Hilltop Holdings Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. Hilltop is a financial holding company with banking, broker-dealer and mortgage origination businesses. The insurance subsidiary National Lloyds Corporation was sold in June 2020; its Q1 2020 results are presented as discontinued operations. Unless noted, amounts are in U.S. dollars.
Financial performance and position
- Profit: Continuing-operations pretax income was $161.7 million, versus $65.6 million in Q1 2020. Net income was $123.9 million, including $3.6 million attributable to noncontrolling interests; income attributable to Hilltop was $120.3 million. Diluted EPS was $1.46, versus $0.51 from continuing operations in Q1 2020 ($0.55 including discontinued operations).
- Revenue and expenses: Net interest income was $105.7 million, down 4% year over year. Noninterest income rose 54% to $417.6 million, while noninterest expense increased 30% to $366.7 million. Net gains from loan sales and other mortgage production income were a major contributor to the increase in noninterest income.
- Margins and returns: Consolidated taxable-equivalent net interest margin was 2.69%, versus 3.42% in Q1 2020. Return on average equity was 20.58% and return on average assets was 2.90%, compared with 9.38% and 1.47%, respectively. The banking segment’s taxable-equivalent margin was 3.31%, versus 3.82%.
- Cash flow: Operating activities provided $313.8 million, compared with $586.3 million used in Q1 2020; investing activities used $307.0 million and financing activities provided $478.2 million. Cash, cash equivalents and restricted cash ended the quarter at $1.84 billion. Mortgage loan originations and sales were significant operating cash-flow drivers.
- Balance sheet and liquidity: At March 31, total assets were $17.68 billion, deposits $11.73 billion and stockholders’ equity $2.45 billion. Loans held for investment, net of allowance, were $7.67 billion; loans held for sale were $2.54 billion. The allowance for credit losses was $144.5 million, down from $149.0 million at year-end.
- Debt and capital: Short-term borrowings were $676.7 million, notes payable $401.7 million and junior subordinated debentures $67.0 million. Hilltop’s total risk-based capital ratio was 22.96%, common equity Tier 1 ratio 19.63% and leverage ratio 13.01%. PlainsCapital was reported as well-capitalized.
Material changes versus the prior comparable period
- Mortgage origination pretax income increased to $93.0 million from $39.8 million. Originations rose 70.7% to $6.18 billion; loan-sale margin increased to 388 basis points from 325 basis points. Refinancings were 53.1% of originations, compared with 35.4%.
- Banking pretax income increased to $64.6 million from $11.5 million. The comparison reflects a $5.2 million credit-loss reversal in Q1 2021 versus a $34.3 million provision in Q1 2020, as well as higher banking net interest income.
- Broker-dealer pretax income was $17.7 million, slightly below $18.2 million. Higher structured-finance revenue was offset by higher compensation and other costs, lower wealth-management revenue and reduced net interest income.
- The overall credit-loss allowance reversal was $5.1 million in Q1 2021, compared with a $34.5 million provision in Q1 2020. Management attributed the current-period reversal primarily to improved macroeconomic forecasts.
- Noninterest expense growth reflected higher compensation and operating costs, particularly in mortgage origination and broker-dealer businesses. Shares outstanding also declined year over year, following the 2020 tender offer and subsequent repurchases.
Outlook, commentary and risks
- Outlook: No specific consolidated earnings or revenue guidance was provided. Management said uncertainty from COVID-19 remained, and expected refinancing to represent a lower share of mortgage originations in the remaining quarters of 2021 if mortgage rates remained relatively unchanged. It anticipated technology-related nonrecurring costs would decline by year-end 2021 and expected to continue reducing retained mortgage servicing if the third-party market improved.
- COVID-19 and credit: Active banking loan deferrals were approximately $130 million at quarter-end. Management described modified loans as potentially higher risk and noted uncertainty about future defaults and loss severity. The allowance depended on economic forecasts and could be volatile; management’s downside scenario indicated modeled losses could raise the allowance by approximately $73 million, before other management judgments.
- Portfolio concentrations: Real estate represented significant banking exposures. Energy-related loans and loans in sectors such as hotels were identified as areas of elevated risk. The company also highlighted deposit outflows, interest-rate changes, mortgage-market conditions and the possibility of goodwill or other asset impairment.
- Contingencies: PrimeLending received an investigative inquiry from the U.S. Attorney for the Western District of Virginia concerning its mortgage “float down” option and said it was cooperating. Management generally did not expect pending litigation and inquiries to materially affect the company as a whole, while acknowledging adverse outcomes could be material in a particular period. The mortgage indemnification reserve was $24.3 million, up from $21.5 million at year-end.
- Other developments: The board authorized up to $75 million in share repurchases through January 2022; $5.0 million was used in Q1. A quarterly dividend of $0.12 per share was declared. Management was preparing for LIBOR transition and evaluating new FDIC brokered-deposit rules. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether elevated mortgage production and margins are sustainable as rates, refinancing volumes and loan-sale margins change.
- How credit quality develops in COVID-affected, commercial real estate and energy exposures, including loans previously granted payment relief.
- Whether the $144.5 million funded allowance and $8.8 million reserve for unfunded commitments remain adequate under changing economic conditions.
- Liquidity and funding needs, including brokered deposits, Hilltop Securities funds swept to the Bank, commercial paper and short-term borrowings.
- The outcome and potential financial impact of the PrimeLending float-down inquiry, and changes in mortgage indemnification claims and reserve estimates.
- Interest-rate and fair-value sensitivity of mortgage servicing rights, mortgage pipeline positions and securities, along with progress and costs of the LIBOR transition.