Hilltop Holdings Inc. — Q2 2023 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2023; balance-sheet comparisons are against December 31, 2022. Hilltop is a Texas-focused financial holding company with banking, broker-dealer and mortgage origination businesses. Amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $118.3 | $112.1 | $240.0 | $212.0 |
| Noninterest income | $190.7 | $239.3 | $353.1 | $455.7 |
| Income before taxes | $27.1 | $47.5 | $58.5 | $77.4 |
| Net income attributable to Hilltop | $18.1 | $33.3 | $43.9 | $55.5 |
| Diluted EPS | $0.28 | $0.45 | $0.68 | $0.73 |
| Consolidated net interest margin | 3.03% | 2.75% | 3.15% | 2.55% |
- Q2 combined net interest and noninterest income was $308.9 million, down about 12% year over year; the six-month total was $593.1 million, down about 11%.
- Q2 noninterest expense declined to $267.0 million from $298.5 million; six-month expense fell to $517.4 million from $584.9 million. The mortgage business drove much of the reduction as compensation and other costs fell with production.
- At June 30, total assets were $17.14 billion, up from $16.26 billion at year-end. Loans held for investment, net of allowance, were $8.24 billion; loans held for sale were $1.33 billion. Deposits were $11.16 billion, down from $11.32 billion.
- Allowance for credit losses was $109.3 million, up from $95.4 million; provision was $14.8 million in Q2 and $17.2 million for the first half. Nonaccrual loans were $39.0 million, and nonperforming assets were $42.4 million, up from $32.6 million at year-end.
- Cash and due from banks was $1.58 billion. For the first half, operating cash flow was negative $323.6 million, investing cash flow negative $192.7 million, and financing cash flow positive $504.5 million. Cash, cash equivalents and restricted cash ended at $1.64 billion.
- Short-term borrowings increased to $1.63 billion from $970.1 million; notes payable were $364.5 million. Total liabilities were $15.05 billion and total stockholders’ equity $2.09 billion.
- Hilltop’s common equity-to-assets ratio was 12.04% and tangible common equity-to-tangible assets was 10.59%. Hilltop’s Tier 1 leverage ratio was 11.47% and CET1 ratio 17.63%; PlainsCapital was reported as well capitalized.
Material changes versus comparable periods
- Hilltop-attributable Q2 income declined 45% and diluted EPS fell from $0.45 to $0.28. For the first half, attributable income declined 21% and EPS fell from $0.73 to $0.68.
- Mortgage origination was the principal earnings headwind: Q2 originations totaled $2.45 billion, down 36%, and first-half originations were $4.18 billion, down 45%. Q2 mortgage segment pre-tax loss was $14.5 million versus $5.6 million income a year earlier; first-half loss was $38.6 million versus $12.1 million income.
- Mortgage sale gains and other production income fell, while broker-dealer results improved. Broker-dealer pre-tax income rose to $18.5 million in Q2 from $9.1 million and to $31.9 million for six months from $0.5 million, helped by stronger structured finance and trading activity.
- Banking pre-tax income was $39.8 million in Q2, down from $51.4 million, mainly due to higher credit-loss provision. First-half banking pre-tax income was broadly flat at $98.1 million.
- Higher asset yields lifted net interest margin, but deposit costs rose sharply: average interest-bearing deposit cost was 2.44% for the first half versus 0.24% in 2022. Noninterest-bearing deposits declined, and the company increased use of brokered deposits and FHLB funding.
- Available-for-sale securities had $131.5 million of net unrealized losses; held-to-maturity securities had $92.3 million. Management attributed available-for-sale losses to market interest rates, not credit deterioration, and recorded no securities credit-loss allowance.
Outlook, commentary, risks and unusual items
- Management expects economic and operating headwinds to adversely affect results through the rest of 2023. It cites tight housing inventory, elevated mortgage rates, deposit competition and funding costs, inflation in compensation, occupancy and software, and uncertainty in the economic outlook. No quantified earnings or revenue guidance is provided.
- The credit-loss forecast used a Moody’s alternative scenario anticipating a mild U.S. recession beginning in Q1 2024, with elevated rates through late 2023. Management cited heightened risk in commercial real estate, especially office properties; modeled alternative scenarios would change the relevant allowance by approximately negative $37 million in an upside case or positive $46 million in a downside case.
- Deposit liquidity remains a focus. At June 30, estimated uninsured deposits were $4.4 billion, about 40% of total deposits. Hilltop reported $7.06 billion of stated banking-segment liquidity sources, including FHLB capacity, available investment portfolio and excess Fed deposits. It had used $500 million of FHLB borrowing capacity and added about $390 million of brokered deposits in Q2; it had not used the Federal Reserve discount window or Bank Term Funding Program.
- Mortgage goodwill was tested after the segment missed forecasts; management concluded estimated fair value remained above carrying value, but further weakness could result in impairment. Mortgage staffing actions are expected to lower annualized pre-tax expenses by about $9 million.
- A third-party vendor reported a MOVEit security incident. Bank customer data, potentially including Social Security and account numbers, was likely obtained; Hilltop Securities data was also potentially obtained, with no indication to date that protected or confidential information was involved. The company is assessing the full scope and does not expect a material financial-statement impact, but notes possible expenses, litigation and regulatory scrutiny.
- Other disclosed matters include a FINRA claim alleging $13 million in losses, for which Hilltop Securities says it will defend and cannot estimate potential loss, and a U.S. Attorney inquiry concerning PrimeLending’s float-down option. Management says it cannot estimate losses for the FINRA claim; it generally does not expect pending matters to materially affect the company as a whole, while noting outcomes remain uncertain.
- The board declared a $0.16-per-share quarterly dividend payable August 25, 2023. A repurchase program authorizes up to $75 million through January 2024; $4.5 million was spent in the first half. The filing also reports the company was evaluating the MOVEit incident after quarter-end.
Important facts for investors to verify
- Whether deposit trends, uninsured-deposit levels and reliance on brokered deposits and short-term borrowing remain manageable as funding costs rise.
- Subsequent credit quality, especially office and other commercial real estate exposures, nonaccrual loans, charge-offs and allowance adequacy.
- Whether mortgage originations, sale margins and operating losses stabilize, and whether future performance triggers a goodwill impairment.
- The eventual scope, costs and any litigation or regulatory consequences of the MOVEit vendor incident; also developments in the disclosed legal and investigative matters.
- How interest-rate movements and continued deposit repricing affect net interest margin, cash flows and the company’s rate-sensitive projections.
- Whether stated capital and liquidity resources remain available in practice, including regulatory constraints and the collateral or conditions attached to funding sources.