Hilltop Holdings Inc. Announces Financial Results for Second Quarter 2020

DALLAS–(BUSINESS WIRE)–Hilltop Holdings Inc. (NYSE: HTH) (“Hilltop”) today announced financial results for the second quarter of 2020. Hilltop produced income from continuing operations to common stockholders of $97.7 million, or $1.08 per diluted share, for the second quarter of 2020, compared to $60.1 million, or $0.64 per diluted share, for the second quarter of 2019. Including income from discontinued operations related to the insurance segment, income applicable to common stockholders was $128.5 million, or $1.42 per diluted share, for the second quarter of 2020, compared to $57.8 million, or $0.62 per diluted share, for the second quarter of 2019. Hilltop’s financial results from continuing operations for the second quarter of 2020 reflect both a significant increase in mortgage origination segment net gains from sales of loans and other mortgage production income and a significant build in the allowance for credit losses associated with the deterioration of the economic outlook from the first quarter of 2020 attributable to the market disruption and economic uncertainties caused by COVID-19.

Hilltop also announced that its Board of Directors declared a quarterly cash dividend of $0.09 per common share, payable on August 31, 2020, to all common stockholders of record as of the close of business on August 14, 2020.

As previously announced on April 30, 2020, in light of the uncertain outlook for 2020 due to the COVID-19 pandemic, and Hilltop’s commitment to maintain strong capital and liquidity to meet the needs of its customers and communities during this exceptional period of economic uncertainty, Hilltop’s Board of Directors suspended its stock repurchase program. Hilltop’s Board of Directors has the ability to reinstate the share repurchase program at its discretion as circumstances warrant.

The COVID-19 pandemic has negatively impacted financial markets and overall economic conditions, and is expected to continue to have implications on our business and operations. The extent of the impact of COVID-19 on our operational and financial performance for the remainder of 2020 is dependent on certain developments, including, among others, the broader adverse implications of COVID-19 on our customers and clients, potential further disruption and deterioration in the financial services industry, including the mortgage servicing and commercial paper markets, and additional, or extended, federal, state and local government orders and regulations that might be imposed in response to the pandemic, all of which are uncertain.

Jeremy Ford, President and CEO of Hilltop, said, “While these remain very challenging times and there is significant uncertainty about the future impacts from the pandemic, I am very proud of our teammates across Hilltop as they continue to execute and display compassion for our clients and each other. Our results from the second quarter demonstrate the strength and durability of our operating model as the mortgage franchise delivered record pre-tax income of $138 million on $6 billion of mortgage originations, while the securities business grew pre-tax income by 26% to $28 million from strength in the fixed income capital markets and structured finance business lines. While the Bank incurred a pre-tax loss of $17 million, it generated pre-provision net revenue, or PPNR, of $48 million during the quarter driven by solid net interest income and lower operating expenses. The Bank also recognized approximately $66 million of provision expense related to significant deterioration in the economic outlook from the end of the first quarter through June. In addition to exceptional PPNR performance, we were also able to fortify our strong excess capital and liquidity positions during the quarter by executing a subordinated debt offering and closing the sale of National Lloyds.”

___________________________

Note: Pre-provision net revenue, or PPNR, is a non-GAAP financial measure which represents pre-tax income (loss) plus provision for credit losses. We believe that this financial measure is useful in assessing the ability of a lending institution to generate income in excess of its provision for credit losses.

Second Quarter 2020 Highlights for Hilltop:

For the second quarter of 2020, net gains from sales of loans and other mortgage production income within our mortgage origination segment was $295.3 million, compared to $131.2 million in the second quarter of 2019, a 125.1% increase;
- Mortgage loan origination production volume was $6.1 billion during the second quarter of 2020, compared to $4.0 billion in the second quarter of 2019.
The provision for credit losses was $66.0 million during the second quarter of 2020, compared to $34.5 million in the first quarter of 2020;
- This significant increase in the provision for credit losses during the second quarter of 2020 was primarily associated with the increase in the expected lifetime credit losses under CECL on collectively evaluated loans within the portfolio attributable to the continued market disruption and related macroeconomic uncertainties caused by COVID-19.
Hilltop’s consolidated annualized return on average assets and return on average equity for the second quarter of 2020 were 3.30% and 23.32%, respectively, compared to 1.74% and 11.63%, respectively, for the second quarter of 2019;
Hilltop’s book value per common share increased to $25.08 at June 30, 2020, compared to $23.71 at March 31, 2020;
Hilltop’s total assets were $16.9 billion at June 30, 2020 compared to $15.7 billion at March 31, 2020;
- Included $249.8 million in assets of discontinued operations associated with the insurance segment at March 31, 2020.
Loans¹, net of allowance for credit losses, increased to $7.3 billion compared to $6.7 billion at March 31, 2020;
- Included supporting our impacted banking clients through funding of over 2,800 loans totaling approximately $672 million at June 30, 2020 through the Paycheck Protection Program, or PPP.
Non-performing loans were $68.3 million, or 0.65% of total loans at June 30, 2020, compared to $87.4 million, or 0.89% of total loans, at March 31, 2020;
As of June 30, 2020, we approved approximately $968 million in COVID-19 related loan modifications;
- Extent of progression of these loans into non-performing loans during future periods is uncertain.
Loans held for sale increased by 6.5% from March 31, 2020 to $2.6 billion at June 30, 2020;
Total deposits were $11.6 billion at June 30, 2020, compared to $9.9 billion at March 31, 2020;
On May 11, 2020, Hilltop completed the issuance and sale of $50 million aggregate principal amount of 5.75% fixed-to-floating rate subordinated notes due May 2030 and $150 million aggregate principal amount of 6.125% fixed-to-floating rate subordinated notes due May 2035;
Hilltop maintained strong capital levels with a Tier 1 Leverage Ratio² of 12.60% and a Common Equity Tier 1 Capital Ratio of 18.46% at June 30, 2020;
- Ratios reflect Hilltop’s decision to elect the transition option as issued by the federal banking regulatory agencies in March 2020 that permits banking institutions to mitigate the estimated cumulative regulatory capital effects from CECL over a five-year transitionary period.
Hilltop’s consolidated net interest margin³decreased to 2.80% for the second quarter of 2020, compared to 3.41% in the first quarter of 2020;
For the second quarter of 2020, noninterest income from continuing operations was $468.1 million, compared to $276.7 million in the second quarter of 2019, a 69.2% increase;
For the second quarter of 2020, noninterest expense from continuing operations was $370.2 million, compared to $304.1 million in the second quarter of 2019, a 21.7% increase; and
Hilltop’s effective tax rate from continuing operations was 23.3% during the second quarter of 2020, compared to 23.0% during the same period in 2019.

Discontinued Operations

On June 30, 2020, Hilltop completed the sale of its insurance segment, National Lloyds Corporation, for cash proceeds of $154.1 million. Insurance segment results and its assets and liabilities have been presented as discontinued operations. Included within discontinued operations for the second quarter of 2020 is the recognition of a gain associated with this transaction of $32.3 million, net of $5.1 million in transaction costs and subject to post-closing adjustments. The resulting book gain from this sale transaction was not recognized for tax purposes pursuant to the rules under the Internal Revenue code. Income (loss) from discontinued operations, net of income taxes, was $30.8 million, or $0.34 per diluted share, for the second quarter of 2020, compared to ($2.3) million, or ($0.02) per diluted share, for the second quarter of 2019.

^{___________________________}Note: “Consolidated” refers to our consolidated financial position and consolidated results of operations, including discontinued operations and assets and liabilities classified as held for sale.

¹ “Loans” reflect loans held for investment excluding broker-dealer loans, net of allowance for credit losses, of $422.1 million and $505.9 million at June 30, 2020 and March 31, 2020, respectively.

² Based on the end of period Tier 1 capital divided by total average assets during the quarter, excluding goodwill and intangible assets.

³ Net interest margin is defined as net interest income divided by average interest-earning assets.

Consolidated Financial and Other Information


Consolidated Balance Sheets	June 30,			March 31,			December 31,			September 30,			June 30,
(in 000’s)	2020			2020			2019			2019			2019
Cash and due from banks	$	1,655,492		$	524,370		$	433,626		$	281,445		$	303,424
Federal funds sold		385			401			394			423			521
Assets segregated for regulatory purposes		194,626			178,805			157,436			83,878			151,271
Securities purchased under agreements to resell		161,457			23,356			59,031			49,998			50,660
Securities:
Trading, at fair value		648,037			393,581			689,576			707,268			601,524
Available for sale, at fair value, net		1,091,348			972,318			911,493			915,334			916,519
Held to maturity, at amortized cost, net		343,198			355,110			386,326			371,361			365,905
Equity, at fair value		122			107			166			164			150
		2,082,705			1,721,116			1,987,561			1,994,127			1,884,098
Loans held for sale		2,592,307			2,433,407			2,106,361			1,984,231			1,609,477
Loans held for investment, net of unearned income		7,849,904			7,345,250			7,381,400			7,321,208			7,202,604
Allowance for credit losses		(156,383	)		(106,739	)		(61,136	)		(55,604	)		(55,177	)
Loans held for investment, net		7,693,521			7,238,511			7,320,264			7,265,604			7,147,427

Broker-dealer and clearing organization receivables		1,222,627			1,838,789			1,780,280			1,731,979			1,707,249
Premises and equipment, net		210,975			215,261			210,375			203,601			198,266
Operating lease right-of-use assets		119,954			113,395			114,320			119,035			120,965
Other assets		709,246			876,615			460,258			578,422			547,768
Goodwill		267,447			267,447			267,447			267,447			267,447
Other intangible assets, net		23,374			25,019			26,666			28,432			30,308
Assets of discontinued operations		—			249,758			248,429			248,407			246,989
Total assets	$	16,934,116		$	15,706,250		$	15,172,448		$	14,837,029		$	14,265,870

Deposits:
Noninterest-bearing	$	3,467,500		$	2,865,192		$	2,769,556		$	2,732,325		$	2,598,253
Interest-bearing		8,182,098			7,082,297			6,262,658			5,998,547			5,864,826
Total deposits		11,649,598			9,947,489			9,032,214			8,730,872			8,463,079
Broker-dealer and clearing organization payables		1,158,628			1,259,181			1,605,518			1,546,163			1,531,891
Short-term borrowings		720,164			1,329,948			1,424,010			1,502,755			1,338,893
Securities sold, not yet purchased, at fair value		55,340			22,768			43,817			59,249			45,447
Notes payable		450,158			244,042			256,269			217,841			204,423
Operating lease liabilities		131,411			124,123			125,619			128,295			129,858
Junior subordinated debentures		67,012			67,012			67,012			67,012			67,012
Other liabilities		409,672			408,224			348,519			355,629			284,136
Liabilities of discontinued operations		—			139,730			140,674			145,786			149,326
Total liabilities		14,641,983			13,542,517			13,043,652			12,753,602			12,214,065

Common stock		902			901			906			906			928
Additional paid-in capital		1,439,686			1,437,301			1,445,233			1,441,604			1,473,599
Accumulated other comprehensive income		23,813			20,939			11,419			12,305			7,862
Retained earnings		797,331			676,946			644,860			602,835			544,275
Deferred compensation employee stock trust, net		778			774			776			789			788
Employee stock trust		(150	)		(150	)		(155	)		(170	)		(171	)
Total Hilltop stockholders’ equity		2,262,360			2,136,711			2,103,039			2,058,269			2,027,281
Noncontrolling interests		29,773			27,022			25,757			25,158			24,524
Total stockholders’ equity		2,292,133			2,163,733			2,128,796			2,083,427			2,051,805
Total liabilities & stockholders’ equity	$	16,934,116		$	15,706,250		$	15,172,448		$	14,837,029		$	14,265,870






	Three Months Ended
Consolidated Income Statements	June 30,		March 31,		December 31,		September 30,		June 30,
(in 000’s, except per share data)	2020		2020		2019		2019		2019
Interest income:
Loans, including fees	$	107,860	$	111,168	$	115,696	$	119,580	$	114,325
Securities borrowed		12,883		13,327		16,196		21,010		15,517
Securities:
Taxable		11,698		15,695		15,174		14,885		13,778
Tax-exempt		1,539		1,610		1,572		1,576		1,513
Other		951		3,075		3,180		3,889		3,867
Total interest income		134,931		144,875		151,818		160,940		149,000

Interest expense:
Deposits		11,947		15,124		17,480		18,887		18,036
Securities loaned		10,796		11,277		13,989		17,889		13,470
Short-term borrowings		2,367		4,744		6,244		8,166		6,897
Notes payable		3,768		2,418		2,337		2,265		2,165
Junior subordinated debentures		705		850		909		955		986
Other		790		126		99		132		162
Total interest expense		30,373		34,539		41,058		48,294		41,716

Net interest income		104,558		110,336		110,760		112,646		107,284
Provision for (reversal of) credit losses		66,026		34,549		6,880		47		(672	)
Net interest income after provision for (reversal of) credit losses		38,532		75,787		103,880		112,599		107,956

Noninterest income:
Net gains from sale of loans and other mortgage production income		295,317		150,486		120,573		157,050		131,173
Mortgage loan origination fees		45,341		28,554		36,939		37,782		33,409
Securities commissions and fees		34,234		40,069		33,205		34,426		34,142
Investment and securities advisory fees and commissions		29,120		23,180		32,083		28,685		22,859
Other		64,113		29,424		40,846		48,562		55,120
Total noninterest income		468,125		271,713		263,646		306,505		276,703

Noninterest expense:
Employees’ compensation and benefits		276,893		196,356		212,498		232,449		212,959
Occupancy and equipment, net		26,174		19,522		30,617		27,002		27,938
Professional services		15,737		14,798		17,211		15,472		13,773
Other		51,405		51,225		47,542		46,263		49,418
Total noninterest expense		370,209		281,901		307,868		321,186		304,088

Income from continuing operations before income taxes		136,448		65,599		59,658		97,918		80,571
Income tax expense		31,808		15,148		13,579		21,472		18,526
Income from continuing operations		104,640		50,451		46,079		76,446		62,045
Income (loss) from discontinued operations, net of income taxes		30,775		3,151		5,623		5,261		(2,254	)
Net income		135,415		53,602		51,702		81,707		59,791
Less: Net income attributable to noncontrolling interest		6,939		3,966		2,426		2,289		1,980
Income attributable to Hilltop	$	128,476	$	49,636	$	49,276	$	79,418	$	57,811

Earnings per common share:
Basic:
Earnings from continuing operations	$	1.08	$	0.51	$	0.48	$	0.81	$	0.64
Earnings (losses) from discontinued operations		0.34		0.04		0.06		0.06		(0.02	)
	$	1.42	$	0.55	$	0.54	$	0.87	$	0.62
Diluted:
Earnings from continuing operations	$	1.08	$	0.51	$	0.48	$	0.81	$	0.64
Earnings (losses) from discontinued operations		0.34		0.04		0.06		0.05		(0.02	)
	$	1.42	$	0.55	$	0.54	$	0.86	$	0.62

Cash dividends declared per common share	$	0.09	$	0.09	$	0.08	$	0.08	$	0.08

Weighted average shares outstanding:
Basic		90,164		90,509		90,606		91,745		93,399
Diluted		90,164		90,550		90,711		91,824		93,418






	Three Months Ended June 30, 2020
Segment Results						Mortgage									All Other and			Hilltop
(in 000’s)	Banking			Broker-Dealer		Origination			Insurance			Corporate			Eliminations			Consolidated
Net interest income (expense)	$	94,102		$	9,663	$	(1,667	)	$	—		$	(3,232	)	$	5,692		$	104,558
Provision for credit losses		65,600			426		—			—			—			—			66,026
Noninterest income		10,656			122,961		340,487			—			550			(6,529	)		468,125
Noninterest expense		56,622			104,411		200,493			—			8,888			(205	)		370,209
Income (loss) from continuing operations before taxes		(17,464	)		27,787		138,327			—			(11,570	)		(632	)		136,448
Income (loss) from discontinued operations before taxes		—			—		—			(1,911	)		32,341			—			30,430
	$	(17,464	)	$	27,787	$	138,327		$	(1,911	)	$	20,771		$	(632	)	$	166,878



	Six Months Ended June 30, 2020
Segment Results						Mortgage								All Other and			Hilltop
(in 000’s)	Banking			Broker-Dealer		Origination			Insurance		Corporate			Eliminations			Consolidated
Net interest income (expense)	$	188,025		$	22,836	$	(1,299	)	$	—	$	(4,888	)	$	10,220		$	214,894
Provision for credit losses		99,875			700		—			—		—			—			100,575
Noninterest income		19,427			209,170		519,455			—		2,838			(11,052	)		739,838
Noninterest expense		113,589			185,350		340,045			—		13,741			(615	)		652,110
Income (loss) from continuing operations before taxes		(6,012	)		45,956		178,111			—		(15,791	)		(217	)		202,047
Income from discontinued operations before taxes		—			—		—			2,103		32,341			—			34,444
	$	(6,012	)	$	45,956	$	178,111		$	2,103	$	16,550		$	(217	)	$	236,491



	Three Months Ended
	June 30,			March 31,			December 31,			September 30,			June 30,
Selected Financial Data	2020			2020			2019			2019			2019

Hilltop Consolidated (1):
Return on average stockholders’ equity		23.32%			9.38%			9.43%			15.55%			11.63%
Return on average assets		3.30%			1.47%			1.40%			2.26%			1.74%
Net interest margin (2)		2.80%			3.41%			3.30%			3.45%			3.49%
Net interest margin (taxable equivalent) (3):
As reported		2.81%			3.42%			3.31%			3.46%			3.49%
Impact of purchase accounting		10 bps			22 bps			19 bps			26 bps			23 bps
Book value per common share ($)		25.08			23.71			23.20			22.71			21.85
Shares outstanding, end of period (000’s)		90,222			90,108			90,641			90,629			92,775
Dividend payout ratio (4)		6.32%			16.41%			14.71%			9.24%			12.92%

Banking Segment:
Net interest margin (2)		3.11%			3.81%			3.77%			3.97%			4.06%
Net interest margin (taxable equivalent) (3):
As reported		3.12%			3.82%			3.78%			3.98%			4.06%
Impact of purchase accounting		12 bps			30 bps			25 bps			35 bps			31 bps
Accretion of discount on loans ($000’s)		3,217			6,639			5,698			7,868			6,444
Net charge-offs (recoveries) ($000’s)		16,382			1,508			1,348			(380)			2,960
Return on average assets		-0.42%			0.33%			1.17%			1.51%			1.43%
Fee income ratio		10.2%			8.5%			10.8%			8.3%			10.3%
Efficiency ratio		54.1%			55.5%			54.9%			50.5%			55.9%
Employees’ compensation and benefits ($000’s)		31,583			32,347			31,455			31,309			33,050

Broker-Dealer Segment:
Net revenue ($000’s) (5)		132,624			99,382			113,128			121,466			116,969
Employees’ compensation and benefits ($000’s)		79,697			56,550			64,301			69,954			70,333
Variable compensation expense ($000’s)		52,372			32,024			39,505			44,921			44,833
Compensation as a % of net revenue		60.1%			56.9%			56.8%			57.6%			60.1%
Pre-tax margin (6)		21.0%			18.3%			21.4%			22.2%			18.9%

Mortgage Origination Segment:
Mortgage loan originations – volume ($000’s):
Home purchases		3,204,573			2,341,847			2,958,176			3,380,812			3,329,024
Refinancings		2,894,486			1,280,741			1,442,329			1,390,989			631,065
Total mortgage loan originations – volume		6,099,059			3,622,588			4,400,505			4,771,801			3,960,089
Mortgage loan sales – volume ($000’s)		5,934,914			3,486,249			4,226,425			4,316,118			3,338,070
Net gains from mortgage loan sales (basis points):
As reported		368			325			304			335			333
Impact of sales to banking segment		(1	)		(13	)		(8	)		(1	)		0
Mortgage servicing rights asset ($000’s) (7)		81,263			30,298			55,504			51,297			53,695
Employees’ compensation and benefits ($000’s)		160,824			100,328			109,753			123,890			106,449
Variable compensation expense ($000’s)		113,826			58,280			67,224			81,287			65,516

Insurance Segment:
Loss and LAE ratio		78.5%			39.7%			43.6%			44.9%			74.6%
Expense ratio		39.1%			38.0%			40.5%			38.3%			38.4%
Combined ratio		117.6%			77.7%			84.1%			83.2%			113.0%
Employees’ compensation and benefits ($000’s)		3,220			2,777			2,929			2,748			2,784

____________________________________
(1)		Ratios and financial data presented on a consolidated basis and includes discontinued operations and those assets and liabilities classified as held for sale.
(2)		Net interest margin is defined as net interest income divided by average interest-earning assets.
(3)		Net interest margin (taxable equivalent), a non-GAAP measure, is defined as taxable equivalent net interest income divided by average interest-earning assets. Taxable equivalent adjustments are based on the applicable 21% federal income tax rate for all periods presented. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest margins for all earning assets, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. The taxable equivalent adjustments to interest income for Hilltop (consolidated) were $0.3 million, $0.3 million, $0.1 million, $0.1 million, and $0.2 million, respectively, for the periods presented and for the banking segment were $0.2 million, $0.2 million, $0.1 million, $0.1 million, and $0.2 million, respectively, for the periods presented.
(4)		Dividend payout ratio is defined as cash dividends declared per common share divided by basic earnings per common share.
(5)		Net revenue is defined as the sum of total broker-dealer net interest income plus total broker-dealer noninterest income.
(6)		Pre-tax margin is defined as income before income taxes divided by net revenue.
(7)		Reported on a consolidated basis and therefore does not include mortgage servicing rights assets related to loans serviced for the banking segment, which are eliminated in consolidation.

Contacts

Investor Relations Contact:

Erik Yohe

214-525-4634

eyohe@hilltop-holdings.com

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Hilltop Holdings Inc. Announces Financial Results for Second Quarter 2020

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