Hilltop Holdings Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Hilltop is a financial holding company operating banking, broker-dealer and mortgage origination businesses. Comparisons below are year over year unless noted; balance-sheet comparisons are against December 31, 2020. Dollar figures are in millions.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $107.9 | $104.6 | $213.6 | $214.9 |
| Noninterest income | $339.9 | $468.1 | $757.5 | $739.8 |
| Continuing pretax income | $133.2 | $136.4 | $294.9 | $202.0 |
| Income attributable to Hilltop from continuing operations | $99.1 | $97.7 | $219.4 | $144.2 |
| Diluted EPS from continuing operations | $1.21 | $1.08 | $2.66 | $1.60 |
| Net interest margin | 2.62% | 2.80% | 2.66% | 3.08% |
Q2 2020 included $30.8 million of after-tax income from discontinued insurance operations; the insurance subsidiary was sold on June 30, 2020. Six-month 2020 net income attributable to Hilltop was $178.1 million including that discontinued business.
- Q2 continuing pretax income edged down despite a $28.7 million credit-loss reversal, compared with a $66.0 million provision in Q2 2020. Six-month continuing pretax income rose mainly because the 2021 period included a $33.8 million reversal versus a $100.6 million provision in 2020.
- Mortgage origination pretax income was $49.0 million in Q2, down from $138.3 million; six-month income was $142.1 million versus $178.1 million. Q2 originations fell 3.3% to $5.9 billion, while six-month originations increased 24.3% to $12.1 billion.
- Broker-dealer pretax income declined to $6.9 million in Q2 from $27.8 million and to $24.5 million for six months from $46.0 million, reflecting weaker structured-finance and fixed-income trading revenues. Banking pretax income improved to $87.0 million in Q2 from a $17.5 million loss, largely due to credit-loss reversals.
Financial condition, cash flow and capital
- Total assets were $17.7 billion; deposits $11.7 billion; loans held for investment, net, $7.5 billion; loans held for sale $2.9 billion; and total stockholders’ equity $2.5 billion.
- Deposits increased 4.4% from year-end. Short-term borrowings rose to $915.9 million from $695.8 million. Notes payable were $396.7 million and junior subordinated debentures $67.0 million. Hilltop reported strong regulatory capital: common equity Tier 1 ratio 20.22% and leverage ratio 12.87%; PlainsCapital was classified as well-capitalized.
- Allowance for credit losses declined to $115.3 million from $149.0 million. Nonperforming assets were $90.1 million, down from $101.3 million; nonperforming loans were 0.66% of total loans versus 0.76% at year-end.
- For the first six months, operating cash flow was negative $325.9 million and investing cash flow negative $120.4 million, partly offset by $673.5 million of financing cash flow. Cash, cash equivalents and restricted cash increased $227.2 million to $1.58 billion. Mortgage loan originations and sales materially affect operating cash flows.
- Hilltop repurchased $49.5 million of stock and paid $19.8 million in dividends during the first half. The board declared a further $0.12-per-share dividend in July and increased the repurchase authorization to $150 million, subject to regulatory review.
Outlook, risks and unusual items
- No specific earnings or revenue guidance was provided. Management said 2021 performance remained uncertain due to COVID-19, vaccination and stimulus developments, borrower conditions, interest rates, mortgage demand and housing inventory constraints.
- The Bank had approximately $76 million of active COVID-related payment deferrals at quarter-end. Management cautioned these credits may carry elevated risk. Energy loans were approximately $78 million, with $42 million of unfunded commitments. Real-estate concentrations and changing economic forecasts remain important credit risks.
- The Bank targeted available liquidity of approximately $5–6 billion for the remainder of 2021; reported available liquidity and borrowing capacity was $7.3 billion at June 30. Hilltop stated its liquidity was sufficient for the foreseeable future.
- Mortgage servicing rights were $124.5 million, down from $143.7 million at year-end. The company had pending agreements to sell servicing rights on $3.4 billion of serviced loans for approximately $42 million, expected to close in Q3 and Q4 2021.
- PrimeLending’s indemnification reserve for loan-sale representations and warranties increased to $26.4 million from $21.5 million. PrimeLending also received an investigative inquiry from the U.S. Attorney for the Western District of Virginia concerning its mortgage “float down” option; it is cooperating. Management could not predict the outcome of inquiries and litigation.
- Hilltop intended to redeem $18.0 million of junior subordinated debentures by July 31, 2021 and said it intended to redeem the remaining $49.0 million during Q3. The company also highlighted the transition away from LIBOR and potential operational, contractual and financial risks.
Investor verification priorities
- Assess how much reported earnings depended on credit-loss reserve releases and whether improved credit trends persist.
- Track mortgage margins, refinancing and purchase volumes, compensation costs, and the completion and proceeds of pending servicing-rights sales.
- Review broker-dealer revenue trends, especially structured finance and fixed-income trading, and the funding and collateral profile of short-term borrowings and commercial paper.
- Monitor COVID-related deferrals, real-estate and energy exposures, loan repurchase/forbearance risks, and the assumptions underlying the allowance for credit losses.
- Follow the float-down inquiry, planned debenture redemptions, capital return authorization and LIBOR transition; the filing does not quantify potential losses from the legal inquiry.