Hilltop Holdings Inc.
Q2 2021 Earnings Call Transcript

Published: 23 Jul 2021

[Operator:]

Good day and welcome to the Hilltop Holdings Second Quarter 2021 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Erik Yohe. Please go ahead.

[Erik Yohe:]

Thank you, . Before we get started, please note that certain statements during today's presentation that are not statements of historical fact, including statements concerning such items as our outlook, business strategy, future plans, financial conditions, allowance for credit losses, the impact and potential impact of COVID-19, stock repurchases and dividends, as well as such other items referenced in the preface of our presentation are forward-looking statements. These statements are based on management's current expectations concerning future events that, by their nature, are subject to risks and uncertainties.

[Jeremy Ford:]

Thank you, Erik, and good morning. 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 selected 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 in Q2 2020. Improvements in the economic outlook and positive credit migration throw 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 Hilltop Securities Suite deposits, increasing by 26% from Q2 2020. This growth was partially offset by the planned runoff of approximately $858 million in broker deposits, and the reduction in Hilltop Securities Suite 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, the commercial loan growth remains pressure. Quality loan demand has been muted, as our borrowers are liquidity, leading to pay downs and payoffs or the use of elevated liquidity to fund capital expenditures, and other investments before seeking bank debt.

[Will Furr:]

Thank you, Jeremy. 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 with a net reversal of provision for credit losses of $28.7 million, which includes approximately $500,000 of net charge-offs in the quarter.

[Operator:]

Thank you. Our first question will come from Brad Milsaps with Piper Sandler. Please go ahead.

[Brad Milsaps:]

Hey, good morning.

[Jeremy Ford:]

Good morning, Brad.

[Will Furr:]

Good morning, Brad.

[Brad Milsaps:]

Jeremy, maybe I want to start with the broker-dealer. Just wondering if you could maybe offer a little bit more color on your outlook there? I know it's a tougher quarter. I think you've made comments in the past that you thought performance in 2021 might look a little bit more like 2019, just kind of curious if that still holds with kind of this quarter in the books now, kind of based on what you're seeing maybe here to start the second half?

[Jeremy Ford:]

Sure. I mean, I think we saw a very volatile quarter as we discussed in Q2, particularly in the businesses that were really outperforming in fixed income and structured finance that are the higher margin businesses as well. And we see those being rectified and improving from where they are today, but clearly not at the levels they were in 2020 with the tailwinds that we had. So, getting to your point, I mean, I think that as we look through the rest of the year, I think we're looking at net revenue of somewhere around $425 million and pre-tax margin in the low teens for the year.

[Brad Milsaps:]

Okay, great. That's helpful. And then, just maybe moving to balance sheet, obviously cash continues to build, you'll continue to get more back with the PPP program and in last quarter you commented you know you didn't really expect to build the bond portfolio in a big way and you really didn't. Just curious if that kind of still holds or kind of what your plans are kind of with some of the excess liquidity.

[Will Furr:]

Hey Brad, it's Will. Couple of things to note. I do think the bond portfolio grows higher through – probably higher into the 2.4 billion to 2.5 billion level and end of the period at 2.1 billion. As we continue to kind of work to address, as you know, they are higher cash levels, higher liquidity levels, we're also increasing the loan retention, as we noted in our comments to 50 million to 75 million. We view the mortgage retention strategy or approach both as a counterbalance to softer commercial loan demand, but also somewhat as an alternative to the investment securities portfolio. So that increase, we will continue to monitor on a quarterly basis. But as we sit here today, those are the two things we're proactively doing to address liquidity over time.

[Brad Milsaps:]

Great. And then just a final for me. I know you kind of addressed it there at the end, but I guess your provision guide would imply that you guys would be actually taking a provision in the back half of the year. Can you just kind of talk a little bit about that? You've got a pretty large reserve. Obviously, you're not expecting a ton of commercial loan growth. So just kind of curious, kind of what's kind of driving your assumption in the back half.

[Will Furr:]

Yeah. I think as we look at it and if look in the appendix, you'll see the COVID-modified loan portfolio. So, we got about $76 million of deferred loans. We're actively monitoring the portfolio. I think we've consistently said, we expect charge-offs to be a little higher than second half year of the year than they are in the first half and that, kind of bears its way here into the outlook. And I think the other portion that's always out there is what's the economic outlook going to bear in subsequent quarters? So, from our perspective, again, we've got a lot of monitoring going on across the portfolio while there's been, as Jeremy mentioned and I tried to mention in my comments, I'd say substantive improvements across a lot of industries and a lot of dimensions in the portfolio. We still got certain credits that we're monitoring very, very closely, principally those business-centric hotels in the short-run. So that's what's leading to that outlook and we've got a recapture so far of about $34 million. But again, I think it continue to be our perspective that we'll have higher charge-off in the second half.

[Brad Milsaps:]

Great. Thank you, guys.

[Will Furr:]

Thank you.

[Jeremy Ford:]

Sure.

[Operator:]

Our next question will come from Michael Rose with Raymond James. Please go ahead.

[Michael Rose:]

Hey, good morning, everyone. Just wanted to start off, following up on Brad's question. So, if I look at the ALLL, ex-PPP, it looks like you're at if I'm doing my math right, so that would imply a little bit of build here. Just given the outlook for credit, which is still pretty positive, I understand the comments around the COVID exposed industries and things like that, but are we kind of at a level for the ALLL that you would think would be relatively steady state from here, all else equal?

[Will Furr:]

Yeah, I think we got to put the traditional kind of caveat around that of the economic outlook to be volatile and that can move the number one way or the other, material in any given period. As it relates to, kind of the other key drivers, whether it'd be credit migration, again we continue to see positive credit migration across a large swath of the portfolio. We still got the watch portfolios, which I mentioned just a moment ago. And as you mentioned, we don't expect loan growth to be outsized in the second half. So, those would historically be the key drivers, loan growth and migration, which we'll both continue to watch, but I think the guidance we put forward here tries to capture our best thinking around where that provision goes from here.

[Michael Rose:]

Okay, that's helpful, Will. And then maybe as a follow-up, just on the mortgage business. I think we're all cognizant that you guys had a great run here and things are normalizing again. So, spreads are normalizing, volumes are normalizing, although we did get another upward revision from the NBA the other day, which should help. What can you guys do, whether it's from hiring additional producers or targeting certain markets to I guess, "soften the blow" and generate a kind of a softer landing as the market normalizes? Thanks.

[Jeremy Ford:]

Yeah, that's a good point, Michael. And I think even though it is normalizing, it is still strong from historical pre-2020 perspective. And to your point, what we really are – the main focus we're doing is trying to recruit profitable LOs. And today we have hired – we've increased our LO count by 72. And in the quarter, as I've mentioned in my comments, we increased it by a that we think will add an incremental $300 million of volume. And that's net of the terminations that we've had.

[Michael Rose:]

Okay. So, what's the base of that off of in terms of lenders? And obviously it dovetails into the higher origination targets you've laid out for the year, moving it from $17 billion to $20 billion to $20 billion to $23 billion, which is a nice move, but just trying to get a sense for what the net add is and what it means for the headcount?

[Jeremy Ford:]

Sure. Where our LO headcount is right now, it is about 1,300.

[Michael Rose:]

Okay, helpful. And maybe just one final one for me. You guys doubled the share buyback authorization to 150 million. I guess, the assumption would be that you would probably use most, if not all of it. And then, just given the capital levels are still elevated, is there the – I guess, the willingness and desire to continue to purchase shares just given you're trading above 1.2 times tangible? Thanks.

[Will Furr:]

Yeah, I mean, I think that really we've been trying to – we bought $15 million year-to-date and so we had $25 million of the first authorization. And so, we didn't – we authorized another $75 million because we didn't want to run into any pressure with that. So, I think we'll take things one at a time and I think we'll be looking to be in the market. We'll obviously be prudent about price and where we're at now, I think, is probably an area that we would be in the market and we'll just kind of play out the year and do it. We're only doing this in open market and we're only going to do it at a level that doesn't impact the stock price.

[Michael Rose:]

Understood. Thanks for taking my questions.

[Jeremy Ford:]

Sure, thanks.

[Operator:]

Our next question will come from Matt Olney with Stephens. Please go ahead.

[Matt Olney:]

Thanks. Good morning, guys. Want to go back to Michael's question around Prime and the new hires that were disclosed. Is this a newer initiative for Prime hiring new lenders or is this just the same hiring strategy, just finding more success recently? I'm trying to appreciate if we should assume additional hires in the future and we could see additional market share takeaway in the mortgage business?

[Jeremy Ford:]

Sure. I think, it's part of the business period. However, with COVID and just overwhelming volume in 2020, there is just really not a lot of movement there. So, you're always going to have churn, you're always going to have higher determinations. I would say, there is a renewed focus on hiring talented, purchase oriented loan officers this year and particularly because we're seeing a normalization in the market.

[Matt Olney:]

And the second part to that Jeremy, given the new hires, should we anticipate some market share takeaways in the mortgage business?

[Jeremy Ford:]

Yeah. I mean, as we said in our comments, I think given the models and the team that we have, I do think that as refinancing wanes, we will be market share taker and that's our goal.

[Matt Olney:]

Okay. And then, sticking with Prime on the expense side, you guys already disclosed some of the good data around the variable comps for that business. But as the industry volumes slowed down, are there any more fixed cost you consider point down, if you think mortgage volumes could be slower for a while?

[Jeremy Ford:]

You know, we're going to obviously really pay attention to that, but in this market where you've got like, in some cases 10 buyers for a property, we're still having to do the work like we are originating like last year. So, we still had to maintain staff and we want to make sure that we're able to really deliver with exceptional service and being on time is a big part of that. So, I don't see that waning, but we'll obviously be very focused on it.

[Matt Olney:]

Okay. And then lastly from me on the loan growth outlook, I definitely appreciate the commentary about the increased level of single family retention, but you also dropped a commentary around commercial loan growth rebounding in the back half of the year that I think you previously mentioned back in April. Any more color you could add to that about why that was dropped?

[Will Furr:]

Well, I think – well, maybe we're still at 0% to 3% kind of full-year average, which has been our position on kind of full-year average loan growth. So, I don't know that – I don't know that we've changed our loan outlook. I do think commercial loans what we're seeing is – for funded loans in particular is hyper-competitive and both pricing, which we generally are comfortable competing on pricing dimension, but also structure is starting to move. And again, we're going to be, as we have been over time, very prudent about structure and maintaining structure, maintaining kind of our underwriting principles. And so, as we look forward, and again I think as we look out with both liquidity to customers, continue to maintain as customer deposits remain at very elevated levels along with the overall liquidity on bank balance sheets, we think that could – this kind of lower growth environment could persist, as we noted into 2022, really driven by those items as well as again, a slowdown in overall funded loan demand as customers put cash to work ahead of borrowing.

[Matt Olney:]

Okay, thanks, guys.

[Will Furr:]

Thank you.

[Jeremy Ford:]

All right. Thanks, Matt.

[Operator:]

Our next question will come from Michael Young with Truist Securities. Please go ahead.

[Michael Young:]

Hey, thanks for taking the question.

[Jeremy Ford:]

Hey, Michael.

[Will Furr:]

Good morning.

[Michael Young:]

Wanted to see if I could just get, sort of more of a real-time update, you know maybe quarter-to-date, we've obviously seen a material drop in interest rates over the last couple of weeks compared to the prior four months and then also the removal of, kind of the 50 basis point additional charge for refinance. So, have you guys seen, in the last couple of weeks, a material increase in volume and does that give you any additional confidence maybe above and beyond when you guys were originally setting guidance?

[Will Furr:]

Yeah. I don't think we've seen anything that would cause us to change our guidance. We took the origination volume up in the range of basically $3 billion to reflect both first half performance, but also what we're seeing on a real-time basis. The fee reduction I think in principle we're seeing can pass through to the client at this juncture. So, it is in there. We're seeing it. But at the end of the day, most originators passing that through, we certainly are. And so from our perspective, again, I think while the mortgage continues to be choppy, we're still very constructive on the purchase origination market. As Jeremy mentioned, there are some constraints there as it relates to overall availability and affordability. But that said, we still remain very constructive on the purchase side of the market. We think refinance is going to move around a little bit based on where rates are, but there was a lot of refinance activity over the last 18 months, and as a result of that, it's probably not as sensitive to short small basis point moves in the 10-year as it may have otherwise been historically. So, we think the guidance outlines our view on what we're seeing at those current levels.

[Michael Young:]

Okay, thanks. And maybe in addition to , could you talk about any other strategic initiatives that you guys might pursue? I know in the past you guys have gotten a little more involved in kind of the construction or renovation market, you know obviously there might be a HELOC opportunity at the core bank as market values appreciate, but people want to hold on to their core loan. Any other things like that that we could look for, joint ventures, etcetera, maybe kind of over the medium-term?

[Jeremy Ford:]

I wouldn't look for anything like product differentiation. We have our joint venture business that's in the homebuilding business. It is really strong. So, we'll continue to try to grow that. However, our JV business at PrimeLending has just three affiliated partners and it represents about 8% to 10% of our overall volume. So, I think that the big thing that PrimeLending is they continue to try to do is really enhance their technology and support for the loan officers and invest in that so that we're able to continue to leverage that network and grow it more and that's what we'll continue to do. And then we have, with the implementation of our new loan origination system, Blue Sage, and then we've got some other add-on applications that should hopefully increase flow.

[Michael Young:]

Okay, great. And one last one if I could sneak it in, just on sort of fair value marks or adjustments that may have flown through, kind of the income statement this quarter that we shouldn't necessarily forecast going forward, I know that's typically a bigger mover in the TBA business, so just any color there would be helpful.

[Will Furr:]

Yeah, not a lot of fair value as it relates to pipeline we've historically had in periods. I think we did note in our press release, we had about $6.5 million of fair value marks related to certain HOP investments where transactions were exceeded in the period. So, that was episodic, if you will, and not necessarily related to any pipeline activity in the core business.

[Michael Young:]

Okay, thank you.

[Operator:]

Our next question will come from Woody Lay with KBW. Please go ahead.

[Woody Lay:]

Hey, good morning guys.

[Jeremy Ford:]

Good morning.

[Woody Lay:]

Most of my questions have been answered, but I had a couple of quick follow-up. So another nice quarter on the deposit cost front. It looks like you have around $300 million of broker deposits remaining. I was just curious when these broker deposits are set to mature and what yield do they carry?

[Will Furr:]

Well, the blend is right around 30 basis points and they are going to mature between now and over the next 12 months to 18 months. So there is a long window in terms of the maturity. So, they kind of move, I'd say, there will be a block of CDs that continue to kind of roll off here over the next 90 days and then the more, kind of money market funds have a longer maturity value on them.

[Woody Lay:]

Okay, got it. And then last from me. You noted that you executed another MSR sale of $32 million, was there any material gain that came out of that sale?

[Will Furr:]

We did execute the sale. We also executed a few LOIs, which will be noted as well. We did see kind of favorable pricing there relative to the mark to the tune of about $9 million.

[Woody Lay:]

Okay, got it. Thanks, guys.

[Will Furr:]

Yeah.

[Operator:]

This will conclude our question-and-answer session. And now the conference has concluded. Thank you for attending today's presentation. You may now disconnect.