Hilltop Holdings Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Hilltop reported net income of approximately $30 million ($0.46 per diluted share). Return on average assets was 0.8% and return on average equity was 5.5%.
• PlainsCapital Bank's net interest margin compressed 5 basis points to 3.05% due to increased deposit costs and mix shift in earning assets. Average loans declined but loan pipeline grew as borrower activity increased.
• PrimeLending faced a pre-tax loss due to reduced origination volume, lower gain on sale margin, and MSR valuation adjustment.
• Hilltop Securities had positive performance in structured finance and fixed income, though wealth management declined.
• Allowance for credit losses declined by $4 million to $111 million, with specific reserves up $1.2 million and positive migrations reducing allowance by $2.2 million.

Segment Performance

• Banking (PlainsCapital Bank): Generated $48 million of pre-tax income on $12.8 billion of average assets, with a return on average assets of 1.14%. Average loans declined by $40 million due to loan payoffs and competition, but loan pipeline grew as borrower activity increased. Average deposit balance rose 1%, driven by core interest-bearing deposits. Net interest margin compressed 5 basis points to 3.05% due to higher deposit costs and mix shift. Credit losses reversed $1.4 million. Revenue contribution: Significant from banking operations.
• PrimeLending: Reported a pre-tax loss of $8.7 million. Origination volume declined by $72 million, gain on sale margin dropped 4 basis points to 224 basis points, and a $4.2 million valuation adjustment on MSR asset negatively impacted results. Revenue contribution: Relatively low due to losses.
• Hilltop Securities: Generated pre-tax income of $17 million on net revenues of $124 million (14% pre-tax margin). Public finance net revenues flat, structured finance up $4.4 million, wealth management down $2.1 million, fixed income up $3.1 million. Revenue contribution: Varied across business lines, with structured finance and fixed income contributing positively.

Guidance

• Expect several quarters for increased borrower activity at PlainsCapital Bank to materialize into funded loans.
• Anticipate net interest margin to drift lower with expected rate cuts, as deposit rate reductions are likely to lag loan repricing.
• Full year average total loans expected to decline 0-2% excluding mortgage warehouse lending and retained mortgages from PrimeLending.

Risks

• Uncertainties in interest rates, inflation, GDP growth, and unemployment could lead to negative credit migration.
• Intense competition for deposits may continue.
• Mortgage banking faces challenges from higher rates, home affordability issues, limited housing supply, and overcapacity in mortgage originators.

Question and Answer

• Q: On Structured Finance, whether Down Payment Assistance programs have more legs?

A: States' budgetary concerns make them episodic, but some states have consistent support, though it's in the states' control.

• Q: Fixed income fees trend in Q4?

A: Lower rates and upward sloping yield curve are net beneficial, expect improvement in fixed income services.

• Q: Mortgage expenses and hires?

A: Mortgage expenses likely to remain stable, may tick up in the first half of 2025, and the bank is recruiting client-facing loan originators and producers.

• Q: Margin pressure outlook?

A: Continued modest margin pressure in the next couple of quarters before stabilization as deposit rate reductions lag loan repricing.

• Q: Loan yields and deposit costs?

A: Loan yields down due to borrower expectations of rate cuts and Fed reduction; deposit costs peaked and expected to decline with rate cuts, targeting a 50%-55% interest bearing deposit beta.

• Q: NPL movement and credit outlook?

A: NPLs declined due to paydowns, but cautious on credit with higher rates and inflation potentially causing negative migration.

• Q: Overnight cash balances and loan growth?

A: Target operating range for cash balances is $300M-$750M, and loan growth expected in commercial real estate with a cautious customer base evaluating the economic and political environment.