Hilltop Holdings Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts below are in millions of dollars unless stated otherwise. Hilltop is a financial holding company with banking, broker-dealer and mortgage origination businesses; its banking operations are primarily in Texas.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $123.5 | $105.1 | $335.5 | $318.7 |
| Provision for (reversal of) credit losses | $(0.8) | $(5.8) | $4.7 | $(39.6) |
| Noninterest income | $207.0 | $367.9 | $662.7 | $1,125.4 |
| Noninterest expense | $288.7 | $355.2 | $873.6 | $1,065.2 |
| Net income attributable to Hilltop | $32.1 | $92.9 | $87.6 | $312.3 |
| Diluted EPS | $0.50 | $1.15 | $1.21 | $3.82 |
- Q3 net interest margin was 3.19%, up from 2.53%; the nine-month margin was 2.75%, versus 2.61%.
- Q3 income before taxes was $42.5 million, down from $123.7 million. Returns on average equity and assets were 6.26% and 0.79%, respectively, versus 14.96% and 2.13% a year earlier.
- Operating cash flow was $1,235.8 million for the first nine months, compared with $873.6 million in 2021. Investing activities used $695.8 million and financing activities used $1,697.7 million; cash, cash equivalents and restricted cash declined $1,157.7 million to $1,887.6 million.
Balance sheet, capital and liquidity
- At September 30, total assets were $16,615.3 million, down from $18,689.1 million at year-end 2021. Loans held for investment, net, were $7,852.5 million; loans held for sale were $1,003.6 million.
- Deposits were $11,352.0 million, down $1,466.1 million from December 31, 2021. Cash and due from banks was $1,777.6 million, compared with $2,823.1 million at year-end.
- Short-term borrowings were $942.3 million; notes payable were $390.4 million. Total liabilities were $14,556.4 million and stockholders’ equity was $2,058.9 million. Hilltop separately reported $162.2 million of parent-company cash and cash equivalents.
- The Bank reported available liquidity and borrowing capacity of $7.659 billion and said it was targeting approximately $5 billion to $6 billion for the remainder of 2022. The Bank was classified as well capitalized; PlainsCapital’s common equity Tier 1 ratio was 14.68% and Hilltop’s was 17.45%.
- The allowance for credit losses was $91.8 million, or 1.16% of loans held for investment. Nonperforming loans were $34.6 million, versus $51.1 million at year-end 2021; nonperforming assets were $36.3 million. Net charge-offs for the first nine months were $4.2 million.
Material changes and segment results
- Hilltop-attributable income fell 65% in Q3 and 72% for the nine months year over year. The main driver was weaker mortgage origination income, alongside lower broker-dealer revenues and less favorable credit-loss provision comparisons. Lower compensation and other expenses partly offset revenue declines.
- Mortgage origination: Q3 originations were $3.04 billion, down 46%; nine-month originations were $10.62 billion, down 40%. The segment recorded a $23.1 million Q3 pretax loss, versus $62.2 million pretax income a year earlier; its nine-month pretax loss was $11.0 million, versus $204.2 million of income. Refinancings were 6.9% of Q3 production, compared with 29.4% a year earlier.
- Banking: Q3 pretax income was $63.6 million, compared with $62.9 million. Nine-month pretax income declined to $161.5 million from $214.5 million, reflecting mainly the change from substantial prior-year credit-loss reversals to a provision in 2022.
- Broker-dealer: Q3 pretax income was $17.5 million, roughly flat year over year; nine-month pretax income declined to $18.0 million from $41.9 million. Management cited lower public finance, fixed income and structured finance revenues amid rising rates and market volatility.
- Hilltop repurchased 14.87 million shares in a Dutch auction tender offer at $29.75 per share for $442.3 million, funded with cash on hand. Shares outstanding fell to 64.6 million from 79.0 million at year-end. The board declared $0.45 per share in dividends during the first nine months and declared a further $0.15 quarterly dividend in October.
- Available-for-sale securities had $168.5 million of net unrealized losses at September 30, versus $18.1 million at year-end, principally reflecting higher market interest rates. The company transferred securities with approximately $782 million book value and $708 million market value from available-for-sale to held-to-maturity in March 2022; the related approximately $74 million pretax unrealized loss is being amortized over the securities’ remaining terms.
Outlook, risks and contingencies
- Management expects the mortgage production and earnings trends seen in Q3 to continue through Q4 2022 and the first half of 2023, citing higher mortgage rates, weaker refinancing, affordability and housing-inventory constraints, and pressure on loan-sale margins. PrimeLending is reviewing its cost structure.
- Management expects inflation-related compensation, occupancy and software cost pressures to continue, with higher fixed costs into the first half of 2023. It also cited declining deposit balances, increased funding costs and a deteriorating economic outlook as headwinds.
- The company’s September economic forecast assumed a mild recession beginning in Q2 2023, with peak unemployment of 6.2%; its allowance estimate is sensitive to macroeconomic assumptions. Management reported that a modeled downside scenario could raise estimated credit losses by approximately $29 million, while an upside scenario could reduce them by approximately $23 million.
- Mortgage origination and broker-dealer reporting units had lower-than-forecast results. The company warned that continued underperformance could create goodwill impairment risk; no impairment charge was reported in the supplied filing text.
- Interest-rate risk is significant. The Bank is asset sensitive, but rising deposit and funding costs may offset asset-yield benefits; management said it was evaluating a move toward a more neutral or liability-sensitive position. For the Bank, a modeled +100 basis-point rate shock increased next-12-month net interest income by 6.04%; the consolidated model estimated a 7.33% increase. These are model estimates, not guidance.
- Uninsured time deposits greater than $250,000 with scheduled maturities totaled $358.2 million. The Bank also had $2.5 billion of unused credit commitments and $100.3 million of standby letters of credit.
- Hilltop Securities faces a FINRA claim alleging a $13.0 million loss; it disputes the claim and cannot estimate potential loss. PrimeLending is also subject to a U.S. Attorney investigation concerning its mortgage “float down” option. Management said it could not rule out a material adverse outcome in a particular reporting period.
- Two mortgage servicing-rights sales, each covering approximately $1.8 billion of serviced loans and expected to generate approximately $36 million and $26 million, respectively, were pending at quarter-end and expected to close in Q4 2022. Completion and proceeds are not assured by the filing.
Most important facts for investors to verify
- Whether mortgage originations, sale margins and mortgage-segment profitability stabilize as management’s stated outlook anticipated.
- Deposit trends, deposit pricing and funding costs, including the effect of continued interest-rate changes on net interest income and liquidity.
- Credit quality, charge-offs, allowance adequacy and actual performance versus the economic scenarios used in the allowance model.
- Fair values and liquidity implications of the securities portfolios and accumulated unrealized losses, including the held-to-maturity transfer.
- Completion and realized economics of the pending servicing-rights sales, goodwill impairment assessments, and developments in the disclosed legal and regulatory matters.