Hilltop Holdings(HTH) - 2023 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Hilltop reported net income of $37 million or $0.57 per diluted share for Q3 2023, with a return on average assets of 0.9% and return on average equity of 7.1% [14][30] - Net interest income decreased by $7.8 million or 6% year-over-year to $116 million, primarily due to higher yields on deposits [7][30] - The allowance for credit losses increased by $1.5 million to $110.8 million, resulting in an allowance for credit losses to total loans held for investment ratio of 1.35% [31][30] Business Line Data and Key Metrics Changes - PlainsCapital Bank generated $53 million of pre-tax income on $13.3 billion of assets, with a return on average assets of 1.2% [16] - Prime lending originated $2.2 billion in volume, a decline of 26% from the same period last year, with gain on sale margin decreasing from 218 basis points to 198 basis points year-over-year [22][23] - Hilltop Securities generated pre-tax income of $22 million on net revenues of $119 million, with improved margins due to higher contribution from higher margin businesses [25] Market Data and Key Metrics Changes - Total non-interest income for Q3 2023 was $197 million, with mortgage-related income and fees decreasing by $9 million year-over-year due to challenges in mortgage banking [37] - Purchase mortgage volumes decreased by $741 million or 26% year-over-year, while refinance volumes decreased by $159 million or 28% [38] - Average total deposits were approximately $11.2 billion, remaining stable, but interest-bearing deposit costs rose to 323 basis points, an increase of 39 basis points from the prior quarter [35][36] Company Strategy and Development Direction - The company is focused on managing margins, maintaining credit quality, and reducing expenses to navigate the challenging environment [19][24] - Strategic initiatives include optimizing operations, reevaluating staffing levels, and enhancing the sales force to improve profitability in the mortgage market [21][24] - The company aims to prioritize balance sheet strength and long-term stockholder value while adapting to market changes [28][48] Management's Comments on Operating Environment and Future Outlook - Management noted ongoing uncertainty regarding interest rates, inflation, and economic health, but expressed confidence in the company's resilience and adaptability [48] - The outlook reflects expectations of further declines in net interest income and net interest margin due to competitive pressures and rising deposit costs [8][73] - Management highlighted that while credit quality remains stable, they are closely monitoring potential risks in the commercial real estate sector [45][47] Other Important Information - Hilltop maintains a common equity Tier 1 capital ratio of 18.6%, with tangible book value per share increasing to $27.67 [27] - The company has approximately $7.3 billion in available liquidity sources as of September 30, 2023 [9] Q&A Session Summary Question: Insights on C&I contraction - The decline was primarily driven by a decrease in mortgage warehouse lending, which accounted for over $90 million of the contraction [55] Question: Expectations for Q4 performance in broker-dealer - Management is optimistic about the public finance business building throughout the year, expecting a solid fourth quarter [57] Question: Appetite for stock buybacks given current trading near tangible book value - Management indicated a cautious approach to buybacks in the current environment, focusing on capital deployment through M&A opportunities [60][63] Question: Increase in special mention loans - A few credits moved into special mention due to cash flow challenges, with management actively monitoring these clients [67] Question: Trends in non-interest bearing deposits - A consistent trend of decline in non-interest bearing deposits is expected as customers shift to interest-bearing products [70][71] Question: Future expectations for NII and NIM - Management expects both NII and NIM to continue trending lower, with NIM projected to be between 2.90% and 3% [73]