Hilltop Holdings Inc. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Full Year 2024 Review: The Fed cut rates three times in 2024, totaling 100 basis points reduction. Hilltop produced an increase in consolidated pretax income. PlainsCapital Bank saw growth in core deposits, PrimeLending improved operational efficiency, and HilltopSecurities had strong results.
• Fourth Quarter 2024: Hilltop reported net income of approximately $36 million or $0.55 per diluted share. PlainsCapital Bank generated $51 million of pretax income, with average deposits increasing by nearly $600 million. PrimeLending had a pretax loss, while HilltopSecurities delivered strong results. Hilltop maintained strong capital levels with a common equity Tier 1 capital ratio of 21% and tangible book value per share increased.
• Credit and Provisions: PlainsCapital Bank realized a reversal of $5.7 million provision for credit losses due to positive loan portfolio migration. There was a negative valuation adjustment of $5 million on an owned office facility and tax benefits reduced the GAAP effective tax rate in the quarter.

Segment Performance

• PlainsCapital Bank: In the fourth quarter, generated $51 million of pretax income on $13.3 billion of average assets, with a return on average assets of 1.24%. Average loans declined ~1% primarily due to a modest decrease in average core loan balances. Average deposit balances increased by nearly $600 million during the quarter, driven by growth in both core interest bearing and non-interest bearing deposits. Realized a reversal of provision for credit losses of $5.7 million. Net interest margin compressed by 7 basis points to 2.98%.
• PrimeLending: Reported a pretax loss of $9.9 million during the quarter. Origination volume increased by $438 million compared to the fourth quarter of 2023, but mortgage origination fees and other related income decreased by five basis points quarter-over-quarter.
• HilltopSecurities: Generated pretax income of $20 million on net revenues of $125 million, with a pretax margin of 16%. Public Finance Services saw a 32% increase in net revenues, Structured Finance net revenues increased by $9 million year-over-year, Wealth Management net revenues increased by $2 million, while fixed income net revenues declined by $10 million compared to the fourth quarter of 2023.

Guidance

• 2025 Outlook: Full year bank loan growth expected to be between 2% and 5%, including retention of PrimeLending mortgage loans ($10 million to $30 million per month). Expect interest bearing deposit costs to move lower in the coming quarter and then stabilize. Structured Finance revenues are affected by state down payment assistance programs.
• Share Repurchase: Hilltop has an authorized $100 million share repurchase program, with plans to be active during open windows throughout the year.

Risks

• Interest Rate Volatility: Impact on net interest margin and loan production as interest rates fluctuate.
• Credit Risks: Persistence of higher interest rates and real estate utilization rates in commercial real estate could negatively impact the portfolio.
• External Factors: State down payment assistance programs affecting Structured Finance revenues, introducing uncertainty.

Question and Answer

Q: About the merchant banking gain and share repurchase plans.

A: Priorities haven't changed. Hilltop has an authorization for a $100 million share repurchase program, to be active during open windows, and is evaluating being active with the repurchase this year.

Q: On loan growth outlook and asset sensitivity.

A: Loan growth range is 2%-5% due to pipeline build and retention of mortgage loans. The longer term target for asset sensitivity is 2% to 4%, with plans to reinvest in the securities portfolio and increase retention of hybrid mortgages.

Q: On Structured Finance revenues, asset sensitivity, and provision volatility.

A: Structured Finance revenues are affected by state down payment assistance programs. Asset sensitivity target is 2%-4% with reinvestment of the securities portfolio. Provision volatility is due to economic outlook variability and activity in the auto note portfolio.

Q: On securities portfolio cash flows, deposit trends, and credit criticized.

A: Securities portfolio cash flows are estimated to be between $250 million and $300 million full year. Deposit growth was affected by episodic events, and credit criticized improved due to specific upgrades in commercial real estate.