Hilltop Holdings (HTH) Delivers Solid Q2 Results Amid Challenging Environment

Published on September 24, 2024 | Ticker: HTH

Hilltop Holdings Inc. (NYSE: HTH), a diversified financial services company, has reported its second quarter 2024 financial results, showcasing resilience in the face of a challenging macroeconomic landscape. The company's consolidated net income for the quarter stood at $20.3 million, or $0.31 per diluted share, compared to $18.1 million, or $0.28 per diluted share, in the same period last year. For the full year 2023, Hilltop reported net income of $109.6 million on revenues of $1.13 billion, with operating cash flow of $443.0 million and free cash flow of $434.5 million.

The company's performance in the second quarter was driven by a mix of factors, including a decline in net interest income, growth in non-interest revenue, and a reduction in non-interest expenses. Hilltop's management team has navigated the current economic headwinds with prudence, focusing on cost optimization and strategic initiatives to position the company for long-term success.

Business Overview

Hilltop Holdings operates through three primary business segments: Banking, Broker-Dealer, and Mortgage Origination. The Banking segment, which includes PlainsCapital Bank, is the company's largest contributor, generating $33 million in pre-tax income during the second quarter on $12.7 billion in assets. The Broker-Dealer segment, comprising Hilltop Securities and Momentum Independent Network, reported pre-tax income of $7 million on net revenues of $104 million. The Mortgage Origination segment, led by PrimeLending, posted positive pre-tax results, benefiting from higher origination volumes and improved gain-on-sale margins.

Financials

Hilltop's net interest income declined 12% year-over-year to $104 million in the second quarter, primarily due to higher yields on deposits and declining earning assets. However, the company's net interest margin improved sequentially by 5 basis points to 2.90%, driven by the return of higher-cost broker deposits. Management expects net interest margin levels to remain relatively stable, with the potential for modest improvements as the Federal Reserve potentially reduces interest rates later in the year.

Non-interest income for the quarter totaled $193.3 million, up 1.4% year-over-year, bolstered by growth in net gains from loan sales and higher investment and securities advisory fees and commissions. The company's non-interest expenses decreased by 3.9% to $256.5 million, reflecting cost-cutting measures implemented in the Mortgage Origination segment.

Loan Portfolio and Asset Quality

Hilltop's net loans held for investment stood at $8.1 billion as of June 30, 2024, up 1.3% sequentially. The company's provision for credit losses in the second quarter was $10.9 million, down 26.3% from the prior-year period. Non-performing assets, as a percentage of total assets, increased to 0.70% from 0.25% in the year-ago quarter, primarily due to the downgrade of two auto lending relationships to non-accrual status.

Capital and Liquidity

Hilltop maintains a strong capital position, with a common equity Tier 1 capital ratio of 19.45% as of June 30, 2024, up from 17.61% a year earlier. The company's tangible book value per share increased to $28.63 from $28.35 at the end of 2023. During the quarter, Hilltop returned $21 million to shareholders through $11 million in dividends and $10 million in share repurchases.

The company's liquidity position remains robust, with approximately $6.5 billion in available liquidity sources as of June 30, 2024. This includes $1.5 billion in Fed deposits, $1.5 billion in FHLB capacity, and $3.5 billion in investment portfolio liquidity. Hilltop does not plan to leverage the Federal Reserve's discount window as part of its internal liquidity modeling efforts.

Outlook

Looking ahead, Hilltop expects full-year 2024 average loans to remain consistent with 2023 levels, excluding mortgage warehouse lending and any retained mortgages from PrimeLending. The company anticipates net interest margin to remain relatively stable at current levels, with the potential for modest improvements as the Federal Reserve potentially reduces interest rates.

In the Mortgage Origination segment, Hilltop expects the next few quarters to remain challenging due to normal seasonal trends, as well as the ongoing impact of higher interest rates and limited housing supply. However, the company believes that cost-cutting measures implemented in this segment will continue to benefit profitability.

Risks and Challenges

Hilltop faces several risks and challenges in the current environment, including the potential for further credit quality deterioration, ongoing competition for deposits, and the continued impact of high interest rates on the Mortgage Origination segment. The company's management team remains vigilant in monitoring these risks and implementing strategies to mitigate their impact.

Conclusion

Hilltop Holdings has demonstrated its ability to navigate the complex macroeconomic landscape, delivering solid financial results in the second quarter of 2024. The company's diversified business model, prudent risk management, and focus on cost optimization have positioned it well to weather the current challenges and capitalize on future growth opportunities. Investors should closely monitor Hilltop's progress as it continues to execute its strategic initiatives and adapt to the evolving market conditions.

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