Good morning. Welcome to the Hilltop Holdings Second Quarter 2020 Earnings Conference Call. All participants will be in listen only mode. Mode. Please note that this event is being recorded.
I would now like to turn the conference over to Eric Yohy, Executive Vice President of Corporate Development. Please go ahead.
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 condition, allowance for credit losses and the impact and potential impacts of COVID-nineteen 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. 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 would like to turn the presentation over to President and CEO, Jeremy Ford.
Thank you, Eric, and good morning. Despite the ongoing pandemic and most of our team working from home, Hilltop had an unbelievable quarter with record breaking mortgage earnings that more than offset a sizable and judicious reserve build at the bank. Before getting into the results of the quarter, I would like to start on Slide 3 and provide an update on our response to the COVID-nineteen pandemic. From an operation standpoint, we are very fortunate to have realigned Hilltop over the past 3 years by building a robust holding company and integrating the functional departments of our operating company. For this has enabled us to ensure business continuity while prioritizing the health and safety of our employees.
We continue to operate with the majority of our employees working remotely, so that essential staff can work safely from our offices. We are tracking all COVID-nineteen cases to ensure the quarantine of affected employees and to ensure impacted offices are cleansed that they can get back open as soon as possible. We are also providing frequent and open communication so that everyone adheres to safety protocols and feels 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 in 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 have been impacted by COVID-nineteen, the bank has provided deferrals on $1,000,000,000 of loans, of which 6 $19,000,000 were principal only and $349,000,000 were 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 $120,000,000 of second round modification. We will be reviewing each of these requests on a case by case basis to ensure they are needs based and assess their viability. Certain industries, including hotel and restaurants have been more severely impacted. So we anticipate a large portion of those credits will be requesting second deferral.
As well, the bank booked over 2,800 PPP loans totaling $672,000,000 This was a huge effort by our bankers who were able to help many customers in need. As the pandemic persists, we will continue to provide personal banking assistance including the waiving of fees, increased daily spending limits and the suspension of residential foreclosure activity. Moving to Slide 4. For the Q2 of 2020, Hilltop reported net income of $128,500,000 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 $97,700,000 As noted at the bottom of the page, the results for National Lloyds this period and the gain on its sale are included in discontinued operations.
This quarter illustrates the strength of our businesses and the importance of diversification. With the mortgage and broker dealer businesses both delivering strong growth from fee income that alleviated the impact of the provision at the bank. Favorable market conditions aided our results, but I'm most proud of our team for working closely together and executing on the opportunities that arose. On June 30, the National Lloyd sales to Align Financial closed for total cash proceeds of $154,000,000 resulting in a net gain on sale of $32,000,000 which was non taxable. This was a great transaction.
Hilltop also had an important strategic accomplishment in the quarter with the successful issuance of $200,000,000 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. As for managing risk, net charge offs for the period were $16,400,000 which included $12,500,000 that was the oil and gas credit that was reserved for in Q1 2020. The allowance for credit losses increased by $49,600,000 this quarter as Hilltop built its loan reserves to reflect the deteriorated economic outlook from Q1 2020. We also continue to enhance our liquidity position and ended the period with $6,600,000,000 of cash, securities and secured borrowing capacity. Moving to Slide 5.
Place Capital Bank recorded a pre tax loss $17,500,000 largely due to our sizable CECL provision of $66,000,000 that was partially increased 5% from the Q2 2019. Notably, Jerry and the bank team did a great job growing PPNR while working tirelessly to process PPP loan and borrower deferral requests. Prime Lending had an outstanding quarter and generated pre tax income of $138,000,000 an increase of $116,500,000 from Q2 2019. That was driven by a 54% increase in origination volume and a 35 basis point increase in gain on sale margin. Steve Thompson and the entire PrimeLending team worked overtime to process the overwhelming volume and they took advantage of the industry's oversupply by rating prices and retaining services.
Hilltop Securities increased pretax by $6,000,000 to $28,000,000 driven by profitable growth in the fixed income services and structured finance businesses. Brad Wingus and the Hilltop Securities team are well underway in raising the caliber and profile of the firm to become the preeminent municipal investment bank. Additionally, they completed the major system conversion for Hilltop Securities in the quarter. Moving to Slide 6. Hilltop has a synergistic and durable business model.
That is something we have been building towards throughout the life of our company. Through acquisitions, we initially integrated our company for capital and funding purposes. Over the past 3 years, we have largely implemented our platform for growth and efficiency initiatives by integrating the shared services departments 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 and Hilltop Securities. We have made significant investments in talented professionals and systems and believe we are in a solid position to grow these core businesses.
With that, I now turn the presentation over to Will to talk further about the financials.
Thank you, Jeremy. I'll start on Page 7. As Jeremy discussed, for the Q2 of 2020 Hilltop reported consolidated net income attributable to common stockholders of 128,500,000 dollars equating to $1.42 per diluted share. Income from continuing operations attributable to common stockholders equated to $97,700,000 or $1.08 per diluted share. Wilcox continuing operations generated 202,000,000 dollars of pre provision net revenue or PPNR during the second quarter, which brings the first half of twenty twenty total PPNR to 302,000,000 dollars PPNR increased by $125,000,000 or 162% versus the prior year period.
Growth versus the prior year period was driven by diversified revenue streams and led by strong mortgage originations. During the 2nd quarter, revenue related to purchase accounting was $3,300,000 and expenses were $1,300,000 resulting in a net purchase accounting pre tax impact of 1 $900,000 for the quarter. In the current period, the purchase accounting expenses largely represent amortization of deposit and other intangible assets related to prior acquisitions. We expect that revenue from purchase loan accretion will continue to decline as the purchase loan portfolio continues to run off. Further, we expect that revenue from purchase loan accretion will average between $3,000,000 $5,000,000 per quarter for the remainder of 2020.
Given the significant growth in earnings, coupled with the successful sale of National Lloyds and the subordinated debt raise completed during the Q2, Hilltop's capital position has been significantly strengthened as we both address the ongoing impacts of the pandemic and position the company to take advantage of opportunities that may be presented over time. Hilltop's period end common equity Tier 1 ratio equated to 18.46% and the Tier 1 leverage ratio equated to 12.6%. I'm moving to Page 8. Net interest income from continuing operations for the 2nd quarter equated to $104,600,000 and declined by $2,700,000 versus the Q2 of 2019. The decline in net interest income was driven by lower purchase loan accretion of $3,200,000 offset by interest income from higher loans held for sale and loans held for investment during the quarter.
During Q2, Hilltop's consolidated average earning assets increased by $1,900,000,000 as the business experienced significant inflows of customer deposits across all product types. Deposit growth, coupled with planned actions including Hilltop's $200,000,000 sub debt rate, an increase in acquired broker deposits of approximately $550,000,000 and proceeds from the sale of National Lloyds all contributed to the increase in the ending period balance cash on deposit at the Federal Reserve, which grew by approximately $1,200,000,000 versus the prior quarter. In addition, the bank generated PPP loans of $672,000,000 net of approximately $21,000,000 of deferred fees, which will be recognized over the life of the loans. Lastly, the mortgage warehouse lending business generated growth of approximately $120,000,000 versus the prior quarter as mortgage volume surged in the 2nd quarter. The Q2 Hilltop consolidated net interest margin equated to 280 basis points and declined by 61 basis points versus the prior quarter.
This decline was driven by the aforementioned growth in average earning assets, the build in liquidity as well as lower yields on loans, securities and deposits. We expect that NIM will continue to be pressured in the 3rd quarter after which we expect that we will begin to see a modest rebound during the Q4 and into the Q1 of 2021. 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 $5,000,000,000 $6,000,000,000 We continue to monitor capital markets, Hilltop's mortgage volumes and overall market functions related to liquidity and we will continue to balance our excess liquidity against the risk over time. Turning to Page 9. The table on the bottom right of Page 9 highlights the liquidity that we maintained at the bank as of June 30.
The bank ended the period with over $6,600,000,000 of liquidity, including both cash, securities and secured borrowing sources. Further, at period end, the parent maintained $388,000,000 of cash, which equates to approximately 4 times annual expenses, dividends and debt service. Moving to Page 10, non interest income for the 2nd quarter equated to $468,000,000 During the period, mortgage applications and locks were very robust as PrimeLending locked approximately $7,400,000,000 in new mortgages. This was a record rate lock quarter for the business and reflected the impact of lower rates and better than expected demand for purchase mortgages across our markets. The combination of strong lock and origination volume and improving gain on sales spreads resulted in mortgage production and fee income increasing by $176,000,000 versus the prior year period.
During the Q2, gain on sale margins in our mortgage business did expand by 43 basis points versus the Q1 of 2020. We expect that gain on sale margins will move higher during the Q3 to between 4 30 basis points and 4.50 basis points. Further, we expect that spreads will remain elevated versus historical levels, but begin to moderate during the Q4 of 2020. During the Q2, the securities business continued to show solid progress as fixed income capital markets delivered revenue growth of approximately $12,000,000 and structured advance saw market conditions improve and revenue increased by 6 point $5,000,000 versus the prior year. At the period end, the mark on the Structured Finance loan pipeline stood at $15,000,000 It remains important to note that results from our fixed income and structured finance businesses can be followed as market rates, spreads and volumes can change significantly from period to period.
Turning to Page 11. Non interest expenses increased from the same period in the prior year by $66,000,000 to $370,000,000 The growth in expenses versus the prior year were driven by an increase in variable compensation of approximately $56,000,000 at both PrimeLending and Hilltop Securities. This increase in variable compensation was directly linked to strong fee revenue growth in the quarter compared to the prior year period. Non variable personnel expenses rose versus the prior year by $8,000,000 driven by increases in overtime hours worked, notably in our mortgage operations, as well as deferred compensation and project labor spend in the period. Over the last 9 quarters, we have continued to make progress in aligning our businesses to the current market conditions and driving efficiencies across the franchise.
Through these efforts, headcounts, professional service costs and marketing and development expenses continue to trend lower as we make progress against our efficiency end objectives. During the Q2, Hilltop incurred $3,500,000 costs on $5,600,000 of spend related to our ongoing core system improvement. During the Q2, we continue to make progress and are moving into the final stages of implementation of our 3 core system installations. The new core loan system has been installed throughout the mortgage business. The securities team completed the Phase 1 implementation of the new operating platform Hilltop Securities and we have now begun the final deployments of the new general ledger and ERP system across Hilltop.
We expect that all of these implementations will deliver significant value to our franchise and position Hilltop for profitable growth in the future. I'm turning to Page 12. Total average held for investment loans grew by 9% versus the Q2 of 2019. Growth versus the same period in the prior year was driven by 6 $72,000,000 net PPP loan originations, coupled with growth in our mortgage warehouse lending business, which experienced growth of approximately 2 $19,000,000 versus the prior year period. Other business loans declined versus the Q1 of 2020 as customer demand has remained soft.
Loan yields have declined over the prior 4 quarters and continue to decline in the 2nd quarter. Both lower market rates, including prime rate and LIBOR rates, coupled with lower purchase loan accretion, have contributed to the yield decline. We do expect that loan yields will continue to be pressured in the coming quarters as market rates remain low and we've added $672,000,000 of PPP loans that yield 100 basis points. Lastly, our loan pipeline remains stable, but many clients are delaying pricing and funding of new loan commitments until they have greater clarity with the economic impact of the pandemic. Moving to Page 13, during the Q2 Hilltop continued the process of building excess liquidity to prepare for the potential disruptions that may be caused by the pandemic and support outsized mortgage origination activity.
2nd quarter average total deposits were approximately $11,200,000,000 and have increased by $2,200,000,000 or 25 percent versus the Q1 of 2020. During the quarter, the bank swept back to the securities business $200,000,000 of deposits as the securities business can achieve a better return on those funds than the bank can earn on excess cash. Excluding the growth from PVP deposits, the sub debt raise and the proceeds from the National Federal National Lloyds, customer deposits have continued to grow as customers retain cash until clarity emerges related to the economic activity. As is shown in the graph, the bank has been able to deliver growth in non interest bearing deposits, which increased by approximately $600,000,000 or 21% versus the Q1 of 2020 on an ending balance basis. Turning to Page 14.
During the quarter, net charge offs equated to $16,400,000 or 92 basis points of total bank held for investment loans on an annualized basis. Charge offs during the quarter largely represent the final disposition of a single energy credit the write down of the assets related to real estate properties that were all reserved for during the Q1. While non performing assets improved, as did the percentage of criticized loans in the 2nd quarter, it is important to note that the bank approved $968,000,000 in COVID 19 related loan modifications during the Q2 and these deferrals are not reflected in the graphs on this page. Further, in the graph on the bottom right, Hilltop's allowance for credit losses to bank long 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 and correspondent loans and mortgage warehouse lending loans, the coverage ratio at the end of the period equates to 2.6%.
I'm turning to Page 15. During the Q2, the macroeconomic outlook deteriorated materially from the outlook that we leveraged to evaluate allowance for credit losses during the Q1. We have presented a few key metrics for comparison in the tables at the bottom of the page. The outlook we've used as our base case for CECL modeling as of June 30 reflects that GDP will have fallen significantly in Q2 with a material rebound during the Q3 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 8% 10% through at least Q4 of 2021. The impact of these economic changes yielded a net allowance build of $60,000,000 in the quarter. Including the economic impacts, charge offs and specific reserves, the allowance for credit losses increased by approximately $50,000,000 in the 2nd quarter. In addition to the changes in economic factors, we incorporated model overlays to reflect ongoing reopening efforts, the potential impacts to the most at risk portions of the portfolio, including the COVID-nineteen loan modification portfolio, as well as the impact of government stimulus.
As it relates to future periods, 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 aligns with our current base case outlook, the primary factors affecting allowance would be credit portfolio migration and new loan originations over time. As we've 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 COVID-nineteen impacted portfolio to represent those customer loans that requested and received a payment deferral during the period versus the broader portfolio views that we've discussed during the Q1.
We believe that this group of loans represents the highest risk portfolio related to COVID-nineteen and that 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 deferrals for $968,000,000 of the loan portfolio, representing approximately 13.5% of the total loan portfolio, excluding PPP loans. Importantly, dollars 619,000,000 were principal only deferrals and $349,000,000 were principal and interest deferrals. In the table, we provide detail on how the $968,000,000 stratified across industry segments and also the amount of allowance for credit loss in dollars and percent terms we provided 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 $122,000,000 of loans, and we'll be evaluating those requests during the Q3. Of the follow on requests, 56% are restaurant and bars and 36% are hotel. We do expect that many of our hotel clients will request additional deferrals as those businesses continue to show significant stress. As was the case in the 1st round of deferrals, our top priority is protecting the principal of the bank, while working to aid our clients in progressing through these unprecedented times. Any follow on deferrals will be needs based and our target will be to extend for an additional 90 day period.
Moving to Page 17. During the Q2, the energy portfolio declined by $42,000,000 The decline was driven by customer pay down and the final resolution and charge off of large energy credit we referenced during Q1 of 2020. In total, the energy portfolio represents $104,000,000 of outstanding balances and $59,000,000 of unfunded commitments for a total exposure of $163,000,000 dollars As of June 30, our allowance for credit losses on the energy portfolio equates to $9,000,000 or 8.7 percent of the outstanding balance. Turning to Page 18. During the second quarter of 2020, Plains Capital Bank incurred a pre tax loss of $17,500,000 driven by a $66,000,000 provision expense as previously reviewed.
The quarter's results reflect stable net and non interest 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 Q1 and in response to the pandemic and the unknown economic impacts, we suspended the retention of single family mortgages by the bank. As we move forward and assuming markets continue to function in an orderly fashion and consumer credit remains stable, we expect to begin retaining PrimeLending originated mortgages during the second half of twenty twenty. Turning to Page 19.
PrimeLending generated a pre tax profit of $138,000,000 during the Q2 of 2020, driven by strong origination volumes that increased from the prior year by $2,100,000,000 or 54%. As noted earlier, gain on sale margins expanded during the Q2 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 expect that during the Q3, the portion of originations that are refinanced transactions will remain elevated from our historical level. During the Q2, Hilltop retained approximately 89% of the mortgage servicing rights related to loans sold during the period.
Beginning in March and carrying into the Q2, the market for servicing deteriorated substantially as concerns regarding funding, servicer advances as well as margin requirements escalated as the pandemic accelerated. Given Hilltop's strong liquidity and capital position, we were able to retain mortgage servicing rights and the asset is now approximately $82,000,000 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 $150,000,000 $175,000,000 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 Q2. Turning to Page 20. Hilltop Securities delivered a pre tax profit of $28,000,000 in the Q2 of 2020.
In the quarter, fixed income service generated solid revenue growth as our traders were able to happily negotiate challenging conditions both in terms of pricing and liquidity. The performance of the team demonstrates the progress we have and continue to make in this business. We've made substantial investments in the team in our broad set of capabilities and those investments are returning dividends in 2020. The structured finance business delivered growth versus the same period in the prior year of $6,500,000 as the secondary markets for mortgage related bond improved from the market dislocation in March. It remains important to note that results from our fixed income and structured finance businesses can be volatile as market rates, spreads and volumes can change significantly from period to period.
As noted earlier, the securities team made significant progress in launching their new operating system during the Q2. 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 are updating our 2020 commentary, but we're not providing updated guidance or outlook. While it is not clear exactly how the economy will rebound or the timeline of that rebound, which we believe will be directly linked to the success in managing the virus and subsequent outbreaks, we remain focused on delivering against those items that we can control.
We're committed to the ongoing safety of our associates and our clients, as well as helping our clients work through these unprecedented challenges that the pandemic has presented us all. We remain committed to executing delivering against our 2021 commitments. Lastly and most important, we are focused on delivering prudent growth across all of our business lines, 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 and A section of the call.
We will now begin the question and answer Our first question is from Michael Young from SunTrust. Go ahead.
Hey, good morning. Hey, Michael. Good morning, Michael.
Wanted to start actually with the broker dealer, a lot of kind of moving pieces here between the investment and the municipal business, I guess the TBA business having a good quarter and then you've got kind of a 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 kind of in the second half, given what could transpire with the TBA business?
Yes, there's a lot there. Well, I would kind of just read that a little bit. Brad Winges came on to be the CEO in the Q1 of 2019 and he's done an incredible job, him and the team over the past year, they've accomplished so much And we feel really good about the business and he's embraced the businesses he's inherited and he's really done a lot to improve 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 where my commentary was they're really raising the profile and the caliber of the firm. The structured finance business is really tied to the mortgage, but it has a lot of strength in it with the limited supply and the first time homebuyer appetite and we're growing clients there. So we're very positive about what they're doing and now with the systems conversion that's been something that's been worked on for several years. I think we'll have a better platform to really market to our correspondent clearing clients as well as our wealth management rest. So anyways, that's what I'd say kind of high level on that.
And as far as slow start to the year given some of the market dynamics and the impact of structured finance business. But I would look for the second half of the year to be kind of as strong as last year. And like last year, I think it will build as we have a positive outlook on the national issuance on municipal debt.
Okay. And maybe with the TBA business specifically, how much of the gain this quarter was kind of fair value or mark to market versus volume driven?
Well, that's we acknowledged in the Q1 call that we had during the month of March had experienced about a $20,000,000 negative mark, which left the pipeline market kind of negative $9,000,000 for the period. As I noted in my comments, at June 30, the mark of the pipeline was positive $15,000,000 So that obviously yields a $24,000,000 change understanding that that's a different pipeline. I mean that pipeline turned over obviously during the window there. So it's a different group of loans etcetera. And then from there you saw strong origination volumes from a TBA volume perspective year on year.
And we expect just kind of given mortgage trends that likely will continue.
Okay. And
I'll ask just one more and then step back. But kind of a higher level question, Jeremy, just on M and A and M and A outlook. There's a lot of kind of volatility right now and maybe a difficulty in price discovery on what you may or may not acquire. So just maybe a comment on kind of what you would be looking for in an M and A transaction and what would give you comfort to begin to look at something given kind of the volatility in the credit dynamics right now?
Sure. Well, I mean, we do have a significant amount of excess capital that we'd like to deploy, largely through bank M and A. We also feel that we need to be patient. We've got our own issues to work through as far as the deferral amount that we have. And then we really hope to be aggressive with the right opportunity.
And I just think if you look at the industry, we all have these material amount of deferral balances and in most cases non performing assets that declined this quarter. And so those 2 things converge, which I would expect they would, there's not a lot to motivate really any transaction.
Okay. So kind of clear that pipeline out for the industry and that would give you more confidence probably to step in?
Yes. The confidence part is going to be harder because we still don't know what the future of a lot of these asset classes are going to be like. But we would be ready to we're actively monitoring and ready to look at anything that we find appealing.
Okay. Thanks. I'll step back.
Our next question is from Brady Gailey from KBW. Go ahead.
Hey, thanks. Good morning, guys.
Good morning. Good
morning. Maybe just to follow-up on
the M and A dialogue. When the time is right, it feels like you guys will be ready. Can you just remind us how big of a deal would you consider as far as Target's assets? And then clearly you have a big Texas franchise. Would you consider franchises outside of Texas like in the Southeast?
On size, I think that we would consider really anything. It will just depend on the level of stock consideration that would be included in the transaction. And I think by and large, we believe that right now we prefer to do something of more scale than less. We still think that there's a lot of strategic reasons to try to partner with somebody in Texas and would hope to do that. But at the same time, I think particularly if there's something of scale out of state, we would do that as well.
But at the end of the day, we're going to make sure that the strategic rationale that drives the deal. And so I think that that will really define our interest.
Right. That's helpful. And then looking at the mortgage business, the gain on sale margin was up 43 basis points last quarter. You're guiding, if you look at the 4.30 to 4.50 gain on sale margin guidance for this quarter, I mean, that's up another the midpoint is up another 72 basis points. So it just it doesn't feel like the mortgage business is slowing down at all.
I mean, volumes are still robust. Gain on sale margin is going up. I mean, you could even have a better mortgage quarter next quarter than this one. Is that
a fair way to think about it? I think the thing to remember about the gain on sale is when you calculate the way we calculate gain on sale, we just close it here, it is at the final disposition of the loan, so the final sale measure. As it relates to kind of the revenue recognition, we recognize 75%, 80% of the revenue at rate lock. So that's why during through my comments, we talked about the rate lock volume which was record in the 2nd quarter and close to $7,400,000,000 but that rate lock is really the, if you will, a defining revenue moment in the context of the overall life and earnings of that asset. I do I would say and I think we said it in some of our 2020 commentary, we have continued to see solid pull through of mortgage volumes and applications through early parts of Q3.
It's not our expectation that we have a repeat quarter, but we certainly are seeing again the pull through of some strong activity in the early parts of Q3 in terms of application volumes going forward. So we expect it's going to be volatile. We expect it's going to be related a little bit to overall consumer confidence and how people feel about the resolution of the pandemic as well as overall economic activity. So again, we're not guiding towards, but again, we are seeing some reasonable pull through in the Q3, early parts of Q3 as it relates to the mortgage volume.
All right. And then just finally for me, I mean excess liquidity is notable here. Any thoughts on deploying some of that excess liquidity like into the bond book? I realize bond yields aren't great today, but it's better than cash.
Yes. And I think that's to some extent what I was trying to suggest in my comments. I mean we're going to work through the second half that excess liquidity position. We think we'll work it down into the $5,000,000,000 to 6 $1,000,000,000 range. Again, as but we are monitoring and again, the reason it got as high as certainly intra period we had some very high mortgage volumes, which we've articulated.
But I'd also say we were preparing for some potential market disruptions that could have occurred from the pandemic and we give the treasury a lot of credit for a lot of the work they've done to kind of stabilize the overall liquidity markets over time and have been functioning in an orderly fashion really over the last second half of the second quarter and continue to do so. So we'll work those down and we will principally working them down through cash and 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 there of 100 to 125 basis points on average. And then we'll also be considering kind of the sweep deposits that come from Hilltop Securities. And then we'll allow some of the broker deposit actions that we brought in. As I mentioned, we brought in about a little over $500,000,000 of it during the Q2.
We kept those very short from a duration perspective and we'll allow a lot of that to mature in the 3rd Q4.
Okay, great. Thanks for the color. Thank you.
This concludes our question and answer. The conference has now concluded.