Hilltop Holdings Inc. (NYSE:HTH) Q2 2022 Earnings Conference Call July 22, 2022 9:00 AM ET
Company Participants
Erik Yohe – Executive Vice President
Jeremy Ford – President and Chief Executive Officer
Will Furr – Chief Financial Officer
Conference Call Participants
Brady Gailey – KBW
Michael Rose – Raymond James
Brad Milsaps – Piper Sandler
Matt Olney – Stephens
Operator
Good morning and welcome to today’s Hilltop Holdings Second Quarter 2022 Earnings Conference Call. My name is Candice, and I will be your moderator for today’s call. [Operator Instructions]
I would now like to pass the floor over to our host, Erik Yohe, Executive Vice President. You may now begin your presentation.
Erik Yohe
Great. Thank you, Candice. Before we get started, please note that certain statements during today’s presentation that are not statements of historical fact, including statements concerning such items as our outlook, business strategy, future plans, financial condition, allowance for credit losses, the impact and potential impacts of COVID-19 or disruptions in the global or national supply chains, stock repurchases and dividends and impacts of interest rate changes, as well as such other items referenced in the preface of our presentation are forward-looking statements.
These statements are based on management’s current expectations concerning future events that, by their nature, are subject to risks and uncertainties. Our actual results, capital, liquidity, and financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our presentation and those included in our most recent annual and quarterly reports filed with the SEC.
Please note that the information presented is preliminary and based upon data available at this time. Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.
Additionally, this presentation includes certain non-GAAP measures, including tangible common equity and tangible book value per share. A reconciliation of these measures to the nearest GAAP measure may be found in the appendix to this presentation, which is posted on our website at ir.hilltop-holdings.com.
With that, I will now turn the presentation over to President and CEO, Jeremy Ford.
Jeremy Ford
Thank you, Erik, and good morning. For the second quarter, Hilltop reported net income of $33 million or $0.45 per diluted share. Results include non-recurring after-tax expenses of $3.5 million related to the tender offer executed in May. Consolidated return on average assets for the period was 0.8% and return on average equity was 5.8%.
PlainsCapital Bank continues to prudently grow while maintaining solid profitability, generating $51 million of pretax income with a return on average assets of 1.09% and an efficiency ratio of 50%. We are encouraged by the growth in the bank loan portfolio, where average loans were up $146 million in the quarter or 8% annualized from both core commercial loans and retained mortgage balances.
Our bankers have steadily built the pipeline of in progress and approved loans each quarter, and their prospect list is at an elevated level. The bank’s loan growth remains centered in commercial real estate across all of our markets with outside strength in Dallas, Fort Worth, and Austin. We also expect additional growth in Houston given several recent hires in that market.
Importantly, we remain committed to our underwriting standards and credit approval process. This is reflected in our prudent loan growth and strong credit quality trends. This past quarter, Criticized Loans declined to 2.5% of total bank loans, which is a decrease from 2.8% in Q1 2022 and 4.8% in Q2 2021. Additionally, non-performing loans declined by $9 million or 19% from Q1 2022 and 33 million or 48% from Q2 2021.
Total average deposits decreased by $435 million or 3% quarter-over-quarter. The reduction in deposit balances was driven by clients moving funds into higher yielding opportunities and reactions to the sharp rise in rates, as well as us utilizing internal Hilltop Holdings deposits for the repurchase of shares.
Compared to prior year, average deposits are still higher by $350 million or 3%, largely due to growth from existing customers. The bank’s loan to deposit ratio remains very conservative at 63%, which provides ample liquidity for our company and Will is going to speak about later in the presentation.
Moving to PrimeLending. After almost two years of historically low mortgage rates, mortgage rates have increased by approximately 250 basis points since last December with just over half of that increase occurring in the second quarter. As a result, mortgage refinance volume has fallen off at a rapid pace.
Additionally, record low home inventory and affordability challenges resulting from rising home prices and higher interest rates have negatively impacted the purchase mortgage market. As expected, these trends have had an adverse impact on both loan origination volume and gain on sale margins.
PrimeLending origination volume has declined by 35% from prior year with refinancing volume declining from 32% to 12% of total volume. PrimeLending gain on sale of loans sold to third parties declined by 116 basis points from prior year and 61 basis points from prior quarter. Partially offsetting these negative trends were decreases in variable compensation and lower fixed expenses.
PrimeLending’s management team has been vigilant in this environment and taken actions to adapt by reducing back office and support headcount by 20% and reducing other expenses such as business development and professional fees and occupancy costs.
During the quarter, Hilltop Securities generated $9.1 million of pretax income on net revenue of $100 million for a pretax margin of 9%. This was an improved quarter for the business with structured finance, fixed income services, and wealth management all performing better than prior year. While TBA Lock Volumes declined 62% from prior year, structured finance revenues improved from favorable pipeline valuation on lower market volatility.
Fixed income services revenues increased 2%, compared to Q2 2021 as trading activity from municipals and better performance in mortgage products more than offset lower sales related revenues. Wealth management revenues improved 3% compared to Q2 2021 as revenues from sweep balances increased due to Fed funds rate increases.
Hilltop Securities continues to focus on growing its retail production and adding quality advisors and expects sweep revenues to continue to grow with further rate hikes. While we feel positive about the momentum of Hilltop Securities, we do believe the trading environment remains volatile, and therefore expect to maintain lower levels of trading inventory until the market improves.
Moving to Page 4. During the quarter, Hilltop returned $455 million of capital to shareholders through a tender offer and dividend. The Q2 2022 tender offer was a significant action for us in repurchasing approximately 19% of the company. Over the past 18 months, we have repurchased approximately 29% of outstanding shares for an average price of 1.09x tangible book value.
Even with these actions, we remain very well capitalized and have more excess capital than when we entered the COVID-19 pandemic. Tangible book value per share increased by 1% from Q2 2021 to $27.08 as both the tender offer and a decrease in AOCI had negative impacts that were offset by retained earnings.
In summary, the first half of the year has been challenging for our trading and mortgage centric businesses. So, the strength of our bank and diversity of our business lines has been key to delivering strong profitability and demonstrate the durability of our franchise.
We do anticipate further interest rate increases in the near term, ongoing market volatility, and inflationary pressures that will have varying impacts to our businesses. I am confident in our ability to navigate this changing economic environment and emerge a stronger company.
With that, I will now turn the presentation over to Will to discuss the financials.
Will Furr
Thank you, Jeremy. I’ll start on Page 5. As Jeremy discussed for the second quarter of 2022, Hilltop reported consolidated income attributable to common stockholders $33 million [equating to] [ph] $0.45 per diluted share. Turning to Page 6. During the second quarter, we continue to experience improvements across the loan portfolio as NPLs declined and charge-offs remain low.
The improvements in the portfolio positively impacted the allowance for credit losses by $10.5 million, but were more than offset by deterioration in the U.S. economic outlook since the last quarter as provided in the Moody’s June S7 scenario. Cumulative changes to the economic outlook resulted in a build in the ACL of $17 million in the quarter.
As of June 30, the allowance for credit losses was $95 million, yielding an ACL to total loans HFI coverage ratio of 1.2%. Additionally, excluding mortgage warehouse, broker dealer, and PPP loans, the ACL to total bank loan HFI ratio equates to 1.33%. Of note, we continue to believe that allowance for credit losses could be volatile and that changes in the allowance will be driven by net loan growth in the portfolio, credit migration trends, and changes to the macroeconomic outlook over time.
Further, certain industry provided economic forecasts are beginning to reflect an increased likelihood of economic recession in future periods, some starting as early as fourth quarter of 2022. We will continue to monitor the current environment, as well as a broad set of economic forecasts during the third quarter to determine what impacts in the updated outlook may have on the allowance for credit losses in future periods.
Turning to Page 7. Net interest income in the second quarter equated to $112 million, including $1.3 million of PPP fees and interest, $3 million of purchase accounting accretion. Net interest margin expanded by 39 basis points versus the first quarter of 2022 to 275 basis points, driven primarily by declines in excess cash levels and higher yields on both loans held for investment and loans held for sale.
We continue to rigorously manage interest bearing deposit costs in the face of increasing competition and customer expectations for higher rates. During the second quarter, new commercial loan originations, including credit renewals and an average book yield of 4.48%, which moved higher by 55 basis points versus the first quarter levels. In addition, we retained $104 million of residential mortgages during the quarter yielding an average interest rate of 4.35%.
Moving to Page 8. In the chart in the upper left, we highlight the asset sensitivity of Hilltop, assuming parallel and instantaneous rate shocks, which represents an asset sensitive position of approximately 8% in the up 100 basis point scenario. As we evaluate asset sensitivity and interest rate risk, we assess a number of potential scenarios.
Of note, if we shift the analysis from an instantaneous parallel shift, the gradual increase over the course of next 12 months, the up 100 basis point asset sensitivity falls to 4%. Impacting future asset sensitivity will be our loans currently at or below their floor levels. As of June 30, Hilltop had approximately $960 million of loans that remained at their contractual floor levels. Of these loans 366 million will reset above their floor levels over the next 12 months.
In the graph on the bottom right of the page, we highlight our deposit pricing approach to the last meaningful rising rate cycle. Throughout that cycle, we maintained an approximate 50% yield beta on interest bearing deposits. As such, our current modeling and outlook continues to reflect that Hilltop’s through the cycle deposit beta will be approximately 50% once this cycle concludes.
Lastly, for 2022, we expect that the impact of PPP related fees and interest, which were approximately $22 million in 2021, and purchase loan accretion, which was approximately $19 million, a decline by combined $25 million to $30 million versus the 2021 levels.
I’m moving to Page 9. Total non-interest income for the second quarter of 2022 equated to $139.9 million. Second quarter mortgage related income and fees decreased by $102 million versus the second quarter of 2021, driven by the ever evolving environment in the mortgage banking, which has moved quickly to being purchased focused. Versus the prior year quarter, purchased mortgage volume decreased by 677 million or 17% and refinanced volumes declined much more substantially increasing by $1.4 billion or 75%.
During the second quarter, reported gain on sale margins declined sharply to 253 basis points, down 111 basis points versus the same period in the prior year. Margins were negatively impacted by pricing reductions across the markets, as well as customer preference to pay more in origination fees, the rate buydowns versus paying the prevailing interest rate in the market.
We expect full-year average margins to remain under substantial pressure during 2022 as mortgage volumes normalized from historically high levels seen over the last two years and the competition for that lower volume drops higher margin. Currently, we expect that full year average gain on sale margins for loans sold to third parties will average between 250 basis points and 290 basis points contingent on market conditions.
The change in other income principally reflects the impact of improved results in structured finance, which benefited from lower market volatility during the second quarter. It remains important to recognize that both fixed income services and structured finance businesses can be volatile from period-to-period as they are impacted by interest rates, overall market liquidity, volatility and production trends.
Turning to Page 10. Non-interest expenses decreased from the same period in the prior year by $45 million to $299 million. The decline in expenses versus the prior year was driven by decreases in variable compensation of approximately $38 million, partly driven by PrimeLending, which was linked to substantially lower fee revenue generation in the quarter, compared to the prior year period.
Additionally, non-compensation variable expenses, particularly mortgage production related expenses declined as volumes declined versus the prior year. Including our second quarter expenses, as Jeremy mentioned earlier, HTH incurred $4.4 million of transaction related expenses related to the closing of the tender transaction. We do not expect any further costs related to this transaction in subsequent quarters.
Looking forward into the last half of 2022, we expect that inflation will continue to impact compensation, occupancy, and software expenses resulting in elevated fixed costs within the businesses, compared to prior periods. To help mitigate some of these headwinds, we remain focused on continuous improvement leveraging the investments we’ve made over the last few years to aggressively manage increased productivity across our front, middle, and back offices.
While these inflationary pressures do exist, we are continuing to further streamline our businesses and accelerate the adoption of our digital capabilities to support client acquisition and overall business productivity.
Turning to Page 11. Average HFI loans equated to 7.8 billion in the second quarter, increasing by approximately $285 million from the prior year levels. During the second quarter, commercial lending, in particular, commercial real estate was solid as [both] [ph] closed production and our forward pipelines remain robust.
Our commercial loan growth rates have improved over the last few quarters that we expect that the full-year commercial loan growth during 2022 will be in the 2% to 5% range as competition remains very intense for newly funded loans. Further, given our current liquidity position, we expect to continue to retain one to four mortgages originated at PrimeLending at a pace of between $25 million and $75 million per month throughout 2022.
Mortgage marketplace has shifted towards adjustable rate products, which we prefer holding versus longer duration fixed rate mortgages that made up the preponderance of loans retained in prior periods.
Turning to Page 12, overall credit quality remained solid. In the graph, in the upper right, we show the ongoing progress made in reducing NPAs as overall credit quality continues to improve across the portfolio. As is shown in the graph on the bottom right of the page, the allowance for credit loss coverage at the bank into the second quarter of 2022 at 1.27%, including both the mortgage warehouse lending, as well as PPP loans.
Moving to Page 13. Second quarter average total deposits were approximately $12.3 billion and it decreased by approximately $288 million or 3% versus the first quarter of 2022. Given the pace of change of interest rates, interest bearing deposit yields have begun to move higher increasing by 7 basis points versus the first quarter of 2022.
Given the expectation of additional rate changes from the Federal Reserve, we do expect to see deposit costs continue to rise in 2022. While deposit levels remain elevated, it should be noted that we remain focused on growing our client base and deepening wallet share through our treasury products and services. These efforts have been successful and we expect they will continue to accelerate into the second half of 2022.
Moving to Page 14. Given the challenges during the first half of 2022, we are updating our 2022 outlook to reflect current market conditions, expectations for future performance, and actions will be taken to support profitable growth over the coming quarters.
It should be noted that we expect ongoing volatility in the capital markets and the overall economy and this volatility could materially impact our results and change our expectations in the future. As such, we will provide updated outlook where appropriate during our quarterly calls.
Operator, that concludes our prepared comments and we’ll turn the call back to you for the Q&A section of the call.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Brady Gailey of KBW. Your line is now open. Please go ahead.
Brady Gailey
Hey, thanks. Good morning, guys.
Jeremy Ford
Good morning.
Brady Gailey
I wanted to start just with mortgage origination. It was great to see that on a linked-quarter basis stayed pretty stable if not on percentage, but that 3.8 billion, what was the monthly progression? Was that fairly consistent over the months of the second quarter and any color on how that’s trended in July?
Will Furr
Brady, it’s Will. I think it was reasonably consistent through the period of the quarter. We didn’t have a significantly high month or a significantly low month. And we’re continuing to see, I’d say, depressed levels on a seasonal basis to reflect what we define here as a pretty challenging mortgage market that is almost expressly purchase in the current environment.
Brady Gailey
Okay. And was there any sort of MSR write-off or MSR benefit that Hilltop realized in the second quarter?
Will Furr
Yes. In the quarter, we always evaluate the overall value of our MSR, and during the period, we had net MSR valuation adjustments of approximately $9 million.
Brady Gailey
Okay. So, a $9 million write-up of MSR in 2Q [rate] [ph]. All right. And then finally on the just buybacks from you guys, obviously, we’re very active with the tender offer in the second quarter, but how do you think about buybacks going forward? Given the move that you’ll add in 2Q, should we think about kind of no buybacks going forward or do you think they’ll still be active where it makes sense?
Jeremy Ford
As we said, we’ve exhausted our authorization with that tender offer. So, we don’t have any authorization that’s currently outstanding and we’ll obviously stay in tune to that if we want to improve another authorization.
Brady Gailey
Okay. And then just lastly for me, is there any additional opportunity to cut mortgage expenses to help increase the profitability of that segment just given kind of the headwinds there?
Will Furr
I think from a mortgage perspective, obviously, we’re adjusting quickly to a challenging environment. The team has worked. As Jeremy mentioned in his comments, diligently over the first six months of the year to right size the business and allow us to maintain profitability through the first half. The team continues to focus on a series of items driving toward our productivity targets, as well as our staffing targets to ensure we continue to drive toward profitability, but again, the second half, we do expect to be challenging in that regard.
Jeremy Ford
Yes. And I think a lot of the cost there is just going to be variable to the volume. And then on the fixed cost side as Will said that they’ve really been vigilant about really managing the franchise not cutting to the bone, but having really managing it to the volume. And at the end of the day, we want to emerge from this, a leader in the business. So, we’re out there recruiting and still trying to make investments in the business that will exit this cycle in a better place.
Brady Gailey
Okay. Alright, great. Thanks for the color guys.
Will Furr
Thank you.
Operator
Thank you. Our next question comes from the line of Michael Rose of Raymond James. Your line is now open. Please go ahead.
Michael Rose
Hey, good morning, guys. Thanks for taking my questions. Hey, well, the other income was up fairly substantially. I know that bounces around from quarter-to-quarter, but can you just remind us what’s in there? And then maybe what comprise the large sequential increase? And then maybe if you can to the extent that you can, what’s the outlook for the next couple of quarters just based on what’s in there? Thanks.
Will Furr
So, thanks for the question. I think other income as we’ve tried to note is – the preponderance of that revenue is generated in our structured finance business, as well as our fixed income services business at Hilltop Securities. And it is volatile. We have seen as we’ve noted pipeline marks in the past that were negative, pipeline marks that are positive kind of period-over-period. We continue to – you’ll continue to see that just nature of the business, but also mark to markets in our trading books as well.
So, it will be a volatile. The improvement was as Jeremy noted in his comments, lower volatility in the quarter and a more stable rate environment, as well as kind of improved demand for some of our products. Really drove the improvement linked quarter, but on a go forward basis, that will be volatile as it relates to overall markets, volatility and rates in particular, as well as overall demand in the structured finance business.
Obviously, we’re showing here the production level has fallen pretty materially. Again, that’s a focus of that business is mortgage, it’s a mortgage centric business. So, we do expect again volatility to continue and that’s why we kind of highlight that in all of our comments.
Michael Rose
Okay, helpful. And then maybe just back to the mortgage outlook. You reduced the outlook for originations for the year totally makes sense, but you’re off to a pretty good start, so it implies a decent decline in the back half of the year. If I just take what the NBA forecast is kind of spitting out currently for this year by down 41%, what would cause you to be anywhere close to the upper end of that limit around 16 billion? Because if I just plug in the NBA’s forecast, it would imply something closer to [13, 13.5] [ph]. Thanks.
Will Furr
I think we’ve got to provide a range. The market has been volatile. We are not articulating that we’ve got a concrete view of where the market goes from here, but we are starting a range of what we think to be kind of plausible outcomes. And again, as we have historically, if you take our guidance, you just kind of take the midpoint that’s a reasonable spot to evaluate from our perspective.
Michael Rose
Alright, fair point. And then maybe just one more for me. Just housekeeping, it looks like PAA last year was around $19 million you’ve got it down 50% to I think 80% now, so it looks like it will be de minimis from here. Can you just remind us how much PAA is left to be recognized? Thanks.
Will Furr
We’ve got just over $12 million to $15 million.
Michael Rose
You said 15?
Will Furr
12 to 15. We will continue to trend down on a quarterly basis.
Michael Rose
Got it. All right. Thanks for taking my questions.
Will Furr
Thank you.
Operator
Thank you. Our next question comes from the line of Brad Milsaps of Piper Sandler. Your line is now open. Please go ahead.
Brad Milsaps
Hey, good morning. Good morning. Maybe well, I wanted to start with expenses. I think your guidance is now down for either a 1% decline or 3% growth in fixed cost. If my math is right, it looks like year to date your fixed costs are down about 4%, I mean, I’ll be comparing apples-to-apples, [because] [ph] that would imply – is your guidance a pretty big step-up in fixed rate expenses in the back half? Can you just maybe flush that out a little bit more, it just seems like it would just be a really big expense build to kind of get anywhere near the guidance?
Will Furr
Yes. I think what we’re seeing is ongoing inflation in our compensation related costs. In particular, our retail associates, operations associates, and the like. And so, we’re monitoring and managing that, but we are continuing to see it and expect to continue to see it throughout. We also have step-ups that we model through from a technology perspective in our overall technology operating cost and then we also have step-ups in our occupancy spend.
So again, we’ve modeled it through. Again, we are doing a lot of work every day and the team is doing a lot of work every day to try to evaluate opportunities to moderate cost, as well as align our cost base to the revenue trends as we sit here today. But again, I think – we think our guidance reflects our current bottoms up buildup for our expense outlook.
Brad Milsaps
Okay, great. And then you guys are still sitting on a fair amount of cash. Can you just kind of talk through your thinking around deployment, whether that’s additional bonds. Obviously, you’ve given guidance around loan growth, but just kind of curious how you’re thinking about the liquidity on the balance sheet?
Will Furr
Yes. So, we continue to maintain an above average cash level. What I noted in my comments was, we are intending to repurchase or purchase $25 million to $75 million of mortgage loans on a monthly basis from PrimeLending. We do expect that the securities portfolio will continue to modestly grow as we have in a very kind of moderate pace through the end of the year. And then we also, as we’ve guided here, we do expect deposits could continue to kind of moderate and run down over time as some of those deposits seek other investment alternatives.
So from – as we look out, we’ve got commercial loan growth, which is our primary consumer. We’ve got the ancillary retention of one to four mortgages that we continue to evaluate on a monthly and quarterly basis to consume liquidity in a targeted way. We’re also growing our investment portfolio again in a very thoughtful and modest way, but consistent with what you’ve seen over the last 12 months to 18 months.
Brad Milsaps
Okay. And then maybe just final one for me, kind of bigger picture. You guys have unique insight into the purchase mortgage market given your presence there across the country. I think most of us use the NBA forecast or some form thereof to kind of forecast for you guys. It actually is showing an increase in purchase activity in 2023, I know you guys don’t – won’t give guidance for us then, but just kind of curious based on what you’re seeing across the country talks with your lenders, would you agree or disagree with that, kind of given where rates have moved to? Just kind of curious given kind of the unique insight you guys have to, you know the purchase market across the U.S?
Jeremy Ford
I think if you as our leadership at Prime, I think that they’d be cautious about that, and they feel like there’s a kind of a resetting in the housing market that home prices have appreciated, some 20% and you’re starting to see some indications of cooling whether it stays on market or sellers reducing their prices. So, I don’t know what that means for exactly for the trajectory, but we think that that’s a 6 month to 12 month period of, kind of resetting the housing market and shifting from being really a seller’s market to more of a buyer’s market.
Brad Milsaps
Great. Thank you, guys.
Operator
Thank you. Our next question comes from the line of Matt Olney of Stephens. Your line is now open. Please go ahead.
Matt Olney
Hey, good morning. I’ll stick with the mortgage discussion here. It looked like Prime was profitable in 2Q even with the pressure on the margins, but looking at that guidance, obviously, we’re calling for lower volumes and lower [on some] [ph] margins from here. When I put that in the model, it looks like the mortgage segment may not be profitable in 3Q or 4Q. I just want to make sure I’m interpreting the guidance accurately with that.
Will Furr
Matt, a couple of things to note. So, PrimeLending, we did have pretax profit in the period as we reported here. As noted earlier on the call here, we had just over $9 million of MSR favorable adjustments in the period. So that gives you a sense of the balance of the origination segment. The other thing I would note here is, we are – again, the team continues to work toward managing expenses and driving productivity and evaluating the business as the market continues to evolve and we’re working through that process.
We would not expect there to be a significant profit and PrimeLending, but the team is diligently focused on being profitable in the second half of the year. But again, the headwinds are significant and the challenges are present.
Jeremy Ford
Yes. And I’d just add to that. They are fighting hard to remain profitable and I think that they’re probably just some seasonal strength in the third quarter. The fourth quarter for the mortgage business is usually breakeven nevertheless. So that’s just something to keep in mind.
Matt Olney
Okay, got it. Thank you for that. And then I also wanted to just flush out the deposit guidance, little confused, I think you talk about the average deposit should decline this year between 3% and 7% using the average balances, it looks like that the deposit balances are still relatively flat the first six months of the year, so it implies that the deposit balances could fall pretty hard at the back half of the year? Just want to make sure I’m interpreting that right.
Will Furr
Well, the way we’re looking at it currently is the overall deposits are down about $1 billion on an ending basis, a little over $1 billion on an ending basis from [12/31 to 6/30] [ph], again, as Jeremy mentioned in his note, $442 million of that is attributable to the tender. We’ve also seen some public finance flows, as well as we’ve returned some broker deposits that we otherwise had.
So, about half of that is explainable and the other half is more customer deposits, which puts us from a decline perspective in that 4% to 5% range, which is exactly kind of where we’re guiding.
We expect that’s likely to continue principally because our liquidity position, our overall relationship base, but we’re not going to chase some of the outsized, I’d say deposit yields are being offered in the marketplace by some of our competitors that we’re going to be prudent and we’re going to continue to do the things we think to position us for long-term success in that regard. But we do recognize that some of our competitors are offering higher rates. And again, we’re going to be diligent about not chasing that to the best of our ability.
Jeremy Ford
And as I mentioned, our loan to deposit ratio right now is in the low 60s, so we don’t really need to.
Matt Olney
Okay. Appreciate that. And then just lastly, I think you mentioned sweep revenue, you made some comments on that, I didn’t get the details, but sweep revenues have improved. I think you recognized more in the second quarter. Are we now at normal levels? Are we going to see more of the benefits in the third quarter?
Jeremy Ford
We are not at normal levels yet because this will – and let me jump in, Will, you [dragged me] [ph], but we’re starting to see that – we didn’t really see the impact in the first quarter. We saw the impact here. We’ve got 5.5 million and we should trend up if the Fed continues to raise to that [3, 3.25] [ph] at year-end to be on about a $10 million a quarter level of sweep revenue.
Matt Olney
I’m sorry. I was just going to ask about the $10 million per quarter versus the 5.5 in 2Q. Am I interpreting that right?
Jeremy Ford
Yes. And up from little under 2 million in Q1.
Matt Olney
Got it. Okay.
Will Furr
It is the way to think about these revenues as they’re going to track very similar to kind of deposit cost except on an [inverse basis] [ph]. So as rates go higher, will pass through a portion of that to the client and we’ll retain a portion of that, and that’s what drives these [fees] [ph] higher. So, a lot of what Jeremy’s – that outlook Jeremy provided there is contingent on the Fed moving again to that 300 to 325 basis point rate, which he said. But I just want to make sure we’re clear, it is dependent on rates continuing to move higher.
Matt Olney
Got it. Okay, guys, thank you.
Jeremy Ford
Thank you.
Will Furr
Thank you.
Operator
Thank you. Ladies and gentlemen, that concludes today’s Hilltop’s earnings conference call. Thank you for your participation. You may now disconnect your lines.
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