Hilltop Holdings(US:HTH)2023-10-23 20:31PART I — FINANCIAL INFORMATION Financial Statements The company's financial statements for September 30, 2023, show total assets of $16.4 billion, with Q3 net income at $39.3 million and year-to-date net income at $87.0 million, influenced by credit loss provisions and mortgage banking income Consolidated Balance Sheet Highlights (in thousands) | Account | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Assets | $16,396,858 | $16,259,282 | | Loans held for investment, net | $8,093,230 | $7,997,231 | | Total Deposits | $11,103,097 | $11,315,749 | | Total Liabilities | $14,289,996 | $14,195,753 | | Total Stockholders' Equity | $2,106,862 | $2,063,529 | Consolidated Statement of Operations Highlights (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $115,650 | $123,486 | $355,622 | $335,533 | | Provision for (reversal of) credit losses | $(40) | $(780) | $17,127 | $4,671 | | Total Noninterest Income | $196,849 | $206,975 | $549,994 | $662,676 | | Net Income | $39,311 | $33,254 | $87,017 | $92,716 | | Diluted EPS | $0.57 | $0.50 | $1.25 | $1.21 | Consolidated Cash Flow Highlights - Nine Months Ended (in thousands) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $179,910 | $1,235,811 | | Net cash provided by (used in) investing activities | $42,031 | $(695,808) | | Net cash used in financing activities | $(304,952) | $(1,697,661) | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's Q3 2023 performance, noting increased net income to $37.0 million driven by broker-dealer strength, while year-to-date net income decreased to $81.0 million due to lower mortgage income and higher credit loss provisions amidst a volatile economic environment - The company's operations have been volatile due to economic headwinds, including tight housing inventories, declining deposit balances, rapid increases in market interest rates, and a volatile economic forecast264 - In response to bank failures in early 2023 and increased competition for liquidity, the company increased interest-bearing deposit rates, accessed additional core deposits from its FDIC insured sweep program, and utilized brokered deposits to bolster its liquidity position266267 Income (Loss) Before Taxes by Segment (in thousands) | Segment | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Banking | $53,153 | $63,629 | $151,225 | $161,461 | | Broker-Dealer | $21,553 | $17,471 | $53,428 | $17,967 | | Mortgage Origination | $(8,240) | $(23,084) | $(46,853) | $(10,961) | - During the nine months ended September 30, 2023, the company repurchased 144,403 shares of common stock for $4.5 million under its $75.0 million stock repurchase program authorized through January 2024205260 Segment Results The Banking segment's pre-tax income decreased in Q3 2023 due to net interest income compression, while the Broker-Dealer segment saw a significant increase, and the Mortgage Origination segment's losses narrowed despite declining volume Segment Income (Loss) Before Taxes - Q3 2023 vs Q3 2022 (in thousands) | Segment | Q3 2023 | Q3 2022 | Variance | | :--- | :--- | :--- | :--- | | Banking | $53,153 | $63,629 | $(10,476) | | Broker-Dealer | $21,553 | $17,471 | $4,082 | | Mortgage Origination | $(8,240) | $(23,084) | $14,844 | Financial Condition As of September 30, 2023, total assets were $16.4 billion, with the securities portfolio decreasing to $2.9 billion and the loan portfolio growing modestly to $8.2 billion, accompanied by increased allowance for credit losses and slightly decreased deposits - The total securities portfolio decreased to $2.86 billion at September 30, 2023, from $3.29 billion at year-end 2022415 - Net unrealized losses on the available-for-sale portfolio were $150.1 million, and on the held-to-maturity portfolio were $121.7 million as of September 30, 2023415 Loan Portfolio Composition (in thousands) | Loan Type | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Commercial real estate | $3,285,899 | $3,245,873 | | Commercial and industrial | $1,662,737 | $1,639,980 | | Construction and land development | $1,088,701 | $980,896 | | 1-4 family residential | $1,783,259 | $1,767,099 | | Broker-dealer | $357,244 | $431,223 | | Total Loans Held for Investment | $8,204,052 | $8,092,673 | - The allowance for credit losses increased to $110.8 million at Q3 2023 from $95.4 million at year-end 2022, driven by a build related to loan portfolio changes and a deteriorating outlook for commercial real estate markets424444 Liquidity and Capital Resources The company maintains a strong liquidity and capital position, with holding company cash increasing to $198.9 million and the Bank having $7.3 billion in available liquidity, while regulatory capital ratios remain well above 'well capitalized' thresholds - At the holding company level, cash and cash equivalents increased to $198.9 million at September 30, 2023, from $172.5 million at year-end 2022486 Bank Segment Available Liquidity (in millions) | Source | September 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | FHLB capacity | $4,387 | $4,139 | | Investment portfolio (available) | $1,588 | $1,606 | | Fed deposits (excess) | $1,326 | $1,332 | | Total | $7,301 | $7,077 | Regulatory Capital Ratios (September 30, 2023) | Ratio | Hilltop | PlainsCapital | Minimum Requirement (incl. buffer) | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 | 18.60% | 15.31% | 7.0% | | Tier 1 Capital | 18.60% | 15.31% | 8.5% | | Total Capital | 21.54% | 16.45% | 10.5% | | Tier 1 Leverage | 11.92% | 10.62% | 4.0% | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate sensitivity, impacting net interest income across segments, with the banking segment being asset sensitive and the mortgage segment hedging its interest rate lock commitments and mortgage servicing rights - The company's primary market risk is sensitivity to changes in interest rates, which significantly impacts net interest income523524 Banking Segment - Estimated Impact of Interest Rate Changes (as of Sep 30, 2023) | Change in Rates (bps) | Change in Net Interest Income (12-month, Millions) | Change in Economic Value of Equity (Millions) | | :--- | :--- | :--- | | +200 | +$33.6 | +$132.8 | | +100 | +$18.1 | +$87.4 | | -100 | -$19.0 | -$144.7 | - The mortgage origination segment's principal market exposure is interest rate risk on its mortgage loans held for sale, IRLCs, and MSR portfolio, which it mitigates using forward commitments and other derivatives543544545 Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the third quarter - The Principal Executive Officer and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of the period553 - No changes in internal control over financial reporting occurred during the third fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls554 PART II — OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings, including a $13.0 million FINRA claim against Hilltop Securities and an ongoing investigative inquiry into PrimeLending's float down option - Hilltop Securities is defending a FINRA claim from WR Investments, LP, which alleges a $13.0 million loss related to the sale of subordinated bonds. Hilltop Securities believes the claims are without merit166 - PrimeLending received an investigative inquiry from the U.S. Attorney for the Western District of Virginia regarding its float down option and is cooperating with requests for information167 Risk Factors The company highlights material changes to its risk factors, including potential adverse effects from financial industry instability and increasing cybersecurity risks, exemplified by a recent data breach involving a third-party vendor - A new risk factor addresses the potential adverse effects from financial industry instability, such as the bank failures in early 2023, which could lead to deposit outflows, increased costs, and reputational risk559560 - The company disclosed a cybersecurity incident involving a third-party vendor's use of the MOVEit Transfer Application, which likely resulted in an unauthorized party obtaining data on substantially all of the Bank's customers, including social security and account numbers563 Unregistered Sales of Equity Securities and Use of Proceeds The company did not repurchase any common stock during Q3 2023, with $70.5 million remaining available under its stock repurchase program authorized through January 2024 - No shares of common stock were repurchased during the third quarter of 2023568 - As of September 30, 2023, $70.5 million remained available under the company's stock repurchase program, which is authorized through January 2024569 Other Information No directors or executive officers adopted, terminated, or modified Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the third quarter of 2023 - No directors or executive officers adopted, terminated, or modified a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the three months ended September 30, 2023570 Exhibits This section lists the exhibits filed with the Form 10-Q, including required certifications from the Principal Executive Officer and Principal Financial Officer, and XBRL data files