Hilltop Holdings Inc

NYSE:HTH

Earnings Call Transcript 2020-Q4

[Operator]

Good morning and welcome to the Hilltop Holdings Fourth Quarter and Full Year 2020 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Erik Yohe. Please go ahead.

[Erik Yohe, Investor Relations]

Thank you, operator. 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.

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 those included in our most recent annual report and quarterly report filed with the SEC. Please note that the information presented is preliminary and based upon data available at this time. 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 and tangible book value per share. A reconciliation of these measures to the nearest GAAP measure may be found in the appendix to this presentation, which is posted on our website at ir.hilltop-holdings.com.

With that, I’d now like to turn the presentation over to President and CEO, Jeremy Ford.

[Jeremy Ford, President and Chief Executive Officer]

Thank you, Erik, and good morning. For the fourth quarter 2020, Hilltop reported net income of $116 million, or $1.35 per diluted share, representing an increase from the fourth quarter 2019 of $67 million or $0.81 per diluted share. This included a final settlement from the sale of National Lloyds of $3.7 million or $0.05 per diluted share. Return on average assets for the period with 2.8% and return on average equity was 21%.

Full year 2020 net income equated to $448 million or $5 per diluted share. This was an increase from $225 million or $2.44 per diluted share in 2019. Full year results reflected discontinued operations from National Lloyds of $38 million. The fourth quarter capped off remarkable year of growth for the organization. We continue to capitalize on a tremendous mortgage market as originations for the quarter totaled $6.8 billion and increased over prior year of $2.4 billion. Driven by PPP loan balances, the bank’s average loans for the fourth quarter increased 8% from prior year and average deposits grew by $2.3 billion or 26% from prior year as well.

Net revenues at the broker-dealer increased for the same period by $37 million or 33%, primarily due to robust volumes and structured finance, public finance, and fixed income businesses. Our strong capital position in 2020 enabled us to distribute $241 million in both dividends and share repurchases. This includes the Dutch auction tender that was executed in the fourth quarter, where Hilltop paid $193 million to repurchase approximately 8 million shares of common stock.

Yesterday, our Board of Directors declared a quarterly cash dividend of $0.12 per common share and increase of 33% from the prior quarter. This dividend is payable on February 26, 2021. During the period, we continue to support our impacted banking clients to the approval of COVID-related loan modification. The balance of total active deferrals as of December 31 was $240 million, down from $968 million at the end of the second quarter.

Our allowance for credit losses as of December 31, totaled $149 million or 2% of the bank's loan portfolio. This reflects a reduction in the reserve balance of $6.2 million from the third quarter, which was driven by fourth quarter payoff, lower than expected charge-off and a shift in the economic outlook.

2020 was a challenging year for all of us, so I believe made us a stronger and better company. I'm very proud of our teammates company-wide and how they responded to take care of each other as well as our clients and the communities we serve. At the onset of the pandemic, our treasury and capital markets teams immediately pulled together to manage the volatility which occurred and to ensure our businesses had ample liquidity to serve the needs of our clients. As well the coordinated efforts of our technology, properties management and human resources groups enabled us to effectively transition 90% of our employees to a work-from-home model in less than 30 days.

Although, the pandemic caused Hilltop to change the way we work. It did not deter our company from making progress on large and complex initiatives. Also notable, our team at PlainsCapital Bank originated 2,800 PPP loans and deferred loan payments in a few short months for their commercial and consumer clients that were most impacted by the pandemic, their efforts in partnering and supporting our banking clients highlight the culture of PlainsCapital and the quality of our bankers. 2020 was also a record breaking year for their company.

As PrimeLending funded a record $23 billion in mortgage loans, Hilltop Securities generated record net revenues of $530 million and Hilltop produced record earnings. Importantly, we do not expect these favorable market conditions to continue indefinitely. As we embark upon 2021, we believe that Hilltop is well positioned with established businesses, synchronized leadership and substantial capital.

Moving to Slide 4, PlainsCapital Bank had a solid quarter with pre-tax income of $59 million as a negative provision of $3.6 million was reported. Net interest income increased $11 million from Q4 2019, driven by fees and interest income from PPP loans. Net interest margin was 3.37% during the period of linked-quarter increase of 35 basis points. As the bank utilized cash proceeds from PPP loan payoff to reduce sweep deposits from Hilltop Securities.

PrimeLending had an outstanding fourth quarter and generated pre-tax income of $84 million, an increase of $76 million from Q4 2019. That was driven by a 54% increase in origination volumes and a gain on sale margin of 448 basis points, a strong finish to an incredible year for the PrimeLending team.

Hilltop Securities also had an outstanding quarter with pre-tax income of $34 million, an increase of $10 million or 42% from the fourth quarter 2019. Structured Finance grew net revenue by 92% from Q4 2019, driven by a 57% increase in TBA lock volume. Public Finance Services grew net revenue by 32% and Fixed Income Services grew net revenue by 45%, both driven by robust volumes, improved capabilities and key talent addition.

Moving to Slide 5. In late 2017, we announced a broad set of initiatives to enhance our platform and streamline operations with the goal of lowering operating costs and building a foundation for future growth. Our goal was to deliver $84 million and run rate PPNR benefit by the end of 2021.

Through the end of 2020, we have completed projects that have resulted in $90 million in revenue and cost benefits. This program was centered around three main areas, enhanced business operations, strategic sourcing, and shared services. And the first area of enhanced business operations, we streamlined front-end operations through the replacement of legacy core systems with the Blue Sage loan origination system at PrimeLending and with the FIS platform in Hilltop Securities. Also, we improved the alignment of leadership and management through effecting succession plan and making certain large organizational changes such as the PrimeLending staff reorganization in 2018 and the restructuring of Hilltop’s risk organization in 2019.

Additionally, we established the agency MBS group at Hilltop Securities, which is a securitized product platform that compliments our mortgage origination businesses. And the second area of strategic sourcing, the focus was to take advantage of the size of our organization in order to improve our pricing and discounts with all vendors.

In order to do this, we implemented an enterprise contract and procurement platform to better enable the organization to work effectively through contracts and across vendors, a single travel and entertainment platform to aggregate data and leverage our scale for better rates and discounts and a consolidation of supplier sourcing, which includes IT hardware and software, to janitorial services and office supply.

Notably, strategic sourcing has been a huge effort and has shown very positive results that we will continue to leverage as we negotiate contracts. The focus of the third and last area was to build a shared services organization to support the entire enterprise. We have redundancy across the organization in most functional departments and through the centralization of certain responsibilities, we now have better controls, communications and run rate costs. Most importantly, our shared services organization has positioned us for enhanced scalability to support both organic and acquisitive growth.

With that, I will now turn the presentation over to Will to talk through the financials.

[Will Furr, Chief Financial Office]

Thank you, Jeremy. I'll start on Page 6. As Jeremy discussed for the fourth quarter of 2020, Hilltop reported consolidated income attributable to common stockholders of $116 million, equating to $35 per diluted share. Hilltop produced income from continuing operations of $113 million or $1.30 per diluted share during the fourth quarter.

For the full year of 2020, Hilltop reported consolidated income attributable to common stockholders of $448 million or $5.01 per diluted share. Income from continuing operations available to common stockholders equated to $409 million or $4.59 per diluted share.

Earnings per share from continuing operations effectively doubled from $2.30 reported in 2019. During the fourth quarter, revenue related to purchase accounting was $5.7 million and expenses were $1.4 million resulting in a net purchase accounting pre-tax impact of $4.3 million for the quarter. In the current period, the purchase accounting expenses largely represent amortization of the positive and other intangible assets related to prior acquisitions.

During the fourth quarter, the provision for loan losses reflected a net recovery of $3.5 million and included $2.7 million of net charge-offs. The impact of the improvements in the macroeconomic assumptions, as well as client pay downs and payoffs yielded a net reduction in the allowance for loan losses during the quarter. As a result of the earnings performance and capital actions taken in 2020, Hilltop’s year-end capital ratios remained strong with common equity Tier 1 of 18.97% and a Tier 1 leverage ratio of 12.64%.

Moving to Page 7, as shown here on Page 7, Hilltop’s allowance for credit losses declined by $6 million versus the third quarter of 2020 as modest improvements in the macroeconomic outlook versus the prior quarter and lower specific reserves resulting from payoffs whereby clients were able to refinance their debt to other institutions, lower our at-risk assets. Year-end allowance for credit losses of $149 million yields in ACL to bank loans HFI ratio of 2.05% as of the year-end 2020.

Of note, we continue to believe that the allowance for credit losses could be volatile and the changes in the allowance will be driven by net loan growth in the portfolio, credit migration and changes to the macroeconomic outlook over time.

I'm turning to Page 8. Net interest income in the fourth quarter equated to $107 million, including $6.3 million of PPP origination fees and the previously referenced purchase accounting accretion, versus the prior year quarter, net interest income decreased by $3.4 million or 3%. Net interest margin, which declined versus the prior year period increased versus the third quarter of 2020 by 15 basis points driven by the recognition of deferred PPP origination fees, and a decline in our cash balances of approximately $500 million.

Loan yields remained pressure and deposit costs remain somewhat elevated as a result of higher broker deposits and TE balance. During the quarter, loan originations including credit renewals maintained an average book-to-yield of 3.97%, which is lower than the third quarter of 2020 originations by approximately 7 basis points. Total interest bearing deposit costs declined by 5 basis points in the quarter, as we continue to lower customer deposit rates and return broker deposits where appropriate.

We expect net interest income and net interest margin will remain pressured as overall market rates remain low, putting pressure on loan held for sale yields and new production yields across the commercial portfolio. And the competition could remain aggressive over the coming quarters.

I'm moving to Page 9, total non-interest income for the fourth quarter of 2020 equated to $448 million. Fourth quarter mortgage related income and fees increased by $140 million versus the fourth quarter of 2019. During the fourth quarter of 2020, the environment in mortgage banking remained strong and our business outperformed our expectations in terms of origination volumes, principally driven by lower mortgage rates, which drove improved demand for both refinance and purchase mortgages, versus the prior year quarter, purchase mortgages increased by $725 million or 25% and refinanced volumes improved substantially increasing by $1.7 billion or 116%.

While volumes during the quarter were very strong gain-on-sale margins also improved by 8 basis points to 448 basis points versus the third quarter of 2020. While we expect gain-on-sale margins could be somewhat bottled in 2021, we expect full year average margins to move their range of 360 basis points to 385 basis points in tangent on market conditions. Other income increased by $31.5 million, driven primarily by improvements in sales and training activities in both capital markets and structured finance businesses at Hilltop Securities.

Favorable market conditions resulted in a 57% increase in TBA locked volumes versus the prior year period. The businesses continue to realize the benefits of the investments we have been making to improve our securitized products structuring, sales and distribution capabilities since the third quarter of 2018. And while we believe these investments will continue to provide ongoing benefits, it is important to recognize that these businesses can be evolved from period-to-period as they are impacted by interest rates, overall market liquidity and production trends.

Turning to Page 10 non-interest expenses increased from the same period in the prior year by $94 million to $402 million. The growth in expenses versus the prior year were driven by an increase in variable compensation of approximately $79 million at Hilltop Securities and PrimeLending. This increase in variable compensation was linked to strong fee revenue growth in the quarter compared to the prior year period.

Looking forward, we expect that in 2021, our revenues will decline from the record levels of 2020, which will put pressure on our efficiency ratio. That said, we remain focused on continuous improvement, leveraging the investments we've made over the last few years to aggressively manage fixed costs, while we continue to further streamline our businesses and accelerate our digital transformation.

Turning to Page 11, total average HFI loans grew by 7% versus the fourth quarter of 2019, growth versus the same period in the prior year was driven by growth in PPP loans principally during the second quarter. Into period banking loans remain stable versus the prior year period as commercial loan demand has remained tibit throughout the pandemic. As we noted on our prior earnings call, we are planning to retain between $30 million and $50 million per month of consumer mortgage loans originated at PrimeLending to help offset demand from our commercial clients, subject to market conditions. During the fourth quarter of 2020 PrimeLending blocked approximately $145 million of loans to be delivered to Plains Capital over the coming months. These loans had an average yield 2.79% and average FICO and LTV of 780% and 62% respectively.

Moving to Page 12. This data highlight the ongoing work or by gain credit teams have been doing to support our clients throughout this pandemic. As noted as of 12/31, 2020 Hilltop had approximately $240 million of loans on an active deferral program. This represents a decline of 75% from the active deferrals at 6/30. In total, this portfolio of loans carries an allowance for credit losses of 17.3% and is concentrated in our hotel and restaurant portfolios.

It is important to note that we are managing this portfolio clients and exposure consistent with our existing credit policies and as a result during the third fourth quarters of 2020, the credit ratings of these clients were reviewed and in many cases were adjusted to reflect the current financial situation for each of these borrowers. As a result of the $240 million of loans on active deferral, $202 million are currently rated as criticized loans. We remain focused on supporting our clients through the challenging times while continuing to protect the bank’s capital.

Turning to Page 13. During the quarter net charge offs equated to $2.7 million or 15 basis points to total HFI loans, as it’s shown on the graph, the bottom right of the page, the allowance for credit loss coverage at the bank ended 2020 at 2.05%, including both mortgage warehouse lending, as well as PPP loans. We continue to believe that both mortgage warehouse, as well as our PPP loans will maintain lower loss content over time, including mortgage warehouse and PPP loans, the banks allow for credit loss to loans HFI ratio equates to 2.48%.

Turning to Page 14. Fourth quarter average total deposits are approximately $11.2 billion, and it is increased by $2.3 billion or 26% versus the fourth quarter of 2019. Throughout the pandemic, we've continued to experience at normally strong deposit flows from our customers driven by government stimulus efforts and shifting client behaviors as customers remain cautious during these challenging times.

During the fourth quarter, customer deposits grew by approximately $392 million from $930, 2020. All setting this growth in the fourth quarter was the return of an additional $200 million in Hilltop Securities sweep deposits and the maturing of $272 million of broker deposits, which we have and will continue to allow them to enroll over the coming quarters. At 12/31 Hilltop maintained $731 million of broker deposits and maintained a blended yield of 44 basis points, of these broker deposits $469 million will mature by 6/30 of 2021.

The inventory broker deposits maintain an average yield of 40 basis points, while the positive levels continue to remain elevated, it should be noted that we remain focused on growing our client base and deepening wallet share for treasury products and services, we’ve ever to be successful in 2020 and we expect that they will continue to accelerate into 2021.

I'm moving to Page 15. During the fourth quarter of 2020 PlainsCapital Bank generated solid profitability producing $59 million of pre-tax income during the quarter, the bank benefited from the previously mentioned provision for credit losses recapture of $3.5 million and the recognition of $6.3 million of PPPs. Non-interest expenses in the quarter reflect right down from certain OREO assets for $3.8 million, which did cause the efficiency ratio to drift higher this period. This year has presented a number of challenges for PlainsCapital, we're very pleased with the resiliency of our clients and teammate across the business.

As Jeremy mentioned, the team delivered for our clients by providing approximately 2,800 PPP loans in 2020 and deferring payments for those customers that have been most impacted by the pandemic. The work this year demonstrates a solid balance of customer support while protecting the principal of the bank and Hilltop. In 2021, the team remains focused on providing great service to our clients and delivering profitable growth while maintaining a moderate risk profile.

I'm moving to Page 16. PrimeLending generated pre-tax profit of $84 million for the fourth quarter of 2020 driven by strong origination volumes that increased from the prior by $2.4 billion for 54%. As noted earlier, gain-on-sale margins expanded during the fourth quarter. In previous calls, we discussed the retention of MSRs during the second and third quarters. This continued during the fourth quarter and the MSR asset end of the year with a value of $144 million. Throughout the second half of 2020, we reduced our retention percentage of servicing rights on sold loans to 57%.

We expect to continue retaining servicing assets at these levels during the first half of 2021 subject to market conditions. And we will be looking to potentially execute both sales throughout the year, if market participation is robust. 2020 reflects a record year for PrimeLending by almost all measures. We're grateful for the teamwork and effort put forth across Hilltop and PrimeLending to deliver these outstanding results for our customers and our company. In 2021 PrimeLending will remain focused on generating profitable mortgage volume and continue and execute on delivering operational efficiencies across the business.

Moving to Page 17. Hilltop Securities delivered a pre-tax profit of $34 million in the fourth quarter of 2020 driven by solid execution in structure finance, capital markets and public finance businesses, which have benefited from our ongoing investments in talent and infrastructure over the last few years and a constructed market backdrop. While activity was strong in the quarter, we continue to execute on our growth plans, investing in bankers and sales professionals across the business to support additional product delivery, enhance our product offerings and deliver our differentiated solution set to municipalities across the country.

This is highlighted in the fourth quarter and public finance services, which was able to deliver net revenue growth of $8 million for 32% versus the same period in the prior year, even as overall market issuance volumes decline. The same Hilltop Securities is focused on delivering profitable revenue growth, optimizing operating expenses while managing market and liquidity risk within a moderate risk profile.

Turning to Page 17. As a result of the team's work over the past few years, we were well-positioned to take advantage of the opportunities the market presented by leveraging our franchise and our hands infrastructure to serve customers walk meeting our teams and clients as safe as possible during some very challenging times and circumstances in 2020. In 2021, we remain focused on remaining nimble as the pandemic evolves to ensure the safety of our teammates and our clients. Further our financial priorities for 2021 remains centered on delivering great customer service to our clients, attracting new customers to our franchise, supporting the communities where we serve, maintaining a moderate risk profile and delivering long-term shareholder value.

Given the current uncertainties in the marketplace, we are not providing specific financial guidance, but we are continuing to provide commentary as to our most current outlook for 2021 with the understanding of the business environment, including the impact of the pandemic could remain volatile throughout the year. That's it, we will continue to provide further updates during our future quarterly call. Operator, that concludes our prepared comments, and we'll turn the call back to you for the Q&A section of the call.

[Operator]

[Operator Instructions] The first question comes from Matt Olney with Stephens, Inc. Please go ahead.

[Matt Olney, Stephens, Inc]

Great. Thanks. Good morning guys. I want to start on the mortgage, you guys gave us some guidance for 2021, and I fully appreciate, it's not easy to give any kind of forward guidance in the mortgage business, but we'd love to kind of hear how you arrived at some of the guidance, especially that $17 billion to $20 billion guidance range for originations. Love to hear kind of how you're thinking about that and how you guys wrap at that. Thanks.

[Will Furr, Chief Financial Office]

Yes. So we obviously evaluate a number of market outlooks the MBA and other kind of industry perspective. And obviously we think the market for refinance will be somewhat challenged, but we also think our business model, which is geared and oriented towards purchase mortgage volume will continue to thrive and grow in 2021. So as a result of that, we do believe that we are positioned to kind of outperform what we left out, what we saw the market was expecting about a 26% pullback. And we believe our battle is somewhat positioned to outperform that, but we recognized as you noted earlier that the volatility in the mortgage market can be significant. So we try to provide a range there that provides some perspective of what we think the most likely outcomes are, but we'll provide those updates on a quarterly basis as well.

[Matt Olney, Stephens, Inc]

Okay. That's helpful, Will. And then on – same thing on the gain-on-sale margins, like the guidance you gave the 360 basis point, 385 basis point, any color – what you're seeing the first few weeks of the year? And should we assume that, that would start at the higher end of the range and could have moved down throughout the year? Is that how you're thinking about them?

[Will Furr, Chief Financial Office]

I think that's right. We are – the way we're evaluating is first – the first part of the year – first part of 2021 seasonally has been stronger than you would've otherwise expected. For the fourth quarter they peaked at, we believe they peaked – gain-on-sale peaked to 448 basis points. We do expect that will trend down through the year to a more normalized level. Again, we think that first quarter remains a little stronger than it just continues to kind of roll down, but we do think the full year average will be in the range of 360 to 385 of the way you described volumes [indiscernible] thinking about volume for the year as well.

[Matt Olney, Stephens, Inc]

Okay. And then the last question on the mortgage front, can you provide us with what the interest rate lock commitments were in the fourth quarter? I know there can be evolve a quarter-over-quarter, I think it was around $22 million in the third quarter. I didn't see any of the materials last night, thanks.

[Jeremy Ford, President and Chief Executive Officer]

Yes. That quarterly number will come out and indicate, which will fall in February. So I don't want to get ahead of the case.

[Matt Olney, Stephens, Inc]

Okay. Thanks guys.

[Jeremy Ford, President and Chief Executive Officer]

Thank you.

[Will Furr, Chief Financial Office]

Thanks.

[Operator]

The next question comes from Michael Rose with Raymond James. Please go ahead.

[Michael Rose, Raymond James]

Hey, good morning guys. How are you?

[Jeremy Ford, President and Chief Executive Officer]

Hey, Michael?

[Will Furr, Chief Financial Office]

Good morning.

[Michael Rose, Raymond James]

Hey. So obviously you guys did some capital actions this past quarter with the Dutch Auction and now it's the buyback, but capital levels are still pretty robust here. I know you guys have talked about M&A in the past, the multiple has certainly improved. Can you just give us an update on your strategic capital priorities? And then if you'd be willing to kind of talk about where capital levels in a normalized environment would time for you guys. Thanks.

[Jeremy Ford, President and Chief Executive Officer]

Okay. Thanks, Michael. I think we did have, I think a strong quarter as far as capital is concerned with the tender offer and also an increase in the dividend by 30%. We will be looking for M&A opportunities in 2021, I think we really want to seek out the right partner and I want to – it was really value us as a good buyer, given our business model and insider ownership and liquidity in our stock, so we'll hope to do that. And we – that's all I can say for right now, other than we authorized $75 million share repurchase again, as well.

[Michael Rose, Raymond James]

Just to follow-up on M&A, what is kind of the optimal deal that you guys would look at whether it's size or whether we deliver in terms of accretion? I know you guys have done, I think the last deal you did was fairly small in the Dallas market or in the Houston market, excuse me. But what are kind of the priorities at this point, given what we're looking at from the macro? Thanks.

[Jeremy Ford, President and Chief Executive Officer]

I think the biggest thing is just to find the right strategic set for us. So that's going to be a commercial bank and probably depository institution in Texas, that's only what our priority would be.

[Michael Rose, Raymond James]

Okay. And then maybe finally for me the deposit costs have continued to come down, well, how much room do you think you have? Do you have any big maturities coming up just any color you could give there would be great. Thanks.

[Jeremy Ford, President and Chief Executive Officer]

Yes, I think, we're going to continue to kind of work through in the context of just moving them down as we think is prudent, we will expect from an overall net interest income perspective that as I mentioned, there'll be a fair number of broker deposit, as they maturities through the first half of the year that will improve net interest income, but that's not necessarily NIM in that regard. Our view on deposit cost is where our CD costs, they will mature and continue to reset it lower levels. But that happens over the next 12 to 18 months. So it's going to be a slow slog lower, but nonetheless we do see deposit rates moving lower over time.

[Michael Rose, Raymond James]

Great. Thanks for taking all my questions.

[Operator]

The next question comes from Woody Lay with KBW. Please go ahead.

[Woody Lay, KBW]

Hey, good morning guys.

[Jeremy Ford, President and Chief Executive Officer]

Good morning.

[Woody Lay, KBW]

So your outlook called for non-variable expenses to remain stable. And I just wanted to clarify if that was stable from the fourth quarter run rate, or if that's looking at full year 2020 non-variable expenses.

[Will Furr, Chief Financial Office]

That's more of a comparative to the full year, so stable with 2020 aggregate.

[Woody Lay, KBW]

Okay. That's helpful. And then one more on expenses, I think in your earnings deck, you call it some one-time professional fees incurred during the quarter with the Dutch Auction and the systems conversion of Hilltop Securities, just wondering if you had the totals of those expenses.

[Will Furr, Chief Financial Office]

About $3.5 million.

[Woody Lay, KBW]

Okay. That's helpful. And then last for me, you'll know that you expect net charge offs to pick up in the back half of 2021. I was wondering if you could provide an update just on your hotel and restaurant portfolios specifically on those ones that are still on deferral.

[Will Furr, Chief Financial Office]

Well, the – I mean, the loans that are still on deferrals as you can see remains the preponderance of those remains kind of hotel and restaurant. And I mean I didn't take the question.

[Woody Lay, KBW]

Yes. I was just hoping to get some color on those two buckets in the deferral. Do you expect occupancy rates to pick up and do you think they're trending in the right direction?

[Will Furr, Chief Financial Office]

I think what we're seeing is certainly from June till the end of the year, we saw some improvement, some of it's seasonal, some of it's according to the year, the hoteliers are still continuing to see vacancy rates well in excess of where they would have otherwise expected them to be, but also higher than they are in terms of break-even from a cash flow perspective. So we are continuing to see cash flow challenges in the hotel space.

I think the restaurant businesses are holding up a little better. I think they've been able to be more nimble in how they evolve their overall operating model to address the challenges of the pandemic. And some of the restrictions have been put in place and are starting to move a little closer to, I'd say, cash flow neutral or break-even over the next couple of quarters. But the hotels are continuing to see wild, modest improvement. I would tell you, utilization rates that are below the levels required to kind of reach profitability.

[Woody Lay, KBW]

Got it. That's good color. Thanks guys.

[Will Furr, Chief Financial Office]

Thank you.

[Jeremy Ford, President and Chief Executive Officer]

Thanks.

[Operator]

The next question comes from Michael Young with Truist Securities. Please go ahead.

[Michael Young, Truist Securities]

Hey, good morning. Thanks for taking the question. Wanted to start just on the kind of overall PPNR improvement plan, Jeremy, could you just maybe back up for us and give us an overview of kind of where that sets you up, what are kind of the additional product enhancements or services that you feel like you guys can offer now? Or can you manage the business much better with everything kind of more consolidated on one system in general ledger, et cetera, just any of the benefits you could kind of walk through would be helpful?

[Jeremy Ford, President and Chief Executive Officer]

Well, I think that 2020 really showcases the benefits of the programs that we've put in place and in a lot of ways, we're really fortunate to have done it before the COVID pandemic hit because we were really able to go work cohesively as one organization. And if you see this over the last three years, the efficiency gains have also – are just underlying all the numbers and provide a lot of economic support for us.

But I do think at this point, when we've gotten the efficiency, we've gotten the operating leverage, we have a really good organization and team so we got to work on finding ways to grow better together amongst this company.

[Michael Young, Truist Securities]

Okay. And does it give you any more confidence and maybe growing your scaling certain businesses or as you can kind of proceed with potential M&A, will that be a better more fruitful process or can you assume higher cost savings? Anything like that that would be strategic would be helpful to hear about?

[Jeremy Ford, President and Chief Executive Officer]

Absolutely. Well, I think that all those are correct. I think that we've got a holding company. They can really provide the shared services model for a larger enterprise, and it's very scalable. And I think if you just see – you hear what's going on in Hilltop Securities, PrimeLending and even at the bank for just improved capabilities, a lot of talent additions, all the systems implementations, there's a lot of improvement, a lot of confidence in what we're building.

[Will Furr, Chief Financial Office]

Hey, Michael, this is Will, I'll just add just a couple of examples that we look forward. I mean, Jeremy mentioned, the structured finance group at Hilltop Securities, just in the last couple of years, we've launched National Warehouse Lending at the bank. And that business is clearly emerged profitable. The Treasury Services Group at the bank also a group that has been around a long time, but we've continued to make investments in growth there. And I think it's worth noting that we saw growth in treasury fees, gross fees in 2020 by about 9% in a pretty challenging operating year for a lot of our clients.

So to the point there, to Jeremy's point, we've been making strategic investments in improving our overall platform. But these businesses are starting and have already started to demonstrate growth and enhance profitability just given what we've been able to do the last couple of years, just for some tangible examples.

[Michael Young, Truist Securities]

Yes, that's great. I appreciate the extra color. And I wanted to actually follow up on the structured finance business. Obviously, it had a very strong year in 2020 given kind of the mortgage origination volume, purchase volume is supposed to be up next year. And I assume that's where most of that structured finance volume is related to. So should we expect that to be maybe stable at least year-over-year or any other color you could provide on that line item would be helpful?

[Jeremy Ford, President and Chief Executive Officer]

I think that – let me just give high level and then you can jump in. But I think going to be challenging for that to be as constructive as it was in 2020. And it was extraordinary. We still think it's going to be very strong in 2021. It was very strong in 2019. We look at – first time home buying market and the very tight inventory, which is a challenge, but we’ll also provide a real support for the business. And there's a lot of investor demand for this. And we've got an incredible team that has really built a great business here. So we feel good about it. In 2021, I mean, I think 2020 was extraordinary.

[Michael Young, Truist Securities]

Okay. And last one for me, just on the warehouse growth both from PrimeLending and this new warehouse effort, that's not contemplated in the loan growth guidance. So I would assume we should expect incremental growth in volumes year-over-year, or do you think there'll be a decline in volumes related to just lower mortgage activity year-over-year, market share gain versus volume growth, I guess.

[Will Furr, Chief Financial Office]

Yes, we would expect that the national warehouse lending business, mortgage warehouse lending business would track with kind of industry level mortgage production outlook that those businesses have a little higher percentage of refinance activity than PrimeLending does on a core basis.

[Michael Young, Truist Securities]

Okay, great. That's all for me.

[Will Furr, Chief Financial Office]

Thanks.

[Operator]

This concludes our question-and-answer session. The conference has also now concluded. Thank you for attending today's conference. You may now disconnect.