Hilltop Holdings Inc. — 2020 Form 10-K Summary
Business context and reporting period
Hilltop is a Texas-based financial holding company with banking, broker-dealer and mortgage origination segments. This annual report covers the fiscal year ended December 31, 2020; quarterly data is also provided, but the filing is not a standalone fourth-quarter report. The former insurance segment was sold on June 30, 2020 and is presented as discontinued operations.
Financial results and condition
| Metric | 2020 | 2019 |
|---|---|---|
| Net interest income | $424.2 million | $439.0 million |
| Provision for credit losses | $96.5 million | $7.2 million |
| Noninterest income | $1.690 billion | $1.063 billion |
| Noninterest expense | $1.454 billion | $1.212 billion |
| Continuing-operations pretax income | $564.4 million | $282.7 million |
| Net income attributable to Hilltop, including discontinued operations | $447.8 million; diluted EPS $5.01 | $225.3 million; diluted EPS $2.44 |
| Net interest margin | 2.85% | 3.48% |
| Operating cash flow | $280.4 million | $(433.0) million |
- Segment pretax income: Banking $103.5 million; broker-dealer $115.6 million; mortgage origination $408.0 million. Corporate recorded a $63.3 million pretax loss.
- Mortgage activity: Originations rose 47% to $23.0 billion. Mortgage segment pretax income increased to $408.0 million from $64.7 million; net gain-on-sale margin was 406 basis points versus 324 basis points.
- Year-end balance sheet: Assets $16.94 billion; deposits $11.24 billion; loans held for investment, net of allowance, $7.54 billion; loans held for sale $2.79 billion; stockholders’ equity $2.35 billion.
- Liquidity and debt: Cash and due from banks was $1.06 billion; cash, cash equivalents and restricted cash totaled $1.35 billion. Short-term borrowings were $695.8 million; notes payable $382.0 million; junior subordinated debentures $67.0 million. Total deposits and other indebtedness were reported at approximately $12.3 billion.
- Capital and asset quality: Hilltop’s common equity Tier 1 ratio was 18.97%; PlainsCapital’s was 14.40%. Allowance for credit losses was $149.0 million, or 1.94% of gross loans, versus $61.1 million, or 0.83%, a year earlier. Nonperforming assets were $101.3 million versus $56.5 million.
- Shareholder returns: Hilltop paid dividends of $0.36 per share and repurchased $208.7 million of stock, including a $193.4 million tender offer.
Material changes versus 2019
- Noninterest income rose 59%, primarily from mortgage loan sales and production, alongside stronger broker-dealer trading and advisory activity. Mortgage segment originations increased while the low-rate environment drove a sharp rise in refinancings.
- Net interest income declined 3% and consolidated net interest margin fell 63 basis points, reflecting lower market rates, changes in earning-asset mix and liquidity actions. Banking segment net interest margin decreased to 3.31% from 4.00%.
- Credit-loss provision increased to $96.5 million, largely reflecting CECL adoption and COVID-19-related economic uncertainty. Net charge-offs were $21.1 million.
- On June 30, Hilltop sold NLC for $154.1 million in cash proceeds and recognized a $36.8 million gain, net of transaction costs. Insurance results are classified as discontinued operations.
- Hilltop issued $200 million of subordinated notes in May, receiving $196.6 million in net proceeds. It also reduced outstanding shares through the tender offer. The prior share repurchase program was suspended in April amid uncertainty.
Outlook, risks and unusual items
- Management provided no specific consolidated earnings guidance. It said the 2021 effects of COVID-19 remained uncertain and depended on the pandemic, economic recovery, client performance and government responses.
- The Bank targeted available liquidity of approximately $5 billion to $6 billion during 2021; year-end available borrowing and liquidity sources were reported at $6.27 billion. Management expected PrimeLending to retain servicing on approximately 50% to 60% of mortgage loan sales in 2021 and had authorized up to 5% of segment originations for retention by the Bank.
- COVID-19 loan modifications totaled approximately $1.04 billion approved through year-end; about $240 million remained in active deferral periods, while approximately $714 million had returned to contractual terms and made at least one payment. Management characterized these loans as elevated risk.
- Key exposures include Texas and real estate concentration, energy-related borrowers, COVID-19-driven credit deterioration, interest-rate changes, mortgage refinancing and servicing-rights valuation, cybersecurity, regulatory requirements, and the LIBOR transition. The $143.7 million mortgage servicing rights asset depends on assumptions including prepayment rates and discount rates.
- For CECL, management’s downside scenario would raise modeled allowance by about $94 million; its upside scenario would reduce it by about $26 million. These are sensitivities, not forecasts of actual provision.
- The company reported that a material weakness in controls over the allowance estimation process, identified in 2019, was remediated by year-end 2020. Management and the auditor concluded internal control over financial reporting was effective; the auditor issued unqualified opinions on the financial statements and controls.
Important facts for investors to verify
- Whether credit performance, deferrals and nonperforming assets improve or deteriorate, and whether the enlarged allowance adequately reflects realized losses.
- How sustainable the 2020 mortgage origination earnings and unusually strong loan-sale margins are as rates, refinancing volumes and servicing-retention levels change.
- Changes in MSR fair value, key valuation assumptions, and the planned 2021 sale of approximately $53 million of MSR assets.
- Liquidity composition and funding costs, including brokered deposits, deposit maturities, short-term borrowings and capacity available under the Bank’s liquidity sources.
- Debt service and capital allocation following the subordinated-note issuance, tender offer, dividends and new $75 million repurchase authorization.
- The discontinued-operations presentation and sale-related gain, and the distinction between continuing-operations earnings and total earnings attributable to Hilltop.