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Text: These statements are based on management's current expectations concerning future events that by their nature are subject to risk and uncertainty.
Please note that the information presented is preliminary and based upon data available at this time.
Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.
For the second quarter, Hilltop reported net income of $99 million or $1.21 per diluted share.
Return on average assets for the period was 2.29% and return on average equity was 16.4%.
Despite certain headwinds in each business, our collective business model was able to generate strong earnings and grow capital, while at the same time returning capital to shareholders through dividends and share repurchases.
PlainsCapital Bank generated pre-tax income of $87 million compared to a pre-tax loss of $17 million in Q2 2020.
Improvements in the economic outlook and positive credit migration drove a $29 million reversal of provision, compared to a provision expense of $66 million in Q2 2020.
Outside of a few pockets of weakness such as business focused hotels, our borrowers generally are seeing improved results with the economy reopening and robust activity.
Strong deposit growth has continued with average interest-bearing deposits, excluding broker deposits and HilltopSecurities sweep deposits, increasing by 26% from Q2 2020.
This growth was partially offset by the planned run-off of approximately $858 million in broker deposits and the reduction in HilltopSecurities sweep deposits of approximately $690 million, as we optimize our liquidity sources and defend our net interest margin.
We attribute this core deposit growth primarily to increased liquidity in the market from government stimulus and the work our bankers have done to increase deposits from existing and new clients.
Total average bank loans declined modestly by 2% versus Q2 2020 as PPP loans have run off and commercial loan growth remains pressured.
Quality loan demand has been muted as our borrowers are flushed with liquidity, leading to pay-downs and payoffs or the use of elevated liquidity to fund capital expenditures and other investments before seeking bank debt.
However, the Texas markets we are in continue to experience significant activity from business and household migration, which should drive meaningful long-term opportunities for the bank, specifically in higher growth markets such as Austin and Dallas, with products like multifamily.
Importantly, our business model has allowed us to selectively retain high quality mortgages from PrimeLending to support loan balances and provide improved yield opportunities for our elevated liquidity and capital.
PrimeLending had another solid quarter, generating $49 million in pre-tax income.
While the mortgage market has begun to normalize compared with the frenzied activity in 2020, volumes and profitability still remain elevated relative to the historical levels.
PrimeLending originated $5.9 billion in volume with a gain on sale margin on loans sold to third parties of 364 basis points.
Although, average mortgage interest rates declined year-over-year, refinance volumes decreased to 32% of total origination compared to 47% in Q2 2020.
A decrease in mortgage interest rates typically leads to an increase in refinancing volume.
However, significant refinancing activity during 2020 has limited the population of loans eligible for refinance.
Importantly, our focus on home purchase mortgage origination should allow us to outperform the broader market.
As the third-party market for mortgage servicing has continued to improve, we have reduced our retained servicing to 25% of total mortgage loans sold during the quarter and executed an MSR sale of $32 million, reducing our MSR assets to $124 million.
In addition to rate, inventory and affordability are the main themes we are paying attention to in the mortgage industry.
With low inventory continuing to drive home prices higher, the properties that are available are increasingly getting out of reach for buyers.
This phenomenon affects both volume as well as gain on sale margins as certain products are more competitive in this environment.
Despite the ever-shifting mortgage landscape, PrimeLending continues to execute well on its growth strategy, primarily centered on hiring purchase-oriented loan officers.
In the second quarter, PrimeLending had a net gain of 11 loan officers that we believe could add incremental annual volume of nearly $300 million.
For HilltopSecurities, they generated $6.9 million of pre-tax income on net revenues of $94 million for a pre-tax margin of 7.3%.
This was a challenging quarter for the mortgage-centric and fixed income businesses.
Although these businesses have performed exceptionally over the past year, they are subject to volatility, which illustrates the importance of diversified revenue streams within HilltopSecurities.
The Structured Finance business was adversely impacted by mortgage market volatility in March and April and generated net revenue of $11.5 million, a decline of 75% from Q2 2020.
On a positive note, lock volumes remain relatively strong compared to pre-2020 historical level as we continue to add and maintain strong relationships with the existing clients.
Importantly, our Public Finance and Wealth Management businesses generated revenue and income growth and we are pleased with their positive momentum.
Moving to Page 4, Hilltop maintained strong capital with common equity tier 1 capital ratio of 20% at quarter end.
During the quarter, Hilltop returned $55 million to shareholders through dividends and share repurchases.
The $45 million in shares repurchased are part of the $75 million share authorization the Board granted in January.
This week, the Hilltop Board authorized an increase to the stock purchase program to $150 million, an increase of $75 million.
Factoring in shares repurchased made during the first half of 2021, Hilltop now has approximately $100 million of available capacity through the expiration of the program in January 2022.
Even with sizable capital distributions to shareholders over the past two years, including the opportunistic tender offer executed in 2020, our tangible book value per share has grown at a compound annual rate of 21%, because of the profitability of our unique business model.
We plan to continue to prudently distribute capital to our shareholders through dividends and share repurchases.
In closing, Hilltop's performance in the quarter highlights the versatility of our franchise and the value of our diversified operating model.
Although near term headwinds and volatility may occur, we believe each of our businesses are well positioned to take advantage of profitable growth opportunities and that we have the leadership, capital, and strategies in place to build on our franchise.
I'll start on Page 5.
As Jeremy discussed, for the second quarter of 2021, Hilltop reported consolidated income attributable to common stockholders of $99 million, equating to $1.21 per diluted share.
Included in the second quarter results was a net reversal of provision for credit losses of $28.7 million, which included approximately $500,000 of net charge-offs in the quarter.
On Page 6, we've detailed the significant drivers to the change in allowance for credit losses for the period.
The most significant drivers in the quarter were the positive migration of certain credits in the portfolio and the further improvement in the expected macroeconomic outlook.
First, related to the macroeconomic outlook, we leveraged the Moody's S7 scenario for our second quarter analysis.
This scenario highlights improving real GDP and unemployment trends coupled with increasing risk of higher inflation in future periods versus the economic scenarios selected for our first quarter assessment.
The impact of the improving economic outlook resulted in the release of $11 million of ACL during the second quarter.
The second key driver was the ongoing improvement in credit quality across the portfolio.
During the quarter, the restaurant portfolio experienced positive migration, resulting from improving financial performance and more resilient outlook for future periods.
Further, the business saw broader-based improvement across the served clients whereby their full-year 2020 results were not as severely impacted as was previously expected and their first half results were improving from prior risk rating assessment periods.
The result of the improvements at the client level equated with net release of ACL of $17 million during the second quarter.
The combination of improved client performance and the improving macroeconomic inbound [Phonetic] outlook which were only modestly offset by net charge-offs resulted in allowance for credit losses for the period ending June 30 of $115 million or 1.51% of total loans.
Further, the coverage ratio of ACL to total loans increases to 1.86%.
The loans that we believe have lower loss potential include PPP, broker dealer, and mortgage warehouse loans are excluded.
Turning to Page 7, net interest income in the second quarter equated to $108 million, including $12.4 million of PPP-related interest and fee income as well as purchase accounting accretion.
Net interest margin declined versus the first quarter of 2021 driven by lower PPP fee recognition, higher average cash balances, and continued pressure on loan held for investment yields.
Somewhat offsetting these items were higher loans held for sale yields resulting from higher overall mortgage rates, coupled with lower interest bearing deposit costs, which should continue to trend lower as expected, finishing the quarter down 9 basis points at 32 basis points.
We continue to expect that interest-bearing deposit cost will move modestly lower over the coming quarters as the consumer CD portfolio continues to mature and reset the lower yields.
As it relates to asset yields, the current competitive environment for commercial loans is resulting in substantial pressure on new business loan yields as well as our ability to maintain current floor rates.
Further, with funded loan growth continuing to be slower than we expected, we are increasing the level of one-to-four family loans we are retaining on the balance sheet to approximately $50 million to $75 million per month from the prior outlook of $30 million to $50 million per month.
As we've alluded in the past calls, we are using the one-to-four family loan retention approach to offset the slower growth in commercial lending environment.
While this does provide a high quality source of asset and net interest income, these loans generally carry a yield below that of our traditional commercial loans, and as a result, will put downward pressure on NIM.
To that end, we expect that NIM will maintain -- will remain pressured into the second half of 2021 moving lower toward 240 basis points and 250 basis points by year-end.
Turning to Page 8, total non-interest income for the second quarter of 2021 equated to $340 million.
Second quarter mortgage-related income and fees decreased by $99 million versus the second quarter of 2020, driven by lower origination volumes, declining gain on sale margins and lower lock volumes.
As it relates to gain on sale margins, we note in our key driver tables on lower right of the page, the gain on sale margin on loans fell 22 basis points versus the prior quarter.
Further, we are providing the impact on gain on sale margin related to these loans that have been retained on the balance sheet.
For additional clarity, the reported gain on sale is the margin reported by our mortgage origination segment and replaced all loans distributed and retained on the balance sheet.
Gain on sale of loans sold to third parties provides the margin on those loans that were distributed outside of Hilltop Holdings or purchased at market value.
During the second quarter of 2021, the environment in mortgage banking remained solid, and as expected, continued to shift to a more purchase mortgage-centric marketplace.
For the second quarter, purchase mortgage volumes increased by $1.1 billion or 38.5%, while refinance volumes declined 43% or $1.4 billion versus the first quarter origination level.
We expect this trend to continue toward a more purchase mortgage-centric market over the coming quarters, which should continue to pressure gain on sale margins into the future.
We continue to expect the gain on sale margins for third-party sales will fall within the full year average range of 360 basis points and 385 basis points.
Other income declined by $37 million, driven primarily by declines in TBA lock volumes, volatility in market rates and volatile trading and fixed income capital markets.
As we noted in the past, the structured financing fixed income to capital market businesses can be volatile from period to period and they are impacted by interest rates, market volatility, origination volume trend and overall market liquidity.
Moving to Page 9, non-interest expenses decreased from the same period in the prior year by $27 million to $343 million.
The decline in expenses versus the prior year was driven by decline in variable compensation of approximately $35 million at HilltopSecurities and PrimeLending.
This decline in variable compensation was linked to lower revenues in the quarter compared to the prior year period.
Looking forward, we continue to expect that our revenues will decline from the record levels of 2020, which will put pressure on our efficiency ratio.
That said, we remain focused on continuous improvement, leveraging the investments we've made over the last few years to aggressively manage fixed cost, while we continue to further streamline our businesses and accelerate our digital transformation.
Moving to Page 10, end of period HFI loan equated to $7.6 billion.
As we've noted on prior calls, we expected that loan growth will be challenging during the first half of 2021 and the results bear that out.
We've seen substantial increases in competition for quality loans across our Texas markets, which we expect will continue into 2022.
Further, the ongoing growth in available liquidity both on bank balance sheet and customer balance sheets could further delay a return to more normal commercial loan growth rates for at least a few quarters.
We continue to expect full year average total loan growth, excluding PPP loans, will be within a range of zero to 3%.
As noted earlier, we are increasing the level of retention of one-to-four family loans originated in PrimeLending to between $50 million and $75 million per month.
During the second quarter of 2021, PrimeLending locked approximately $176 million loans to be retained by PlainsCapital over the coming months.
These loans had an average yield of 3.11% and an average FICO and LTV of 780% and 64%, respectively.
Turning to Page 11, second quarter credit trends continue to reflect the slow but steady recovery in the Texas economy as the reopening of businesses continues to provide for improved customer cash flows and fewer borrowers on active deferral programs.
As of June 30, we have approximately $76 million of loan on active deferral programs, down from $130 million at March 31.
Further, the allowance for credit losses to end-of-period loan ratio for the active deferral loan equates to 16.8% at June 30.
As is shown in the graph at the bottom right of the page, the allowance for credit loss coverage ratio, including both mortgage warehouse lending as well as PPP loans at the bank ended the second quarter at 1.64%.
We continue to believe that both mortgage warehouse lending as well as our PPP loans will maintain lower loss content over time.
Excluding mortgage warehouse and PPP loans, the bank's ACL to end-of-period loans HFI ratio equated to 1.86%.
Turning to Page 12, second quarter end-of-period total deposits were approximately $11.7 billion and remained stable with the first quarter 2021 levels.
While the overall balances were relatively unchanged, the mix of deposits continues to improve as brokered deposits declined approximately $300 million and non-interest-bearing deposits rose by approximately $200 million versus the first quarter 2021 levels.
Given our strong liquidity position and balance sheet profile, we are expecting to allow brokered deposits to mature and run-off.
At 6/30/21, Hilltop maintained $268 million of brokered deposits that have a blended yield of 31 basis points.
While deposit levels remains elevated, it should be noted that we remain focused on growing our client base and deepening wallet share through the sales of our commercial treasury products and focused client acquisition efforts.
Turning to Page 13, in 2021, we continue to remain nimble as the pandemic evolves to ensure the safety of our teammates and our clients.
Further, our financial priorities for 2021 remains centered on delivering great customer service to our clients, attracting new customers to our franchise, supporting new communities where we serve, maintaining a moderate risk profile, and delivering long-term shareholder value.
Given the current uncertainties in the marketplace, we are not providing specific financial guidance, but we are continuing to provide commentary as to our most current outlook for 2021 with the understanding that the business environment, including the impact of the pandemic, could remain volatile throughout the year.
That said, we will continue to provide updates during our future quarterly call.

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hilltop holdings inc qtrly income from continuing operations of $1.21 per diluted share.

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