Hilltop Holdings Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing, not a standalone fourth-quarter report. Hilltop is a Texas-based financial holding company with banking, broker-dealer and mortgage origination segments. It sold its insurance subsidiary in 2020; that business is presented as discontinued operations.
Financial performance and position
| Metric | 2021 | 2020 |
|---|---|---|
| Net interest income | $423.0 million | $424.2 million |
| Noninterest income | $1,410.3 million | $1,690.5 million |
| Provision for (reversal of) credit losses | $(58.2) million | $96.5 million |
| Income from continuing operations before tax | $504.1 million | $564.4 million |
| Income attributable to Hilltop from continuing operations | $374.5 million | $409.4 million |
| Diluted EPS from continuing operations | $4.61 | $4.58 |
| Consolidated net interest margin | 2.57% | 2.85% |
| Operating cash flow | $765.6 million | $313.4 million |
| Total assets / deposits / stockholders’ equity at year-end | $18.7 billion / $12.8 billion / $2.5 billion | $16.9 billion / $11.2 billion / $2.4 billion |
Net income was $386.1 million, including $11.6 million attributable to noncontrolling interests. The 2020 comparison included $38.4 million of after-tax discontinued-operation income, including a gain on the sale of the insurance business. Return on average assets was 2.17% (2.88% in 2020); return on average stockholders’ equity was 15.38% (20.03%).
Year-end cash and due from banks was $2.8 billion; cash, cash equivalents and restricted cash totaled $3.0 billion. The Bank reported $8.4 billion of available liquidity and borrowing capacity. Consolidated borrowings included $859.4 million of short-term borrowings and $387.9 million of notes payable; the $67 million of junior subordinated debentures were fully redeemed in 2021. Hilltop reported $367.9 million of parent-company cash. The filing does not present a single consolidated free-cash-flow measure.
Regulatory capital remained strong: Hilltop’s total capital ratio was 23.75% and PlainsCapital’s was 16.77%; PlainsCapital was classified as well-capitalized. The allowance for credit losses was $91.4 million, or 1.16% of loans held for investment, versus $149.0 million, or 1.94%, a year earlier. Nonperforming assets fell to $54.0 million from $101.3 million.
Material changes versus 2020
- Income before tax from continuing operations declined 11%, despite diluted continuing-operations EPS increasing slightly to $4.61, supported in part by a lower weighted-average share count following repurchases.
- Noninterest income fell 17%, mainly due to lower mortgage production income and lower broker-dealer trading and structured-finance gains. Mortgage origination segment pretax income declined 42% to $235.5 million; funded volume was $22.7 billion versus $23.0 billion.
- Broker-dealer pretax income declined 62% to $43.7 million as trading and structured-finance revenues weakened; public finance and wealth-management activity partially offset the decline.
- Banking pretax income increased to $282.9 million from $103.5 million, primarily reflecting a $58.2 million credit-loss reversal in 2021 versus a $96.3 million provision in 2020. Banking net interest margin declined to 3.07% from 3.31%.
- Deposits increased by $1.6 billion and total assets by $1.7 billion. The available-for-sale securities portfolio recorded net unrealized losses of $18.1 million, compared with net unrealized gains of $26.3 million in 2020, reflecting higher market interest rates.
Outlook, risks and unusual items
Management provided no specific full-year 2022 earnings or revenue guidance. It described substantial uncertainty around pandemic effects and identified expected headwinds including tight housing inventory and mortgage volumes, a return toward normalized credit losses, potentially declining deposits, interest-rate changes, and inflation-related compensation, occupancy and software costs. Management expected inflationary pressures to raise certain fixed costs in 2022.
Key risks include credit deterioration, especially in real estate and Texas-concentrated lending; interest-rate and yield-curve changes; mortgage volume and margin compression; cybersecurity and technology execution; regulatory requirements; and the transition from LIBOR. The Bank’s energy loans held for investment totaled approximately $75 million, with $39 million of unfunded commitments. Active COVID-related payment deferrals were approximately $4 million at year-end, though previously modified loans remain under monitoring.
PrimeLending’s mortgage servicing rights (MSR) asset was $87.0 million, down from $143.7 million. Changes in rates and prepayment assumptions can materially affect its fair value and earnings. The mortgage segment’s indemnification reserve for loan-sale representations and warranties was $27.4 million, up from $21.5 million. PrimeLending also received an investigative inquiry from the U.S. Attorney for the Western District of Virginia concerning its float-down option and stated that it was cooperating.
Hilltop repurchased 3.6 million shares for $123.6 million and paid $39.0 million in common dividends during 2021. The board authorized a new repurchase program of up to $100 million through January 2023 and increased the quarterly dividend to $0.15 in January 2022. The 2021 results also included $6.5 million of pretax gains from observable transactions involving two merchant-bank equity investments. The auditor issued an unqualified opinion on the financial statements and internal controls; allowance estimation and MSR valuation were identified as critical audit matters.
Most important facts for investors to verify
- Whether the $58.2 million credit-loss reversal reflects sustainable improvement or a temporary release of pandemic-related reserves; review assumptions and downside sensitivity.
- Mortgage origination margins, purchase/refinance mix, volume trends and MSR valuation as interest rates and housing conditions change.
- Broker-dealer earnings exposure to trading conditions, interest rates and structured-finance demand.
- Deposit stability, the composition and cost of funding, and the use of broker-dealer sweep balances and short-term borrowings.
- Potential exposure from the float-down inquiry, loan-sale indemnification claims, and other litigation or regulatory matters.
- Capital and liquidity available after dividends and repurchases, and the conditions under which subsidiary dividends can be paid to Hilltop.