Q2 2020 Hilltop Holdings Inc Earnings Call
Well the hilltop holdings second quarter 2020, <unk> earnings Conference call, all participants will be in listen only mode. So do you need assistance. Please say no conference specialist by pressing the star King followed by zero. After todays presentation, there will be an opportunity to ask questions.
Please note that this event is being recorded I would now like to turn the conference over to Eric Joey Executive Vice President of corporate development. Please go ahead.
Thank you.
Before we get started we know that certain statements during todays presentation that are not statements of historical facts.
These statements concerning such items as our outlook business strategy future plans financial condition allowance for credit losses, and the impact of potential it back to covert 19 are forward looking statements.
These statements are based on management's current expectations concerning future events.
They're nature are subject to risks and uncertainties.
Our actual results capital liquidity and financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our presentation and that was included in our most recent annual report in quarterly report filed with the FCC.
Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.
Additionally, this presentation includes certain non-GAAP measures, including tangible common equity intangible book value per share a reconciliation of these measures to the nearest GAAP measure maybe found in the appendix to this presentation, which is posted on our website at IR Hilltop Dash holdings Dot com.
With that I'd like to turn the presentation over to president and CEO Jerry for.
I think your and good morning.
Despite the ongoing pandemic and most of our team working from home Hilltop had an unbelievable order with record breaking mortgage earnings that more than offset a sizable and judicious reserve build at the bank.
Before getting into the result of the quarter I'd like to start on slide three and provide an update on our response to the cobot Nike and then.
From an operation standpoint, we're very fortunate to have realized hilltop over the past three year by building a robust holding company and integrating a functional departments of our operating company.
For this has enabled us to ensure business continuity, while prioritizing the health and safety of our employee.
We continue to operate with the majority of our employees working remotely so that essential staff and worked safely from our office.
We are tracking all cobot Nike cases to ensure the quarantine have affected employees and to ensure impacted offices are Glenn so that they can get back open as soon as possible.
We're also providing frequent and open communication, so that everyone hears the safety protocols and feel connected.
While we did see an increase in employee cases, this past quarter. The overall number remains low and has not had a material impact on our businesses.
Since the start of the pandemic, we have been constant contact with our clients to continue to serve their needs and in particular provide relief and support where required.
By partnering with our borrowers that have been impacted by covert 19. The bank has provided deferrals on $1 billion of loan.
Wage $619 million were principal only and $349 million were principal and interest or the more severely impacted borrower.
At the initial 90 day deferrals are starting to come due the bank has already received requests for approximately $120 million a second round modification.
We will be reviewing each of these requests on a case by case basis.
To ensure their needs based and assess their viability.
Certain industries, including hotels and restaurants have been more severely impact.
So we anticipate a large purchase portion of those credits will be requesting second deferral.
As well the bank booked over 2800, PPP loan totaling 672 million dollar.
This was a huge effort by our bankers, who were able to help many customer than me.
At the pandemic for said, we will continue to provide personal banking system, including awaiting a fee increase daily spin limit and the suspension of residential foreclosure activity.
Moving to slide four.
For the second quarter 2020, he'll talk reported net income of $128.5 million or $1.42 cents 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.
As noted at the bottom of the page the results for National Lloyds This period and the gain on sale are included in discontinued operation.
This quarter illustrates the strength of our businesses and the importance of diversification.
The mortgage broker dealer businesses, both delivered strong growth from fee income that alleviated the impact of the provision at the bank.
Favorable market conditions aided our adult what I'm most proud of our team for working closely together and executing on the opportunities that arose.
On June Thirtyth, the national Lloyds fail to align financial close for total cash proceeds of $154 million.
Resulting in a net gain on sale or $32 million.
Which was non taxable.
This was a great outcome for both parties and I think the hilltop team that worked so hard on national Lloyds for many years before and during the transaction.
No problem also had an important strategic accomplishments in the quarter.
With the successful issuance of $200 million of subordinated debt, which further bolstered our liquidity and capital to persevere, the current recession and to enhance our position to take advantage of future opportunity.
That's for managing risk net charge off for the period were $16.4 million, which included $12.5 million. It 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 this loan reserve to reflect the deteriorated economic outlook from Q1 2020.
We also continue to enhance our lack liquidity position and ended the period was $6.6 billion of cash security and secured borrowing capacity.
Moving to slide five.
Well its capital Bank recorded a pretax loss of $17.5 million largely due to our sizable Cecil provision of $66 million that was partially offset by stable net interest income and lower operating expense.
The bank pre provision net revenue increased 5% from the second quarter 2019.
Notably Jerry in the bank team did a great job growing PPNR, while working tirelessly to process TPP loan and borrower deferral requests.
I'm running had an outstanding quarter and generated pretax 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, increasing gain on sale margin.
D. Thompson of the entire prime lending team worked overtime to process the overwhelming volume and it took advantage of the industry's oversupply by raising prices and retaining servicing.
Hilltop Securities increased pre tax by $6 million to $28 million driven by profitable growth in the fixed income services and structured finance businesses.
Brad when it gets in the hilltop securities team are well underway in raising the caliber and profile of the firm to become the pre eminent municipal focused investment bank.
Additionally, they completed the major system conversion for hilltop securities in the core.
Moving to slide six.
Nope has a synergistic and durable business model that is something we have been building towards throughout the life of our company.
Through acquisition, we initially integrated our company for capital and funding Burke.
Over the past three year, we have largely implemented our platform for growth and efficiency initiatives by integrating the shared services department and executing on efficiency projects to build a scalable platform.
And now with the sale of National Lloyds, we have solidified our business model.
Which is a franchise anchored by Plainscapital bank and augmented with powerful fee income businesses and prime lending hilltop securities.
We have made significant investments in talent professionals and system and believe we are in solid position to grow the core business.
With that I now turn the presentation over to will talk further about the financial.
Thank you Jeremy.
Sort on page seven.
Jeremy Scott from second quarter 2020, built off of one consolidated net income attributable common stockholders of 128.5 million according to $1.42 per diluted share.
Income from continuing operations attributable to common stockholders equated to 97.7 million or $1.80 per diluted share.
How about continuing operations generated 202 million of pre provision net revenue for PBR during the second quarter, which brings the first half a point total PBR the 302 million.
You can our increased by 125 million 462%.
Versus the prior year period.
Wrote versus the prior year period was driven by our diversified revenue stream and led by strong mortgage originations.
During the second quarter revenue related to purchase accounting was $3.3 million and expenses were $1.3 billion, resulting in net purchase accounting pre tax impact of 1.9 million for the quarter.
In the current period, the purchase accounting expenses largely represent amortization deposit other intangible assets related to prior acquisition.
We expected revenue from purchase loan accretion will continue to decline as the purchase loan portfolio continues Raul.
Further we expect revenue for purchase loan accretion will average between three and $5 million per quarter for the remainder of 2020.
Given the significant growth in earnings coupled with the successful sailed national Lloyds and the subordinated debt raise completed during the second quarter.
South capital position has been significantly strengthened as we both address the ongoing impacts of the pandemic and positioning the company to take advantage of opportunities that may be presented over time.
Tough period in common equity tier one ratio acquitted, 18.46% and the tier one leverage ratio equating to 12.6%.
Moving to page eight.
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 2019.
The declining net interest income was driven by lower purchase loan accretion of $3.2 million offset by interest income from higher loans held for sale and loans held for investment during the quarter.
During Q2.
Hilltops consolidated average, earning assets increased by 1.9 billion as the business experienced significant inflows of customer deposit across all product types.
The growth coupled with planned actions, including new cost 200 million dollar subdebt rate.
An increase in acquired broker deposits of approximately 550 million.
And proceeds from the sales National Lloyds all contributed to the increase in the ending period balance of cash on the positive the federal reserve, which grew by approximately $1.2 billion versus the prior quarter.
In addition, the bank generated Pvp evolve with 672 million net of approximately 21 million of deferred fees.
Each will be recognized over the life walls.
Lastly, mortgage warehouse lending business generated growth of approximately $120 million versus the prior quarter as mortgage volume surge in the second quarter.
The second quarter Hilltop consolidated net interest margin equated to 280 basis points.
Declined by 61 basis points versus the prior quarter.
This decline was driven by the aforementioned growth an average earning assets.
The building liquidity as well as lower yields on loans security and the Pablo.
We expect that NIM will continue to be pressured in the third quarter after which we expect that we will begin to see a modest rebound during the fourth quarter and ended the first quarter of 2021.
A significant driver the improvement will be our efforts to reduce our cash and liquidity position over the second half of the year to between five and $6 billion.
We continue to moderate the capital market hilltop mortgage volumes and overall market functions related to liquidity and we will continue to balance our excess liquidity against the risk overtime.
Turning to page and.
The table on the bottom right a page non highlight liquidity that we maintained bank as of June Thirtyth.
Thank you ended the period with over 6.6 billion of liquidity, including both cash security and secured borrowing horses.
Further appearing in the parent maintain 388 million put cash, which equates to approximately four times annual expenses dividends and debt service.
Moving to page can't.
Noninterest income for the second quarter equating to 468 million.
During the period mortgage applications and loss were very robust as prime lending block approximately 7.4 billion new mortgages.
As a record rate rate last quarter for the business and reflected the impact of lower rate and better than expected demand for purchase mortgage and across our markets.
The combination of strong walk in origination volume and improving gain on fill spreads resulted in mortgage production in fee income increasing by 176 million versus the prior year period.
During the second quarter, we don't know 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, two between 430 and 450 basis points.
Further we expected spreads will remain elevated versus historical levels well begin to moderate during the fourth quarter of 2020.
During the second quarter. The security business continues to show solid progress as fixed income capital markets delivered revenue growth of approximately 12 million in structured finance on market conditions improve and revenue increased by six and a half million versus the prior year.
It.
Area at the period in.
The Mark on the structured finance loan pipeline stood at $15 million.
It remains important note that results from our fixed income and structured finance businesses can be ball as market rates spreads and volumes can change significantly from period to period.
Turning to page 11.
Noninterest expenses increased from the same period in the prior year by $66 million to $370 million.
The growth and expenses versus the prior year were driven by the increase in variable compensation of approximately $56 million at both prime lending and hilltop securities.
This increase in variable compensation was directly linked to strong fee revenue growth in the quarter improved compared the prior year period.
Non variable personal expenses rose versus the prior year by $8 million driven by increases in overtime hours work, notably in our mortgage operations as well as deferred compensation and project labor spend in the period.
Over the last nine quarters, we've continued to make progress and aligning our businesses to the current market conditions and driving efficiencies across the franchise.
These efforts headcount professional service costs, and marketing and development expenses continue to trend lower as we make progress against our efficiency and objectives.
During the second quarter hilltop incurred 3.5 million call on 5.6 million spin related to our ongoing core system improvement.
During the second quarter, we continued to make progress are moving into the final stages of implementation of our three core system installation.
The new core loan system has been installed throughout the mortgage business.
The securities team completed the phase one implementation of the new operating platform Hilltop Securities.
And we have now begun to file deployment of the new general Ledger and ERP system across hilltop.
We expect it all these implementations will deliver significant value or franchise and physician hilltop are profitable growth in the future.
Im turning to page 12.
Total leverage held for investment loans grew by 9% versus the second quarter 2019.
Gross versus the same period. The prior year was driven by 672 million net BBB loan originations coupled with growth in our mortgage warehouse lending business, which experienced growth of approximately 219 million versus the prior year period.
Other business loans declined versus the first quarter of 2020.
As customer demand has remained soft.
Loan yields of the Blondo has declined over the prior four quarters and continued decline in the second quarter.
Lower market rate, including prime rate analog where rates coupled with lower purchase loan accretion has contributed to the yield car.
We do expect loan yields will continue to be pressured in the coming quarters as mortgage rates remain low and we've added $672 million BBB loan yield 100 basis points.
Lastly, our loan pipeline remained stable with many clients are delaying pricing and funding and we won't commitments until they have greater clarity the economic impact of the pandemic.
Moving to page 13.
During the second quarter Hilltop continued the process of building excess liquidity to prepare for the potential disruptions that may be caused by the pandemic into port outsize mortgage origination activity.
Second quarter average total deposits were approximately $11.2 billion and have increased by 2.2 billion for 25% versus the first quarter 2020.
During the quarter the bank swept back to the security business approximately 200 made as a positive.
As the securities business can achieve a better return of those funds than the bank can all.
Excess cash.
Excuse me growth from PBP deposit.
The sub debt raise in the proceeds from the national filled national Lloyd.
Customer deposits have continued to grow as customers are paying cash until clarity emerges related to the economic activity.
As is showing the graph the bank has been able to deliver growth in non interest bearing deposit, which increased by approximately $600 million or 21% versus first quarter of 2020 on an ending balance basis.
Turning to page 14.
During the quarter net charge offs equated to $16.4 million or 92 basis points of total bank held for investment loan on annualized basis.
Charge off during the quarter largely represent the final disposition of the single energy credit and the write down of the assets related to real estate properties that were all reserved for during the first quarter.
While nonperforming assets improved as the percentage of criticized loans in the second quarter. It is important to note in the bank approved 968 million in co. The 19 related loan modifications during the second quarter and these deferrals are not reflected in the graph on page.
Further in the graph on the bottom right hilltop allow for credit losses to bank loans held for investment increased to 2.1% during the quarter.
As it relates to the allows the credit loss to bank loans ratio, if we exclude TPP balances and our collateral maintenance loan, which we believe we'll have little loss content overtime because of the collateral coverage of the loan types, which include broker dealer margin correspondent loan and mortgage warehouse lending loans.
A coverage ratio within it appeared equates to 2.6%.
I'm turning the page 15.
During the second quarter, the macroeconomic outlook deteriorated materially from the outlook, we leveraged to evaluate allowance for credit losses during the first quarter.
We have presented a few key metrics for comparison is able to the bottom of the page.
The outlook, we use as our base case for seasonal modeling as of June Thirtyth reflects the GP GDP will fall significantly in Q2 with the material during third quarter of 2020, and then a slower but steady improvement through the end of 2021.
Further our base case assumes U.S. unemployment remains elevated between eight and 10% through at least Q4 2020 War.
The impact of these economic changes yielded a net allowance build of $60 million in the quarter.
Including the economic impacts charge offs.
And Pacific reserves, the allowance for credit losses increased by approximately $50 million in the second quarter.
In addition to the changes economic factors, we incorporated model overlays to reflect ongoing ria, but reopening efforts.
The potential impacts for the most at risk portions of the portfolio included the including the code and 19 loan modification portfolio.
As well as the impact of government stimulus.
As it relates to future period, it remains very difficult to assess how the economy will react as the pandemic continues over the coming quarters.
However, assuming the economic performance generally aligned with our current base case outlook. The primary factors affecting allowance, we'd be credit portfolio migration and new loan originations over time.
As we noted in the past, we do expect that allowance for credit losses could be volatile in the future given the potential for significant shifts in the economic outlook from one reporting period.
To another.
Turning to page 16.
We are updating our views of the Kobin 19 impacted portfolio to represent those customer loan that requested and received a payment deferral during the period versus the broader portfolio views that we've discussed during the first quarter.
We believe this group loans represents the highest risk portfolio related to koby 19.
Ended the relationship management credit teams are managing these relationships to monitor performance as these clients progress through these very challenging times.
As previously mentioned the bank approved deferral for $968 million loan portfolio, representing approximately 13.5% of the total loan portfolio, excluding PPP low.
Importantly, $619 million were principal only deferrals and 349 million, we're principal and interest of or.
In the table, we provide detail how 968 million stratify the across industry segments and also the amount of allowance for credit loss in dollars and present terms Weve I'm proud to these loans as of June Thirtyth.
Notably.
The Hcl to loan coverage on this portfolio is 7.1% as a period in.
As of July 24, we have received requests for fall will deferrals related to 122 million households, and we'll be evaluating those requests during third quarter.
Of the fall requests, 56%, our restaurants and bars.
And 36% or hotel.
We do expect that many of our hotel parts will request additional referrals as those businesses continued to show significant stress.
As was the case in the first from the deferral our top priority is protecting the principal rebate, while working to aid our clients in progressing through these unprecedented Tom.
Any volume deferrals will be need based.
And our target will be to extend for an additional 90 day period.
Moving to page 17.
During the second quarter, the energy portfolio declined by $42 million. The decline was driven by customer paid out and the bottle resolution in charge off of large any energy credit we reference during Q1 in 2020.
In total the energy portfolio represents a 104 million of outstanding balances and 59 million of unfunded commitments for total exposure of 163 million.
As of June Thirtyth, our allowance for credit losses on the energy portfolio equates to $9 million.
Or 8.7% of the outstanding balance.
Turning to page 18.
During the second quarter of 2020, Plainscapital bank incurred a pretax loss of 17.5 million driven by $66 million provision expense as previously reviewed.
The quarter has ultraflex, they will net and noninterest income and ongoing improvement in operating expenses.
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.
During the first quarter and in response to the pandemic and the unknown economic impacts we suspended the retention of single family mortgage is by the bank.
As we move forward and assuming markets continue to function orderly fashion and consumer credit remains stable.
We expect to begin retain prama anymore originating mortgages during the second half of 2020.
Our in page 18.
Prime lending generated pretax profit of $138 million during the second quarter 20 point driven by strong origination volumes that increase from the prior year by 2.1 billion EUR, 54%.
As noted earlier gain on sale margins expanded during the second quarter versus the prior year as market volumes and pricing actions provided for higher spreads.
During the period refinance activity represented 47% of total origination.
Further we expected during the third quarter the portion of originations that or refinanced transactions will remain elevated from our historical low.
During the second quarter hilltop retained approximately 89% of the mortgage servicing rights related to loan sold during the period.
Beginning in March and hearing into the second quarter the market for servicing jury substantially as concerns regarding funding.
Servicer advances as well as margin requirements escalated as a pandemic accelerate.
Given hilltop strong liquidity and capital position, we were able to retain mortgage retained mortgage servicing rights and the asset is now approximately $2 million.
We do expect that we will continue retaining a significant portion of the servicing rights for loan so over the coming quarters and the as it could grow to between 150 at $175 million by year end.
The results of our mortgage business during the quarter were very solid and we're pleased with how our mortgage origination team has executed under some very challenging circumstances during the second quarter.
Turning to page 20.
Hilltop securities liver pretax profit of $28 million in the second quarter point twice.
In the quarter fixed income services generated solid revenue growth as or traders were able to apple we negotiate challenging conditions, both in terms of pricing and liquidity.
The performance of the team demonstrate the progress we have and continue to make in this business.
We've made substantial investment from the team.
And our broad set of capabilities and those investments are returning dividends in 2020.
Structured finance business delivered growth in the versus the same period. The prior year at 6.5 million as the secondary markets for mortgage related volume improved.
From the market dislocation in March.
It remains important to note the results from our fixed income instruction structured finance businesses can be volatile as market rates spreads and volumes and changed significantly from period to period.
As noted earlier the securities team made significant progress in launching their new operating system during the second quarter.
While this is a significant milestone the team will continue working over the coming quarters to enhance and optimize the system.
Turning to page 21.
Given the uncertainty surrounding the economy, specifically related to the pandemic, we're updating our 2020 commentary for we're not providing updated guidance your outlook.
While it is not clear exactly how the economy will rebound or the timeline of that rebound, which we believe we directly linked the success in managing the virus and subsequent outbreaks.
We remain focused on delivering against those items that we can control.
We're committing to the we're committed to the ongoing safety of our associates and our clients.
As well as helping our clients worked through these unprecedented challenges.
The pandemic has presented us all.
We remain committed to executing our platform growth and efficiency initiatives and delivering against our 2021 commitments.
Lastly in most important we are focused on delivering prudent growth across all of our business line.
While maintaining a moderate risk profile and delivering long term shareholder value.
Operator that concludes our prepared comments and we will turn the call over to you for the Q at a section of the call.
We will now begin the question and answer session.
We ask that question you know press Star then one are you touched on phone.
If you weren't using a speakerphone please pick up your handset before passing the keys to one question. Please press Star then to at this time, we will pause momentarily to assemble a roster.
Our first question is from Michael Young from Suntrust.
I had.
Hey, good morning.
Michael Nigel.
And what are the started actually would then the broker dealer on lot of kind of moving pieces here between the investment then.
This full business side and the tea in the I guess, the TB business, having a good quarter and then you've got kind of the new system coming online. So I guess, there's a lot of moving pieces, but just trying to think about the outlook for that business. Both in terms of the cost savings from the new system and revenue potential.
So kind of in the second half.
Given what could or transpiring TV business.
Yeah, there's a lot there well I would kind of to reset a little bit and that you know battling it came onto the CEO.
In the.
First quarter of 2019 and has done an incredible job hammamet team over the past year they've accomplished so much.
And we feel really good about about the business and embraced the disease inherited and really not a lot to prove them as well with the team.
And so I think the prospects are really strong for that business. The recruiting has really picked up in public finance and fixed income services.
And also in our wealth management businesses.
And that's one of my commentary, where they're really raising the profile of the caliber the firm.
The structured finance business is really tied the mortgage but it has a lot of strength in it.
The limited supply in the first time homebuyer appetite and we're growing client there.
So were very positive about what they're doing and now with the systems conversion that than something that than worked on for several years. I think we'll have a better platform that really markets our correspondent clearing vyvanse as well as are our wealth management reps.
So anyway, that's what I'd say kind of high level on that and you know as far as revenues concern. They had a really strong net revenue for the quarter of $130 million.
You know any kind of had a.
Slow start to the year, given some of the market dynamics and the impact in structured finance business, but I would look for the second half of the year to the.
To the kind of as strong as last year and like last year I think it'll building, we have a positive outlook on the national issuance on.
Well that.
Okay.
And maybe with the TB business, specifically, how much of the gain this quarter was kind of fair value or mark to market.
Versus volume driven.
Well less Oh, we acknowledged in the first quarter call that we it during the month of March had experienced about 20 million dollar negative mark which lift the lifted white wine market kind of negative 9 million dollar for the period or as I noted in my comments during at June Thirtyth Tomorrow Likewise.
A positive team so that that obviously.
Yield to 24 million dollar change understanding that that's a different whitewave that like what turned over obviously during the during the window. There. So it's a different different group loans et cetera.
And then from there you know you saw strong origination volumes.
Maybe a volume perspective year on year, and we expect we expect Jeff just kind of given mortgage trend that they'll likely will continue.
Okay.
And.
Yeah, I'll ask just one more and sent back but you know kind of a higher level question. Jeremy just on on M&A in M&A outlook I'm, you know, there's a lot I kind of volatility right now.
And maybe have difficulty in price discovery on what you may or may not acquire so just maybe a comment on unit kind of what you would be looking for a imminent and M&A transaction and what would give you comfort to begin.
Look at something given kind of the volatility in that the credit dynamics right now.
Sure well I mean, we.
We do have we know the sitting on excess capital that we'd like to deploy largely through bank M&A.
We also feel that.
We need to be patient, we've got our own issues to work through as far the deferral amount that we have really really hope to be aggressive with the right opportunity.
And I just think you know if you looked at the industry. We all have a material amount of a deferral balances and in most cases nonperforming assets declined this quarter until those two thing converge, which I would expect they would.
There's not a lot to motivate.
In transaction.
Okay, so kind of clear clear that not pipeline out for the industry and I would give you more confidence probably to settle.
Yeah, the confidence Bart gonna be harder.
Bill though.
What the future a lot of asset classes are going up.
We would be ready to.
We're actively monitoring and ready to go look at it anything we find appealing.
Okay. Thanks, I'll step back.
Our next question, it's Tom Brady Gailey from KBW go ahead.
Hey, Thanks, good morning, guys.
Good morning warning.
Maybe just a follow up on the on M&A dialogue when the time is right. It sounds like you guys will be ready can you just remind us.
How how big of a deal what you consider as far as a target assets and then it clearly you have a big Texas franchise would you consider franchises outside of Texas like in the southeast.
You know on size.
I think that we would consider really anything.
And.
This depend on the level of stock consideration.
I would be included in the transaction.
And I think by and large we believe that right now would prefer to do something of more scale.
Let.
Filtering that you know there's a lot of.
Strategic reason the to try to partner with somebody in Texas.
And.
What has to do that but at the same time, I think particularly if theres something of a scale.
Out of state, we would do that as well.
But at the end of the day, we're going to make sure that as a strategic rationale that.
The.
That drive the deal and and so I think that that are really define our interest.
Right. Okay. That's helpful. And then looking at the mortgage business you know the gain on sale margin was up 43 basis points last quarter, you're guiding and if you look at 430 to 450 gain on sale margin guidance for this quarter and that's up another the midpoint is up another 72 basis.
Points. So it just it doesn't feel like the mortgage businesses slowing down at all and what volumes are still robust the gain on sale margin is going up or you could even have a better mortgage quarter.
Next quarter again, when this is up a fair way to think about it.
I think the I think the thing to remember about the gain on sale is when you you calculate the way we calculate battlefield lose slows it here.
It is that they follow this position will also the bottle sale.
Measure as it relates to kind of the revenue recognition, we recognized 70, 580% of the revenue at rate lock. So that's why there through through my comments, we talked about the rate lock volume, which was record in the in the second quarter is close to 7.4 billion.
But at that rate lock is really that if you will defining revenue moment in the context of the overall, the overall light or things of that that asset.
I do you know I would say and I think we said it in some of our 2020 commentary we have continue to see solid pull through of mortgage volumes and applications through early early parts of third quarter. It's our expectation that we have a we have a repeat quarter, but we certainly are seeing again.
Pull through of strong activity in the early portion third quarter terms of application volumes.
Going forward. So will it can be we expected to go to be volatile. We expect is going to be a related a little bit to overall consumer confidence and how people feel about the resolution of the pandemic as well as an overall economic activity. So.
Again, we're not guiding towards but again, we are seeing some some reasonable pull through in the third quarter early parts of third quarter as it relates as mortgage volume.
All right and then just finally from me I mean that excess liquidity.
It was notable here I mean any thoughts on deploying some of that excess liquidity like into the bond book and I realize it bond yields are great today, but it's it's better than cash.
Yes, Matt I think thats to some extent what I was what I was trying to suggest in my in my comments I mean, we're we're going to.
Work over through the second half that excess liquidity position, we they will work it down into the $5 billion to $6 billion range.
Get is but we are monitoring it again reason recently got as high as certainly intra period, we had some we had some very high mortgage volumes, which we we've articulated but I'd also say we were we were preparing for some potential potential market disruptions that could have occurred from a pandemic a week.
Yeah, we get the Treasury a lot of credit for a lot of work they've done just got to stabilize the overall liquidity markets overtime to functioning in an orderly fashion.
Really have less in second half of the second quarter and continue to do so we'll work those down it we will principally working them down through cash that we will likely be deferring or putting some of that cash to work in terms of securities purchases, which again to your point, we're seeing a yield a yield there of 100 go.
Hundred 25 basis points on average.
And then we'll also be considering how does this weve sweep deposits to cover hilltop Securities and then will will allow some of the broker deposit.
And that we brought in as I mentioned, we brought in about little over half a billion dollars of it during the second quarter. We kept those very short from a duration perspective that will allow a lot of estimate tour in the third fourth quarter.
Okay, great. Thanks for the color.
Thank you.
This concludes our question and now I'm sorry.
The conference has now concluded.
Thank you for attending todays presentation.
You may now disconnect.
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