Hilltop Holdings Inc. annual report, FY2023

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Hilltop Holdings Inc. — 2023 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2023. This annual filing reports full-year results; it is not a standalone fourth-quarter report. Hilltop is a Texas-based financial holding company with banking, broker-dealer and mortgage origination segments.

Financial results and position

  • Revenue: Net interest income was $466.8 million, up 1.7% from $459.0 million in 2022. Noninterest income was $729.0 million, down 12.4% from $832.5 million. Together, these totaled approximately $1.196 billion, versus $1.291 billion in 2022.
  • Profit: Income before tax was $149.1 million, down 4.5%; net income was $118.0 million, versus $119.3 million. Income attributable to Hilltop was $109.6 million, or diluted EPS of $1.69, compared with $113.1 million, or $1.60 per diluted share.
  • Segments: Banking generated $199.0 million of pretax income (2022: $219.5 million); broker-dealer generated $73.5 million (2022: $37.8 million); mortgage origination recorded a $62.8 million pretax loss (2022 loss: $36.5 million). Corporate recorded a $60.7 million pretax loss.
  • Margins and costs: Consolidated net interest margin was 3.07%, up from 2.87% (taxable-equivalent: 3.09% versus 2.88%). Banking-segment NIM was 3.13%, slightly above 3.11%. Noninterest expense declined 8.8% to $1.028 billion, partly reflecting lower mortgage-related compensation.
  • Cash flow: Operating cash flow was $443.0 million, compared with $1.189 billion in 2022; investing activities provided $158.3 million, versus using $877.3 million; financing activities used $332.5 million, versus $1.710 billion. Cash, cash equivalents and restricted cash increased $268.8 million to $1.917 billion.
  • Balance sheet and liquidity: Total assets were $16.47 billion; loans held for investment, net, were $7.97 billion; and deposits were $11.06 billion, down from $11.32 billion. Estimated uninsured deposits were $4.7 billion, approximately 42% of deposits. The Bank reported $7.41 billion of specified available liquidity from FHLB capacity, available investment securities and excess Fed deposits; this excludes Federal Reserve discount-window capacity.
  • Credit: The allowance for credit losses was $111.4 million, or 1.38% of loans held for investment, versus $95.4 million and 1.18% a year earlier. Nonaccrual loans rose to $68.3 million from $29.5 million; nonperforming assets were $73.4 million. Commercial real estate loans were about 39% of the banking segment’s loan portfolio.
  • Debt and capital: At year-end, short-term borrowings were $900.0 million and notes payable were $347.1 million; the latter included $150 million of 5% senior notes due April 2025 and $200 million of subordinated notes due 2030 and 2035. Hilltop’s total capital ratio was 22.34% and PlainsCapital’s was 16.58%; PlainsCapital was classified as well-capitalized.
  • Shareholder returns: Hilltop declared and paid $0.64 per share in 2023, totaling $41.6 million. It repurchased $5.1 million of stock. In January 2024, the board raised the quarterly dividend to $0.17 per share and authorized a new repurchase program of up to $75 million through January 2025.

Material changes versus 2022

  • Mortgage origination volume fell 34.9% to $8.24 billion; mortgage-segment noninterest income declined 30% to $316.8 million, and its pretax loss widened to $62.8 million. Management cited higher mortgage rates, tight housing inventory and affordability challenges.
  • Broker-dealer pretax income nearly doubled, supported by improved trading, structured finance and wealth-management results, including higher FDIC sweep revenue. Segment expenses also increased.
  • Banking pretax income declined 9%. Higher interest income was offset by sharply higher deposit costs: average interest-bearing deposit cost rose to 2.89% from 0.67%, and banking net interest income fell 3.8%.
  • The credit-loss provision increased to $18.4 million from $8.3 million, reflecting portfolio changes and a weaker commercial real estate outlook. Net charge-offs were $2.4 million, compared with $4.2 million.
  • Cash dividends per share increased from $0.60 to $0.64. Diluted EPS rose despite lower income attributable to Hilltop, alongside a lower weighted-average share count.

Outlook, risks and unusual items

  • Management expected economic headwinds to continue affecting 2024 results, including deposit competition and funding costs, inflation in compensation, occupancy and software, interest-rate uncertainty, and mortgage production challenges. The filing provides no specific numerical earnings or revenue guidance.
  • Liquidity actions during 2023 included raising deposit rates, using approximately $1.1 billion of Hilltop Securities FDIC-insured sweep deposits at the Bank, and temporarily increasing brokered deposits; $208 million of brokered deposits remained at year-end. The Bank reported no year-end FHLB borrowings and had not used the Federal Reserve discount window or Bank Term Funding Program.
  • Key exposures include Texas and commercial real estate concentration, rising deposit costs, interest-rate and securities valuation risk, mortgage-volume and MSR valuation volatility, and potential increases in credit losses. Management’s downside credit scenario indicated modeled allowance could be about $47 million higher than its base estimate.
  • A third-party vendor’s 2023 MOVEit security incident likely exposed information held about substantially all Bank customers, including Social Security and account numbers. Hilltop said it incurred, and may continue to incur, related costs and faces possible litigation and regulatory scrutiny; it reported no indication that protected or confidential Hilltop Securities information was involved based on its review to date.
  • Management found no goodwill impairment at year-end, but reported that mortgage and broker-dealer performance and economic conditions could prompt future impairment testing. The mortgage segment’s MSR asset was $96.7 million.
  • Disclosed matters include a FINRA claim alleging $13 million in losses against Hilltop Securities, which the firm intends to defend, and a U.S. Attorney investigative inquiry concerning PrimeLending’s float-down option. The company said it could not estimate potential losses for the FINRA claim.
  • PwC issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal control over financial reporting were effective at December 31, 2023.

Most important facts for investors to verify

  • Whether deposit balances, uninsured-deposit mix and deposit pricing costs remain stable, and how the Bank’s available liquidity compares with potential outflows.
  • Trends in commercial real estate credit quality, nonaccrual loans, criticized or potential problem loans, and allowance adequacy.
  • Mortgage origination volume, segment losses, cost-reduction results and MSR valuation sensitivity.
  • Broker-dealer earnings sustainability, including contributions from trading and FDIC sweep revenues.
  • Refinancing plans and funding cost for the $150 million senior notes due in April 2025, alongside the terms of any future capital returns.
  • Developments in the MOVEit incident, legal and regulatory matters, and any subsequent goodwill impairment indicators.