By partnering with our borrowers that had been impacted by COVID-19, the Bank has provided deferrals on $1 billion of loans of which $619 million were principal only and $349 million for principal and interest for the more severely impacted borrowers.
As the initial 90-day deferrals are starting to come due, the Bank has already received requests for approximately $120 million of second-round modification.
As well, the Bank booked over 2,800 PPP loans totaling $672 million.
For the second quarter of 2020, Hilltop reported net income of $128.5 million or $1.42 per diluted share resulting in a 3.3% return on average assets and a 23% return on average equity.
Net income from continuing operations was $97.7 million.
On June 30, the National Lloyds sales to Align Financial closed for total cash proceeds of $154 million, resulting in a net gain on sale of $32 million, which was non-taxable.
With the successful issuance of $200 million of subordinated debt, which further bolsters our liquidity and capital to persevere the current recession and to enhance our position to take advantage of future opportunities.
Net charge-offs for the period were $16.4 million, which included $12.5 million that was the oil and gas credit that was reserved for in Q1 2020.
The allowance for credit losses increased by $49.6 million this quarter as Hilltop built its loan reserve to reflect the deteriorated economic outlook from Q1 2020.
We also continue to enhance our liquidity position and ended the period with $6.6 billion of cash, security and secured borrowing capacity.
PlainsCapital Bank recorded a pre-tax loss of $17.5 million largely due to our sizable CECL provision of $66 million that was partially offset by stable net interest income and lower operating expenses.
The Bank's pre-provision net revenue increased 5% from the second quarter 2019.
PrimeLending had an outstanding quarter and generated pre-tax income of $138 million, an increase of $116.5 million from Q2 2019.
That was driven by a 54% increase in origination volume and a 35 basis point increase in gain on sale margins.
HilltopSecurities, increased pre-tax by $6 million to $28 million, driven by profitable growth in the fixed income services and structured finance businesses.
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As Jeremy discussed, for the second quarter of 2020, Hilltop reported consolidated net income attributable to common stockholders of $128.5 million, equating to $1.42 per diluted share.
Income from continuing operations attributable to common stockholders equated to $97.7 million or $1.08 per diluted share.
Hilltop's continuing operations generated $202 million of pre-provision net revenue or PPNR during the second quarter, which brings the first half of 2020 total PPNR to $302 million.
PPNR increased by $125 million or 162% versus the prior year period.
During the second quarter revenue related to purchase accounting was $3.3 million and expenses were $1.3 million resulting in a net purchase accounting pre-tax impact of $1.9 million for the quarter.
Further, we expect the revenue from purchased loan accretion will average between $3 million and $5 million per quarter for the remainder of 2020.
Hilltop's period end Common Equity Tier 1 ratio equated to 18.46% and the Tier 1 leverage ratio equated to 12.6%.
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Net interest income from continuing operations for the second quarter equated to $104.6 million and declined by $2.7 million versus the second quarter of 2019.
The decline in net interest income was driven by lower purchase loan accretion of $3.2 million offset by interest income from higher loan held for sale and loans held for investment during the quarter.
During Q2, Hilltop's consolidated average earning assets increased by $1.9 billion as the business experienced significant inflows of customer deposits across all product types.
Deposit growth coupled with planned actions including Hilltop's $200 million subdebt raise, an increase in acquired brokered deposits of approximately $550 million and proceeds from the sale of National Lloyds all contributed to the increase in the ending period balance of cash on deposit at the Federal Reserve which grew by approximately $1.2 billion versus the prior quarter.
In addition, the Bank generated PPP loans of $672 million, net of approximately $21 million of deferred fees which will be recognized over the life of loans.
Lastly, the mortgage warehouse lending business generated growth of approximately $120 million versus the prior quarter, as mortgage volumes surged in the second quarter.
The second quarter Hilltop consolidated net interest margin equated to 280 basis points and declined by 61 basis points versus the prior quarter.
A significant driver of the improvement will be our efforts to reduce our cash and liquidity position over the second half of the year to between $5 billion and $6 billion.
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The table on the bottom right of Page 9 highlights the liquidity that we maintain at the bank as of June 30.
The Bank ended the period with over $6.6 billion of liquidity, including both cash, securities and secured borrowing sources.
Further, at period end, the parent maintained $388 million of cash, which equates to approximately 4 times annual expenses, dividends and debt service.
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Noninterest income for the second quarter equated to $468 million.
During the period mortgage applications and locks were very robust as PrimeLending locked approximately $7.4 billion in new mortgages.
The combination of strong lock-in origination volume and improving gain on sale spreads resulted in mortgage production and fee income increasing by $176 million versus the prior year period.
During the second quarter, gain on sale margins in our mortgage business did expand by 43 basis points versus the first quarter of 2020.
We expect the gain on sale margins will move higher during the third quarter to between 430 and 450 basis points.
During the second quarter, the securities business continued to show solid progress as fixed income capital markets delivered revenue growth of approximately $12 million and structured finance saw market conditions improve and revenue increased by $6.5 million versus the prior year.
At the period end, the mark on the structured finance loan pipeline stood at $15 million.
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Noninterest expenses increased from the same period in the prior year by $66 million to $370 million.
The growth in expenses versus the prior year were driven by the increase in variable compensation of approximately $56 million at both PrimeLending and HilltopSecurities.
Non-variable personnel expenses rose versus the prior year by $8 million driven by increases in over time hour at work, notably in our mortgage operations as well as deferred compensation and project labor spend in the period.
During the second quarter, Hilltop incurred $3.5 million in costs on $5.6 million of spend related to our ongoing core system improvement.
The securities team completed the Phase 1 implementation of the new operating platform HilltopSecurities.
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Total average held for investment loans grew by 9% versus the second quarter of 2019.
Growth versus the same period in the prior year was driven by $672 million of net PPP loan originations, coupled with growth in our mortgage warehouse lending business, which experienced growth of approximately $219 million versus the prior year period.
We do expect that loan yields will continue to be pressured in the coming quarters as market rates remain low and we've added $672 million in PPP loans that yield 100 basis points.
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Second quarter average total deposits were approximately $11.2 billion and have increased by $2.2 billion or 25% versus the first quarter of 2020.
During the quarter, the bank swept back to the securities business approximately $200 million in deposit as the securities business can achieve a better return of those funds then the bank can earn on excess cash.
As shown in the graph, the bank has been able to deliver growth in noninterest bearing deposits, which increased by approximately $600 million or 21% versus the first quarter of 2020 on an ending balance basis.
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During this quarter, net charge-offs equated to $16.4 million or 92 basis points of total bank held for investment loans on an annualized basis.
While non-performing assets improved as is a percentage of criticized loans in the second quarter, it is important to note that the Bank approved $968 million in COVID-19-related loan modifications during the second quarter, and these deferrals are not reflected in the graph on this page.
Further, in the graph on the bottom right, Hilltop allowance for credit losses, the Bank's loans held for investment increased to 2.1% during the quarter.
As it relates to the allowance to credit loss to bank loans ratio, if we exclude PPP balances and our collateral maintenance loans, which we believe will have little loss content over time because of the collateral coverage of the loan types which include broker dealer margin and correspondent loans and mortgage warehouse lending loans, the coverage ratio at the end of the period equates to 2.6%.
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Further, our base case assumes US unemployment remains elevated between 8% and 10% through at least Q4 2021.
The impact of these economic changes yielded a net allowance build of $60 million in the quarter, including the economic impacts, charge-off, and specific reserves, the allowance for credit losses increased by approximately $50 million in the second quarter.
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As previously mentioned, the Bank approved deferrals for $968 million of loan portfolio representing approximately 13.5% of the total loan portfolio, excluding PPP loans.
Importantly, $619 million were principal only deferrals and $349 million were principal and interest deferrals.
In the table, we provided detail on how the $968 million stratified across industry segments and also the amount of allowance for credit loss in dollars and percent terms prior to these loans as of June 30.
Notably, the ACL loan coverage on this portfolio is 7.1% as of period end.
As of July 24, we have received requests for follow-on deferrals related to $122 million of loans and we'll be evaluating those requests during the third quarter.
Of the follow-on request, 56% are restaurant and bars and 36% are hotels.
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During the second quarter, the energy portfolio declined by $42 million.
In total, the energy portfolio represents $104 million of outstanding balances and $59 million of unfunded commitments for a total exposure of $163 million.
As of June 30, our allowance for credit losses on the energy portfolio equates to $9 million or 8.7% of the outstanding balance.
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During the second quarter of 2020, PlainsCapital Bank incurred a pre-tax loss of $17.5 million, driven by a $66 million provision expense, as previously reviewed.
The efficiency ratio during the quarter equated to 54% and reflects the ongoing efforts to reduce deposit costs, lower operating costs and drive prudent revenue growth over time.
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PrimeLending generated a pre-tax profit of $138 million during the second quarter of 2020, driven by strong origination volumes that increased from the prior year by $2.1 billion or 54%.
During the period, refinanced activity represented 47% of total origination.
During the second quarter, Hilltop retained approximately 89% of the mortgage servicing rights related to loans sold during the period.
Given Hilltop's strong liquidity and capital position, we were able to retain the mortgage servicing rights and the asset is now approximately $82 million.
We do expect that we will continue retaining a significant portion of the servicing rights for loans sold over the coming quarters and the asset could grow to between $150 million and $175 million by year end.
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HilltopSecurities delivered a pre-tax profit of $28 million in the second quarter of 2020.
The structured finance business delivered growth versus the same period in the prior year of $6.5 million as the secondary markets for mortgage-related bonds improved from the market dislocation in March.
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Summary:
For the second quarter of 2020, Hilltop reported net income of $128.5 million or $1.42 per diluted share resulting in a 3.3% return on average assets and a 23% return on average equity.
As Jeremy discussed, for the second quarter of 2020, Hilltop reported consolidated net income attributable to common stockholders of $128.5 million, equating to $1.42 per diluted share.
Income from continuing operations attributable to common stockholders equated to $97.7 million or $1.08 per diluted share.