlook, risks and contingencies

  • No specific full-year earnings or revenue guidance is provided. Management said the remainder of 2022 was uncertain, citing rising interest rates, inflation, tight housing inventories, potentially declining deposits, mortgage-volume headwinds and expected inflationary pressure on compensation, occupancy and software costs.
  • The Bank’s credit-loss estimate used a Moody’s alternative economic scenario reflecting slower growth, persistent inflation and faster rate increases. Management cautioned that the allowance may be volatile and could require further provisions if the recovery weakens. A sensitivity analysis indicated modeled allowance changes of approximately $13 million lower under an upside scenario or $32 million higher under a downside scenario; these were scenarios, not forecasts.
  • Key exposures include interest-rate and securities-market movements, mortgage origination and servicing risks, real-estate loan concentrations, credit quality, deposit outflows, COVID-19 impacts, cybersecurity, regulation and the LIBOR transition. The Bank’s available liquidity was elevated, but its largest 15 depositors represented 10.37% of Bank deposits.
  • PrimeLending is cooperating with an investigative inquiry from the U.S. Attorney for the Western District of Virginia regarding its float-down option. The filing says the ultimate outcome of inquiries and litigation is inherently unpredictable; management did not expect pending matters, apart from specifically disclosed matters, to have a material overall effect.
  • Other items to monitor include mortgage-loan representations-and-warranties claims, with a $27.3 million indemnification reserve; $37.4 million of loans subject to repurchase under pandemic-related forbearance; and $2.3 billion of unused Bank credit commitments plus $106.2 million of standby letters of credit.

Important facts for investors to verify

  1. Whether mortgage production and sale margins stabilize as rates rise and refinancing activity contracts.
  2. Whether broker-dealer trading and structured-finance results recover, and how much volatility remains in those revenues.
  3. Whether deposit levels, funding costs and liquidity remain consistent with management’s stated liquidity target.
  4. How securities unrealized losses, the held-to-maturity transfer and accumulated other comprehensive loss evolve, including any impact on capital or liquidity.
  5. Whether loan quality and the allowance remain adequate under changing economic conditions, especially for real-estate and energy exposures.
  6. Developments in the U.S. Attorney inquiry, mortgage repurchase claims and other legal or regulatory matters.