Hilltop Holdings(US:HTH)2023-07-21 15:40Financial Data and Key Metrics Changes - Hilltop reported net income of $18 million or $0.28 per diluted share for Q2 2023, with a return on average assets of 0.5% and return on average equity of 3.5% [14][29] - The allowance for credit losses increased by $12 million to $109 million, resulting in an allowance to total loans ratio of 1.31% as of June 30, 2023 [30][31] - Net interest income for the second quarter was $118 million, a year-over-year increase of $6 million or 6%, primarily due to higher yields on loans and securities [37][29] Business Line Data and Key Metrics Changes - The wealth management business saw revenue improvement due to higher short-term interest rates, despite weaker transactional production [8] - PrimeLending originated $2.5 million in volume, a decline of 36% from the same period last year, with only 6% of this volume being refinanced [11][9] - Hilltop Securities realized pretax income of $19 million on net revenues of $113 million, with a 13% increase in net revenues compared to the previous year [24] Market Data and Key Metrics Changes - Average loans at PlainsCapital Bank increased by $172 million in the quarter, approximately 9% annualized, but loan growth is expected to slow due to declining pipelines [16][17] - Total average deposits were approximately $11.3 billion, an increase of about $300 million or 3% from the previous quarter [43] - Non-interest income for Q2 2023 was $191 million, with mortgage-related income decreasing by $50 million due to challenges in the mortgage banking sector [47] Company Strategy and Development Direction - The company continues to prioritize balance sheet strength and capital preservation, focusing on long-term growth opportunities despite current macroeconomic challenges [15][27] - PrimeLending is resizing its business and reducing its expense base, including headcount reductions and branch consolidations, to adapt to the challenging mortgage market [22][23] - Hilltop maintains a competitive position in deposit pricing and plans to pass through future rate increases to clients [70][78] Management's Comments on Operating Environment and Future Outlook - Management expressed concerns about the macroeconomic environment, including inflation and interest rates, which could lead to further credit migration [52][59] - The company expects interest rates to remain elevated, and it will continue to adopt a conservative approach in its operations [27][29] - Management noted that while credit quality remains solid, ongoing cash flow challenges could impact clients and the portfolio [59][60] Other Important Information - Hilltop maintains strong capital levels with a common equity Tier 1 capital ratio of 17.6% and tangible book value per share increased to $27.45 [26] - The company has approximately $7 billion in available liquidity sources as of June 30, 2023, with a revision of cash targets to between $750 million and $1.5 billion [40][41] Q&A Session Summary Question: Interest-bearing deposit beta expectations - Management indicated that the marginal interest-bearing deposit beta expectations are for 75% to 100% on any additional federal fund increases, reflecting a competitive market [66][70] Question: Broker deposits rate and term - Broker deposits added during the quarter ranged from 5% to 510 basis points with terms of 90 to 180 days [71] Question: Outlook for broker-dealer business - Management noted strength in sweep revenues and expects a stronger second half due to investments in fixed income and public finance services [78] Question: Margin compression expectations - Management anticipates potential NIM decline of 7 to 10 basis points for each incremental 25 basis point increase in rates [84] Question: Reserve increase mechanics - The reserve increase was primarily driven by a deterioration in the macroeconomic outlook, with over half of the build related to macroeconomic factors [89] Question: Deposit cost commentary - Management stated that most rate increases occurred in April and May, driven by customer demand for higher yields [97] Question: Exposure in office portfolio - The office portfolio exposure is primarily in larger metro areas like Dallas and Austin, with a focus on mid and low-rise buildings [100][101] Question: Buyback outlook - Management indicated that buybacks are not compelling at the moment due to the macroeconomic environment, but would consider if valuations dip significantly [102] Question: Competitive environment for deposit pricing - Management noted that the competitive landscape has stabilized, with no significant irrational behaviors observed among competitors [108]