Hilltop Holdings(HTH) - 2021 Q1 - Quarterly Report

Report Information - Registrant: Hilltop Holdings Inc.[2] - Filing Type: Form 10-Q, Quarterly Report[2] - Quarterly Period Ended: March 31, 2021[2] - Commission File Number: 1-31987[2] - Filer Status: Large accelerated filer[4] - Common Stock Outstanding (April 23, 2021): 82,260,548 shares[4] PART I — FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets Total assets and liabilities grew, driven by increases in cash, securities, loans, and deposits Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2021 | December 31, 2020 | Change | | :----- | :------------- | :---------------- | :----- | | Total Assets | $17,682,837 | $16,944,264 | +$738,573 | | Total Liabilities | $15,236,822 | $14,593,617 | +$643,205 | | Total Stockholders' Equity | $2,446,015 | $2,350,647 | +$95,368 | | Cash and due from banks | $1,564,489 | $1,062,560 | +$501,929 | | Total deposits | $11,732,779 | $11,242,319 | +$490,460 | | Loans held for investment, net | $7,666,158 | $7,544,097 | +$122,061 | Consolidated Statements of Operations Net income and EPS rose significantly year-over-year, driven by higher noninterest income and a credit loss reversal Consolidated Statements of Operations Highlights (Three Months Ended March 31, in thousands, except per share data) | Metric | 2021 | 2020 | Change | | :----- | :--- | :--- | :----- | | Total interest income | $146,923 | $144,875 | +$2,048 | | Total interest expense | $41,241 | $34,539 | +$6,702 | | Net interest income | $105,682 | $110,336 | -$4,654 | | Provision for (reversal of) credit losses | $(5,109) | $34,549 | -$39,658 | | Total noninterest income | $417,585 | $271,713 | +$145,872 | | Total noninterest expense | $366,662 | $281,901 | +$84,761 | | Income from continuing operations before income taxes | $161,714 | $65,599 | +$96,115 | | Net income | $123,944 | $53,602 | +$70,342 | | Income attributable to Hilltop | $120,345 | $49,636 | +$70,709 | | Basic EPS | $1.46 | $0.55 | +$0.91 | | Diluted EPS | $1.46 | $0.55 | +$0.91 | Consolidated Statements of Comprehensive Income Comprehensive income increased significantly year-over-year, driven by a substantial rise in net income Consolidated Comprehensive Income Highlights (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | Change | | :----- | :--- | :--- | :----- | | Net income | $123,944 | $53,602 | +$70,342 | | Change in fair value of cash flow and fair value hedges, net of tax | $6,035 | $(3,200) | +$9,235 | | Net unrealized gains (losses) on securities available for sale, net of tax | $(20,241) | $12,605 | -$32,846 | | Comprehensive income applicable to Hilltop | $106,068 | $59,156 | +$46,912 | Consolidated Statements of Stockholders' Equity Total stockholders' equity increased due to net income, partially offset by other comprehensive loss and capital returns Consolidated Stockholders' Equity Highlights (March 31, 2021 vs. December 31, 2020, in thousands) | Metric | March 31, 2021 | December 31, 2020 | Change | | :----- | :------------- | :---------------- | :----- | | Total Hilltop stockholders' equity | $2,419,185 | $2,323,939 | +$95,246 | | Net income attributable to Hilltop | $120,345 | N/A | N/A | | Other comprehensive loss | $(14,277) | N/A | N/A | | Repurchases of common stock | $(4,950) | N/A | N/A | | Dividends on common stock | $(9,865) | N/A | N/A | Consolidated Statements of Cash Flows The company experienced a significant net cash inflow from operating activities, leading to a large increase in cash Consolidated Cash Flow Highlights (Three Months Ended March 31, in thousands) | Activity | 2021 | 2020 | Change | | :------- | :--- | :--- | :----- | | Net cash provided by (used in) operating activities | $313,816 | $(582,770) | +$896,586 | | Net cash used in investing activities | $(307,026) | $(16,414) | -$290,612 | | Net cash provided by financing activities | $478,185 | $718,074 | -$239,889 | | Net change in cash, cash equivalents and restricted cash | $484,975 | $118,890 | +$366,085 | | Cash, cash equivalents and restricted cash, end of period | $1,838,278 | $761,679 | +$1,076,599 | Notes to Consolidated Financial Statements Summary of Significant Accounting and Reporting Policies Hilltop Holdings Inc is a financial holding company providing banking, broker-dealer, and mortgage origination services - Hilltop Holdings Inc operates as a financial holding company with primary business units: PlainsCapital Corporation (banking, wealth/investment management, residential mortgage lending) and Hilltop Securities Holdings LLC (investment banking, broker-dealer services)[18][20] - The sale of National Lloyds Corporation (NLC), the former insurance segment, was completed on June 30, 2020, with its results for Q1 2020 presented as discontinued operations[19] - The company acknowledges material uncertainty and potential adverse effects on its business, financial condition, results of operations, and cash flows due to the COVID-19 pandemic[21] - Unaudited consolidated financial statements are prepared in conformity with GAAP and SEC rules, with management's estimates and assumptions affecting reported amounts[22][23] Recently Issued Accounting Standards The company adopted ASU 2020-01, which did not materially impact its consolidated financial statements - Adopted ASU 2020-01 on January 1, 2021, clarifying interactions among ASC 321, ASC 323, and ASC 815 for equity securities and investments[34] - The adoption of ASU 2020-01 did not have a material impact on consolidated financial statements[34] Discontinued Operations Hilltop completed the sale of its insurance segment, NLC, on June 30, 2020, for $154.1 million - NLC (insurance segment) was sold on June 30, 2020, for $154.1 million cash proceeds[35] - Recognized an aggregate gain of $36.8 million from the NLC sale in 2020[35] NLC Discontinued Operations Results (Three Months Ended March 31, 2020, in thousands) | Metric | 2020 | | :----- | :--- | | Total interest income | $1,005 | | Total noninterest income | $30,391 | | Total noninterest expense | $26,976 | | Income from discontinued operations before income taxes | $4,014 | | Income tax expense | $863 | | Income from discontinued operations, net of income taxes | $3,151 | Fair Value Measurements The company measures certain financial instruments at fair value, with MSR using Level 3 inputs - Fair value measurements are classified into a hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[44][45] - Substantially all mortgage loans held for sale and retained MSR asset are measured at fair value under the Fair Value Option to mitigate earnings volatility[47] - Level 3 inputs for MSR asset valuation include weighted average constant prepayment rate (11.28% in Q1 2021 vs 12.15% in Q4 2020) and discount rate (13.68% in Q1 2021 vs 14.60% in Q4 2020)[56][57] Fair Value of Financial Instruments (March 31, 2021 vs. December 31, 2020, in thousands) | Instrument | March 31, 2021 (Total Fair Value) | December 31, 2020 (Total Fair Value) | | :--------- | :-------------------------------- | :--------------------------------- | | Trading securities | $528,712 | $694,255 | | Available for sale securities | $1,715,406 | $1,462,205 | | Loans held for sale | $2,249,067 | $2,521,404 | | MSR asset | $142,125 | $143,742 | Changes in Fair Value of Instruments under Fair Value Option (Three Months Ended March 31, in thousands) | Instrument | 2021 (Total Changes in Fair Value) | 2020 (Total Changes in Fair Value) | | :--------- | :--------------------------------- | :--------------------------------- | | Loans held for sale | $(67,956) | $33,979 | | MSR asset | $16,865 | $(11,030) | Securities The company's securities portfolio saw a decrease in trading securities and an increase in available-for-sale securities - Net gains from trading portfolio: $8.7 million (Q1 2021) vs $7.0 million (Q1 2020)[79] - Net gains from structured product trading activities: $44.1 million (Q1 2021) vs $21.3 million (Q1 2020)[79] Trading Securities Fair Value (March 31, 2021 vs. December 31, 2020, in thousands) | Type | March 31, 2021 | December 31, 2020 | | :--- | :------------- | :---------------- | | U.S. Treasury securities | $465 | $40,491 | | Residential mortgage-backed securities | $161,557 | $336,081 | | States and political subdivisions | $183,385 | $171,573 | | Total Trading Securities | $528,712 | $694,255 | Available for Sale Securities Fair Value (March 31, 2021 vs. December 31, 2020, in thousands) | Type | March 31, 2021 | December 31, 2020 | | :--- | :------------- | :---------------- | | Residential mortgage-backed securities | $900,283 | $641,611 | | Collateralized mortgage obligations | $539,818 | $565,908 | | Total Available for Sale Securities | $1,715,406 | $1,462,205 | Loans Held for Investment Loans held for investment increased, while non-accrual loans also saw a slight rise - Active COVID-19 related loan modifications with deferrals: approximately $130 million as of March 31, 2021[93] - Loans past due 90 days or more and accruing: $265.2 million (March 31, 2021) vs $243.6 million (December 31, 2020), primarily guaranteed by U.S. government agencies[100] Loans Held for Investment by Portfolio Segment (March 31, 2021 vs. December 31, 2020, in thousands) | Segment | March 31, 2021 | December 31, 2020 | | :------ | :------------- | :---------------- | | Commercial real estate | $3,114,936 | $3,133,903 | | Commercial and industrial | $2,574,229 | $2,627,774 | | 1-4 family residential | $745,544 | $629,938 | | Broker-dealer | $520,175 | $437,007 | | Total Loans Held for Investment | $7,810,657 | $7,693,141 | Non-accrual Loans (March 31, 2021 vs. December 31, 2020, in thousands) | Segment | March 31, 2021 | December 31, 2020 | | :------ | :------------- | :---------------- | | Commercial and industrial | $36,144 | $34,049 | | 1-4 family residential | $22,653 | $21,377 | | Total Non-accrual Loans | $69,992 | $67,094 | Allowance for Credit Losses The allowance for credit losses decreased due to a net reversal driven by improved macroeconomic forecasts - ACL for loans held for investment decreased by $5.1 million in Q1 2021, primarily due to a net reversal of credit losses on collectively evaluated loans ($6.5 million) driven by improved macroeconomic forecasts[118][120] - Adopted CECL standard on January 1, 2020, resulting in a $12.6 million increase in ACL for loans held for investment[113][120] - Allowance for off-balance sheet credit exposures increased to $8.8 million at March 31, 2021, from $8.388 million at the beginning of the period, primarily due to increases in available commitment balances[123][124] Changes in Allowance for Credit Losses for Loans Held for Investment (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | | :----- | :--- | :--- | | Balance, beginning of period | $149,044 | $61,136 | | Transition Adjustment CECL | — | $12,562 | | Provision for (reversal of) credit losses | $(5,109) | $34,549 | | Net recoveries (charge-offs) | $564 | $(1,508) | | Balance, end of period | $144,499 | $106,739 | Mortgage Servicing Rights The MSR asset's fair value slightly decreased, with significant additions from new originations and substantial sales - Mortgage loans serviced for others decreased to $12.1 billion at March 31, 2021, from $14.6 billion at December 31, 2020[126] - Weighted average constant prepayment rate decreased to 11.28% (Q1 2021) from 12.15% (Q4 2020); weighted average discount rate decreased to 13.68% (Q1 2021) from 14.60% (Q4 2020)[129] - Contractually specified servicing fees, late fees, and ancillary fees earned increased to $16.2 million (Q1 2021) from $5.9 million (Q1 2020)[133] Changes in Fair Value of MSR Asset (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | | :----- | :--- | :--- | | Balance, beginning of period | $143,742 | $55,504 | | Additions | $34,301 | $4,475 | | Sales | $(52,783) | $(18,650) | | Changes in fair value (model inputs/assumptions) | $24,137 | $(9,594) | | Balance, end of period | $142,125 | $30,299 | Deposits Total deposits increased, driven by growth in noninterest-bearing demand and money market accounts Deposits by Type (March 31, 2021 vs. December 31, 2020, in thousands) | Type | March 31, 2021 | December 31, 2020 | | :--- | :------------- | :---------------- | | Noninterest-bearing demand | $4,031,181 | $3,612,384 | | Interest-bearing demand accounts | $2,568,355 | $2,399,341 | | Money market | $2,895,070 | $2,716,878 | | Time | $1,327,177 | $1,506,435 | | Total Deposits | $11,732,779 | $11,242,319 | Short-term Borrowings Short-term borrowings decreased slightly, with a notable reduction in securities sold under agreements to repurchase - Average interest rate on federal funds purchased and securities sold under agreements to repurchase decreased to 0.36% (Q1 2021) from 1.78% (Q1 2020)[140] - Commercial paper outstanding increased to $336.4 million at March 31, 2021, with a weighted average maturity of 157 days and rate of 1.13%[142] Short-term Borrowings (March 31, 2021 vs. December 31, 2020, in thousands) | Type | March 31, 2021 | December 31, 2020 | | :--- | :------------- | :---------------- | | Federal funds purchased | $158,835 | $180,325 | | Securities sold under agreements to repurchase | $123,437 | $237,856 | | Commercial paper | $336,380 | $277,617 | | Total Short-term Borrowings | $676,652 | $695,798 | Notes Payable Notes payable increased, primarily due to an increase in Ventures Management lines of credit Notes Payable (March 31, 2021 vs. December 31, 2020, in thousands) | Type | March 31, 2021 | December 31, 2020 | | :--- | :------------- | :---------------- | | Senior Notes due April 2025, net | $148,980 | $148,937 | | Subordinated Notes due May 2030, net | $49,229 | $49,207 | | Subordinated Notes due May 2035, net | $147,650 | $147,608 | | Ventures Management lines of credit | $55,854 | $36,235 | | Total Notes Payable | $401,713 | $381,987 | Leases The company's net operating lease cost slightly decreased, while lease terms and discount rates remained consistent - Weighted average remaining lease term for operating leases: 5.4 years (March 31, 2021) vs 5.5 years (December 31, 2020)[151] - Weighted average discount rate for operating leases: 4.56% (March 31, 2021) vs 4.67% (December 31, 2020)[151] Lease Costs (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | | :----- | :--- | :--- | | Net operating lease cost | $9,379 | $10,012 | | Total finance lease cost | $281 | $291 | Cash Flows from Leases (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | | :----- | :--- | :--- | | Operating cash flows from operating leases | $9,240 | $9,951 | Income Taxes The company's effective tax rates from continuing operations approximated the applicable statutory rates - Effective tax rate from continuing operations: 23.4% (Q1 2021) vs 23.1% (Q1 2020)[155] Commitments and Contingencies The company is involved in various legal proceedings and regulatory inquiries, which are not expected to be material - The company is subject to legal proceedings, claims, investigations, and regulatory inquiries, with outcomes inherently unpredictable[156][157][161] - Management believes the outcome of pending and threatened litigation and inquiries will not have a material effect on the company's overall financial position, except for specific matters[163] - PrimeLending received an investigative inquiry from the U.S. Attorney for the Western District of Virginia regarding its float down option[162] - Mortgage origination segment's indemnification liability reserve increased to $24.3 million (March 31, 2021) from $21.5 million (December 31, 2020)[168][171] - Provision for indemnification losses was $3.0 million (Q1 2021) vs $0.7 million (Q1 2020)[168] Financial Instruments with Off-Balance Sheet Risk The company has significant off-balance sheet commitments in its banking and broker-dealer segments - Banking segment had outstanding unused commitments to extend credit of $2.0 billion at March 31, 2021[174] - Banking segment had outstanding financial and performance standby letters of credit of $83.7 million at March 31, 2021[174] - Broker-dealer segment is exposed to off-balance sheet risk from securities transactions, derivatives, clearing agreements, and secured financing arrangements[176] Stock-Based Compensation The company granted 532,000 restricted stock units in Q1 2021, with $32.9 million in unrecognized expense - Granted 532,000 RSUs in Q1 2021, with 320,377 time-based and 150,668 performance-based outstanding at March 31, 2021[179][182] - Unrecognized compensation expense related to outstanding RSUs: $32.9 million, expected to be recognized over a weighted average period of 1.72 years[183] Regulatory Matters Hilltop and its subsidiaries maintain capital ratios well above regulatory minimums - PlainsCapital's capital ratios place it in the 'well capitalized' category under regulatory requirements[186] - Hilltop Securities' excess net capital: $301.3 million at March 31, 2021[192] - PrimeLending and its subsidiaries' net worth and liquidity exceeded HUD and GNMA requirements as of March 31, 2021[195] Regulatory Capital Ratios (March 31, 2021, in thousands) | Metric | PlainsCapital (Actual Ratio) | Hilltop (Actual Ratio) | Minimum Capital Requirements (Including Conservation Buffer) | To Be Well Capitalized Ratio | | :----- | :--------------------------- | :--------------------- | :----------------------------------------------------------- | :--------------------------- | | Common equity Tier 1 capital (to risk weighted assets) | 14.74 % | 19.63 % | 7.0 % | 6.5 % | | Tier 1 capital (to risk weighted assets) | 14.74 % | 20.22 % | 8.5 % | 8.0 % | | Total capital (to risk weighted assets) | 15.64 % | 22.96 % | 10.5 % | 10.0 % | | Tier 1 capital (to average assets) | 10.50 % | 13.01 % | 4.0 % | 5.0 % | Stockholders' Equity The company returned capital to shareholders through dividends and a new $75.0 million stock repurchase program - Declared and paid cash dividends of $0.12 per common share (Q1 2021) vs $0.09 (Q1 2020)[196] - Repurchased $5.0 million of common stock (149,878 shares at $33.01 average price) in Q1 2021[198] - New stock repurchase program authorized in January 2021 for up to $75.0 million through January 2022[197] Derivative Financial Instruments The company uses various derivative instruments to mitigate interest rate risk across its segments - Company uses derivatives to mitigate interest rate risk, including interest rate swaps, forward commitments to sell MBSs, and Eurodollar futures[199] - PrimeLending's non-hedging derivatives (IRLCs and forward commitments) fair value changes: +$43.8 million (Q1 2021) vs +$19.9 million (Q1 2020)[204] - Decrease in fair value of IRLCs at March 31, 2021, driven by a decrease in the average value of individual IRLCs due to increased mortgage interest rates[212] Derivative Positions (March 31, 2021 vs. December 31, 2020, in thousands) | Instrument (Notional Amount) | March 31, 2021 | December 31, 2020 | | :--------------------------- | :------------- | :---------------- | | IRLCs | $2,673,869 | $2,470,013 | | Commitments to sell MBSs | $5,837,856 | $6,141,079 | | Interest rate swaps (designated as cash flow hedges) | $125,000 | $105,000 | | Interest rate swaps (designated as fair value hedges) | $77,118 | $60,618 | Balance Sheet Offsetting The company's balance sheet offsetting disclosures detail financial instruments subject to master netting arrangements - Securities lending activities involve lending securities against cash or similar collateral, with daily mark-to-market adjustments[220] Gross and Net Amounts of Recognized Assets Subject to Offsetting (March 31, 2021, in thousands) | Asset Type | Gross Amounts of Recognized Assets | Net Amounts Presented in the Balance Sheet | | :--------- | :------------------------------- | :--------------------------------------- | | Securities borrowed | $1,545,730 | $1,545,730 | | Reverse repurchase agreements | $106,342 | $106,342 | | Forward MBS derivatives | $50,960 | $50,638 | Gross and Net Amounts of Recognized Liabilities Subject to Offsetting (March 31, 2021, in thousands) | Liability Type | Gross Amounts of Recognized Liabilities | Net Amounts Presented in the Balance Sheet | | :------------- | :------------------------------------ | :--------------------------------------- | | Securities loaned | $1,464,186 | $1,464,186 | | Repurchase agreements | $123,392 | $123,392 | Broker-Dealer and Clearing Organization Receivables and Payables Broker-dealer receivables and payables increased, driven by higher securities borrowed and loaned balances Broker-Dealer and Clearing Organization Receivables (March 31, 2021 vs. December 31, 2020, in thousands) | Type | March 31, 2021 | December 31, 2020 | | :--- | :------------- | :---------------- | | Securities borrowed | $1,545,730 | $1,338,855 | | Total Receivables | $1,596,817 | $1,404,727 | Broker-Dealer and Clearing Organization Payables (March 31, 2021 vs. December 31, 2020, in thousands) | Type | March 31, 2021 | December 31, 2020 | | :--- | :------------- | :---------------- | | Securities loaned | $1,464,186 | $1,245,066 | | Total Payables | $1,546,227 | $1,368,373 | Segment and Related Information The mortgage origination and banking segments significantly increased their income before taxes - Continuing operations comprise three reportable segments: banking, broker-dealer, and mortgage origination[226] Income (Loss) from Continuing Operations Before Taxes by Segment (Three Months Ended March 31, in thousands) | Segment | 2021 | 2020 | Change | | :------ | :--- | :--- | :----- | | Banking | $64,595 | $11,452 | +$53,143 | | Broker-Dealer | $17,667 | $18,169 | -$502 | | Mortgage Origination | $93,012 | $39,784 | +$53,228 | | Corporate | $(13,774) | $(4,200) | -$9,574 | | Total Continuing Operations | $161,714 | $65,599 | +$96,115 | Earnings per Common Share Basic and diluted earnings per common share from continuing operations significantly increased year-over-year Earnings per Common Share (Three Months Ended March 31, in thousands, except per share data) | Metric | 2021 | 2020 | | :----- | :--- | :--- | | Income from continuing operations attributable to Hilltop | $120,345 | $46,485 | | Basic EPS from continuing operations | $1.46 | $0.51 | | Diluted EPS from continuing operations | $1.46 | $0.51 | | Weighted average shares outstanding - basic | 82,169 | 90,509 | | Weighted average shares outstanding - diluted | 82,657 | 90,550 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements The report contains forward-looking statements subject to various risks and uncertainties that could cause actual results to differ - Report includes forward-looking statements regarding future results, financial condition, liquidity, market trends, and operations[238] - Key risks include the COVID-19 pandemic's impact, credit risks of lending activities, effectiveness of data security, changes in economic conditions, interest rate environment, and regulatory changes[239][243] - Company does not undertake to update any forward-looking statement except as required by federal securities laws[242] Overview Hilltop Holdings reported $120.3 million in income attributable to common stockholders for Q1 2021 - Hilltop Holdings Inc provides business and consumer banking, broker-dealer, and mortgage origination services[244] - Income applicable to common stockholders: $120.3 million, or $1.46 per diluted share (Q1 2021)[248] - Dividend payout ratio: 8.19% (Q1 2021)[248] - Consolidated total assets: $17.7 billion; total deposits: $11.7 billion; total loans (including held for sale): $10.2 billion; stockholders' equity: $2.4 billion (March 31, 2021)[250] Income Before Income Taxes by Segment (Q1 2021, in millions) | Segment | Income Before Taxes | | :------ | :------------------ | | Banking | $64.6 | | Broker-Dealer | $17.7 | | Mortgage Origination | $93.0 | Recent Developments The company discusses the ongoing impact of COVID-19, operational adjustments, and the status of its loan portfolio - COVID-19 pandemic continues to cause economic uncertainty, but easing of restrictions and vaccine distribution are noted[251] - Company bolstered cash position in March 2020 by raising brokered deposits and sweeping funds from Hilltop Securities into the Bank[252][253] - Bank approved approximately $1.0 billion in COVID-19 related loan modifications in 2020, with an additional $8 million in Q1 2021; Active deferrals were $130 million at March 31, 2021[260][261] - Bank's loan portfolio includes $492.4 million in PPP loans at March 31, 2021; SBA approved $420 million in forgiveness applications by April 16, 2021[264] - Outlook for 2021 remains uncertain due to COVID-19, dependent on vaccine effectiveness, government stimulus, and market conditions[267][268] Factors Affecting Results of Operations Operating results are significantly influenced by general economic conditions, particularly interest rate fluctuations and regulatory changes - Key factors impacting results include changes in interest rates, fluctuations in securities volume and price, inflation, political events, and regulatory requirements[270] - Recent economic and political environment has led to legislative and regulatory initiatives that could substantially change the financial services industry[270] Factors Affecting Comparability of Results of Operations Comparability is affected by the NLC sale, a stock tender offer, note issuance, technology upgrades, and LIBOR transition - NLC sale completed June 30, 2020, impacting comparability as its results are now discontinued operations[271] - Completed a $193.4 million modified 'Dutch auction' tender offer for 8,058,947 common shares on November 17, 2020[272] - Issued $200 million in aggregate principal amount of 2030 and 2035 Subordinated Notes in May 2020[273] - Significant investments in technology enhancements and core system upgrades are ongoing, with non-recurring costs expected to decline by end of 2021[274][275][276] - Transition away from LIBOR is a key factor, with SOFR proposed as an alternative; Company is assessing impacts and amending contracts[277][280][282] - FDIC finalized revisions to brokered deposit rules, effective April 1, 2021, with full compliance by January 1, 2022, which the company is evaluating for financial impacts[284] Segment Information Hilltop's continuing operations are structured into banking, broker-dealer, and mortgage origination segments - Company's continuing operations are divided into three reportable segments: banking, broker-dealer, and mortgage origination[286] - Banking segment: provides business and consumer banking services, revenue primarily from net interest income[287] - Broker-dealer segment: provides investment banking and financial services, revenue primarily from fees and commissions[288] - Mortgage origination segment: offers loan products, revenue predominantly from origination/servicing fees and selling loans in secondary market[289] - Corporate activities include holding company financing, merchant banking, and administrative services[290] Key Performance Indicators The company's key performance indicators, including ROAE and ROAA, showed strong improvement in Q1 2021 - Key performance indicators include return on average stockholders' equity, return on average assets, net interest margin, and net charge-offs to average loans outstanding[296] - Regulatory capital ratios are key measures for assessing capital position and comparing to peers[297] - Purchase accounting contributed 13 and 22 basis points to consolidated taxable equivalent net interest margin in Q1 2021 and Q1 2020, respectively[313] Consolidated Key Performance Indicators (Three Months Ended March 31) | Metric | 2021 | 2020 | | :----- | :--- | :--- | | Return on average stockholders' equity | 20.58 % | 9.38 % | | Return on average assets | 2.90 % | 1.47 % | | Net interest margin | 2.69 % | 3.41 % | | Leverage ratio (end of period) | 13.01 % | 13.03 % | | Common equity Tier 1 risk-based capital ratio (end of period) | 19.63 % | 15.96 % | How We Generate Revenue Revenue is generated from net interest income and noninterest income, with the latter increasing significantly - Revenue sources: net interest income (difference between interest earned on assets and interest paid on liabilities) and noninterest income[299] - Net interest income from continuing operations decreased in Q1 2021 vs Q1 2020[299] - Noninterest income from continuing operations increased in Q1 2021 vs Q1 2020, primarily due to a $131.2 million increase in mortgage production income[300] - Broker-dealer noninterest income: $66.0 million in securities commissions/fees and $30.6 million in trading gains (Q1 2021)[305] - Mortgage operations noninterest income: $310.2 million in net gains from sale of loans, other mortgage production income, and origination fees (Q1 2021)[305] Consolidated Operating Results Consolidated income from continuing operations increased significantly, driven by mortgage origination and a credit loss reversal - Income from continuing operations applicable to common stockholders: $120.3 million ($1.46 diluted EPS) in Q1 2021 vs $46.5 million ($0.51 diluted EPS) in Q1 2020[302] - Q1 2021 results reflect significant increase in mortgage origination segment net gains and a reversal of credit losses[302] - Net interest income decreased in Q1 2021, primarily due to decreased net yields on mortgage loans held for sale and interest incurred on Subordinated Notes[319] - Provision for (reversal of) credit losses: $(5.1) million reversal in Q1 2021 vs $34.5 million provision in Q1 2020, due to improved macroeconomic forecasts[320][321] - Noninterest income increased in Q1 2021 due to higher mortgage loan sales volume, fair value changes, and structured finance net revenues[322] - Noninterest expense increased in Q1 2021 due to higher variable compensation and operating costs in mortgage origination and broker-dealer segments[323] Segment Results from Continuing Operations Banking Segment The banking segment's income before taxes increased significantly due to a reversal of credit losses - Net interest income increased due to higher volume of interest-earning assets (mortgage warehouse lending, PPP loans), partially offset by lower loan yields[342] - Reversal of credit losses ($5.2 million) primarily from improved macroeconomic forecasts and slower prepayment assumptions on certain portfolios[347] - Banking segment retained approximately $159 million in mortgage loans originated by the mortgage origination segment in Q1 2021[346] Banking Segment Operating Results (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | Variance | | :----- | :--- | :--- | :------- | | Net interest income | $103,884 | $93,923 | +$9,961 | | Provision for (reversal of) credit losses | $(5,175) | $34,275 | -$39,450 | | Income before income taxes | $64,595 | $11,452 | +$53,143 | Banking Segment Key Performance Indicators (Three Months Ended March 31) | Metric | 2021 | 2020 | | :----- | :--- | :--- | | Efficiency ratio | 48.42 % | 55.47 % | | Return on average assets | 1.48 % | 0.33 % | | Net interest margin | 3.30 % | 3.81 % | | Net recoveries (charge-offs) to average loans outstanding | 0.03 % | (0.09)% | Broker-Dealer Segment The broker-dealer segment's income before taxes slightly decreased due to lower net interest income - Structured finance net revenues increased by $12.7 million due to strong issuance volumes and demand for mortgage products[360] - Wealth management net revenues decreased due to lower customer balance-based revenues in a low interest rate environment[360] - Other noninterest income increased by $15.2 million from structured finance derivative activities[361] Broker-Dealer Segment Operating Results (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | Variance | | :----- | :--- | :--- | :------- | | Total net interest income | $10,514 | $13,173 | $(2,659) | | Total noninterest income | $98,623 | $86,209 | +$12,414 | | Income before income taxes | $17,667 | $18,169 | $(502) | Broker-Dealer Segment Key Performance Indicators (Three Months Ended March 31) | Metric | 2021 | 2020 | | :----- | :--- | :--- | | Total compensation as a % of net revenue | 60.5 % | 56.9 % | | Pre-tax margin | 16.2 % | 18.3 % | | Public finance services: Number of issues | 231 | 217 | | Public finance services: Aggregate amount of offerings | $15,592,020 | $11,393,139 | | Structured finance: Lock production/TBA volume | $1,933,214 | $1,954,482 | Mortgage Origination Segment The mortgage origination segment's income before taxes increased significantly, driven by higher loan origination volume - Net gains from sale of loans margin: 388 bps (Q1 2021) vs 325 bps (Q1 2020)[383] - Retained servicing on 50% of loans sold in Q1 2021, down from 89% in Q2/Q3 2020, but up from 9% in Q1 2020[387] - Indemnification liability reserve: $24.3 million (March 31, 2021) vs $21.5 million (December 31, 2020)[398] Mortgage Origination Segment Operating Results (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | Variance | | :----- | :--- | :--- | :------- | | Net interest income (expense) | $(7,098) | $368 | $(7,466) | | Noninterest income | $310,444 | $178,968 | +$131,476 | | Income before income taxes | $93,012 | $39,784 | +$53,228 | Mortgage Loan Originations and Sales Volume (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | Variance | | :----- | :--- | :--- | :------- | | Mortgage Loan Originations - volume | $6,184,105 | $3,622,588 | +$2,561,517 | | Home purchases (% of total) | 46.94 % | 64.65 % | -17.71 % | | Refinancings (% of total) | 53.06 % | 35.35 % | +17.71 % | | Mortgage Loan Sales - volume | $6,350,837 | $3,486,249 | +$2,864,588 | Corporate Corporate activities resulted in a higher loss before income taxes, primarily due to increased interest expense - Interest expense included $3.1 million on $200 million Subordinated Notes (issued May 2020) in Q1 2021[404] - Noninterest expenses increased due to a prior year non-recurring gain on sale transaction and increased professional fees[406] Corporate Operating Results (Three Months Ended March 31, in thousands) | Metric | 2021 | 2020 | Variance | | :----- | :--- | :--- | :------- | | Net interest expense | $(4,692) | $(1,656) | $(3,036) | | Income (loss) from continuing operations before income taxes | $(13,774) | $(4,200) | $(9,574) | Results from Discontinued Operations There were no results from discontinued operations in Q1 2021 following the sale of NLC - No results from discontinued operations in Q1 2021 following NLC sale on June 30, 2020[407] - Insurance segment income before income taxes: $4.0 million (Q1 2020)[407] - Corporate recognized a $36.8 million pre-tax gain on NLC sale within discontinued operations in Q2 2020[408] Financial Condition Securities Portfolio The total securities portfolio increased, with available-for-sale securities growing while trading securities decreased - Banking segment's securities portfolio: $2.0 billion at March 31, 2021, primarily for interest rate management and collateral[416] - Broker-dealer segment's trading securities: $527.7 million at March 31, 2021, for sales, underwriting, and customer activities[418] - No allowance for credit losses recognized on debt securities portfolio, as declines in value are unrelated to credit loss[420] Total Securities Portfolio (March 31, 2021 vs. December 31, 2020, in thousands) | Type | March 31, 2021 | December 31, 2020 | | :--- | :------------- | :---------------- | | Trading securities, at fair value | $528,712 | $694,255 | | Securities available for sale, at fair value | $1,715,406 | $1,462,205 | | Securities held to maturity, at amortized cost | $300,088 | $311,944 | | Total securities portfolio | $2,544,395 | $2,468,544 | Loan Portfolio Consolidated loans held for investment increased, with growth in the banking and broker-dealer segments - Banking segment's loan portfolio included $492.4 million in PPP loans at March 31, 2021[426] - Broker-dealer segment's loans held for investment increased to $519.9 million, driven by a 17% increase in customer margin accounts and 21% in correspondent receivables[428] Consolidated Loans Held for Investment (March 31, 2021 vs. December 31, 2020, in thousands) | Segment | March 31, 2021 | December 31, 2020 | | :------ | :------------- | :---------------- | | Commercial real estate | $3,114,936 | $3,133,903 | | Commercial and industrial | $2,574,229 | $2,627,774 | | Broker-dealer | $520,175 | $437,007 | | Total Loans Held for Investment, gross | $7,810,657 | $7,693,141 | Mortgage Origination Segment Loans Held for Sale and IRLCs (March 31, 2021 vs. December 31, 2020, in thousands) | Metric | March 31, 2021 | December 31, 2020 | | :----- | :------------- | :---------------- | | Loans held for sale (fair value) | $2,249,067 | $2,521,404 | | IRLCs (fair value) | $2,722,678 | $2,546,061 | Allowance for Credit Losses on Loans The allowance for credit losses decreased due to improved macroeconomic forecasts for GDP growth and unemployment - ACL for loans held for investment decreased by $5.1 million in Q1 2021, driven by improvements in macroeconomic forecast assumptions[448] - Company utilized a single macroeconomic consensus scenario from Moody's Analytics (March 2021) for ACL estimation[438] - Allowance for credit losses as a percentage of gross loans held for investment: 1.85% (March 31, 2021) vs 1.45% (March 31, 2020)[462] - ACL for unfunded loan commitments increased to $8.8 million (March 31, 2021) from $8.388 million (beginning of period) due to increases in available commitment balances[469] - Upside economic scenario would decrease ACL by ~$21 million; downside scenario would increase ACL by ~$73 million[457][458] U.S. Real GDP Growth Rate Forecasts (Q1 2021 vs. Q4 2020) | Quarter | March 31, 2021 Forecast | December 31, 2020 Forecast | | :------ | :---------------------- | :------------------------- | | Q1 2021 | 5.0% | 1.6% | | Q2 2021 | 6.5% | 4.5% | | Q3 2021 | 6.7% | 4.7% | U.S. Unemployment Rate Forecasts (Q1 2021 vs. Q4 2020) | Quarter | March 31, 2021 Forecast | December 31, 2020 Forecast | | :------ | :---------------------- | :------------------------- | | Q1 2021 | 6.3% | 6.9% | | Q2 2021 | 6.2% | 7.1% | | Q3 2021 | 5.8% | 7.0% | Potential Problem Loans Potential problem loans, defined as loans with potential weaknesses but still performing, decreased significantly - Potential problem loans decreased to $4.8 million (three credit relationships) at March 31, 2021, from $11.3 million (seven credit relationships) at December 31, 2020[470] - Potential problem loans exclude COVID-19 payment deferment program modifications and purchased credit deteriorated (PCD) loans[470] Non-Performing Assets Non-performing assets slightly decreased, with a minor increase in non-accrual loans and a decrease in OREO - Loans past due 90 days or more and still accruing: $265.2 million (March 31, 2021) vs $243.6 million (December 31, 2020), primarily government-guaranteed loans held for sale[475][478] - COVID-19 related loan modifications are not reported as TDRs due to CARES Act exemptions[476] Non-Performing Assets (March 31, 2021 vs. December 31, 2020, in thousands) | Metric | March 31, 2021 | December 31, 2020 | Variance | | :----- | :------------- | :---------------- | :------- | | Non-accrual loans | $78,276 | $77,980 | +$296 | | Troubled debt restructurings (accruing) | $1,584 | $1,954 | -$370 | | Non-performing loans | $79,860 | $79,934 | -$74 | | Other real estate owned (OREO) | $19,899 | $21,289 | -$1,390 | | Non-performing assets | $99,759 | $101,324 | -$1,565 | | Non-performing assets as a percentage of total assets | 0.56 % | 0.60 % | -0.04 % | Deposits Consolidated deposits increased, with the average balance growing and the average rate paid decreasing significantly Consolidated Deposits (Three Months Ended March 31, in thousands) | Metric | 2021 (Average Balance) | 2021 (Average Rate Paid) | 2020 (Average Balance) | 2020 (Average Rate Paid) | | :----- | :--------------------- | :----------------------- | :--------------------- | :----------------------- | | Noninterest-bearing demand deposits | $3,729,994 | 0.00 % | $2,730,975 | 0.00 % | | Interest-bearing demand deposits | $5,625,682 | 0.24 % | $4,589,046 | 0.71 % | | Total Deposits | $11,356,569 | 0.28 % | $8,995,802 | 0.67 % | Borrowings Consolidated borrowings remained stable, with a decrease in short-term borrowings offset by an increase in notes payable Consolidated Borrowings (March 31, 2021 vs. December 31, 2020, in thousands) | Type | March 31, 2021 (Balance) | March 31, 2021 (Average Rate Paid) | December 31, 2020 (Balance) | December 31, 2020 (Average Rate Paid) | | :--- | :----------------------- | :------------------------------- | :-------------------------- | :------------------------------------ | | Short-term borrowings | $676,652 | 1.22 % | $695,798 | 1.46 % | | Notes payable | $401,713 | 4.95 % | $381,987 | 4.54 % | | Junior subordinated debentures | $67,012 | 3.40 % | $67,012 | 4.13 % | | Total Borrowings | $1,145,377 | 2.66 % | $1,144,797 | 2.51 % | Liquidity and Capital Resources Hilltop maintains strong liquidity and capital, continuing its dividend and stock repurchase programs - Hilltop's cash and cash equivalents: $383.3 million at March 31, 2021, up from $374.8 million at December 31, 2020[486] - Company declared a quarterly cash dividend of $0.12 per common share on April 22, 2021[490] - New stock repurchase program authorized in January 2021 for up to $75.0 million through January 2022[492] - Hilltop's regulatory capital ratios (e.g., total capital to risk weighted assets 22.96%) and PlainsCapital's ratios (e.g., total capital to risk weighted assets 15.64%) exceeded regulatory requirements and conservation buffers at March 31, 2021[505][506] - Banking segment's available liquidity and borrowing capacity: $6.981 billion at March 31, 2021, targeting $5-6 billion for remainder of 2021[511] - Broker-dealer segment has $600 million in uncommitted credit arrangements and $250 million in committed revolving credit facilities[515] - Mortgage origination segment funds loans through $3.3 billion warehouse lines of credit with the Bank[517] Impact of Inflation and Changing Prices The company's financial condition is more significantly affected by changes in interest rates than by inflation - Changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate[520] - Interest rates are highly sensitive to factors beyond control, including expected inflation, economic conditions, and monetary/fiscal policies[520] Off-Balance Sheet Arrangements; Commitments; Guarantees The company engages in off-balance sheet transactions, including credit commitments and standby letters of credit - Banking segment had outstanding unused commitments to extend credit of $2.0 billion and standby letters of credit of $83.7 million at March 31, 2021[524] - Broker-dealer segment is exposed to off-balance sheet risk through securities transactions, derivatives, clearing agreements, and secured financing arrangements[525] Critical Accounting Estimates The company's critical accounting estimates involve significant judgment and complexity, with no changes reported - Critical accounting estimates include allowance for credit losses, goodwill and identifiable intangible assets, mortgage loan indemnification liability, mortgage servicing rights asset, and acquisition accounting[527] - No changes in critical accounting policies since December 31, 2020[528] Item 3. Quantitative and Qualitative Disclosures About Market Risk Overview of Market Risk The company's assessment indicates no material changes in market risk disclosures from its 2020 Form 10-K - No material changes in quantitative and qualitative market risk disclosures from 2020 Form 10-K[529] - Market risk is the risk of loss from changes in financial instrument value due to interest rates, market prices, and issuer credit perception[530] Banking Segment Market Risk The banking segment's primary market risk is sensitivity to interest rate changes, which it manages through ALM policies - Banking segment's primary market risk is sensitivity to changes in interest rates, impacting net interest income[531] - Uses asset/liability management policies, interest rate shock analysis, repricing gap analysis, and derivative instruments to manage interest rate risk[533] - Banking segment is overall asset sensitive, meaning net interest income would generally rise if rates increase[536] Estimated Impact of Interest Rate Changes on Banking Segment (March 31, 2021, in thousands) | Change in Interest Rates (basis points) | Changes in Net Interest Income (Amount) | Changes in Net Interest Income (Percent) | Changes in Economic Value of Equity (Amount) | Changes in Economic Value of Equity (Percent) | | :------------------------------------ | :-------------------------------------- | :--------------------------------------- | :------------------------------------------- | :-------------------------------------------- | | +300 | $107,701 | 29.11 % | $665,753 | 33.97 % | | +200 | $68,693 | 18.57 % | $478,475 | 24.41 % | | +100 | $31,121 | 8.41 % | $261,669 | 13.35 % | | -50 | $(9,027) | (2.44)% | $(291,115) | (14.85)% | Broker-Dealer Segment Market Risk The broker-dealer segment is exposed to market risk from its role as a financial intermediary and trading activities - Broker-dealer segment exposed to market risk from financial intermediation and trading activities, including interest rate and market price risk[543] - Risk managed by setting limits on position size and duration, periodic credit reviews, and using central clearing organizations[544][548] - Movement in short-term interest rates could reduce the positive spread between interest income and expense[544] Mortgage Origination Segment Market Risk The mortgage origination segment's primary market exposure is interest rate risk, which it mitigates using derivatives - Primary market exposure is interest rate risk, affecting mortgage loans held for sale, IRLCs, and MSR[550] - Uses forward commitments to sell MBSs and other derivatives (U.S. Treasury bond futures/options, Eurodollar futures) to mitigate interest rate risk[552][553] - MSR are particularly sensitive to declining interest rates due to higher prepayment risk[553] - Hedging strategies may not completely eliminate risk and could potentially increase losses if improperly designed or executed[553] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes in internal control - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2021[556] - No material changes in internal control over financial reporting occurred during the first fiscal quarter[557] PART II. OTHER INFORMATION Item 1. Legal Proceedings Material pending legal proceedings are described in Note 14 to the Consolidated Financial Statements - Material pending legal proceedings are described in Note 14 to the Consolidated Financial Statements[559] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2020 Form 10-K - No material changes to risk factors disclosed in the 2020 Form 10-K[560] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 149,878 shares of common stock for $5.0 million during Q1 2021 - New stock repurchase program authorized in January 2021 for up to $75.0 million through January 2022[562] Common Stock Repurchases (Three Months Ended March 31, 2021) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | | :----- | :------------------------------- | :--------------------------- | :----------------------------------------------------------------------------------- | | January 1 - January 31, 2021 | — | $— | $75,000,000 | | February 1 - February 28, 2021 | 108,682 | $32.98 | $71,415,668 | | March 1 - March 31, 2021 | 41,196 | $33.11 | $70,051,668 | | Total | 149,878 | $33.01 | N/A | Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including agreements, certifications, and XBRL documents - Includes Stock Purchase Agreements, Compensation arrangements, Certifications (Principal Executive Officer, Principal Financial Officer), and XBRL Instance Document[564] Signatures - Signed by William B. Furr, Chief Financial Officer, on April 26, 2021[569]