Hilltop Holdings Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Financial amounts below are in U.S. dollars; millions are used unless noted. Hilltop provides banking, broker-dealer and mortgage origination services. Its former insurance segment was sold in June 2020, so prior-year comparisons include discontinued-operation effects where indicated.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $105.1m | $101.9m | $318.7m | $316.8m |
| Noninterest income | $367.9m | $502.7m | $1,125.4m | $1,242.5m |
| Income before tax, continuing operations | $123.7m | $205.9m | $418.6m | $407.9m |
| Income attributable to Hilltop | $92.9m | $153.3m | $312.3m | $331.4m |
| Diluted EPS | $1.15 | $1.70 | $3.82 | $3.67 |
| Consolidated net interest margin | 2.53% | 2.56% | 2.61% | 2.90% |
- Q3 income attributable to Hilltop fell 39% year over year, as lower mortgage and broker-dealer revenue more than offset higher banking income and a credit-loss reversal. Q3 continuing-operations diluted EPS was $1.15 versus $1.69.
- Nine-month income attributable to Hilltop declined 6%; however, continuing-operations income attributable to Hilltop rose to $312.3m from $296.7m. The 2020 comparison included $34.7m of after-tax income from discontinued operations, including the insurance-sale gain.
- Q3 provision for credit losses was a $5.8m reversal, compared with a $0.6m reversal in 2020. The nine-month reversal was $39.6m, compared with a $100.0m provision in 2020, reflecting improved realized conditions, forecasts and credit metrics.
- Q3 noninterest income decreased 27% and noninterest expense decreased 11% year over year. Nine-month noninterest income decreased 9%, while expense increased 1%.
Segments and material changes
- Banking: Pre-tax income was $62.9m in Q3 and $214.5m for nine months, versus $50.3m and $44.2m, respectively, in 2020. Nine-month results benefited substantially from credit-loss reversals versus the prior-year allowance build. Banking net interest margin was 2.99% in Q3 and 3.16% for nine months, down from 3.03% and 3.28%.
- Broker-dealer: Pre-tax income was $17.4m in Q3 and $41.9m for nine months, down from $35.4m and $81.4m. Lower structured-finance and fixed-income trading revenue outweighed growth in public finance and wealth management.
- Mortgage origination: Pre-tax income was $62.2m in Q3 and $204.2m for nine months, down from $145.9m and $324.1m. Q3 originations declined 13% to $5.6bn, while nine-month originations increased 9% to $17.7bn. Lower loan-sale margins and fair-value/derivative results weighed on earnings; higher nine-month volume partly offset this.
Financial position, liquidity and capital
- At September 30, total assets were $18.0bn, up from $16.9bn at year-end 2020. Total deposits were $12.1bn, up from $11.2bn; loans held for investment, net, were $7.44bn versus $7.54bn. Loans held for sale were $2.11bn versus $2.79bn.
- Cash and due from banks was $2.46bn; cash, cash equivalents and restricted cash totaled $2.73bn. The latter includes $269.5m segregated for regulatory purposes and unavailable for general use. Hilltop parent-company cash and cash equivalents were $343.1m.
- Stockholders’ equity was $2.50bn. Allowance for credit losses on investment loans declined to $109.5m from $149.0m; nonperforming assets were $83.8m, or 0.47% of assets, versus $101.3m, or 0.60%, at year-end.
- Debt and borrowing balances included $747.0m of short-term borrowings and $395.8m of notes payable. PCC redeemed all $67.0m of junior subordinated debentures during Q3. Commercial paper outstanding was $367.9m, secured by $400.5m of securities.
- Banking liquidity sources listed totaled $8.17bn, including FHLB capacity, available investment securities and excess Federal Reserve deposits. Management targeted available banking liquidity of approximately $5bn–$6bn for the remainder of 2021. PlainsCapital was categorized as well capitalized; its common equity Tier 1 ratio was 15.40%, and Hilltop’s was 21.28%.
- Nine-month cash flow from operating activities was $873.6m, investing activities used $191.1m and financing activities provided $697.3m. Cash, cash equivalents and restricted cash increased $1.38bn, to $2.73bn.
Outlook, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management said the effects of COVID-19 on the remainder of 2021 and 2022 remained uncertain, citing vaccination effectiveness, stimulus, customer impacts and possible government measures.
- Mortgage results remain exposed to rates, loan demand, competitive pricing, home-inventory shortages and construction supply-chain constraints. Management anticipated a lower refinance share in Q4 2021 if mortgage rates remained relatively unchanged; this was not a firm forecast.
- Credit estimates depend on uncertain macroeconomic forecasts. Management’s downside-scenario sensitivity indicated an approximately $48m increase in modeled allowance, while an upside scenario indicated an approximately $10m decrease; these are scenario analyses, not guidance.
- Other identified risks include real-estate and energy exposure, interest-rate and LIBOR-transition risk, securities-market conditions, cyber incidents, regulation, litigation, and potential goodwill or MSR valuation changes. The filing added climate-related transition and customer-credit effects as a risk factor.
- PrimeLending received an investigative inquiry from the U.S. Attorney for the Western District of Virginia concerning its float-down option and said it was cooperating. Management stated it could not predict outcomes of inquiries and litigation; it did not believe pending matters, other than specifically disclosed matters, would materially affect the company as a whole.
- Hilltop repurchased $123.6m of stock during the nine months, including 2.24m shares in Q3. The board later increased the repurchase authorization to $200m, subject to regulatory review. A $0.12-per-share quarterly dividend was declared after quarter-end.
Important facts for investors to verify
- Whether mortgage margins, production and MSR-sale activity sustain earnings as refinancing demand and rates change.
- How credit quality and the allowance develop as COVID-era deferrals end; active deferrals were about $17m at quarter-end, and management cautioned that forecasts remain uncertain.
- The effect of weaker structured-finance and fixed-income trading on broker-dealer profitability.
- Liquidity composition and availability, including restricted cash, short-term commercial paper funding and deposit flows.
- Developments in the PrimeLending float-down inquiry, mortgage indemnification reserve and announced MSR sales.
- Regulatory approval and execution of the expanded share-repurchase program, and the implications of capital returns for liquidity and capital ratios.