UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2020March 31, 2021
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 1-31987
Hilltop Holdings Inc.
(Exact name of registrant as specified in its charter)
| | |
Maryland | | 84-1477939 |
(State or other jurisdiction of incorporation or | | (I.R.S. Employer Identification No.) |
organization) | | |
| | |
6565 Hillcrest Avenue | | |
Dallas, TX | | 75205 |
(Address of principal executive offices) | | (Zip Code) |
(214) 855-2177
(Registrant’s telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act:
| | | | |
Title of each class | | Trading symbol | | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | | HTH | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | |
Large accelerated filer ⌧ | | Accelerated filer ◻ |
| | |
Non-accelerated filer ◻ | | Smaller reporting company ☐ |
| | Emerging growth company ☐ |
| | |
| | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ⌧
The number of shares of the registrant's common stock outstanding at July 30, 2020April 23, 2021 was 90,223,676.82,260,548.
HILLTOP HOLDINGS INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2020March 31, 2021
TABLE OF CONTENTS
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PART I — FINANCIAL INFORMATION | | |
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Item 1. | Financial Statements | |
| 3 | |
| 4 | |
| 5 | |
| 6 | |
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| | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(Unaudited)
| | | | | | | | | | | ||||
| | June 30, | | December 31, |
| | March 31, | | December 31, |
| ||||
|
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| ||||
Assets | | | | | | | | | | | | | | |
Cash and due from banks | | $ | 1,655,492 | | $ | 433,626 | | | $ | 1,564,489 | | $ | 1,062,560 | |
Federal funds sold | |
| 385 | |
| 394 | | |
| 396 | |
| 386 | |
Assets segregated for regulatory purposes | | | 194,626 | | | 157,436 | | | | 273,393 | | | 290,357 | |
Securities purchased under agreements to resell | | | 161,457 | | | 59,031 | | | | 106,342 | | | 80,319 | |
Securities: | | | | | | | | | | | | | | |
Trading, at fair value | |
| 648,037 | |
| 689,576 | | |
| 528,712 | |
| 694,255 | |
Available for sale, at fair value, net (amortized cost of $1,061,096 and 899,817, respectively) | |
| 1,091,348 | |
| 911,493 | | |||||||
Held to maturity, at amortized cost, net (fair value of $359,542 and $388,930, respectively) | | | 343,198 | | | 386,326 | | |||||||
Available for sale, at fair value, net (amortized cost of $1,715,428 and 1,435,919, respectively) | |
| 1,715,406 | |
| 1,462,205 | | |||||||
Held to maturity, at amortized cost, net (fair value of $311,402 and $326,671, respectively) | | | 300,088 | | | 311,944 | | |||||||
Equity, at fair value | | | 122 | | | 166 | | | | 189 | | | 140 | |
| |
| 2,082,705 | | | 1,987,561 | | |
| 2,544,395 | | | 2,468,544 | |
| | | | | | | | | | | | | | |
Loans held for sale | |
| 2,592,307 | |
| 2,106,361 | | |
| 2,538,986 | |
| 2,788,386 | |
Loans held for investment, net of unearned income | |
| 7,849,904 | |
| 7,381,400 | | |
| 7,810,657 | |
| 7,693,141 | |
Allowance for credit losses | |
| (156,383) | |
| (61,136) | | |
| (144,499) | |
| (149,044) | |
Loans held for investment, net | |
| 7,693,521 | |
| 7,320,264 | | |
| 7,666,158 | |
| 7,544,097 | |
| | | | | | | | | | | | | | |
Broker-dealer and clearing organization receivables | |
| 1,222,627 | |
| 1,780,280 | | |
| 1,596,817 | |
| 1,404,727 | |
Premises and equipment, net | |
| 210,975 | |
| 210,375 | | |
| 213,304 | |
| 211,595 | |
Operating lease right-of-use assets | | | 119,954 | |
| 114,320 | | | | 101,055 | |
| 105,757 | |
Mortgage servicing rights | | | 142,125 | | | 143,742 | | |||||||
Other assets | |
| 709,246 | |
| 460,258 | | |
| 648,895 | |
| 555,983 | |
Goodwill | |
| 267,447 | |
| 267,447 | | |
| 267,447 | |
| 267,447 | |
Other intangible assets, net | |
| 23,374 | |
| 26,666 | | |
| 19,035 | |
| 20,364 | |
Assets of discontinued operations | | | — | | | 248,429 | | |||||||
Total assets | | $ | 16,934,116 | | $ | 15,172,448 | | | $ | 17,682,837 | | $ | 16,944,264 | |
| | | | | | | | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | |
Noninterest-bearing | | $ | 3,467,500 | | $ | 2,769,556 | | | $ | 4,031,181 | | $ | 3,612,384 | |
Interest-bearing | |
| 8,182,098 | |
| 6,262,658 | | |
| 7,701,598 | |
| 7,629,935 | |
Total deposits | |
| 11,649,598 | |
| 9,032,214 | | |
| 11,732,779 | |
| 11,242,319 | |
| | | | | | | | | | | | | | |
Broker-dealer and clearing organization payables | |
| 1,158,628 | |
| 1,605,518 | | |
| 1,546,227 | |
| 1,368,373 | |
Short-term borrowings | |
| 720,164 | |
| 1,424,010 | | |
| 676,652 | |
| 695,798 | |
Securities sold, not yet purchased, at fair value | | | 55,340 | | | 43,817 | | | | 97,055 | | | 79,789 | |
Notes payable | |
| 450,158 | |
| 256,269 | | |
| 401,713 | |
| 381,987 | |
Operating lease liabilities | | | 131,411 | |
| 125,619 | | | | 120,339 | |
| 125,450 | |
Junior subordinated debentures | |
| 67,012 | |
| 67,012 | | |
| 67,012 | |
| 67,012 | |
Other liabilities | |
| 409,672 | |
| 348,519 | | |
| 595,045 | |
| 632,889 | |
Liabilities of discontinued operations | | | — | | | 140,674 | | |||||||
Total liabilities | |
| 14,641,983 | |
| 13,043,652 | | |
| 15,236,822 | |
| 14,593,617 | |
Commitments and contingencies (see Notes 13 and 14) | | | | | | | | |||||||
Commitments and contingencies (see Notes 14 and 15) | | | | | | | | |||||||
Stockholders' equity: | | | | | | | | | | | | | | |
Hilltop stockholders' equity: | | | | | | | | | | | | | | |
Common stock, $0.01 par value, 125,000,000 shares authorized; 90,222,156 and 90,640,944 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively | |
| 902 | |
| 906 | | |||||||
Common stock, $0.01 par value, 125,000,000 shares authorized; 82,260,548 and 82,184,893 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively | |
| 823 | |
| 822 | | |||||||
Additional paid-in capital | |
| 1,439,686 | |
| 1,445,233 | | |
| 1,319,518 | |
| 1,317,929 | |
Accumulated other comprehensive income | |
| 23,813 | |
| 11,419 | | |
| 3,486 | |
| 17,763 | |
Retained earnings | | | 797,331 | |
| 644,860 | | | | 1,094,727 | |
| 986,792 | |
Deferred compensation employee stock trust, net | | | 778 | |
| 776 | | | | 752 | |
| 771 | |
Employee stock trust (7,539 and 7,794 shares, at cost, at June 30, 2020 and December 31, 2019, respectively) | | | (150) | |
| (155) | | |||||||
Employee stock trust (6,060 and 6,930 shares, at cost, at March 31, 2021 and December 31, 2020, respectively) | | | (121) | |
| (138) | | |||||||
Total Hilltop stockholders' equity | |
| 2,262,360 | |
| 2,103,039 | | |
| 2,419,185 | |
| 2,323,939 | |
Noncontrolling interests | |
| 29,773 | |
| 25,757 | | |
| 26,830 | |
| 26,708 | |
Total stockholders' equity | |
| 2,292,133 | |
| 2,128,796 | | |
| 2,446,015 | |
| 2,350,647 | |
Total liabilities and stockholders' equity | | $ | 16,934,116 | | $ | 15,172,448 | | | $ | 17,682,837 | | $ | 16,944,264 | |
See accompanying notes.
3
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended March 31, | ||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
|
| 2021 |
| 2020 | ||||||
Interest income: | | | | | | | | | | | | | | | | | | | |
Loans, including fees | | $ | 107,860 | | $ | 114,325 | | $ | 219,028 | | $ | 225,195 | | | $ | 104,277 | | $ | 111,168 |
Securities borrowed | | | 12,883 | | | 15,517 | | | 26,210 | | | 32,376 | | | | 28,972 | | | 13,327 |
Securities: | | | | | | | | | | | | | | | | | | | |
Taxable | |
| 11,698 | |
| 13,778 | |
| 27,393 | |
| 28,434 | | |
| 10,251 | |
| 15,695 |
Tax-exempt | |
| 1,539 | |
| 1,513 | |
| 3,149 | |
| 3,011 | | |
| 2,102 | |
| 1,610 |
Other | |
| 951 | |
| 3,867 | |
| 4,026 | |
| 8,922 | | |
| 1,321 | |
| 3,075 |
Total interest income | |
| 134,931 | |
| 149,000 | |
| 279,806 | |
| 297,938 | | |
| 146,923 | |
| 144,875 |
| | | | | | | | | | | | | | | | | | | |
Interest expense: | | | | | | | | | | | | | | | | | | | |
Deposits | |
| 11,947 | |
| 18,036 | |
| 27,071 | |
| 35,142 | | |
| 7,741 | |
| 15,124 |
Securities loaned | | | 10,796 | | | 13,470 | | | 22,073 | |
| 28,208 | | | | 25,486 | | | 11,277 |
Short-term borrowings | |
| 2,367 | |
| 6,897 | |
| 7,111 | |
| 12,368 | | |
| 2,013 | |
| 4,744 |
Notes payable | |
| 3,768 | |
| 2,165 | |
| 6,186 | |
| 4,346 | | |
| 4,797 | |
| 2,418 |
Junior subordinated debentures | |
| 705 | |
| 986 | |
| 1,555 | |
| 1,987 | | |
| 562 | |
| 850 |
Other | |
| 790 | |
| 162 | |
| 916 | |
| 314 | | |
| 642 | |
| 126 |
Total interest expense | |
| 30,373 | |
| 41,716 | |
| 64,912 | |
| 82,365 | | |
| 41,241 | |
| 34,539 |
| | | | | | | | | | | | | | | | | | | |
Net interest income | |
| 104,558 | |
| 107,284 | |
| 214,894 | |
| 215,573 | | |
| 105,682 | |
| 110,336 |
Provision for (reversal of) credit losses | |
| 66,026 | |
| (672) | |
| 100,575 | |
| 279 | | |
| (5,109) | |
| 34,549 |
Net interest income after provision for (reversal of) credit losses | |
| 38,532 | |
| 107,956 | |
| 114,319 | |
| 215,294 | | |
| 110,791 | |
| 75,787 |
| | | | | | | | | | | | | | | | | | | |
Noninterest income: | | | | | | | | | | | | | | | | | | | |
Net gains from sale of loans and other mortgage production income | |
| 295,317 | |
| 131,173 | |
| 445,803 | |
| 227,312 | | |
| 267,080 | |
| 150,486 |
Mortgage loan origination fees | |
| 45,341 | |
| 33,409 | |
| 73,895 | |
| 55,282 | | |
| 43,155 | |
| 28,554 |
Securities commissions and fees | |
| 34,234 | |
| 34,142 | |
| 74,303 | |
| 70,111 | | |
| 38,314 | |
| 40,069 |
Investment and securities advisory fees and commissions | | | 29,120 | |
| 22,859 | |
| 52,300 | |
| 43,019 | | | | 27,695 | |
| 23,180 |
Other | |
| 64,113 | |
| 55,120 | |
| 93,537 | |
| 96,942 | | |
| 41,341 | |
| 29,424 |
Total noninterest income | |
| 468,125 | |
| 276,703 | |
| 739,838 | |
| 492,666 | | |
| 417,585 | |
| 271,713 |
| | | | | | | | | | | | | | | | | | | |
Noninterest expense: | | | | | | | | | | | | | | | | | | | |
Employees' compensation and benefits | |
| 276,893 | |
| 212,959 | |
| 473,249 | |
| 399,655 | | |
| 270,353 | |
| 196,356 |
Occupancy and equipment, net | |
| 26,174 | |
| 27,938 | |
| 45,696 | |
| 55,717 | | |
| 24,429 | |
| 19,522 |
Professional services | |
| 15,737 | |
| 13,773 | |
| 30,535 | |
| 27,882 | | |
| 13,585 | |
| 14,798 |
Other | |
| 51,405 | |
| 49,418 | |
| 102,630 | |
| 99,581 | | |
| 58,295 | |
| 51,225 |
Total noninterest expense | |
| 370,209 | |
| 304,088 | |
| 652,110 | |
| 582,835 | | |
| 366,662 | |
| 281,901 |
| | | | | | | | | | | | | | | | | | | |
Income from continuing operations before income taxes | |
| 136,448 | |
| 80,571 | |
| 202,047 | |
| 125,125 | | |
| 161,714 | |
| 65,599 |
Income tax expense | |
| 31,808 | |
| 18,526 | |
| 46,956 | |
| 28,663 | | |
| 37,770 | |
| 15,148 |
Income from continuing operations | | | 104,640 | | | 62,045 | | | 155,091 | | | 96,462 | | | | 123,944 | | | 50,451 |
Income (loss) from discontinued operations, net of income taxes | | | 30,775 | | | (2,254) | | | 33,926 | | | 3,106 | | ||||||
Income from discontinued operations, net of income taxes | | | — | | | 3,151 | |||||||||||||
Net income | |
| 135,415 | |
| 59,791 | |
| 189,017 | |
| 99,568 | | |
| 123,944 | |
| 53,602 |
Less: Net income attributable to noncontrolling interest | |
| 6,939 | |
| 1,980 | |
| 10,905 | |
| 2,971 | | |
| 3,599 | |
| 3,966 |
Income attributable to Hilltop | | $ | 128,476 | | $ | 57,811 | | $ | 178,112 | | $ | 96,597 | | | $ | 120,345 | | $ | 49,636 |
| | | | | | | | | | | | | | | | | | | |
Earnings per common share: | | | | | | | | | | | | | | | | | | | |
Basic: | | | | | | | | | | | | | | | | | | | |
Earnings from continuing operations | | $ | 1.08 | | $ | 0.64 | | $ | 1.60 | | $ | 1.00 | | | $ | 1.46 | | $ | 0.51 |
Earnings (losses) from discontinued operations | | | 0.34 | | | (0.02) | | | 0.37 | | | 0.03 | | ||||||
Earnings from discontinued operations | | | — | | | 0.04 | |||||||||||||
| | $ | 1.42 | | $ | 0.62 | | $ | 1.97 | | $ | 1.03 | | | $ | 1.46 | | $ | 0.55 |
Diluted: | | | | | | | | | | | | | | | | | | | |
Earnings from continuing operations | | $ | 1.08 | | $ | 0.64 | | $ | 1.60 | | $ | 1.00 | | | $ | 1.46 | | $ | 0.51 |
Earnings (losses) from discontinued operations | | | 0.34 | | | (0.02) | | | 0.37 | | | 0.03 | | ||||||
Earnings from discontinued operations | | | — | | | 0.04 | |||||||||||||
| | $ | 1.42 | | $ | 0.62 | | $ | 1.97 | | $ | 1.03 | | | $ | 1.46 | | $ | 0.55 |
Weighted average share information: | | | | | | | | | | | | | | | | | | | |
Basic | |
| 90,164 | |
| 93,399 | |
| 90,337 | |
| 93,533 | | |
| 82,169 | |
| 90,509 |
Diluted | |
| 90,164 | |
| 93,418 | |
| 90,337 | |
| 93,534 | | |
| 82,657 | |
| 90,550 |
See accompanying notes.
4
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
| | | | | | | | | | | | | | | ||||
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | ||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2021 |
| 2020 | ||||||
Net income | | $ | 135,415 | | $ | 59,791 | | $ | 189,017 | | $ | 99,568 | | $ | 123,944 | | $ | 53,602 |
Other comprehensive income: | | | | | | | | | | | | | | | | | | |
Change in fair value of cash flow hedges, net of tax of $(110), $0, $(1,043) and $0, respectively | | | (377) | | | — | | | (3,577) | | | — | ||||||
Net unrealized gains on securities available for sale, net of tax of $927, $2,574, $4,653 and $4,782, respectively | |
| 3,245 | |
| 8,924 | |
| 15,850 | |
| 16,473 | ||||||
Reclassification adjustment for gains included in net income, net of tax of $2, $0, $36 and $5, respectively | |
| 6 | |
| — | |
| 121 | |
| 16 | ||||||
Change in fair value of cash flow and fair value hedges, net of tax of $505 and $(933), respectively | | | 6,035 | | | (3,200) | ||||||||||||
Net unrealized gains (losses) on securities available for sale, net of tax of $(5,974) and $3,726, respectively | |
| (20,241) | |
| 12,605 | ||||||||||||
Reclassification adjustment for gains (losses) included in net income, net of tax of $(21) and $34, respectively | |
| (71) | |
| 115 | ||||||||||||
Comprehensive income | |
| 138,289 | |
| 68,715 | |
| 201,411 | |
| 116,057 | |
| 109,667 | |
| 63,122 |
Less: comprehensive income attributable to noncontrolling interest | |
| 6,939 | |
| 1,980 | |
| 10,905 | |
| 2,971 | |
| 3,599 | |
| 3,966 |
| | | | | | | | | | | | | | | | | | |
Comprehensive income applicable to Hilltop | | $ | 131,350 | | $ | 66,735 | | $ | 190,506 | | $ | 113,086 | | $ | 106,068 | | $ | 59,156 |
See accompanying notes.
5
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | |
| | |
| Accumulated |
| |
| Deferred |
|
|
| | |
| Total |
| | |
| | | ||||
| | | | | | Additional | | Other | | | | Compensation | | Employee | | Hilltop | | | | | Total | |||||||||
| Common Stock | | Paid-in | | Comprehensive | | Retained | | Employee Stock | | Stock Trust | | Stockholders’ | | Noncontrolling | | Stockholders’ | |||||||||||||
| Shares | | Amount | | Capital | | Income (Loss) | | Earnings | | Trust, Net | | Shares | | Amount | | Equity | | Interest | | Equity | |||||||||
Balance, March 31, 2019 | 93,821 | | $ | 938 | | $ | 1,491,585 | | $ | (1,062) | | $ | 499,452 | | $ | 827 | | 11 | | $ | (213) | | $ | 1,991,527 | | $ | 23,604 | | $ | 2,015,131 |
Net income | — | | | — | | | — | | | — | | | 57,811 | | | — | | — | | | — | | | 57,811 | | | 1,980 | | | 59,791 |
Other comprehensive income | — | | | — | | | — | | | 8,924 | | | — | | | — | | — | | | — | | | 8,924 | | | — | | | 8,924 |
Stock-based compensation expense | — | | | — | | | 2,385 | | | — | | | — | | | — | | — | | | — | | | 2,385 | | | — | | | 2,385 |
Common stock issued to board members | 7 | | | — | | | 141 | | | — | | | — | | | — | | — | | | — | | | 141 | | | — | | | 141 |
Issuance of common stock related to share-based awards, net | 162 | | | 2 | | | (1,013) | | | — | | | — | | | — | | — | | | — | | | (1,011) | | | — | | | (1,011) |
Repurchases of common stock | (1,215) | | | (12) | | | (19,499) | | | — | | | (5,469) | | | — | | — | | | — | | | (24,980) | | | — | | | (24,980) |
Dividends on common stock ($0.08 per share) | — | | | — | | | — | | | — | | | (7,519) | | | — | | — | | | — | | | (7,519) | | | — | | | (7,519) |
Deferred compensation plan | — | | | — | | | — | | | — | | | — | | | (39) | | (2) | | | 42 | | | 3 | | | — | | | 3 |
Net cash distributed to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | (1,060) | | | (1,060) |
Balance, June 30, 2019 | 92,775 | | $ | 928 | | $ | 1,473,599 | | $ | 7,862 | | $ | 544,275 | | $ | 788 | | 9 | | $ | (171) | | $ | 2,027,281 | | $ | 24,524 | | $ | 2,051,805 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, March 31, 2020 | 90,108 | | $ | 901 | | $ | 1,437,301 | | $ | 20,939 | | $ | 676,946 | | $ | 774 | | 8 | | $ | (150) | | $ | 2,136,711 | | $ | 27,022 | | $ | 2,163,733 |
Net income | — | | | — | | | — | | | — | | | 128,476 | | | — | | — | | | — | | | 128,476 | | | 6,939 | | | 135,415 |
Other comprehensive income | — | | | — | | | — | | | 2,874 | | | — | | | — | | — | | | — | | | 2,874 | | | — | | | 2,874 |
Stock-based compensation expense | — | | | — | | | 3,117 | | | — | | | — | | | — | | — | | | — | | | 3,117 | | | — | | | 3,117 |
Common stock issued to board members | 8 | | | — | | | 146 | | | — | | | — | | | — | | — | | | — | | | 146 | | | — | | | 146 |
Issuance of common stock related to share-based awards, net | 126 | | | 1 | | | (556) | | | — | | | — | | | — | | — | | | — | | | (555) | | | — | | | (555) |
Repurchases of common stock | (20) | | | — | | | (322) | | | — | | | 30 | | | — | | — | | | — | | | (292) | | | — | | | (292) |
Dividends on common stock ($0.09 per share) | — | | | — | | | — | | | — | | | (8,121) | | | — | | — | | | — | | | (8,121) | | | — | | | (8,121) |
Deferred compensation plan | — | | | — | | | — | | | — | | | — | | | 4 | | — | | | — | | | 4 | | | — | | | 4 |
Net cash distributed to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | (4,188) | | | (4,188) |
Balance, June 30, 2020 | 90,222 | | $ | 902 | | $ | 1,439,686 | | $ | 23,813 | | $ | 797,331 | | $ | 778 | | 8 | | $ | (150) | | $ | 2,262,360 | | $ | 29,773 | | $ | 2,292,133 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | |
| | |
| Accumulated |
| |
| Deferred |
|
|
| | |
| Total |
| | |
| | | ||||
| | | | | | Additional | | Other | | | | Compensation | | Employee | | Hilltop | | | | | Total | |||||||||
| Common Stock | | Paid-in | | Comprehensive | | Retained | | Employee Stock | | Stock Trust | | Stockholders’ | | Noncontrolling | | Stockholders’ | |||||||||||||
| Shares | | Amount | | Capital | | Income | | Earnings | | Trust, Net | | Shares | | Amount | | Equity | | Interest | | Equity | |||||||||
Balance, December 31, 2019 | 90,641 | | $ | 906 | | $ | 1,445,233 | | $ | 11,419 | | $ | 644,860 | | $ | 776 | | 8 | | $ | (155) | | $ | 2,103,039 | | $ | 25,757 | | $ | 2,128,796 |
Net income | — | | | — | | | — | | | — | | | 49,636 | | | — | | — | | | — | | | 49,636 | | | 3,966 | | | 53,602 |
Other comprehensive income | — | | | — | | | — | | | 9,520 | | | — | | | — | | — | | | — | | | 9,520 | | | — | | | 9,520 |
Stock-based compensation expense | — | | | — | | | 3,642 | | | — | | | — | | | — | | — | | | — | | | 3,642 | | | — | | | 3,642 |
Common stock issued to board members | 10 | | | — | | | 146 | | | — | | | — | | | — | | — | | | — | | | 146 | | | — | | | 146 |
Issuance of common stock related to share-based awards, net | 158 | | | 2 | | | (471) | | | — | | | — | | | — | | — | | | — | | | (469) | | | — | | | (469) |
Repurchases of common stock | (701) | | | (7) | | | (11,249) | | | — | | | (3,701) | | | — | | — | | | — | | | (14,957) | | | — | | | (14,957) |
Dividends on common stock ($0.09 per share) | — | | | — | | | — | | | — | | | (8,158) | | | — | | — | | | — | | | (8,158) | | | — | | | (8,158) |
Deferred compensation plan | — | | | — | | | — | | | — | | | — | | | (2) | | — | | | 5 | | | 3 | | | — | | | 3 |
Adoption of accounting standards | — | | | — | | | — | | | — | | | (5,691) | | | — | | — | | | — | | | (5,691) | | | — | | | (5,691) |
Net cash distributed to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | (2,701) | | | (2,701) |
Balance, March 31, 2020 | 90,108 | | $ | 901 | | $ | 1,437,301 | | $ | 20,939 | | $ | 676,946 | | $ | 774 | | 8 | | $ | (150) | | $ | 2,136,711 | | $ | 27,022 | | $ | 2,163,733 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2020 | 82,185 | | $ | 822 | | $ | 1,317,929 | | $ | 17,763 | | $ | 986,792 | | $ | 771 | | 7 | | $ | (138) | | $ | 2,323,939 | | $ | 26,708 | | $ | 2,350,647 |
Net income | — | | | — | | | — | | | — | | | 120,345 | | | — | | — | | | — | | | 120,345 | | | 3,599 | | | 123,944 |
Other comprehensive loss | — | | | — | | | — | | | (14,277) | | | — | | | — | | — | | | — | | | (14,277) | | | — | | | (14,277) |
Stock-based compensation expense | — | | | — | | | 4,594 | | | — | | | — | | | — | | — | | | — | | | 4,594 | | | — | | | 4,594 |
Common stock issued to board members | 4 | | | — | | | 147 | | | — | | | — | | | — | | — | | | — | | | 147 | | | — | | | 147 |
Issuance of common stock related to share-based awards, net | 222 | | | 2 | | | (748) | | | — | | | — | | | — | | — | | | — | | | (746) | | | — | | | (746) |
Repurchases of common stock | (150) | | | (1) | | | (2,404) | | | — | | | (2,545) | | | — | | — | | | — | | | (4,950) | | | — | | | (4,950) |
Dividends on common stock ($0.12 per share) | — | | | — | | | — | | | — | | | (9,865) | | | — | | — | | | — | | | (9,865) | | | — | | | (9,865) |
Deferred compensation plan | — | | | — | | | — | | | — | | | — | | | (19) | | (1) | | | 17 | | | (2) | | | — | | | (2) |
Net cash distributed to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | (3,477) | | | (3,477) |
Balance, March 31, 2021 | 82,261 | | $ | 823 | | $ | 1,319,518 | | $ | 3,486 | | $ | 1,094,727 | | $ | 752 | | 6 | | $ | (121) | | $ | 2,419,185 | | $ | 26,830 | | $ | 2,446,015 |
See accompanying notes.
6
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
(in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | |
| | |
| Accumulated |
| |
| Deferred |
|
|
| | |
| Total |
| | |
| | | ||||
| | | | | | Additional | | Other | | | | Compensation | | Employee | | Hilltop | | | | | Total | |||||||||
| Common Stock | | Paid-in | | Comprehensive | | Retained | | Employee Stock | | Stock Trust | | Stockholders’ | | Noncontrolling | | Stockholders’ | |||||||||||||
| Shares | | Amount | | Capital | | Income (Loss) | | Earnings | | Trust, Net | | Shares | | Amount | | Equity | | Interest | | Equity | |||||||||
Balance, December 31, 2018 | 93,610 | | $ | 936 | | $ | 1,489,816 | | $ | (8,627) | | $ | 466,737 | | $ | 825 | | 11 | | $ | (217) | | $ | 1,949,470 | | $ | 24,423 | | $ | 1,973,893 |
Net income | — | | | — | | | — | | | — | | | 96,597 | | | — | | — | | | — | | | 96,597 | | | 2,971 | | | 99,568 |
Other comprehensive income | — | | | — | | | — | | | 16,489 | | | — | | | — | | — | | | — | | | 16,489 | | | — | | | 16,489 |
Stock-based compensation expense | — | | | — | | | 4,739 | | | — | | | — | | | — | | — | | | — | | | 4,739 | | | — | | | 4,739 |
Common stock issued to board members | 15 | | | — | | | 281 | | | — | | | — | | | — | | — | | | — | | | 281 | | | — | | | 281 |
Issuance of common stock related to share-based awards, net | 365 | | | 4 | | | (1,738) | | | — | | | — | | | — | | — | | | — | | | (1,734) | | | — | | | (1,734) |
Repurchases of common stock | (1,215) | | | (12) | | | (19,499) | | | — | | | (5,469) | | | — | | — | | | — | | | (24,980) | | | — | | | (24,980) |
Dividends on common stock ($0.16 per share) | — | | | — | | | — | | | — | | | (14,983) | | | — | | — | | | — | | | (14,983) | | | — | | | (14,983) |
Deferred compensation plan | — | | | — | | | — | | | — | | | — | | | (37) | | (2) | | | 46 | | | 9 | | | — | | | 9 |
Adoption of accounting standards | — | | | — | | | — | | | — | | | 1,393 | | | — | | — | | | — | | | 1,393 | | | — | | | 1,393 |
Net cash distributed to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | (2,870) | | | (2,870) |
Balance, June 30, 2019 | 92,775 | | $ | 928 | | $ | 1,473,599 | | $ | 7,862 | | $ | 544,275 | | $ | 788 | | 9 | | $ | (171) | | $ | 2,027,281 | | $ | 24,524 | | $ | 2,051,805 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2019 | 90,641 | | $ | 906 | | $ | 1,445,233 | | $ | 11,419 | | $ | 644,860 | | $ | 776 | | 8 | | $ | (155) | | $ | 2,103,039 | | $ | 25,757 | | $ | 2,128,796 |
Net income | — | | | — | | | — | | | — | | | 178,112 | | | — | | — | | | — | | | 178,112 | | | 10,905 | | | 189,017 |
Other comprehensive income | — | | | — | | | — | | | 12,394 | | | — | | | — | | — | | | — | | | 12,394 | | | — | | | 12,394 |
Stock-based compensation expense | — | | | — | | | 6,759 | | | — | | | — | | | — | | — | | | — | | | 6,759 | | | — | | | 6,759 |
Common stock issued to board members | 18 | | | — | | | 292 | | | — | | | — | | | — | | — | | | — | | | 292 | | | — | | | 292 |
Issuance of common stock related to share-based awards, net | 284 | | | 3 | | | (1,027) | | | — | | | — | | | — | | — | | | — | | | (1,024) | | | — | | | (1,024) |
Repurchases of common stock | (721) | | | (7) | | | (11,571) | | | — | | | (3,671) | | | — | | — | | | — | | | (15,249) | | | — | | | (15,249) |
Dividends on common stock ($0.18 per share) | — | | | — | | | — | | | — | | | (16,279) | | | — | | — | | | — | | | (16,279) | | | — | | | (16,279) |
Deferred compensation plan | — | | | — | | | — | | | — | | | — | | | 2 | | — | | | 5 | | | 7 | | | — | | | 7 |
Adoption of accounting standards (Note 2) | — | | | — | | | — | | | — | | | (5,691) | | | — | | — | | | — | | | (5,691) | | | — | | | (5,691) |
Net cash distributed to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | (6,889) | | | (6,889) |
Balance, June 30, 2020 | 90,222 | | $ | 902 | | $ | 1,439,686 | | $ | 23,813 | | $ | 797,331 | | $ | 778 | | 8 | | $ | (150) | | $ | 2,262,360 | | $ | 29,773 | | $ | 2,292,133 |
See accompanying notes.
7
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | Three Months Ended March 31, | | ||||||||
|
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| ||||
Operating Activities | | | | | | | | | | | | | | |
Net income | | $ | 189,017 | | $ | 99,568 | | | $ | 123,944 | | $ | 53,602 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | | | | | | | | |
Provision for credit losses | |
| 100,575 | |
| 279 | | |||||||
Provision for (reversal of) credit losses | |
| (5,109) | |
| 34,549 | | |||||||
Depreciation, amortization and accretion, net | |
| 8,111 | |
| (1,612) | | |
| 5,930 | |
| 1,883 | |
Net change in fair value of equity securities | | | 44 | |
| (16) | | |||||||
Deferred income taxes | |
| 742 | |
| 1,824 | | |
| 1,424 | |
| (2,053) | |
Other, net | |
| 600 | |
| 5,168 | | |
| 5,775 | |
| (2,410) | |
Net change in securities purchased under agreements to resell | |
| (102,426) | |
| 10,951 | | |
| (26,023) | |
| 35,675 | |
Net change in trading securities | |
| 41,539 | |
| 143,942 | | |
| 165,543 | |
| 295,995 | |
Net change in broker-dealer and clearing organization receivables | |
| 711,290 | |
| (258,976) | | |
| (275,257) | |
| 11,768 | |
Net change in other assets | |
| (136,942) | |
| (5,525) | | |
| (97,606) | |
| (243,683) | |
Net change in broker-dealer and clearing organization payables | |
| (364,631) | |
| 138,310 | | |
| 171,709 | |
| (281,891) | |
Net change in other liabilities | |
| 30,443 | |
| (11,544) | | |
| (13,289) | |
| (73,963) | |
Net change in securities sold, not yet purchased | | | 11,523 | |
| (36,220) | | | | 17,266 | |
| (21,049) | |
Proceeds from sale of mortgage servicing rights asset | |
| 18,650 | |
| — | | |
| 52,783 | |
| 18,650 | |
Change in valuation of mortgage servicing rights asset | | | (16,865) | | | 11,030 | | |||||||
Net gains from sales of loans | | | (445,803) | |
| (227,312) | | | | (267,080) | |
| (150,486) | |
Loans originated for sale | |
| (11,035,100) | |
| (6,783,246) | | |
| (6,960,572) | |
| (4,256,981) | |
Proceeds from loans sold | | | 10,870,200 | |
| 6,790,418 | | | | 7,431,243 | |
| 3,983,089 | |
Net cash used in operating activities for continuing operations | |
| (102,168) | |
| (133,991) | | |||||||
Net cash provided by (used in) operating activities for discontinued operations | | | (28,533) | | | 3,357 | | |||||||
Net cash used in operating activities | | | (130,701) | | | (130,634) | | |||||||
Net cash provided by (used in) operating activities for continuing operations | |
| 313,816 | |
| (586,275) | | |||||||
Net cash provided by operating activities for discontinued operations | | | — | | | 3,505 | | |||||||
Net cash provided by (used in) operating activities | | | 313,816 | | | (582,770) | | |||||||
Investing Activities | | | | | | | | | | | | | | |
Proceeds from maturities and principal reductions of securities held to maturity | |
| 49,918 | | | 25,726 | | |
| 11,707 | | | 37,624 | |
Proceeds from sales, maturities and principal reductions of securities available for sale | |
| 194,336 | | | 67,064 | | |
| 249,628 | | | 73,889 | |
Purchases of securities held to maturity | | | (7,080) | | | (40,789) | | |
| — | | | (6,532) | |
Purchases of securities available for sale | |
| (357,307) | | | (191,108) | | |
| (531,701) | | | (119,778) | |
Net change in loans held for investment | |
| (632,976) | | | (267,006) | | |
| (29,151) | | | (19,692) | |
Purchases of premises and equipment and other assets | |
| (21,005) | | | (14,935) | | |
| (8,341) | | | (17,754) | |
Proceeds from sales of premises and equipment and other real estate owned | |
| 17,591 | | | 9,777 | | | | 867 | | | 15,350 | |
Net cash received from (paid to) Federal Home Loan Bank and Federal Reserve Bank stock | |
| 22,905 | | | (11,301) | | |
| (35) | | | 18,685 | |
Net cash used in investing activities for continuing operations | | | (733,618) | |
| (422,572) | | | | (307,026) | |
| (18,208) | |
Net cash provided by investing activities for discontinued operations | | | 1,941 | | | 11,635 | | | | — | | | 1,794 | |
Net cash received from disposal of discontinued operations | | | 84,763 | | | — | | |||||||
Net cash used in investing activities | |
| (646,914) | |
| (410,937) | | |
| (307,026) | |
| (16,414) | |
Financing Activities | | | | | | | | | | | | | | |
Net change in deposits | |
| 2,535,125 | |
| 25,579 | | |
| 496,605 | |
| 850,829 | |
Net change in short-term borrowings | |
| (703,846) | |
| 273,086 | | |
| (18,834) | |
| (94,062) | |
Proceeds from notes payable | |
| 860,484 | |
| 365,270 | | |
| 239,020 | |
| 273,386 | |
Payments on notes payable | |
| (666,681) | |
| (362,255) | | |
| (219,401) | |
| (285,639) | |
Payments to repurchase common stock | |
| (15,249) | |
| (24,980) | | |
| (4,950) | |
| (14,957) | |
Dividends paid on common stock | |
| (16,279) | |
| (14,983) | | |
| (9,865) | |
| (8,158) | |
Net cash distributed to noncontrolling interest | | | (6,889) | |
| (2,870) | | | | (3,477) | |
| (2,701) | |
Taxes paid on employee stock awards netting activity | | | (1,025) | |
| (1,734) | | |||||||
Other, net | | | (311) | |
| (215) | | | | (913) | |
| (624) | |
Net cash provided by financing activities | |
| 1,985,329 | | | 256,898 | | |
| 478,185 | | | 718,074 | |
| | | | | | | | | | | | | | |
Net change in cash, cash equivalents and restricted cash | |
| 1,207,714 | |
| (284,673) | | |
| 484,975 | |
| 118,890 | |
Cash, cash equivalents and restricted cash, beginning of period | |
| 642,789 | |
| 778,466 | | |
| 1,353,303 | |
| 642,789 | |
Cash, cash equivalents and restricted cash, end of period | | $ | 1,850,503 | | $ | 493,793 | | | $ | 1,838,278 | | $ | 761,679 | |
| | | | | | | | | | | | | | |
Reconciliation of Cash, Cash Equivalents and Restricted Cash to Consolidated Balance Sheets | | | | | | | | | | | | | | |
Cash and due from banks | | $ | 1,655,492 | | $ | 303,424 | | | $ | 1,564,489 | | $ | 524,370 | |
Cash and due from banks, included within assets of discontinued operations | | | — | | | 38,577 | | | | 0 | | | 58,103 | |
Federal funds sold | | | 385 | | | 521 | | | | 396 | | | 401 | |
Assets segregated for regulatory purposes | | | 194,626 | | | 151,271 | | | | 273,393 | | | 178,805 | |
Total cash, cash equivalents and restricted cash | | $ | 1,850,503 | | $ | 493,793 | | | $ | 1,838,278 | | $ | 761,679 | |
Supplemental Disclosures of Cash Flow Information | | | | | | | | | | | | | | |
Cash paid for interest | | $ | 64,621 | | $ | 80,880 | | | $ | 37,095 | | $ | 37,041 | |
Cash paid for income taxes, net of refunds | | $ | 5,976 | | $ | 12,504 | | | $ | 1,622 | | $ | 1,771 | |
Supplemental Schedule of Non-Cash Activities | | | | | | | | | | | | | | |
Derecognition of construction in progress related to build-to-suit lease obligations | | $ | — | | $ | 29,195 | | |||||||
Conversion of loans to other real estate owned | | $ | 12,455 | | $ | 2,931 | | | $ | 461 | | $ | 182 | |
Additions to mortgage servicing rights | | $ | 63,915 | | $ | 4,408 | | | $ | 34,301 | | $ | 4,475 | |
See accompanying notes.
87
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting and Reporting Policies
Nature of Operations
Hilltop Holdings Inc. (“Hilltop” and, collectively with its subsidiaries, the “Company”) is a financial holding company registered under the Bank Holding Company Act of 1956. The Company’s primary line of business is to provide business and consumer banking services from offices located throughout Texas through PlainsCapital Bank (the “Bank”). In addition, the Company provides an array of financial products and services through its broker-dealer and mortgage origination subsidiaries.
On June 30, 2020, Hilltop completed the sale of all of the outstanding capital stock of National Lloyds Corporation (“NLC”), which comprisescomprised the operations of the former insurance segment, for cash proceeds of $154.1 million, and was subject to post-closing adjustments. Accordingly, NLC’s results and its assets and liabilitiesfor the three months ended March 31, 2020 have been presented as discontinued operations in the consolidated financial statements. For further details, see Note 3 to the consolidated financial statements.
As a result of the above noted sale of NLC, theThe Company, headquartered in Dallas, Texas, provides its products and services through its 2 remaining primary business units included within continuing operations, PlainsCapital Corporation (“PCC”) and Hilltop Securities Holdings LLC (“Securities Holdings”). PCC is a financial holding company that provides, through its subsidiaries, traditional banking, wealth and investment management and treasury management services primarily in Texas and residential mortgage lending throughout the United States. Securities Holdings is a holding company that provides, through its subsidiaries, investment banking and other related financial services, including municipal advisory, sales, trading and underwriting of taxable and tax-exempt fixed income securities, equity trading, clearing, securities lending, structured finance and retail brokerage services throughout the United States. Unless otherwise noted, the Company’s notes to the consolidated financial statements present information limited to continuing operations.
As a result of the spread of the the novel coronavirus (“COVID-19”) pandemic, economic uncertainties continue to adversely impact the global economy and hashave contributed to significant volatility in the global economy, as well as banking and other financial activity in the areas in which the Company operates. The effects of COVID-19 and the governmental and societal response to the virus have negatively impacted financial markets and overall economic conditions on an unprecedented scale, resulting in the shuttering of businesses across the country and significant job loss. Many of these businesses have begun to reopenreopened but may be operating at limited capacity. The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19. COVID-19 presents material uncertainty which could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flowsflows.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”), and in conformity with the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, these financial statements contain all adjustments necessary for a fair statement of the results of the interim periods presented. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 20192020 (“20192020 Form 10-K”). Results for interim periods are not necessarily indicative of results to be expected for a full year or any future period.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates regarding the allowance for credit losses, the fair values of financial instruments, the mortgage loan indemnification liability, and the potential impairment of goodwill and identifiable intangible assets are particularly subject to change. As a result of the sale of NLC on June 30, 2020, the reserve for losses and loss adjustment expensesThe Company has applied its critical accounting policies
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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(“LAE”) is not a significant accounting estimate. Other than changes related to the implementation of the current expected credit losses standard (ASU 2016-13), the Company has applied its critical accounting policies and estimation methods consistently in all periods presented in these consolidated financial statements. Actual amounts and values as of the balance sheet dates may be materially different than the amounts and values reported due to the inherent uncertainty in the estimation process. Also, future amounts and values could differ materially from those estimates due to changes in values and circumstances after the balance sheet date.
Hilltop owns 100% of the outstanding stock of PCC. PCC owns 100% of the outstanding stock of the Bank and 100% of the membership interest in Hilltop Opportunity Partners LLC, a merchant bank utilized to facilitate investments in companies engaged in non-financial activities. The Bank owns 100% of the outstanding stock of PrimeLending, a PlainsCapital Company (“PrimeLending”).
PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC (“Ventures Management”), which holds an ownership interest in and is the managing member of certain affiliated business arrangements (“ABAs”).
PCC also owns 100% of the outstanding common securities of PCC Statutory Trusts I, II, III and IV (the “Trusts”), which are not included in the consolidated financial statements under the requirements of the Variable Interest Entities (“VIE”) Subsections of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) because the primary beneficiaries of the Trusts are not within the consolidated group.
Hilltop has a 100% membership interest in Securities Holdings, which operates through its wholly owned subsidiaries, Hilltop Securities Inc. (“Hilltop Securities”), Hilltop SecuritiesMomentum Independent Network Inc. (“HTSMomentum Independent Network” and collectively with Hilltop Securities, the “Hilltop Broker-Dealers”) and Hilltop Securities Asset Management, LLC. Hilltop Securities is a broker-dealer registered with the SEC and Financial Industry Regulatory Authority (“FINRA”) and a member of the New York Stock Exchange (“NYSE”), HTSMomentum Independent Network is an introducing broker-dealer that is also registered with the SEC and FINRA. Hilltop Securities, HTSMomentum Independent Network and Hilltop Securities Asset Management, LLC are registered investment advisers under the Investment Advisers Act of 1940.
In addition, Hilltop owns 100% of the membership interest in each of HTH Hillcrest Project LLC (“HTH Project LLC”) and Hilltop Investments I, LLC. Hilltop Investments I, LLC owns 50% of the membership interest in HTH Diamond Hillcrest Land LLC (“Hillcrest Land LLC”) which is consolidated under the aforementioned VIE Subsections of the ASC. These entities are related to the Hilltop Plaza investment discussed in detail in Note 1820 to the consolidated financial statements included in the Company’s 20192020 Form 10-K and are collectively referred to as the “Hilltop Plaza Entities.”
The consolidated financial statements include the accounts of the above-named entities. Intercompany transactions and balances have been eliminated. Noncontrolling interests have been recorded for minority ownership in entities that are not wholly owned and are presented in compliance with the provisions of Noncontrolling Interest in Subsidiary Subsections of the ASC.
Certain reclassifications have been made to the prior period consolidated financial statements to conform with the current period presentation, including reclassifications due to the adoption of new accounting pronouncements and reclassifications due to the presentation of NLC’s results and its assets and liabilities as discontinued operations.presentation. In preparing these consolidated financial statements, subsequent events were evaluated through the time the financial statements were issued. Financial statements are considered issued when they are widely distributed to all stockholders and other financial statement users, or filed with the SEC.
Significant accounting policies are detailed in Note 1 to the consolidated financial statements included in the Company’s 20192020 Form 10-K. As a result of the adoption of ASU 2016-13, which sets forth a “current
expected credit loss” model,
and related updates, improvements and technical corrections (collectively, “CECL”), the Company has included new or modified significant accounting policies as summarized below.
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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Securities
Management classifies securities at the time of purchase and reassesses such designations at each balance sheet date. Securities held for resale to facilitate principal transactions with customers are classified as trading and are carried at fair value, with changes in fair value reflected in the consolidated statements of operations. The Company reports interest income on trading securities as interest income on securities and other changes in fair value as other noninterest income.
Debt securities held but not intended to be held to maturity or on a long-term basis are classified as available for sale. Securities included in this category are those that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, prepayment risk or other factors related to interest rate and prepayment risk. Debt securities available for sale are carried at fair value. Unrealized holding gains and losses on debt securities available for sale, net of taxes, are reported in other comprehensive income (loss) until realized. Premiums and discounts are recognized in interest income using the effective interest method and reflect any optionality that may be embedded in the security.
Equity securities are carried at fair value, with changes in fair value reflected in the consolidated statements of operations. Equity securities that do not have readily determinable fair values are initially recorded at cost and subsequently remeasured when there is (i) an observable transaction involving the same investment, (ii) an observable transaction involving a similar investment from the same issuer or (iii) an impairment. These remeasurements are reflected in the consolidated statements of operations. Purchases and sales (and related gain or loss) of securities are recorded on the trade date, based on specific identification.
Allowance for Credit Losses on Available for Sale and Held to Maturity Securities
Available for sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. For available for sale debt securities, a decline in fair value due to credit loss results in recording an allowance for credit losses to the extent the fair value is less than the amortized cost basis. Declines in fair value that have not been recorded through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded through other comprehensive income, net of applicable taxes.
Allowances for credit losses may result from credit deterioration of the issuer or the collateral underlying the security. In performing an assessment of whether any decline in fair value is due to a credit loss, all relevant information is considered at the individual security level. In assessing whether a credit loss exists, the Company compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses is recorded, limited to the amount by which the fair value is less than the amortized cost basis.
CECL has replaced the previous other-than-temporary-impairment (“OTTI”) model. Under the OTTI model, credit losses were recognized as a reduction to the cost basis of the investment with recovery of an impairment loss recognized prospectively over time as interest income, and reversals of impairment were not allowed. Under CECL, effective January 1, 2020, if the Company intends to sell a debt security, or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis, the debt security is written down to its fair value and the write down is charged against the allowance for credit losses, with any incremental impairment reported in earnings. Reversals of the allowance for credit losses are permitted and should not exceed the allowance amount initially recognized.
For debt securities held to maturity, estimated expected credit losses are calculated in a manner like that used for loans held for investment. That is, the historical lifetime probability of default and severity of loss in the event of default is derived or obtained from external sources and adjusted for the expected effects of reasonable and supportable forecasts over the expected lives of the securities on those historical credit losses. With respect to certain classes of debt securities, primarily U.S. Treasuries, the Company considers the history of credit losses, current conditions and reasonable and supportable forecasts, which may indicate that the expectation that nonpayment of the amortized cost basis is or continues to be zero, even if the U.S. government were to technically default. Therefore, for those securities, the Company does not record expected credit losses.
11
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Loans Held for Investment
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the amount of unpaid principal reduced by unearned income, net unamortized deferred fees and an allowance for credit losses. Unearned income on installment loans and interest on other loans is recognized using the effective interest method. Net fees received for providing loan commitments and letters of credit that result in loans are deferred and amortized to interest income over the life of the related loan, beginning with the initial borrowing. Net fees on commitments and letters of credit that are not expected to be funded are amortized to noninterest income over the commitment period. Income on direct financing leases is recognized on a basis that achieves a constant periodic rate of return on the outstanding investment.
The accrual of interest on credit deteriorated loans is discontinued when, in management’s opinion, there is a clear indication that the borrower’s cash flow may not be sufficient to meet principal and interest payments, which is generally when a loan is 90 days past due unless the asset is both well secured and in the process of collection. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is charged against income. Once placed on non-accrual status, interest income is recognized on a cash basis. Additionally, accretion of purchased discount on non-accrual loans is suspended.
The Company follows applicable regulatory guidance when measuring past due status. The Company uses the actual days elapsed since the payment due date of the loan to determine delinquency.
Management defines loans acquired in a business combination as acquired loans. Acquired loans are recorded at estimated fair value on their purchase date with no carryover of the related allowance for credit losses. Acquired loans are segregated between those considered to be credit deteriorated and those without credit deterioration at acquisition. To make this determination, management considers such factors as past due status, non-accrual status and credit risk ratings. For acquired performing loans, a lifetime allowance for credit losses is estimated as of the date of acquisition and is recorded through provision for (reversal of) credit losses. The difference between the purchase price and loan receivable is amortized over the remaining life of the loan.
All formerly designated purchased credit impaired (“PCI”) loans became purchased credit deteriorated (“PCD”) loans effective January 1, 2020. PCD loans are loans that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination. For PCD loans, any non-credit discount or premium related to an acquired pool of PCD loans is allocated to each individual asset within the pool. On the acquisition date, the initial allowance for credit losses measured on a pooled basis is allocated to each individual asset within the pool to allocate any non-credit discount or premium. Credit losses are measured based on unpaid principal balance. A lifetime allowance for credit losses is estimated as of the date of acquisition. The initial allowance for credit losses is added to the purchase price and is considered to be part of the PCD loan amortized cost basis.
Allowance for Credit Losses for Loans Held for Investment
Credit quality within the loans held for investment portfolio is continuously monitored by management and is reflected within the allowance for credit losses for loans. The allowance for credit losses, or reserve, is an estimate of expected losses over the lifetime of a loan within the Company’s existing loans held for investment portfolio. The allowance for credit losses for loans held for investment is adjusted by a provision for (reversal of) credit losses, which is reported in earnings, and reduced by the charge-off of loan amounts, net of recoveries.
The credit loss estimation process involves procedures to appropriately consider the unique characteristics of the Company’s loan portfolio segments, which are further disaggregated into loan classes, the level at which credit risk is monitored. The allowance for credit losses for loans not evaluated for specific reserves is calculated using statistical credit factors, including probabilities of default (“PD”) and loss given default (“LGD”), to the amortized cost of pools of loan exposures with similar risk characteristics over its contractual life, adjusted for prepayments, to arrive at an estimate of expected credit losses. Economic forecasts are applied over the period management believes it can estimate
12
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
reasonable and supportable forecasts. Reasonable and supportable forecast periods and reversion assumptions to historical data are credit model specific. The Company typically forecasts economic variables over a one to four year horizon. Prepayments are estimated by loan type using historical information and adjusted for current and future conditions.
Commercial loans that exceed a minimum size scope are underwritten and graded using credit models that leverage national industry default data to score the loans. At the conclusion of the process of underwriting or re-grading a borrower, each borrower (for commercial and industrial loans) or property (for commercial real estate loans) is assigned a PD grade threshold. The valuation methodology of risk rating internal grades is based on the merits of the financial ratios of the borrower or the property. In addition, an LGD grade is determined by the credit models utilizing collateral information provided. A master rating scale effectively "pools" the loans by credit scores and assigns a standard one year PD percentage and an LGD percentage equally for all loans that have a given score. For borrowers or loans that do not meet the minimum balance threshold, an internal scorecard is utilized to approximate the grades derived from the credit models and is mapped to the master rating scale. The resulting numerical PD grade is the credit quality indicator for commercial loans. The grades on borrowers or properties that are scored in the credit models are determined at origination and updated at least annually. The grades on the internal scorecards are updated annually if they meet a minimum threshold, or if new circumstances (favorable or unfavorable) warrant a re-scoring.
When computing allowance levels, credit loss assumptions are estimated using models that analyze loans according to credit risk ratings, historic loss experience, past due status and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Future factors and forecasts may result in significant changes in the allowance and provision (reversal) for credit losses in those future periods. The allowance for credit losses will primarily reflect estimated losses for pools of loans that share similar risk characteristics, but will also consider individual loans that do not share risk characteristics with other loans.
Loans that Share Risk Characteristics with Other Loans
In estimating the component of the allowance for credit losses for loans that share similar risk characteristics with other loans, such loans are segregated into loan classes. Loans are designated into loan classes based on loans pooled by product types and similar risk characteristics or areas of risk concentration. In determining the allowance for credit losses, the Company derives an estimated credit loss assumption from a model that categorizes loan pools based on loan type and internal risk rating or past due category as follows.
Commercial and Industrial and Commercial Real Estate Loans. The Company assesses the credit quality of the borrower and assigns an internal risk rating by loan type for the commercial and industrial and commercial real estate portfolios. Internal risk ratings are assigned at origination or acquisition, and if necessary, adjusted for changes in credit quality over the life of the exposure. In assessing the internal PD risk rating of the loan or related unfunded commitments, we separately evaluate owner and non-owner occupied real estate. The borrower’s financial statements may be used to evaluate amounts and sources of repayments, debt service coverage, debt capacity, and quality of earnings. Other non-financial metrics are also evaluated including the geographies and industries within which it operates, its management strength, and its reputation and historical experience. The internal LGD risk rating also considers assessment of collateral quality and current loan to value, collateral type and loan seniority, covenant strength and performance, as well as any individual, corporate, or government guarantees.
These factors are based on an evaluation of historical and current information and sometimes involve subjective assessment and interpretation. Specific considerations for construction are considered in the internal PD and LGD risk ratings including property type, development phase and complexity, as well as lease-up and stabilization projections. The PD and LGD factors are further sensitized in the models for future expectations over the loan’s contractual life, adjusted for prepayments.
1-4 Family Residential Loans. The 1-4 family residential loan portfolio is segmented into pools of residential real estate loans with similar credit risk characteristics. The models calculate expected losses and prepayments using borrower
13
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
information at origination, including FICO score, loan type, collateral type, lien position, geography, origination year, and loan to value. Past due status post-origination is also a key input in the models. Current and future changes in economic conditions, including unemployment rates, home prices, index rates, and mortgage rates, are also considered.
Consumer Loans. The consumer loan portfolio is segmented into pools of consumer installment loans or revolving lines of credit with similar credit characteristics. The models calculate expected losses using borrower information at origination, including FICO score, origination year, geography, and collateral type.
Broker-Dealer Loans. The broker-dealer loan portfolio is evaluated on an individual basis using the collateral maintenance practical expedient. The collateral maintenance practical expedient allows the broker-dealer to compare the fair value of the collateral of each loan as of the reporting date to loan value. The underlying collateral of the loans to customers and correspondents is marked to market daily and any required additional collateral is collected. The allowance represents the amount of unsecured loan balances at the end of the period.
Qualitative Factors
Estimating the timing and amounts of future loss cash flows is subject to significant management judgment as these loss cash flows rely upon estimates such as default rates, loss severities, collateral valuations, the amounts and timing of principal payments (including any expected prepayments) or other factors that are reflective of current or future expected conditions. These estimates, in turn, depend on the duration of current overall economic conditions, industry, borrower, or portfolio specific conditions, the expected outcome of bankruptcy or insolvency proceedings, as well as, in certain circumstances, other economic factors, including the level of current and future real estate prices. All of these estimates and assumptions require significant management judgment and certain assumptions that are highly subjective. Model imprecision also exists in the allowance for credit losses estimation process due to the inherent time lag of available industry information and differences between expected and actual outcomes.
Management considers adjustments for these conditions in its allowance for credit loss estimates qualitatively where they may not be measured directly in its individual or collective assessments, including but not limited to:
Loans that Do Not Share Risk Characteristics with Other Loans
When a loan is assigned a substandard non-accrual risk rating grade, the loan subsequently is evaluated on an individual basis and no longer evaluated on a collective basis. The net realizable value of the loan is compared to the appropriate loan basis (i.e. PCD loan versus non-PCD loan) to determine any allowance for credit losses. Loans that are below a predetermined threshold, with the exception of 1-4 family residential loans, are fully reserved. The Company generally considers non-accrual loans to be collateral-dependent. The practical expedient to measure credit losses using the fair value of the collateral has been exercised.
For commercial real estate loans, the fair value of collateral primarily is based on appraisals. For owner occupied real estate loans, underlying properties are occupied by the borrower in its business, and evaluations are based on business operations used to service the debt. For non-owner occupied real estate loans, underlying properties are income-producing and evaluations are based on tenant revenues. For income producing construction and land development loans, appraisals reflect the assumption that properties are completed.
For 1-4 family residential loans that are graded substandard non-accrual, an assessment of value is made using the most recent appraisal on file. If the appraisal on file is older than two years, the latest property tax assessment is used as a
14
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
screening value to determine if a reserve might be required. If the assessed value is less than the appraised value, this value is discounted for selling costs and is used to measure the reserve required. If the appraisal is less than two years old, the value is discounted for selling costs and compared to the appropriate basis in the loan.
Consumer loans are charged off when they reach 90 days delinquency as a general rule. There are limited cases where the loan is not charged off due to special circumstances and is subject to the collateral review process.
Off-Balance Sheet Credit Exposures, Including Unfunded Loan Commitments
The Company maintains a separate allowance for credit losses from off-balance sheet credit exposures, including unfunded loan commitments, which is included in other liabilities within the consolidated balance sheets. The Company estimates expected losses by calculating a commitment usage factor based on industry usage factors. The commitment usage factor is applied over the relevant contractual period. Loss factors from the underlying loans to which commitments are related are applied to the results of the usage calculation to estimate any liability for credit losses related for each loan type.
2. Recently Issued Accounting Standards
Accounting Standards Adopted During 20202021
In March 2020, FASB issued ASU 2020-03 which included various clarifications and improvements related to financial instruments. The following topics are addressed: fair value option disclosures, applicability of portfolio exception to non-financial items, disclosures for depository and lending institutions, cross-reference to line-of-credit or revolving debt arrangements, cross-reference to net asset value practical expedient, the contractual term of a net investment in a lease for measuring expected credit losses, and recording of an allowance for credit losses when control of financial assets sold is regained. All items had various effective dates, which for the Company ranged from January 1, 2020 to the date of issuance. The adoption of ASU 2020-03 did not have a material impact on the Company’s consolidated financial statements.
In December 2019, FASB issued ASU 2019-12 which simplifies the accounting for income taxes by removing certain exceptions to the general principles in the ASC and is intended to improve consistency by clarifying and amending existing guidance. The amendments are effective for annual periods beginning after December 15, 2020. As permitted within the amendment, the Company elected to early adopt and prospectively apply the provisions of this amendment as of January 1, 2020. The removal of the exceptions did not result in a material change in the Company’s current or deferred income tax provisions and did not have a material impact on the Company’s consolidated financial statements.
In August 2018, FASB issued ASU 2018-15 which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include internal-use software licenses). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The amendment also includes presentation and disclosure provisions regarding capitalized implementation costs. The amendment is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. The Company adopted the provisions of this amendment as of January 1, 2020. The impact of this amendment is limited to presentation and disclosure changes that did not have an impact on the Company’s consolidated financial statements.
In August 2018, FASB issued ASU 2018-13 which includes various removals, modifications and additions to existing guidance regarding fair value disclosures. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. The Company adopted the provisions of these amendments as
15
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
of January 1, 2020. The impact of these amendments is limited to presentation and disclosure changes that did not have an impact on the Company’s consolidated financial statements.
In June 2016, FASB issued ASU 2016-13 which sets forth a current expected credit loss model that requires entities to measure all credit losses expected over the life of an exposure (or pool of exposures) for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The FASB has issued various updates, improvements and technical corrections to the standard since the issuance of ASU 2016-13. The new standard, which is codified in ASC 326, Financial Instruments – Credit Losses, replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. For available for sale securities, the standard modifies the current OTTI model by requiring entities to record an allowance for credit losses rather than reducing the carrying amount of securities. Additionally, the new standard eliminated the former accounting model for PCI loans, but requires an allowance to be recognized for PCD assets. The new standard also requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. The Company’s implementation efforts included, among other activities, the development, testing and validation of credit forecasting models and a new credit scoring system for significant loan portfolio segments, reassessment of risk rating grades and matrix, as well as development of the policies, systems and controls required to fully implement CECL. The new standard is effective for the Company for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2019, with a cumulative-effect adjustment to retained earnings at the date of adoption. On January 1, 2020, the Company adopted the new CECL standard and recorded entries that resulted in an aggregate allowance for credit losses of $83.6 million within the consolidated balance sheets. The transition adjustment resulted in a net of tax, decrease of $5.7 million to opening retained earnings at January 1, 2020. The decrease to retained earnings included an initial estimate of lifetime expected credit losses for PCD loans and was recognized through a balance sheet gross-up. While not material, the impact of the adoption of CECL also affected the Company’s regulatory capital, performance and other asset quality ratios. Future changes in the allowance for credit losses are expected to be volatile given dependence upon, among other things, the portfolio composition and quality, as well as the impact of significant drivers, including prepayment assumptions and macroeconomic conditions and forecasts.
Accounting Standards Issued But Not Yet Adopted
In March 2020, FASB issued ASU 2020-04, which is intended to provide temporary optional expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. This guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments prospectively through December 31, 2022. The Company is currently evaluating the provisions of the amendment and the impact on its future consolidated financial statements.
In January 2020, FASB issued ASU 2020-01 to clarify the interaction among ASC 321, ASC 323, and ASC 815 for equity securities, equity method investments, and certain financial instruments to acquire equity securities. ASU 2020-01 clarifies whether re-measurement of equity investments is appropriate when observable transactions cause the equity method to be triggered or discontinued. ASU 2020-01 also provides that certain forward contracts and purchased options to acquire equity securities will be measured under ASC 321 without an assessment of subsequent accounting upon settlement or exercise. The amendment is effective in periods beginning after December 15, 2020. The Company does not expectadopted the provisions of this amendment as of January 1, 2021. The adoption of ASU 2020-01 tothese provisions did not have a material impact on its consolidated financial statements.
16
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
T
3. Discontinued Operations
NLC Sale
On June 30, 2020, Hilltop completed the sale of all of the outstanding capital stock of NLC, which comprisescomprised the operations of the insurance segment, for cash proceeds of $154.1 million. During the three months ended June 30, 2020, Hilltop recognized a pre-taxan aggregate gain associated with this transaction of $32.3$36.8 million, net of customary transaction costs of $5.1 million and was subject to post-closing adjustments. The resulting book gain from this sale transaction was not recognized for tax purposes due to the excess tax basis over book basis being greater than the recorded book gain. Any tax loss related to this transaction is deemed disallowed pursuant to the rules under the Internal Revenue Code.
During the first quarter of 2020, management had determined that the pendingthen-pending sale of NLC met the criteria to be presented as discontinued operations. Therefore, NLC’s results and its assets and liabilitiesfor the three months ended March 31, 2020 have been presented as discontinued operations in the consolidated financial statements. All related notes to the consolidated financial statements for discontinued operations have been included in this note. The following table detailspresents the carrying amounts of assets and liabilities of NLC reflected in the consolidated balance sheet under the caption “Assetsresults of discontinued operations” and “Liabilities of discontinued operations”, respectively.operations for NLC for the three months ended March 31, 2020.
| | | |
| | December 31, | |
|
| 2019 | |
Assets | | | |
Cash and due from banks | | $ | 51,333 |
Securities: | | | |
Available for sale, at fair value | | | 86,899 |
Equity, at fair value | | | 19,841 |
| | | 106,740 |
| | | |
Premises and equipment, net | | | 9,607 |
Operating lease right-of-use assets | | | 2,739 |
Other assets | | | 50,533 |
Goodwill | | | 23,988 |
Other intangible assets, net | | | 3,489 |
Total assets of discontinued operations | | $ | 248,429 |
| | | |
Liabilities | | | |
Notes payable | | $ | 27,500 |
Operating lease liabilities | | | 2,783 |
Other liabilities | | | 110,391 |
Total liabilities of discontinued operations | | $ | 140,674 |
| | |
Interest income: | | |
Securities: | | |
Taxable | $ | 938 |
Other | | 67 |
Total interest income | | 1,005 |
| | |
Interest expense: | | |
Notes payable | | 406 |
| | |
Noninterest income: | | |
Net insurance premiums earned | | 32,637 |
Other | | (2,246) |
Total noninterest income | | 30,391 |
| | |
Noninterest expense: | | |
Employees' compensation and benefits | | 2,777 |
Occupancy and equipment, net | | 247 |
Professional services | | 8,527 |
Loss and loss adjustment expenses | | 12,949 |
Other | | 2,476 |
Total noninterest expense | | 26,976 |
| | |
Income from discontinued operations before income taxes | | 4,014 |
Income tax expense | | 863 |
Income from discontinued operations, net of income taxes | $ | 3,151 |
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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The following table presents the results of discontinued operations for NLC for the periods indicated.
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
| | 2020 |
| 2019 | | 2020 | | 2019 | ||||
Interest income: | | | | | | | | | | | | |
Securities: | | | | | | | | | | | | |
Taxable | | $ | 814 | | $ | 906 | | $ | 1,752 | | $ | 1,866 |
Other | | | 4 | | | 150 | | | 71 | | | 292 |
Total interest income | | | 818 | | | 1,056 | | | 1,823 | | | 2,158 |
| | | | | | | | | | | | |
Interest expense: | | | | | | | | | | | | |
Notes payable | | | 369 | | | 464 | | | 775 | | | 924 |
| | | | | | | | | | | | |
Noninterest income: | | | | | | | | | | | | |
Net insurance premiums earned | | | 32,440 | | | 33,466 | | | 65,077 | | | 66,669 |
Other | | | 5,297 | | | 2,702 | | | 3,051 | | | 6,004 |
Total noninterest income | | | 37,737 | | | 36,168 | | | 68,128 | | | 72,673 |
| | | | | | | | | | | | |
Noninterest expense: | | | | | | | | | | | | |
Employees' compensation and benefits | | | 3,225 | | | 2,784 | | | 6,002 | | | 5,986 |
Occupancy and equipment, net | | | 217 | | | 281 | | | 464 | | | 525 |
Professional services | | | 9,674 | | | 9,980 | | | 18,201 | | | 18,813 |
Loss and loss adjustment expenses | | | 25,470 | | | 24,981 | | | 38,419 | | | 39,907 |
Other | | | 1,511 | | | 1,563 | | | 3,987 | | | 4,696 |
Total noninterest expense | | | 40,097 | | | 39,589 | | | 67,073 | | | 69,927 |
| | | | | | | | | | | | |
Income (loss) from discontinued operations before income taxes | | | (1,911) | | | (2,829) | | | 2,103 | | | 3,980 |
Gain on disposal of discontinued operations | | | 32,341 | | | — | | | 32,341 | | | — |
Income tax (benefit) expense | | | (345) | | | (575) | | | 518 | | | 874 |
Income (loss) from discontinued operations, net of income taxes | | $ | 30,775 | | $ | (2,254) | | $ | 33,926 | | $ | 3,106 |
Securities
The available for sale securities held by NLC at December 31, 2019 reflected in the consolidated balance sheets under the caption “Assets of discontinued operations” were primarily comprised of U.S. Treasury, residential mortgage-backed and corporate debt securities with aggregate unrealized gross gains of $2.5 million and measured using Level 2 inputs on a recurring basis. NLC’s available for sale portfolio had nominal unrealized gross losses at December 31, 2019.
NLC had unrealized net gains of $1.1 million from the equity securities held at December 31, 2019, measured using Level 1 inputs on a recurring basis. NLC recognized net gains of $1.9 million and $0.2 million during the three months ended June 30, 2020 and 2019, respectively, and recognized net losses of $2.5 million and net gains of $1.4 million during the six months ended June 30, 2020 and 2019, respectively, due to changes in the fair value of equity securities still held at the balance sheet date.
18
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Reinsurance Activity
The effects of reinsurance on premiums written and earned are included within discontinued operations for all periods presented and are summarized as follows (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended | | ||||||||||||||||||||||||
| | 2020 | | 2019 | | 2020 | | 2019 | | | March 31, 2020 | | ||||||||||||||||||||
|
| Written |
| Earned |
| Written |
| Earned |
| Written |
| Earned |
| Written |
| Earned |
|
| Written |
| Earned |
| ||||||||||
Premiums from direct business | | $ | 33,831 | | $ | 30,638 | | $ | 35,562 | | $ | 31,727 | | $ | 63,811 | | $ | 61,384 | | $ | 66,352 | | $ | 63,463 | | | $ | 29,980 | | $ | 30,746 | |
Reinsurance assumed | |
| 3,444 | |
| 3,208 | |
| 3,622 | |
| 3,256 | |
| 6,396 | |
| 6,452 | |
| 6,751 | |
| 6,448 | | |
| 2,952 | |
| 3,244 | |
Reinsurance ceded | |
| (1,406) | |
| (1,406) | |
| (1,517) | |
| (1,517) | |
| (2,759) | |
| (2,759) | |
| (3,242) | |
| (3,242) | | |
| (1,353) | |
| (1,353) | |
Net premiums | | $ | 35,869 | | $ | 32,440 | | $ | 37,667 | | $ | 33,466 | | $ | 67,448 | | $ | 65,077 | | $ | 69,861 | | $ | 66,669 | | | $ | 31,579 | | $ | 32,637 | |
The effects of reinsurance on incurred losses and LAE are included within discontinued operations for all periods and are as follows (in thousands).
| | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | Three Months Ended |
| |||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
|
| March 31, 2020 |
| |||||
Losses and LAE incurred | | $ | 25,462 | | $ | 23,959 | | $ | 38,225 | | $ | 38,943 | | | $ | 12,763 | |
Reinsurance recoverables | |
| 8 | |
| 1,022 | |
| 194 | |
| 964 | | |
| 186 | |
Net loss and LAE incurred | | $ | 25,470 | | $ | 24,981 | | $ | 38,419 | | $ | 39,907 | | | $ | 12,949 | |
4. Fair Value Measurements
Fair Value Measurements and Disclosures
The Company determines fair values in compliance with The Fair Value Measurements and Disclosures Topic of the ASC (the “Fair Value Topic”). The Fair Value Topic defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. The Fair Value Topic defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Fair Value Topic assumes that transactions upon which fair value measurements are based occur in the principal market for the asset or liability being measured. Further, fair value measurements made under the Fair Value Topic exclude transaction costs and are not the result of forced transactions.
The Fair Value Topic includes a fair value hierarchy that classifies fair value measurements based upon the inputs used in valuing the assets or liabilities that are the subject of fair value measurements. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs, as indicated below.
● | Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities that the Company can access at the measurement date. |
● | Level 2 Inputs: Observable inputs other than Level 1 prices. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, yield curves, prepayment speeds, default rates, credit risks and loss severities), and inputs that are derived from or corroborated by market data, among others. |
● | Level 3 Inputs: Unobservable inputs that reflect an entity’s own |
1911
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Fair Value Option
The Company has elected to measure substantially all of PrimeLending’s mortgage loans held for sale and the retained mortgage servicing rights (“MSR”) asset and substantially all of mortgage loans held for sale at fair value, under the provisions of the Fair Value Option. The Company elected to apply the provisions of the Fair Value Option to these items so that it would have the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. At June 30, 2020March 31, 2021 and December 31, 2019,2020, the aggregate fair value of PrimeLending’s mortgage loans held for sale accounted for under the Fair Value Option was $2.45$2.25 billion and $1.94$2.52 billion, respectively, and the unpaid principal balance of those loans was $2.33$2.21 billion and $1.88$2.41 billion, respectively. The interest component of fair value is reported as interest income on loans in the accompanying consolidated statements of operations.
The Company holds a number of financial instruments that are measured at fair value on a recurring basis, either by the application of the Fair Value Option or other authoritative pronouncements. The fair values of those instruments are determined primarily using Level 2 inputs.inputs, as further described below. Those inputs include quotes from mortgage loan investors and derivatives dealers and data from independent pricing services. The fair value of loans held for sale is determined using an exit price method.
The following tables present information regarding financial assets and liabilities measured at fair value on a recurring basis (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||||||
June 30, 2020 | | Inputs | | Inputs | | Inputs | | Fair Value |
| |||||||||||||||||
March 31, 2021 | | Inputs | | Inputs | | Inputs | | Fair Value |
| |||||||||||||||||
Trading securities | | $ | 50,771 | | $ | 597,266 | | $ | — | | $ | 648,037 | | | $ | 5,364 | | $ | 523,348 | | $ | — | | $ | 528,712 | |
Available for sale securities | | | — | | | 1,091,348 | | | — | | | 1,091,348 | | | | — | | | 1,715,406 | | | — | | | 1,715,406 | |
Equity securities | | | 122 | | | — | | | — | | | 122 | | | | 189 | | | — | | | — | | | 189 | |
Loans held for sale | | | — | | | 2,357,115 | | | 91,936 | | | 2,449,051 | | | | — | | | 2,171,792 | | | 77,275 | | | 2,249,067 | |
Derivative assets | | | — | | | 148,573 | | | — | | | 148,573 | | | | — | | | 136,508 | | | — | | | 136,508 | |
MSR asset | | | — | | | — | | | 81,264 | | | 81,264 | | | | — | | | — | | | 142,125 | | | 142,125 | |
Securities sold, not yet purchased | | | 24,027 | | | 31,313 | | | — | | | 55,340 | | | | 66,090 | | | 30,965 | | | — | | | 97,055 | |
Derivative liabilities | | | — | | | 58,436 | | | — | | | 58,436 | | | | — | | | 54,455 | | | — | | | 54,455 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Level 1 |
| Level 2 |
| Level 3 |
| | Total | |
| Level 1 |
| Level 2 |
| Level 3 |
| | Total | | ||||||
December 31, 2019 | | Inputs | | Inputs | | Inputs | | | Fair Value | | ||||||||||||||||
December 31, 2020 | | Inputs | | Inputs | | Inputs | | | Fair Value | | ||||||||||||||||
Trading securities | | $ | — | | $ | 689,576 | | $ | — | | $ | 689,576 | | | $ | 45,390 | | $ | 648,865 | | $ | — | | $ | 694,255 | |
Available for sale securities | | | — | | | 911,493 | | | — | | | 911,493 | | | | — | | | 1,462,205 | | | — | | | 1,462,205 | |
Equity securities | | | 166 | | | — | | | — | | | 166 | | | | 140 | | | — | | | — | | | 140 | |
Loans held for sale | | | — | | | 1,868,518 | | | 67,195 | | | 1,935,713 | | | | — | | | 2,449,588 | | | 71,816 | | | 2,521,404 | |
Derivative assets | | | — | | | 33,129 | | | — | | | 33,129 | | | | — | | | 126,898 | | | — | | | 126,898 | |
MSR asset | | | — | | | — | | | 55,504 | | | 55,504 | | | | — | | | — | | | 143,742 | | | 143,742 | |
Securities sold, not yet purchased | | | 29,080 | | | 14,737 | | | — | | | 43,817 | | | | 54,494 | | | 25,295 | | | — | | | 79,789 | |
Derivative liabilities | | | — | | | 17,140 | | | — | | | 17,140 | | | | — | | | 74,598 | | | — | | | 74,598 | |
2012
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The following tables include a rollforward for those financial instruments measured at fair value using Level 3 inputs (in thousands).
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Total Gains or Losses | | | |
| ||||
| | | | | | | | | | | | | | (Realized or Unrealized) | | | |
| ||||
|
| Balance at |
| | |
| | |
|
| |
| | |
| Included in Other |
| | |
| ||
| | Beginning of | | Purchases/ | | Sales/ | | Transfers to | | Included in | | Comprehensive | | Balance at |
| |||||||
| | Period | | Additions | | Reductions | | (from) Level 3 | | Net Income | | Income (Loss) | | End of Period |
| |||||||
Three months ended March 31, 2021 | | | | | | | | | | | | | | | | | | | | | | |
Loans held for sale | | $ | 71,816 | | $ | 12,494 | | $ | (7,239) | | $ | 741 | | $ | (537) | | $ | — | | $ | 77,275 | |
MSR asset | |
| 143,742 | | | 34,301 | | | (52,783) | | | — | | | 16,865 | | | — | |
| 142,125 | |
Total | | $ | 215,558 | | $ | 46,795 | | $ | (60,022) | | $ | 741 | | $ | 16,328 | | $ | — | | $ | 219,400 | |
| | | | | | | | | | | | | | | | | | | | | | |
Three months ended March 31, 2020 | | | | | | | | | | | | | | | | | | | | | | |
Loans held for sale | | $ | 67,195 | | $ | 14,285 | | $ | (4,175) | | $ | 6,220 | | $ | (3,937) | | $ | — | | $ | 79,588 | |
MSR asset | | | 55,504 | | | 4,475 | | | (18,650) | | | — | | | (11,030) | | | — | | | 30,299 | |
Total | | $ | 122,699 | | $ | 18,760 | | $ | (22,825) | | $ | 6,220 | | $ | (14,967) | | $ | — | | $ | 109,887 | |
All net realized and unrealized gains (losses) in the tables above are reflected in the accompanying consolidated financial statements. The unrealized gains (losses) relate to financial instruments still held at March 31, 2021.
For Level 3 financial instruments measured at fair value on a recurring basis at March 31, 2021 and December 31, 2020, the significant unobservable inputs used in the fair value measurements were as follows.
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Range (Weighted-Average) | ||||||||||||||
| | | | | | March 31, | | December 31, | ||||||||||||
Financial instrument |
| Valuation Technique |
| Unobservable Inputs |
| 2021 | | 2020 | ||||||||||||
Loans held for sale | | Market comparable | | Projected price | | 91 | - | 94 | % | ( | 94 | %) | | 91 | - | 94 | % | ( | 94 | %) |
| | | | | | | | | | | | | | | | | | | | |
MSR asset | | Discounted cash flows | | Constant prepayment rate | | | | | 11.28 | % | | | | | | 12.15 | % | | ||
| | | | Discount rate | | | | | 13.68 | % | | | | | | 14.60 | % | |
The fair value of certain loans held for sale that cannot be sold through normal sale channels or are non-performing is measured using Level 3 inputs. The fair value of such loans is generally based upon estimates of expected cash flows using unobservable inputs, including listing prices of comparable assets, uncorroborated expert opinions, and/or management’s knowledge of underlying collateral.
The MSR asset is reported at fair value using Level 3 inputs. The MSR asset is valued by projecting net servicing cash flows, which are then discounted to estimate the fair value. The fair value of the MSR asset is impacted by a variety of factors. Prepayment and discount rates, the most significant unobservable inputs, are discussed further in Note 8 to the consolidated financial statements. The decreases in the weighted average prepayment and discount rates used to value the MSR asset at March 31, 2021, compared to December 31, 2020, reflect the effect of increased mortgage rates reducing consumer refinancing activity and an increase in third-party servicing outlets.
The Company had 0 transfers between Levels 1 and 2 during the periods presented. Any transfers are based on changes in the observability and/or significance of the valuation inputs and are assumed to occur at the beginning of the quarterly reporting period in which they occur.
13
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The following table presents those changes in fair value of instruments recognized in the consolidated statements of operations that are accounted for under the Fair Value Option (in thousands).
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2021 | | Three Months Ended March 31, 2020 | | ||||||||||||||
|
| |
| Other |
| Total |
| |
| Other |
| Total |
| ||||||
| | Net | | Noninterest | | Changes in | | Net | | Noninterest | | Changes in | | ||||||
| | Gains (Losses) | | Income | | Fair Value | | Gains (Losses) | | Income | | Fair Value | | ||||||
Loans held for sale | | $ | (67,956) | | $ | — | | $ | (67,956) | | $ | 33,979 | | $ | — | | $ | 33,979 | |
MSR asset | |
| 16,865 | |
| — | |
| 16,865 | |
| (11,030) | |
| — | |
| (11,030) | |
The Fair Value of Financial Instruments Subsection of the ASC requires disclosure of the fair value of financial assets and liabilities, including the financial assets and liabilities previously discussed. There have been no changes to the methods for determining estimated fair value for financial assets and liabilities as described in detail in Note 5 to the consolidated financial statements included in the Company’s 2020 Form 10-K.
The following tables present the carrying values and estimated fair values of financial instruments not measured at fair value on either a recurring or non-recurring basis (in thousands).
| | | | | | | | | | | | | | | | |
| | | | | Estimated Fair Value |
| ||||||||||
|
| Carrying |
| Level 1 |
| Level 2 |
| Level 3 |
| | |
| ||||
March 31, 2021 | | Amount | | Inputs | | Inputs | | Inputs | | Total |
| |||||
Financial assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,564,885 | | $ | 1,564,885 | | $ | — | | $ | — | | $ | 1,564,885 | |
Assets segregated for regulatory purposes | | | 273,393 | | | 273,393 | | | — | | | — | | | 273,393 | |
Securities purchased under agreements to resell | | | 106,342 | | | — | | | 106,342 | | | — | | | 106,342 | |
Held to maturity securities | | | 300,088 | | | — | | | 311,402 | | | — | | | 311,402 | |
Loans held for sale | | | 289,919 | | | — | | | 289,919 | | | — | | | 289,919 | |
Loans held for investment, net | | | 7,666,158 | | | — | | | 520,175 | | | 7,342,590 | | | 7,862,765 | |
Broker-dealer and clearing organization receivables | |
| 1,596,817 | |
| — | |
| 1,596,817 | |
| — | |
| 1,596,817 | |
Other assets | |
| 73,208 | |
| — | |
| 71,499 | |
| 1,709 | |
| 73,208 | |
| | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | |
Deposits | |
| 11,732,779 | |
| — | |
| 11,742,710 | |
| — | |
| 11,742,710 | |
Broker-dealer and clearing organization payables | |
| 1,546,227 | |
| — | |
| 1,546,227 | |
| — | |
| 1,546,227 | |
Short-term borrowings | |
| 676,652 | |
| — | |
| 676,652 | |
| — | |
| 676,652 | |
Debt | |
| 468,725 | |
| — | |
| 468,725 | |
| — | |
| 468,725 | |
Other liabilities | |
| 11,067 | |
| — | |
| 11,067 | |
| — | |
| 11,067 | |
14
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
| | | | | | | | | | | | | | | | |
| | | | | Estimated Fair Value |
| ||||||||||
|
| Carrying |
| Level 1 |
| Level 2 |
| Level 3 |
| | |
| ||||
December 31, 2020 | | Amount | | Inputs | | Inputs | | Inputs | | Total |
| |||||
Financial assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,062,946 | | $ | 1,062,946 | | $ | — | | $ | — | | $ | 1,062,946 | |
Assets segregated for regulatory purposes | | | 290,357 | | | 290,357 | | | — | | | — | | | 290,357 | |
Securities purchased under agreements to resell | | | 80,319 | | | — | | | 80,319 | | | — | | | 80,319 | |
Held to maturity securities | | | 311,944 | | | — | | | 326,671 | | | — | | | 326,671 | |
Loans held for sale | | | 266,982 | | | — | | | 266,982 | | | — | | | 266,982 | |
Loans held for investment, net | | | 7,544,097 | | | — | | | 437,007 | | | 7,351,411 | | | 7,788,418 | |
Broker-dealer and clearing organization receivables | |
| 1,404,727 | |
| — | |
| 1,404,727 | |
| — | |
| 1,404,727 | |
Other assets | |
| 74,881 | |
| — | |
| 73,111 | |
| 1,770 | |
| 74,881 | |
| | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | |
Deposits | |
| 11,242,319 | |
| — | |
| 11,256,629 | |
| — | |
| 11,256,629 | |
Broker-dealer and clearing organization payables | |
| 1,368,373 | |
| — | |
| 1,368,373 | |
| — | |
| 1,368,373 | |
Short-term borrowings | |
| 695,798 | |
| — | |
| 695,798 | |
| — | |
| 695,798 | |
Debt | |
| 448,999 | |
| — | |
| 448,999 | |
| — | |
| 448,999 | |
Other liabilities | |
| 6,133 | |
| — | |
| 6,133 | |
| — | |
| 6,133 | |
The Company held equity investments other than securities of $63.7 million and $63.6 million at March 31, 2021 and December 31, 2020, respectively, which are included within other assets in the consolidated balance sheets. Of the $63.7 million of such equity investments held at March 31, 2021, $22.9 million do not have readily determinable fair values and each is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The following table presents the adjustments to the carrying value of these investments during the periods presented (in thousands).
| | | | ��� | | | |
| | | Three Months Ended March 31, | ||||
|
| | 2021 |
| 2020 | ||
Balance, beginning of period |
| | $ | 22,844 |
| $ | 19,771 |
Upward adjustments | | | | 121 | | | 106 |
Impairments and downward adjustments | | | | (60) | | | (789) |
Balance, end of period | | | $ | 22,905 | | $ | 19,088 |
5. Securities
The fair value of trading securities is summarized as follows (in thousands).
| | | | | | | | |
| | March 31, | | December 31, | | | ||
|
| 2021 |
| 2020 |
|
| ||
U.S. Treasury securities |
| $ | 465 |
| $ | 40,491 |
|
|
U.S. government agencies: | | | | | | | | |
Bonds | | | 20,376 | | | 40 | | |
Residential mortgage-backed securities | |
| 161,557 | |
| 336,081 | | |
Commercial mortgage-backed securities | |
| 861 | |
| 876 | | |
Collateralized mortgage obligations | | | 80,729 | | | 69,172 | | |
Corporate debt securities | | | 64,535 | | | 62,481 | | |
States and political subdivisions | | | 183,385 | | | 171,573 | | |
Private-label securitized product | | | 11,655 | | | 8,571 | | |
Other | | | 5,149 | | | 4,970 | | |
Totals | | $ | 528,712 | | $ | 694,255 | | |
In addition to the securities shown above, the Hilltop Broker-Dealers enter into transactions that represent commitments to purchase and deliver securities at prevailing future market prices to facilitate customer transactions and satisfy such
15
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
commitments. Accordingly, the Hilltop Broker-Dealers’ ultimate obligations may exceed the amount recognized in the financial statements. These securities, which are carried at fair value and reported as securities sold, not yet purchased in the consolidated balance sheets, had a value of $97.1 million and $79.8 million at March 31, 2021 and December 31, 2020, respectively.
The amortized cost and fair value of available for sale and held to maturity securities are summarized as follows (in thousands).
| | | | | | | | | | | | | |
| | Available for Sale | | ||||||||||
| | Amortized | | Unrealized | | Unrealized | | | |
| |||
March 31, 2021 | | Cost | | Gains | | Losses | | Fair Value |
| ||||
U.S. government agencies: | | | | | | | | | | | | | |
Bonds | | $ | 76,527 | | $ | 970 | | $ | (334) | | $ | 77,163 | |
Residential mortgage-backed securities | |
| 897,085 | |
| 13,009 | |
| (9,811) | |
| 900,283 | |
Commercial mortgage-backed securities | | | 157,906 | |
| 594 | |
| (9,551) | |
| 148,949 | |
Collateralized mortgage obligations | |
| 536,548 | |
| 5,327 | |
| (2,057) | |
| 539,818 | |
States and political subdivisions | |
| 47,362 | |
| 2,045 | |
| (214) | |
| 49,193 | |
Totals | | $ | 1,715,428 | | $ | 21,945 | | $ | (21,967) | | $ | 1,715,406 | |
| | | | | | | | | | | | | |
| | Available for Sale | | ||||||||||
| | Amortized | | Unrealized | | Unrealized | | | |
| |||
December 31, 2020 | | Cost | | Gains | | Losses | | Fair Value |
| ||||
U.S. government agencies: | | | | | | | | | | | | | |
Bonds | | $ | 82,036 | | $ | 1,095 | | $ | (325) | | $ | 82,806 | |
Residential mortgage-backed securities | |
| 624,863 | |
| 17,194 | |
| (446) | |
| 641,611 | |
Commercial mortgage-backed securities | | | 124,929 | |
| 768 | |
| (1,159) | |
| 124,538 | |
Collateralized mortgage obligations | |
| 559,362 | |
| 6,916 | |
| (370) | |
| 565,908 | |
States and political subdivisions | |
| 44,729 | |
| 2,613 | |
| — | |
| 47,342 | |
Totals | | $ | 1,435,919 | | $ | 28,586 | | $ | (2,300) | | $ | 1,462,205 | |
| | | | | | | | | | | | | |
| | Held to Maturity |
| ||||||||||
| | Amortized | | Unrealized | | Unrealized | | | |
| |||
March 31, 2021 |
| Cost |
| Gains |
| Losses |
| Fair Value |
| ||||
U.S. government agencies: | | | | | | | | | | | | |
|
Residential mortgage-backed securities | | $ | 12,541 | | $ | 603 | | $ | — | | $ | 13,144 |
|
Commercial mortgage-backed securities | | | 152,309 | |
| 6,792 | |
| — | |
| 159,101 |
|
Collateralized mortgage obligations | |
| 65,043 | |
| 1,738 | |
| — | |
| 66,781 |
|
States and political subdivisions | |
| 70,195 | |
| 2,211 | |
| (30) | |
| 72,376 |
|
Totals | | $ | 300,088 | | $ | 11,344 | | $ | (30) | | $ | 311,402 |
|
| | | | | | | | | | | | | |
| | Held to Maturity |
| ||||||||||
| | Amortized | | Unrealized | | Unrealized | | | |
| |||
December 31, 2020 |
| Cost |
| Gains |
| Losses |
| Fair Value |
| ||||
U.S. government agencies: | | | | | | | | | | | | | |
Residential mortgage-backed securities | | $ | 13,547 | | $ | 708 | | $ | — | | $ | 14,255 | |
Commercial mortgage-backed securities | | | 152,820 | | | 9,205 | | | — | | | 162,025 | |
Collateralized mortgage obligations | |
| 74,932 | |
| 2,036 | |
| — | |
| 76,968 | |
States and political subdivisions | |
| 70,645 | |
| 2,778 | |
| — | |
| 73,423 | |
Totals | | $ | 311,944 | | $ | 14,727 | | $ | — | | $ | 326,671 | |
Additionally, the Company had unrealized net gains of $0.1 million at both March 31, 2020 and December 31, 2020 from equity securities with fair values of $0.2 million and $0.1 million held at March 31, 2021 and December 31, 2020, respectively. The Company recognized nominal net gains and nominal net losses during the three months ended March 31,
16
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
2021 and 2020, respectively, due to changes in the fair value of equity securities still held at the balance sheet date. During the three months ended March 31, 2021 and 2020, net gains recognized from equity securities sold were nominal.
Information regarding available for sale and held to maturity securities that were in an unrealized loss position is shown in the following tables (dollars in thousands).
| | | | | | | | | | | | | | | | | |
| | March 31, 2021 | | December 31, 2020 |
| ||||||||||||
|
| Number of |
| | |
| Unrealized |
| Number of |
| | |
| Unrealized |
| ||
| | Securities | | Fair Value | | Losses | | Securities | | Fair Value | | Losses |
| ||||
Available for Sale | | | | | | | | | | | | | | | | | |
U.S. government agencies: | | | | | | | | | | | | | | | | | |
Bonds: | | | | | | | | | | | | | | | | | |
Unrealized loss for less than twelve months |
| 5 | | $ | 34,739 | | $ | 334 |
| 8 | | $ | 60,298 | | $ | 325 | |
Unrealized loss for twelve months or longer |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
|
| 5 | | | 34,739 | | | 334 |
| 8 | |
| 60,298 | |
| 325 | |
Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | |
Unrealized loss for less than twelve months |
| 54 | |
| 604,251 | |
| 9,811 |
| 15 | |
| 86,287 | |
| 429 | |
Unrealized loss for twelve months or longer |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
|
| 54 | | | 604,251 | | | 9,811 |
| 15 | |
| 86,287 | |
| 429 | |
Commercial mortgage-backed securities: | | | | | | | | | | | | | | | | | |
Unrealized loss for less than twelve months |
| 14 | |
| 137,123 | |
| 9,551 |
| 10 | |
| 105,386 | |
| 1,176 | |
Unrealized loss for twelve months or longer |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
|
| 14 | | | 137,123 | | | 9,551 |
| 10 | |
| 105,386 | |
| 1,176 | |
Collateralized mortgage obligations: | | | | | | | | | | | | | | | | | |
Unrealized loss for less than twelve months |
| 18 | |
| 160,376 | |
| 2,027 |
| 10 | |
| 101,990 | |
| 324 | |
Unrealized loss for twelve months or longer |
| 3 | |
| 3,852 | |
| 30 |
| 5 | |
| 13,611 | |
| 46 | |
|
| 21 | | | 164,228 | | | 2,057 |
| 15 | |
| 115,601 | |
| 370 | |
States and political subdivisions: | | | | | | | | | | | | | | | | | |
Unrealized loss for less than twelve months |
| 24 | |
| 8,421 | |
| 214 |
| — | |
| — | |
| — | |
Unrealized loss for twelve months or longer |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
|
| 24 | | | 8,421 | | | 214 |
| — | |
| — | |
| — | |
Total available for sale: | | | | | | | | | | | | | | | | | |
Unrealized loss for less than twelve months |
| 115 | |
| 944,910 | |
| 21,937 |
| 43 | |
| 353,961 | |
| 2,254 | |
Unrealized loss for twelve months or longer |
| 3 | |
| 3,852 | |
| 30 |
| 5 | |
| 13,611 | |
| 46 | |
|
| 118 | | $ | 948,762 | | $ | 21,967 |
| 48 | | $ | 367,572 | | $ | 2,300 | |
| | | | | | | | | | | | | | | | | |
| | March 31, 2021 | | December 31, 2020 |
| ||||||||||||
|
| Number of |
| | |
| Unrealized |
| Number of |
| | |
| Unrealized |
| ||
| | Securities | | Fair Value | | Losses | | Securities | | Fair Value | | Losses |
| ||||
Held to Maturity | | | | | | | | | | | | | | | | |
|
States and political subdivisions: | | | | | | | | | | | | | | | | | |
Unrealized loss for less than twelve months |
| 7 | | $ | 2,093 | | $ | 30 |
| 2 | | $ | 578 | | $ | — | |
Unrealized loss for twelve months or longer |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
|
| 7 | |
| 2,093 | |
| 30 |
| 2 | |
| 578 | |
| — | |
Total held to maturity: | | | | | | | | | | | | | | | | | |
Unrealized loss for less than twelve months |
| 7 | |
| 2,093 | |
| 30 |
| 2 | |
| 578 | |
| — | |
Unrealized loss for twelve months or longer |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
|
| 7 | | $ | 2,093 | | $ | 30 |
| 2 | | $ | 578 | | $ | — | |
17
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties. The following tables include a rollforward for those financial instruments measured atamortized cost and fair value using Level 3 inputsof securities, excluding trading and equity securities, at March 31, 2021 are shown by contractual maturity below (in thousands).
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Total Gains or Losses | | | |
| ||||
| | | | | | | | | | | | | | (Realized or Unrealized) | | | |
| ||||
|
| Balance at |
| | |
| | |
|
| |
| | |
| Included in Other |
| | |
| ||
| | Beginning of | | Purchases/ | | Sales/ | | Transfers to | | Included in | | Comprehensive | | Balance at |
| |||||||
| | Period | | Additions | | Reductions | | (from) Level 3 | | Net Income | | Income (Loss) | | End of Period |
| |||||||
Three months ended June 30, 2020 | | | | | | | | | | | | | | | | | | | | | | |
Loans held for sale | | $ | 79,588 | | $ | 34,339 | | $ | (26,768) | | $ | 2,746 | | $ | 2,031 | | $ | — | | $ | 91,936 | |
MSR asset | |
| 30,299 | | | 59,440 | | | — | | | — | | | (8,475) | | | — | |
| 81,264 | |
Total | | $ | 109,887 | | $ | 93,779 | | $ | (26,768) | | $ | 2,746 | | $ | (6,444) | | $ | — | | $ | 173,200 | |
| | | | | | | | | | | | | | | | | | | | | | |
Six months ended June 30, 2020 | | | | | | | | | | | | | | | | | | | | | | |
Loans held for sale | | $ | 67,195 | | $ | 48,623 | | $ | (30,943) | | $ | 8,967 | | $ | (1,906) | | $ | — | | $ | 91,936 | |
MSR asset | | | 55,504 | | | 63,915 | | | (18,650) | | | — | | | (19,505) | | | — | | | 81,264 | |
Total | | $ | 122,699 | | $ | 112,538 | | $ | (49,593) | | $ | 8,967 | | $ | (21,411) | | $ | — | | $ | 173,200 | |
| | | | | | | | | | | | | | | | | | | | | | |
Three months ended June 30, 2019 | | | | | | | | | | | | | | | | | | | | | | |
Loans held for sale | | $ | 57,844 | | $ | 14,053 | | $ | (11,108) | | $ | (612) | | $ | (3,378) | | $ | — | | $ | 56,799 | |
MSR asset | | | 62,049 | | | 2,547 | | | — | | | — | | | (10,901) | | | — | | | 53,695 | |
Total | | $ | 119,893 | | $ | 16,600 | | $ | (11,108) | | $ | (612) | | $ | (14,279) | | $ | — | | $ | 110,494 | |
| | | | | | | | | | | | | | | | | | | | | | |
Six months ended June 30, 2019 | | | | | | | | | | | | | | | | | | | | | | |
Loans held for sale | | $ | 50,464 | | $ | 29,480 | | $ | (18,084) | | | 425 | | $ | (5,486) | | $ | — | | $ | 56,799 | |
MSR asset | | | 66,102 | | | 4,408 | | | — | | | — | | | (16,815) | | | — | | | 53,695 | |
Total | | $ | 116,566 | | $ | 33,888 | | $ | (18,084) | | $ | 425 | | $ | (22,301) | | $ | — | | $ | 110,494 | |
| | | | | | | | | | | | | |
| | Available for Sale | | Held to Maturity | | ||||||||
|
| Amortized |
| | |
| Amortized |
| | |
| ||
| | Cost | | Fair Value |
| Cost | | Fair Value |
| ||||
Due in one year or less | | $ | 20,331 | | $ | 20,392 | | $ | 843 | | $ | 877 | |
Due after one year through five years | |
| 40,512 | |
| 41,809 | |
| 1,185 | |
| 1,213 | |
Due after five years through ten years | |
| 17,013 | |
| 17,501 | |
| 9,850 | |
| 10,183 | |
Due after ten years | |
| 46,033 | |
| 46,654 | |
| 58,317 | |
| 60,103 | |
| |
| 123,889 | |
| 126,356 | |
| 70,195 | |
| 72,376 | |
| | | | | | | | | | | | | |
Residential mortgage-backed securities | |
| 897,085 | |
| 900,283 | |
| 12,541 | |
| 13,144 | |
Collateralized mortgage obligations | |
| 536,548 | |
| 539,818 | |
| 65,043 | |
| 66,781 | |
Commercial mortgage-backed securities | |
| 157,906 | |
| 148,949 | |
| 152,309 | |
| 159,101 | |
| | $ | 1,715,428 | | $ | 1,715,406 | | $ | 300,088 | | $ | 311,402 | |
The Company recognized net gains of $8.7 million and $7.0 million from its trading portfolio during the three months ended March 31, 2021 and 2020, respectively. In addition, the Hilltop Broker-Dealers realized net gains of $44.1 million and $21.3 million during the three months ended March 31, 2021 and 2020, respectively, from structured product trading activities. The Company had $0.1 million in other realized losses on securities and $0.2 million in other realized gains on securities during the three months ended March 31, 2021 and 2020, respectively. All netsuch realized gains and unrealized gains (losses)losses are recorded as a component of other noninterest income within the consolidated statements of operations.
Securities with a carrying amount of $732.5 million and $712.3 million (with a fair value of $750.5 million and $733.8 million, respectively) at March 31, 2021 and December 31, 2020, respectively, were pledged by the Bank to secure public and trust deposits, federal funds purchased and securities sold under agreements to repurchase, and for other purposes as required or permitted by law. Substantially all of these pledged securities were included in the tables above are reflected in the accompanying consolidated financial statements. The unrealized gains (losses) relateavailable for sale and held to financial instruments still heldmaturity securities portfolios at June 30,March 31, 2021 and December 31, 2020.
For Level 3 financial instruments measured at fair value on a recurring basis at June 30, 2020Mortgage-backed securities and December 31, 2019,collateralized mortgage obligations consist primarily of Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) pass-through and participation certificates. GNMA securities are guaranteed by the significant unobservable inputs used infull faith and credit of the fair value measurements were as follows.United States, while FNMA and FHLMC securities are fully guaranteed by those respective United States government-sponsored enterprises, and conditionally guaranteed by the full faith and credit of the United States.
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Range (Weighted-Average) | ||||||||||||||
| | | | | | June 30, | | December 31, | ||||||||||||
Financial instrument |
| Valuation Technique |
| Unobservable Inputs |
| 2020 | | 2019 | ||||||||||||
Loans held for sale | | Discounted cash flows / Market comparable | | Projected price | | 91 | - | 95 | % | ( | 94 | %) | | 92 | - | 96 | % | ( | 95 | %) |
| | | | | | | | | | | | | | | | | | | | |
MSR asset | | Discounted cash flows | | Constant prepayment rate | | | | 13.45 | % | | | | | | 13.16 | % | | | ||
| | | | Discount rate | | | | 14.62 | % | | | | | | 11.14 | % | | |
The fair value of certain loans held for sale that cannot be sold through normal sale channels or are non-performing is measured using Level 3 inputs. The fair value of such loans is generally based upon estimates of expected cash flows using unobservable inputs, including listing prices of comparable assets, uncorroborated expert opinions, and/or management’s knowledge of underlying collateral.
The MSR asset, which is included in other assets within the Company’s consolidated balance sheets, is reported at fair value using Level 3 inputs. The MSR asset is valued by projecting net servicing cash flows, which are then discounted to estimate the fair value. The fair value of the MSR asset is impacted by a variety of factors. Prepayment rates and discount rates, the most significant unobservable inputs, are discussed further in Note 7 to the consolidated financial statements. The increase in the weighted average discount rate used to value the MSR asset at June 30, 2020, compared to December 31, 2019, addresses the potential effect of the reduction in third-party servicing outlets during the second quarter of 2020 resulting from the impact of the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).
2118
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The CARES Act permits borrowers of federally-backed mortgage loans to forbear payments, which could negatively impact servicers’ liquidity and their ability to purchase servicing.6. Loans Held for Investment
The Company had 0 transfers between Levels 1Bank originates loans to customers primarily in Texas. Although the Bank has diversified loan and 2 duringleasing portfolios and, generally, holds collateral against amounts advanced to customers, its debtors’ ability to honor their contracts is substantially dependent upon the periods presented. Any transfersgeneral economic conditions of the region and of the industries in which its debtors operate, which consist primarily of agribusiness, construction, energy, real estate and wholesale/retail trade. The Hilltop Broker-Dealers make loans to customers and correspondents through transactions originated by both employees and independent retail representatives throughout the United States. The Hilltop Broker-Dealers control risk by requiring customers to maintain collateral in compliance with various regulatory and internal guidelines, which may vary based upon market conditions. Securities owned by customers and held as collateral for loans are based on changesnot included in the observability and/or significance of the valuation inputs andconsolidated financial statements.
Loans held for investment summarized by portfolio segment are assumed to occur at the beginning of the quarterly reporting period in which they occur.as follows (in thousands).
| | | | | | | |
| | March 31, | | December 31, | | ||
|
| 2021 |
| 2020 | | ||
Commercial real estate | | $ | 3,114,936 | | $ | 3,133,903 | |
Commercial and industrial (1) | |
| 2,574,229 | | | 2,627,774 | |
Construction and land development | |
| 821,883 | | | 828,852 | |
1-4 family residential | | | 745,544 | | | 629,938 | |
Consumer | | | 33,890 | | | 35,667 | |
Broker-dealer (2) | | | 520,175 | | | 437,007 | |
| |
| 7,810,657 | |
| 7,693,141 | |
Allowance for credit losses | |
| (144,499) | | | (149,044) | |
Total loans held for investment, net of allowance | | $ | 7,666,158 | | $ | 7,544,097 | |
(1) | Included loans totaling $492.4 million at March 31, 2021 funded through the Paycheck Protection Program. |
(2) | Primarily represents margin loans to customers and correspondents associated with broker-dealer segment operations. |
The following table presentsprovides details associated with non-accrual loans, excluding those changes in fair value of instruments recognized in the consolidated statements of operations that are accountedclassified as held for under the Fair Value Optionsale (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||
| | Three Months Ended June 30, 2020 | | Three Months Ended June 30, 2019 | | | Non-accrual Loans | | | | | ||||||||||||||||||||||||||||||||
|
| |
| Other |
| Total |
| |
| Other |
| Total |
| | March 31, 2021 | | December 31, 2020 | | Interest Income Recognized | ||||||||||||||||||||||||
| | Net | | Noninterest | | Changes in | | Net | | Noninterest | | Changes in | | | With | | With No | | | | | With | | With No | | | | | Three Months Ended March 31, | ||||||||||||||
| | Gains (Losses) | | Income | | Fair Value | | Gains (Losses) | | Income | | Fair Value | |
| Allowance |
| Allowance |
| Total |
| Allowance |
| Allowance |
| Total |
| 2021 |
| 2020 | ||||||||||||||
Loans held for sale | | $ | 24,499 | | $ | — | | $ | 24,499 | | $ | 17,179 | | $ | — | | $ | 17,179 | | ||||||||||||||||||||||||
MSR asset | |
| (8,475) | |
| — | |
| (8,475) | |
| (10,901) | |
| — | |
| (10,901) | | ||||||||||||||||||||||||
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Non-owner occupied | | $ | 997 | | $ | 368 | | $ | 1,365 | | $ | 1,213 | | $ | 445 | | $ | 1,658 | | $ | 74 | | $ | (97) | |||||||||||||||||||
Owner occupied | |
| 3,363 | | | 5,940 | | | 9,303 | |
| 3,473 | | | 6,002 | | | 9,475 | | | 90 | | | 16 | |||||||||||||||||||
Commercial and industrial | | | 12,572 | | | 23,572 | | | 36,144 | | | 10,821 | | | 23,228 | | | 34,049 | | | 143 | | | 300 | |||||||||||||||||||
Construction and land development | |
| 101 | | | 400 | | | 501 | |
| 102 | | | 405 | | | 507 | | | 15 | | | 22 | |||||||||||||||||||
1-4 family residential | |
| 2,852 | | | 19,801 | | | 22,653 | |
| 4,726 | | | 16,651 | | | 21,377 | | | 924 | | | 983 | |||||||||||||||||||
Consumer | |
| 26 | | | — | | | 26 | |
| 28 | | | — | | | 28 | | | — | | | (5) | |||||||||||||||||||
Broker-dealer | |
| — | | | — | | | — | |
| — | | | — | | | — | | | — | | | — | |||||||||||||||||||
| | $ | 19,911 | | $ | 50,081 | | $ | 69,992 | | $ | 20,363 | | $ | 46,731 | | $ | 67,094 | | $ | 1,246 | | $ | 1,219 |
| | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2020 | | Six Months Ended June 30, 2019 | | ||||||||||||||
|
| |
| Other |
| Total |
| |
| Other |
| Total |
| ||||||
| | Net | | Noninterest | | Changes in | | Net | | Noninterest | | Changes in | | ||||||
| | Gains (Losses) | | Income | | Fair Value | | Gains (Losses) | | Income | | Fair Value | | ||||||
Loans held for sale | | $ | 58,478 | | $ | — | | $ | 58,478 | | $ | 3,855 | | $ | — | | $ | 3,855 | |
MSR asset | |
| (19,505) | |
| — | |
| (19,505) | |
| (16,815) | |
| — | |
| (16,815) | |
At March 31, 2021 and December 31, 2020, $8.3 million and $10.9 million, respectively, of real estate loans secured by residential properties and classified as held for sale were in non-accrual status.
Loans accounted for on a non-accrual basis increased $2.9 million from December 31, 2020 to March 31, 2021, primarily due to an increase in commercial and industrial loans of $2.1 million and an increase in 1-4 family residential loans of $1.3 million. The Fair Value of Financial Instruments Subsection of the ASC requires disclosure of the fair value of financial assetsincrease in commercial and liabilities, including the financial assetsindustrial loans in non-accrual status since December 31, 2020 was primarily due to 4 relationships that included 6 loans totaling $2.9 million and liabilities previously discussed. There have been no changes to the methods for determining estimated fair value for financial assets and liabilities as described in detail in Note 3 to the consolidated financial statements included in the Company’s 2019 Form 10-K.
The following tables present the carrying values and estimated fair values of financial instruments not measuredhad a $1.0 million reserve at fair value on either a recurring or non-recurring basis (in thousands).
| | | | | | | | | | | | | | | | |
| | | | | Estimated Fair Value |
| ||||||||||
|
| Carrying |
| Level 1 |
| Level 2 |
| Level 3 |
| | |
| ||||
June 30, 2020 | | Amount | | Inputs | | Inputs | | Inputs | | Total |
| |||||
Financial assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 1,655,877 | | $ | 1,655,877 | | $ | — | | $ | — | | $ | 1,655,877 | |
Assets segregated for regulatory purposes | | | 194,626 | | | 194,626 | | | — | | | — | | | 194,626 | |
Securities purchased under agreements to resell | | | 161,457 | | | — | | | 161,457 | | | — | | | 161,457 | |
Held to maturity securities | | | 343,198 | | | — | | | 359,542 | | | — | | | 359,542 | |
Loans held for sale | | | 143,256 | | | — | | | 143,256 | | | — | | | 143,256 | |
Loans held for investment, net | | | 7,693,521 | | | — | | | 422,891 | | | 7,508,015 | | | 7,930,906 | |
Broker-dealer and clearing organization receivables | |
| 1,222,627 | |
| — | |
| 1,222,627 | |
| — | |
| 1,222,627 | |
Other assets | |
| 72,574 | |
| — | |
| 70,461 | |
| 2,113 | |
| 72,574 | |
| | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | |
Deposits | |
| 11,649,598 | |
| — | |
| 11,668,575 | |
| — | |
| 11,668,575 | |
Broker-dealer and clearing organization payables | |
| 1,158,628 | |
| — | |
| 1,158,628 | |
| — | |
| 1,158,628 | |
Short-term borrowings | |
| 720,164 | |
| — | |
| 720,164 | |
| — | |
| 720,164 | |
Debt | |
| 517,170 | |
| — | |
| 517,170 | |
| — | |
| 517,170 | |
Other liabilities | |
| 9,603 | |
| — | |
| 9,603 | |
| — | |
| 9,603 | |
2219
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
| | | | | | | | | | | | | | | | |
| | | | | Estimated Fair Value |
| ||||||||||
|
| Carrying |
| Level 1 |
| Level 2 |
| Level 3 |
| | |
| ||||
December 31, 2019 | | Amount | | Inputs | | Inputs | | Inputs | | Total |
| |||||
Financial assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 434,020 | | $ | 434,020 | | $ | — | | $ | — | | $ | 434,020 | |
Assets segregated for regulatory purposes | | | 157,436 | | | 157,436 | | | — | | | — | | | 157,436 | |
Securities purchased under agreements to resell | | | 59,031 | | | — | | | 59,031 | | | — | | | 59,031 | |
Held to maturity securities | | | 386,326 | | | — | | | 388,930 | | | — | | | 388,930 | |
Loans held for sale | | | 170,648 | | | — | | | 170,648 | | | — | | | 170,648 | |
Loans held for investment, net | | | 7,320,264 | | | — | | | 576,527 | | | 6,990,706 | | | 7,567,233 | |
Broker-dealer and clearing organization receivables | |
| 1,780,280 | |
| — | |
| 1,780,280 | |
| — | |
| 1,780,280 | |
Other assets | |
| 71,040 | |
| — | |
| 69,580 | |
| 1,460 | |
| 71,040 | |
| | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | |
Deposits | |
| 9,032,214 | |
| — | |
| 9,032,496 | |
| — | |
| 9,032,496 | |
Broker-dealer and clearing organization payables | |
| 1,605,518 | |
| — | |
| 1,605,518 | |
| — | |
| 1,605,518 | |
Short-term borrowings | |
| 1,424,010 | |
| — | |
| 1,424,010 | |
| — | |
| 1,424,010 | |
Debt | |
| 323,281 | |
| — | |
| 323,281 | |
| — | |
| 323,281 | |
Other liabilities | |
| 8,340 | |
| — | |
| 8,340 | |
| — | |
| 8,340 | |
The Company held equity investments other than securities of $61.1 million and $36.6 million at June 30, 2020 and DecemberMarch 31, 2019, respectively, which are included within other assets in the consolidated balance sheets. Of the $61.1 million of such equity investments held at June 30, 2020, $20.6 million do not have readily determinable fair values and each is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The following table presents the adjustments to the carrying value of these investments during the periods presented (in thousands).
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2020 |
| 2019 | | 2020 |
| 2019 | ||||
Balance, beginning of period |
| $ | 19,088 |
| $ | 20,477 | | $ | 19,771 |
| $ | 20,376 |
Additional investments | | | — | | | — | | | — | | | — |
Upward adjustments | | | 1,525 | | | 101 | | | 1,631 | | | 202 |
Impairments and downward adjustments | | | — | | | (672) | | | (789) | | | (672) |
Dispositions | |
| — | |
| — | |
| — | |
| — |
Balance, end of period | | $ | 20,613 | | $ | 19,906 | | $ | 20,613 | | $ | 19,906 |
5. Securities
The fair value of trading securities is summarized as follows (in thousands).
| | | | | | | | |
| | June 30, | | December 31, | | | ||
|
| 2020 |
| 2019 |
|
| ||
U.S. Treasury securities |
| $ | 50,487 |
| $ | — |
|
|
U.S. government agencies: | | | | | | | | |
Bonds | | | 33,115 | | | 24,680 | | |
Residential mortgage-backed securities | |
| 135,653 | |
| 331,601 | | |
Commercial mortgage-backed securities | |
| 2,114 | |
| 2,145 | | |
Collateralized mortgage obligations | | | 236,139 | | | 191,154 | | |
Corporate debt securities | | | 52,536 | | | 36,973 | | |
States and political subdivisions | | | 127,955 | | | 93,117 | | |
Unit investment trusts | | | — | | | 3,468 | | |
Private-label securitized product | | | 6,342 | | | 2,992 | | |
Other | | | 3,696 | | | 3,446 | | |
Totals | | $ | 648,037 | | $ | 689,576 | | |
23
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
In addition to the securities shown above, the Hilltop Broker-Dealers enter into transactions that represent commitments to purchase and deliver securities at prevailing future market prices to facilitate customer transactions and satisfy such commitments. Accordingly, the Hilltop Broker-Dealers’ ultimate obligations may exceed the amount recognized in the financial statements. These securities, which are carried at fair value and reported as securities sold, not yet purchased in the consolidated balance sheets, had a value of $55.3 million and $43.8 million at June 30, 2020 and December 31, 2019, respectively.
The amortized cost and fair value of available for sale and held to maturity securities are summarized as follows (in thousands).
| | | | | | | | | | | | | |
| | Available for Sale | | ||||||||||
| | Amortized | | Unrealized | | Unrealized | | | |
| |||
June 30, 2020 | | Cost | | Gains | | Losses | | Fair Value |
| ||||
U.S. government agencies: | | | | | | | | | | | | | |
Bonds | | $ | 61,915 | | $ | 1,315 | | $ | — | | $ | 63,230 | |
Residential mortgage-backed securities | |
| 535,874 | |
| 17,015 | |
| (181) | |
| 552,708 | |
Commercial mortgage-backed securities | | | 18,685 | |
| 846 | |
| — | |
| 19,531 | |
Collateralized mortgage obligations | |
| 400,298 | |
| 9,088 | |
| (252) | |
| 409,134 | |
States and political subdivisions | |
| 44,324 | |
| 2,421 | |
| — | |
| 46,745 | |
Totals | | $ | 1,061,096 | | $ | 30,685 | | $ | (433) | | $ | 1,091,348 | |
| | | | | | | | | | | | | |
| | Available for Sale | | ||||||||||
| | Amortized | | Unrealized | | Unrealized | | | |
| |||
December 31, 2019 | | Cost | | Gains | | Losses | | Fair Value |
| ||||
U.S. government agencies: | | | | | | | | | | | | | |
Bonds | | $ | 84,590 | | $ | 1,049 | | $ | (64) | | $ | 85,575 | |
Residential mortgage-backed securities | |
| 430,514 | |
| 6,662 | |
| (147) | |
| 437,029 | |
Commercial mortgage-backed securities | | | 11,488 | |
| 543 | |
| — | |
| 12,031 | |
Collateralized mortgage obligations | |
| 333,256 | |
| 3,175 | |
| (815) | |
| 335,616 | |
States and political subdivisions | |
| 39,969 | |
| 1,273 | |
| — | |
| 41,242 | |
Totals | | $ | 899,817 | | $ | 12,702 | | $ | (1,026) | | $ | 911,493 | |
| | | | | | | | | | | | | |
| | Held to Maturity |
| ||||||||||
| | Amortized | | Unrealized | | Unrealized | | | |
| |||
June 30, 2020 |
| Cost |
| Gains |
| Losses |
| Fair Value |
| ||||
U.S. government agencies: | | | | | | | | | | | | |
|
Residential mortgage-backed securities | | $ | 15,693 | | $ | 846 | | $ | — | | $ | 16,539 |
|
Commercial mortgage-backed securities | | | 159,608 | |
| 10,945 | |
| — | |
| 170,553 |
|
Collateralized mortgage obligations | |
| 96,413 | |
| 2,431 | |
| — | |
| 98,844 |
|
States and political subdivisions | |
| 71,484 | |
| 2,151 | |
| (29) | |
| 73,606 |
|
Totals | | $ | 343,198 | | $ | 16,373 | | $ | (29) | | $ | 359,542 |
|
| | | | | | | | | | | | | |
| | Held to Maturity |
| ||||||||||
| | Amortized | | Unrealized | | Unrealized | | | |
| |||
December 31, 2019 |
| Cost |
| Gains |
| Losses |
| Fair Value |
| ||||
U.S. government agencies: | | | | | | | | | | | | | |
Bonds | | $ | 24,020 | | $ | 10 | | $ | (35) | | $ | 23,995 | |
Residential mortgage-backed securities | |
| 17,776 | |
| 295 | |
| — | |
| 18,071 | |
Commercial mortgage-backed securities | | | 161,624 | | | 2,810 | | | (655) | | | 163,779 | |
Collateralized mortgage obligations | |
| 113,894 | |
| 226 | |
| (904) | |
| 113,216 | |
States and political subdivisions | |
| 69,012 | |
| 1,013 | |
| (156) | |
| 69,869 | |
Totals | | $ | 386,326 | | $ | 4,354 | | $ | (1,750) | | $ | 388,930 | |
24
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Additionally, the Company had unrealized net gains of $0.1 million and $0.1 million at June 30, 2020 and December 31, 2020, respectively, from equity securities with fair values of $0.1 million and $0.2 million held at June 30, 2020 and December 31, 2019, respectively. The Company recognized nominal net gains and net losses during the three and six months ended June 30, 2020 and 2019, respectively, due to changes in the fair value of equity securities still held at the balance sheet date. During the three and six months ended June 30, 2020 and 2019, net gains recognized from equity securities sold were nominal.
Information regarding available for sale and held to maturity securities that were in an unrealized loss position is shown in the following tables (dollars in thousands).
| | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
| ||||||||||||
|
| Number of |
| | |
| Unrealized |
| Number of |
| | |
| Unrealized |
| ||
| | Securities | | Fair Value | | Losses | | Securities | | Fair Value | | Losses |
| ||||
Available for Sale | | | | | | | | | | | | | | | | | |
U.S. government agencies: | | | | | | | | | | | | | | | | | |
Bonds: | | | | | | | | | | | | | | | | | |
Unrealized loss for less than twelve months |
| 1 | | $ | 5,000 | | $ | — |
| 2 | | $ | 24,937 | | $ | 64 | |
Unrealized loss for twelve months or longer |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
|
| 1 | | | 5,000 | | | — |
| 2 | |
| 24,937 | |
| 64 | |
Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | |
Unrealized loss for less than twelve months |
| 2 | |
| 25,819 | |
| 181 |
| 37 | |
| 36,187 | |
| 87 | |
Unrealized loss for twelve months or longer |
| — | |
| — | |
| — |
| 2 | |
| 13,683 | |
| 58 | |
|
| 2 | | | 25,819 | | | 181 |
| 39 | |
| 49,870 | |
| 145 | |
Commercial mortgage-backed securities: | | | | | | | | | | | | | | | | | |
Unrealized loss for less than twelve months |
| — | |
| — | |
| — |
| 1 | |
| 9,967 | |
| 2 | |
Unrealized loss for twelve months or longer |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
|
| — | | | — | | | — |
| 1 | |
| 9,967 | |
| 2 | |
Collateralized mortgage obligations: | | | | | | | | | | | | | | | | | |
Unrealized loss for less than twelve months |
| 2 | |
| 7,981 | |
| 20 |
| 15 | |
| 94,545 | |
| 446 | |
Unrealized loss for twelve months or longer |
| 12 | |
| 53,162 | |
| 232 |
| 13 | |
| 46,217 | |
| 369 | |
|
| 14 | | | 61,143 | | | 252 |
| 28 | |
| 140,762 | |
| 815 | |
States and political subdivisions: | | | | | | | | | | | | | | | | | |
Unrealized loss for less than twelve months |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
Unrealized loss for twelve months or longer |
| — | |
| — | |
| — |
| 1 | |
| 487 | |
| — | |
|
| — | | | — | | | — |
| 1 | |
| 487 | |
| — | |
Total available for sale: | | | | | | | | | | | | | | | | | |
Unrealized loss for less than twelve months |
| 5 | |
| 38,800 | |
| 201 |
| 55 | |
| 165,636 | |
| 599 | |
Unrealized loss for twelve months or longer |
| 12 | |
| 53,162 | |
| 232 |
| 16 | |
| 60,387 | |
| 427 | |
|
| 17 | | $ | 91,962 | | $ | 433 |
| 71 | | $ | 226,023 | | $ | 1,026 | |
25
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
| | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
| ||||||||||||
|
| Number of |
| | |
| Unrealized |
| Number of |
| | |
| Unrealized |
| ||
| | Securities | | Fair Value | | Losses | | Securities | | Fair Value | | Losses |
| ||||
Held to Maturity | | | | | | | | | | | | | | | | |
|
U.S. government agencies: | | | | | | | | | | | | | | | | | |
Bonds: | | | | | | | | | | | | | | | | | |
Unrealized loss for less than twelve months |
| — | | $ | — | | $ | — |
| 2 | | $ | 9,665 | | $ | 35 | |
Unrealized loss for twelve months or longer |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
|
| — | |
| — | |
| — |
| 2 | |
| 9,665 | |
| 35 | |
Commercial mortgage-backed securities: | | | | | | | | | | | | | | | | | |
Unrealized loss for less than twelve months |
| — | |
| — | |
| — |
| 8 | |
| 44,610 | |
| 656 | |
Unrealized loss for twelve months or longer |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
|
| — | |
| — | |
| — |
| 8 | |
| 44,610 | |
| 656 | |
Collateralized mortgage obligations: | | | | | | | | �� | | | | | | | | | |
Unrealized loss for less than twelve months |
| — | |
| — | |
| — |
| 4 | |
| 23,904 | |
| 287 | |
Unrealized loss for twelve months or longer |
| — | |
| — | |
| — |
| 8 | |
| 59,560 | |
| 617 | |
|
| — | |
| — | |
| — |
| 12 | |
| 83,464 | |
| 904 | |
States and political subdivisions: | | | | | | | | | | | | | | | | | |
Unrealized loss for less than twelve months |
| 13 | |
| 4,169 | |
| 29 |
| 38 | |
| 15,996 | |
| 124 | |
Unrealized loss for twelve months or longer |
| — | |
| — | |
| — |
| 4 | |
| 1,099 | |
| 31 | |
|
| 13 | |
| 4,169 | |
| 29 |
| 42 | |
| 17,095 | |
| 155 | |
Total held to maturity: | | | | | | | | | | | | | | | | | |
Unrealized loss for less than twelve months |
| 13 | |
| 4,169 | |
| 29 |
| 52 | |
| 94,175 | |
| 1,102 | |
Unrealized loss for twelve months or longer |
| — | |
| — | |
| — |
| 12 | |
| 60,659 | |
| 648 | |
|
| 13 | | $ | 4,169 | | $ | 29 |
| 64 | | $ | 154,834 | | $ | 1,750 | |
Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties. The amortized cost and fair value of securities, excluding trading and equity securities, at June 30, 2020 are shown by contractual maturity below (in thousands).
| | | | | | | | | | | | | |
| | Available for Sale | | Held to Maturity | | ||||||||
|
| Amortized |
| | |
| Amortized |
| | |
| ||
| | Cost | | Fair Value |
| Cost | | Fair Value |
| ||||
Due in one year or less | | $ | 6,056 | | $ | 6,065 | | $ | 452 | | $ | 456 | |
Due after one year through five years | |
| 58,432 | |
| 60,042 | |
| 987 | |
| 996 | |
Due after five years through ten years | |
| 20,229 | |
| 20,987 | |
| 7,068 | |
| 7,313 | |
Due after ten years | |
| 21,522 | |
| 22,881 | |
| 62,977 | |
| 64,841 | |
| |
| 106,239 | |
| 109,975 | |
| 71,484 | |
| 73,606 | |
| | | | | | | | | | | | | |
Residential mortgage-backed securities | |
| 535,874 | |
| 552,708 | |
| 15,693 | |
| 16,539 | |
Collateralized mortgage obligations | |
| 400,298 | |
| 409,134 | |
| 96,413 | |
| 98,844 | |
Commercial mortgage-backed securities | |
| 18,685 | |
| 19,531 | |
| 159,608 | |
| 170,553 | |
| | $ | 1,061,096 | | $ | 1,091,348 | | $ | 343,198 | | $ | 359,542 | |
The Company recognized net gains of $13.5 million and $2.5 million from its trading portfolio during the three months ended June 30, 2020 and 2019, respectively and $20.5 million and $10.7 million during the six months ended June 30, 2020 and 2019, respectively. In addition, the Hilltop Broker-Dealers realized net gains from structured product trading activities of $20.8 million and $30.4 million during the three months ended June 30, 2020 and 2019, respectively, and $42.2 million and $55.7 million during the six months ended June 30, 2020 and 2019, respectively. The Company had nominal other realized gains on securities during the three months ended June 30, 2020 and other realized gains on securities of $0.2 million during the six months ended June 30, 2020. All such realized gains and losses are recorded as a component of other noninterest income within the consolidated statements of operations.
Securities with a carrying amount of $610.2 million and $576.0 million (with a fair value of $633.1 million and $583.6 million, respectively) at June 30, 2020 and December 31, 2019, respectively, were pledged by the Bank to secure public and trust deposits, federal funds purchased and securities sold under agreements to repurchase, and for other purposes as required or permitted by law. Substantially all of these pledged securities were included in the available for sale and held to maturity securities portfolios at June 30, 2020 and December 31, 2019.
26
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Mortgage-backed securities and collateralized mortgage obligations consist primarily of Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) pass-through and participation certificates. GNMA securities are guaranteed by the full faith and credit of the United States, while FNMA and FHLMC securities are fully guaranteed by those respective United States government-sponsored enterprises, and conditionally guaranteed by the full faith and credit of the United States.
Allowance for Credit Losses for Available for Sale Securities and Held to Maturity Securities
The Company has evaluated available for sale debt securities that are in an unrealized loss position and has determined that any declines in value are unrelated to credit loss and are related to changes in market interest rates since purchase. In addition, as of June 30, 2020, the Company had not made a decision to sell any of its debt securities held, nor did the Company consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis and therefore,no allowance was recognized on the debt securities portfolio at June 30, 2020. NaN of the available for sale debt securities held were past due at June 30, 2020.
6. Loans Held for Investment
Loans held for investment summarized by portfolio segment are as follows (in thousands).
| | | | | | | |
| | June 30, | | December 31, | | ||
|
| 2020 |
| 2019 |
| ||
Commercial real estate | | $ | 3,043,723 | | $ | 3,000,523 | |
Commercial and industrial (1) | |
| 2,736,089 | |
| 2,025,720 | |
Construction and land development | |
| 931,899 | |
| 940,564 | |
1-4 family residential | | | 672,843 | |
| 791,020 | |
Consumer | | | 42,459 | |
| 47,046 | |
Broker-dealer (2) | | | 422,891 | |
| 576,527 | |
| |
| 7,849,904 | |
| 7,381,400 | |
Allowance for credit losses | |
| (156,383) | |
| (61,136) | |
Total loans held for investment, net of allowance | | $ | 7,693,521 | | $ | 7,320,264 | |
Non-accrual loans, excluding those classified as held for sale, are summarized by class in the following table (in thousands).
| | | | | | | |
| | June 30, | | December 31, | | ||
| | 2020 | | 2019 | | ||
Commercial real estate: |
| |
|
| |
|
|
Non-owner occupied | | $ | 3,519 | | $ | 3,813 | |
Owner occupied | |
| 10,224 | |
| 3,495 | |
Commercial and industrial | | | 32,259 | |
| 15,262 | |
Construction and land development | |
| 1,404 | |
| 1,316 | |
1-4 family residential | |
| 11,351 | |
| 7,382 | |
Consumer | |
| 308 | |
| 26 | |
Broker-dealer | |
| — | |
| — | |
| | $ | 59,065 | | $ | 31,294 | |
At June 30, 2020 and December 31, 2019, an additional $9.2 million and $4.8 million, respectively, of real estate loans secured by residential properties and classified as held for sale were in non-accrual status.
Loans accounted for on a non-accrual basis increased from December 31, 2019 to June 30, 2020, primarily due to the addition of commercial real estate loans totaling $9.1 million, a single commercial and industrial relationship totaling $11.8 million and various 1-4 family residential loans. The increase in commercial real estate loans in non-accrual status
27
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
at June 30, 2020 of $6.4 million was primarily related to the addition of 24 loans totaling $9.1 million, with a reserve of $1.4 million, that were previously accruing at December 31, 2019. This increase from December 31, 2019 was partially offset by the settlement of a single loan accounted for on a non-accrual basis with a carrying amount of $2.5 million. The increase in commercial and industrial loans in non-accrual status since December 31, 2019 was primarily due to a single relationship that included 3 loans totaling $11.8 million and had a $4.8 million reserve at June 30, 2020 and a CECL transition gross-up adjustment of $4.6 million related to a loan with an amortized cost of $6.8 million and a reserve of $4.4 million at June 30, 2020.2021. The increase in 1-4 family residential loans in non-accrual status at June 30, 2020,March 31, 2021, compared to December 31, 2019,2020, was primarily related to the classification of $4.0$3.6 million of loans as non-accrual, that were previously classified as accruing.
The following table provides further details associated with non-accrual loans (in thousands).
| | | | | | | | | | | | | | | |
| | Non-accrual Loans | | Interest Income Recognized (1) | |||||||||||
| | With | | With No | | | | | Three Months Ended | | Six Months Ended | ||||
June 30, 2020 |
| Allowance |
| Allowance |
| Total | | June 30, 2020 | | June 30, 2020 | |||||
Commercial real estate: | | | | | | | | | | | | | | | |
Non-owner occupied | | $ | 2,174 | | $ | 1,345 | | $ | 3,519 | | $ | 86 | | $ | (11) |
Owner occupied | |
| 2,277 | | | 7,947 | | | 10,224 | | | 69 | | | 85 |
Commercial and industrial | | | 25,566 | | | 6,693 | | | 32,259 | | | 102 | | | 402 |
Construction and land development | |
| 198 | | | 1,206 | | | 1,404 | | | 31 | | | 53 |
1-4 family residential | |
| 1,252 | | | 10,099 | | | 11,351 | | | 182 | | | 1,165 |
Consumer | |
| 308 | | | — | | | 308 | | | 2 | | | (3) |
Broker-dealer | |
| — | | | — | | | — | | | — | | | — |
| | $ | 31,775 | | $ | 27,290 | | $ | 59,065 | | $ | 472 | | $ | 1,691 |
The Company considers non-accrual loans to be collateral-dependent unless there are underlying mitigating circumstances. The practical expedient to measure the allowance using the fair value of the collateral has been implemented.
The Bank classifies loan modifications as troubled debt restructurings (“TDRs”) when it concludes that it has both granted a concession to a debtor and that the debtor is experiencing financial difficulties. Loan modifications are typically structured to create affordable payments for the debtor and can be achieved in a variety of ways. The Bank modifies loans by reducing interest rates and/or lengthening loan amortization schedules. The Bank may also reconfigure a single loan into 2 or more loans (“A/B Note”). The typical A/B Note restructure results in a “bad” loan which is charged off and a “good” loan or loans, the terms of which comply with the Bank’s customary underwriting policies. The debt charged off on the “bad” loan is not forgiven to the debtor.
In March 2020, the CARES Act was passed, which, among other things, allows the Bank to suspend the requirements for certain loan modifications to be categorized as a TDR, including the related impairment for accounting purposes. Therefore,On December 27, 2020, the Bank is notConsolidated Appropriations Act 2021 was signed into law. Section 541 of this legislation, “Extension of Temporary Relief From Troubled Debt Restructurings and Insurer Clarification,” extends certain relief provisions from the March CARES Act that were set to expire at the end of 2020. This new legislation extends the relief to financial institutions to suspend TDR assessment and reporting COVID-19 relatedrequirements under GAAP for loan modifications as TDRs.to the earlier of 60 days after the national emergency termination date or January 1, 2022. The Bank’s COVID-19 payment deferral programs allow for a deferral of principal and/or interest payments with such deferred principal payments due and payable on maturity date of the existing loan. As of June 30, 2020, theThe Bank’s actions included approval of $968.1 millionapproximately $1.0 billion in COVID-19 related loan modifications.modifications as of December 31, 2020. During the first quarter of 2021, the Bank continued to support its impacted banking clients through the approval of COVID-19 related loan modifications, which resulted in an additional $8 million of new COVID-19 related loan modifications since December 31, 2020. The portfolio of active deferrals that have not reached the end of their deferral period was approximately $130 million as of March 31, 2021. While the majority of the portfolio of COVID-19 related loan modifications no longer require deferral, such loans may represent elevated risk, and therefore management continues to monitor these loans. The extent to which these measures will impact the Bank is uncertain, and any progression of these loans, whether receiving COVID-19 payment deferrals or not, into non-accrual status during future periods is uncertain and will depend on future developments that cannot be predicted.
There were 0 TDRs granted during the three months ended March 31, 2021 that do not qualify for the CARES Act exemption. There was 1 TDR granted during the three months ended March 31, 2020 with a balance at date of extension of $1.1 million and a balance at March 31, 2020 of $1.2 million. The Bank had nominal unadvanced commitments to borrowers whose loans had been restructured in TDRs at March 31, 2021 and at December 31, 2020. There were 0 TDRs granted during the twelve months preceding March 31, 2021 and March 31, 2020, for which a payment was at least 30 days past due.
An analysis of the aging of the Company’s loan portfolio is shown in the following tables (in thousands).
| | | | | | | | | | | | | | | | | | | | | | |
|
| | |
| | |
| | |
| | |
| | |
| | |
| Accruing Loans |
| |
| | Loans Past Due | | Loans Past Due | | Loans Past Due | | Total Past | | Current | | Total | | Past Due |
| |||||||
March 31, 2021 | | 30-59 Days | | 60-89 Days | | 90 Days or More | | Due Loans | | Loans | | Loans | | 90 Days or More |
| |||||||
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | |
Non-owner occupied | | $ | 4,618 | | $ | — | | $ | 199 | | $ | 4,817 | | $ | 1,769,495 | | $ | 1,774,312 | | $ | — | |
Owner occupied | |
| 3,270 | | | 79 | | | 7,436 | | | 10,785 | | | 1,329,839 | | | 1,340,624 | | | — | |
Commercial and industrial | | | 2,021 | | | 868 | | | 9,744 | | | 12,633 | | | 2,561,596 | | | 2,574,229 | | | — | |
Construction and land development | |
| 19 | | | — | | | — | | | 19 | | | 821,864 | | | 821,883 | | | — | |
1-4 family residential | |
| 8,148 | | | 1,807 | | | 10,943 | | | 20,898 | | | 724,646 | | | 745,544 | | | — | |
Consumer | |
| 38 | | | 23 | | | 26 | | | 87 | | | 33,803 | | | 33,890 | | | — | |
Broker-dealer | |
| — | | | — | | | — | | | — | | | 520,175 | | | 520,175 | | | — | |
| | $ | 18,114 | | $ | 2,777 | | $ | 28,348 | | $ | 49,239 | | $ | 7,761,418 | | $ | 7,810,657 | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | |
2820
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Information regarding TDRs granted during the three and six months ended June 30, 2020, is shown in the following table (dollars in thousands). At June 30, 2020, the Bank had $0.1 million of unadvanced commitments to borrowers whose loans had been restructured in TDRs, while such unadvanced commitments were nominal at December 31, 2019.
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended June 30, 2020 | | Three Months Ended June 30, 2019 | ||||||||||||
|
|
| Number of |
| Balance at |
| Balance at |
| Number of |
| Balance at |
| Balance at | ||||
| | | Loans | | Extension | | End of Period | | Loans | | Extension | | End of Period | ||||
Commercial real estate: | | | | | | | | | | | | | | | | | |
Non-owner occupied | | | — | | $ | — | | $ | — | | — | | $ | — | | $ | — |
Owner occupied | | | — | |
| — | |
| — | | — | |
| — | |
| — |
Commercial and industrial | | | 1 | |
| 6,750 | |
| 2,000 | | 3 | |
| 7,993 | |
| 7,973 |
Construction and land development | | | — | |
| — | |
| — | | — | |
| — | |
| — |
1-4 family residential | | | — | |
| — | |
| — | | — | |
| — | |
| — |
Consumer | | | — | |
| — | |
| — | | — | |
| — | |
| — |
Broker-dealer | | | — | |
| — | |
| — | | — | |
| — | |
| — |
| | | 1 |
| $ | 6,750 |
| $ | 2,000 |
| 3 |
| $ | 7,993 |
| $ | 7,973 |
| | | | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, 2020 | | Six Months Ended June 30, 2019 | ||||||||||||
|
|
| Number of |
| Balance at |
| Balance at |
| Number of |
| Balance at |
| Balance at | ||||
| | | Loans | | Extension | | End of Period | | Loans | | Extension | | End of Period | ||||
Commercial real estate: | | | | | | | | | | | | | | | | | |
Non-owner occupied | | | — | | $ | — | | $ | — | | — | | $ | — | | $ | — |
Owner occupied | | | — | |
| — | |
| — | | — | |
| — | |
| — |
Commercial and industrial | | | 2 | |
| 7,839 | |
| 3,166 | | 3 | |
| 7,993 | |
| 7,973 |
Construction and land development | | | — | |
| — | |
| — | | — | |
| — | |
| — |
1-4 family residential | | | — | |
| — | |
| — | | — | |
| — | |
| — |
Consumer | | | — | |
| — | |
| — | | — | |
| — | |
| — |
Broker-dealer | | | — | |
| — | |
| — | | — | |
| — | |
| — |
| | | 2 |
| $ | 7,839 |
| $ | 3,166 |
| 3 |
| $ | 7,993 |
| $ | 7,973 |
The following table presents information regarding TDRs granted during the twelve months preceding June 30, 2020, for which a payment was at least 30 days past due (dollars in thousands). There were 0 TDRs granted during the twelve months preceding June 30, 2019 for which a payment was at least 30 days past due.
| | | | | | | | |
|
| Twelve Months Preceding June 30, 2020 | ||||||
| | Number of |
| Balance at |
| Balance at | ||
| | Loans | | Extension | | End of Period | ||
Commercial real estate: | | | | | | | | |
Non-owner occupied | | — | | $ | — | | $ | — |
Owner occupied | | — | | | — | | | — |
Commercial and industrial | | 1 | | | 1,625 | | | 1,421 |
Construction and land development | | — | | | — | | | — |
1-4 family residential | | — | | | — | | | — |
Consumer | | — | | | — | | | — |
Broker-dealer | | — | | | — | | | — |
| | 1 | | $ | 1,625 | | $ | 1,421 |
29
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
An analysis of the aging of the Company’s loan portfolio is shown in the following tables (in thousands).
| | | | | | | | | | | | | | | | | | | | | | |
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| | |
| | |
| | |
| | |
| | |
| | |
| Accruing Loans |
| |
| | Loans Past Due | | Loans Past Due | | Loans Past Due | | Total | | Current | | Total | | Past Due |
| |||||||
June 30, 2020 | | 30-59 Days | | 60-89 Days | | 90 Days or More | | Past Due Loans | | Loans | | Loans | | 90 Days or More |
| |||||||
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | |
Non-owner occupied | | $ | 1,662 | | $ | — | | $ | 1,313 | | $ | 2,975 | | $ | 1,729,473 | | $ | 1,732,448 | | $ | — | |
Owner occupied | |
| 1,822 | |
| 681 | | | 6,662 | |
| 9,165 | |
| 1,302,110 | | | 1,311,275 | | | — | |
Commercial and industrial | | | 1,325 | |
| — | | | 6,909 | |
| 8,234 | |
| 2,727,855 | | | 2,736,089 | | | 939 | |
Construction and land development | |
| 3,755 | |
| — | | | 29 | |
| 3,784 | |
| 928,115 | | | 931,899 | | | — | |
1-4 family residential | |
| 8,700 | |
| 1,807 | | | 5,755 | |
| 16,262 | |
| 656,581 | | | 672,843 | | | — | |
Consumer | |
| 72 | |
| 22 | | | 284 | |
| 378 | |
| 42,081 | | | 42,459 | | | — | |
Broker-dealer | |
| — | |
| — | | | — | |
| — | |
| 422,891 | | | 422,891 | | | — | |
| | $ | 17,336 | | $ | 2,510 | | $ | 20,952 | | $ | 40,798 | | $ | 7,809,106 | | $ | 7,849,904 | | $ | 939 | |
| | | | | | | | | | | | | | | | | | | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| Accruing Loans |
| ||
|
| | |
| | |
| | |
| | |
| | |
| | |
| Accruing Loans |
| | Loans Past Due | | Loans Past Due | | Loans Past Due | | Total Past | | Current | | Total | | Past Due |
| ||||||||
| | Loans Past Due | | Loans Past Due | | Loans Past Due | | Total | | Current | | Total | | Past Due |
| |||||||||||||||||||||||||||||
December 31, 2019 | | 30-59 Days | | 60-89 Days | | 90 Days or More | | Past Due Loans | | Loans | | Loans | | 90 Days or More |
| |||||||||||||||||||||||||||||
December 31, 2020 | | 30-59 Days | | 60-89 Days | | 90 Days or More | | Due Loans | | Loans | | Loans | | 90 Days or More |
| |||||||||||||||||||||||||||||
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Non-owner occupied | | $ | 4,062 | | $ | — | | $ | 2,790 | | $ | 6,852 | | $ | 1,702,500 | | $ | 1,709,352 | | $ | — | | | $ | 1,919 | | $ | — | | $ | 199 | | $ | 2,118 | | $ | 1,786,193 | | $ | 1,788,311 | | $ | — | |
Owner occupied | |
| 1,813 | | | 880 | | | 3,265 | |
| 5,958 | |
| 1,285,213 | | | 1,291,171 | | — | | |
| 195 | | | 522 | | | 8,328 | | | 9,045 | | | 1,336,547 | | | 1,345,592 | | | — | | |
Commercial and industrial | | | 5,967 | | | 1,735 | | | 3,395 | |
| 11,097 | |
| 2,014,623 | | | 2,025,720 | | 3 | | | | 3,114 | | | 407 | | | 7,318 | | | 10,839 | | | 2,616,935 | | | 2,627,774 | | | 6 | | |
Construction and land development | |
| 7,580 | | | 1,827 | | | — | |
| 9,407 | |
| 931,157 | | | 940,564 | | — | | |
| 19 | | | — | | | — | | | 19 | | | 828,833 | | | 828,852 | | | — | | |
1-4 family residential | |
| 12,058 | | | 3,442 | | | 6,520 | |
| 22,020 | |
| 769,000 | | | 791,020 | | — | | |
| 8,110 | | | 3,040 | | | 12,420 | | | 23,570 | | | 606,368 | | | 629,938 | | | — | | |
Consumer | |
| 455 | | | 34 | | | — | |
| 489 | |
| 46,557 | | | 47,046 | | — | | |
| 172 | | | 123 | | | 26 | | | 321 | | | 35,346 | | | 35,667 | | | — | | |
Broker-dealer | |
| — | | | — | | | — | |
| — | |
| 576,527 | | | 576,527 | | | — | | |
| — | | | — | | | — | | | — | | | 437,007 | | | 437,007 | | | — | |
| | $ | 31,935 | | $ | 7,918 | | $ | 15,970 | | $ | 55,823 | | $ | 7,325,577 | | $ | 7,381,400 | | $ | 3 | | | $ | 13,529 | | $ | 4,092 | | $ | 28,291 | | $ | 45,912 | | $ | 7,647,229 | | $ | 7,693,141 | | $ | 6 | |
In addition to the loans shown in the tables above, PrimeLending had $123.7$265.2 million and $102.7$243.6 million of loans included in loans held for sale (with an aggregate unpaid principal balance of $125.2$267.0 million and $104.0$245.5 million, respectively) that were 90 days past due and accruing interest at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. These loans are guaranteed by U.S. government agencies and include loans that are subject to repurchase, or have been repurchased, by PrimeLending.
In response to the ongoing COVID-19 pandemic, the Company allowed modifications, such as payment deferrals for up to 90 days and temporary forbearance, to credit-worthy borrowers who are experiencing temporary hardship due to the effects of COVID-19. These short-term modifications generally meet the criteria of the CARES Act and, therefore, they are not reported as past due or placed on non-accrual status (provided the loans were not past due or on non-accrual status prior to the deferral). The Company elected to accrue and recognize interest income on these modifications during the payment deferral period.
Additionally, the Company granted temporary forbearance to borrowers of a federally backed mortgage loan experiencing financial hardship due, directly or indirectly, to the COVID-19 pandemic. The CARES Act, which among other things, established the ability for financial institutions to grant a forbearance for up to 180 days, which can be extended for an additional 180-day period upon the request of the borrower. During that time, no fees, penalties or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the mortgage contract will accrue on the borrower’s account. As of March 31, 2021, PrimeLending had $152.0 million of loans subject to repurchase under a forbearance agreement related to delinquencies on or after April 1, 2020.
Management tracks credit quality trends on a quarterly basis related to: (i) past due levels, (ii) non-performing asset levels, (iii) classified loan levels, and (iv) general economic conditions in state and local markets. The Company defines classified loans as loans with a risk rating of substandard, doubtful or loss. There have been no changes to the risk rating internal grades utilized for commercial loans as described in detail in Note 7 to the consolidated financial statements in the Company’s 2020 Form 10-K.
3021
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
A description of the risk rating internal grades for commercial loans is presented in the following table.
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For 1-4 family residential and consumer loans, the Company utilizes separate credit models designed for these types of loans to estimate the PD and LGD grades for the allowance for credit losses calculation. The primary driver of the PD score is the borrower's FICO score at origination. A portion of the Company’s 1-4 family residential loans were acquired as part of a FDIC-assisted transaction in 2013 and the FICO information at origination was incomplete. The credit scores were refreshed in 2016 and these new scores were used as a proxy for the FICO score at origination. New originations and loan purchases are scored using the FICO score at origination. FICO score bands are assigned following prevalent industry standards and are used as the credit quality indicator for these types of loans. Substandard non-accrual loans are treated as a separate category in the credit scoring grid as the probability of default is 100% and the FICO score is no longer a relevant predictor.
31
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The following table presents loans held for investment grouped by asset class and credit quality indicator, segregated by year of origination or renewal (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost Basis by Origination Year | | | | | | | | Amortized Cost Basis by Origination Year | | | | | | | ||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | 2015 and | | | | | | | | | | | | | | | | | | | | | | | | 2016 and | | | | | | |
June 30, 2020 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | | Prior | | Revolving | | Total | |||||||||||||||||||||||||||||||
March 31, 2021 | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | | Prior | | Revolving | | Total | |||||||||||||||||||||||||||||||
Commercial real estate: non-owner occupied | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Internal Grade 1-3 (Pass low risk) | | $ | 8,455 | | $ | 39,658 | | $ | 5,310 | | $ | 12,951 | | $ | 13,452 | | $ | 16,990 | | $ | 402 | | $ | 97,218 | | $ | 1,315 | | $ | 21,584 | | $ | 25,522 | | $ | 2,967 | | $ | 1,543 | | $ | 25,102 | | $ | 1 | | $ | 78,034 |
Internal Grade 4-7 (Pass normal risk) | | | 123,378 | | | 157,843 | | | 160,125 | | | 124,013 | | | 160,255 | | | 105,776 | | | 22,671 | | | 854,061 | | | 77,105 | | | 215,239 | | | 118,279 | | | 80,556 | | | 87,046 | | | 141,703 | | | 29,881 | | | 749,809 |
Internal Grade 8-11 (Pass high risk and watch) | | | 114,528 | | | 133,162 | | | 128,832 | | | 106,085 | | | 144,102 | | | 66,126 | | | 381 | | | 693,216 | | | 47,159 | | | 254,256 | | | 144,782 | | | 90,039 | | | 87,938 | | | 159,420 | | | 1,060 | | | 784,654 |
Internal Grade 12 (Special mention) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 953 | | | — | | | 3,147 | | | — | | | — | | | 4,100 |
Internal Grade 13 (Substandard accrual) | | | 3,620 | | | 10,571 | | | 8,550 | | | 13,949 | | | 8,153 | | | 39,591 | | | — | | | 84,434 | | | 15,569 | | | 16,863 | | | 16,114 | | | 27,690 | | | 24,912 | | | 55,090 | | | 112 | | | 156,350 |
Internal Grade 14 (Substandard non-accrual) | | | — | | | — | | | — | | | 882 | | | 222 | | | 2,415 | | | — | | | 3,519 | | | — | | | — | | | — | | | — | | | — | | | 1,365 | | | — | | | 1,365 |
Commercial real estate: owner occupied | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Internal Grade 1-3 (Pass low risk) | | $ | 28,290 | | $ | 30,841 | | $ | 11,075 | | $ | 30,513 | | $ | 23,041 | | $ | 46,508 | | $ | 2 | | $ | 170,270 | | $ | 53,912 | | $ | 62,479 | | $ | 20,802 | | $ | 9,650 | | $ | 40,569 | | $ | 39,802 | | $ | 953 | | $ | 228,167 |
Internal Grade 4-7 (Pass normal risk) | | | 104,569 | | | 143,052 | | | 216,241 | | | 84,590 | | | 69,401 | | | 111,861 | | | 29,618 | | | 759,332 | | | 14,627 | | | 160,608 | | | 140,191 | | | 132,548 | | | 55,572 | | | 129,848 | | | 33,823 | | | 667,217 |
Internal Grade 8-11 (Pass high risk and watch) | | | 75,276 | | | 83,909 | | | 65,866 | | | 29,401 | | | 30,419 | | | 40,902 | | | 9,644 | | | 335,417 | | | 9,537 | | | 117,480 | | | 75,922 | | | 45,331 | | | 22,478 | | | 47,365 | | | 1,285 | | | 319,398 |
Internal Grade 12 (Special mention) | | | — | | | — | | | — | | | — | | | — | | | 30 | | | — | | | 30 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
Internal Grade 13 (Substandard accrual) | | | 4,418 | | | 2,427 | | | 3,945 | | | 7,614 | | | 6,840 | | | 10,758 | | | — | | | 36,002 | | | 3,128 | | | 9,554 | | | 5,578 | | | 70,928 | | | 10,222 | | | 17,129 | | | — | | | 116,539 |
Internal Grade 14 (Substandard non-accrual) | | | 552 | | | — | | | 270 | | | 5,591 | | | 2,881 | | | 930 | | | — | | | 10,224 | | | 19 | | | 504 | | | 1,260 | | | 360 | | | 5,316 | | | 1,844 | | | — | | | 9,303 |
Commercial and industrial | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Internal Grade 1-3 (Pass low risk) | | $ | 22,556 | | $ | 12,880 | | $ | 6,327 | | $ | 5,761 | | $ | 4,310 | | $ | 698 | | $ | 19,218 | | $ | 71,750 | | $ | 6,841 | | $ | 32,861 | | $ | 26,279 | | $ | 7,850 | | $ | 5,176 | | $ | 3,202 | | $ | 20,597 | | $ | 102,806 |
Internal Grade 4-7 (Pass normal risk) | | | 56,557 | | | 107,050 | | | 70,933 | | | 56,709 | | | 23,741 | | | 16,322 | | | 367,699 | | | 699,011 | | | 37,973 | | | 162,663 | | | 50,894 | | | 49,216 | | | 26,491 | | | 25,428 | | | 398,758 | | | 751,423 |
Internal Grade 8-11 (Pass high risk and watch) | | | 66,368 | | | 84,275 | | | 50,768 | | | 20,955 | | | 33,751 | | | 3,035 | | | 183,972 | | | 443,124 | | | 28,608 | | | 73,506 | | | 43,507 | | | 16,768 | | | 11,714 | | | 15,336 | | | 202,553 | | | 391,992 |
Internal Grade 12 (Special mention) | | | 6,211 | | | 1,337 | | | — | | | 350 | | | — | | | — | | | 301 | | | 8,199 | | | 735 | | | — | | | — | | | — | | | — | | | — | | | — | | | 735 |
Internal Grade 13 (Substandard accrual) | | | 3,260 | | | 3,087 | | | 10,155 | | | 1,447 | | | 5,618 | | | 666 | | | 11,525 | | | 35,758 | | | 2,082 | | | 9,227 | | | 3,356 | | | 10,492 | | | 5,394 | | | 5,612 | | | 19,248 | | | 55,411 |
Internal Grade 14 (Substandard non-accrual) | | | 11,441 | | | 10,413 | | | 1,851 | | | 446 | | | 646 | | | 3,448 | | | 4,014 | | | 32,259 | | | 6,851 | | | 18,791 | | | 4,398 | | | 1,927 | | | 283 | | | 101 | | | 3,793 | | | 36,144 |
Construction and land development | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Internal Grade 1-3 (Pass low risk) | | $ | 5,880 | | $ | 6,986 | | $ | 22,927 | | $ | 279 | | $ | 1,115 | | $ | 311 | | $ | 2,224 | | $ | 39,722 | | $ | 4,088 | | $ | 10,353 | | $ | 2,538 | | $ | 4,075 | | $ | 256 | | $ | 4,316 | | $ | 1,203 | | $ | 26,829 |
Internal Grade 4-7 (Pass normal risk) | | | 121,835 | | | 184,223 | | | 75,290 | | | 32,349 | | | 7,530 | | | 4,572 | | | 23,898 | | | 449,697 | | | 46,669 | | | 193,481 | | | 94,295 | | | 62,581 | | | 2,129 | | | 5,547 | | | 35,272 | | | 439,974 |
Internal Grade 8-11 (Pass high risk and watch) | | | 86,018 | | | 158,812 | | | 137,512 | | | 18,524 | | | 3,701 | | | 1,050 | | | 8,398 | | | 414,015 | | | 33,597 | | | 164,634 | | | 58,067 | | | 48,030 | | | 630 | | | 3,609 | | | 14,223 | | | 322,790 |
Internal Grade 12 (Special mention) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
Internal Grade 13 (Substandard accrual) | | | — | | | 1,112 | | | — | | | 5,356 | | | — | | | — | | | — | | | 6,468 | | | 366 | | | 2,106 | | | 1,423 | | | — | | | 5,391 | | | — | | | 5,485 | | | 14,771 |
Internal Grade 14 (Substandard non-accrual) | | | — | | | 437 | | | 29 | | | — | | | 769 | | | 169 | | | — | | | 1,404 | | | 400 | | | — | | | — | | | — | | | — | | | 101 | | | — | | | 501 |
Construction and land development - individuals | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
FICO less than 620 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
FICO between 620 and 720 | | | 1,884 | | | 82 | | | 1,467 | | | — | | | — | | | — | | | — | | | 3,433 | | | 181 | | | 74 | | | — | | | 1,244 | | | — | | | 127 | | | — | | | 1,626 |
FICO greater than 720 | | | 6,086 | | | 5,330 | | | 5,744 | | | — | | | — | | | — | | | — | | | 17,160 | | | 4,276 | | | 9,738 | | | — | | | — | | | — | | | — | | | — | | | 14,014 |
Substandard non-accrual | | | — | | | — | | | — | | | — | | | — | | �� | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
Other (1) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 25 | | | 1,353 | | | — | | | — | | | — | | | — | | | — | | | 1,378 |
1-4 family residential | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
FICO less than 620 | | $ | 719 | | $ | 882 | | $ | 3,704 | | $ | 229 | | $ | 1,049 | | $ | 38,230 | | $ | 538 | | $ | 45,351 | | $ | — | | $ | 1,249 | | $ | 787 | | $ | 3,668 | | $ | 55 | | $ | 30,157 | | $ | 311 | | $ | 36,227 |
FICO between 620 and 720 | | | 8,514 | | | 23,071 | | | 11,113 | | | 9,476 | | | 13,609 | | | 46,358 | | | 1,428 | | | 113,569 | | | 6,205 | | | 14,019 | | | 16,317 | | | 9,396 | | | 8,291 | | | 46,118 | | | 1,270 | | | 101,616 |
FICO greater than 720 | | | 44,434 | | | 110,514 | | | 94,278 | | | 49,710 | | | 48,653 | | | 95,031 | | | 6,342 | | | 448,962 | | | 137,140 | | | 141,403 | | | 72,909 | | | 55,977 | | | 26,799 | | | 88,019 | | | 4,337 | | | 526,584 |
Substandard non-accrual | | | — | | | — | | | — | | | 98 | | | 476 | | | 10,777 | | | — | | | 11,351 | | | 162 | | | — | | | 822 | | | — | | | 142 | | | 21,527 | | | — | | | 22,653 |
Other (1) | | | 11,881 | | | 18,060 | | | 9,735 | | | 2,211 | | | 1,418 | | | 9,764 | | | 541 | | | 53,610 | | | 11,736 | | | 26,093 | | | 9,456 | | | 5,717 | | | 1,371 | | | 3,050 | | | 1,041 | | | 58,464 |
Consumer | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
FICO less than 620 | | $ | 594 | | $ | 1,625 | | $ | 155 | | $ | 155 | | $ | 53 | | $ | 90 | | $ | 356 | | $ | 3,028 | | $ | 179 | | $ | 828 | | $ | 923 | | $ | 92 | | $ | 87 | | $ | 59 | | $ | 315 | | $ | 2,483 |
FICO between 620 and 720 | | | 2,795 | | | 4,283 | | | 792 | | | 846 | | | 156 | | | 125 | | | 2,347 | | | 11,344 | | | 2,419 | | | 3,012 | | | 1,774 | | | 375 | | | 513 | | | 111 | | | 2,075 | | | 10,279 |
FICO greater than 720 | | | 7,075 | | | 5,027 | | | 3,487 | | | 410 | | | 450 | | | 66 | | | 4,584 | | | 21,099 | | | 1,339 | | | 6,283 | | | 1,407 | | | 2,681 | | | 112 | | | 72 | | | 2,835 | | | 14,729 |
Substandard non-accrual | | | — | | | — | | | — | | | 35 | | | — | | | 23 | | | 250 | | | 308 | | | — | | | — | | | — | | | — | | | 25 | | | 1 | | | — | | | 26 |
Other (1) | | | 3,893 | | | 2,123 | | | 364 | | | 59 | | | 50 | | | — | | | 191 | | | 6,680 | | | 1,600 | | | 3,440 | | | 873 | | | 80 | | | 28 | | | 35 | | | 317 | | | 6,373 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total loans with credit quality measures | | $ | 931,087 | | $ | 1,343,072 | | $ | 1,106,845 | | $ | 620,994 | | $ | 605,861 | | $ | 672,622 | | $ | 700,544 | | $ | 5,981,025 | | $ | 555,843 | | $ | 1,733,681 | | $ | 939,428 | | $ | 740,238 | | $ | 433,630 | | $ | 871,196 | | $ | 780,748 | | $ | 6,054,764 |
Commercial and industrial (mortgage warehouse lending) | | | | | | | | | | | | | | | | | | | | | | | $ | 774,129 | | | | | | | | | | | | | | | | | | | | | | | $ | 743,347 |
Commercial and industrial (Paycheck Protection Program loans) | | | | | | | | | | | | | | | | | | | | | | | $ | 671,859 | | | | | | | | | | | | | | | | | | | | | | | $ | 492,371 |
Broker-Dealer (margin loans and correspondent receivables) | | | | | | | | | | | | | | | | | | | | | | | $ | 422,891 | | | | | | | | | | | | | | | | | | | | | | | $ | 520,175 |
Total loans held for investment | | | | | | | | | | | | | | | | | | | | | | | $ | 7,849,904 | | | | | | | | | | | | | | | | | | | | | | | $ | 7,810,657 |
(1) Loans classified in this category were assigned a FICO score based on various factors specific to the borrower for credit modeling purposes.
22
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
7. Allowance for Credit Losses
Available for Sale Securities and Held to Maturity Securities
The Company has evaluated available for sale debt securities that are in an unrealized loss position and has determined that any decline in value is unrelated to credit loss and related to changes in market interest rates since purchase. NaN of the available for sale debt securities held were past due at March 31, 2021. In addition, as of March 31, 2021, the Company had not made a decision to sell any of its debt securities held, nor did the Company consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis. The Company does not expect to have credit losses associated with the debt securities and no allowance was recognized on the debt securities portfolio at transition.
Loans Held for Investment
The allowance for credit losses for loans held for investment represents management’s best estimate of all expected credit losses over the expected contractual life of our existing portfolio. Management revised its methodology for determining the allowance for credit losses upon the implementation of CECL.the current expected credit losses (“CECL”) standard. Management considers the level of allowance for credit losses to be a reasonable and supportable estimate of expected credit losses inherent within the loans held for investment portfolio as of June 30, 2020.March 31, 2021. While the Company believes it has an appropriate allowance for the existing loan portfolio at June 30, 2020,March 31, 2021, additional provision for losses on existing loans may be necessary in the future.
32
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Future changes in the allowance for credit losses are expected to be volatile given dependence upon, among other things, the portfolio composition and quality, as well as the impact of significant drivers, including prepayment assumptions and macroeconomic conditions and forecasts. In addition to the allowance for credit losses, the Company maintains a separate allowance for credit losses related to off-balance sheet credit exposures, including unfunded loan commitments, and this amount is included in other liabilities within the consolidated balance sheets (see Note 14 to the consolidated financial statements).sheets. For further information on the policies that govern the estimation of the allowances for credit losses levels, see Note 1 to the consolidated financial statements.statements in the Company’s 2020 Form 10-K.
One of the most significant judgments involved in estimating the Company’s allowance for credit losses relates to the macroeconomic forecasts used to estimate credit losses over the reasonable and supportable forecast period. To determine our best estimate of expected credit losses as of June 30, 2020,March 31, 2021, the Company utilized a single macroeconomic baselineconsensus scenario published by a third partyMoody’s Analytics in June 2020March 2021 that was updated for continued deterioration into reflect the U.S. economic outlook. This consensus scenario utilizes multiple economic variables in forecasting the economic outlook due to COVID-19 conditions.and is based on Moody’s Analytics’ review of a variety of surveys of baseline forecasts of the U.S. economy. Significant variables that impact the modeled losses across our loan portfolios are the U.S. Real Gross Domestic Product, or GDP, growth rates and unemployment rate assumptions. Changes in these assumptions and forecasts of economic conditions could significantly affect the estimate of expected credit losses at the balance sheet date or between reporting periods.
The COVID-19 pandemic has resulted in a weak labor market and weak overall economic conditions that will affecthave affected borrowers across our lending portfolios and significantportfolios. Significant judgment is required to estimate the severity and duration of the current economic downturn, as well as its potential impact on borrower defaults and loss severity. In particular, macroeconomic conditions and forecasts regarding the duration and severity of the economic downturn are rapidly changing and remain highly uncertain as the resurgence of COVID-19 cases evolvesand vaccine effectiveness evolve nationally and in key geographies. It is difficult to predict exactly how borrower behavior will be impacted by these economic conditions as the effectiveness of government stimulus, customer relief and enhanced unemployment benefits should help mitigate in the short term, but the extent and duration of government stimulus as well as performance of recently implemented payment deferral programs remains uncertain.
The increase in the allowance for credit losses for loans held for investment during the six months ended June 30, 2020 was primarily attributable to changes within the Bank. As previously discussed, duringDuring the first quarter of 2020, the Company adopted the new CECL standard and recorded transition adjustment entries that resulted in an allowance for credit losses of $73.7 million as of January 1, 2020, an increase of $12.6 million. This increase included an increase in credit losses of $18.9 million from the expansion of the loss horizon to life of loan, partially offset by the elimination of the non-credit component within the historical allowance related to previously categorized PCI loans of $6.3 million.
During the three and six months ended June 30,March 31, 2020, the significant build in the allowance included provision for credit lossesreserves on individually evaluated loans of $6.2increased $17.6 million, and $23.8 million, respectively, while the provision for credit lossesreserves on expected losses of collectively evaluated loans accounted for $59.9 million and $76.6 million, respectively, of the total respective provisionincreased primarily due to the increase in the expected lifetime credit losses under CECL attributable to the deteriorating economic outlook associated with the impact of the market disruption caused by the COVID-19 pandemic. The changes in the allowance for credit losses during the noted periods were also attributable to other factors including, but not limited to, loan growth, loan mix and changes in risk rating grades. The change in the allowance during the three and six months ended June 30, 2020 was also impacted by net charge-offs of $16.4 million and $17.9 million, respectively, primarily associated with loans specifically reserved for during the first quarter of 2020.
Changes in the allowance for credit losses for loans held for investment, distributed by portfolio segment, are shown below (in thousands).
| | | | | | | | | | | | | | | | | | | |
|
| Balance, |
| Transition |
| Provision for |
| |
| Recoveries on |
| Balance, | | ||||||
| | Beginning of | | Adjustment | | (Reversal of) | | Loans | | Charged Off | | End of | | ||||||
Three Months Ended June 30, 2020 | | Period | | CECL | | Credit Losses | | Charged Off | | Loans | | Period | | ||||||
Commercial real estate | | $ | 53,939 | | $ | — | | $ | 56,875 | | $ | (4,274) | | $ | 11 | | $ | 106,551 | |
Commercial and industrial | |
| 38,550 | |
| — | |
| 5,176 | |
| (12,544) | |
| 681 | |
| 31,863 | |
Construction and land development | |
| 6,360 | |
| — | |
| 2,031 | |
| — | |
| 2 | |
| 8,393 | |
1-4 family residential | |
| 6,365 | |
| — | |
| 1,199 | |
| (170) | |
| 5 | |
| 7,399 | |
Consumer | | | 1,203 | | | — | | | 319 | | | (197) | | | 104 | | | 1,429 | |
Broker-dealer | | | 322 | | | — | | | 426 | | | — | | | — | | | 748 | |
Total | | $ | 106,739 | | $ | — | | $ | 66,026 | | $ | (17,185) | | $ | 803 | | $ | 156,383 | |
3323
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
lifetime credit losses under CECL attributable to the deteriorating economic outlook associated with the impact of the market disruption caused by the COVID-19 pandemic. While not material, the change in the allowance for credit losses during the three months ended March 31, 2020 was also attributable to other factors including, but not limited to, loan growth, loan mix and changes in risk rating grades. The change in the allowance during the three months ended March 31, 2020 was also impacted by net charge-offs of $1.5 million.
During the three months ended March 31, 2021, the allowance was primarily comprised of a net reversal of credit losses on expected losses of collectively evaluated loans of $6.5 million primarily due to improvements in the macroeconomic forecast assumptions from the prior quarter, partially offset by slower prepayment assumptions on certain commercial real estate and construction and land portfolios, as well as an increase in the provision for credit losses on individually evaluated loans of $1.4 million primarily related to changes in risk rating grades and updated realizable values. The change in the allowance for credit losses during the current period was primarily attributable to the Bank and also reflected other factors including, but not limited to, loan growth, loan mix, and changes in qualitative factors from the prior quarter. The change in the allowance during the three months ended March 31, 2021 was also impacted by net recoveries of $0.6 million.
Changes in the allowance for credit losses for loans held for investment, distributed by portfolio segment, are shown below (in thousands).
| | | | | | | | | | | | | | | | | | | |
|
| Balance, |
| Transition |
| Provision for |
| |
| Recoveries on |
| Balance, | | ||||||
| | Beginning of | | Adjustment | | (Reversal of) | | Loans | | Charged Off | | End of | | ||||||
Three Months Ended March 31, 2021 | | Period | | CECL | | Credit Losses | | Charged Off | | Loans | | Period | | ||||||
Commercial real estate | | $ | 109,629 | | $ | — | | $ | (5,517) | | $ | — | | $ | 14 | | $ | 104,126 | |
Commercial and industrial | |
| 27,703 | |
| — | | | 556 | | | (179) | | | 433 | |
| 28,513 | |
Construction and land development | |
| 6,677 | |
| — | | | 572 | | | — | | | — | |
| 7,249 | |
1-4 family residential | |
| 3,946 | |
| — | | | (857) | | | (110) | | | 409 | |
| 3,388 | |
Consumer | | | 876 | | | — | | | 71 | | | (79) | | | 76 | | | 944 | |
Broker-dealer | | | 213 | | | — | | | 66 | | | — | | | — | | | 279 | |
Total | | $ | 149,044 | | $ | — | | $ | (5,109) | | $ | (368) | | $ | 932 | | $ | 144,499 | |
| | | | | | | | | | | | | | | | | | | |
|
| Balance, |
| Transition |
| Provision for |
| |
| Recoveries on |
| Balance, |
| ||||||
| | Beginning of | | Adjustment | | (Reversal of) | | Loans | | Charged Off | | End of | | ||||||
Three Months Ended March 31, 2020 | | Period | | CECL | | Credit Losses | | Charged Off | | Loans | | Period | | ||||||
Commercial real estate | | $ | 31,595 | | $ | 8,073 | | $ | 14,475 | | $ | (214) | | $ | 10 | | $ | 53,939 | |
Commercial and industrial | |
| 17,964 | | | 3,193 | | | 18,446 | | | (1,440) | | | 387 | |
| 38,550 | |
Construction and land development | |
| 4,878 | | | 577 | | | 907 | | | (2) | | | — | |
| 6,360 | |
1-4 family residential | |
| 6,386 | | | (29) | | | 201 | | | (203) | | | 10 | |
| 6,365 | |
Consumer | | | 265 | | | 748 | | | 246 | | | (176) | | | 120 | | | 1,203 | |
Broker-dealer | | | 48 | | | — | | | 274 | | | — | | | — | | | 322 | |
Total | | $ | 61,136 | | $ | 12,562 | | $ | 34,549 | | $ | (2,035) | | $ | 527 | | $ | 106,739 | |
Unfunded Loan Commitments
The Bank uses a process similar to that used in estimating the allowance for credit losses on the funded portion to estimate the allowance for credit loss on unfunded loan commitments. The allowance is based on the estimated exposure at default, multiplied by the lifetime Probability of Default grade and Loss Given Default grade for that particular loan segment. The Bank estimates expected losses by calculating a commitment usage factor based on industry usage factors. The commitment usage factor is applied over the relevant contractual period. Loss factors from the underlying loans to which commitments are related are applied to the results of the usage calculation to estimate any liability for credit losses related for each loan type. The expected losses on unfunded commitments align with statistically calculated parameters used to calculate the allowance for credit losses on the funded portion. There is no reserve calculated for letters of credit as they are issued primarily as credit enhancements and the likelihood of funding is low.
24
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | |
|
| Balance, |
| Transition |
| Provision for |
| |
| Recoveries on |
| Balance, |
| ||||||
| | Beginning of | | Adjustment | | (Reversal of) | | Loans | | Charged Off | | End of | | ||||||
Six Months Ended June 30, 2020 | | Period | | CECL | | Credit Losses | | Charged Off | | Loans | | Period | | ||||||
Commercial real estate | | $ | 31,595 | | $ | 8,073 | | $ | 71,350 | | $ | (4,488) | | $ | 21 | | $ | 106,551 | |
Commercial and industrial | |
| 17,964 | |
| 3,193 | |
| 23,622 | |
| (13,984) | |
| 1,068 | |
| 31,863 | |
Construction and land development | |
| 4,878 | |
| 577 | |
| 2,938 | |
| (2) | |
| 2 | |
| 8,393 | |
1-4 family residential | |
| 6,386 | |
| (29) | |
| 1,400 | |
| (373) | |
| 15 | |
| 7,399 | |
Consumer | | | 265 | | | 748 | | | 565 | | | (373) | | | 224 | | | 1,429 | |
Broker-dealer | | | 48 | | | — | | | 700 | | | — | | | — | | | 748 | |
Total | | $ | 61,136 | | $ | 12,562 | | $ | 100,575 | | $ | (19,220) | | $ | 1,330 | | $ | 156,383 | |
Changes in the allowance for credit losses for loans with off-balance sheet credit exposures are shown below (in thousands).
| | | | | | | | | | | | | | | | | | | |
|
| Balance, |
| Transition |
| Provision for |
| |
| Recoveries on |
| Balance, |
| ||||||
| | Beginning of | | Adjustment | | (Reversal of) | | Loans | | Charged Off | | End of | | ||||||
Three Months Ended June 30, 2019 | | Period | | CECL | | Credit Losses | | Charged Off | | Loans | | Period | | ||||||
Commercial real estate | | $ | 26,845 | | $ | — | | $ | (1,731) | | $ | — | | $ | — | | $ | 25,114 | |
Commercial and industrial | |
| 21,268 | |
| — | |
| 1,254 | |
| (2,430) | |
| 322 | |
| 20,414 | |
Construction and land development | |
| 5,908 | |
| — | |
| (1,512) | |
| — | |
| — | |
| 4,396 | |
1-4 family residential | |
| 4,331 | |
| — | |
| 1,447 | |
| (871) | |
| 17 | |
| 4,924 | |
Consumer | | | 409 | | | — | | | (128) | | | (10) | | | 12 | | | 283 | |
Broker-dealer | | | 48 | | | — | | | (2) | | | — | | | — | | | 46 | |
Total | | $ | 58,809 | | $ | — | | $ | (672) | | $ | (3,311) | | $ | 351 | | $ | 55,177 | |
| | | | | | | |
| | | Three Months Ended March 31, | ||||
|
| | 2021 | | 2020 | ||
Balance, beginning of period | | | $ | 8,388 | | $ | 2,075 |
Transition adjustment CECL accounting standard | | | | — | | | 3,837 |
Other noninterest expense | | | | 419 | | | 1,297 |
Balance, end of period | | | $ | 8,807 | | $ | 7,209 |
| | | | | | | | | | | | | | | | | | | |
|
| Balance, |
| Transition |
| Provision for |
| |
| Recoveries on |
| Balance, |
| ||||||
| | Beginning of | | Adjustment | | (Reversal of) | | Loans | | Charged Off | | End of | | ||||||
Six Months Ended June 30, 2019 | | Period | | CECL | | Credit Losses | | Charged Off | | Loans | | Period | | ||||||
Commercial real estate | | $ | 27,100 | | $ | — | | $ | (1,986) | | $ | — | | $ | — | | $ | 25,114 | |
Commercial and industrial | |
| 21,980 | |
| — | |
| 1,712 | |
| (4,248) | |
| 970 | |
| 20,414 | |
Construction and land development | |
| 6,061 | |
| — | |
| (1,665) | |
| — | |
| — | |
| 4,396 | |
1-4 family residential | |
| 3,956 | |
| — | |
| 1,836 | |
| (899) | |
| 31 | |
| 4,924 | |
Consumer | | | 267 | | | — | | | 458 | | | (464) | | | 22 | | | 283 | |
Broker-dealer | | | 122 | | | — | | | (76) | | | — | | | — | | | 46 | |
Total | | $ | 59,486 | | $ | — | | $ | 279 | | $ | (5,611) | | $ | 1,023 | | $ | 55,177 | |
As previously discussed, the Company adopted the new CECL standard and recorded a transition adjustment entry that resulted in an allowance for credit losses of $5.9 million as of January 1, 2020. During three months ended March 31, 2020, the increase in the reserve for unfunded commitments was primarily due to the macroeconomic uncertainties associated with the impact of the market disruption caused by COVID-19 conditions. During the three months ended March 31, 2021, the increase in the reserve for unfunded commitments was primarily due to increases in available commitment balances.
7.8. Mortgage Servicing Rights
The following tables present the changes in fair value of the Company’s MSR asset as included in other assets within the consolidated balance sheets, and other information related to the serviced portfolio (dollars in thousands).
| | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| Three Months Ended March 31, | | ||||||||||||
| 2020 | | 2019 |
| 2020 | | 2019 |
| 2021 | | 2020 | | ||||||
Balance, beginning of period | $ | 30,299 | | $ | 62,049 | | $ | 55,504 | | $ | 66,102 | | $ | 143,742 | | $ | 55,504 | |
Additions |
| 59,440 | |
| 2,547 | |
| 63,915 | |
| 4,408 | |
| 34,301 | |
| 4,475 | |
Sales |
| — | |
| — | |
| (18,650) | |
| — | |
| (52,783) | |
| (18,650) | |
Changes in fair value: | | | | | | | | | | | | | | | | | | |
Due to changes in model inputs or assumptions (1) |
| (6,284) | |
| (8,739) | |
| (15,878) | |
| (13,772) | |
| 24,137 | |
| (9,594) | |
Due to customer payoffs |
| (2,191) | |
| (2,162) | |
| (3,627) | |
| (3,043) | |
| (7,272) | |
| (1,436) | |
Balance, end of period | $ | 81,264 | | $ | 53,695 | | $ | 81,264 | | $ | 53,695 | | $ | 142,125 | | $ | 30,299 | |
| | | | | | | | | | | | | | | | | | |
| June 30, | | December 31, | | | | | | | | March 31, | | December 31, | | ||||
| 2020 | | 2019 | | | | | | | | 2021 | | 2020 | | ||||
Mortgage loans serviced for others | $ | 8,635,201 | | $ | 4,948,441 | | | | | | | | $ | 12,124,282 | | $ | 14,643,623 | |
MSR asset as a percentage of serviced mortgage loans |
| 0.94 | % |
| 1.12 | % | | | | | | |
| 1.17 | % |
| 0.98 | % |
(1) | Primarily represents normal customer payments, changes in discount rates and prepayment speed assumptions, which are primarily affected by changes in interest rates and the refinement of other MSR model assumptions. |
(2) | Represents unpaid principal balance of mortgage loans serviced for others. |
The key assumptions used in measuring the fair value of the Company’s MSR asset were as follows.
| | | | | | |
|
| March 31, | | | December 31, | |
| | 2021 | |
| 2020 | |
Weighted average constant prepayment rate |
| 11.28 | % | | 12.15 | % |
Weighted average discount rate |
| 13.68 | % | | 14.60 | % |
Weighted average life (in years) |
| 6.6 | | | 6.3 | |
3425
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The key assumptions used in measuring the fair value of the Company’s MSR asset were as follows.
| | | | | | |
|
| June 30, | | | December 31, | |
| | 2020 | |
| 2019 | |
Weighted average constant prepayment rate |
| 13.45 | % | | 13.16 | % |
Weighted average discount rate |
| 14.62 | % | | 11.14 | % |
Weighted average life (in years) |
| 5.9 | | | 6.0 | |
A sensitivity analysis of the fair value of the Company’s MSR asset to certain key assumptions is presented in the following table (in thousands).
| | | | | | | | | | | ||||
| | June 30, | | December 31, | | | March 31, | | December 31, | | ||||
|
| 2020 |
| 2019 | |
| 2021 |
| 2020 | | ||||
Constant prepayment rate: | | | | | | | | | | | | | | |
Impact of 10% adverse change | | $ | (3,838) | | $ | (3,072) | | | $ | (4,229) | | $ | (5,639) | |
Impact of 20% adverse change | |
| (7,458) | |
| (5,943) | | |
| (8,497) | |
| (11,164) | |
Discount rate: | | | | | | | | | | | | | | |
Impact of 10% adverse change | |
| (3,434) | |
| (2,094) | | |
| (6,418) | |
| (6,435) | |
Impact of 20% adverse change | |
| (6,569) | |
| (4,028) | | |
| (12,254) | |
| (12,287) | |
This sensitivity analysis presents the effect of hypothetical changes in key assumptions on the fair value of the MSR asset. The effect of such hypothetical change in assumptions generally cannot be extrapolated because the relationship of the change in one key assumption to the change in the fair value of the MSR asset is not linear. In addition, in the analysis, the impact of an adverse change in one key assumption is calculated independent of any impact on other assumptions. In reality, changes in one assumption may change another assumption.
Contractually specified servicing fees, late fees and ancillary fees earned of $5.1$16.2 million and $6.6$5.9 million during the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and $11.0 million and $12.9 million during the six months ended June 30, 2020 and 2019, respectively, were included in net gains from sale of loans and other mortgage production income within the consolidated statements of operations.
8.9. Deposits
Deposits are summarized as follows (in thousands).
| | | | | | | | | | | | | ||
| | June 30, | | December 31, | | | March 31, | | December 31, | | ||||
|
| 2020 |
| 2019 | |
| 2021 |
| 2020 | | ||||
Noninterest-bearing demand | | $ | 3,467,500 | | $ | 2,769,556 | | | $ | 4,031,181 | | $ | 3,612,384 | |
Interest-bearing: | | | | | | | | | | | | | | |
Demand accounts | |
| 2,065,586 | |
| 1,881,614 | | |
| 2,568,355 | |
| 2,399,341 | |
Brokered - demand | |
| 545,185 | |
| — | | |
| 186,011 | |
| 282,426 | |
Money market | |
| 3,049,638 | |
| 2,641,116 | | |
| 2,895,070 | |
| 2,716,878 | |
Brokered - money market | |
| 159,992 | |
| 5,000 | | |
| 213,978 | |
| 124,243 | |
Savings | |
| 240,230 | |
| 199,076 | | |
| 271,910 | |
| 276,327 | |
Time | |
| 1,423,236 | |
| 1,505,375 | | |
| 1,327,177 | |
| 1,506,435 | |
Brokered - time | |
| 698,231 | |
| 30,477 | | |
| 239,097 | |
| 324,285 | |
| | $ | 11,649,598 | | $ | 9,032,214 | | | $ | 11,732,779 | | $ | 11,242,319 | |
10. Short-term Borrowings
Short-term borrowings are summarized as follows (in thousands).
| | | | | | | |
| | March 31, | | December 31, |
| ||
|
| 2021 |
| 2020 |
| ||
Federal funds purchased | | $ | 158,835 | | $ | 180,325 | |
Securities sold under agreements to repurchase | |
| 123,437 | |
| 237,856 | |
Federal Home Loan Bank | |
| — | |
| — | |
Short-term bank loans | | | 58,000 | | | — | |
Commercial paper | |
| 336,380 | |
| 277,617 | |
| | $ | 676,652 | | $ | 695,798 | |
Federal funds purchased and securities sold under agreements to repurchase generally mature daily, on demand, or on some other short-term basis. The Bank and the Hilltop Broker-Dealers execute transactions to sell securities under
3526
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
9. Short-term Borrowings
Short-term borrowings are summarized as follows (in thousands).
| | | | | | | |
| | June 30, | | December 31, |
| ||
|
| 2020 |
| 2019 |
| ||
Federal funds purchased | | $ | 135,650 | | $ | 81,625 | |
Securities sold under agreements to repurchase | |
| 352,150 | |
| 612,125 | |
Federal Home Loan Bank | |
| — | |
| 600,000 | |
Short-term bank loans | | | 15,000 | | | 111,000 | |
Commercial paper | |
| 217,364 | |
| 19,260 | |
| | $ | 720,164 | | $ | 1,424,010 | |
Federal funds purchased and securities sold under agreements to repurchase generally mature daily, on demand, or on some other short-term basis. The Bank and the Hilltop Broker-Dealers execute transactions to sell securities under agreements to repurchase with both customers and other broker-dealers. Securities involved in these transactions are held by the Bank, the Hilltop Broker-Dealers or a third-party dealer.
Information concerning federal funds purchased and securities sold under agreements to repurchase is shown in the following tables (dollars in thousands).
| | | | | | | | | | | | | | | | | | |
|
| Six Months Ended June 30, | | | | |
| Three Months Ended March 31, | | | ||||||||
| | 2020 | | 2019 |
| | | | 2021 | | 2020 |
| | |||||
Average balance during the period | | $ | 605,396 | | $ | 621,268 | | | | | $ | 367,313 | | $ | 732,954 | | | |
Average interest rate during the period | |
| 1.29 | % | | 2.54 | % | | | | |
| 0.36 | % | | 1.78 | % | |
| | | | | | | | | | | | | | | | | | |
| | June 30, | | December 31, | | | | | | March 31, | | December 31, | | | ||||
|
| 2020 |
| 2019 | | | |
| 2021 |
| 2020 | | | |||||
Average interest rate at end of period |
| | 0.48 | % | | 1.97 | % | | | |
| | 0.25 | % | | 0.25 | % | |
Securities underlying the agreements at end of period: | | | | | | | | | | | | | | | | | | |
Carrying value | | $ | 360,743 | | $ | 612,515 | | | | | $ | 123,392 | | $ | 237,913 | | | |
Estimated fair value | | $ | 386,732 | | $ | 661,023 | | | | | $ | 134,558 | | $ | 262,554 | | |
Federal Home Loan Bank (“FHLB”)FHLB short-term borrowings mature over terms not exceeding 365 days and are collateralized by FHLB Dallas stock, nonspecified real estate loans and certain specific commercial real estate loans. Other information regarding FHLB short-term borrowings is shown in the following tables (dollars in thousands).
| | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | Three Months Ended March 31, | | | ||||||||
| | 2020 | | 2019 | | | | 2021 | | 2020 | | | ||||
Average balance during the period | | $ | 77,692 | | $ | 159,945 | | | | $ | — | | $ | 153,736 | | |
Average interest rate during the period | | | 1.62 | % | | 2.47 | % | | | | — | % | | 1.63 | % | |
| | | | | | | | | | | | | | | | |
| | | June 30, | | | December 31, | | | ||||||||
| | | 2020 | | | 2019 | | | ||||||||
Average interest rate at end of period | | | — | % | | 1.56 | % | |
The Hilltop Broker-Dealers use short-term bank loans periodically to finance securities owned, margin loans to customers and correspondents and underwriting activities. Interest on the borrowings varies with the federal funds rate. The weighted average interest rate on the borrowings at June 30, 2020 and DecemberMarch 31, 20192021 was 1.08% and 2.52%, respectively.1.25%.
During the fourth quarter of 2019, Hilltop Securities initiated 2 commercial paper programs, in the ordinary course of its business, of whichuses the net proceeds (after deducting related issuance expenses) from the sale will be usedof 2 commercial paper programs for general corporate purposes, including working capital and the funding of a portion of its securities inventories. The commercial
36
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
paper notes (“CP Notes”) may be issued with maturities of 14 days to 270 days from the date of issuance. The CP Notes are issued under 2 separate programs, Series 2019-1 CP Notes and Series 2019-2 CP Notes, in maximum aggregate amounts of $300 million and $200 million, respectively. The CP Notes are not redeemable prior to maturity or subject to voluntary prepayment and do not bear interest, but are sold at a discount to par. The CP Notes are secured by a pledge of collateral owned by Hilltop Securities. As of June 30, 2020,March 31, 2021, the weighted average maturity of the CP Notes was 139157 days at a rate of 2.23%.1.13%, with a weighted average remaining life of 106 days. At June 30, 2020,March 31, 2021, the aggregate amount outstanding under these secured arrangements was $217.4$336.4 million, which was collateralized by securities held for firm accounts valued at $120.4$364.1 million.
10.11. Notes Payable
Notes payable consisted of the following (in thousands).
| | | | | | |
| | June 30, | | December 31, | ||
|
| 2020 |
| 2019 | ||
Senior Notes due April 2025, net of discount of $1,149 and $1,232, respectively | | $ | 148,851 | | $ | 148,768 |
Subordinated Notes due May 2030, net of discount of $835 | | | 49,165 | | | — |
Subordinated Notes due May 2035, net of discount of $2,474 | | | 147,526 | | | — |
FHLB notes, including premium of $115 and $146, respectively, with maturities ranging from September 2020 to June 2030 | |
| 28,058 | |
| 28,848 |
Ventures Management lines of credit due August 2020 | | | 76,558 | | | 78,653 |
| | $ | 450,158 | | $ | 256,269 |
Subordinated Notes
On May 7, 2020, Hilltop completed a public offering of $50 million aggregate principal amount of 5.75% fixed-to-floating rate subordinated notes due May 15, 2030 (the “2030 Subordinated Notes”) and $150 million aggregate principal amount of 6.125% fixed-to-floating rate subordinated notes due May 15, 2035 (the “2035 Subordinated Notes,”) (collectively, the “Subordinated Notes”). The price for the Subordinated Notes was 100% of the principal amount of the Subordinated Notes. The net proceeds from the offering, after deducting underwriting discounts and fees and expenses of $3.4 million, were $196.6 million. Hilltop intends to use the net proceeds of the offerings for general corporate purposes.
The 2030 Subordinated Notes and the 2035 Subordinated Notes will mature on May 15, 2030 and May 15, 2035, respectively. Hilltop may redeem the Subordinated Notes, in whole or in part, from time to time, subject to obtaining regulatory approval, beginning with the interest payment date of May 15, 2025 for the 2030 Subordinated Notes and beginning with the interest payment date of May 15, 2030 for the 2035 Subordinated Notes, in each case at a redemption price equal to 100% of the principal amount of the Subordinated Notes being redeemed plus accrued and unpaid interest to but excluding the date of redemption.
The 2030 Subordinated Notes bear interest at the rate of 5.75% per year, payable semi-annually in arrears commencing on November 15, 2020. The interest rate for the 2030 Subordinated Notes will reset quarterly beginning May 15, 2025 to an interest rate, per year, equal to the then-current benchmark rate, which is expected to be three-month term Secured Overnight Financing Rate (“SOFR rate”), plus 5.68%, payable quarterly in arrears. The 2035 Subordinated Notes bear interest at the rate of 6.125% per year, payable semi-annually in arrears commencing on November 15, 2020. The interest rate for the 2035 Subordinated Notes will reset quarterly beginning May 15, 2030 to an interest rate, per year, equal to the then-current benchmark rate, which is expected to be three-month term SOFR rate plus 5.80%, payable quarterly in arrears.
| | | | | | |
| | March 31, | | December 31, | ||
|
| 2021 |
| 2020 | ||
Senior Notes due April 2025, net of discount of $1,020 and $1,063, respectively | | $ | 148,980 | | $ | 148,937 |
Subordinated Notes due May 2030, net of discount of $771 and $793, respectively | | | 49,229 | | | 49,207 |
Subordinated Notes due May 2035, net of discount of $2,350 and $2,392, respectively | | | 147,650 | | | 147,608 |
Ventures Management lines of credit | |
| 55,854 | |
| 36,235 |
| | $ | 401,713 | | $ | 381,987 |
3727
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
11.12. Leases
Supplemental balance sheet information related to finance leases is as follows (in thousands).
| | | | | | | | | | ||||
| | June 30, | | December 31, | | | March 31, | | December 31, | ||||
| | 2020 | | | 2019 | | 2021 | | 2020 | ||||
Finance leases: | | | | | | | | | | | | ||
Premises and equipment | | $ | 7,780 | | $ | 7,780 | | $ | 7,780 | | $ | 7,780 | |
Accumulated depreciation | | | (4,473) | | | (4,178) | | | (4,915) | | | (4,768) | |
Premises and equipment, net | | $ | 3,307 | | $ | 3,602 | | $ | 2,865 | | $ | 3,012 |
The components of lease costs, including short-term lease costs, are as follows (in thousands).
| | | | | | | | | | | | | | ||||||
| | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended March 31, | ||||||||||||
| | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | ||||||
Operating lease cost | | $ | 10,621 | | $ | 10,599 | | $ | 21,251 | | $ | 21,130 | | $ | 9,718 | | $ | 10,630 | |
Less operating lease and sublease income | | | (354) | | | (663) | | | (972) | | | (1,050) | | | (339) | | | (618) | |
Net operating lease cost | | $ | 10,267 | | $ | 9,936 | | $ | 20,279 | | $ | 20,080 | | $ | 9,379 | | $ | 10,012 | |
| | | | | | | | | | | | | | | | ||||
Finance lease cost: | | | | | | | | | | | | | | | | ||||
Amortization of ROU assets | | $ | 147 | | $ | 147 | | $ | 295 | | $ | 295 | | | $ | 147 | | $ | 147 |
Interest on lease liabilities | | | 141 | | | 150 | | | 285 | | | 302 | | | | 134 | | | 144 |
Total finance lease cost | | $ | 288 | | $ | 297 | | $ | 580 | | $ | 597 | | $ | 281 | | $ | 291 |
Supplemental cash flow information related to leases is as follows (in thousands):.
| | | | | | | | | | | | | ||
| | Six Months Ended June 30, | | | Three Months Ended March 31, | | ||||||||
| | 2020 | | 2019 | | | 2021 | | 2020 | | ||||
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | | | | | | ||
Operating cash flows from operating leases | | $ | 19,075 | | $ | 19,810 | | | $ | 9,240 | | $ | 9,951 | |
Operating cash flows from finance leases | | | 285 | | 302 | | | | 134 | | 144 | | ||
Financing cash flows from finance leases | | | 312 | | 290 | | | | 167 | | 155 | | ||
Right-of-use assets obtained in exchange for new lease obligations: | | | | | | | ||||||||
Right-of-use assets obtained in exchange for lease obligations: | | | | | | | ||||||||
Operating leases | | $ | 8,476 | | $ | 24,188 | | | $ | 6,334 | | $ | 4,049 | |
Finance leases | | | — | | — | | | | — | | — | |
Information regarding the lease terms and discount rates of the Company’s leases is as follows.
| | | | | | | | | | | | | | |
| June 30, 2020 | | March 31, 2021 | | December 31, 2020 | |||||||||
| Weighted Average | | | | Weighted Average | | | | Weighted Average | | | |||
| Remaining Lease | | Weighted Average | | Remaining Lease | | Weighted Average | | Remaining Lease | | Weighted Average | |||
Lease Classification | Term (Years) | | Discount Rate | | Term (Years) | | Discount Rate | | Term (Years) | | Discount Rate | |||
Operating | 5.7 | | 4.98 | % | | 5.4 | | 4.56 | % | | 5.5 | | 4.67 | % |
Finance | 6.1 | | 4.80 | % | | 5.4 | | 4.82 | % | | 5.6 | | 4.81 | % |
3828
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Future minimum lease payments under the Leasing Standardlease agreements as of June 30, 2020, under lease agreements that had commenced as of or subsequent to January 1, 2019,March 31, 2021, are presented below (in thousands).
| | | | | | | | | ||
| Operating Leases | | Finance Leases | Operating Leases | | Finance Leases | ||||
2020 | $ | 18,439 | | $ | 600 | |||||
2021 | | 32,952 | | 1,212 | $ | 26,677 | | $ | 911 | |
2022 | | 26,876 | | 1,241 | | 29,233 | | 1,241 | ||
2023 | | 21,297 | | 1,280 | | 23,488 | | 1,280 | ||
2024 | | 14,143 | | 1,163 | | 15,875 | | 1,163 | ||
2025 | | 11,593 | | 886 | ||||||
Thereafter | | 38,057 | | | 2,297 | | 29,884 | | | 1,411 |
Total minimum lease payments | $ | 151,764 | | $ | 7,793 | | 136,750 | | 6,892 | |
Less amount representing interest | | (20,353) | | | (2,610) | | (16,411) | | | (2,199) |
Lease liabilities | $ | 131,411 | | $ | 5,183 | $ | 120,339 | | $ | 4,693 |
As of June 30, 2020,March 31, 2021, the Company had additional operating leases that have not yet commenced with aggregate future minimum lease payments of approximately $1.2$23.2 million. These operating leases are expected to commence between August 2020April 2021 and JuneOctober 2021 with lease terms ranging from fivethree to sixeleven years.
A related party is the lessor in an operating lease with Hilltop. Hilltop’s minimum payment under the lease is $0.5 million annually through 2028, for an aggregate remaining obligation of $4.2 million at June 30, 2020.
12.13. Income Taxes
The Company applies an estimated annual effective rate to interim period pre-tax income to calculate the income tax provision for the quarter in accordance with the principal method prescribed by the accounting guidance established for computing income taxes in interim periods. The Company’s effective tax rates from continuing operations were 23.3%23.4% and 23.0%23.1% for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and 23.2% and 22.9% forapproximated the six months ended June 30, 2020 and 2019, respectively. The effective tax rates approximatedapplicable statutory rates and include the effect of investments in tax-exempt instruments, offset by non-deductible expenses.for such periods.
13.14. Commitments and Contingencies
Legal Matters
The Company is subject to loss contingencies related to litigation, claims, investigations and legal and administrative cases and proceedings arising in the ordinary course of business. The Company evaluates these contingencies based on information currently available, including advice of counsel. The Company establishes accruals for those matters when a loss contingency is considered probable and the related amount is reasonably estimable. Any accruals are periodically reviewed and may be adjusted as circumstances change. A portion of the Company’s exposure with respect to loss contingencies may be offset by applicable insurance coverage. In determining the amounts of any accruals or estimates of possible loss contingencies, the Company does not take into account the availability of insurance coverage, other than that provided by reinsurers in the insurance segment.coverage. When it is practicable, the Company estimates loss contingencies for possible litigation and claims, whether or not there is an accrued probable loss. When the Company is able to estimate such probable losses, and when it estimates that it is reasonably possible it could incur losses in excess of amounts accrued, the Company is required to make a disclosure of the aggregate estimation. As available information changes, however, the matters for which the Company is able to estimate, as well as the estimates themselves, will be adjusted accordingly.
Assessments of litigation and claims exposures are difficult due to many factors that involve inherent unpredictability. Those factors include the following: the varying stages of the proceedings, particularly in the early stages; unspecified, unsupported, or uncertain damages; damages other than compensatory, such as punitive damages; a matter presenting meaningful legal uncertainties, including novel issues of law; multiple defendants and jurisdictions; whether discovery has begun or is complete; whether meaningful settlement discussions have commenced; and whether the claim involves a class action and if so, how the class is defined. As a result of some of these factors, the Company may be unable to estimate reasonably possible losses with respect to some or all of the pending and threatened litigation and claims asserted against the Company.
The Company is involved in information-gathering requests and investigations (both formal and informal), as well as reviews, examinations and proceedings (collectively, “Inquiries”) by various governmental regulatory agencies, law enforcement authorities and self-regulatory bodies regarding certain of its businesses, business practices and policies, as
3929
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
estimate reasonably possible losseswell as the conduct of persons with whom it does business. Additional Inquiries will arise from time to time. In connection with those Inquiries, the Company receives document requests, subpoenas and other requests for information. The Inquiries could develop into administrative, civil or criminal proceedings or enforcement actions that could result in consequences that have a material effect on the Company’s consolidated financial position, results of operations or cash flows as a whole. Such consequences could include adverse judgments, findings, settlements, penalties, fines, orders, injunctions, restitution, or alterations in the Company’s business practices, and could result in additional expenses and collateral costs, including reputational damage.
PrimeLending received an investigative inquiry from the United States Attorney for the Western District of Virginia regarding PrimeLending’s float down option. At this time, the United States Attorney has requested certain materials with respect to some or all of the pendingthis matter, and threatened litigation and claims asserted against the Company.PrimeLending is fully cooperating with such requests.
While the final outcome of litigation and claims exposures or of any Inquiries is inherently unpredictable, management is currently of the opinion that the outcome of pending and threatened litigation and inquiries will not, except related to specific matters disclosed above, have a material effect on the Company’s business, consolidated financial position, results of operations or cash flows as a whole. However, in the event of unexpected future developments, it is reasonably possible that an adverse outcome in any matter, including the matters discussed above, could be material to the Company’s business, consolidated financial position, results of operations or cash flows for any particular reporting period of occurrence.
Indemnification Liability Reserve
The mortgage origination segment may be responsible to agencies, investors, or other parties for errors or omissions relating to its representations and warranties that each loan sold meets certain requirements, including representations as to underwriting standards and the validity of certain borrower representations in connection with the loan. If determined to be at fault, the mortgage origination segment either repurchases the affected loan from or indemnifies the claimant against loss. The mortgage origination segment has established an indemnification liability reserve for such probable losses.
Generally, the mortgage origination segment first becomes aware that an agency, investor, or other party believes a loss has been incurred on a sold loan when it receives a written request from the claimant to repurchase the loan or reimburse the claimant’s losses. Upon completing its review of the claimant’s request, the mortgage origination segment establishes a specific claims reserve for the loan if it concludes its obligation to the claimant is both probable and reasonably estimable.
An additional reserve has been established for probable agency, investor or other party losses that may have been incurred, but not yet reported to the mortgage origination segment based upon a reasonable estimate of such losses. Factors considered in the calculation of this reserve include, but are not limited to, the total volume of loans sold exclusive of specific claimant requests, actual claim settlements and the severity of estimated losses resulting from future claims, and the mortgage origination segment’s history of successfully curing defects identified in claim requests. In addition, the mortgage origination segment has considered that GNMA, FNMA and FHLMC have imposed certain restrictions on loans the agencies will accept under a forbearance agreement resulting from the COVID-19 pandemic, which could increase the magnitude of indemnification losses on these loans.
While the mortgage origination segment’s sales contracts typically include borrower early payment default repurchase provisions, these provisions have not been a primary driver of claims to date, and therefore, are not a primary factor considered in the calculation of this reserve.
At June 30, 2020March 31, 2021 and December 31, 2019,2020, the mortgage origination segment’s indemnification liability reserve totaled $15.5$24.3 million and $11.8$21.5 million, respectively. The provision for indemnification losses was $3.9$3.0 million and $0.8$0.7 million during the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and $4.6 million and $1.3 million during the six months ended June 30, 2020 and 2019, respectively.
4030
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The following tables provide for a rollforward of claims activity for loans put-back to the mortgage origination segment based upon an alleged breach of a representation or warranty with respect to a loan sold and related indemnification liability reserve activity (in thousands).
| | | | | | | | | | | | | | | | | | | ||
| | Representation and Warranty Specific Claims |
| | Representation and Warranty Specific Claims |
| ||||||||||||||
| | Activity - Origination Loan Balance |
| | Activity - Origination Loan Balance |
| ||||||||||||||
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | Three Months Ended March 31, |
| ||||||||||||
|
| 2020 |
| 2019 | | 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| ||||||
Balance, beginning of period | | $ | 34,779 | | $ | 30,112 | | $ | 32,144 | | $ | 33,784 | | | $ | 30,085 | | $ | 32,144 | |
Claims made | |
| 6,141 | |
| 6,504 | |
| 12,212 | |
| 9,686 | | |
| 5,112 | |
| 6,071 | |
Claims resolved with no payment | |
| (673) | |
| (1,579) | |
| (1,657) | |
| (7,266) | | |
| (2,914) | |
| (984) | |
Repurchases | |
| (5,053) | |
| (1,478) | |
| (7,383) | |
| (2,645) | | |
| (1,811) | |
| (2,330) | |
Indemnification payments | |
| — | |
| (485) | |
| (122) | |
| (485) | | |
| (335) | |
| (122) | |
Balance, end of period | | $ | 35,194 | | $ | 33,074 | | $ | 35,194 | | $ | 33,074 | | | $ | 30,137 | | $ | 34,779 | |
| | | | | | | | | | | | | | | | | | | ||
| | Indemnification Liability Reserve Activity | | | Indemnification Liability Reserve Activity |
| ||||||||||||||
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
|
| Three Months Ended March 31, |
| ||||||||||||
| | 2020 |
| 2019 |
| 2020 |
| 2019 |
| | 2021 |
| 2020 |
| ||||||
Balance, beginning of period | | $ | 12,148 | | $ | 10,721 | | $ | 11,776 | | $ | 10,701 | | | $ | 21,531 | | $ | 11,776 | |
Additions for new sales | |
| 2,897 | |
| 792 | |
| 3,622 | |
| 1,281 | | |
| 3,007 | |
| 725 | |
Repurchases | |
| (210) | |
| (127) | |
| (480) | |
| (209) | | |
| (124) | |
| (271) | |
Early payment defaults | |
| (359) | |
| (97) | |
| (402) | |
| (239) | | |
| (12) | |
| (39) | |
Indemnification payments | |
| — | |
| (92) | |
| (40) | |
| (95) | | |
| (141) | |
| (43) | |
Change in reserves for loans sold in prior years | |
| 987 | |
| (364) | |
| 987 | |
| (606) | | |
| — | |
| — | |
Balance, end of period | | $ | 15,463 | | $ | 10,833 | | $ | 15,463 | | $ | 10,833 | | | $ | 24,261 | | $ | 12,148 | |
| | | | | | | | | | | | | | | | | | | ||
| | June 30, | | December 31, | | | | | | | | | March 31, | | December 31, | | ||||
|
| 2020 | | 2019 |
| | | | | |
|
| 2021 | | 2020 | | ||||
Reserve for Indemnification Liability: | | | | | | | | | | | | | | | | | | | | |
Specific claims | | $ | 1,423 | | $ | 1,071 | | | | | | | | | $ | 881 | | $ | 961 | |
Incurred but not reported claims | |
| 14,040 | |
| 10,705 | | | | | | | | |
| 23,380 | |
| 20,570 | |
Total | | $ | 15,463 | | $ | 11,776 | | | | | | | | | $ | 24,261 | | $ | 21,531 | |
Although management considers the total indemnification liability reserve to be appropriate, there may be changes in the reserve over time to address incurred losses due to unanticipated adverse changes in the economy and historical loss patterns, discrete events adversely affecting specific borrowers or industries, and/or actions taken by institutions or investors. The impact of such matters is considered in the reserving process when probable and estimable.
14.15. Financial Instruments with Off-Balance Sheet Risk
Banking
The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit that involve varying degrees of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received. The contract amounts of those instruments reflect the extent of involvement (and therefore the exposure to credit loss) the Bank has in particular classes of financial instruments.
Commitments to extend credit are agreements to lend to a customer provided that the terms established in the contract are met. Commitments generally have fixed expiration dates and may require payment of fees. Because some commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third-party. These letters of credit are primarily issued to support public and private
4131
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
performance of a customer to a third party. These letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.
In the aggregate, the Bank had outstanding unused commitments to extend credit of $2.0 billion at June 30, 2020March 31, 2021 and outstanding financial and performance standby letters of credit of $90.3$83.7 million at June 30, 2020.
In order to estimate the allowance for credit loss on unfunded loan commitments, the Bank uses a process similar to that used in estimating the allowance for credit losses on the funded portion. The allowance is based on the estimated exposure at default, multiplied by the lifetime PD grade and LGD grade for that particular loan segment. The Bank estimates expected losses by calculating a commitment usage factor based on industry usage factors. The commitment usage factor is applied over the relevant contractual period. Loss factors from the underlying loans to which commitments are related are applied to the results of the usage calculation to estimate any liability for credit losses related for each loan type. The expected losses on unfunded commitments align with statistically calculated parameters used to calculate the allowance for credit losses on the funded portion. There is no reserve calculated for letters of credit as they are issued primarily as credit enhancements and the likelihood of funding is low.
Changes in the allowance for credit losses for loans with off-balance sheet credit exposures are shown below (in thousands).
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2020 |
| 2019 | | 2020 |
| 2019 | ||||
Balance, beginning of period | | $ | 7,209 | | $ | 2,255 | | $ | 2,075 | | $ | 2,366 |
Transition adjustment CECL accounting standard | | | — | | | — | | | 3,837 | | | — |
Expense (reversal of expense) | | | 1,822 | | | 8 | | | 3,119 | | | (103) |
Balance, end of period | | $ | 9,031 | | $ | 2,263 | | $ | 9,031 | | $ | 2,263 |
As previously discussed, the Company adopted the new CECL standard and recorded a transition adjustment entry that resulted in an allowance for credit losses of $5.9 million as of January 1, 2020. During the three and six months ended June 30, 2020, the increases in the reserve for unfunded commitments were primarily due to a deteriorating economic outlook associated with the impact of the market disruption caused by COVID-19 conditions.March 31, 2021.
The Bank uses the same credit policies in making commitments and standby letters of credit as it does for on-balance sheet instruments.loans held for investment. The amount of collateral obtained, if deemed necessary, in these transactions is based on management’s credit evaluation of the borrower. Collateral held varies but may include real estate, accounts receivable, marketable securities, interest-bearing deposit accounts, inventory, and property, plant and equipment.
Broker-Dealer
In the normal course of business, the Hilltop Broker-Dealers execute, settle, and finance various securities transactions that may expose the Hilltop Broker-Dealers to off-balance sheet risk in the event that a customer or counterparty does not fulfill its contractual obligations. Examples of such transactions include the sale of securities not yet purchased by customers or for the accounts of the Hilltop Broker-Dealers, use of derivatives to support certain non-profit housing organization clients and to hedge changes in the fair value of certain securities, clearing agreements between the Hilltop Broker-Dealers and various clearinghouses and broker-dealers, secured financing arrangements that involve pledged securities, and when-issued underwriting and purchase commitments.
42
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
15.16. Stock-Based Compensation
PursuantSince 2012, the Company has issued stock-based incentive awards pursuant to the Hilltop Holdings Inc. 2012 Equity Incentive Plan (the “2012 Plan”),. In July 2020, pursuant to stockholders’ approval, the Company may grant nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance awards, dividend equivalent rights and other awards to employees ofadopted the Company, its subsidiaries and outside directors of the Company. In the aggregate, 4,000,000 shares of common stock may be delivered pursuantHilltop Holdings Inc. 2020 Equity Incentive Plan (the “2020 Plan”). The 2020 Plan serves as successor to awards granted under the 2012 Plan. At June 30, 2020, 22,785 shares of common stock remained available for issuance pursuant to awards granted under theThe 2012 Plan excluding shares that may be delivered pursuantand the 2020 Plan are referred to outstanding awards. Compensation expense related to the 2012 Plan was $3.3 million and $2.5 million during the three months ended June 30, 2020 and 2019, respectively, and $7.1 million and $5.0 million during the six months ended June 30, 2020 and 2019, respectively.collectively as “the Equity Plans.”
During the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, Hilltop granted 18,3974,181 and 14,89510,291 shares of common stock, respectively, pursuant to the 2012 PlanEquity Plans to certain non-employee members of the Company’s board of directors for services rendered to the Company.
Restricted Stock Units
The following table summarizes information about nonvested RSUrestricted stock unit (“RSU”) activity for the sixthree months ended June 30, 2020March 31, 2021 (shares in thousands).
| | | | | | | | | | | ||
| | | RSUs | | | RSUs | ||||||
| | | | | Weighted | | | | | Weighted | ||
| | | | | Average | | | | | Average | ||
| | | | | Grant Date | | | | | Grant Date | ||
|
|
| Outstanding |
| Fair Value |
|
| Outstanding |
| Fair Value | ||
Balance, December 31, 2019 | | 1,437 | | $ | 22.64 | |||||||
Balance, December 31, 2020 | Balance, December 31, 2020 | | 1,833 | | $ | 21.48 | ||||||
| Granted | | 535 | | $ | 21.91 | Granted | | 532 | | $ | 32.93 |
| Vested/Released | | (338) | | $ | 27.06 | Vested/Released | | (248) | | $ | 24.69 |
| Forfeited | | (20) | | $ | 22.61 | Forfeited | | (6) | | $ | 22.17 |
Balance, June 30, 2020 | | 1,614 | | $ | 21.47 | |||||||
Balance, March 31, 2021 | Balance, March 31, 2021 | | 2,111 | | $ | 23.99 |
Vested/Released RSUs include an aggregate of 54,66526,694 shares withheld to satisfy employee statutory tax obligations during the sixthree months ended June 30, 2020. Pursuant to certain RSU award agreements, an aggregate of 5,482 vested RSUs at June 30, 2020 require deferral of the settlement in shares and statutory tax obligations to a future date.March 31, 2021.
During the sixthree months ended June 30, 2020,March 31, 2021, the Compensation Committee of the board of directors of the Company awarded certain executives and key employees an aggregate of 520,510471,505 RSUs pursuant to the 2012 Plan.Equity Plans. Of the RSUs granted during the sixthree months ended June 30, 2020, 395,378March 31, 2021, 320,377 that were outstanding at June 30, 2020,March 31, 2021, are subject to time-based vesting conditions and generally cliff vest on the third anniversary of the grant date. Of the RSUs granted
32
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
during the sixthree months ended June 30, 2020, 122,232March 31, 2021, 150,668 that were outstanding at June 30, 2020March 31, 2021, provide for cliff vesting based upon the achievement of certain performance goals over a three-year period.
At June 30, 2020,March 31, 2021, in the aggregate, 1,324,4101,746,622 of the outstanding RSUs are subject to time-based vesting conditions and generally cliff vest on the third anniversary of the grant date, and 289,493364,149 outstanding RSUs cliff vest based upon the achievement of certain performance goals over a three-year period. At June 30, 2020March 31, 2021, unrecognized compensation expense related to outstanding RSUs of $21.7$32.9 million is expected to be recognized over a weighted average period of 1.801.72 years.
16.17. Regulatory Matters
Banking and Hilltop
PlainsCapital, which includes the Bank and PrimeLending, and Hilltop are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct, material effect on the consolidated financial statements. The regulations require PlainsCapital and Hilltop to meet
43
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
specific capital adequacy guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company performs reviews of the classification and calculation of risk-weighted assets to ensure accuracy and compliance with the Basel III regulatory capital requirements as implemented by the Board of Governors of the Federal Reserve System. The capital classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the companies to maintain minimum amounts and ratios (set forth in the following table) of Tier 1 capital (as defined in the regulations) to total average assets (as defined), and minimum ratios of common equity Tier 1, Tier 1 and total capital (as defined) to risk-weighted assets (as defined).
In order to avoid limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary bonus payments to executive officers, Basel III requires banking organizations to maintain a capital conservation buffer above minimum risk-based capital requirements measured relative to risk-weighted assets.
The following tables showtable shows PlainsCapital’s and Hilltop’s actual capital amounts and ratios in accordance with Basel III compared to the regulatory minimum capital requirements including conservation buffer ratio in effect at the end of the period (dollars in thousands). Based on actual capital amounts and ratios shown in the following table, PlainsCapital’s ratios place it in the “well capitalized” (as defined) capital category under regulatory requirements. Actual capital amounts and ratios as of June 30, 2020March 31, 2021 reflect PlainsCapital’s and Hilltop’s decision to elect the transition option as issued by the federal banking regulatory agencies in March 2020 that permits banking institutions to mitigate the estimated cumulative regulatory capital effects from CECL over a five-year transitionary period.
| | | | | | | | | | |
| | | | | | | Minimum Capital | | |
|
| | | | | | | Requirements | | | |
| | | | | | | Including | | To Be Well |
|
| | Actual | | Conservation Buffer | | Capitalized |
| |||
|
| Amount |
| Ratio |
| Ratio |
| Ratio |
| |
June 30, 2020 | | | | | | | | | | |
Tier 1 capital (to average assets): | | | | | | | | | | |
PlainsCapital | | $ | 1,333,686 |
| 10.37 | % | 4.0 | % | 5.0 | % |
Hilltop | |
| 2,045,096 |
| 12.60 | % | 4.0 | % | N/A | |
Common equity Tier 1 capital (to risk-weighted assets): | | | | | | | | | | |
PlainsCapital | | | 1,333,686 |
| 14.03 | % | 7.0 | % | 6.5 | % |
Hilltop | | | 1,980,096 |
| 18.46 | % | 7.0 | % | N/A | |
Tier 1 capital (to risk-weighted assets): | | | | | | | | | | |
PlainsCapital | |
| 1,333,686 |
| 14.03 | % | 8.5 | % | 8.0 | % |
Hilltop | |
| 2,045,096 |
| 19.06 | % | 8.5 | % | N/A | |
Total capital (to risk-weighted assets): | | | | | | | | | | |
PlainsCapital | |
| 1,414,838 |
| 14.88 | % | 10.5 | % | 10.0 | % |
Hilltop | |
| 2,340,456 |
| 21.82 | % | 10.5 | % | N/A | |
| | | | | | | | | | |
| | | | | | | Minimum Capital | | |
|
| | | | | | | Requirements | | | |
| | | | | | | Including | | To Be Well |
|
| | Actual | | Conservation Buffer | | Capitalized |
| |||
|
| Amount |
| Ratio |
| Ratio |
| Ratio |
| |
December 31, 2019 | | | | | | | | | | |
Tier 1 capital (to average assets): | | | | | | | | | | |
PlainsCapital | | $ | 1,236,289 |
| 11.61 | % | 4.0 | % | 5.0 | % |
Hilltop | |
| 1,822,970 |
| 12.71 | % | 4.0 | % | N/A | |
Common equity Tier 1 capital (to risk-weighted assets): | | | | | | | | | | |
PlainsCapital | | | 1,236,289 |
| 13.45 | % | 7.0 | % | 6.5 | % |
Hilltop | | | 1,776,381 |
| 16.70 | % | 7.0 | % | N/A | |
Tier 1 capital (to risk-weighted assets): | | | | | | | | | | |
PlainsCapital | |
| 1,236,289 |
| 13.45 | % | 8.5 | % | 8.0 | % |
Hilltop | |
| 1,822,970 |
| 17.13 | % | 8.5 | % | N/A | |
Total capital (to risk-weighted assets): | | | | | | | | | | |
PlainsCapital | |
| 1,299,453 |
| 14.13 | % | 10.5 | % | 10.0 | % |
Hilltop | |
| 1,867,771 |
| 17.55 | % | 10.5 | % | N/A | |
4433
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | Minimum Capital | | |
|
| | | | | | | | | | | | Requirements | | | |
| | March 31, 2021 | | December 31, 2020 | | Including | | To Be Well |
| ||||||
| | Actual | | Actual | | Conservation Buffer | | Capitalized |
| ||||||
|
| Amount |
| Ratio |
| Amount |
| Ratio |
| Ratio |
| Ratio |
| ||
Tier 1 capital (to average assets): | | | | | | | | | | | | | | | |
PlainsCapital | | $ | 1,429,465 |
| 10.50 | % | $ | 1,385,842 |
| 10.44 | % | 4.0 | % | 5.0 | % |
Hilltop | |
| 2,221,143 |
| 13.01 | % |
| 2,111,580 |
| 12.64 | % | 4.0 | % | N/A | |
Common equity Tier 1 capital (to risk-weighted assets): | | | | | | | | | | | | | | | |
PlainsCapital | | | 1,429,465 |
| 14.74 | % | | 1,385,842 |
| 14.40 | % | 7.0 | % | 6.5 | % |
Hilltop | | | 2,156,143 |
| 19.63 | % | | 2,046,580 |
| 18.97 | % | 7.0 | % | N/A | |
Tier 1 capital (to risk-weighted assets): | | | | | | | | | | | | | | | |
PlainsCapital | |
| 1,429,465 |
| 14.74 | % |
| 1,385,842 |
| 14.40 | % | 8.5 | % | 8.0 | % |
Hilltop | |
| 2,221,143 |
| 20.22 | % |
| 2,111,580 |
| 19.57 | % | 8.5 | % | N/A | |
Total capital (to risk-weighted assets): | | | | | | | | | | | | | | | |
PlainsCapital | |
| 1,515,894 |
| 15.64 | % |
| 1,470,364 |
| 15.27 | % | 10.5 | % | 10.0 | % |
Hilltop | |
| 2,522,752 |
| 22.96 | % |
| 2,409,684 |
| 22.34 | % | 10.5 | % | N/A | |
Broker-Dealer
Pursuant to the net capital requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Hilltop Securities has elected to determine its net capital requirements using the alternative method. Accordingly, Hilltop Securities is required to maintain minimum net capital, as defined in Rule 15c3-1 promulgated under the Exchange Act, equal to the greater of $250,000 and $1,000,000, respectively, or 2% of aggregate debit balances, as defined in Rule 15c3-3 promulgated under the Exchange Act. Additionally, the net capital rule of the NYSE provides that equity capital may not be withdrawn or cash dividends paid if resulting net capital would be less than 5% of the aggregate debit items. HTSMomentum Independent Network follows the primary (aggregate indebtedness) method, as defined in Rule 15c3-1 promulgated under the Exchange Act, which requires the maintenance of the larger of $250,000 or 6-2/3% of aggregate indebtedness.
At June 30, 2020,March 31, 2021, the net capital position of each of the Hilltop Broker-Dealers was as follows (in thousands).
| | | | | | | | | | | | | | |
| | | | | HTS | | | | | | Momentum | | ||
| | Hilltop | | Independent | | | Hilltop | | Independent | | ||||
|
| Securities |
| Network |
|
| Securities |
| Network |
| ||||
Net capital | | $ | 281,682 | | $ | 3,019 | | | $ | 310,528 | | $ | 4,348 | |
Less: required net capital | | | 8,241 | | | 250 | | | | 9,220 | | | 264 | |
Excess net capital | | $ | 273,441 | | $ | 2,769 | | | $ | 301,308 | | $ | 4,084 | |
| | | | | | | | | | | | | | |
Net capital as a percentage of aggregate debit items | | | 68.4 | % | | | | | | 67.4 | % | | | |
Net capital in excess of 5% aggregate debit items | | $ | 261,080 | | | | | | $ | 287,477 | | | | |
Under certain conditions, Hilltop Securities may be required to segregate cash and securities in a special reserve account for the benefit of customers under Rule 15c3-3 promulgated under the Exchange Act. Assets segregated for regulatory purposes under the provisions of the Exchange Act are restricted and not available for general corporate purposes. At June 30, 2020March 31, 2021 and December 31, 2019,2020, the Hilltop Broker-Dealers held cash of $194.6$273.4 million and $157.4$290.4 million, respectively, segregated in special reserve bank accounts for the benefit of customers. The Hilltop Broker-Dealers were not required to segregate cash and securities in special reserve accounts for the benefit of proprietary accounts of introducing broker-dealers at June 30, 2020March 31, 2021 or December 31, 2019.2020.
34
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Mortgage Origination
As a mortgage originator, PrimeLending and its subsidiaries are subject to minimum net worth and liquidity requirements established by HUD and GNMA, as applicable. On an annual basis, PrimeLending and its subsidiaries submit audited financial statements to HUD and GNMA, as applicable, documenting their respective compliance with minimum net worth and liquidity requirements. As of June 30, 2020,March 31, 2021, PrimeLending and its subsidiaries’ net worth and liquidity exceeded the amounts required by both HUD and GNMA, as applicable.
17.18. Stockholders’ Equity
Dividends
During the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, the Company declared and paid cash dividends of $0.18$0.12 and $0.16$0.09 per common share, or an aggregate of $16.3$9.9 million and $15.0$8.2 million, respectively.
On July 23, 2020,April 22, 2021, Hilltop’s board of directors declared a quarterly cash dividend of $0.09$0.12 per common share, payable on August 31, 2020,May 28, 2021, to all common stockholders of record as of the close of business on AugustMay 14, 2020.2021.
45
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Stock Repurchases
In January 2020,2021, the Hilltop board of directors authorized a new stock repurchase program through January 2021,2022, pursuant to which the Company is authorized to repurchase, in the aggregate, up to $75.0 million of its outstanding common stock, inclusive of repurchases to offset dilution related to grants of stock-based compensation.
During the sixthree months ended June 30, 2020,March 31, 2021, the Company paid $15.2$5.0 million to repurchase an aggregate of 720,901149,878 shares of common stock at an average price of $21.13$33.01 per share. The Company’s stock repurchase program, prior year repurchases and related accounting policy are discussed in detail in Note 1 and Note 2325 to the consolidated financial statements included in the Company’s 20192020 Form 10-K.
As previously announced on April 30, 2020, in light of the uncertain outlook for 2020 due to the COVID-19 pandemic, and Hilltop’s commitment to maintain strong capital and liquidity to meet the needs of its customers and communities during this exceptional period of economic uncertainty, Hilltop’s board of directors suspended its stock repurchase program. Hilltop’s board of directors has the ability to reinstate the stock repurchase program at its discretion as circumstances warrant.
18.19. Derivative Financial Instruments
The Company uses various derivative financial instruments to mitigate interest rate risk. The Bank’s interest rate risk management strategy involves effectively managing the re-pricing characteristics of certain assets and liabilities to mitigate potential adverse impacts from changes in interest rates on the Bank’s net interest margin. Additionally, the Bank manages variability of cash flows associated with its variable rate debt in interest-related cash outflows with interest rate swap contracts. PrimeLending has interest rate risk relative to interest rate lock commitments (“IRLCs”) and its inventory of mortgage loans held for sale. PrimeLending is exposed to such interest rate risk from the time an IRLC is made to an applicant to the time the related mortgage loan is sold. To mitigate interest rate risk, PrimeLending executes forward commitments to sell mortgage-backed securities (“MBSs”) and Eurodollar futures. Additionally, PrimeLending has interest rate risk relative to its MSR asset and uses derivative instruments, including interest rate swaps and U.S. Treasury bond futures and options to hedge this risk. The Hilltop Broker-Dealers use forward commitments to both purchase and sell MBSs to facilitate customer transactions and as a means to hedge related exposure to interest rate risk in certain inventory positions. Additionally, Hilltop Securities uses various derivative instruments, including U.S. Treasury bond futures and options, Eurodollar futures and municipal market data, or MMD, rate locks, to hedge changes in the fair value of its securities.
Non-Hedging Derivative Instruments and the Fair Value Option
As discussed in Note 4 to the consolidated financial statements, the Company has elected to measure substantially all mortgage loans held for sale at fair value under the provisions of the Fair Value Option. The election provides the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without applying hedge accounting provisions. The fair values of PrimeLending’s IRLCs and forward commitments are recorded in other assets or other liabilities, as appropriate, and changes in the fair values of these derivative instruments are recorded as a component of net gains from sale of loans and other mortgage production income. These changes in
35
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
fair value are attributable to changes in the volume of IRLCs, mortgage loans held for sale, commitments to purchase and sell MBSs and MSR assets, and changes in market interest rates. Changes in market interest rates also conversely affect the value of PrimeLending’s mortgage loans held for sale and its MSR asset, which are measured at fair value under the Fair Value Option. The effect of the change in market interest rates on PrimeLending’s loans held for sale and MSR asset is discussed in Note 48 to the consolidated financial statements. The fair values of the Hilltop Broker-Dealers’ and the Bank’s derivative instruments are recorded in other assets or other liabilities, as appropriate. Changes in the fair value of derivatives are presented in the following table (in thousands).
| | | | | | | | | | | | | | | | | |||
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | | ||||||||||||
| | 2020 |
| 2019 |
| 2020 |
| 2019 | | 2021 |
| 2020 |
| ||||||
Increase (decrease) in fair value of derivatives during period: | | | | | | | | | | | | | | | | | |||
PrimeLending | | $ | 47,267 | | $ | (783) | | $ | 67,143 | | $ | 17,405 | | $ | 43,839 | | $ | 19,876 | |
Hilltop Broker-Dealers | | 20,149 | | | 12,581 | | | 12,008 | | | 10,774 | | (22,194) | | (8,141) | | |||
Bank | | (0) | | | (85) | | | (135) | | | (146) | | 11 | | (135) | |
Hedging Derivative Instruments
The Company has entered into interest rate swap contracts to manage the exposure to changes in fair value associated with certain available for sale fixed rate collateralized mortgage backed securities and fixed rate loans held for investment attributable to changes in the designated benchmark interest rate. Certain of these fair value hedges have been designated as a last-of-layer hedge, which provides the Company the ability to execute a fair value hedge of the interest rate risk associated with a portfolio of similar prepayable assets whereby the last dollar amount estimated to remain in the portfolio of assets is identified as the hedged item. Additionally, the Company has outstanding interest rate swap contracts designated as cash flow hedges and utilized to manage the variability of cash flows associated with its variable rate borrowings.
Under each of its interest rate swap contracts designated as hedges, the Company receives a floating rate and pays a fixed rate on the outstanding notional amount. The Company assesses the hedge effectiveness both at the onset of the hedge and at regular intervals throughout the life of the derivative. To the extent that the derivative instruments are highly effective in offsetting the variability of the hedged cash flows or fair value, changes in the fair value of the derivative are included as a component of other comprehensive loss on our consolidated balance sheets. Although the Company has determined at the onset of the hedges that the derivative instruments will be highly effective hedges throughout the term of the contract, any portion of derivative instruments subsequently determined to be ineffective will be recognized in earnings.
Derivative positions are presented in the following table (in thousands).
| | | | | | | | | | | | |
| | March 31, 2021 | | December 31, 2020 | ||||||||
|
| Notional |
| Estimated |
| Notional |
| Estimated | ||||
| | Amount | | Fair Value | | Amount | | Fair Value | ||||
Derivative instruments (not designated as hedges): | | | | | | | | | | | | |
IRLCs | | $ | 2,673,869 | | $ | 48,809 | | $ | 2,470,013 | | $ | 76,048 |
Commitments to purchase MBSs | |
| 2,075,777 | |
| (20,185) | |
| 2,478,041 | |
| 22,311 |
Commitments to sell MBSs | | | 5,837,856 | |
| 50,638 | |
| 6,141,079 | |
| (40,621) |
Interest rate swaps | | | 58,256 | |
| (502) | |
| 43,786 | |
| (2,196) |
U.S. Treasury bond futures and options (1) | | | 324,000 | |
| — | |
| 225,400 | |
| — |
Eurodollar and other futures (1) | | | 201,616 | |
| — | |
| — | |
| — |
| | | | | | | | | | | | |
Derivative instruments (designated as hedges): | | | | | | | | | | | | |
Interest rate swaps designated as cash flow hedges | | $ | 125,000 | | $ | (885) | | $ | 105,000 | | $ | (3,112) |
Interest rate swaps designated as fair value hedges (2) | | | 77,118 | | | 4,178 | | | 60,618 | | | (130) |
(1) | Changes in the fair value of these contracts are settled daily with the respective counterparties of PrimeLending and the Hilltop Broker-Dealers. |
(2) | The Company designated $77.1 million and $60.6 million as the hedged amount (from a closed portfolio of prepayable available for sale securities and loans held for investment with a carrying value of $72.9 million and $60.7 million as of March 31, 2021 and December 31, 2020, |
4636
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Derivative positions are presented in the following table (in thousands).
respectively), of which, a subset of these hedges are in last-of-layer hedging relationships. The cumulative basis adjustment included in the carrying value of the hedged items totaled $4.2 million and $0.1 million as of March 31, 2021 and December 31, 2020, respectively. |
| | | | | | | | | | | | |
| | June 30, 2020 | | December 31, 2019 | ||||||||
|
| Notional |
| Estimated |
| Notional |
| Estimated | ||||
| | Amount | | Fair Value | | Amount | | Fair Value | ||||
Derivative instruments (not designated as hedges): | | | | | | | | | | | | |
IRLCs | | $ | 2,782,720 | | $ | 101,210 | | $ | 914,526 | | $ | 18,222 |
Customer-based written options | |
| — | |
| — | |
| 31,200 | |
| — |
Customer-based purchased options | |
| — | |
| — | |
| 31,200 | |
| — |
Commitments to purchase MBSs | |
| 2,056,173 | |
| 15,779 | |
| 3,346,946 | |
| 3,321 |
Commitments to sell MBSs | | | 5,695,995 | |
| (20,613) | |
| 5,988,198 | |
| (5,904) |
Interest rate swaps | | | 47,399 | |
| (2,147) | |
| 15,012 | |
| (178) |
U.S. Treasury bond futures and options (1) | | | 113,100 | |
| — | |
| 283,500 | |
| — |
Eurodollar futures (1) | | | 14,000 | |
| — | |
| 934,000 | |
| — |
| | | | | | | | | | | | |
Derivative instruments (designated as hedges): | | | | | | | | | | | | |
Interest rate swaps designated as cash flow hedges | | $ | 105,000 | | $ | (4,092) | | $ | 50,000 | | $ | 528 |
(1) Changes in the fair value of these contracts are settled daily with the respective counterparties of PrimeLending and the Hilltop Broker-Dealers.
The increasedecrease in the estimated fair value of the IRLCs at June 30, 2020,March 31, 2021, compared to December 31, 2019,2020, was driven by the accelerateda decrease in mortgage interest rates during the six months ended June 30, 2020 triggered by the economic impact of the COVID-19 pandemic, and an increase in the average value of individual IRLCs. The impact of this decrease was partially offset by a slight increase in the total volume of IRLCs. The decrease in the average value of individual IRLCs was primarily driven by PrimeLending managing increased loan origination volumesdue to a level that could be supported by its loan fulfillment operations and addressing anticipated enhanced credit and liquidity risks triggered byan increase in mortgage interest rates throughout the economic impact of the COVID-19 pandemic.three months ended March 31, 2021.
PrimeLending hadheld cash collateral advances totaling $21.1 million and $4.5$58.5 million to offset net liabilityasset derivative positions on its commitments to sell MBSs at June 30, 2020 andMarch 31, 2021. This amount is included in other liabilities within the consolidated balance sheets. PrimeLending had advanced cash collateral totaling $26.1 million to offset net liability positions on its commitments to sell MBSs at December 31, 2019, respectively.2020. In addition, PrimeLending and the Hilltop Broker-Dealers had advanced cash collateral totaling $1.4$4.9 million and $3.7$2.7 million on U.S. Treasury bond futures and options and Eurodollar futuresvarious derivative instruments at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. TheseThe advanced cash collateral amounts are included in other assets within the consolidated balance sheets.
19.20. Balance Sheet Offsetting
Certain financial instruments, including resale and repurchase agreements, securities lending arrangements and derivatives, may be eligible for offset in the consolidated balance sheets and/or subject to master netting arrangements or similar agreements. The following tables present the assets and liabilities subject to enforceable master netting arrangements, repurchase agreements, or similar agreements with offsetting rights (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
| | | | | | | | Gross Amounts Not Offset in | | | | | | | | | | Gross Amounts Not Offset in | | | ||||||||||||||||
| | | | | | Net Amounts | | the Balance Sheet | | | | | | | | Net Amounts | | the Balance Sheet | | | ||||||||||||||||
|
| Gross Amounts |
| Gross Amounts |
| of Assets |
| |
| Cash |
| |
| Gross Amounts |
| Gross Amounts |
| of Assets |
| |
| Cash |
| | ||||||||||||
| | of Recognized | | Offset in the | | Presented in the | | Financial | | Collateral | | Net | | of Recognized | | Offset in the | | Presented in the | | Financial | | Collateral | | Net | ||||||||||||
| | Assets | | Balance Sheet | | Balance Sheet | | Instruments | | Pledged | | Amount | | Assets | | Balance Sheet | | Balance Sheet | | Instruments | | Pledged | | Amount | ||||||||||||
June 30, 2020 | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
March 31, 2021 | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Securities borrowed: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Institutional counterparties | | $ | 1,112,826 | | $ | — | | $ | 1,112,826 | | $ | (1,070,763) | | $ | — | | $ | 42,063 | | $ | 1,545,730 | | $ | — | | $ | 1,545,730 | | $ | (1,539,833) | | $ | — | | $ | 5,897 |
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
Reverse repurchase agreements: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Institutional counterparties | | 161,457 | | — | | 161,457 | | (160,658) | | — | | 799 | | 106,342 | | — | | 106,342 | | (103,439) | | — | | 2,903 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Forward MBS derivatives: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Institutional counterparties | |
| 15,779 | |
| — | |
| 15,779 | |
| (15,779) | |
| — | |
| — | |
| 50,960 | |
| (322) | |
| 50,638 | |
| (7,512) | |
| — | |
| 43,126 |
| | $ | 1,290,062 | | $ | — | | $ | 1,290,062 | | $ | (1,247,200) | | $ | — | | $ | 42,862 | | $ | 1,703,032 | | $ | (322) | | $ | 1,702,710 | | $ | (1,650,784) | | $ | — | | $ | 51,926 |
December 31, 2019 | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
December 31, 2020 | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Securities borrowed: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Institutional counterparties | | $ | 1,634,782 | | $ | — | | $ | 1,634,782 | | $ | (1,586,820) | | $ | — | | $ | 47,962 | | $ | 1,338,855 | | $ | — | | $ | 1,338,855 | | $ | (1,273,955) | | $ | — | | $ | 64,900 |
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
Reverse repurchase agreements: | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
Institutional counterparties | | 59,031 | | — | | 59,031 | | (58,619) | | — | | 412 | | 80,319 | | — | | 80,319 | | (79,925) | | — | | 394 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
Forward MBS derivatives: | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
Institutional counterparties | | | 3,640 | | | — | | | 3,640 | | | (3,640) | | | — | | | — | | | 22,311 | | | — | | | 22,311 | | | (22,311) | | | — | | | 0 |
| | $ | 1,697,453 | | $ | — | | $ | 1,697,453 | | $ | (1,649,079) | | $ | — | | $ | 48,374 | | $ | 1,441,485 | | $ | — | | $ | 1,441,485 | | $ | (1,376,191) | | $ | — | | $ | 65,294 |
4737
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||
| | | | | | | | Gross Amounts Not Offset in | | | | | | | | | | Gross Amounts Not Offset in | | | ||||||||||||||||
| | | | | | Net Amounts | | the Balance Sheet | | | | | | | | Net Amounts | | the Balance Sheet | | | ||||||||||||||||
|
| Gross Amounts |
| Gross Amounts |
| of Liabilities |
| |
| Cash |
| |
| Gross Amounts |
| Gross Amounts |
| of Liabilities |
| |
| Cash |
| | ||||||||||||
| | of Recognized | | Offset in the | | Presented in the | | Financial | | Collateral | | Net | | of Recognized | | Offset in the | | Presented in the | | Financial | | Collateral | | Net | ||||||||||||
| | Liabilities | | Balance Sheet | | Balance Sheet | | Instruments | | Pledged | | Amount | | Liabilities | | Balance Sheet | | Balance Sheet | | Instruments | | Pledged | | Amount | ||||||||||||
June 30, 2020 | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
March 31, 2021 | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Securities loaned: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Institutional counterparties | | $ | 982,070 | | $ | — | | $ | 982,070 | | $ | (948,012) | | $ | — | | $ | 34,058 | | $ | 1,464,186 | | $ | — | | $ | 1,464,186 | | $ | (1,457,134) | | $ | — | | $ | 7,052 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swaps: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Institutional counterparties | |
| 2,147 | |
| — | |
| 2,147 | |
| (1,946) | |
| — | |
| 201 | |
| 829 | |
| (327) | |
| 502 | |
| (440) | |
| — | |
| 62 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Repurchase agreements: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Institutional counterparties | |
| 347,344 | |
| — | |
| 347,344 | |
| (347,344) | |
| — | |
| — | |
| 123,392 | |
| — | |
| 123,392 | |
| (123,392) | |
| — | |
| 0 |
Customer counterparties | |
| 4,806 | |
| — | |
| 4,806 | |
| (4,806) | |
| — | |
| — | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Forward MBS derivatives: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Institutional counterparties | |
| 20,824 | |
| (211) | |
| 20,613 | |
| (928) | |
| — | |
| 19,685 | |
| 20,185 | |
| — | |
| 20,185 | |
| (20,185) | |
| — | |
| 0 |
| | $ | 1,357,191 | | $ | (211) | | $ | 1,356,980 | | $ | (1,303,036) | | $ | — | | $ | 53,944 | | $ | 1,608,592 | | $ | (327) | | $ | 1,608,265 | | $ | (1,601,151) | | $ | — | | $ | 7,114 |
December 31, 2019 | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
December 31, 2020 | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Securities loaned: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Institutional counterparties | | $ | 1,555,964 | | $ | — | | $ | 1,555,964 | | $ | (1,509,933) | | $ | — | | $ | 46,031 | | $ | 1,245,066 | | $ | — | | $ | 1,245,066 | | $ | (1,179,090) | | $ | — | | $ | 65,976 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest rate swaps: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Institutional counterparties | | | 178 | |
| — | |
| 178 | |
| (112) | |
| — | |
| 66 | | | 2,196 | |
| — | |
| 2,196 | |
| (2,123) | |
| — | |
| 73 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Repurchase agreements: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Institutional counterparties | |
| 586,651 | |
| — | |
| 586,651 | |
| (586,651) | |
| — | |
| — | |
| 237,856 | |
| — | |
| 237,856 | |
| (237,856) | |
| — | |
| 0 |
Customer counterparties | | | 25,474 | |
| — | |
| 25,474 | |
| (25,474) | |
| — | |
| — | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Forward MBS derivatives: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Institutional counterparties | |
| 6,890 | |
| (667) | |
| 6,223 | |
| (2,384) | |
| — | |
| 3,839 | |
| 40,741 | |
| (120) | |
| 40,621 | |
| (12,670) | |
| — | |
| 27,951 |
| | $ | 2,175,157 | | $ | (667) | | $ | 2,174,490 | | $ | (2,124,554) | | $ | — | | $ | 49,936 | | $ | 1,525,859 | | $ | (120) | | $ | 1,525,739 | | $ | (1,431,739) | | $ | — | | $ | 94,000 |
Secured Borrowing Arrangements
Secured Borrowings (Repurchase Agreements) — The Company participates in transactions involving securities sold under repurchase agreements, which are secured borrowings and generally mature one to thirtyninety days from the transaction date or involve arrangements with no definite termination date. Securities sold under repurchase agreements are reflected at the amount of cash received in connection with the transactions. The Company may be required to provide additional collateral based on the fair value of the underlying securities, which is monitored on a daily basis.
Securities Lending Activities — The Company’s securities lending activities include lending securities for other broker-dealers, lending institutions and its own clearing and retail operations. These activities involve lending securities to other broker-dealers to cover short sales, to complete transactions in which there has been a failure to deliver securities by the required settlement date and as a conduit for financing activities.
When lending securities, the Company receives cash or similar collateral and generally pays interest (based on the amount of cash deposited) to the other party to the transaction. Securities lending transactions are executed pursuant to written agreements with counterparties that generally require securities loaned to be marked-to-market on a daily basis. The Company receives collateral in the form of cash in an amount generally in excess of the fair value of securities loaned. The Company monitors the fair value of securities loaned on a daily basis, with additional collateral obtained or refunded, as necessary. Collateral adjustments are made on a daily basis through the facilities of various clearinghouses. The Company is a principal in these securities lending transactions and is liable for losses in the event of a failure of any other party to honor its contractual obligation. Management sets credit limits with each counterparty and reviews these limits regularly to monitor the risk level with each counterparty. The Company is subject to credit risk through its securities lending activities if securities prices decline rapidly because the value of the Company’s collateral could fall below the amount of the indebtedness it secures. In rapidly appreciating markets, credit risk increases due to short positions. The Company’s securities lending business subjects the Company to credit risk if a counterparty fails to perform or if collateral securing its obligations is insufficient. In securities transactions, the Company is subject to credit risk during the period between the execution of a trade and the settlement by the customer.
4838
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The following tables present the remaining contractual maturities of repurchase agreement and securities lending transactions accounted for as secured borrowings (in thousands). The Company had 0 repurchase-to-maturity transactions outstanding at both June 30, 2020March 31, 2021 and December 31, 2019.2020.
| | | | | | | | | | | | | | | | | | | | | | | | |||||||
| | Remaining Contractual Maturities | | Remaining Contractual Maturities | ||||||||||||||||||||||||||
| | Overnight and | | | | | | Greater Than | | | | | Overnight and | | | | | | Greater Than | | | | ||||||||
June 30, 2020 | | Continuous | | Up to 30 Days | | 30-90 Days | | 90 Days | | Total | ||||||||||||||||||||
March 31, 2021 | | Continuous | | Up to 30 Days | | 30-90 Days | | 90 Days | | Total | ||||||||||||||||||||
Repurchase agreement transactions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury and agency securities | | $ | 4,806 | | $ | 46,260 | | $ | 46,061 | | $ | — | | $ | 97,127 | |||||||||||||||
Asset-backed securities | | | 159,092 | | 55,057 | | 40,874 | | — | | 255,023 | | $ | 12,523 | | $ | 25,571 | | $ | 85,298 | | $ | — | | $ | 123,392 | ||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securities lending transactions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate securities | | | 113 | | | — | | | — | | | — | | | 113 | | | 5,874 | | | — | | | — | | | — | | | 5,874 |
Equity securities | | | 981,957 | | | — | | | — | | | — | | | 981,957 | | | 1,458,312 | | | — | | | — | | | — | | | 1,458,312 |
Total | | $ | 1,145,968 | | $ | 101,317 | | $ | 86,935 | | $ | — | | $ | 1,334,220 | | $ | 1,476,709 | | $ | 25,571 | | $ | 85,298 | | $ | — | | $ | 1,587,578 |
| | | | | | | | | | | | | | | | | | | | | | | | |||||||
Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above | Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above | | | | $ | 1,334,220 | Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above | | | | $ | 1,587,578 | ||||||||||||||||||
Amount related to agreements not included in offsetting disclosure above | | | | | | | | | | | $ | — | | | | | | | | | | | | $ | — | |||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||
| | Remaining Contractual Maturities | | Remaining Contractual Maturities | ||||||||||||||||||||||||||
| | Overnight and | | | | | | Greater Than | | | | | Overnight and | | | | | | Greater Than | | | | ||||||||
December 31, 2019 | | Continuous | | Up to 30 Days | | 30-90 Days | | 90 Days | | Total | ||||||||||||||||||||
December 31, 2020 | | Continuous | | Up to 30 Days | | 30-90 Days | | 90 Days | | Total | ||||||||||||||||||||
Repurchase agreement transactions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury and agency securities | | $ | 45,950 | | $ | — | | $ | — | | $ | — | | $ | 45,950 | |||||||||||||||
Asset-backed securities | | | 257,396 | | 12,892 | | 295,887 | | — | | 566,175 | | $ | 110,831 | | $ | — | | $ | 127,025 | | $ | — | | $ | 237,856 | ||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securities lending transactions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Corporate securities | | | 120 | | | — | | | — | | | — | | | 120 | | | 113 | | | — | | | — | | | — | | | 113 |
Equity securities | | | 1,555,844 | | | — | | | — | | | — | | | 1,555,844 | | | 1,244,953 | | | — | | | — | | | — | | | 1,244,953 |
Total | | $ | 1,859,310 | | $ | 12,892 | | $ | 295,887 | | $ | — | | $ | 2,168,089 | | $ | 1,355,897 | | $ | — | | $ | 127,025 | | $ | — | | $ | 1,482,922 |
| | | | | | | | | | | | | | | | | | | | | | | | |||||||
Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above | Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above | | | | $ | 2,168,089 | Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above | | | | $ | 1,482,922 | ||||||||||||||||||
Amount related to agreements not included in offsetting disclosure above | | | | | | | | | | | $ | — | | | | | | | | | | | | $ | — |
20.21. Broker-Dealer and Clearing Organization Receivables and Payables
Broker-dealer and clearing organization receivables and payables consisted of the following (in thousands).
| | | | | | | | | | | | | ||
| | June 30, | | December 31, |
| | March 31, | | December 31, |
| ||||
|
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| ||||
Receivables: | | | | | | | | | | | | | | |
Securities borrowed | | $ | 1,112,826 | | $ | 1,634,782 | | | $ | 1,545,730 | | $ | 1,338,855 | |
Securities failed to deliver | |
| 94,348 | |
| 18,726 | | |
| 24,333 | |
| 58,244 | |
Trades in process of settlement | |
| — | |
| 104,922 | | |
| 14,379 | |
| — | |
Other | |
| 15,453 | |
| 21,850 | | |
| 12,375 | |
| 7,628 | |
| | $ | 1,222,627 | | $ | 1,780,280 | | | $ | 1,596,817 | | $ | 1,404,727 | |
Payables: | | | | | | | | | | | | | | |
Securities loaned | | $ | 982,070 | | $ | 1,555,964 | | | $ | 1,464,186 | | $ | 1,245,066 | |
Correspondents | |
| 39,810 | |
| 37,036 | | |
| 42,448 | |
| 33,547 | |
Securities failed to receive | |
| 88,641 | |
| 8,568 | | |
| 28,445 | |
| 61,589 | |
Trades in process of settlement | |
| 40,456 | |
| — | | |
| — | |
| 21,765 | |
Other | |
| 7,651 | |
| 3,950 | | |
| 11,148 | |
| 6,406 | |
| | $ | 1,158,628 | | $ | 1,605,518 | | | $ | 1,546,227 | | $ | 1,368,373 | |
4939
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
21.22. Segment and Related Information
The Company currently has 4Following the sale of NLC on June 30, 2020, we have 2 primary business units within continuing operations, PCC (banking and mortgage origination) and Securities Holdings (broker-dealer). Under GAAP, our continuing operations business units are comprised of 3 reportable business segments that are organized primarily by the core products offered to the segments’ respective customers.customers: banking, broker-dealer and mortgage origination. These segments reflect the manner in which operations are managed and the criteria used by the chief operating decision maker, the Company’s President and Chief Executive Officer, to evaluate segment performance, develop strategy and allocate resources.
The banking segment includes the operations of the Bank. The broker-dealer segment includes the operations of Securities Holdings and the mortgage origination segment is composed of PrimeLending.
As discussed in Note 3 to the consolidated financial statements, during the first quarter of 2020, management had determined that the insurance segment met the criteria to be presented as discontinued operations. On June 30, 2020, Hilltop completed the sale of NLC. Accordingly,NLC, which comprised the operations of the former insurance segment. As a result, insurance segment results and its assets and liabilitiesfor the three months ended March 31, 2020 have been presented as discontinued operations in the consolidated financial statements and instatements. Income from discontinued operations before taxes was $4.0 million during the tables below.three months ended March 31, 2020.
Corporate includes certain activities not allocated to specific business segments. These activities include holding company financing and investing activities, merchant banking investment opportunities and management and administrative services to support the overall operations of the Company.
Balance sheet amounts not discussed previously and the elimination of intercompany transactions are included in “All Other and Eliminations.” The following tables present certain information about continuing operations reportable business segment revenues, operating results, goodwill and assets (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||
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| |
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| Mortgage |
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| |
| All Other and |
| Hilltop |
| | |
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| | | | | |
| | |
| | | |||||||
Three Months Ended June 30, 2020 | | Banking | | Broker-Dealer | | Origination | | Insurance | | Corporate | | Eliminations | | Consolidated |
| |||||||||||||||||||||||||
| | | | | | | Mortgage | | | | | All Other and | | Continuing | ||||||||||||||||||||||||||
Three Months Ended March 31, 2021 | | Banking | | Broker-Dealer | | Origination | | Corporate | | Eliminations | | Operations | ||||||||||||||||||||||||||||
Net interest income (expense) | | $ | 103,884 | | $ | 10,514 | | $ | (7,098) | | $ | (4,692) | | $ | 3,074 | | $ | 105,682 | ||||||||||||||||||||||
Provision for (reversal of) credit losses | |
| (5,175) | | | 66 | | | — | | | — | | | — | |
| (5,109) | ||||||||||||||||||||||
Noninterest income | |
| 11,324 | | | 98,623 | | | 310,444 | | | 506 | | | (3,312) | |
| 417,585 | ||||||||||||||||||||||
Noninterest expense | |
| 55,788 | |
| 91,404 | |
| 210,334 | | | 9,588 | | | (452) | |
| 366,662 | ||||||||||||||||||||||
Income (loss) from continuing operations before taxes | | $ | 64,595 | | $ | 17,667 | | $ | 93,012 | | $ | (13,774) | | $ | 214 | | $ | 161,714 | ||||||||||||||||||||||
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| |
| |
| Mortgage |
| |
| All Other and | | Continuing | ||||||||||||||||||||||||||||
Three Months Ended March 31, 2020 | | Banking | | Broker-Dealer | | Origination | | Corporate | | Eliminations | | Operations | ||||||||||||||||||||||||||||
Net interest income (expense) | | $ | 94,102 | | $ | 9,663 | | $ | (1,667) | | $ | — | | $ | (3,232) | | $ | 5,692 | | $ | 104,558 | | | $ | 93,923 | | $ | 13,173 | | $ | 368 | | $ | (1,656) | | $ | 4,528 | | $ | 110,336 |
Provision for credit losses | |
| 65,600 | | | 426 | | | — | | | — | | | — | | | — | |
| 66,026 | | |
| 34,275 | | | 274 | | | — | | — | | | — | |
| 34,549 | |
Noninterest income | |
| 10,656 | | | 122,961 | | | 340,487 | | | — | | | 550 | | | (6,529) | |
| 468,125 | | |
| 8,771 | | | 86,209 | | | 178,968 | | 2,309 | | | (4,544) | |
| 271,713 | |
Noninterest expense | |
| 56,622 | |
| 104,411 | |
| 200,493 | | | — | | | 8,888 | | | (205) | |
| 370,209 | | |
| 56,967 | |
| 80,939 | |
| 139,552 | | | 4,853 | | | (410) | |
| 281,901 |
Income (loss) from continuing operations before taxes | | | (17,464) | | | 27,787 | | | 138,327 | | | — | | | (11,570) | | | (632) | | | 136,448 | | | $ | 11,452 | | $ | 18,169 | | $ | 39,784 | | $ | (4,200) | | $ | 394 | | $ | 65,599 |
Income (loss) from discontinued operations before taxes | | | — | | | — | | | — | | | (1,911) | | | 32,341 | | | — | | | 30,430 | | ||||||||||||||||||
| | $ | (17,464) | | $ | 27,787 | | $ | 138,327 | | $ | (1,911) | | $ | 20,771 | | $ | (632) | | $ | 166,878 | | ||||||||||||||||||
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| Mortgage |
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|
| |
| All Other and |
| Hilltop | | |||||||||||||||||||||||
Six Months Ended June 30, 2020 | | Banking | | Broker-Dealer | | Origination | | Insurance | | Corporate | | Eliminations | | Consolidated | | |||||||||||||||||||||||||
Net interest income (expense) | | $ | 188,025 | | $ | 22,836 | | $ | (1,299) | | $ | — | | $ | (4,888) | | $ | 10,220 | | $ | 214,894 | | ||||||||||||||||||
Provision for credit losses | |
| 99,875 | | | 700 | | | — | | | — | | | — | | | — | |
| 100,575 | | ||||||||||||||||||
Noninterest income | |
| 19,427 | | | 209,170 | | | 519,455 | | | — | | | 2,838 | | | (11,052) | |
| 739,838 | | ||||||||||||||||||
Noninterest expense | |
| 113,589 | |
| 185,350 | |
| 340,045 | | | — | | | 13,741 | | | (615) | |
| 652,110 | | ||||||||||||||||||
Income (loss) from continuing operations before taxes | | | (6,012) | | | 45,956 | | | 178,111 | | | — | | | (15,791) | | | (217) | | | 202,047 | | ||||||||||||||||||
Income from discontinued operations before taxes | | | — | | | — | | | — | | | 2,103 | | | 32,341 | | | — | | | 34,444 | | ||||||||||||||||||
| | $ | (6,012) | | $ | 45,956 | | $ | 178,111 | | $ | 2,103 | | $ | 16,550 | | $ | (217) | | $ | 236,491 | | ||||||||||||||||||
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| Mortgage |
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| |
| All Other and |
| Hilltop |
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Three Months Ended June 30, 2019 | | Banking | | Broker-Dealer | | Origination | | Insurance | | Corporate | | Eliminations | | Consolidated |
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Net interest income (expense) | | $ | 93,423 | | $ | 11,410 | | $ | (1,031) | | $ | — | | $ | (1,331) | | $ | 4,813 | | $ | 107,284 | | ||||||||||||||||||
Provision for (reversal of) credit losses | |
| (670) | | | (2) | | | — | | | — | | | — | | | — | |
| (672) | | ||||||||||||||||||
Noninterest income | |
| 10,742 | | | 105,559 | | | 164,548 | | | — | | | 648 | | | (4,794) | |
| 276,703 | | ||||||||||||||||||
Noninterest expense | |
| 58,251 | |
| 94,870 | |
| 141,721 | | | — | | | 9,274 | | | (28) | |
| 304,088 | | ||||||||||||||||||
Income (loss) from continuing operations before taxes | | | 46,584 | | | 22,101 | | | 21,796 | | | — | | | (9,957) | | | 47 | | | 80,571 | | ||||||||||||||||||
Loss from discontinued operations before taxes | | | — | | | — | | | — | | | (2,829) | | | — | | | — | | | (2,829) | | ||||||||||||||||||
| | $ | 46,584 | | $ | 22,101 | | $ | 21,796 | | $ | (2,829) | | $ | (9,957) | | $ | 47 | | $ | 77,742 | |
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| | | | | | | | Mortgage |
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| |
| All Other and |
| Continuing | |||
| | Banking | | Broker-Dealer | | Origination | | Corporate | | Eliminations | | Operations | ||||||
March 31, 2021 | | | | | | | | | | | | | | | | | | |
Goodwill | | $ | 247,368 | | $ | 7,008 | | $ | 13,071 | | $ | — | | $ | — | | $ | 267,447 |
| | | | | | | | | | | | | | | | | | |
Total assets | | $ | 13,963,896 | | $ | 3,305,933 | | $ | 3,178,650 | | $ | 2,969,691 | | $ | (5,735,333) | | $ | 17,682,837 |
| | | | | | | | | | | | | | | | | | |
December 31, 2020 | | | | | | | | | | | | | | | | | | |
Goodwill | | $ | 247,368 | | $ | 7,008 | | $ | 13,071 | | $ | — | | $ | — | | $ | 267,447 |
| | | | | | | | | | | | | | | | | | |
Total assets | | $ | 13,338,930 | | $ | 3,196,346 | | $ | 3,285,005 | | $ | 2,823,374 | | $ | (5,699,391) | | $ | 16,944,264 |
5040
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
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| |
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| |
| Mortgage |
| |
|
| |
| All Other and |
| Hilltop |
| |||||
Six Months Ended June 30, 2019 | | Banking | | Broker-Dealer | | Origination | | Insurance | | Corporate | | Eliminations | | Consolidated |
| |||||||
Net interest income (expense) | | $ | 186,113 | | $ | 24,260 | | $ | (1,499) | | $ | — | | $ | (2,661) | | $ | 9,360 | | $ | 215,573 | |
Provision for (reversal of) credit losses | |
| 355 | | | (76) | | | — | | | — | | | — | | | — | |
| 279 | |
Noninterest income | |
| 21,362 | | | 196,865 | | | 282,580 | | | — | | | 1,360 | | | (9,501) | |
| 492,666 | |
Noninterest expense | |
| 118,977 | |
| 182,677 | |
| 256,398 | | | — | | | 24,836 | | | (53) | |
| 582,835 | |
Income (loss) from continuing operations before taxes | | | 88,143 | | | 38,524 | | | 24,683 | | | — | | | (26,137) | | | (88) | | | 125,125 | |
Income from discontinued operations before taxes | | | — | | | — | | | — | | | 3,980 | | | — | | | — | | | 3,980 | |
| | $ | 88,143 | | $ | 38,524 | | $ | 24,683 | | $ | 3,980 | | $ | (26,137) | | $ | (88) | | $ | 129,105 | |
| | | | | | | | | | | | | | | | | | | | | | |
| |
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| |
| Mortgage |
| |
|
| |
| All Other and |
| Hilltop |
| |||||
| | Banking | | Broker-Dealer | | Origination | | Insurance | | Corporate | | Eliminations | | Consolidated |
| |||||||
June 30, 2020 | | | | | | | | | | | | | | | | | | | | | | |
Goodwill | | $ | 247,368 | | $ | 7,008 | | $ | 13,071 | | $ | — | | $ | — | | $ | — | | $ | 267,447 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 13,575,474 | | $ | 2,954,978 | | $ | 2,972,527 | | $ | — | | $ | 2,828,281 | | $ | (5,397,144) | | $ | 16,934,116 | |
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December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | |
Goodwill | | $ | 247,368 | | $ | 7,008 | | $ | 13,071 | | $ | — | | $ | — | | $ | — | | $ | 267,447 | |
| | | | | | | | | | | | | | | | | | | | | | |
Assets of discontinued operations | | $ | — | | $ | — | | $ | — | | $ | 248,429 | | $ | — | | $ | — | | $ | 248,429 | |
Total assets | | $ | 11,147,344 | | $ | 3,457,068 | | $ | 2,357,415 | | $ | 248,429 | | $ | 2,393,604 | | $ | (4,431,412) | | $ | 15,172,448 | |
22.23. Earnings per Common Share
Net earnings, less any preferred dividends accumulated for the period (whether or not declared), is allocated between the common stock and participating securities pursuant to the two-class method, if applicable. Basic earnings per common share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding during the period, excluding participating nonvested restricted shares. The Company calculated basic earnings per common share using the treasury method instead of the two-class method since there were 0 instruments which qualified as participating securities during the three or six months ended June 30, 2020 or 2019.
Diluted earnings per common share is computed in a similar manner, except that first the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares, excluding the participating securities, were issued using the treasury stock method. During the three and six months ended June 30, 2020 and 2019, RSUs were the only potentially dilutive non-participating instruments issued by Hilltop. Next, the Company determines and includes in the diluted earnings per common share calculation the more dilutive effect of the participating securities using the treasury stock method or the two-class method. Undistributed losses are not allocated to the nonvested share-based payment awards (the participating securities) under the two-class method as the holders are not contractually obligated to share in the losses of the Company.
51
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The following table presents the computation of basic and diluted earnings per common share (in thousands, except per share data).
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | Three Months Ended March 31, | ||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
|
| 2021 |
| 2020 | ||||||
Basic earnings per share: | | | | | | | | | | | | | | | | | | | |
Income from continuing operations | | | 97,701 | | $ | 60,065 | | $ | 144,186 | | $ | 93,491 | | | $ | 120,345 | | $ | 46,485 |
Income from discontinued operations | | | 30,775 | | | (2,254) | | | 33,926 | | | 3,106 | | | | — | | | 3,151 |
Income attributable to Hilltop | | $ | 128,476 | | $ | 57,811 | | $ | 178,112 | | $ | 96,597 | | | $ | 120,345 | | $ | 49,636 |
| | | | | | | | | | | | | | | | | | | |
Weighted average shares outstanding - basic | |
| 90,164 | |
| 93,399 | |
| 90,337 | |
| 93,533 | | |
| 82,169 | |
| 90,509 |
| | | | | | | | | | | | | | | | | | | |
Basic earnings per common share: | | | | | | | | | | | | | | | | | | | |
Income from continuing operations | | $ | 1.08 | | $ | 0.64 | | $ | 1.60 | | $ | 1.00 | | | $ | 1.46 | | $ | 0.51 |
Income from discontinued operations | | | 0.34 | | | (0.02) | | | 0.37 | | | 0.03 | | | | — | | | 0.04 |
| | $ | 1.42 | | $ | 0.62 | | $ | 1.97 | | $ | 1.03 | | | $ | 1.46 | | $ | 0.55 |
| | | | | | | | | | | | | | | | | | | |
Diluted earnings per share: | | | | | | | | | | | | | | | | | | | |
Income from continuing operations | | $ | 97,701 | | $ | 60,065 | | $ | 144,186 | | $ | 93,491 | | | $ | 120,345 | | $ | 46,485 |
Income from discontinued operations | | | 30,775 | | | (2,254) | | | 33,926 | | | 3,106 | | | | — | | | 3,151 |
Income attributable to Hilltop | | $ | 128,476 | | $ | 57,811 | | $ | 178,112 | | $ | 96,597 | | | $ | 120,345 | | $ | 49,636 |
| | | | | | | | | | | | | | | | | | | |
Weighted average shares outstanding - basic | |
| 90,164 | |
| 93,399 | |
| 90,337 | |
| 93,533 | | |
| 82,169 | |
| 90,509 |
Effect of potentially dilutive securities | |
| — | | | 19 | |
| — | |
| 1 | | |
| 488 | | | 41 |
Weighted average shares outstanding - diluted | |
| 90,164 | |
| 93,418 | |
| 90,337 | |
| 93,534 | | |
| 82,657 | |
| 90,550 |
| | | | | | | | | | | | | | | | | | | |
Diluted earnings per common share: | | | | | | | | | | | | | | | | | | | |
Income from continuing operations | | $ | 1.08 | | $ | 0.64 | | $ | 1.60 | | $ | 1.00 | | | $ | 1.46 | | $ | 0.51 |
Income from discontinued operations | | | 0.34 | | | (0.02) | | | 0.37 | | | 0.03 | | | | — | | | 0.04 |
| | $ | 1.42 | | $ | 0.62 | | $ | 1.97 | | $ | 1.03 | | | $ | 1.46 | | $ | 0.55 |
5241
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the consolidated historical financial statements and notes appearing elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”) and the financial information set forth in the tables herein.
Unless the context otherwise indicates, all references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, to the “Company,” “we,” “us,” “our” or “ours” or similar words are to Hilltop Holdings Inc. and its direct and indirect wholly owned subsidiaries, references to “Hilltop” refer solely to Hilltop Holdings Inc., references to “PCC” refer to PlainsCapital Corporation (a wholly owned subsidiary of Hilltop), references to “Securities Holdings” refer to Hilltop Securities Holdings LLC (a wholly owned subsidiary of Hilltop), references to “Hilltop Securities” refer to Hilltop Securities Inc. (a wholly owned subsidiary of Securities Holdings), references to “HTS“Momentum Independent Network” refer to Hilltop SecuritiesMomentum Independent Network Inc. (a wholly owned subsidiary of Securities Holdings), Hilltop Securities and HTSMomentum Independent Network are collectively referred to as the “Hilltop Broker-Dealers”, references to the “Bank” refer to PlainsCapital Bank (a wholly owned subsidiary of PCC), references to “FNB” refer to First National Bank, references to “SWS” refer to the former SWS Group, Inc., references to “PrimeLending” refer to PrimeLending, a PlainsCapital Company (a wholly owned subsidiary of the Bank) and its subsidiaries as a whole, references to “NLC” refer to National Lloyds Corporation (formerly a wholly owned subsidiary of Hilltop) and its subsidiaries as a whole, references to “NLIC” refer to National Lloyds Insurance Company (a wholly owned subsidiary of NLC) and references to “ASIC” refer to American Summit Insurance Company (a wholly owned subsidiary of NLC).subsidiaries.
FORWARD-LOOKING STATEMENTS
This Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended by the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, included in this Quarterly Report that address results or developments that we expect or anticipate will or may occur in the future, and statements that are preceded by, followed by or include, words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “goal,” “intends,” “may,” “might,” “plan,” “probable,” “projects,” “seeks,” “should,” “target,” “view” or “would” or the negative of these words and phrases or similar words or phrases, including such things as our business strategy, our financial condition, our revenue, our liquidity and sources of funding, market trends, operations and business, taxes, the impact of natural disasters or public health emergencies, such as the current global outbreak of a novel strain of coronavirus (“COVID-19”) that the World Health Organization (“WHO”) declared a global pandemic in March 2020,, information technology expenses, capital levels, mortgage servicing rights (“MSR”) assets, stock repurchases, dividend payments, use of proceeds from offerings, expectations concerning mortgage loan origination volume, servicer advances and interest rate compression, expected levels of refinancing as a percentage of total loan origination volume, projected losses on mortgage loans originated, total expenses, the effects of government regulation applicable to our operations, the appropriateness of, and changes in, our allowance for credit losses and provision for (reversal of) credit losses, including as a result of the “current expected credit losses” (CECL) model, expected future benchmark rates, anticipated investment yields, our expectations regarding accretion of discount on loans in future periods, the collectability of loans, cybersecurity incidents and the outcome of litigation are forward-looking statements.
These forward-looking statements are based on our beliefs, assumptions and expectations of our future performance taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If an event occurs, our business, business plan, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Certain factors that could cause actual results to differ include, among others:
● |
the COVID-19 pandemic and the response of governmental authorities to the pandemic, which have caused and are causing significant harm to the global economy and our business; |
53
● | the credit risks of lending activities, including our ability to estimate credit losses and |
● | effectiveness of our data security controls in the face of cyber attacks; |
● | changes in general economic, market and business conditions in areas or markets where we compete, including changes in the |
42
● | risks associated with concentration in real estate related loans; |
● |
● | the effects of our indebtedness on our ability to manage our business successfully, including the restrictions imposed by the indenture governing our indebtedness; |
● | changes in state and federal laws, regulations or policies affecting one or more of our business segments, including changes in regulatory fees, deposit insurance premiums, capital requirements and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”); |
● | cost and availability of capital; |
● | changes in key management; |
● | competition in our banking, broker-dealer and mortgage origination segments from other banks and financial institutions as well as investment banking and financial advisory firms, mortgage bankers, asset-based non-bank lenders and government agencies; |
● | legal and regulatory proceedings; |
● | risks associated with merger and acquisition integration; and |
● | our ability to use excess capital in an effective manner. |
For a more detailed discussion of these and other factors that may affect our business and that could cause the actual results to differ materially from those anticipated in these forward-looking statements, see “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 20192020 (“20192020 Form 10-K”), which was filed with the Securities and Exchange Commission (the “SEC”) on February 27, 2020,16, 2021, this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Part II, Item 1A, “Risk Factors” herein and other filings we have made with the SEC. We caution that the foregoing list of factors is not exhaustive, and new factors may emerge, or changes to the foregoing factors may occur, that could impact our business. All subsequent written and oral forward-looking statements concerning our business attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements above. We do not undertake any obligation to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Quarterly Report except to the extent required by federal securities laws.
5443
OVERVIEW
We are a financial holding company registered under the Bank Holding Company Act of 1956. Our primary line of business is to provide business and consumer banking services from offices located throughout Texas through the Bank. We also provide an array of financial products and services through our broker-dealer and mortgage origination segments. The following includes additional details regarding the financial products and services provided by each of our primary business units.
PCC. PCC is a financial holding company that provides, through its subsidiaries, traditional banking and wealth, investment and treasury management services primarily in Texas and residential mortgage loans throughout the United States.
Securities Holdings. Securities Holdings is a holding company that provides, through its subsidiaries, investment banking and other related financial services, including municipal advisory, sales, trading and underwriting of taxable and tax-exempt fixed income securities, clearing, securities lending, structured finance and retail brokerage services throughout the United States.
During the first quarter of 2020, management determined that the then-pending sale of NLC met the criteria to be presented as discontinued operations. As a result, NLC’s results for the three months ended March 31, 2020 have been presented as discontinued operations in the consolidated financial statements. On June 30, 2020, we completed the sale of all of the outstanding capital stock of NLC, which comprisescomprised the operations of our former insurance segment, for cash proceeds of $154.1 million. During 2020, Hilltop recognized aan aggregate gain associated with this transaction of $32.3$36.8 million, net of $5.1 million in transaction costs and was subject to post-closing adjustments. The resulting book gain from this sale transaction was not recognized for tax purposes due to the excess tax basis over book basis being greater than the recorded book gain. Any tax loss related to this transaction is deemed disallowed pursuant to the rules under the Internal Revenue Code. We also entered into an agreement at closing to refrain for a specified period from certain activities that compete with the business of NLC. Accordingly, NLC’s results and its assets and liabilities have been presented as discontinued operations in the consolidated financial statements. Unless otherwise noted, for purposes of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, “consolidated” refers to our consolidated financial position and consolidated results of operations, including discontinued operations and assets and liabilities of the discontinued operations.
During the three and six months ended June 30, 2020, our income from continuing operations to common stockholders was $97.7 million, or $1.08 per diluted share, and $144.2 million, or $1.60 per diluted share, respectively. After income from discontinued operations, net of income taxes, of $30.8 million, or $0.34 per diluted share, and $33.9 million, or $0.37 per diluted share,March 31, 2021, income applicable to common stockholders for the three and six months ended June 30, 2020 was $128.5$120.3 million, or $1.42$1.46 per diluted share, and $178.1 million, or $1.97 per diluted share, respectively.share. We declared total common dividends of $0.09 and $0.18$0.12 per share during the three and six months ended June 30, 2020, respectively,March 31, 2021, resulting in a dividend payout ratio of 6.32% and 9.12%, respectively.8.19%. Dividend payout ratio is defined as cash dividends declared per common share divided by basic earnings per common share, including discontinued operations. We also paid an aggregate of $15.2$5.0 million to repurchase shares of our common stock during the sixthree months ended June 30, 2020.March 31, 2021.
We reported $136.4 million and $202.0$161.7 million of income from continuing operations before income taxes during the three and six months ended June 30, 2020,March 31, 2021, including the following contributions from our reportable business segments.
● | The banking segment |
● | The broker-dealer segment contributed |
● | The mortgage origination segment contributed |
Our insurance segment, the results of which have been presented within discontinued operations in the consolidated financial statements, incurred a loss before income taxes of $1.9 million during the three months ended June 30, 2020 and contributed $2.1 million of income before income taxes during the six months ended June 30, 2020.
At June 30, 2020,March 31, 2021, on a consolidated basis, we had total assets of $16.9$17.7 billion, total deposits of $11.6$11.7 billion, total loans, including loans held for sale, of $10.3$10.2 billion and stockholders’ equity of $2.3$2.4 billion.
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Recent Developments
COVID-19
The COVID-19 has spread globally, including to every state in the United States,pandemic and has resulted in the WHO declaring COVID-19 to be a global pandemic. On March 13, 2020, the United States declared a national emergency with respect to COVID-19. The U.S. federal government issued social distancing guidelines as a measure to reduce the escalation of the spread of COVID-19 in the United States. A majority of states and certain U.S. territories, including the District of Columbia, issued orders requiring the closure of non-essential businesses and/or requiring residents to stay at home. The effects of COVID-19 and therelated governmental and societal response to the virus have negatively impactedcontrol measures severely disrupted financial markets and overall economic conditions on an unprecedented scale, resultingthroughout 2020. While the impact of the pandemic and the uncertainties have remained into 2021, there have been varying degrees of easing of restrictive measures in the shutteringUnited States and an increasing reopening of businesses, acrossin addition to millions of Americans receiving the countryCOVID-19 vaccine. Further, the U.S. federal government continued to enact policies to provide fiscal stimulus to the economy and significant job loss. Many of these businesses have begunrelief to reopen but may be operating at limited capacity. We are following guidelines establishedthose affected by the Centers for Disease Controlpandemic, with the most recent stimulus expected to bolster household finances as well as those of small businesses, states and WHO and orders issued bymunicipalities. Throughout the state and local governments wherepandemic, we operate. We have taken a number of precautionary steps to safeguard our business and our employees from COVID-19, including, but not limited to, banking by appointment, implementing employee travel restrictions and telecommuting arrangements, while maintaining business continuity so that we can continue to deliver service to and meet the demands of our clients. Since March 23, 2020,the start of the pandemic, most of our employees have been working remotely, with only certain operationally critical employees working on site at our principal business headquarters and business segment locations. We expect to begin the process of returning a majority of our employees to their respective office locations beginning in the second quarter of 2021 based initially on a rotational team schedule to better ensure that appropriate social distancing measures are monitoringfollowed. We will continue to monitor and assessingassess the impact of the COVID-19 pandemic on a dailyregular basis to ensure that we continue to adhere to guidelines and orders issued by federal, state and local governments.
In March and April 2020, President Trump signed into law two relief bills, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and the Paycheck Protection Program and Health Care Enhancement Act (the “PPP/HCE Act”), which are intended to provide emergency relief to several groups and individuals impacted by the COVID-19 pandemic. Among the numerous provisions contained in the CARES Act is the creation of a $349 billion Paycheck Protection Program (“PPP”) that provides federal government loan forgiveness for Small Business Administration (“SBA”) Section 7(a) loans for small businesses, which may include our customers, to pay up to eight weeks of employee compensation and other basic expenses such as electric and telephone bills. The PPP/HCE Act included an additional $310 billion for PPP funding. The CARES Act also provides for relief related to the adoption of certain accounting principles as well as tax provisions that may support the improvement of working capital levels. We will continue to evaluate the provisions of the CARES Act and the PPP/HCE Act and their impact on Hilltop and our employees as well as our customers and clients.
In light of the extreme volatility and disruptions in the capital and credit markets in March 2020 resulting from the COVID-19 crisis and its negative impact on the economy, including a significant decline in corporate debt and equity issuances and a deterioration in the mortgage servicing and commercial paper markets, we took a number of precautionary actions beginning in March 2020 to enhance our financial flexibility by bolstering our cash position to ensure that we havemaintained adequate cash readily available to meet both expected and unexpected funding needs without adversely affecting our daily operations. Additionally, as previously announced on April 30, 2020, in light of the uncertain outlook for 2020 due to the COVID-19 pandemic, and Hilltop’s commitment to maintain strong capital and liquidity to meet the needs of its customers and communities during this exceptional period of economic uncertainty, Hilltop’s board of directors suspended its stock repurchase program. Hilltop’s board of directors has the ability to reinstate the stock repurchase program at its discretion as circumstances warrant.
The Federal Open Market Committee (“FOMC”) reduced the target range for short-term rates by 150 basis points to a range of 0.00%0% to 0.25% during March 2020 to support the economy and potentially reduce the impacts from the COVID-19 pandemic. As a result of these rate adjustments and the stressed economic outlook, mortgage rates fell to historically low levels. Given our exposure to the mortgage market, this precipitous decline in rates resulted in significant growth in mortgage originations at both PrimeLending and Hilltop Securities through its partnerships with certain housing finance authorities. To improve our already strong liquidity position, we raised brokered and other wholesale funding to support the enhanced mortgage activity. To meet increased liquidity demands, we raised brokered deposits during 2020 that totaled $1.4 billionhave a remaining balance of approximately $639 million at June 30,March 31, 2021, down from approximately $731 million at December 31, 2020. Further, beginning in March 2020, an additional $200 million of deposits waswere swept from Hilltop Securities into the Bank. Since June 30, 2020, given the continued strong cash and liquidity levels at the Bank, the total funds swept from Hilltop Securities into the Bank bringing the total funds swept from Hilltop Securities to approximately $1.5 billion until June 2020 when the total funds swept was reduced, back to $1.3 billion.and was approximately $700 million as of March 31, 2021.
Further, during March 2020, we substantially reduced the trading portfolio inventory limits at Hilltop Securities in an effort to protect capital, minimize losses and ensure target liquidity levels throughout the crisis. During March 2020, the
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capital markets experienced significant friction and in certain portions of the market, liquidity was not prevalent. In particular for us, the market for municipal securities, collateralized mortgage obligations, mortgage derivatives and Government National Mortgage Association (“GNMA”) mortgage pools experienced significant liquidity stress at points during the month. The Federal Reserve, in partnership with the Treasury of the United States, stepped in to provide additional liquidity in each of these critical markets. We will continue to evaluate market conditions andto determine the appropriateness of capital market inventory limits.
Asset Valuation
At each reporting date between annual impairment tests, the Company considerswe consider potential indicators of impairment. Given the current economic uncertainty and volatility surrounding COVID-19, the Company assessedwe considered whether the events and circumstances resulted in it being more likely than not that the fair value of any reporting unit and other intangible assets were less than their respective carrying value. Impairment indicators considered comprised the condition of the economy and bankingfinancial services industry; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of the Company’sour stock and other relevant events. Specifically, our banking segment has experienced lower-than-forecasted operating results during the first six months
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Given the potential impacts as a result of COVID-19, actual results may differ materially from our current estimates as the scope of COVID-19 evolves or if the duration of business disruptions is longer than currently anticipated. The Company further considered the amount by which fair value exceeded book value in the most recent quantitative analysis and sensitivities performed. At the conclusion of the assessment, the Company determined that as of June 30, 2020 it was more likely than not that the fair value of goodwill and other intangible assets exceeded their respective carrying values.
While certain valuation assumptions and judgments will change to account for pandemic-related circumstances, we do not anticipate significant changes in methodology used to determine the fair value of our goodwill, intangible assets and other long-lived assets. We will continue to monitor developments regarding the COVID-19 pandemic and measures implemented in response to the pandemic, market capitalization, overall economic conditions and any other triggering events or circumstances that may indicate an impairment in the future.
In addition,To the COVID-19 crisis could causeextent a further and sustained decline in our stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform impairment tests on our goodwill and other intangible assets, and result in an impairment charge being recorded for that period. In the event that we conclude that all or a portion of our goodwill and other intangible assets are impaired, a non-cash charge for the respective amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.
Loan Portfolio
In response to the COVID-19 pandemic, startingthe Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and the Paycheck Protection Program and Health Care Enhancement Act (the “PPP/HCE Act”) were passed in March 2020, which were intended to provide emergency relief to several groups and individuals impacted by the COVID-19 pandemic. Among the numerous provisions contained in the CARES Act was the creation of a $349 billion Paycheck Protection Program (“PPP”) that provides federal government loan forgiveness for Small Business Administration (“SBA”) Section 7(a) loans for small businesses, which may include our customers, to pay up to eight weeks of employee compensation and other basic expenses such as electric and telephone bills. Further, the CARES Act allows the Bank to suspend the troubled debt restructuring (“TDR”) requirements for certain loan modifications to be categorized as a TDR.
Starting in March 2020, the Bank implemented several actions to better support our impacted banking clients. Such programs includeclients and allow for loan modifications such as principal and/or interest payment deferrals, participation in the PPP as an SBA preferred lender and personal banking assistance including waived fees, increased daily spending limits and suspension of residential foreclosure activities. The COVID-19 payment deferment programs allow for a deferral of principal and/or interest payments with such deferred principal payments due and payable on the maturity date of the existing loan. TheseThe Bank’s actions during 2020 included approval of approximately $1.0 billion in COVID-19 payment deferrals are not categorizedrelated loan modifications as a TDR asof December 31, 2020.
During the CARES Act allowsfirst quarter of 2021, the Bank continued to suspendsupport its impacted banking clients through the TDR requirements for certainapproval of COVID-19 related loan modifications.modifications, which resulted in an additional $8 million of new COVID-19 related loan modifications since December 31, 2020. The portfolio of active deferrals that have not reached the end of their deferral period was approximately $130 million as of March 31, 2021. While the majority of the portfolio of COVID-19 related loan modifications no longer require deferral, such loans represent elevated risk, and therefore management continues to monitor these loans. The extent to which these measures will impact the Bank is uncertain, and any progression of loans, whether receiving COVID-19 payment deferrals or not, into non-performing assets, during future periods is uncertain and will depend on future developments that cannot be predicted.
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As noted above, the Bank’s actions during the second quarter of 2020 included supporting our impacted banking clients through loan modifications. While all industries have experienced or willcould experience adverse impacts due to the COVID-19 pandemic, certain of our loan portfolio industry sectors and subsectors, including real estate collateralized by office buildings, have an increased level of risk. The following table provides additional approved modification information on those loans held for investment balances, by portfolio industry sector, including collectively evaluated allowance for credit losses, that have been severely impacted byinclude active COVID-19 payment deferrals (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||
| | | | | | | | | | | | | | | Allowance for | | | Allowance for | | | | | | | | | | | | | | | | Allowance for | | | Allowance for | | ||||||||||
| | | | | Approved | | | | | | | | | | | | Credit Losses | | | Credit Losses | | | | | | Active | | | | | | | | | | | | Credit Losses | | | Credit Losses | | ||||||
| | Approved | | 90 Day | | | | | | Classified | | Allowance | | as a % of | | | as a % of | | | Active | | 90 Day | | | | | | Classified | | Allowance | | as a % of | | | as a % of | | ||||||||||||
| | 90 Day | | Interest and | | Total | | and | | for | | Total | | | Classified | | | 90 Day | | Interest and | | Total | | and | | for | | Total | | | Classified | | ||||||||||||||||
|
| Principal | | Principal | | Approved Modifications | | Criticized | | Credit | | Approved | | | and Criticized | |
| Principal | | Principal | | Active Modifications | | Criticized | | Credit | | Active | | | and Criticized | | ||||||||||||||||
June 30, 2020 | | Deferrals | | Deferrals | | ($) | | (#) | | Loans | | Losses | | Modifications | | | Loans | | ||||||||||||||||||||||||||||||
March 31, 2021 | | Deferrals | | Deferrals | | ($) | | (#) | | Loans | | Losses | | Modifications | | | Loans | | ||||||||||||||||||||||||||||||
Hotel | | $ | 81,052 | | $ | 121,078 | | $ | 202,130 | | 39 | | $ | 37,353 | | $ | 20,802 | | 10.3 | % | | 55.7 | % | | $ | 107,471 | | $ | — | | $ | 107,471 | | 14 | | $ | 87,271 | | $ | 15,599 | | 14.5 | % | | 17.9 | % | ||
Restaurants | | | — | | — | | — | | — | | — | | — | | — | | | — | | |||||||||||||||||||||||||||||
Transportation & Warehousing | | | 7,683 | | — | | 7,683 | | 11 | | 7,683 | | 1,301 | | 16.9 | % | | 16.9 | % | |||||||||||||||||||||||||||||
1-4 Family Residential | | | — | | 9,493 | | 9,493 | | 94 | | 6,718 | | 60 | | 0.6 | % | | 0.9 | % | |||||||||||||||||||||||||||||
Retail | | | 149,648 | | 44,482 | | 194,130 | | 95 | | 12,280 | | 13,485 | | 6.9 | % | | 109.8 | % | | | — | | — | | — | | — | | — | | — | | — | | | — | | ||||||||||
Restaurants | | | 53,314 | | 83,004 | | 136,318 | | 105 | | 1,036 | | 6,332 | | 4.6 | % | | 611.2 | % | |||||||||||||||||||||||||||||
Real Estate & Rental & Leasing | | | 89,903 | | 22,720 | | 112,623 | | 93 | | 11,518 | | 7,053 | | 6.3 | % | | 61.2 | % | | | — | | 888 | | 888 | | 1 | | 888 | | 63 | | 7.1 | % | | 7.1 | % | ||||||||||
Health Care & Social Assistance | | | 59,513 | | 3,029 | | 62,542 | | 99 | | 3,293 | | 3,623 | | 5.8 | % | | 110.0 | % | |||||||||||||||||||||||||||||
1-4 Family Residential | | | 18,453 | | 30,765 | | 49,218 | | 318 | | 7,128 | | 2,733 | | 5.6 | % | | 38.3 | % | |||||||||||||||||||||||||||||
Transportation & Warehousing | | | 15,695 | | 20,481 | | 36,176 | | 100 | | 5,762 | | 2,896 | | 8.0 | % | | 50.3 | % | |||||||||||||||||||||||||||||
Healthcare and Social Assistance | | | 729 | | 1,604 | | 2,333 | | 2 | | 2,333 | | 303 | | 13.0 | % | | 13.0 | % | |||||||||||||||||||||||||||||
All Other | | | 151,492 | | | 23,476 | | | 174,968 | | 265 | | | 19,707 | | | 11,618 | | 6.6 | % | | 59.0 | % | | | 2,420 | | | — | | | 2,420 | | 2 | | | 2,420 | | | 104 | | 4.3 | % | | 4.3 | % | ||
| | $ | 619,070 | | $ | 349,035 | | $ | 968,105 | | 1,114 | | $ | 98,077 | | $ | 68,542 | | 7.1 | % | | 69.9 | % | | $ | 118,303 | | $ | 11,985 | | $ | 130,288 | | 124 | | $ | 107,313 | | $ | 17,430 | | 13.4 | % | | 16.2 | % |
In addition, the Bank’s loan portfolio includes collateralized loans extended to businesses that depend on the energy industry, including those within the exploration and production, field services, pipeline construction and transportation sectors. The sharp declineHistorical volatility in crude oil prices coupled with the economic uncertainties associated with COVID-19 havehas resulted in an increased pressures on this portfolio.level of risk related to the energy industry. The following table summarizes energy loan portfolio exposures by sector (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
| | Loans Held for Investment Balances | | | Loans Held for Investment Balances | | ||||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | Allowance For Credit Losses as | | | | | | | | | | | | | Allowance For Credit Losses as | | ||||||||||||||||||
| | Total | | | | | | | | Classified | | Allowance | | a Percentage of | | | Total | | | | | | | | Classified | | Allowance | | a Percentage of | | ||||||||||||||
| | Loans Held | | Unfunded | | Total | | and Criticized | | For Credit | | Total Loans Held | | Classified and | | | Loans Held | | Unfunded | | Total | | and Criticized | | For Credit | | Total Loans Held | | Classified and | | ||||||||||||||
June 30, 2020 | | For Investment | | Commitments | | Commitments | | Loans | | Losses | | For Investment | | Criticized Loans | | |||||||||||||||||||||||||||||
March 31, 2021 | | For Investment | | Commitments | | Commitments | | Loans | | Losses | | For Investment | | Criticized Loans | | |||||||||||||||||||||||||||||
Exploration / Production | | $ | 9,106 | | $ | 9,759 | | $ | 18,865 | | $ | — | | $ | 2,130 | | | 23.4 | % | | — | % | | $ | 9,042 | | $ | 7,549 | | $ | 16,591 | | $ | — | | $ | 1,551 | | | 17.2 | % | | — | |
Midstream | | | 21,876 | | | 2,500 | | | 24,376 | | | 13,778 | | | 5,334 | | | 24.4 | % | | 38.7 | % | | | 11,611 | | | 2,500 | | | 14,111 | | | 3,773 | | | 11 | | | 0.1 | % | | 0.3 | % |
Services | |
| 56,173 | |
| 21,214 | |
| 77,387 | |
| 8,869 | |
| 1,464 | | | 2.6 | % | | 16.5 | % | |
| 26,828 | |
| 8,225 | |
| 35,053 | |
| 6,840 | |
| 1,129 | | | 4.2 | % | | 16.5 | % |
Other | | | 16,410 | | | 25,693 | | | 42,103 | | | — | | | 41 | | | 0.2 | % | | — | % | | | 28,445 | | | 24,804 | | | 53,249 | | | 3,801 | | | 109 | | | 0.4 | % | | 2.9 | % |
| | $ | 103,565 | | $ | 59,166 | | $ | 162,731 | | $ | 22,647 | | $ | 8,969 | | | 8.7 | % | | 39.6 | % | | $ | 75,926 | | $ | 43,078 | | $ | 119,004 | | $ | 14,414 | | $ | 2,800 | | | 3.7 | % | | 19.4 | % |
As noted above, the Bank’s actions during the second quarter of 2020 also included supporting our impacted banking clients through the initial PPP effort. These efforts included approval and funding of over 2,800 PPP loans ranging from approximately $1 thousand to $8.4 million, with approximately $314 million remaining outstanding at March 31, 2021. The PPP loans made by the Bank are guaranteed by the SBA and, if used by the borrower for authorized purposes, may be fully forgiven. On October 2, 2020, the SBA began approving the Bank’s PPP forgiveness applications and remitting forgiveness payments to PPP lenders for PPP borrowers. Through April 16, 2021, the SBA had approved approximately 2,270 initial round PPP forgiveness applications totaling approximately $672$420 million, with PPP loans of approximately $185 million pending SBA review and approval.
In addition, given updates from the SBA regarding the second round of the PPP effort, the Bank has been accepting new applications from impacted banking clients since January 2021. While the majority of these applications are second draw loans, the Bank has received some first draw loan requests. These efforts have included approval and funding of over 1,160 second round PPP loans ranging from approximately $1 thousand to $2.4 million, with approximately $178 million and $199 million outstanding at June 30, 2020.March 31, 2021 and April 16, 2021, respectively, with an additional approximately $28 million under review.
Refer to the discussion in the “Financial Condition – Allowance for Credit Losses on Loans” section that follows for more details regarding the significant assumptions and estimates involved in estimating credit losses given the economic uncertainties associated with COVID-19.
Outlook for 20202021
The spread of COVID-19 pandemic has had,negatively impacted financial markets and overall economic conditions, and is expected to continue to have adverse effectsimplications on our business and operations. The broader adverse implications of COVID-19 on the operations and overall financial performance of our clients is uncertain due to the currently unknowable duration and severity of the COVID-19 pandemic. The extent of the impact of COVID-19 on our operational and financial performance for the remainder of 20202021 is likewise currently uncertain and will dependdependent on certain developments, including, among others, the ongoing distribution and effectiveness of vaccines, government stimulus, the ultimate impact of COVID-19 on our
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customers and clients, potential further disruption and deterioration in the global economy and the financial services industry, including the mortgage servicing and commercial paper markets, and additional, or extended, federal, state and local government orders and regulations that might be imposed in response to the pandemic, all of which are uncertain.
See “Item 1A. Risk Factors” of our 2020 Form 10-K for additional discussion of the potential adverse impact of COVID-19 on our business, results of operations and financial condition.
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As a financial institution providing products and services through our banking, broker-dealer and mortgage origination segments, we are directly affected by general economic and market conditions, many of which are beyond our control and unpredictable. A key factor impacting our results of operations includes changes in the level of interest rates in addition to twists in the shape of the yield curve with the magnitude and direction of the impact varying across the different lines of business. Other factors impacting our results of operations include, but are not limited to, fluctuations in volume and price levels of securities, inflation, political events, investor confidence, investor participation levels, legal, regulatory, and compliance requirements and competition. All of these factors have the potential to impact our financial position, operating results and liquidity. In addition, the recent economic and political environment has led to legislative and regulatory initiatives, both enacted and proposed, that could substantially change the regulation of the financial services industry and may significantly impact us.
Factors Affecting Comparability of Results of Operations
NLC Sale
As previously discussed, on June 30, 2020, we completed the sale of all of the outstanding capital stock of NLC, which comprisescomprised the operations of our insurance segment. Accordingly, NLC’s results and its assets and liabilitiesfor the three months ended March 31, 2020 have been presented as discontinued operations in the consolidated financial statements.
Tender Offer
On September 23, 2020, we announced the commencement of a modified “Dutch auction” tender offer to purchase shares of our common stock for an aggregate cash purchase price of up to $350 million. On November 17, 2020, we completed our tender offer, repurchasing 8,058,947 shares of outstanding common stock at a price of $24.00 per share for a total of $193.4 million excluding fees and expenses. We funded the tender offer with cash on hand.
Subordinated Notes due 2030 and 2035
On May 7, 2020, we completed a public offering of $50 million aggregate principal amount of 5.75% fixed-to-floating rate subordinated notes due May 15, 2030 (the “2030 Subordinated Notes”) and $150 million aggregate principal amount of 6.125% fixed-to-floating rate subordinated notes due May 15, 2035 (the “2035 Subordinated Notes”). We collectively refer to the 2030 Subordinated Notes”) (collectively, and the 2035 Subordinated Notes as the “Subordinated Notes”). The price for the Subordinated Notes was 100% of the principal amount of the Subordinated Notes. The net proceeds from the offering, after deducting underwriting discounts and fees and expenses of $3.4 million, were $196.6 million. We intend to use the net proceeds of the offerings for general corporate purposes.
The 2030 Subordinated Notes and the 2035 Subordinated Notes will mature on May 15, 2030 and May 15, 2035, respectively. We may redeem the Subordinated Notes, in whole or in part, from time to time, subject to obtaining Federal Reserve approval, beginning with the interest payment date of May 15, 2025 for the 2030 Subordinated Notes and beginning with the interest payment date of May 15, 2030 for the 2035 Subordinated Notes, at a redemption price equal to 100% of the principal amount of the Subordinated Notes being redeemed plus accrued and unpaid interest to but excluding the date of redemption.
The 2030 Subordinated Notes bear interest at a rate of 5.75% per year, payable semi-annually in arrears commencing on November 15, 2020. The interest rate for the 2030 Subordinated Notes will reset quarterly beginning May 15, 2025 to an interest rate, per year, equal to the then-current benchmark rate, which is expected to be three-month term Secured Overnight Financing Rate (“SOFR”) rate, plus 5.68%, payable quarterly in arrears. The 2035 Subordinated Notes bear interest at a rate of 6.125% per year, payable semi-annually in arrears commencing on November 15, 2020. The interest rate for the 2035 Subordinated Notes will reset quarterly beginning May 15, 2030 to an interest rate, per year, equal to the then-current benchmark rate, which is expected to be three-month term SOFR rate, plus 5.80%, payable quarterly in arrears.
Factors Affecting Results of Operations
Technology Enhancements and Corporate Initiatives
In furtherance of our goal of building a premier, diversified financial services company, we regularly evaluate strategic opportunities to invest in our business and technology platforms. Such investments are intended to support long-term technological competitiveness and improve operational efficiencies throughout our organization. During 2018, we began the significant investment in new technological solutions, substantial core system upgrades and other technology enhancements. Such significant investments specifically include single enterprise-wide general ledger and procurement solutions, a mortgage loan origination system and a core system replacement within our broker-dealer segment (collectively referred to as “Core System Improvements”). In combination with these technology enhancements, we are continuing our efforts to consolidate common back office functions. We believe that costsCosts incurred related to these Core System Improvements and the consolidation of common back office functions will continue to represent an increasinglyrepresented a significant portion of our noninterest expenses throughout 2020 and into 2021, but we are making2020. We believe that such non-recurring costs will decline by the end of 2021. We
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have made such investments with the expectation that they will result in cost savings over the long term. Beginning in the second quarter of 2019, the mortgage origination segment began the implementation of a new mortgage loan origination system. The transition from the previous mortgage loan origination system was completed during the fourth quarter of 2020. During the second quarter of 2020, we implemented the core system replacement within our broker-dealer segment. This was a highly complex endeavor and the broker-dealer segment continues to work with the technology vendors, clients and internal stakeholders. Costs related to our Core System Improvements, disaggregated by segment between internal-use software costs that were capitalized as premises, equipment and other assets and costs that were recorded to noninterest expense, were as follows (in thousands).
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Mortgage | | | | | | | | Hilltop | ||
Three Months Ended June 30, 2020 | | Banking | | Broker-Dealer | | Origination | | Insurance | | Corporate | | Consolidated | ||||||
Premises, equipment and other assets | | $ | — | | $ | 650 | | $ | 693 | | $ | — | | $ | 764 | | $ | 2,107 |
Noninterest expense | | | — | | | 2,787 | | | 69 | | | — | | | 602 | | | 3,458 |
Total | | $ | — | | $ | 3,437 | | $ | 762 | | $ | — | | $ | 1,366 | | $ | 5,565 |
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| | | | | | | | | | | | | | | | | | |
| | | | | | | | Mortgage | | | | | | | | Hilltop | ||
Six Months Ended June 30, 2020 | | Banking | | Broker-Dealer | | Origination | | Insurance | | Corporate | | Consolidated | ||||||
Premises, equipment and other assets | | $ | — | | $ | 1,223 | | $ | 888 | | $ | — | | $ | 3,400 | | $ | 5,511 |
Noninterest expense | | | — | | | 4,027 | | | 512 | | | — | | | 777 | | | 5,316 |
Total | | $ | — | | $ | 5,250 | | $ | 1,400 | | $ | — | | $ | 4,177 | | $ | 10,827 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Mortgage | | | | | | | | Hilltop | ||
Three Months Ended June 30, 2019 | | Banking | | Broker-Dealer | | Origination | | Insurance | | Corporate | | Consolidated | ||||||
Premises, equipment and other assets | | $ | — | | $ | 703 | | $ | 2,367 | | $ | — | | $ | 919 | | $ | 3,989 |
Noninterest expense | | | — | | | 1,083 | | | 748 | | | — | | | 174 | | | 2,005 |
Total | | $ | — | | $ | 1,786 | | $ | 3,115 | | $ | — | | $ | 1,093 | | $ | 5,994 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Mortgage | | | | | | | | Hilltop | ||
Six Months Ended June 30, 2019 | | Banking | | Broker-Dealer | | Origination | | Insurance | | Corporate | | Consolidated | ||||||
Premises, equipment and other assets | | $ | — | | $ | 1,854 | | $ | 4,368 | | $ | — | | $ | 1,333 | | $ | 7,555 |
Noninterest expense | | | — | | | 2,126 | | | 1,770 | | | — | | | 358 | | | 4,254 |
Total | | $ | — | | $ | 3,980 | | $ | 6,138 | | $ | — | | $ | 1,691 | | $ | 11,809 |
Factors Affecting Comparability of Results of Operations
Changes in Management and Efficiency Initiative-Related Charges
In 2019, we successfully completed several leadership transitionsAdditionally, through effective succession planning. During the six months ended June 30, 2019, the broker-dealer segment’s results reflected aggregate pre-tax charges of $2.2 million within employees’ compensation and benefits noninterest expenses, all of which were recognized in the firstthird quarter of 2019, related2020, we made significant progress in our transition to a single, enterprise-wide general ledger solution by replacing legacy ledgers at our banking and mortgage origination segments, as well as corporate, and recently, in April 2021, we replaced our only remaining legacy ledger and transitioned our broker-dealer segment to the resignation of Hill A. Feinberg as President and Chief Executive Officer of Hilltop Securities and the appointment of his successor, M. Bradley Winges. Also, during the six months ended June 30, 2019, corporate recognized a pre-tax charge of $5.8 million within employees’ compensation and benefits noninterest expenses in the first quarter of 2019 related to the retirement of Alan B. White, our former Vice Chairman and Co-Chief Executive Officer. These management changes and the related impact on our results of operations are collectively referred to as the “Leadership Changes.” For additional information regarding the Leadership Changes, refer to the section captioned “Factors Affecting the Current Year — Changes in Management and Efficiency Initiative-Related Changes” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2019 Form 10-K.
In addition to the costs associated with the Leadership Changes, corporate recognized $0.7 million in efficiency initiative-related charges during the six months ended June 30, 2019.enterprise-wide general ledger solution.
LIBOR
In July 2017, the Financial Conduct Authority (“FCA”) announced that it intends to cease compelling banks to submit rates for the calculation of the London Interbank Offered Rate (“LIBOR”)LIBOR after 2021. Most recently in March 2021, the FCA and the Intercontinental Exchange (“ICE”) Benchmark Administration concurrently confirmed their original intention to stop requesting banks to submit the rates required to calculate LIBOR after the 2021 calendar year and additionally announced firm target dates for the phase out of various LIBOR tenors. Pursuant to the announcement, one week and two-month LIBOR will cease to be published or lose representativeness immediately after December 31, 2021, and all remaining USD LIBOR tenors will cease to be published or lose representativeness immediately after June 30, 2023.
Working groups comprised of various regulators and other industry groups have been formed in the United States and other countries in order to provide guidance on this topic. In particular, the Alternative Reference Rates Committee (“ARRC”) has proposed that SOFRthe Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR. The ARRC has also published recommended fall-back language for LIBOR-linked financial instruments, among numerous other areas of guidance.
The Financial Accounting Standards Board (“FASB”) issued guidance in March 2020 intended to provide temporary optional expedients and exceptions to the GAAPaccounting principles generally accepted in the United States (“GAAP”) guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. Additionally, the FASB issued specific accounting guidance that permits the use of the Overnight Index Swap rate based on the SOFR to be designated as a benchmark interest rate for hedge accounting purposes.
Certain loans we originate bear interest at a floating rate based on LIBOR. We also pay interest on certain borrowings, are counterparty to derivative agreements, that are based on LIBOR and have existing contracts with payment calculations that use LIBOR as the reference rate. These changes will create various risks surrounding the financial, operational, compliance and legal aspects associated with changing certain elements of existing contracts.
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ARRC has proposed a paced market transition plan to SOFR from LIBOR, and organizations are currently working on industry-wide and company-specific transition plans as it relates to derivatives and cash markets exposed to LIBOR. However, at this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate loans, debentures, or other securities or financial arrangements, given LIBOR’s role in determining market interest rates globally.
A cross-functional team is leading enterprise-wideWe have made a preliminary assessment of areas across the organization that will be affected by the migration away from LIBOR and have transitioned to the impact assessment and early implementation efforts and will continuestages. In light of the above described recent changes to monitor, assess and plan for the LIBOR phase out of LIBOR and consider taking a variety ofdates being pushed out to 2023, we are considering the actions that will be required, including negotiating certain of our agreements based on an alternative benchmark rate that may be established, if any. During the third quarter of 2020, PrimeLending began originating conventional adjustable-rate mortgage, or ARM, loan products utilizing a SOFR rate with terms consistent with government-sponsored enterprise, or GSE, guidelines. In addition, the Bank’s management team is currently working with its commercial relationships who have LIBOR-based contracts maturing after 2021 to amend terms and establish an alternative benchmark rate. We are currently working to completealso continuing work on an enterprise-wide contract model and software review to better evaluate both the impacts of the LIBOR phase outphase-out and transition needs.requirements. As a result of these actions,this effort, we may incur significant expenses in effecting the transition, including, but not limited to, changes to our agreements and our agreements with customers that do not contemplate LIBOR being unavailable, systems and processes.
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Brokered Deposits
In December 2020, the Federal Deposit Insurance Corporation (“FDIC”) finalized revisions to its rules and prior guidance regarding brokered deposits (the “Revisions”). The Revisions are intended to modernize the FDIC's framework for regulating brokered deposits and ensure that the classification of a deposit as brokered appropriately reflects changes in the banking landscape. They also modify the interest rate restrictions applicable to certain depository institutions and clarify the application of the brokered deposit requirements to non-maturity deposits. The Revisions became effective on April 1, 2021, but full compliance is not required during a transitionary period ending January 1, 2022. We are currently evaluating the Revisions, and any future financial impacts on our banking and broker-dealer segments, compared to our current brokered deposit and funds sweep relationships.
Segment Information
As previously discussed, on June 30, 2020, we completed the sale of all of the outstanding capital stock of NLC, which comprised the operations of the insurance segment. Accordingly, insurance segment results and its assets and liabilitiesfor the three months ended March 31, 2020 have been presented as discontinued operations in the consolidated financial statements and in the table below.we no longer have an insurance segment. Additional details are presented in Note 3, Discontinued Operations, in the notes to our consolidated financial statements.
As a result ofFollowing the above notedabove-noted sale of NLC, we have two primary business units within continuing operations, PCC (banking and mortgage origination) and Securities Holdings (broker-dealer). Under accounting principles generally accepted in the United States (“GAAP”),GAAP, our business units are comprised of fourthree reportable business segments organized primarily by the core products offered to the segments’ respective customers: banking, broker-dealer and mortgage origination and insurance (discontinued operations).origination. Consistent with our historical segment operating results, we anticipate that future revenues will be driven primarily from the banking segment, with the remainder being generated by our broker-dealer and mortgage origination segments. Operating results for the mortgage origination segment have historically been more volatile than operating results for the banking and broker-dealer segments.
The banking segment includes the operations of the Bank. The banking segment primarily provides business and consumer banking services from offices located throughout Texas and generates revenue from its portfolio of earning assets. The Bank’s results of operations are primarily dependent on net interest income. The Bank also derives revenue from other sources, including service charges on customer deposit accounts and trust fees.
The broker-dealer segment includes the operations of Securities Holdings, which operates through its wholly owned subsidiaries Hilltop Securities, HTSMomentum Independent Network and Hilltop Securities Asset Management, LLC. The broker-dealer segment generates a majority of its revenues from fees and commissions earned from investment advisory and securities brokerage services. Hilltop Securities is a broker-dealer registered with the SEC and the Financial Industry Regulatory Authority (“FINRA”) and a member of the New York Stock Exchange (“NYSE”). HTSMomentum Independent Network is an introducing broker-dealer that is also registered with the SEC and FINRA. Hilltop Securities, HTSMomentum Independent Network and Hilltop Securities Asset Management, LLC are registered investment advisers under the Investment Advisers Act of 1940.
The mortgage origination segment includes the operations of PrimeLending, which offers a variety of loan products and generates revenue predominantly from fees charged on the origination and servicing of loans and from selling these loans in the secondary market.
Corporate includes certain activities not allocated to specific business segments. These activities include holding company financing and investing activities, merchant banking investment opportunities, and management and administrative services to support the overall operations of the Company.
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The eliminations of intercompany transactions are included in “All Other and Eliminations.” Additional information concerning our reportable segments is presented in Note 21,22, Segment and Related Information, in the notes to our consolidated financial statements.
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The following table presents certain information about the continuing operating results of our reportable segments (in thousands). This table serves as a basis for the discussion and analysis in the segment operating results sections that follow.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||
| | Three Months Ended June 30, | | Variance 2020 vs 2019 | | | Six Months Ended June 30, | | Variance 2020 vs 2019 | | | Three Months Ended March 31, | | Variance 2021 vs 2020 | | | ||||||||||||||||||||||
| | 2020 | | 2019 | | Amount | | Percent | | | 2020 | | 2019 | | Amount | | Percent | | | 2021 | | 2020 | | Amount | | Percent | | | ||||||||||
Net interest income (expense): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||
Banking | | $ | 94,102 | | $ | 93,423 | | $ | 679 | | 1 | % | | $ | 188,025 | | $ | 186,113 | | $ | 1,912 | | 1 | % | | $ | 103,884 | | $ | 93,923 | | $ | 9,961 | | 11 | % | | |
Broker-Dealer | | | 9,663 | | | 11,410 | | | (1,747) | | (15) | % | | | 22,836 | | 24,260 | | | (1,424) | | (6) | % | | 10,514 | | 13,173 | | (2,659) | | (20) | % | | |||||
Mortgage Origination | | | (1,667) | | | (1,031) | | | (636) | | (62) | % | | | (1,299) | | (1,499) | | | 200 | | 13 | % | | (7,098) | | 368 | | (7,466) | | NM | | | |||||
Corporate | | | (3,232) | | | (1,331) | | | (1,901) | | (143) | % | | | (4,888) | | (2,661) | | | (2,227) | | (84) | % | | (4,692) | | (1,656) | | (3,036) | | (183) | % | | |||||
All Other and Eliminations | | | 5,692 | | | 4,813 | | | 879 | | 18 | % | | | 10,220 | | | 9,360 | | | 860 | | 9 | % | | | 3,074 | | | 4,528 | | | (1,454) | | (32) | % | | |
Hilltop Consolidated | | $ | 104,558 | | $ | 107,284 | | $ | (2,726) | | (3) | % | | $ | 214,894 | | $ | 215,573 | | $ | (679) | | (0) | % | ||||||||||||||
Hilltop Continuing Operations | | $ | 105,682 | | $ | 110,336 | | $ | (4,654) | | (4) | % | | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||
Provision for (reversal of) credit losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||
Banking | | $ | 65,600 | | $ | (670) | | $ | 66,270 | | NM | | | $ | 99,875 | | $ | 355 | | $ | 99,520 | | NM | | | $ | (5,175) | | $ | 34,275 | | $ | (39,450) | | (115) | % | | |
Broker-Dealer | | | 426 | | | (2) | | | 428 | | NM | | | | 700 | | (76) | | | 776 | | NM | | | 66 | | 274 | | (208) | | (76) | % | | |||||
Mortgage Origination | | | — | | | — | | | — | | — | | | | — | | — | | | — | | — | | | — | | — | | — | | — | | | |||||
Corporate | | | — | | | — | | | — | | — | | | | — | | — | | | — | | — | | | — | | — | | — | | — | | | |||||
All Other and Eliminations | | | — | | | — | | | — | | — | | | | — | | | — | | | — | | — | | | | — | | | — | | | — | | — | | | |
Hilltop Consolidated | | $ | 66,026 | | $ | (672) | | $ | 66,698 | | NM | | | $ | 100,575 | | $ | 279 | | $ | 100,296 | | NM | | ||||||||||||||
Hilltop Continuing Operations | | $ | (5,109) | | $ | 34,549 | | $ | (39,658) | | (115) | % | | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||
Noninterest income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||
Banking | | $ | 10,656 | | $ | 10,742 | | $ | (86) | | (1) | % | | $ | 19,427 | | $ | 21,362 | | $ | (1,935) | | (9) | % | | | $ | 11,324 | | $ | 8,771 | | $ | 2,553 | | 29 | % | |
Broker-Dealer | | | 122,961 | | | 105,559 | | | 17,402 | | 16 | % | | | 209,170 | | 196,865 | | | 12,305 | | 6 | % | | 98,623 | | 86,209 | | 12,414 | | 14 | % | | |||||
Mortgage Origination | | | 340,487 | | | 164,548 | | | 175,939 | | 107 | % | | | 519,455 | | 282,580 | | | 236,875 | | 84 | % | | 310,444 | | 178,968 | | 131,476 | | 73 | % | | |||||
Corporate | | | 550 | | | 648 | | | (98) | | (15) | % | | | 2,838 | | 1,360 | | | 1,478 | | 109 | % | | 506 | | 2,309 | | (1,803) | | (78) | % | | |||||
All Other and Eliminations | | | (6,529) | | | (4,794) | | | (1,735) | | (36) | % | | | (11,052) | | | (9,501) | | | (1,551) | | (16) | % | | | (3,312) | | | (4,544) | | | 1,232 | | 27 | % | | |
Hilltop Consolidated | | $ | 468,125 | | $ | 276,703 | | $ | 191,422 | | 69 | % | | $ | 739,838 | | $ | 492,666 | | $ | 247,172 | | 50 | % | ||||||||||||||
Hilltop Continuing Operations | | $ | 417,585 | | $ | 271,713 | | $ | 145,872 | | 54 | % | | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||
Noninterest expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||
Banking | | $ | 56,622 | | $ | 58,251 | | $ | (1,629) | | (3) | % | | $ | 113,589 | | $ | 118,977 | | $ | (5,388) | | (5) | % | | | $ | 55,788 | | $ | 56,967 | | $ | (1,179) | | (2) | % | |
Broker-Dealer | | | 104,411 | | | 94,870 | | | 9,541 | | 10 | % | | | 185,350 | | 182,677 | | | 2,673 | | 1 | % | | 91,404 | | 80,939 | | 10,465 | | 13 | % | | |||||
Mortgage Origination | | | 200,493 | | | 141,721 | | | 58,772 | | 41 | % | | | 340,045 | | 256,398 | | | 83,647 | | 33 | % | | | 210,334 | | 139,552 | | 70,782 | | 51 | % | | ||||
Corporate | | | 8,888 | | | 9,274 | | | (386) | | (4) | % | | | 13,741 | | 24,836 | | | (11,095) | | (45) | % | | 9,588 | | 4,853 | | 4,735 | | 98 | % | | |||||
All Other and Eliminations | | | (205) | | | (28) | | | (177) | | NM | | | | (615) | | | (53) | | | (562) | | NM | | | | (452) | | | (410) | | | (42) | | (10) | % | | |
Hilltop Consolidated | | $ | 370,209 | | $ | 304,088 | | $ | 66,121 | | 22 | % | | $ | 652,110 | | $ | 582,835 | | $ | 69,275 | | 12 | % | ||||||||||||||
Hilltop Continuing Operations | | $ | 366,662 | | $ | 281,901 | | $ | 84,761 | | 30 | % | | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||
Income (loss) from continuing operations before taxes: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||
Banking | | $ | (17,464) | | $ | 46,584 | | $ | (64,048) | | (137) | % | | $ | (6,012) | | $ | 88,143 | | $ | (94,155) | | (107) | % | | $ | 64,595 | | $ | 11,452 | | $ | 53,143 | | 464 | % | | |
Broker-Dealer | | | 27,787 | | | 22,101 | | | 5,686 | | 26 | % | | | 45,956 | | 38,524 | | | 7,432 | | 19 | % | | 17,667 | | 18,169 | | (502) | | (3) | % | | |||||
Mortgage Origination | | | 138,327 | | | 21,796 | | | 116,531 | | 535 | % | | | 178,111 | | 24,683 | | | 153,428 | | 622 | % | | 93,012 | | 39,784 | | 53,228 | | 134 | % | | |||||
Corporate | | | (11,570) | | | (9,957) | | | (1,613) | | (16) | % | | | (15,791) | | (26,137) | | | 10,346 | | 40 | % | | (13,774) | | (4,200) | | (9,574) | | (228) | % | | |||||
All Other and Eliminations | | | (632) | | | 47 | | | (679) | | NM | | | | (217) | | | (88) | | | (129) | | NM | | | | 214 | | | 394 | | | (180) | | (46) | % | | |
Hilltop Consolidated | | $ | 136,448 | | $ | 80,571 | | $ | 55,877 | | 69 | % | | $ | 202,047 | | $ | 125,125 | | $ | 76,922 | | 61 | % | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||
Income (loss) from discontinued operations before taxes: | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||
Insurance | | $ | (1,911) | | $ | (2,829) | | $ | 918 | | 32 | % | | $ | 2,103 | | $ | 3,980 | | $ | (1,877) | | (47) | % | ||||||||||||||
Corporate (1) | | | 32,341 | | | — | | | 32,341 | | NM | | | | 32,341 | | | — | | | 32,341 | | NM | | ||||||||||||||
Hilltop Consolidated | | $ | 30,430 | | $ | (2,829) | | $ | 33,259 | | NM | | | $ | 34,444 | | $ | 3,980 | | $ | 30,464 | | NM | | ||||||||||||||
Hilltop Continuing Operations | | $ | 161,714 | | $ | 65,599 | | $ | 96,115 | | 147 | % | |
NM | Not meaningful. |
Key Performance Indicators
We utilize several key indicators of financial condition and operating performance to evaluate the various aspects of our business. In addition to traditional financial metrics, such as revenue and growth trends, we monitor several other financial measures and non-financial operating metrics to help us evaluate growth trends, measure the adequacy of our capital based on regulatory reporting requirements, measure the effectiveness of our operations and assess operational efficiencies. These indicators change from time to time as the opportunities and challenges in our businesses change.
Specifically, performance ratios and asset quality ratios are typically used for measuring the performance of banking and financial institutions. We consider return on average stockholders’ equity, return on average assets and net interest margin to be important supplemental measures of operating performance that are commonly used by securities analysts, investors and other parties interested in the banking and financial industry. The net charge-offs to average loans
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outstanding ratio is also considered a key measure for our banking segment as it indicates the performance of our loan portfolio.
In addition, we consider regulatory capital ratios to be key measures that are used by us, as well as banking regulators, investors and analysts, to assess our regulatory capital position and to compare our regulatory capital to that of other financial services companies. We monitor our capital strength in terms of both leverage ratio and risk-based capital ratios based on capital requirements administered by the federal banking agencies. The risk-based capital ratios are minimum supervisory ratios generally applicable to banking organizations, but banking organizations are widely
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expected to operate with capital positions well above the minimum ratios. Failure to meet minimum capital requirements can initiate certain mandatory actions by regulators that, if undertaken, could have a material effect on our financial condition or results of operations.
How We Generate Revenue
We generate revenue from net interest income and from noninterest income. Net interest income represents the difference between the income earned on our assets, including our loans and investment securities, and our cost of funds, including the interest paid on the deposits and borrowings that are used to support our assets. Net interest income is a significant contributor to our operating results and is primarily earned by our banking segment. Fluctuations in interest rates, as well as the amounts and types of interest-earning assets and interest-bearing liabilities we hold, affect net interest income. Net interest income from continuing operations decreased slightly during the sixthree months ended June 30, 2020,March 31, 2021, compared with the six months ended June 30, 2019,same period in 2020, primarily due to decreases within our mortgage origination segment, broker-dealer segment and corporate, partially offset by an increase within our banking segment.
The other component of our revenue is noninterest income, which is primarily comprised of the following:
(i) | Income from broker-dealer operations. Through Securities Holdings, we provide investment banking and other related financial services. We generated $66.0 million and $63.2 million in securities commissions and fees and investment and securities advisory fees and commissions, and $30.6 million and $20.1 million in gains from derivative and trading portfolio activities (included within other noninterest income), during the three months ended March 31, 2021 and 2020, respectively. |
(ii) | Income from mortgage operations. Through PrimeLending, we generate noninterest income by originating and selling mortgage loans. During the three months ended March 31, 2021 and 2020, we generated $310.2 million and $179.0 million, respectively, in net gains from sale of loans, other mortgage production income (including income associated with retained mortgage servicing rights), and mortgage loan origination fees. |
TheIn the aggregate, we generated an increase in noninterest income from continuing operations during the three months ended March 31, 2021, compared to the same period in 2020, noted in the segment results table previously presented, was primarily due to an increase of $237.1$131.2 million in net gains from sale of loans, other mortgage production income and mortgage loan origination fees within our mortgage origination segment.
We also incur noninterest expenses in the operation of our businesses. Our businesses engage in labor intensive activities and, consequently, employees’ compensation and benefits represent the majority of our noninterest expenses.
Consolidated Operating Results
Income from continuing operations applicable to common stockholders during the three months ended June 30, 2020March 31, 2021 was $97.7$120.3 million, or $1.08$1.46 per diluted share, compared with $60.1$46.5 million, or $0.64$0.51 per diluted share, during the three months ended June 30, 2019. IncomeMarch 31, 2020. Hilltop’s financial results from continuing operations applicable to common stockholders duringfor the sixthree months ended June 30, 2020 was $144.2 million, or $1.60 per diluted share, compared with $93.5 million, or $1.00 per diluted share, duringMarch 31, 2021 reflect a significant increase in mortgage origination segment net gains from sales of loans and other mortgage production income, while the sixthree months ended June 30, 2019.March 31, 2020 results included a build in the allowance for credit losses associated with the impact of macroeconomic forecast assumptions attributable to the market disruption and economic uncertainties caused by COVID-19.
Including income from discontinued operations, net of income taxes, income applicable to common stockholders was $128.5$49.6 million, or $1.42$0.55 per diluted share, during the three months ended June 30, 2020, compared to $57.8 million, or $0.62 per diluted share, during the three months ended June 30, 2019. Including income from discontinued operations, net of income taxes, income applicable to common stockholders was $178.1 million, or $1.97 per diluted share, during the six months ended June 30, 2020, compared to $96.6 million, or $1.03 per diluted share, during the six months ended June 30, 2019. Hilltop’s financial results from continuing operations for the three and six months ended June 30, 2020 reflect both a significant increase in mortgage origination segment net gains from sales of loans and other mortgage production income and a significant build in the allowance for credit losses associated with the deterioration of the
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economic outlook from the first quarter of 2020 attributable to the market disruption and economic uncertainties caused by COVID-19, while the six months ended June 30, 2019 results included the costs incurred during the first quarter of 2019 associated with the significant Leadership Changes and other efficiency initiative-related charges which, in the aggregate, totaled $8.7 million before income taxes.March 31, 2020.
Certain items included in net income for the three and six months ended June 30,March 31, 2021 and 2020 and 2019 resulted from purchase accounting associated with the merger of PlainsCapital Corporation with and into a wholly owned subsidiary of Hilltop on November 30, 2012, (the “PlainsCapital Merger”), the Federal Deposit Insurance Corporation (“FDIC”) -assistedFDIC-assisted transaction (the “FNB Transaction”) whereby the Bank acquired certain assets and assumed certain liabilities of FNB, the acquisition of SWS Group, Inc. in a stock and cash transaction, (the “SWS Merger”) and the acquisition of The Bank of River Oaks (“BORO”) in an all-cash transaction (“BORO Acquisition”), respectively (collectively, the “Bank Transactions”). Income before income taxes during the three months ended March 31, 2021 and 2020 included the following purchase accounting itemsnet accretion on earning assets and liabilities of $4.9 million and $6.6 million, respectively, and amortization of identifiable intangibles of $1.3 million and $1.8 million, respectively, related to the Bank Transactions (in thousands).Transactions.
| | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2020 | | | PlainsCapital Merger | | | FNB Transaction | | | SWS Merger | | | BORO Acquisition | | | Total | |
Net accretion on earning assets and liabilities | | $ | 223 | | $ | 2,265 | | $ | 83 | | $ | 666 | | $ | 3,237 | |
Amortization of identifiable intangibles | | | (764) | | | (38) | | | (139) | | | (595) | | | (1,536) | |
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| | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2020 | | | PlainsCapital Merger | | | FNB Transaction | | | SWS Merger | | | BORO Acquisition | | | Total | |
Net accretion on earning assets and liabilities | | $ | 707 | | $ | 7,780 | | $ | 165 | | $ | 1,232 | | $ | 9,884 | |
Amortization of identifiable intangibles | | | (1,717) | | | (76) | | | (313) | | | (1,190) | | | (3,296) | |
| | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2019 | | | PlainsCapital Merger | | | FNB Transaction | | | SWS Merger | | | BORO Acquisition | | | Total | |
Net accretion on earning assets and liabilities | | $ | 558 | | $ | 4,405 | | $ | 445 | | $ | 1,003 | | $ | 6,411 | |
Amortization of identifiable intangibles | | | (1,001) | | | (76) | | | (174) | | | (714) | | | (1,965) | |
| | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2019 | | | PlainsCapital Merger | | | FNB Transaction | | | SWS Merger | | | BORO Acquisition | | | Total | |
Net accretion on earning assets and liabilities | | $ | 1,102 | | $ | 9,938 | | $ | 1,006 | | $ | 2,980 | | $ | 15,026 | |
Amortization of identifiable intangibles | | | (2,002) | | | (152) | | | (348) | | | (1,428) | | | (3,930) | |
The information shown in the table below includes certain key performance indicators on a consolidated basis.
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | Six Months Ended June 30, | | | | Three Months Ended March 31, | | | ||||||||
|
| 2020 |
| 2019 |
| | 2020 |
| | 2019 |
| | | 2021 |
| | 2020 |
| |
Return on average stockholders' equity (1) |
| 23.32 | % | 11.63 | % | | 16.52 | % | | 9.86 | % | | | 20.58 | % | | 9.38 | % | |
Return on average assets (2) |
| 3.30 | % | 1.74 | % | | 2.44 | % | | 1.48 | % | | | 2.90 | % | | 1.47 | % | |
Net interest margin (3) (4) | | 2.80 | % | 3.49 | % | | 3.08 | % | | 3.59 | % | | | 2.69 | % | | 3.41 | % | |
Leverage ratio (5) (end of period) | | | | | | | 12.60 | % | | 13.00 | % | | | 13.01 | % | | 13.03 | % | |
Common equity Tier 1 risk-based capital ratio (6) (end of period) |
| | | | | | 18.46 | % | | 16.32 | % | | | 19.63 | % | | 15.96 | % | |
(1) | Return on average stockholders’ equity is defined as consolidated income attributable to Hilltop divided by average total Hilltop stockholders’ equity. |
(2) | Return on average assets is defined as consolidated net income divided by average assets. |
(3) | Net interest margin is defined as net interest income divided by average interest-earning assets. We consider net interest margin as a key indicator of profitability, as it represents interest earned on our interest-earning assets compared to interest incurred. |
(4) | The securities financing operations within our broker-dealer segment had the effect of lowering both the net interest margin and taxable equivalent net interest margin by |
(5) | The leverage ratio is a regulatory capital ratio and is defined as Tier 1 risk-based capital divided by average consolidated assets. |
(6) | The common equity Tier 1 risk-based capital ratio is a regulatory capital ratio and is defined as common equity Tier 1 risk-based capital divided by risk weighted assets. Common equity includes common equity Tier 1 capital (common stockholders’ equity and certain minority interests in the equity capital accounts of consolidated subsidiaries, but excluding goodwill and various intangible assets) and additional Tier 1 capital (certain qualifying minority interests not included in common equity Tier 1 capital, certain preferred stock and related surplus, and certain subordinated debt). |
We present net interest margin and net interest income below, on a taxable-equivalent basis. Net interest margin (taxable equivalent), a non-GAAP measure, is defined as taxable equivalent net interest income divided by average interest-earning assets. Taxable equivalent adjustments are based on the applicable corporate federal income tax rate of 21% for all periods presented. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide
64
more meaningful comparisons of net interest margins for all earning assets, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments.
During the three months ended June 30,March 31, 2021 and 2020, and 2019, purchase accounting contributed 1013 and 2322 basis points, respectively, to our consolidated taxable equivalent net interest margin of 2.81%2.69% and 3.49%3.42%, respectively. During the six months ended June 30, 2020 and 2019,The purchase accounting contributed 16 and 27 basis points, respectively, to our consolidated taxable equivalent net interest margin of 3.09% and 3.59%, respectively, andactivity was primarily related to the following purchase accounting itemsaccretion of discount of loans which totaled $4.9 million and $6.6 million during the three months ended March 31, 2021 and 2020, respectively, associated with the Bank Transactions (in thousands).Transactions.
53
| | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2020 | | | PlainsCapital Merger | | | FNB Transaction | | | SWS Merger | | | BORO Acquisition | | | Total | |
Accretion of discount on loans | | $ | 188 | | $ | 2,265 | | $ | 98 | | $ | 666 | | $ | 3,217 | |
Accretion of discount on acquired securities | | | 35 | | | — | | | — | | | — | | | 35 | |
| | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2020 | | | PlainsCapital Merger | | | FNB Transaction | | | SWS Merger | | | BORO Acquisition | | | Total | |
Accretion of discount on loans | | $ | 648 | | $ | 7,780 | | $ | 196 | | $ | 1,232 | | $ | 9,856 | |
Accretion of discount on acquired securities | | | 59 | | | — | | | — | | | — | | | 59 | |
| | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2019 | | | PlainsCapital Merger | | | FNB Transaction | | | SWS Merger | | | BORO Acquisition | | | Total | |
Accretion of discount on loans | | $ | 687 | | $ | 4,405 | | $ | 413 | | $ | 939 | | $ | 6,444 | |
Accretion (amortization) of discount (premium) on acquired securities | | | (129) | | | — | | | 7 | | | 64 | | | (58) | |
| | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2019 | | | PlainsCapital Merger | | | FNB Transaction | | | SWS Merger | | | BORO Acquisition | | | Total | |
Accretion of discount on loans | | $ | 1,440 | | $ | 9,938 | | $ | 949 | | $ | 2,852 | | $ | 15,179 | |
Accretion (amortization) of discount (premium) on acquired securities | | | (338) | | | — | | | 14 | | | 128 | | | (196) | |
The tablestable below provideprovides additional details regarding our consolidated net interest income (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | Three Months Ended March 31, | | ||||||||||||||||||||||||||||
| | 2020 | | 2019 | | | 2021 | | 2020 | | ||||||||||||||||||||||||
|
| Average |
| Interest |
| Annualized |
| Average |
| Interest |
| Annualized |
|
| Average |
| Interest |
| Annualized |
| Average |
| Interest |
| Annualized |
| ||||||||
| | Outstanding | | Earned or | | Yield or | | Outstanding | | Earned or | | Yield or | | | Outstanding | | Earned or | | Yield or | | Outstanding | | Earned or | | Yield or | | ||||||||
| | Balance | | Paid | | Rate | | Balance | | Paid | | Rate | | | Balance | | Paid | | Rate | | Balance | | Paid | | Rate | | ||||||||
Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-earning assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans held for sale | | $ | 2,308,368 | | $ | 20,036 |
| 3.47 | % | $ | 1,307,251 | | $ | 15,041 |
| 4.60 | % | | $ | 2,573,085 | | $ | 16,233 |
| 2.52 | % | $ | 1,619,644 | | $ | 15,631 |
| 3.86 | % |
Loans held for investment, gross (1) | | | 7,744,395 | | | 87,823 |
| 4.50 | % | | 7,078,807 | | | 99,284 |
| 5.57 | % | | | 7,645,883 | | | 88,044 |
| 4.62 | % | | 7,262,282 | | | 95,538 |
| 5.23 | % |
Investment securities - taxable | |
| 1,681,336 | |
| 12,489 |
| 2.97 | % |
| 1,733,536 | |
| 14,654 |
| 3.38 | % | |
| 2,267,709 | |
| 10,233 |
| 1.80 | % |
| 1,798,897 | |
| 16,606 |
| 3.69 | % |
Investment securities - non-taxable (2) | |
| 215,645 | |
| 1,822 |
| 3.38 | % |
| 227,953 | |
| 1,687 |
| 2.96 | % | |
| 284,001 | |
| 2,280 |
| 3.21 | % |
| 208,863 | |
| 1,902 |
| 3.64 | % |
Federal funds sold and securities purchased under agreements to resell | |
| 61,956 | |
| (7) |
| (0.04) | % |
| 69,369 | |
| 369 |
| 2.13 | % | |
| 93,525 | |
| — |
| 0.00 | % |
| 60,943 | |
| 134 |
| 0.89 | % |
Interest-bearing deposits in other financial institutions | |
| 1,569,277 | |
| 541 |
| 0.14 | % |
| 325,130 | |
| 1,982 |
| 2.44 | % | |
| 1,565,879 | |
| 582 |
| 0.15 | % |
| 461,775 | |
| 1,512 |
| 1.32 | % |
Securities borrowed | | | 1,375,849 | | | 12,883 | | 3.70 | % | | 1,598,063 | | | 15,517 | | 3.84 | % | | | 1,452,704 | | | 28,972 | | 7.98 | % | | 1,568,737 | | | 13,327 | | 3.36 | % |
Other | |
| 59,917 | |
| 439 |
| 2.95 | % |
| 68,990 | |
| 1,682 |
| 9.77 | % | |
| 49,916 | |
| 762 |
| 6.18 | % |
| 78,595 | |
| 1,512 |
| 7.72 | % |
Interest-earning assets, gross (2) | |
| 15,016,743 | |
| 136,026 |
| 3.60 | % |
| 12,409,099 | |
| 150,216 |
| 4.81 | % | |
| 15,932,702 | |
| 147,106 |
| 3.70 | % |
| 13,059,736 | |
| 146,162 |
| 4.45 | % |
Allowance for credit losses | |
| (102,216) | | | | | | |
| (59,437) | | | | | | | |
| (149,397) | | | | | | |
| (74,430) | | | | | | |
Interest-earning assets, net | |
| 14,914,527 | | | | | | |
| 12,349,662 | | | | | | | |
| 15,783,305 | | | | | | |
| 12,985,306 | | | | | | |
Noninterest-earning assets | |
| 1,603,791 | | | | | | |
| 1,414,227 | | | | | | | |
| 1,559,039 | | | | | | |
| 1,633,387 | | | | | | |
Total assets | | $ | 16,518,318 | | | | | | | $ | 13,763,889 | | | | | | | | $ | 17,342,344 | | | | | | | $ | 14,618,693 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest-bearing deposits | | $ | 7,925,031 | | $ | 11,946 |
| 0.61 | % | $ | 5,792,236 | | $ | 18,036 |
| 1.25 | % | | $ | 7,626,575 | | $ | 7,741 |
| 0.41 | % | $ | 6,264,827 | | $ | 15,125 |
| 0.97 | % |
Securities loaned | | | 1,280,958 | | | 10,797 | | 3.39 | % | | 1,462,370 | | | 13,470 | | 3.69 | % | | | 1,355,945 | | | 25,486 | | 7.62 | % | | 1,474,988 | | | 11,277 | | 3.07 | % |
Notes payable and other borrowings | |
| 1,110,516 | |
| 7,998 |
| 2.88 | % |
| 1,389,295 | |
| 10,674 |
| 3.06 | % | |
| 1,130,068 | |
| 8,014 |
| 2.85 | % |
| 1,368,038 | |
| 8,544 |
| 2.50 | % |
Total interest-bearing liabilities | |
| 10,316,505 | |
| 30,741 |
| 1.20 | % |
| 8,643,901 | |
| 42,180 |
| 1.95 | % | |
| 10,112,588 | |
| 41,241 |
| 1.65 | % |
| 9,107,853 | |
| 34,946 |
| 1.54 | % |
Noninterest-bearing liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Noninterest-bearing deposits | |
| 3,303,165 | | | | | | |
| 2,549,792 | | | | | | | |
| 3,729,994 | | | | | | |
| 2,730,975 | | | | | | |
Other liabilities | |
| 658,416 | | | | | | |
| 551,333 | | | | | | | |
| 1,101,972 | | | | | | |
| 633,722 | | | | | | |
Total liabilities | |
| 14,278,086 | | | | | | |
| 11,745,026 | | | | | | | |
| 14,944,554 | | | | | | |
| 12,472,550 | | | | | | |
Stockholders’ equity | |
| 2,215,538 | | | | | | |
| 1,995,811 | | | | | | | |
| 2,371,281 | | | | | | |
| 2,121,877 | | | | | | |
Noncontrolling interest | |
| 24,694 | | | | | | |
| 23,052 | | | | | | | |
| 26,509 | | | | | | |
| 24,266 | | | | | | |
Total liabilities and stockholders' equity | | $ | 16,518,318 | | | | | | | $ | 13,763,889 | | | | | | | | $ | 17,342,344 | | | | | | | $ | 14,618,693 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income (2) | | | | | $ | 105,285 | | | | | | | $ | 108,036 | | | | | | | | $ | 105,865 | | | | | | | $ | 111,216 | | | |
Net interest spread (2) | | | | | | |
| 2.40 | % | | | | | |
| 2.86 | % | | | | | | |
| 2.05 | % | | | | | |
| 2.91 | % |
Net interest margin (2) | | | | | | |
| 2.81 | % | | | | | |
| 3.49 | % | | | | | | |
| 2.69 | % | | | | | |
| 3.42 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65
| | Six Months Ended June 30, | | ||||||||||||||
| | 2020 | | 2019 | | ||||||||||||
|
| Average |
| Interest |
| Annualized |
| Average |
| Interest |
| Annualized |
| ||||
| | Outstanding | | Earned or | | Yield or | | Outstanding | | Earned or | | Yield or | | ||||
| | Balance | | Paid | | Rate | | Balance | | Paid | | Rate | | ||||
Assets | | | | | | | | | | | | | | | | | |
Interest-earning assets | | | | | | | | | | | | | | | | | |
Loans held for sale | | $ | 1,962,872 | | $ | 35,667 |
| 3.63 | % | $ | 1,161,938 | | $ | 27,529 |
| 4.74 | % |
Loans held for investment, gross (1) | | | 7,504,472 | | | 183,361 |
| 4.85 | % | | 6,961,727 | | | 197,666 |
| 5.66 | % |
Investment securities - taxable | |
| 1,740,116 | |
| 29,095 |
| 3.34 | % |
| 1,762,856 | |
| 30,238 |
| 3.43 | % |
Investment securities - non-taxable (2) | |
| 212,254 | |
| 3,724 |
| 3.51 | % |
| 224,795 | |
| 3,344 |
| 2.98 | % |
Federal funds sold and securities purchased under agreements to resell | |
| 61,449 | |
| 128 |
| 0.42 | % |
| 67,866 | |
| 756 |
| 2.25 | % |
Interest-bearing deposits in other financial institutions | |
| 1,015,526 | |
| 2,053 |
| 0.41 | % |
| 414,857 | |
| 5,133 |
| 2.49 | % |
Securities borrowed | | | 1,472,293 | | | 26,210 | | 3.52 | % | | 1,522,656 | | | 32,376 | | 4.23 | % |
Other | |
| 69,257 | |
| 1,951 |
| 5.66 | % |
| 65,148 | |
| 3,353 |
| 10.35 | % |
Interest-earning assets, gross (2) | |
| 14,038,239 | |
| 282,189 |
| 4.00 | % |
| 12,181,843 | |
| 300,395 |
| 4.92 | % |
Allowance for credit losses | |
| (88,323) | | | | | | |
| (59,493) | | | | | | |
Interest-earning assets, net | |
| 13,949,916 | | | | | | |
| 12,122,350 | | | | | | |
Noninterest-earning assets | |
| 1,618,589 | | | | | | |
| 1,416,638 | | | | | | |
Total assets | | $ | 15,568,505 | | | | | | | $ | 13,538,988 | | | | | | |
| | | | | | | | | | | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | | |
Interest-bearing deposits | | $ | 7,094,929 | | $ | 27,071 |
| 0.77 | % | $ | 5,808,968 | | $ | 35,142 |
| 1.22 | % |
Securities loaned | | | 1,377,973 | | | 22,073 | | 3.22 | % | | 1,379,149 | | | 28,208 | | 4.12 | % |
Notes payable and other borrowings | |
| 1,239,277 | |
| 16,542 |
| 2.67 | % |
| 1,228,258 | |
| 19,939 |
| 3.26 | % |
Total interest-bearing liabilities | |
| 9,712,179 | |
| 65,686 |
| 1.36 | % |
| 8,416,375 | |
| 83,289 |
| 1.99 | % |
Noninterest-bearing liabilities | | | | | | | | | | | | | | | | | |
Noninterest-bearing deposits | |
| 3,017,070 | | | | | | |
| 2,535,007 | | | | | | |
Other liabilities | |
| 646,069 | | | | | | |
| 587,323 | | | | | | |
Total liabilities | |
| 13,375,318 | | | | | | |
| 11,538,705 | | | | | | |
Stockholders’ equity | |
| 2,168,707 | | | | | | |
| 1,977,274 | | | | | | |
Noncontrolling interest | |
| 24,480 | | | | | | |
| 23,009 | | | | | | |
Total liabilities and stockholders' equity | | $ | 15,568,505 | | | | | | | $ | 13,538,988 | | | | | | |
| | | | | | | | | | | | | | | | | |
Net interest income (2) | | | | | $ | 216,503 | | | | | | | $ | 217,106 | | | |
Net interest spread (2) | | | | | | |
| 2.64 | % | | | | | |
| 2.93 | % |
Net interest margin (2) | | | | | | |
| 3.09 | % | | | | | |
| 3.59 | % |
(1) | Average balance includes non-accrual loans. |
(2) | Presented on a taxable equivalent basis with annualized taxable equivalent adjustments based on the applicable corporate federal income tax rate of 21% for the periods presented. The adjustment to interest income was |
The banking segment’s net interest margin exceeds our consolidated net interest margin shown above. Our consolidated net interest margin includes certain items that are not reflected in the calculation of our net interest margin within our banking segment and reduce our consolidated net interest margin, such as the borrowing costs of Hilltop and the yields and costs associated with certain items within interest-earning assets and interest-bearing liabilities in the broker-dealer segment, including items related to securities financing operations that particularly decrease net interest margin. In addition, yields and costs on certain interest-earning assets, such as warehouse lines of credit extended to subsidiaries (operating segments) by the banking segment, are eliminated from the consolidated financial statements. Our consolidated net interest margins for the three and six months ended June 30, 2020March 31, 2021 were also negatively impacted by certain actions taken by management during 2020 to strengthen our available liquidity position. Such actions, including increasing overall cash balances by raising brokered money market and brokered time deposits and raising capital through the issuance of subordinated debt, have beenwere taken out of an abundance of caution as the pandemic continues to create significant uncertainty in the banking and capital markets.
On a consolidated basis, net interest income decreased during the three and six months ended June 30, 2020,March 31, 2021, compared with the same periodsperiod in 2019,2020, primarily due to the effects of decreased net yields on mortgage loans held for sale and interest incurred beginning in May 2020 related to the new Subordinated Notes at corporate, and decreasespartially offset by the decrease in netmarket interest earnedrates on money markets and margin loansdeposits within the broker-dealerbanking segment. Refer to the discussion in the “Banking Segment” section that follows for more details on the changes in net interest income, including the component changes in the volume of average interest-earning assets and interest-bearing liabilities and changes in the rates earned or paid on those items.
The provision for (reversal of) credit losses is determined by management as the amount necessary to maintain the allowance for credit losses at the amount of expected credit losses inherent within the loans held for investment portfolio. The amount of expense and the corresponding level of allowance for credit losses for loans are based on our
54
evaluation of the collectability of the loan portfolio based on historical loss experience, reasonable and supportable forecasts, and other significant qualitative and quantitative factors. Substantially all of our consolidated provision for
66
(reversal (reversal of) credit losses is related to the banking segment. During the three and six months ended June 30, 2020,March 31, 2021 the provision forreversal of credit losses was significantlyprimarily impacted by the banking segment’s buildreduction in reserves associated with the increase in the expected lifetime credit losses under CECL on both individually evaluated loans and collectively evaluated loans within the portfolio attributable to improvements in macroeconomic forecast assumptions from the market disruption and related economic uncertainties caused by COVID-19.prior quarter. Refer to the discussion in the “Financial Condition – Allowance for Credit Losses on Loans” section that follows for more details regarding the significant assumptions and estimates involved in estimating credit losses. During the six months ended June 30, 2019, the provision for (reversal of) credit losses was impacted by the banking segment’s release during the first quarter of 2019 of a $2.0 million reserve associated with previously estimated hurricane loss exposures due to improved customer performance.
Noninterest income from continuing operations increased during the three and six months ended June 30, 2020,March 31, 2021, compared with the same periodsperiod in 2019,2020, primarily due to increases in total mortgage loan sales volume, and changes in net fair value and related derivative activity, and increases in average loan sales margin, partially offset by a decrease in average mortgage loan origination fees within our mortgage origination segment, as well as increases in structured finance net revenues within our broker-dealer segment.
Noninterest expense from continuing operations increased during the three and six months ended June 30, 2020,March 31, 2021, compared with the same periodsperiod in 2019,2020, primarily due to increases in variable compensation and segment operating costs associated with the increased mortgage loan originations within our mortgage origination segment and increases in both variable and non-variable compensation within our broker-dealer segment.
Effective income tax rates from continuing operations during the three months ended June 30,March 31, 2021 and 2020 were 23.4% and 2019 were 23.3% and 23.0%23.1%, respectively, and approximated the applicable statutory rates for the six months ended June 30, 2020 and 2019, were 23.2% and 22.9%, respectively. The effective tax ratessuch periods which approximated statutory rates and include the effect of investments in tax-exempt instruments, offset by non-deductible expenses.rates.
Segment Results from Continuing Operations
Banking Segment
The following table presents certain information about the operating results of our banking segment (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | |||||||
| | Three Months Ended June 30, |
| Variance | | Six Months Ended June 30, |
| Variance | | | Three Months Ended March 31, |
| Variance | | |||||||||||||||
| | 2020 | | 2019 | | 2020 vs 2019 | | 2020 | | 2019 | | 2020 vs 2019 | | | 2021 | | 2020 | | 2021 vs 2020 | | |||||||||
Net interest income | | $ | 94,102 | | $ | 93,423 | | $ | 679 | | $ | 188,025 | | $ | 186,113 | | $ | 1,912 | | | $ | 103,884 | | $ | 93,923 | | $ | 9,961 | |
Provision for (reversal of) credit losses | |
| 65,600 | |
| (670) | |
| 66,270 | |
| 99,875 | |
| 355 | |
| 99,520 | | |
| (5,175) | |
| 34,275 | |
| (39,450) | |
Noninterest income | |
| 10,656 | |
| 10,742 | |
| (86) | |
| 19,427 | |
| 21,362 | |
| (1,935) | | |
| 11,324 | |
| 8,771 | |
| 2,553 | |
Noninterest expense | | | 56,622 | |
| 58,251 | |
| (1,629) | | | 113,589 | |
| 118,977 | |
| (5,388) | | | | 55,788 | |
| 56,967 | |
| (1,179) | |
Income (loss) before income taxes | | $ | (17,464) | | $ | 46,584 | | $ | (64,048) | | $ | (6,012) | | $ | 88,143 | | $ | (94,155) | | ||||||||||
Income before income taxes | | $ | 64,595 | | $ | 11,452 | | $ | 53,143 | |
The declinesincrease in income (loss) before income taxes during the three and six months ended June 30, 2020,March 31, 2021, compared with the same periodsperiod in 2019, were2020, was primarily due to the combined impact of both a reversal of credit losses during the first quarter of 2021, which reflected improvements in macroeconomic forecast assumptions from the prior quarter and the significant increase in the provision for credit losses during the first quarter of 2020 associated with the adoption of CECL and the market disruption caused by COVID-19. Changes to net interest income related to the component changes in the volume of average interest-earning assets and interest-bearing liabilities and changes in the rates earned or paid on those items are discussed in more detail below.
The information shown in the table below includes certain key indicators of the performance and asset quality of our banking segment.
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | Six Months Ended June 30, | | | Three Months Ended March 31, | | ||||||
|
| 2020 |
| 2019 |
| | 2020 |
| 2019 | |
| 2021 |
| 2020 |
|
Efficiency ratio (1) |
| 54.05 | % | 55.92 | % | | 54.75 | % | 57.35 | % |
| 48.42 | % | 55.47 | % |
Return on average assets (2) |
| (0.42) | % | 1.43 | % | | (0.08) | % | 1.38 | % |
| 1.48 | % | 0.33 | % |
Net interest margin (3) | | 3.11 | % | 4.06 | % | | 3.42 | % | 4.15 | % | | 3.30 | % | 3.81 | % |
Net charge-offs to average loans outstanding (4) | | (0.90) | % | (0.18) | % | | (0.51) | % | (0.14) | % | |||||
Net recoveries (charge-offs) to average loans outstanding (4) | | 0.03 | % | (0.09) | % |
(1) | Efficiency ratio is defined as noninterest expenses divided by the sum of total noninterest income and net interest income for the period. We consider the efficiency ratio to be a measure of the banking segment’s profitability. |
(2) | Return |
(3) | Net interest margin is defined as net interest income divided by average interest-earning assets. We consider net interest margin as a key indicator of profitability, as it represents interest earned on interest-earning assets compared to interest incurred. |
(4) | Net |
6755
The banking segment presents net interest margin and net interest income in the following discussion and tables below on a taxable equivalent basis. Net interest margin (taxable equivalent), a non-GAAP measure, is defined as taxable equivalent net interest income divided by average interest-earning assets. Taxable equivalent adjustments are based on the applicable corporate federal income tax rate of 21% for all periods presented. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest margins for all earning assets, we use net interest income on a taxable equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments.
During the three months ended June 30,March 31, 2021 and 2020, and 2019, purchase accounting contributed 1217 and 3130 basis points, respectively, to the banking segment’s taxable equivalent net interest margin of 3.12%3.31% and 4.06%, respectively. During the six months ended June 30, 2020 and 2019, purchase accounting contributed 20 and 37 basis points, respectively, to the banking segment’s taxable equivalent net interest margin of 3.43% and 4.15%3.82%, respectively. These purchase accounting items are primarily related to accretion of discount of loans associated with the Bank Transactions as detailed in the tables previously presented in the Consolidated Operating Results section.
The tablestable below provideprovides additional details regarding our banking segment’s net interest income (dollars in thousands).
| | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | ||||||||||||||
| | 2020 | | 2019 | | ||||||||||||
|
| Average |
| Interest |
| Annualized |
| Average |
| Interest |
| Annualized |
| ||||
| | Outstanding | | Earned or | | Yield or | | Outstanding | | Earned or | | Yield or | | ||||
| | Balance | | Paid | | Rate | | Balance | | Paid | | Rate | | ||||
Assets | | | | | | | | | | | | | | | | | |
Interest-earning assets | | | | | | | | | | | | | | | | | |
Loans held for investment, gross (1) | | $ | 7,295,513 | | $ | 83,408 |
| 4.54 | % | $ | 6,562,887 | | $ | 92,311 |
| 5.58 | % |
Subsidiary warehouse lines of credit | |
| 2,109,947 | |
| 19,898 |
| 3.73 | % |
| 1,180,367 | |
| 14,064 |
| 4.71 | % |
Investment securities - taxable | |
| 1,243,917 | |
| 6,677 |
| 2.15 | % |
| 1,185,925 | |
| 7,650 |
| 2.58 | % |
Investment securities - non-taxable (2) | |
| 114,272 | |
| 977 |
| 3.42 | % |
| 93,198 | |
| 796 |
| 3.42 | % |
Federal funds sold and securities purchased under agreements to resell | |
| 401 | |
| — |
| 0.03 | % |
| 454 | |
| — |
| 0.18 | % |
Interest-bearing deposits in other financial institutions | |
| 1,335,238 | |
| 339 |
| 0.10 | % |
| 167,583 | |
| 1,004 |
| 2.40 | % |
Other | |
| 40,559 | |
| (300) |
| (2.96) | % |
| 48,987 | |
| 609 |
| 4.98 | % |
Interest-earning assets, gross (2) | |
| 12,139,847 | |
| 110,999 |
| 3.63 | % |
| 9,239,401 | |
| 116,434 |
| 5.00 | % |
Allowance for credit losses | |
| (101,821) | | | | | | |
| (59,363) | | | | | | |
Interest-earning assets, net | |
| 12,038,026 | | | | | | |
| 9,180,038 | | | | | | |
Noninterest-earning assets | |
| 992,270 | | | | | | |
| 931,815 | | | | | | |
Total assets | | $ | 13,030,296 | | | | | | | $ | 10,111,853 | | | | | | |
| | | | | | | | | | | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | | |
Interest-bearing deposits | | $ | 7,801,882 | | $ | 16,142 |
| 0.83 | % | $ | 5,523,716 | | $ | 19,940 |
| 1.45 | % |
Notes payable and other borrowings | |
| 173,888 | |
| 558 |
| 1.28 | % |
| 494,439 | |
| 2,918 |
| 2.34 | % |
Total interest-bearing liabilities | |
| 7,975,770 | |
| 16,700 |
| 0.84 | % |
| 6,018,155 | |
| 22,858 |
| 1.52 | % |
Noninterest-bearing liabilities | | | | | | | | | | | | | | | | | |
Noninterest-bearing deposits | |
| 3,330,573 | | | | | | |
| 2,517,946 | | | | | | |
Other liabilities | |
| 124,761 | | | | | | |
| 74,802 | | | | | | |
Total liabilities | |
| 11,431,104 | | | | | | |
| 8,610,903 | | | | | | |
Stockholders’ equity | |
| 1,599,192 | | | | | | |
| 1,500,950 | | | | | | |
Total liabilities and stockholders’ equity | | $ | 13,030,296 | | | | | | | $ | 10,111,853 | | | | | | |
| | | | | | | | | | | | | | | | | |
Net interest income (2) | | | | | $ | 94,299 | | | | | | | $ | 93,576 | | | |
Net interest spread (2) | | | | | | |
| 2.79 | % | | | | | |
| 3.48 | % |
Net interest margin (2) | | | | | | |
| 3.12 | % | | | | | |
| 4.06 | % |
68
| | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | ||||||||||||||
| | 2020 | | 2019 | | ||||||||||||
|
| Average |
| Interest |
| Annualized |
| Average |
| Interest |
| Annualized |
| ||||
| | Outstanding | | Earned or | | Yield or | | Outstanding | | Earned or | | Yield or | | ||||
| | Balance | | Paid | | Rate | | Balance | | Paid | | Rate | | ||||
Assets | | | | | | | | | | | | | | | | | |
Interest-earning assets | | | | | | | | | | | | | | | | | |
Loans held for investment, gross (1) | | $ | 7,016,800 | | $ | 173,337 |
| 4.90 | % | $ | 6,461,968 | | $ | 183,621 |
| 5.66 | % |
Subsidiary warehouse lines of credit | |
| 1,788,722 | |
| 34,333 |
| 3.80 | % |
| 1,059,085 | |
| 25,149 |
| 4.72 | % |
Investment securities - taxable | |
| 1,228,847 | |
| 14,079 |
| 2.29 | % |
| 1,150,060 | |
| 14,742 |
| 2.56 | % |
Investment securities - non-taxable (2) | |
| 110,676 | |
| 1,877 |
| 3.39 | % |
| 95,383 | |
| 1,625 |
| 3.41 | % |
Federal funds sold and securities purchased under agreements to resell | |
| 480 | |
| 1 |
| 0.22 | % |
| 435 | |
| — |
| 0.15 | % |
Interest-bearing deposits in other financial institutions | |
| 815,465 | |
| 1,246 |
| 0.31 | % |
| 241,540 | |
| 2,918 |
| 2.44 | % |
Other | |
| 49,308 | |
| 251 |
| 1.02 | % |
| 45,057 | |
| 1,153 |
| 5.12 | % |
Interest-earning assets, gross (2) | |
| 11,010,298 | |
| 225,124 |
| 4.06 | % |
| 9,053,528 | |
| 229,208 |
| 5.05 | % |
Allowance for credit losses | |
| (88,083) | | | | | | |
| (59,386) | | | | | | |
Interest-earning assets, net | |
| 10,922,215 | | | | | | |
| 8,994,142 | | | | | | |
Noninterest-earning assets | |
| 956,029 | | | | | | |
| 938,574 | | | | | | |
Total assets | | $ | 11,878,244 | | | | | | | $ | 9,932,716 | | | | | | |
| | | | | | | | | | | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | | |
Interest-bearing deposits | | $ | 6,912,743 | | $ | 34,901 |
| 1.02 | % | $ | 5,524,537 | | $ | 38,935 |
| 1.42 | % |
Notes payable and other borrowings | |
| 248,722 | |
| 1,823 |
| 1.46 | % |
| 338,028 | |
| 3,851 |
| 2.27 | % |
Total interest-bearing liabilities | |
| 7,161,465 | |
| 36,724 |
| 1.03 | % |
| 5,862,565 | |
| 42,786 |
| 1.47 | % |
Noninterest-bearing liabilities | | | | | | | | | | | | | | | | | |
Noninterest-bearing deposits | |
| 3,035,303 | | | | | | |
| 2,503,017 | | | | | | |
Other liabilities | |
| 112,025 | | | | | | |
| 83,503 | | | | | | |
Total liabilities | |
| 10,308,793 | | | | | | |
| 8,449,085 | | | | | | |
Stockholders’ equity | |
| 1,569,451 | | | | | | |
| 1,483,631 | | | | | | |
Total liabilities and stockholders’ equity | | $ | 11,878,244 | | | | | | | $ | 9,932,716 | | | | | | |
| | | | | | | | | | | | | | | | | |
Net interest income (2) | | | | | $ | 188,400 | | | | | | | $ | 186,422 | | | |
Net interest spread (2) | | | | | | |
| 3.03 | % | | | | | |
| 3.58 | % |
Net interest margin (2) | | | | | | |
| 3.43 | % | | | | | |
| 4.15 | % |
| | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | ||||||||||||||
| | 2021 | | 2020 | | ||||||||||||
|
| Average |
| Interest |
| Annualized |
| Average |
| Interest |
| Annualized |
| ||||
| | Outstanding | | Earned or | | Yield or | | Outstanding | | Earned or | | Yield or | | ||||
| | Balance | | Paid | | Rate | | Balance | | Paid | | Rate | | ||||
Assets | | | | | | | | | | | | | | | | | |
Interest-earning assets | | | | | | | | | | | | | | | | | |
Loans held for investment, gross (1) | | $ | 7,185,414 | | $ | 84,519 |
| 4.72 | % | $ | 6,738,086 | | $ | 89,929 |
| 5.30 | % |
Subsidiary warehouse lines of credit | |
| 2,338,614 | |
| 21,910 |
| 3.75 | % |
| 1,467,498 | |
| 14,435 |
| 3.89 | % |
Investment securities - taxable | |
| 1,786,911 | |
| 6,272 |
| 1.40 | % |
| 1,213,777 | |
| 7,402 |
| 2.44 | % |
Investment securities - non-taxable (2) | |
| 115,069 | |
| 985 |
| 3.42 | % |
| 107,079 | |
| 900 |
| 3.36 | % |
Federal funds sold and securities purchased under agreements to resell | |
| 386 | |
| — |
| 0.00 | % |
| 560 | |
| 1 |
| 0.36 | % |
Interest-bearing deposits in other financial institutions | |
| 1,286,353 | |
| 321 |
| 0.10 | % |
| 295,692 | |
| 906 |
| 1.23 | % |
Other | |
| 36,813 | |
| 74 |
| 0.81 | % |
| 58,055 | |
| 552 |
| 3.80 | % |
Interest-earning assets, gross (2) | |
| 12,749,560 | |
| 114,081 |
| 3.58 | % |
| 9,880,747 | |
| 114,125 |
| 4.59 | % |
Allowance for credit losses | |
| (149,082) | | | | | | |
| (74,345) | | | | | | |
Interest-earning assets, net | |
| 12,600,478 | | | | | | |
| 9,806,402 | | | | | | |
Noninterest-earning assets | |
| 996,312 | | | | | | |
| 919,788 | | | | | | |
Total assets | | $ | 13,596,790 | | | | | | | $ | 10,726,190 | | | | | | |
| | | | | | | | | | | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | | |
Interest-bearing deposits | | $ | 7,511,096 | | $ | 9,581 |
| 0.52 | % | $ | 6,023,604 | | $ | 18,758 |
| 1.25 | % |
Notes payable and other borrowings | |
| 149,144 | |
| 402 |
| 1.09 | % |
| 323,555 | |
| 1,266 |
| 1.55 | % |
Total interest-bearing liabilities | |
| 7,660,240 | |
| 9,983 |
| 0.53 | % |
| 6,347,159 | |
| 20,024 |
| 1.27 | % |
Noninterest-bearing liabilities | | | | | | | | | | | | | | | | | |
Noninterest-bearing deposits | |
| 4,077,479 | | | | | | |
| 2,740,033 | | | | | | |
Other liabilities | |
| 188,586 | | | | | | |
| 99,289 | | | | | | |
Total liabilities | |
| 11,926,305 | | | | | | |
| 9,186,481 | | | | | | |
Stockholders’ equity | |
| 1,670,485 | | | | | | |
| 1,539,709 | | | | | | |
Total liabilities and stockholders’ equity | | $ | 13,596,790 | | | | | | | $ | 10,726,190 | | | | | | |
| | | | | | | | | | | | | | | | | |
Net interest income (2) | | | | | $ | 104,098 | | | | | | | $ | 94,101 | | | |
Net interest spread (2) | | | | | | |
| 3.05 | % | | | | | |
| 3.32 | % |
Net interest margin (2) | | | | | | |
| 3.31 | % | | | | | |
| 3.82 | % |
(1) | Average balance includes non-accrual loans. |
(2) | Presented on a taxable equivalent basis with annualized taxable equivalent adjustments based on the applicable corporate federal income tax |
The banking segment’s net interest margin exceeds our consolidated net interest margin. Our consolidated net interest margin includes certain items that are not reflected in the calculation of our net interest margin within our banking segment and reduce our consolidated net interest margin, such as the borrowing costs of Hilltop and the yields and costs associated with certain items within interest-earning assets and interest-bearing liabilities in the broker-dealer segment, including items related to securities financing operations that particularly decrease net interest margin. In addition, the banking segment’s interest-earning assets include warehouse lines of credit extended to other subsidiaries, (operating segments), which are eliminated from the consolidated financial statements. The banking segment’s net interest marginsmargin for the three and six months ended June 30, 2020 were alsoMarch 31, 2021 was negatively impacted by certain actions taken by management during 2020 to strengthen the Bank’s available liquidity position. Such actions, including increasing overall cash balances by raising brokered money
56
market and brokered time deposits, and raising capital through the issuance of subordinated debt, have beenwere taken out of an abundance of caution as the pandemic continues to create significant uncertainty in the banking and capital markets.
69
The following table summarizes the changes in the banking segment’s net interest income for the periods indicated below, including the component changes in the volume of average interest-earning assets and interest-bearing liabilities and changes in the rates earned or paid on those items (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | Three Months Ended March 31, |
| |||||||||||||||||||||
| | 2020 vs. 2019 | | 2020 vs. 2019 |
| | 2021 vs. 2020 |
| |||||||||||||||||||||
| | Change Due To (1) | | | | | Change Due To (1) | | | |
| | Change Due To (1) | | | |
| ||||||||||||
|
| Volume |
| Yield/Rate |
| Change |
| Volume |
| Yield/Rate |
| Change |
|
| Volume |
| Yield/Rate |
| Change |
| |||||||||
Interest income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans held for investment, gross | | $ | 10,192 | | $ | (19,095) | | $ | (8,903) | | $ | 7,829 | | $ | (18,113) | | $ | (10,284) | | | $ | 5,846 | | $ | (11,256) | | $ | (5,410) | |
Subsidiary warehouse lines of credit | |
| 10,924 | |
| (5,090) | |
| 5,834 | |
| 8,591 | |
| 593 | |
| 9,184 | | |
| 8,358 | |
| (883) | |
| 7,475 | |
Investment securities - taxable | |
| 373 | |
| (1,346) | |
| (973) | |
| 504 | |
| (1,167) | |
| (663) | | |
| 3,447 | |
| (4,577) | |
| (1,130) | |
Investment securities - non-taxable (2) | |
| 180 | |
| 1 | |
| 181 | |
| 130 | |
| 122 | |
| 252 | | |
| 66 | |
| 19 | |
| 85 | |
Federal funds sold and securities purchased under agreements to resell | |
| — | |
| — | |
| — | |
| — | |
| 1 | |
| 1 | | |
| — | |
| (1) | |
| (1) | |
Interest-bearing deposits in other financial institutions | |
| 6,998 | |
| (7,663) | |
| (665) | |
| 3,486 | |
| (5,158) | |
| (1,672) | | |
| 3,011 | |
| (3,596) | |
| (585) | |
Other | |
| (105) | |
| (804) | |
| (909) | |
| 54 | |
| (956) | |
| (902) | | |
| (199) | |
| (279) | |
| (478) | |
Total interest income (2) | |
| 28,562 | | | (33,997) | | | (5,435) | | | 20,594 | | | (24,678) | | | (4,084) | | | | 20,529 | | | (20,573) | | | (44) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deposits | | $ | 8,224 | | $ | (12,022) | | $ | (3,798) | | $ | 4,919 | | $ | (8,953) | | $ | (4,034) | | | $ | 4,594 | | $ | (13,771) | | $ | (9,177) | |
Notes payable and other borrowings | |
| (1,867) | |
| (493) | |
| (2,360) | |
| (505) | |
| (1,523) | |
| (2,028) | | |
| (667) | |
| (197) | |
| (864) | |
Total interest expense | |
| 6,357 | |
| (12,515) | |
| (6,158) | |
| 4,414 | |
| (10,476) | |
| (6,062) | | |
| 3,927 | |
| (13,968) | |
| (10,041) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net interest income (2) | | $ | 22,205 | | $ | (21,482) | | $ | 723 | | $ | 16,180 | | $ | (14,202) | | $ | 1,978 | | | $ | 16,602 | | $ | (6,605) | | $ | 9,997 | |
(1) | Changes attributable to both volume and yield/rate are included in yield/rate column. |
(2) | Annualized taxable equivalent. |
Changes in the yields earned on interest-earning assets decreased taxable equivalent net interest income during the three and six months ended June 30, 2020,March 31, 2021, compared to the same periodsperiod in 2019,2020, primarily as a result of lower loan yields due to decreased market rates, the addition of 1% note rate PPP loans, and the decrease in accretion of discount on loans of $3.2 million and $5.3 million, respectively.$1.8 million. Accretion of discount on loans is expected to continue to decrease in future periods as loans acquired in the Bank Transactions are repaid, refinanced or renewed. Changes in the volume of interest-earning assets, primarily due to seasonal increasesthe significant increase in mortgage warehouse lending volume and new PPP loan originations, and higher cash balances held at the Federal Reserve, increased taxable equivalent net interest income during the three and six months ended June 30, 2020,March 31, 2021, compared with the same periodsperiod in 2019.2020. Changes in rates paid on interest-bearing liabilities increased taxable equivalent net interest income during the three and six months ended June 30, 2020,March 31, 2021, compared with the same periodsperiod in 2019,2020, due to decreases in market interest rates. Our portfolio includes loans that periodically reprice or mature prior to the end of an amortized term. Some of our variable-rate loans remain at applicable rate floors, which may delay and/or limit changes in net interest income during a period of changing rates. If interest rates were to fall further, the impact on our net interest income for certain variable-rate loans would be limited by these rate floors. In addition, declining interest rates may reduce our cost of funds on deposits. The extent of this impact will ultimately be driven by the timing, magnitude and frequency of interest rate and yield curve movements, as well as changes in market conditions and timing of management strategies. If interest rates were to rise, yields on the portion of our loan portfolio that remain at applicable rate floors would rise more slowly than increases in market interest rates. Any changes in interest rates across the term structure will continue to impact net interest income and net interest margin. The impact of rate movements will change with the shape of the yield curve, including any changes in steepness or flatness and inversions at any points on the yield curve.
In response to the COVID-19 pandemic, the Bank implemented several actions to better support our impacted banking clients. Such programs include loan modifications such as principal and/or interest payment deferrals, participation in the PPP as an SBA preferred lender and personal banking assistance including waived fees, increased daily spending limits and suspension of residential foreclosure activities. The extent to which these measures will impact the Bank is uncertain. The adverse economic conditions caused by the COVID-19 pandemic have had and can be expected to continue to have a significant adverse effect onnegatively impacted the banking segment’s business and results of operations, including significantly reduced demand for loan products and services from customers, deposit balance attrition, possible
70
recognition of credit losses and increases in allowance for credit losses, especially if businesses remain limited in their operating capacity, unemployment remains elevated and customers draw on their lines of credit or seek additional loans to help finance their businesses, and possible constraints on liquidity and capital, whether due to increases in risk-weighted assets related to supporting customer activities or to regulatory actions.losses. In the event future operating performance is below our projections, there are negative changes to projected provision for credit losses on loans, long-term loan and deposit growth rates or discount rates increase, the
57
estimated fair value of the banking reporting unit may decline below carrying value, and we may be required to record a goodwill impairment charge. Additionally, with regardsrespect to its core deposit intangible assets, in the event that the deposit retention levels and derived cost savings from available core deposits at the Bank relative to an alternative cost of funds falls to a level that cannot support the remaining carrying value, we may be required to record an impairment charge. The extentWe will continue to whichmonitor developments regarding the COVID-19 pandemic negatively affects the banking segment’s business, results of operations and financial condition, as well as its regulatory capital and liquidity ratios, will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third partiesmeasures implemented in response to the pandemic, as discussedmarket capitalization, overall economic conditions, effectiveness of vaccinations, government stimulus, payment deferral programs and any other triggering events or circumstances that may indicate an impairment in morethe future. See further detail in the “Recent Developments” section above.
During the three months ended June 30,March 31, 2021 and 2020, and 2019, the banking segment retained approximately $12.0$159 million and $12.4 million, respectively, in mortgage loans originated by the mortgage origination segment. During the six months ended June 30, 2020 and 2019, the banking segment retained approximately $142.5 million and $19.9$131 million, respectively, in mortgage loans originated by the mortgage origination segment. These loans are purchased by the banking segment at par. For origination services provided, the banking segment reimburses the mortgage origination segment for direct origination costs associated with these mortgage loans, in addition to payment of a correspondent fee. The correspondent fees are eliminated in consolidation. In March 2020, the Bank made a decision to sell the previously purchased mortgage loans to the mortgage origination segment, instead of holding them for investment. In October 2020, the Bank began purchasing and retaining mortgage loans originated by the mortgage origination segment again. During 2021, we expect loans originated by the mortgage origination segment on behalf of and retained by the banking segment to increase based on approved authority for up to 5% of the mortgage origination segment’s total origination volume. The determination of mortgage loan retention levels by the banking segment will be impacted by, among other things, an ongoing review of the prevailing mortgage rates, balance sheet positioning at Hilltop and the banking segment’s outlook for commercial loan growth.
The banking segment’s provision forreversal of credit losses increased during the three and six months ended June 30, 2020, compared to the same periods in 2019,March 31, 2021 reflected a net reversal of credit losses of $5.2 million on loans held for investment. This net reversal of credit losses was primarily comprised of a net reversal of credit losses on expected losses of collectively evaluated loans of $6.5 million primarily due to improvements in the build in reserves associated withmacroeconomic forecast assumptions from the prior quarter, partially offset by slower prepayment assumptions on certain commercial real estate and construction and land portfolios, as well as an increase in the expected lifetime credit losses under CECL. During the three and six months ended June 30, 2020, individually evaluated loans accounted for $5.8 million and $23.1 million, respectively, of the provision for credit losses while collectivelyon individually evaluated loans within the portfolio accounted for $59.9of $1.3 million and $76.6 million, respectively, of the total respective provision primarily attributablerelated to the market disruption and related economic uncertainties caused by COVID-19. The changes in provision forrisk rating grades and updated realizable values. The change in credit losses during the noted periods wereperiod was also attributable to other factors including, but not limited to, loan growth, loan mix and changes in risk rating grades.qualitative factors from the prior quarter. The change in the allowance during the three and six months ended June 30, 2020March 31, 2021 was also impacted by net charge-offsrecoveries of $16.4 million and $17.9 million, respectively, primarily associated with loans specifically reserved for during the first quarter of 2020.$0.6 million. Refer to the discussion in the “Financial Condition – Allowance for Credit Losses on Loans” section that follows for more details regarding the significant assumptions and estimates involved in estimating credit losses.
The banking segment’s noninterest income was relatively flatincreased during the three months ended June 30, 2020,March 31, 2021, compared to the same period in 2019, while noninterest income decreased during the six months ended June 30, 2020, compared to the same period in 2019, primarily due to increased other real estate owned (“OREO”) income as well as changes in our intercompany financing charges and service charge relief provided to consumers in responses to COVID-19.charges.
The banking segment’s noninterest expensesexpense decreased during the three and six months ended June 30, 2020,March 31, 2021, compared to the same periodsperiod in 2019,2020, primarily due to a reductiondecrease in the reserve for unfunded commitments attributable to year-over-year changes in macroeconomic uncertainties and available commitment balances and reductions in salary and employee benefits, legal, and business development and other operating expenses, as well as an increase in gain on sale of OREO properties, partially offset by an increase in the reserve for unfunded commitments.
FDIC assessment and OREO expenses.
7158
Broker-Dealer Segment
The following table provides additional detaildetails regarding our broker-dealer segment operating results (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Variance | | Six Months Ended June 30, | | Variance | | | Three Months Ended March 31, | | Variance | | |||||||||||||||
|
| 2020 |
| 2019 |
| 2020 vs 2019 | | 2020 |
| 2019 |
| 2020 vs 2019 | |
| 2021 |
| 2020 | | 2021 vs 2020 | | |||||||||
Net interest income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Wealth management: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securities lending | | $ | 2,087 | | $ | 2,047 | | $ | 40 | | $ | 4,137 | | $ | 4,168 | | $ | (31) | | | $ | 3,486 | | $ | 2,050 | | $ | 1,436 | |
Clearing services | | | 1,992 | | | 3,085 | | | (1,093) | | | 4,570 | | | 5,736 | | | (1,166) | | | | 1,449 | | | 2,578 | | | (1,129) | |
Structured finance | | | 1,490 | | | 1,472 | | | 18 | | | 4,048 | | | 3,625 | | | 423 | | ||||||||||
Structured finance (5) | | | 396 | | | 2,923 | | | (2,527) | | |||||||||||||||||||
Fixed income services (5) | | | 3,159 | | | 1,097 | | | 2,062 | | | 5,683 | | | 2,151 | | | 3,532 | | | | 4,128 | | | 2,524 | | | 1,604 | |
Other (5) | | | 935 | | | 3,709 | | | (2,774) | | | 4,398 | | | 8,580 | | | (4,182) | | | | 1,055 | | | 3,098 | | | (2,043) | |
Total net interest income | | | 9,663 | | | 11,410 | | | (1,747) | | | 22,836 | | | 24,260 | | | (1,424) | | | | 10,514 | | | 13,173 | | | (2,659) | |
Noninterest income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Securities commissions and fees by business line (1): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed income services (5) | | | 12,617 | | | 8,583 | | | 4,034 | | | 25,773 | | | 19,363 | | | 6,410 | | ||||||||||
Fixed income services | | | 13,674 | | | 13,156 | | | 518 | | |||||||||||||||||||
Wealth management: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Retail | | | 16,794 | | | 18,805 | | | (2,011) | | | 37,558 | | | 36,856 | | | 702 | | ||||||||||
Retail (5) | | | 18,754 | | | 20,352 | | | (1,598) | | |||||||||||||||||||
Clearing services | | | 7,959 | | | 8,484 | | | (525) | | | 16,965 | | | 17,269 | | | (304) | | | | 6,242 | | | 9,006 | | | (2,764) | |
Other (5) | | | 998 | | | 1,114 | | | (116) | | | 2,058 | | | 2,315 | | | (257) | | ||||||||||
Structured finance (5) | | | 334 | | | 412 | | | (78) | | |||||||||||||||||||
Other | | | 1,044 | | | 1,060 | | | (16) | | |||||||||||||||||||
| | | 38,368 | | | 36,986 | | | 1,382 | | 82,354 | | | 75,803 | | | 6,551 | | | | 40,048 | | | 43,986 | | | (3,938) | | |
Investment and securities advisory fees and commissions by business line: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Public finance services (5) | | | 18,245 | | | 14,901 | | | 3,344 | | | 32,793 | | | 28,205 | | | 4,588 | | | | 17,463 | | | 16,507 | | | 956 | |
Fixed income services (5) | | | 3,165 | | | 1,417 | | | 1,748 | | | 4,495 | | | 2,895 | | | 1,600 | | | | 1,904 | | | (214) | | | 2,118 | |
Wealth management: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Retail | | | 5,063 | | | 5,160 | | | (97) | | | 11,044 | | | 9,703 | | | 1,341 | | | | 7,250 | | | 5,981 | | | 1,269 | |
Clearing services | | | 329 | | | 320 | | | 9 | | | 709 | | | 595 | | | 114 | | | | 445 | | | 380 | | | 65 | |
Structured finance (5) | | | 2,234 | | | 1,028 | | | 1,206 | | | 3,090 | | | 1,568 | | | 1,522 | | | | 556 | | | 441 | | | 115 | |
Other | | | 84 | | | 33 | | | 51 | | | 169 | | | 53 | | | 116 | | | | 77 | | | 85 | | | (8) | |
| | | 29,120 | | | 22,859 | | | 6,261 | | 52,300 | | | 43,019 | | | 9,281 | | | | 27,695 | | | 23,180 | | | 4,515 | | |
Other: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Structured finance | | | 43,091 | | | 37,819 | | | 5,272 | | | 52,448 | | | 61,547 | | | (9,099) | | | | 24,551 | | | 9,357 | | | 15,194 | |
Fixed income services (5) | | | 11,438 | | | 7,654 | | | 3,784 | | | 22,182 | | | 15,564 | | | 6,618 | | ||||||||||
Other (5) | | | 944 | | | 241 | | | 703 | | | (114) | | | 932 | | | (1,046) | | ||||||||||
Fixed income services | | | 6,035 | | | 10,744 | | | (4,709) | | |||||||||||||||||||
Other | | | 294 | | | (1,058) | | | 1,352 | | |||||||||||||||||||
| | | 55,473 | | | 45,714 | | | 9,759 | | | 74,516 | | | 78,043 | | | (3,527) | | | | 30,880 | | | 19,043 | | | 11,837 | |
Total noninterest income | | | 122,961 | | | 105,559 | | | 17,402 | | | 209,170 | | | 196,865 | | | 12,305 | | | | 98,623 | | | 86,209 | | | 12,414 | |
Net revenue (2) | | | 132,624 | | | 116,969 | | | 15,655 | | | 232,006 | | | 221,125 | | | 10,881 | | | | 109,137 | | | 99,382 | | | 9,755 | |
Noninterest expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variable compensation (3) | | | 52,372 | | | 44,833 | | | 7,539 | | | 84,396 | | | 79,414 | | | 4,982 | | | | 37,412 | | | 32,024 | | | 5,388 | |
Non-variable compensation and benefits | | | 27,325 | | | 25,500 | | | 1,825 | | | 51,851 | | | 53,994 | | | (2,143) | | | | 28,615 | | | 24,526 | | | 4,089 | |
Segment operating costs (4) | | | 25,140 | | | 24,535 | | | 605 | | | 49,803 | | | 49,193 | | | 610 | | | | 25,443 | | | 24,663 | | | 780 | |
Total noninterest expense | | | 104,837 | | | 94,868 | | | 9,969 | | | 186,050 | | | 182,601 | | | 3,449 | | | | 91,470 | | | 81,213 | | | 10,257 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | $ | 27,787 | | $ | 22,101 | | $ | 5,686 | | $ | 45,956 | | $ | 38,524 | | $ | 7,432 | | | $ | 17,667 | | $ | 18,169 | | $ | (502) | |
(1) | Securities commissions and fees includes income of |
(2) | Net revenue is defined as the sum of total net interest income and total noninterest income. We consider net revenue to be a key performance measure in the evaluation of the broker-dealer segment’s financial position and operating performance as we believe it is the primary revenue performance measure used by investors and analysts. Net revenue provides for some level of comparability of trends across the financial services industry as it reflects both noninterest income, including investment and securities advisory fees and commissions, as well as net interest income. Internally, we assess the broker-dealer segment’s performance on a revenue basis for comparability with our banking segment. |
(3) | Variable compensation represents performance-based commissions and incentives. |
(4) | Segment operating costs include provision for credit losses associated with the broker-dealer |
(5) | Noted balances during all prior periods include certain reclassifications to conform to current period presentation. |
DuringDespite the three months ended June 30, 2020,continued economic disruptions related to the broker-dealer’spandemic, during the first quarter of 2021, the broker-dealer segment’s public finance services business line experienced improved resultsnet revenues of $1.3 million which was in line with a modest improvementimprovements in both Texas and national issuance activity and market share compared to the same period during the prior year, despite the economic disruptions related to the pandemic. Due to market volatilityyear. The structured finance business line experienced comparatively improved results with strong issuance volumes and increased demand for mortgage products in the first quarter of 2020,2021 as compared to the structured finance business linemarket volatility experienced fluctuating results; however, strong issuance volumes, combined with improved market conditions aided in the recovery in this business line. Structuring activity results also improved as demand for structured agency products rebounded in the secondfirst quarter of 2020. Additionally,However, interest rate volatility late in the second quarter of 2020,is expected to present headwinds to the business going forward. Additionally, although the fixed income services business line demonstratedline’s net revenues improved operating results. Transactional revenues improved$1.1 million, compared with the second quartersame period in 2020, this improvement was offset by the wind-down of 2019 as we experienced relative strengththe equity capital market business line, resulting in municipal, taxable, and mortgage products.an offsetting decline of net revenues of $1.6 million. The wealth management business line’s net revenues were lower in the second quarter of 2020,three months ended March 31, 2021, compared to the same period in the prior year,2020, as transactional revenues declined following the volatile markets experienced in the first quarter of 2020. Additionally, customer balance revenues were driven lower due to the current low interest rate environment. Additional information related to the impact of COVID-19 is included within the “Recent Developments” section above.
7259
The specific components of the overall increase$0.5 million decrease in the broker-dealer segment’s income before income taxes during the three and six months ended June 30, 2020,March 31, 2021, compared with the same period in 2019,2020, was primarily as a result of the following:
● |
● | a $9.5 million increase in compensation expense, of |
● | a $2.8 million decrease in net revenue in our wealth management business line, which was |
The broker-dealer segment is subject to interest rate risk as a consequence of maintaining inventory positions, trading in interest rate sensitive financial instruments and maintaining a matched stock loan book. Changes in interest rates are likely to have a meaningful impact on our overall financial performance. Our broker-dealer segment has historically earned a significant portion of its revenues from advisory fees upon the successful completion of client transactions.transactions, which could be adversely impacted by interest rate volatility. Rapid or significant changes in interest rates could adversely affect the broker-dealer segment’s bond trading, sales, underwriting activities and other interest spread-sensitive activities described below. The broker-dealer segment also receives administrative fees for providing money market and FDIC investment alternatives to clients, which tend to be sensitive to short term interest rates. In addition, the profitability of the broker-dealer segment depends, to an extent, on the spread between revenues earned on customer loans and excess customer cash balances, and the interest expense paid on customer cash balances, as well as the interest revenue earned on trading securities, net of financing costs.
In the broker-dealer segment, interest is earned from securities lending activities, interest charged on customer margin loan balances and interest earned on investment securities used to support sales, underwriting and other customer activities. NetThe decrease in net interest income decreased betweenduring the three and six months ended June 30,March 31, 2021, compared with the same period in 2020, and the comparable periods in 2019,was primarily due to decreases in net interest income from our structured finance business and the interest earned from customer activities. With the 118 basis point decrease in the three-month weighted average Federal Funds interest rate from March 31, 2020 to March 31, 2021, the amount of interest earned on money marketscustomer investment activities decreased as well. This decrease was partially offset by an increase in net interest earned from the broker-dealer’s taxable securities and margin loans.our stock lending business. The net interest spread in our stock lending business increased 21 basis points from March 31, 2020 to March 31, 2021.
Noninterest income increased betweenduring the three and six months ended June 30,March 31, 2021, compared to the same period in 2020, and the comparable periods in 2019, primarily due to increases in all areas of the business for the three months ended June 30, 2020 and increases in securities commissions and feesother noninterest income and investment and securities advisory fees and commissions, partially offset by decreasesa decrease in other noninterest income for the six months ended June 30, 2020.securities commissions and fees.
Securities commissions and fees increaseddecreased during the three and six months ended June 30, 2020,March 31, 2021, compared with the same periodsperiod in 2019,2020, primarily due to increasesa decrease in commissions earned on over-the-counter securities transactions in our fixed income serviceswealth management line of business line, partially offset by decreasesgiven declines in our retail group in commissions earned on over-the-counter securities, insurance productsmoney market and mutual fund sales transactions for the three months ended June 30, 2020
73
and increases in commissions earned on municipal bonds, over-the-counter securities and mortgage back securities transactions in our fixed income services business line for the six months ended June 30, 2020.$4.5 million.
Investment and securities advisory fees and commissions increased during the three and six months ended June 30, 2020,March 31, 2021, compared with the same periodsperiod in 2019,2020, primarily due to increases in municipal market transactionsfees earned from our underwriting activities of $2.0 million and for the six months ended June 30, 2020, an increase in money marketmanagement fees which leveled off and in some instances decreased in the second quarterearned by our wealth management business line from advisory services of 2020.$1.3 million.
Other noninterest income increased during the three months ended June 30, 2020 and decreased during the six months ended June 30, 2020,March 31, 2021, compared with the same periodsperiod in 2019.2020. The increase during the three months ended June 30, 2020period was primarily the result of a $5.3$15.2 million increase in trading gains earned from our structured finance business line’s derivative activities due to a stabilization from adjustments made instrong year-over-year volumes and robust customer
60
demand compared to the business line from heightened market volatility from the sudden shift in the previous quarter. The fixed income services business line’s trading portfolio activities, primarily in our municipal securities portfolio resulted in a $3.8 million increase for the three months ended June 30, 2020. The decrease during the six months ended June 30, 2020 was primarily as a result of a $9.1 million decrease in trading gains earned from our structured finance business’ derivative activities due to heightenedhousing market volatility in March 2020 as previously discussed.brought on by the COVID-19 pandemic. An additional $1.0$1.3 million of the decreaseincrease was noted in our deferred compensation plan investments due to the decreaseincrease in the financial markets from the prior year comparativecomparable period. These decreasesyear-over-year increases were partially offset by a $6.6$4.7 million increasedecrease in other interest income within our fixed income services business line as discussed above.within both our taxable and municipal securities trading portfolios.
Noninterest expenses increased during the three and six months ended June 30, 2020,March 31, 2021, compared to the same periodsperiod in 2019,2020, primarily due to increases in variable compensation partially offset, for the six months ended June 30, 2020, by the $2.2 millionand an increase in pre-tax costs in the first quarterour deferred compensation expenses of 2019 associated with the Leadership Changes as discussed in the “Factors Affecting Results of Operations” section above and decreased expenses from the broker-dealer segment’s 2019 efficiency initiative. Other$1.7 million. Additionally, other noninterest expensesexpense increased during the sixthree months ended June 30, 2020,March 31, 2021, compared to the same period in 2019,2020, primarily due to increased expenses in 2021 associated with the deployment of athe new back-office system on June 1, 2020.system.
Selected information concerning the broker-dealer segment, including key performance indicators, follows (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended March 31, | | |||||||||||||
| 2020 |
| | 2019 |
| | 2020 |
| | 2019 | | | 2021 |
| | 2020 | | |||
Total compensation as a % of net revenue (1) | | 60.1 | % | | 60.1 | % | | | 58.7 | % | | 60.3 | % | | | 60.5 | % | | 56.9 | % |
Pre-tax margin (2) | | | | | | | | 19.8 | % | | 17.4 | % | | | 16.2 | % | | 18.3 | % | |
FDIC insured program balances at the Bank (end of period) | | | | | | | $ | 1,300,155 | | $ | 1,304,744 | | | $ | 734,685 | | $ | 1,500,117 | | |
Other FDIC insured program balances (end of period) | | | | | | | $ | 1,014,400 | | $ | 675,621 | | | $ | 1,839,707 | | $ | 761,452 | | |
Customer funds on deposit, including short credits (end of period) | | | | | | | $ | 430,388 | | $ | 325,427 | | | $ | 476,537 | | $ | 341,815 | | |
| | | | | | | | | | | | | | | | | | | | |
Public finance services: | | | | | | | | | | | | | | | | | | | | |
Number of issues | | 379 | | | 350 | | | 596 | | | 563 | | | | 231 | | | 217 | | |
Aggregate amount of offerings | $ | 14,784,486 | | $ | 14,333,886 | | $ | 26,177,625 | | $ | 26,125,624 | | | $ | 15,592,020 | | $ | 11,393,139 | | |
| | | | | | | | | | | | | | | | | | | | |
Structured finance: | | | | | | | | | | | | | | | | | | | | |
Lock production/TBA volume | $ | 2,070,420 | | $ | 1,650,597 | | $ | 4,024,902 | | $ | 2,798,811 | | | $ | 1,933,214 | | $ | 1,954,482 | | |
| | | | | | | | | | | | | | | | | | | | |
Fixed income services: | | | | | | | | | | | | | | | | | | | | |
Total volumes | $ | 27,853,061 | | $ | 22,570,905 | | $ | 53,444,078 | | $ | 42,602,822 | | | $ | 63,330,195 | | $ | 25,591,017 | | |
Net inventory (end of period) | | | | | | | $ | 590,368 | | $ | 553,586 | | | $ | 430,633 | | $ | 368,445 | | |
| | | | | | | | | | | | | | | | | | | | |
Wealth management (Retail and Clearing services groups): | | | | | | | | | | | | | | | | | | | | |
Retail employee representatives (end of period) | | | | | | | | 123 | | | 124 | | | | 109 | | | 121 | | |
Independent registered representatives (end of period) | | | | | | | | 191 | | | 203 | | | | 188 | | | 194 | | |
Correspondents (end of period) | | | | | | | | 137 | | | 148 | | | | 125 | | | 143 | | |
Correspondent receivables (end of period) | | | | | | | $ | 162,495 | | $ | 232,500 | | | $ | 217,889 | | $ | 245,316 | | |
Customer margin balances (end of period) | | | | | | | $ | 269,859 | | $ | 336,729 | | | $ | 301,219 | | $ | 260,476 | | |
| | | | | | | | | | | | | | | | | | | | |
Wealth management (Securities lending group): | | | | | | | | | | | | | | | | | | | | |
Interest-earning assets - stock borrowed (end of period) | | | | | | | $ | 1,112,826 | | $ | 1,569,362 | | | $ | 1,545,730 | | $ | 1,275,774 | | |
Interest-bearing liabilities - stock loaned (end of period) | | | | | | | $ | 982,070 | | $ | 1,459,218 | | | $ | 1,464,186 | | $ | 1,167,559 | |
(1) | Total compensation includes the sum of non-variable compensation and benefits and variable compensation. We consider total compensation as a percentage of net revenue to be a key performance measure and indicator of segment profitability. |
(2) | Pre-tax margin is defined as income before income taxes divided by net revenue. We consider pre-tax margin to be a key performance measure given its use as a profitability metric representing the percentage of net revenue earned that results in a profit. |
7461
Mortgage Origination Segment
The following table presents certain information regarding the operating results of our mortgage origination segment (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| Variance | | Six Months Ended June 30, |
| Variance | | | Three Months Ended March 31, |
| Variance | | |||||||||||||||
| | 2020 | | 2019 | | 2020 vs 2019 | | 2020 | | 2019 | | 2020 vs 2019 | | | 2021 | | 2020 | | 2021 vs 2020 | | |||||||||
Net interest income (expense) | | $ | (1,667) | | $ | (1,031) | | $ | (636) | | $ | (1,299) | | $ | (1,499) | | $ | 200 | | | $ | (7,098) | | $ | 368 | | $ | (7,466) | |
Noninterest income | |
| 340,487 | |
| 164,548 | |
| 175,939 | |
| 519,455 | |
| 282,580 | |
| 236,875 | | |
| 310,444 | |
| 178,968 | |
| 131,476 | |
Noninterest expense | | | 200,493 | |
| 141,721 | |
| 58,772 | | | 340,045 | |
| 256,398 | |
| 83,647 | | | | 210,334 | |
| 139,552 | |
| 70,782 | |
Income before income taxes | | $ | 138,327 | | $ | 21,796 | | $ | 116,531 | | $ | 178,111 | | $ | 24,683 | | $ | 153,428 | | | $ | 93,012 | | $ | 39,784 | | $ | 53,228 | |
The mortgage lending business is subject to variables that can impact loan origination volume, including seasonal transaction volumes and interest rate fluctuations. Historically, the mortgage origination segment has experienced increased loan origination volume from purchases of homes during the spring and summer months, when more people tend to move and buy or sell homes. An increase in mortgage interest rates tends to result in decreased loan origination volume from refinancings, while a decrease in mortgage interest rates tends to result in increased loan origination volume from refinancings. Changes in mortgage interest rates have historically had a lesser impact on home purchasepurchases volume than on refinancing volume. See details regarding refinancing volume in the table below.
As discussed in more detail in the “Recent Developments” section above, and as a result ofsince March 2020, economic uncertainties resulting from the spread of COVID-19 economic uncertainties continue to have had disruptive effects in locationson the financial markets in which the mortgage origination segment operates and the global economy more widely, as well as causingthe global economy. In response to the COVID-19 pandemic, during the first quarter of 2020, the FOMC reduced short-term rates by 150 basis points to a range of 0% to 0.25%. 10-year interest rates declined significantly during the first quarter 2020, which was followed by a steady decrease in mortgage interest rates during the remainder of 2020. Since December 2020, mortgage rates have increased, volatility and declines in financial markets. Loan origination volumebut remained lower during both the three and six months ended June 30, 2020, increased significantlyfirst quarter of 2021 compared to the same periodsperiod in 2019, as mortgage interest rates have continued to decline since the end of 2019. This trend,2020. Recent trends, as well as typical historical patterns in loan origination volume from purchases of homes or from refinancings as a result of movements in mortgage interest rates, may not be indicative of future loan origination volumes given the economic uncertainties stemming from the COVID-19 pandemic. The mortgage origination segment’s business is dependent upon the willingness and ability of its employees and customers to conduct mortgage transactions. The continuing impact of the COVID-19 pandemic’s impactpandemic on such customers could have a material adverse effect on the operations of the mortgage origination segment. A further increase in mortgage interest rates during the remainder of 2021 could impact the percentage mix of refinancing and purchase volumes relative to total loan origination volume compared to 2020.
Income before income taxes increased $116.5$53.2 million, or 534.6%133.8%, during the three months ended June 30, 2020,March 31, 2021, compared with the same period in 2019. Income before income taxes increased $153.4 million, or 621.6%, during the six months ended June 30, 2020, compared with the same period in 2019. These increases were2020. This increase was primarily the result of a significantslight increase in interest rate lock commitments (“IRLCs”) related to substantial increasesan increase in mortgage loan applications. In response to the COVID-19 pandemic, the FOMC reduced short-term rates by 150 basis pointsapplications, and to a rangegreater extent an increase in the average value of 0.00% to 0.25%. Further, the 10-year interest rates also declined significantly which led to an accelerated decrease in mortgage interest rates during the three and six months ended June 30, 2020.individual IRLCs.
The CARES Act provides borrowers the ability to request forbearance of residential mortgage loan payments, placing a significant strain on mortgage servicers as they may be required to fund missed or deferred payments related to loans in forbearance. A significant increase in nationwide forbearance requests hassince March 2020 resulted in the reduction of third-party mortgage servicers willing to purchase mortgage servicing rights. As a result of this market dynamic, beginning in the second quarter of 2020, we increased the amount of retained servicing on mortgage loan salesloans sold, as discussed in more detail below. Beginning in the fourth quarter of 2020 and continuing into the first quarter of 2021, PrimeLending began to 89%reduce the amount of total mortgage loan salesretained servicing. However, amounts retained during the three months ended June 30, 2020. We expect that PrimeLending will retain servicing in excessfirst quarter of 75% of its mortgage loan sales during2021 continued to exceed amounts retained prior to the remainder ofsecond quarter 2020. PrimeLending utilizes a third partythird-party to manage its servicing portfolio, and we therefore do not expect to incur additionalsignificant fluctuations in infrastructure costs to manage an increasechanges in PrimeLending’s servicing portfolio. PrimeLending’s liquidity has not been, and we do not expect that it will be significantly impacted by forbearance requests resulting from the anticipated increase in forbearance requests. In addition,CARES Act. GNMA, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation have imposed certainmay impose restrictions on loans the agencies will accept, including loans under a forbearance agreement, which could result in PrimeLending seeking non-agency investors or choosing to retain these loans.
As average mortgage interest rates decreased between the three months ended June 30,March 31, 2020 and the comparable period in 2019,2021, refinancing volume as a percentage of total origination volume increased from 15.9%35.4% to 47.5%53.1%. As averageSince December 2020, mortgage interest rates decreased between the six months ended June 30, 2020 and the comparable period in 2019, refinancing volume as a percentage of total origination volume increased from 16.0% to 42.9%. See details regarding refinancing volume in the table below.have increased. If current mortgage interest rates remain relatively unchanged, we anticipate a higherlower percentage of refinancing volumes relative to total loan origination volume forduring the remainderlast three quarters of 20202021 as compared to the same period in 2019. A higher refinance percentage could also be driven by a slowing of purchase
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compared to the first quarter of 2021. A higher refinance percentage could be driven by a slowing of purchase volume due to the negative impact on new and existing home sales resulting from the COVID-19 pandemic. While PrimeLending experienced a slight increase in purchase volume as a percentage of total loan origination volume during the latter part of the second quarter of 2020, we are uncertain whether this will continue.
The mortgage origination segment primarily originates its mortgage loans through a retail channel, with limited lending through its affiliated business arrangements (“ABAs”). For the sixthree months ended June 30, 2020,March 31, 2021, funded volume through ABAs was approximately 8.6%5% of the mortgage origination segment’s total loan volume. Currently,As of March 31, 2021, PrimeLending owns a 51%greater than 50% membership interest in fourthree ABAs. On June 18, 2020, the mortgage origination segment provided notice to the sole minority member of one of its ABA’s of its intention to dissolve the ABA by September 30, 2020. We expect total production within the ABA channel will range between 8% and 10%to increase slightly to 7% of the total loan volume of the mortgage origination segment for 2020.during the remainder of 2021.
The following table provides certainfurther details regarding our mortgage loan originations and selected informationsales for the periods indicated below (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||
| | Three Months Ended June 30, |
| | | | Six Months Ended June 30, | | | | | | Three Months Ended March 31, | | | | |||||||||||||||||||||||||
| | 2020 | | 2019 | | | | | 2020 | | 2019 | | | | | | 2021 | | 2020 | | | | | ||||||||||||||||||
|
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| |
| % of |
|
| |
| % of |
| | Variance |
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| |
| % of |
|
| |
| % of |
| | Variance | |
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| |
| % of |
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| |
| % of |
| | Variance | |
| | Amount | | Total | | Amount | | Total |
| | 2020 vs 2019 | | Amount | | Total | | Amount | | Total | | | 2020 vs 2019 | | | Amount | | Total | | Amount | | Total | | | 2021 vs 2020 | | ||||||
Mortgage Loan Originations - units |
| | 22,391 | | | | | 15,760 | | | | | 6,631 |
| | 36,129 | | | | | 26,038 | | | | | 10,091 | |
| | 21,741 | | | | | 13,738 | | | | | 8,003 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage Loan Originations - volume | | $ | 6,099,059 | | | | $ | 3,960,089 | | | | $ | 2,138,970 | | $ | 9,721,647 | | | | $ | 6,407,131 | | | | $ | 3,314,516 | | | $ | 6,184,105 | | | | $ | 3,622,588 | | | | $ | 2,561,517 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage Loan Originations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Conventional | | $ | 4,266,105 |
| 69.95 | % | $ | 2,388,216 |
| 60.31 | % | $ | 1,877,889 | | $ | 6,582,091 |
| 67.71 | % | $ | 3,879,150 |
| 60.54 | % | $ | 2,702,941 | | | $ | 4,482,763 |
| 72.49 | % | $ | 2,315,487 |
| 63.92 | % | $ | 2,167,276 | |
Government | |
| 1,432,122 |
| 23.48 | % |
| 976,733 |
| 24.66 | % |
| 455,389 | |
| 2,322,298 |
| 23.89 | % |
| 1,574,915 |
| 24.58 | % |
| 747,383 | | |
| 803,172 |
| 12.99 | % |
| 890,176 |
| 24.57 | % |
| (87,004) | |
Jumbo | |
| 217,016 |
| 3.56 | % |
| 334,708 |
| 8.45 | % |
| (117,692) | |
| 461,475 |
| 4.75 | % |
| 529,848 |
| 8.27 | % |
| (68,373) | | |
| 707,543 |
| 11.44 | % |
| 244,958 |
| 6.76 | % |
| 462,585 | |
Other | |
| 183,816 |
| 3.01 | % |
| 260,432 |
| 6.58 | % |
| (76,616) | |
| 355,783 |
| 3.65 | % |
| 423,218 |
| 6.61 | % |
| (67,435) | | |
| 190,627 |
| 3.08 | % |
| 171,967 |
| 4.75 | % |
| 18,660 | |
| | $ | 6,099,059 |
| 100.00 | % | $ | 3,960,089 |
| 100.00 | % | $ | 2,138,970 | | $ | 9,721,647 |
| 100.00 | % | $ | 6,407,131 |
| 100.00 | % | $ | 3,314,516 | | | $ | 6,184,105 |
| 100.00 | % | $ | 3,622,588 |
| 100.00 | % | $ | 2,561,517 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Home purchases | | $ | 3,204,573 |
| 52.54 | % | $ | 3,329,024 |
| 84.06 | % | $ | (124,451) | | $ | 5,546,421 |
| 57.05 | % | $ | 5,379,784 |
| 83.97 | % | $ | 166,637 | | | $ | 2,902,710 |
| 46.94 | % | $ | 2,341,847 |
| 64.65 | % | $ | 560,863 | |
Refinancings | |
| 2,894,486 |
| 47.46 | % |
| 631,065 |
| 15.94 | % |
| 2,263,421 | |
| 4,175,226 |
| 42.95 | % |
| 1,027,347 |
| 16.03 | % |
| 3,147,879 | | |
| 3,281,395 |
| 53.06 | % |
| 1,280,741 |
| 35.35 | % |
| 2,000,654 | |
| | $ | 6,099,059 |
| 100.00 | % | $ | 3,960,089 |
| 100.00 | % | $ | 2,138,970 | | $ | 9,721,647 |
| 100.00 | % | $ | 6,407,131 |
| 100.00 | % | $ | 3,314,516 | | | $ | 6,184,105 |
| 100.00 | % | $ | 3,622,588 |
| 100.00 | % | $ | 2,561,517 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Texas | | $ | 1,149,799 |
| 18.85 | % | $ | 758,016 |
| 19.14 | % | $ | 391,783 | | $ | 1,855,156 |
| 19.08 | % | $ | 1,227,468 |
| 19.16 | % | $ | 627,688 | | | $ | 1,076,892 |
| 17.41 | % | $ | 705,357 |
| 19.47 | % | $ | 371,535 | |
California | |
| 636,294 |
| 10.43 | % |
| 376,086 |
| 9.50 | % |
| 260,208 | |
| 1,016,357 |
| 10.45 | % |
| 613,820 |
| 9.58 | % |
| 402,537 | | |
| 795,060 |
| 12.86 | % |
| 380,063 |
| 10.49 | % |
| 414,997 | |
Arizona | |
| 290,436 |
| 4.70 | % |
| 174,724 |
| 4.82 | % |
| 115,712 | | |||||||||||||||||||||||||||
Florida | |
| 432,339 |
| 7.09 | % |
| 288,711 |
| 7.29 | % |
| 143,628 | |
| 703,523 |
| 7.24 | % |
| 485,798 |
| 7.58 | % |
| 217,725 | | |
| 280,907 |
| 4.54 | % |
| 271,185 |
| 7.49 | % |
| 9,722 | |
Arizona | |
| 277,131 |
| 4.54 | % |
| 176,753 |
| 4.46 | % |
| 100,378 | |
| 451,855 |
| 4.65 | % |
| 289,459 |
| 4.52 | % |
| 162,396 | | ||||||||||||||
South Carolina | |
| 245,464 |
| 4.02 | % |
| 151,620 |
| 3.83 | % |
| 93,844 | |
| 397,309 |
| 4.09 | % |
| 250,331 |
| 3.91 | % |
| 146,978 | | |
| 261,218 |
| 4.22 | % |
| 151,845 |
| 4.19 | % |
| 109,373 | |
North Carolina | |
| 226,466 |
| 3.66 | % |
| 113,645 |
| 3.14 | % |
| 112,821 | | |||||||||||||||||||||||||||
Ohio | |
| 235,788 |
| 3.87 | % |
| 174,581 |
| 4.41 | % |
| 61,207 | |
| 361,982 |
| 3.72 | % |
| 278,118 |
| 4.34 | % |
| 83,864 | | |
| 222,639 |
| 3.60 | % |
| 126,193 |
| 3.48 | % |
| 96,446 | |
Washington | |
| 215,460 |
| 3.48 | % |
| 123,042 |
| 3.40 | % |
| 92,418 | | |||||||||||||||||||||||||||
Maryland | |
| 217,412 |
| 3.56 | % |
| 135,191 |
| 3.41 | % |
| 82,221 | |
| 350,782 |
| 3.61 | % |
| 212,234 |
| 3.31 | % |
| 138,548 | | |
| 195,113 |
| 3.16 | % |
| 133,370 |
| 3.68 | % |
| 61,743 | |
Missouri | |
| 209,861 |
| 3.44 | % |
| 135,248 |
| 3.42 | % |
| 74,613 | |
| 325,520 |
| 3.35 | % |
| 210,061 |
| 3.28 | % |
| 115,459 | | |
| 189,012 |
| 3.06 | % |
| 115,659 |
| 3.19 | % |
| 73,353 | |
North Carolina | |
| 192,994 |
| 3.16 | % |
| 116,058 |
| 2.93 | % |
| 76,936 | |
| 306,639 |
| 3.15 | % |
| 197,954 |
| 3.09 | % |
| 108,685 | | ||||||||||||||
Washington | |
| 183,315 |
| 3.01 | % |
| 158,251 |
| 4.00 | % |
| 25,064 | |
| 306,357 |
| 3.15 | % |
| 245,004 |
| 3.82 | % |
| 61,353 | | ||||||||||||||
All other states | |
| 2,318,662 |
| 38.03 | % |
| 1,489,574 |
| 37.61 | % |
| 829,088 | |
| 3,646,167 |
| 37.51 | % |
| 2,396,884 |
| 37.41 | % |
| 1,249,283 | | |
| 2,430,902 |
| 39.31 | % |
| 1,327,505 |
| 36.65 | % |
| 1,103,397 | |
| | $ | 6,099,059 |
| 100.00 | % | $ | 3,960,089 |
| 100.00 | % | $ | 2,138,970 | | $ | 9,721,647 |
| 100.00 | % | $ | 6,407,131 |
| 100.00 | % | $ | 3,314,516 | | | $ | 6,184,105 |
| 100.00 | % | $ | 3,622,588 |
| 100.00 | % | $ | 2,561,517 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Mortgage Loan Sales - volume: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
External third parties | | $ | 5,922,884 | | 99.80 | % | $ | 3,325,653 | | 99.63 | % | $ | 2,597,231 | | $ | 9,278,573 |
| 98.49 | % | $ | 6,029,279 |
| 99.67 | % | $ | 3,249,294 | | | $ | 6,192,073 |
| 97.50 | % | $ | 3,355,689 |
| 96.26 | % | $ | 2,836,384 | |
Banking segment | |
| 12,030 | | 0.20 | % |
| 12,417 | | 0.37 | % |
| (387) | |
| 142,590 |
| 1.51 | % |
| 19,905 |
| 0.33 | % |
| 122,685 | | |
| 158,764 |
| 2.50 | % |
| 130,560 |
| 3.74 | % |
| 28,204 | |
| | $ | 5,934,914 | | 100.00 | % | $ | 3,338,070 | | 100.00 | % | $ | 2,596,844 | | $ | 9,421,163 |
| 100.00 | % | $ | 6,049,184 |
| 100.00 | % | $ | 3,371,979 | | | $ | 6,350,837 |
| 100.00 | % | $ | 3,486,249 |
| 100.00 | % | $ | 2,864,588 | |
We consider the mortgage origination segment’s total loan origination volume to be a key performance measure. Loan origination volume is central to the segment’s ability to generate income by originating and selling mortgage loans, resulting in net gains from the sale of loans, other mortgage production income and mortgage loan origination fees. Total loan origination volume is a measure utilized by management, our investors and analysts in assessing market share and growth of the mortgage origination segment.
TheWhile the mortgage origination segment’s loan applications and IRLCs increased slightly during the three months ended March 31, 2021, compared to the same period in 2020, total loan origination volume during the three and six months ended June 30, 2020 increased 54.0% and 51.7%, respectively, compared to the same periods in 2019. Incomeincome before income taxes increased 70.7% and 133.8% during the
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three and six months ended June 30, 2020 increased 534.6% and 621.6%, respectively, compared to the same periods in 2019.that time, respectively. The increase in income before income taxes duringin the three months ended June 30, 2020, compared to the same period in 2019,March 31, 2021 was primarily due to increasesan increase in the average value of individual IRLCs, which is ultimately reflected in net gains onfrom sale of loans, the change in net fair value and related derivative activity of IRLCs and loans held for sale, and mortgage loan origination fees and other related income. These changes wereloans. This increase was partially offset by an increase in variable compensation that varies with the volume of mortgage loanloans originations (“variable compensation”). and a decrease in change in net fair value of interest rate lock commitments and loans held for sale.
Net interest expense during the three and six months ended June 30,March 31, 2021 and 2020 and 2019 was primarily comprised of interest income earned on loans held for sale offset by interest incurred on warehouse lines of credit primarily held with the Bank, as well asand related intercompany financing costs. The primary reason for the increasedecrease in net interest expense during the three months ended June 30,March 31, 2021 and 2020 was a decrease inincluded the averageeffects of decreased net spread between the yieldyields on mortgage loans held for sale and the Bank warehouse lines of credit interest rate as the average balance of loans held for sale increased, partially offset by a decrease in intercompany financing costs. The primary reason for the decrease in net interest expense during the six months ended June 30, 2020 was a decrease in intercompany financing costs, partially offset by a decrease in the average net spread between the yield on loans held for sale and the Bank warehouse linestwo periods.
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Noninterest income was comprised of the items set forth in the table below (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Variance | | Six Months Ended June 30, | | Variance | | | Three Months Ended March 31, | | Variance | | |||||||||||||||
| 2020 |
| 2019 |
| 2020 vs 2019 |
| 2020 |
| 2019 |
| 2020 vs 2019 |
|
| 2021 |
| 2020 |
| 2021 vs 2020 |
| |||||||||
Net gains from sale of loans | $ | 218,274 | | $ | 110,996 | | $ | 107,278 | | $ | 331,590 | | $ | 200,347 | | $ | 131,243 | | | $ | 246,588 | | $ | 113,538 | | $ | 133,050 | |
Mortgage loan origination fees and other related income | | 45,361 | | | 33,409 | | | 11,952 | | | 74,138 | | | 55,282 | | | 18,856 | | | | 43,155 | | | 28,554 | | | 14,601 | |
Other mortgage production income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Change in net fair value and related derivative activity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
IRLCs and loans held for sale | | 79,916 | | | 18,722 | | | 61,194 | | | 113,943 | | | 21,925 | | | 92,018 | | | | (4,606) | | | 34,028 | | | (38,634) | |
Mortgage servicing rights asset | | (8,182) | | | (5,198) | | | (2,984) | | | (11,209) | | | (7,864) | | | (3,345) | | | | 9,132 | | | (3,027) | | | 12,159 | |
Servicing fees | | 5,118 | | | 6,619 | | | (1,501) | | | 10,993 | | | 12,890 | | | (1,897) | | | | 16,175 | | | 5,875 | | | 10,300 | |
Total noninterest income | $ | 340,487 | | $ | 164,548 | | $ | 175,939 | | $ | 519,455 | | $ | 282,580 | | $ | 236,875 | | | $ | 310,444 | | $ | 178,968 | | $ | 131,476 | |
The increasesincrease in net gains from sale of loans during the three and six months ended June 30, 2020,March 31, 2021, compared with the same periodsperiod in 2019, were2020, was primarily a result of an increase in total loan sales volume, in addition to an increase in average loan sales margin. Since PrimeLending sells substantially all mortgage loans it originates to various investors in the secondary market, the increases in loan sales volume during the three and six months ended June 30, 2020 areMarch 31, 2021 is consistent with increasesthe increase in loan origination volume during the same periods in 2019.period. The increase in average loans sales margin was primarily driven by PrimeLending managing increased loan origination volumes to a level that could be supported by its loan fulfillment operations and addressing anticipated enhanced credit and liquidity risks triggered by the economic impact of the COVID-19 pandemic. The increasesincrease in mortgage loan origination fees during the three and six months ended June 30, 2020,March 31, 2021, compared with the same periodsperiod in 2019,2020, were primarily the result of an increase in loan origination volume, partially offset by a decrease in average mortgage loan origination fees.
We consider the mortgage origination segment’s net gains from sale of loans margin, in basis points, to be a key performance measure. Net gains from sale of loans margin is defined as net gains from sale of loans divided by loan sales volume. The net gains from sale of loans is central to the segment’s generation of income. The mortgage origination segment’s net gains from sale of loans margins,margin, including loans sold to the banking segment, during the three months ended June 30,March 31, 2021 and 2020 and 2019 were 368was 388 bps and 333 bps, respectively. The mortgage origination segment’s net gains from sale of loans margins, including loans sold to the banking segment, during the six months ended June 30, 2020 and 2019 were 352 bps and 331325 bps, respectively. During the three months ended June 30,March 31, 2021 and 2020, and 2019, the mortgage origination segment originated approximately $12.0$159 million and $12.4$131 million, respectively, in loans on behalf of the banking segment, representing approximately 0.2%2.5% and 0.4%3.6%, respectively, of PrimeLending’s total loan origination volume during each applicable period. During the six months ended June 30, 2020 and 2019, the mortgage origination segment originated approximately $142.6 million and $19.9 million, respectively, in loans on behalf of the banking segment, representing approximately 1.5% and 0.3%, respectively, of PrimeLending’s total loan origination volume during each applicablerespective period. These loans were sold to the banking segment at par. For origination services provided, the mortgage origination segment was reimbursed direct origination costs associated with these loans, in addition to payment of a correspondent fee. The reimbursed origination costs and correspondent fee are included in the mortgage origination segment operating results, and the correspondent fees are eliminated in consolidation. The impact of loans sold to the banking segment at par was de minimisa decrease to the net gain from sale of loans margin of 10 basis points and 13 basis points during the three months ended June 30,March 31, 2021 and 2020, and for the same period in 2019. The impact of loans sold to the banking segment at par
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was to reduce the margin 5 bps during the three months ended June 30, 2020, while the impact on the same period in 2019 was de minimis.respectively. Loan volumes to be originated on behalf of and retained by the banking segment are evaluated each quarter, andquarter. While we anticipate an increase in loans sold to the banking segment during the remainder of 2021, we do not expect itthese sales to exceed 5% of total origination volumesvolume during the second half of 2020.this time. In March 2020, the mortgage origination segment executed a letter of intent with the banking segment to purchase mortgage loans previously sold to the banking segment with an unpaid principal balance of approximately $210 million. Such original sales of approximately $121 million are reflected in the previous mortgage loan details table within the mortgage loan sales volume to the banking segment during the three months ended March 31, 2020. The remaining $91 million of such original sales were sold to the banking segment during 2019. When these loans were sold at par by the mortgage origination segment, the banking segment’s intent was to hold these loans for investment. The mortgage origination segment completed the repurchase of these loans from the banking segment and in turn sold the loans to investors in the secondary market during the second quarter of 2020.
Noninterest income included the impact of changes between periods in the net fair value of the mortgage origination segment’s IRLCs and loans held for sale and the related activity associated with forward commitments used by the mortgage origination segment to mitigate interest rate risk associated with its IRLCs and mortgage loans held for sale. The increasesdecrease during the three and six months ended June 30, 2020 wereMarch 31, 2021 was the result of increasesa decrease in the volumeaverage value of individual IRLCs and loans held for sale, as well as increasespartially offset by an increase in the average valuetotal volume of individual IRLCs and loans held for sale.
The mortgage origination segment sells substantially all mortgage loans it originates to various investors in the secondary market, historically with the majority servicing released. In addition, the mortgage origination segment originates loans on behalf of the Bank. The mortgage origination segment’s determination of whether to retain or release servicing on mortgage loans it sells is impacted by, among other things, changes in mortgage interest rates, and
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refinancing and market activity. During the three months ended June 30,March 31, 2020, the mortgage origination segmentPrimeLending retained servicing on approximately 89%9% of loans sold, compared to 6% duringsold. Beginning in the same period in 2019. Duringsecond quarter of 2020, we increased the six months ended June 30, 2020, the mortgage origination segmentamount of retained servicing on approximately 59%mortgage loan sales. During both the second and third quarters of 2020, PrimeLending retained servicing on 89% of total mortgage loans sold, compared to 6% during the same period in 2019. sold. The increase in rates of retained servicing during both periodsthis time was due to the reduction in third partythird-party servicing outlets during the second quarter of 2020 resulting from the impact of the CARES Act. The CARES Act permits borrowers of federally-backed mortgage loans to forbear payments, which could negatively impact servicers’ liquidity and their ability to purchase servicing. TheAs forbearance requests leveled off during the latter part of 2020, the third-party market for mortgage origination segment anticipates that the percentageservicing rights improved, increasing demand, which allowed PrimeLending to reduce retained servicing to 57% of servicing retained relative tototal mortgage loans sold may exceed 75% during at least the next two quartersfourth quarter of 2020.2020 and 50% of total mortgage loans sold during the first quarter 2021. If the third-party market for mortgage servicing rights continues to improve, we expect that PrimeLending will continue to reduce retained servicing on mortgage loans sold during the remainder of 2021. The related MSR asset was valued at $81.9$142.5 million on $8.8$12.2 billion of serviced loan volume at June 30, 2020,March 31, 2021, compared with a value of $56.7$144.2 million on $5.1$14.7 billion of serviced loan volume at December 31, 2019.2020. The mortgage origination segment may, from time to time, manage its MSR asset through different strategies, including varying the percentage of mortgage loans sold servicing released and opportunistically selling MSR assets. The mortgage origination segment has also retained servicing on certain loans sold to the banking segment. Gains and losses associated with such sales to the banking segment and the related MSR asset are eliminated in consolidation. The mortgage origination segment uses derivative financial instruments, including U.S. Treasury bond futures and options, Eurodollar futures and forward commitments to sell mortgage-backed securities, as a means to mitigate interest rate risk associated with its MSR asset. Changes in the net fair value of the MSR asset and the related derivatives associated with normal customer payments, changes in discount rates, prepayment speed assumptions and customer payoffs resulted in a net lossesgain of $8.2$9.1 million and $11.2a net loss of $3.0 million during the three and six months ended June 30,March 31, 2021 and 2020, respectively, compared to net losses of $5.2 million and $7.9 million during the three and six months ended June 30, 2019, respectively. Additionally, net servicing income was $1.0 million and $3.7$7.9 million during the three and six months ended June 30, 2020, respectively,March 31, 2021, compared with $3.5 million and $6.6$2.7 million during the same period in 2019.2020. On February 14, 2020,March 31, 2021, the mortgage origination segment sold MSR assets of $18.7$52.8 million, which represented $1.5$4.9 billion of its serviced loan volume at the time.
Noninterest expenses were comprised of the items set forth in the table below (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | ||
| Three Months Ended June 30, | | Variance | | Six Months Ended June 30, | | Variance | | | Three Months Ended March 31, | | Variance | | |||||||||||||||
| 2020 |
| 2019 |
| 2020 vs 2019 |
| 2020 |
| 2019 |
| 2020 vs 2019 |
|
| 2021 |
| 2020 |
| 2021 vs 2020 |
| |||||||||
Variable compensation | $ | 113,826 | | $ | 65,516 | | $ | 48,310 | | $ | 172,105 | | $ | 104,445 | | $ | 67,660 | | | $ | 115,486 | | $ | 58,280 | | $ | 57,206 | |
Non-variable compensation and benefits | | 46,999 | | | 40,933 | | | 6,066 | | | 89,047 | | | 81,047 | | | 8,000 | | | | 50,762 | | 42,048 | | 8,714 | | ||
Segment operating costs | | 29,016 | | | 27,241 | | | 1,775 | | | 60,669 | | | 56,168 | | | 4,501 | | | | 30,420 | | 31,652 | | (1,232) | | ||
Lender paid closing costs | | 6,558 | | | 4,925 | | | 1,633 | | | 10,918 | | | 8,423 | | | 2,495 | | | | 5,468 | | 4,360 | | 1,108 | | ||
Servicing expense | | 4,094 | | | 3,106 | | | 988 | | | 7,306 | | | 6,315 | | | 991 | | | | 8,198 | | | 3,212 | | | 4,986 | |
Total noninterest expense | $ | 200,493 | | $ | 141,721 | | $ | 58,772 | | $ | 340,045 | | $ | 256,398 | | $ | 83,647 | | | $ | 210,334 | | $ | 139,552 | | $ | 70,782 | |
Total employees’ compensation and benefits accounted for the majority of noninterest expenses incurred during all periods presented. Specifically, variable compensation comprised 70.8%69.5% and 61.5%58.1% of total employees’ compensation and benefits expenses during the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and 65.9% and 56.3% during the six months ended June 30, 2020 and 2019, respectively. The increasesincrease in the percentage concentration of variable compensation and benefits werewas primarily due to an increase in loan origination volume. Variable compensation, which
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is primarily driven by loan origination volume, tends to fluctuate to a greater degree than loan origination volume because mortgage loan originator and fulfillment staff incentive compensation plans are structured to pay at increasing rates as higher monthly volume tiers are achieved. However, certain other incentive compensation plans driven by non-mortgage production criteria may alter this trend. In addition to increasesan increase in loan origination volume between the three and six months ended June 30, 2020 and 2019, primarily driving the increase in variable compensation and benefits, there was also a slightan increase in the average incentive rate paid.paid and the impact of incentive plans driven by non-mortgage production criteria contributed to the increase in variable compensation.
While total loan origination volume increased 54.0% and 51.7%70.7% for the three and six months ended June 30, 2020, respectively,March 31, 2021, compared to the same periodsperiod in 2019,2020, the aggregate non-variable compensation and benefits and segment operating costs of the mortgage origination segment increased by 11.5% and 9.1%, respectively. The aforementioned increases during the three and six months ended June 30, 2020, compared to the same periods in 2019, were primarily due to increases in non-variable compensation and benefits and loan origination costs. The increases in non-variable compensation were primarily the result of overtime expense incurred due to increased loan volume, an20.7%. This increase in the average cost of employee benefits, and an increase in technology infrastructure support. The increases in loan origination costs during the three and six months ended June 30, 2020, werewas primarily due to an increase in salaries resulting from increased underwriting and loan origination volume. Tofulfillment staff and an increase in overtime expense incurred to support the recent increase in loan origination volume during the mortgage origination segment plansfirst quarter of 2021. Segment operating costs decreased slightly during the three months ended March 31, 2021, compared to increase underwritingthe same period in 2020, primarily as a result of a decrease in advertising and loan fulfillment staff, which would increase noninterest expenses.business development expense.
In exchange for a higher interest rate, customers may opt to have PrimeLending pay certain costs associated with the origination of their mortgage loans (“lender paid closing costs”). Fluctuations in lender paid closing costs are not always aligned with fluctuations in loan origination volume. Other loan pricing conditions, including the mortgage loan interest
65
rate, loan origination fees paid by the customer, and a customer’s willingness to pay closing costs, may influence fluctuations in lender paid closing costs.
Between January 1, 20112012 and June 30, 2020,March 31, 2021, the mortgage origination segment sold mortgage loans totaling $124.1$135.2 billion. These loans were sold under sales contracts that generally include provisions that hold the mortgage origination segment responsible for errors or omissions relating to its representations and warranties that loans sold meet certain requirements, including representations as to underwriting standards and the validity of certain borrower representations in connection with the loan. In addition, the sales contracts typically require the refund of purchased servicing rights plus certain investor servicing costs if a loan experiences an early payment default. While the mortgage origination segment sold loans prior to 2011,2012, it does not anticipate experiencing significant losses in the future on loans originated prior to 20112012 as a result of investor claims under these provisions of its sales contracts.
When a claim for indemnification of a loan sold is made by an agency, investor, or other party, the mortgage origination segment evaluates the claim and determines if the claim can be satisfied through additional documentation or other deliverables. If the claim is valid and cannot be satisfied in that manner, the mortgage origination segment negotiates with the claimant to reach a settlement of the claim. Settlements typically result in either the repurchase of a loan or reimbursement to the claimant for losses incurred on the loan.
Following is a summary of the mortgage origination segment’s claims resolution activity relating to loans sold between January 1, 20112012 and June 30, 2020March 31, 2021 (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | |
| | Original Loan Balance | | Loss Recognized | | | Original Loan Balance | | Loss Recognized | | ||||||||||||
| | | | | % of | | | | | % of | | | | | | % of | | | | | % of | |
| | | | | Loans | | | | | Loans | | | | | | Loans | | | | | Loans | |
|
| Amount |
| Sold |
| Amount |
| Sold |
|
| Amount |
| Sold |
| Amount |
| Sold |
| ||||
Claims resolved with no payment | | $ | 416,268 | | 0.34% | | $ | — | | 0.00% | | | $ | 192,704 | | 0.14% | | $ | — | | 0.00% | |
| | | | | | | | | | | | | | | | | | | | | | |
Claims resolved because of a loan repurchase or payment to an investor for losses incurred (1) | | | 221,876 | | 0.18% | | | 9,239 | | 0.01% | | | | 215,463 | | 0.16% | | | 8,165 | | 0.01% | |
| | $ | 638,144 | | 0.52% | | $ | 9,239 | | 0.01% | | | $ | 408,167 | | 0.30% | | $ | 8,165 | | 0.01% | |
(1) | Losses incurred include refunded purchased servicing rights. |
For each loan it concludes its obligation to a claimant is both probable and reasonably estimable, the mortgage origination segment has established a specific claims indemnification liability reserve. An additional indemnification liability reserve has been established for probable agency, investor or other party losses that may have been incurred, but not yet reported to the mortgage origination segment based upon a reasonable estimate of such losses. In addition to other factors, the mortgage origination segment has considered that GNMA, FNMAFederal National Mortgage Association and FHLMCFederal Home Loan Mortgage Corporation have imposed certain
79
restrictions on loans the agencies will accept under a forbearance agreement resulting from the COVID-19 pandemic, which could increase the magnitude of indemnification losses on these loans.
At June 30, 2020March 31, 2021 and December 31, 2019,2020, the mortgage origination segment’s total indemnification liability reserve totaled $15.5$24.3 million and $11.8$21.5 million, respectively. The related provision for indemnification losses was $3.9$3.0 million and $0.7 million during the three months ended March 31, 2021 and 2020, respectively.
Corporate
The following table presents certain financial information regarding the operating results of corporate (in thousands).
| | | | | | | | | | |
| | Three Months Ended March 31, |
| Variance | | |||||
| | 2021 | | 2020 | | 2021 vs 2020 | | |||
Net interest expense | | $ | (4,692) | | $ | (1,656) | | $ | (3,036) | |
Noninterest income | |
| 506 | |
| 2,309 | |
| (1,803) | |
Noninterest expense | | | 9,588 | |
| 4,853 | |
| 4,735 | |
Income (loss) from continuing operations before income taxes | | $ | (13,774) | | $ | (4,200) | | $ | (9,574) | |
Corporate includes certain activities not allocated to specific business segments. These activities include holding company financing and investing activities, merchant banking investment opportunities and management and administrative services to support the overall operations of the Company. Hilltop’s merchant banking investment
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activities include the identification of attractive opportunities for capital deployment in companies engaged in non-financial activities through its merchant bank subsidiary, Hilltop Opportunity Partners LLC.
As a holding company, Hilltop’s primary investment objectives are to support capital deployment for organic growth and to preserve capital to be deployed through acquisitions, dividend payments and potential stock repurchases. Investment and interest income earned during the three months ended March 31, 2021 was primarily comprised of dividend income from merchant banking investment activities, in addition to interest income earned on intercompany notes.
Interest expense during each period included recurring quarterly interest expense of $1.9 million incurred on our $150.0 million aggregate principal amount of 5% senior notes due 2025 (“Senior Notes”). During the three months ended March 31, 2021, we incurred interest expense of $3.1 million on our $200 million aggregate principal amount of Subordinated Notes, which were issued in May 2020. Additionally, we incurred interest expense of $0.6 million and $0.8 million during the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, and $4.6on junior subordinated debentures of $67.0 million and $1.3 millionissued by PCC (the “Debentures”).
Noninterest income from continuing operations during the sixthree months ended June 30,March 31, 2021 and 2020 included activity related to our investment in a real estate development in Dallas’ University Park, which also serves as headquarters for both Hilltop and 2019, respectively.the Bank, and net noninterest income associated with activity within our merchant bank subsidiary.
Noninterest expenses from continuing operations were primarily comprised of employees’ compensation and benefits, occupancy expenses and professional fees, including corporate governance, legal and transaction costs. Noninterest expenses increased during the three months ended March 31, 2021, compared to the same period in 2020, primarily due to a prior year non-recurring gain on sale transaction, partially offset by an increase in expenses associated with professional fees.
Results from Discontinued Operations
Insurance Segment
As previously discussed, on June 30, 2020, we completed the sale of NLC. Accordingly, insurance segment results and its assets and liabilitiesfor the three months ended March 31, 2020 have been presented as discontinued operations in the consolidated financial statements. Additional details are presented in Note 3, Discontinued Operations, in the notes to our consolidated financial statements.
The following table presents certain information regarding All activity associated with the operating results of our insurance segment that have been reflected within discontinued operationswas recognized in 2020, therefore, there are no results in the consolidated statements of operations (in thousands).
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| Variance | | Six Months Ended June 30, |
| Variance | | ||||||||||
| | 2020 | | 2019 | | 2020 vs 2019 | | 2020 | | 2019 | | 2020 vs 2019 | | ||||||
Net interest income | | $ | 449 | | $ | 592 | | $ | (143) | | $ | 1,048 | | $ | 1,234 | | $ | (186) | |
Noninterest income | |
| 37,737 | |
| 36,168 | |
| 1,569 | |
| 68,128 | |
| 72,673 | |
| (4,545) | |
Noninterest expense | | | 40,097 | |
| 39,589 | |
| 508 | | | 67,073 | |
| 69,927 | |
| (2,854) | |
Income (loss) from discontinued operations before income taxes | | $ | (1,911) | | $ | (2,829) | | $ | 918 | | $ | 2,103 | | $ | 3,980 | | $ | (1,877) | |
The decrease in lossthree months ended March 31, 2021. Income from discontinued operations before income taxes was $4.0 million during the three months ended March, 31 2020.
Corporate
As a result of the previously noted sale of NLC on June 30, 2020 compared with the same period in 2019, was primarily due to a realizedfor cash proceeds of $154.1 million, Hilltop recognized an aggregate pre-tax gain on sale within discontinued operations of corporate of $36.8 million, net of customary transaction costs of $5.1 million. The resulting book gain from this sale transaction was not recognized for tax purposes pursuant to the sale of other invested assets andrules under the recovery of fair value associated with the equity securities held by the insurance segment, partially offset by a decline in net insurance premiums earned and an increase in loss and LAE. The decrease inInternal Revenue Code. All income from discontinued operations before income taxes during the six months ended June 30, 2020, comparedassociated with the same period in 2019,corporate was primarily due to a year-over-year reductionrecognized beginning in the fair value associated with the equity securities held by the insurance segment and a decline in net insurance premiums earned, partially offset by a decrease in loss and LAE.
The insurance segment’s operations resulted in combined ratiossecond quarter of 117.6% and 113.0% during the three months ended June 30, 2020 and 2019, respectively, and 97.5% and 99.8% during the six months ended June 30, 2020 and 2019, respectively. The increase in the combined ratio during the three months ended June 30, 2020, compared with the same period in 2019, was primarily driven by an increase in the loss and LAE ratio. The combined ratio is a measure of overall insurance underwriting profitability, and represents the sum of loss and LAE and underwriting expenses divided by net insurance premiums earned.
Noninterest income from discontinued operations during the three months ended June 30, 2020 and 2019 was primarily comprised of net insurance premiums earned of $32.4 million and $33.5 million, respectively. Noninterest income during the six months ended June 30, 2020 and 2019 was primarily comprised of net insurance premiums earned of $65.1 million and $66.7 million, respectively. The year-over-year decrease in net insurance premiums earned were driven by the effect of a decrease in net premiums written as discussed below.
Direct insurance premiums written by major product line are presented in the table below (in thousands).
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Variance | | Six Months Ended June 30, | | Variance |
| ||||||||||
|
| 2020 |
| 2019 |
| 2020 vs 2019 |
| 2020 |
| 2019 |
| 2020 vs 2019 |
| ||||||
Direct Insurance Premiums Written: | | | | | | | | | | | | | | | | | | | |
Homeowners | | $ | 14,067 | | $ | 14,840 | | $ | (773) | | $ | 25,866 | | $ | 26,825 | | $ | (959) | |
Fire | |
| 10,335 | |
| 10,809 | |
| (474) | |
| 19,745 | |
| 20,576 | |
| (831) | |
Mobile Home | |
| 9,429 | |
| 9,913 | |
| (484) | |
| 18,200 | |
| 18,951 | |
| (751) | |
| | $ | 33,831 | | $ | 35,562 | | $ | (1,731) | | $ | 63,811 | | $ | 66,352 | | $ | (2,541) | |
The aggregate direct insurance premiums written for our three largest insurance product lines decreased by $1.7 million and $2.5 million during the three and six months ended June 30, 2020, compared with the same periods in 2019. The
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decreases in total direct insurance premiums written during the three and six months ended June 30, 2020, compared to the same period in 2019, were primarily due to competitive pressures.
Net insurance premiums earned by major product line are presented in the table below (in thousands).
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Variance | | Six Months Ended June 30, | | Variance |
| ||||||||||
|
| 2020 |
| 2019 |
| 2020 vs 2019 |
| 2020 |
| 2019 |
| 2020 vs 2019 |
| ||||||
Net Insurance Premiums Earned: | | | | | | | | | | | | | | | | | | | |
Homeowners | | $ | 13,533 | | $ | 14,029 | | $ | (496) | | $ | 26,378 | | $ | 26,953 | | $ | (575) | |
Fire | |
| 9,893 | |
| 10,142 | |
| (249) | |
| 20,137 | |
| 20,674 | |
| (537) | |
Mobile Home | |
| 9,014 | |
| 9,295 | |
| (281) | |
| 18,562 | |
| 19,042 | |
| (480) | |
| | $ | 32,440 | | $ | 33,466 | | $ | (1,026) | | $ | 65,077 | | $ | 66,669 | | $ | (1,592) | |
Net insurance premiums earned during the three and six months ended June 30, 2020 decreased compared to the same periods in 2019, primarily due to the decrease in direct insurance premiums written noted above.
Noninterest expenses from discontinued operations during the three and six months ended June 30, 2020 and 2019 included both loss and LAE expenses and policy acquisition and other underwriting expenses, as well as other noninterest expenses. Loss and LAE are recognized based on formula and case basis estimates for losses reported with respect to direct business, estimates of unreported losses based on past experience and deduction of amounts for reinsurance placed with reinsurers. Loss and LAE ratios during the three months ended June 30, 2020 and 2019 were 78.5% and 74.6%, respectively, and 59.0% and 59.9% for the six months ended June 30, 2020 and 2019, respectively. The increase in the loss and LAE ratio during the three months ended June 30, 2020, compared to the same period in 2019, was primarily driven by a decrease in premiums earned of 3.1% and a 2.0% increase in loss and LAE expense.
Policy acquisition and other underwriting expenses encompass all expenses incurred relative to NLC operations, and include elements of multiple categories of expense otherwise reported as noninterest expense and reflected as a part of discontinued operations within the consolidated statements of operations.
The following table details the calculation of the underwriting expense ratio for the periods presented (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Variance | | | Six Months Ended June 30, | | Variance | | ||||||||||
|
| 2020 |
| 2019 |
| 2020 vs 2019 |
|
| 2020 |
| 2019 |
| 2020 vs 2019 |
| ||||||
Amortization of deferred policy acquisition costs | | $ | 8,878 | | $ | 9,102 | | $ | (224) | | | $ | 16,967 | | $ | 17,194 | | $ | (227) | |
Other underwriting expenses | |
| 5,002 | |
| 4,760 | |
| 242 | | |
| 10,249 | |
| 11,322 | |
| (1,073) | |
Total | |
| 13,880 | |
| 13,862 | |
| 18 | | |
| 27,216 | |
| 28,516 | |
| (1,300) | |
Agency expenses | |
| (1,191) | |
| (1,019) | |
| (172) | | |
| (2,138) | |
| (1,884) | |
| (254) | |
Total less agency expenses | | $ | 12,689 | | $ | 12,843 | | $ | (154) | | | $ | 25,078 | | $ | 26,632 | | $ | (1,554) | |
Net insurance premiums earned | | $ | 32,440 | | $ | 33,466 | | $ | (1,026) | | | $ | 65,077 | | $ | 66,669 | | $ | (1,592) | |
Expense ratio | |
| 39.1 | % |
| 38.4 | % |
| 0.7 | % | |
| 38.5 | % |
| 39.9 | % |
| (1.4) | % |
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Corporate
The following table presents certain financial information regarding the operating results of corporate (in thousands).
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| Variance | | Six Months Ended June 30, |
| Variance | ||||||||||
| | 2020 | | 2019 | | 2020 vs 2019 | | 2020 | | 2019 | | 2020 vs 2019 | ||||||
Net interest expense | | $ | (3,232) | | $ | (1,331) | | $ | (1,901) | | $ | (4,888) | | $ | (2,661) | | $ | (2,227) |
Noninterest income | |
| 550 | |
| 648 | |
| (98) | |
| 2,838 | |
| 1,360 | |
| 1,478 |
Noninterest expense | | | 8,888 | |
| 9,274 | |
| (386) | | | 13,741 | |
| 24,836 | |
| (11,095) |
Income (loss) from continuing operations before income taxes | | $ | (11,570) | | $ | (9,957) | | $ | (1,613) | | $ | (15,791) | | $ | (26,137) | | $ | 10,346 |
Corporate includes certain activities not allocated to specific business segments. These activities include holding company financing and investing activities, merchant banking investment opportunities and management and administrative services to support the overall operations of the Company. Hilltop’s merchant banking investment activities include the identification of attractive opportunities for capital deployment in companies engaged in non-financial activities through its merchant bank subsidiary, Hilltop Opportunity Partners LLC.2020.
As a holding company, Hilltop’s primary investment objectives are to support capital deployment for organic growth and to preserve capital to be deployed through acquisitions, dividend payments and potential stock repurchases. Investment and interest income during the three and six months ended June 30, 2020 was primarily comprised of dividend income from merchant banking investment activities, in addition to interest income earned on intercompany notes.
Interest expense during each period included recurring quarterly interest expense of $1.9 million incurred on our $150.0 million aggregate principal amount of 5% senior notes due 2025 (“Senior Notes”). During the second quarter of 2020, we incurred interest expense of $1.7 million on our recently completed public offering in May 2020 of $200 million aggregate principal amount of Subordinated Notes. Additionally, we incurred interest expense of $0.7 million and $1.0 million during the three months ended June 30, 2020 and 2019, respectively, and $1.6 million and $2.0 million during the six months ended June 30, 2020 and 2019, respectively, on junior subordinated debentures of $67.0 million issued by PCC (the “Debentures”).
Noninterest income from continuing operations during the three and six months ended June 30, 2020 and 2019 included activity related to our investment in a new real estate development in Dallas’ University Park, which also serves as headquarters for both Hilltop and the Bank, and net noninterest income associated with activity within our merchant bank subsidiary.
Noninterest expenses from continuing operations during the three and six months ended June 30, 2020 and 2019 were primarily comprised of employees’ compensation and benefits, occupancy expenses and professional fees, including corporate governance, legal and transaction costs. Noninterest expenses decreased during the three and six months ended June 30, 2020, compared to the same periods in 2019. The decrease during the six months ended June 30, 2020, compared to the same period in 2019, included $6.5 million of aggregate pre-tax costs associated with the Leadership Changes and efficiency initiative-related charges discussed in the “Factors Affecting Comparability of Results of Operations” section.
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Financial Condition
The following discussion contains a more detailed analysis of our financial condition at June 30, 2020,March 31, 2021, as compared with December 31, 2019.2020.
Securities Portfolio
At June 30, 2020,March 31, 2021, investment securities consisted of securities of the U.S. Treasury, U.S. government and its agencies, obligations of municipalities and other political subdivisions, primarily in the State of Texas, as well as mortgage-backed, corporate debt, and equity securities. We may categorize investments as trading, available for sale, held to maturity and equity securities.
67
Trading securities are bought and held principally for the purpose of selling them in the near term and are carried at fair value, marked to market through operations and held at the Bank and the Hilltop Broker-Dealers. Securities classified as available for sale may, from time to time, be bought and sold in response to changes in market interest rates, changes in securities’ prepayment risk, increases in loan demand, general liquidity needs and to take advantage of market conditions that create more economically attractive returns. Such securities are carried at estimated fair value, with unrealized gains and losses recorded in accumulated other comprehensive income (loss). Equity investments are carried at fair value, with all changes in fair value recognized in net income. Securities are classified as held to maturity based on the intent and ability of our management, at the time of purchase, to hold such securities to maturity. These securities are carried at amortized cost.
The table below summarizes our securities portfolio (in thousands).
| | | | | | | |
| | June 30, | | December 31, | | ||
|
| 2020 |
| 2019 |
| ||
Trading securities, at fair value | | | | | | | |
U.S. Treasury securities | | $ | 50,487 | | $ | — | |
U.S. government agencies: | | | | | | | |
Bonds | | | 33,115 | | | 24,680 | |
Residential mortgage-backed securities | | | 135,653 | | | 331,601 | |
Commercial mortgage-backed securities | | | 2,114 | | | 2,145 | |
Collateralized mortgage obligations | | | 236,139 | | | 191,154 | |
Corporate debt securities | | | 52,536 | | | 36,973 | |
States and political subdivisions | | | 127,955 | | | 93,117 | |
Unit investment trusts | | | — | | | 3,468 | |
Private-label securitized product | | | 6,342 | | | 2,992 | |
Other | |
| 3,696 | |
| 3,446 | |
| |
| 648,037 | |
| 689,576 | |
Securities available for sale, at fair value | | | | | | | |
U.S. government agencies: | | | | | | | |
Bonds | |
| 63,230 | |
| 85,575 | |
Residential mortgage-backed securities | |
| 552,708 | |
| 437,029 | |
Commercial mortgage-backed securities | | | 19,531 | | | 12,031 | |
Collateralized mortgage obligations | |
| 409,134 | |
| 335,616 | |
States and political subdivisions | |
| 46,745 | |
| 41,242 | |
| |
| 1,091,348 | |
| 911,493 | |
Securities held to maturity, at amortized cost | | | | | | | |
U.S. government agencies: | | | | | | | |
Bonds | | | — | | | 24,020 | |
Residential mortgage-backed securities | |
| 15,693 | | | 17,776 | |
Commercial mortgage-backed securities | | | 159,608 | | | 161,624 | |
Collateralized mortgage obligations | |
| 96,413 | | | 113,894 | |
States and political subdivisions | |
| 71,484 | | | 69,012 | |
| |
| 343,198 | |
| 386,326 | |
| | | | | | | |
Equity securities, at fair value | | | 122 | | | 166 | |
| | | | | | | |
Total securities portfolio | | $ | 2,082,705 | | $ | 1,987,561 | |
| | | | | | | |
| | March 31, | | December 31, | | ||
|
| 2021 |
| 2020 |
| ||
Trading securities, at fair value | | | | | | | |
U.S. Treasury securities | | $ | 465 | | $ | 40,491 | |
U.S. government agencies: | | | | | | | |
Bonds | | | 20,376 | | | 40 | |
Residential mortgage-backed securities | | | 161,557 | | | 336,081 | |
Commercial mortgage-backed securities | | | 861 | | | 876 | |
Collateralized mortgage obligations | | | 80,729 | | | 69,172 | |
Corporate debt securities | | | 64,535 | | | 62,481 | |
States and political subdivisions | | | 183,385 | | | 171,573 | |
Private-label securitized product | | | 11,655 | | | 8,571 | |
Other | |
| 5,149 | |
| 4,970 | |
| |
| 528,712 | |
| 694,255 | |
Securities available for sale, at fair value | | | | | | | |
U.S. government agencies: | | | | | | | |
Bonds | |
| 77,163 | | | 82,806 | |
Residential mortgage-backed securities | |
| 900,283 | | | 641,611 | |
Commercial mortgage-backed securities | | | 148,949 | | | 124,538 | |
Collateralized mortgage obligations | |
| 539,818 | | | 565,908 | |
States and political subdivisions | |
| 49,193 | |
| 47,342 | |
| |
| 1,715,406 | |
| 1,462,205 | |
Securities held to maturity, at amortized cost | | | | | | | |
U.S. government agencies: | | | | | | | |
Residential mortgage-backed securities | |
| 12,541 | | | 13,547 | |
Commercial mortgage-backed securities | | | 152,309 | | | 152,820 | |
Collateralized mortgage obligations | |
| 65,043 | | | 74,932 | |
States and political subdivisions | |
| 70,195 | | | 70,645 | |
| |
| 300,088 | |
| 311,944 | |
| | | | | | | |
Equity securities, at fair value | | | 189 | | | 140 | |
| | | | | | | |
Total securities portfolio | | $ | 2,544,395 | | $ | 2,468,544 | |
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We had nominal net unrealized losses at March 31, 2021 and net unrealized gains of $30.3 million and $11.7$26.3 million at June 30, 2020 and December 31, 2019, respectively,2020 related to the available for sale investment portfolio, and net unrealized gains of $16.3$11.3 million and $2.6$14.7 million associated with the securities held to maturity portfolio at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. We hadEquity securities included net unrealized gains of $0.1 million at both June 30, 2020March 31, 2021 and December 31, 2019 related to equity securities.2020.
Banking Segment
The banking segment’s securities portfolio plays a role in the management of our interest rate sensitivity and generates additional interest income. In addition, the securities portfolio is used to meet collateral requirements for public and trust deposits, securities sold under agreements to repurchase and other purposes. The available for sale and equity securities portfolios serve as a source of liquidity. Historically, the Bank’s policy has been to invest primarily in securities of the U.S. government and its agencies, obligations of municipalities in the State of Texas and other high grade fixed income securities to minimize credit risk. At June 30, 2020,March 31, 2021, the banking segment’s securities portfolio of $1.4$2.0 billion was comprised of trading securities of $2.3$1.0 million, available for sale securities of $1.1$1.7 billion, equity securities of $0.1 $0.2
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million and held to maturity securities of $343.2$300.1 million, in addition to $12.7$15.0 million of other investments included in other assets within the consolidated balance sheets.
Broker-Dealer Segment
The broker-dealer segment holds securities to support sales, underwriting and other customer activities. The interest rate risk inherent in holding these securities is managed by setting and monitoring limits on the size and duration of positions and on the length of time the securities can be held. The Hilltop Broker-Dealers are required to carry their securities at fair value and record changes in the fair value of the portfolio in operations. Accordingly, the securities portfolio of the Hilltop Broker-Dealers included trading securities of $645.7$527.7 million at June 30, 2020.March 31, 2021. In addition, the Hilltop Broker-Dealers enter into transactions that represent commitments to purchase and deliver securities at prevailing future market prices to facilitate customer transactions and satisfy such commitments. Accordingly, the Hilltop Broker-Dealers’ ultimate obligationsobligation may exceed the amount recognized in the financial statements. These securities, which are carried at fair value and reported as securities sold, not yet purchased in the consolidated balance sheets, had a value of $55.3$97.1 million at June 30, 2020.March 31, 2021.
Corporate
At June 30, 2020,March 31, 2021, the corporate portfolio included other investments, including those associated with merchant banking, of $39.7$38.8 million in other assets within the consolidated balance sheets.
Allowance for Credit Losses for Available for Sale Securities and Held to Maturity Securities
We have evaluated available for sale debt securities that are in an unrealized loss position and have determined that any declines in value are unrelated to credit loss and related to changes in market interest rates since purchase. In addition, as of June 30, 2020, we had not made a decision to sell any of our debt securities held, nor did we consider it more likely than not that we would be required to sell such securities before recovery of their amortized cost basis. None of the available for sale debt securities held were past due at June 30, 2020.March 31, 2021. In addition, as of March 31, 2021, we had evaluated our held to maturity debt securities, considering the current credit ratings and recognized losses, and determined the potential credit loss to be minimal. With respect to these securities, we considered the risk of credit loss to be negligible, and therefore, no allowance was recognized on the debt securities portfolio at March 31, 2021.
Loan Portfolio
Consolidated loans held for investment are detailed in the tables below, classified by portfolio segment.
| | | | | | | |
|
| June 30, |
| December 31, |
| ||
| | 2020 | | 2019 |
| ||
Commercial real estate | | $ | 3,043,723 | | $ | 3,000,523 | |
Commercial and industrial | |
| 2,736,089 | |
| 2,025,720 | |
Construction and land development | |
| 931,899 | |
| 940,564 | |
1-4 family residential | |
| 672,843 | |
| 791,020 | |
Consumer | | | 42,459 | | | 47,046 | |
Broker-dealer | | | 422,891 | | | 576,527 | |
Loans held for investment, gross | |
| 7,849,904 | |
| 7,381,400 | |
Allowance for credit losses | |
| (156,383) | |
| (61,136) | |
Loans held for investment, net of allowance | | $ | 7,693,521 | | $ | 7,320,264 | |
| | | | | | |
|
| March 31, |
| December 31, | ||
| | 2021 | | 2020 | ||
Commercial real estate | | $ | 3,114,936 | | $ | 3,133,903 |
Commercial and industrial | |
| 2,574,229 | |
| 2,627,774 |
Construction and land development | |
| 821,883 | |
| 828,852 |
1-4 family residential | |
| 745,544 | |
| 629,938 |
Consumer | | | 33,890 | | | 35,667 |
Broker-dealer | | | 520,175 | | | 437,007 |
Loans held for investment, gross | |
| 7,810,657 | |
| 7,693,141 |
Allowance for credit losses | |
| (144,499) | |
| (149,044) |
Loans held for investment, net of allowance | | $ | 7,666,158 | | $ | 7,544,097 |
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Banking Segment
The loan portfolio constitutes the majorprimary earning asset of the banking segment and typically offers the best alternative for obtaining the maximum interest spread above the banking segment’s cost of funds. The overall economic strength of the banking segment generally parallels the quality and yield of its loan portfolio.
The banking segment’s total loans held for investment, net of the allowance for credit losses, were $9.5 billion and $8.6$9.6 billion at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. The banking segment’s loan portfolio includes warehouse lines of credit extended to PrimeLending of $3.3 billion, of which $2.3 billion and $1.8$2.5 billion was drawn at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. Amounts advanced against the warehouse lines of credit are eliminated from net loans held for investment on our consolidated balance sheets. The banking segment does not generally participate in syndicated loan transactions and has no foreign loans in its portfolio.
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The banking segment’s loan portfolio includes $671.9included $492.4 million inrelated to both initial and second round PPP loans.loans at March 31, 2021. While these loans have terms up to 60 months, borrowers can apply for forgiveness of these loans with the SBA. Through April 16, 2021, the SBA had approved approximately 2,270 initial round PPP forgiveness applications from the Bank totaling approximately $420 million, with PPP loans of approximately $185 million pending SBA review and approval. We anticipate a significant amount of these remaining initial round PPP loans pending approval being forgiven over the next three quarters.quarter. The Bank has not commenced the submission of PPP forgiveness applications on second round PPP loans. The forgiveness/payoff of thesethe PPP loans would generate an increase in interest income as we would recognize the remaining unamortized origination fee at the time of payoff.payoff or forgiveness.
At June 30, 2020,March 31, 2021, the banking segment had loan concentrations (loans to borrowers engaged in similar activities) that exceeded 10% of total loans in its real estate portfolio. The areas of concentration within our real estate portfolio were non-construction commercial real estate loans, construction and land development loans, and non-construction residential real estate loans, which represented 41.0%42.7%, 12.5%11.3% and 9.1%10.2%, respectively, of the banking segment’s total loans held for investment (excluding warehouse lines of credit extended to PrimeLending) at June 30, 2020.March 31, 2021. The banking segment’s loan concentrations were within regulatory guidelines at June 30, 2020.March 31, 2021.
Broker-Dealer Segment
The loan portfolio of the broker-dealer segment consists primarily of margin loans to customers and correspondents. These loans are collateralized by the securities purchased or by other securities owned by the clients and, because of collateral coverage ratios, are believed to present minimal collectability exposure. Additionally, these loans are subject to a number of regulatory requirements as well as the Hilltop Broker-Dealers’ internal policies. The broker-dealer segment’s total loans held for investment, net of the allowance for credit losses, were $422.1$519.9 million and $576.5$436.8 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. This decreaseincrease from December 31, 20192020 to June 30, 2020March 31, 2021 was primarily attributable to a decreasean increase of $50.8$44.5 million, or 16.3%17%, in customer margin accounts and a decreasean increase of $101.7$37.7 million, or 38.5%21%, in receivables from correspondents.
Mortgage Origination Segment
The loan portfolio of the mortgage origination segment consists of loans held for sale, primarily single-family residential mortgages funded through PrimeLending, and IRLCs with customers pursuant to which we agree to originate a mortgage loan on a future date at an agreed-upon interest rate. The components of the mortgage origination segment’s loans held for sale and IRLCs are as follows (in thousands).
| | | | | | | | | | | | | | |
| | June 30, | | December 31, | | | March 31, | | December 31, | | ||||
|
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| ||||
Loans held for sale: | | | | | | | | | | | | | | |
Unpaid principal balance | | $ | 2,333,091 | | $ | 1,878,231 | | | $ | 2,207,245 | | $ | 2,411,626 | |
Fair value adjustment | |
| 115,960 | |
| 57,482 | | |
| 41,822 | |
| 109,778 | |
| | $ | 2,449,051 | | $ | 1,935,713 | | | $ | 2,249,067 | | $ | 2,521,404 | |
IRLCs: | | | | | | | | | | | | | | |
Unpaid principal balance | | $ | 2,782,720 | | $ | 914,526 | | | $ | 2,673,869 | | $ | 2,470,013 | |
Fair value adjustment | |
| 101,210 | |
| 18,222 | | |
| 48,809 | |
| 76,048 | |
| | $ | 2,883,930 | | $ | 932,748 | | | $ | 2,722,678 | | $ | 2,546,061 | |
The mortgage origination segment uses forward commitments to mitigate interest rate risk associated with its loans held for sale and IRLCs. The notional amounts of these forward commitments at June 30, 2020March 31, 2021 and December 31, 20192020 were
85
$3.8 $3.9 billion and $2.2$4.0 billion, respectively, while the related estimated fair values were ($19.7)$43.1 million and ($3.8)28.0) million, respectively.
Allowance for Credit Losses on Loans
Since December 31, 2019, we have updated our Critical Accounting Policies and Estimates related to the allowance for credit losses as a result of the implementation of CECL on January 1, 2020. For additional information regarding the allowance for credit losses, refer to the section captioned “Critical Accounting Policies and Estimates” includedset forth in thisPart II, Item 7 of our 2020 Form 10-Q.10-K.
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Loans Held for Investment
The Bank has lending policies in place with the goal of establishing an asset portfolio that will provide a return on stockholders’ equity sufficient to maintain capital to assets ratios that meet or exceed established regulations. Loans are underwritten with careful consideration of the borrower’s financial condition, the specific purpose of the loan, the primary sources of repayment and any collateral pledged to secure the loan.
Underwriting procedures address financial components based on the size and complexity of the credit. The financial components include, but are not limited to, current and projected cash flows, shock analysis and/or stress testing, and trends in appropriate balance sheet and statement of operations ratios. The Bank’s loan policy provides specific underwriting guidelines by portfolio segment, including commercial and industrial, real estate, construction and land development, and consumer loans. The guidelines for each individual portfolio segment set forth permissible and impermissible loan types. With respect to each loan type, the guidelines within the Bank’s loan policy provide minimum requirements for the underwriting factors listed above. The Bank’s underwriting procedures also include an analysis of any collateral and guarantor. Collateral analysis includes a complete description of the collateral, as well as determined values, monitoring requirements, loan to value ratios, concentration risk, appraisal requirements and other information relevant to the collateral being pledged. Guarantor analysis includes liquidity and cash flow evaluation based on the significance with which the guarantors are expected to serve as secondary repayment sources.
The Bank maintains a loan review department that reviews credit risk in response to both external and internal factors that potentially impact the performance of either individual loans or the overall loan portfolio. The loan review process reviews the creditworthiness of borrowers and determines compliance with the loan policy. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel. Results of these reviews are presented to management, the Bank’s board of directors and the Risk Committee of the board of directors of the Company.
The allowance for credit losses for loans held for investment represents management’s best estimate of all expected credit losses over the expected contractual life of our existing portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods. Such future changes in the allowance for credit losses are expected to be volatile given dependence upon, among other things, the portfolio composition and quality, as well as the impact of significant drivers, including prepayment assumptions and macroeconomic conditions and forecasts.
One of the most significant judgments involved in estimating our allowance for credit losses relates to the macroeconomic forecasts used to estimate credit losses over the reasonable and supportable forecast period. To determine the allowance for credit losses as of June 30, 2020, we utilized a single macroeconomic baseline scenario published by a third party in June 2020.
The COVID-19 pandemic has resulted in a weak labor market and weak overall economic conditions that will affecthave affected borrowers across our lending portfolios and significantportfolios. Significant judgment is required to estimate the severity and duration of the current economic downturn, as well as its potential impact on borrower defaults and loss severity. In particular, macroeconomic conditions and forecasts regarding the duration and severity of the economic downturn are rapidly changing and remain highly uncertain as the resurgence of COVID-19 cases evolvesand vaccine effectiveness evolve nationally and in key geographies. It is difficult to predict exactly how borrower behavior will be impacted by these economic conditions as the effectiveness of vaccinations, government stimulus, customer relief and enhanced unemployment benefits should help mitigate in the short term, but the extent and duration of government stimulus as well as performance of recently implemented payment deferral programs remains uncertain.
One of the most significant judgments involved in estimating our allowance for credit losses relates to the macroeconomic forecasts used to estimate credit losses over the reasonable and supportable forecast period. To determine the allowance for credit losses as of March 31, 2021, we utilized a single macroeconomic consensus scenario published by Moody’s Analytics in March 2021.
During previous quarterly macroeconomic assessments through December 31, 2020, we utilized a single baseline scenario published by Moody’s Analytics. The change to the consensus scenario was based on our evaluation of the Moody’s economic forecast compared to other industry surveys over the reasonable and supportable period and our assessment of the reasonableness of impacts associated with the key monetary and government stimulus policy assumptions. The consensus economic scenario considered several industry surveys in the near-term forecasts and assumes reversion to the long-term trends embedded in the baseline economic scenario before reverting to historical data.
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The following table summarizes the U.S. Real Gross Domestic Product (“GDP”) growth rates and unemployment rate assumptions used in our economic forecast used to determine our best estimate of expected credit losses aslosses.
| | | | | | | | | | | |
| | | As of | ||||||||
| | | March 31, | | December 31, | | September 30, | | June 30, | | March 31, |
| | | 2021 | | 2020 | | 2020 | | 2020 | | 2020 |
GDP growth rates: | | | | | | | | | | | |
| Q1 2020 | | | | | | | | | | (2.5)% |
| Q2 2020 | | | | | | | | (33.4)% | | (18.3)% |
| Q3 2020 | | | | | | 26.6% | | 19.8% | | 10.9% |
| Q4 2020 | | | | 4.0% | | 2.9% | | 0.1% | | 2.4% |
| Q1 2021 | | 5.0% | | 1.6% | | 3.6% | | 0.2% | | 2.6% |
| Q2 2021 | | 6.5% | | 4.5% | | 3.1% | | 1.8% | | 3.3% |
| Q3 2021 | | 6.7% | | 4.7% | | 4.4% | | 8.5% | | 5.1% |
| Q4 2021 | | 4.8% | | 5.8% | | 6.0% | | 7.3% | | |
| Q1 2022 | | 3.2% | | 4.8% | | 5.5% | | | | |
| Q2 2022 | | 2.5% | | 4.4% | | | | | | |
| Q3 2022 | | 2.1% | | | | | | | | |
| | | | | | | | | | | |
Unemployment rates: | | | | | | | | | | | |
| Q1 2020 | | | | | | | | | | 3.8% |
| Q2 2020 | | | | | | | | 14.0% | | 8.7% |
| Q3 2020 | | | | | | 8.9% | | 9.1% | | 6.3% |
| Q4 2020 | | | | 6.7% | | 9.1% | | 9.5% | | 6.5% |
| Q1 2021 | | 6.3% | | 6.9% | | 8.9% | | 9.7% | | 6.7% |
| Q2 2021 | | 6.2% | | 7.1% | | 8.7% | | 9.7% | | 6.7% |
| Q3 2021 | | 5.8% | | 7.0% | | 8.3% | | 9.2% | | 6.6% |
| Q4 2021 | | 5.4% | | 6.8% | | 7.8% | | 8.7% | | |
| Q1 2022 | | 5.1% | | 6.5% | | 7.3% | | | | |
| Q2 2022 | | 4.9% | | 6.2% | | | | | | |
| Q3 2022 | | 4.7% | | | | | | | | |
As of March 31, 2021, our near-term economic forecast improved from December 31, 2020, assumedreflecting better than expected economic and COVID case data and the approval of a severe, but short U.S. recession during the first halfthird round of 2020 with U.S Real Gross Domestic Product (“GDP”) growth rates down -2.5%$1.9 trillion in the first quarter of 2020 and -18.3%government stimulus in the second quarter of 2020, followed byMarch 2021. As a strong economic recovery as businesses re-open and consumer spending increases during the second half of 2020 withresult, projected real GDP growth rates up 10.9% inthrough the third quarter of 2021 was revised upward and unemployment rate forecasts were adjusted lower based on economic and employment data observed in February 2021. Forecasts for commercial real estate prices nationally were updated higher with declines through 2021 and recovery to pre-COVID levels in early 2024. Our new interest rate expectations assume monetary policy support from the Federal Reserve and a target range of the federal funds rate at 0% to 0.25% into mid-2023.
As of December 31, 2020, our near-term economic forecast improved from September 30, 2020, reflecting better than expected economic data and 2.4% in the fourth quarterapproval of 2020. In 2021,additional government stimulus earlier than expected. As such, projected real GDP growth rates were expected to increase to 2.6% in the first quarter of 2021 3.3%was revised upward. However, we revised our near-term 2021 real GDP forecast to reflect approximately $900 billion of additional stimulus compared to $1.5 trillion planned as of September 30, 2020. Unemployment rate forecasts were adjusted lower based on economic data observed in October and November 2020, as well as recent COVID vaccine approvals showing progress towards the secondnext phase of labor market recovery. Forecasts for commercial real estate prices nationally were updated lower as of December 31, 2020 to reflect declines through 2022 and recovery to pre-COVID levels in late 2024. Prior quarter forecasts as of September 30, 2020 assumed declines through 2021 and 5.1%recovery to pre-COVID levels in mid-2023. Our interest rate expectations continued to assume monetary policy support from the thirdFederal Reserve and fourth quartersa target range of 2021. Unemployment rates were assumedthe federal funds rate at 0% to average 3.8% during0.25% into late 2023.
Since December 31, 2019, our economic forecast changed significantly year-over-year in response to weak economic conditions caused by the first quarter ofCOVID pandemic as developments occurred rapidly in February and March 2020 8.7% during the second quarter of 2020, 6.3% during the third quarter of 2020 and 6.5% during the fourth quarter of 2020. The unemployment rates were expected to remain elevated into the fourth quarter of 2021 at 6.3% and the fourth quarter of 2022 at 4.6% as forecasts revert to historical data. Management’s recovery assumptions included some expected benefit of COVID-19 relatedassociated with fiscal and monetary stimulus measures and the expected beneficial impacts of the CARES Act and certain regulatory interagency guidance.
As of June 30,December 31, 2019, we assumed the U.S. economy was in the late stages of the economic cycle with unemployment rates near historical lows of 3.6% increasing to 3.8% in the fourth quarter of 2020 our best estimateand reverting to historical data in the fourth quarter of expected credit losses used2022. Downside risks to the economy were concerns over international trade war between the U.S. and its trading partners and potential fallout from a baseline economic forecast that continued to assumeBrexit in 2020. Interest rate expectations assumed one rate cut in 2020 with the Federal Reserve target range of the federal funds rate at 1.25% to 1.50% before reverting to historical data in 2023. In response to the COVID pandemic, the Federal Reserve twice cut federal funds rate targets in March 2020 to 0% to 0.25% into 2023, but was updated for continued deterioration in the U.S. economic outlook due to COVID-19 conditions. GDP growth rates were assumed to decline -33.4% in the second quarterwith interest rate expectations as of December 31, 2020 and recover 19.8% in the third quarter of 2020 and 0.1% in the fourth quarter of 2020. In 2021, GDP growth rates were expected to increase to 0.2% in the first quarter of 2021, 1.8% in the second quarter of 2021, 8.5% in the third quarter of 2021 and 7.3% in the fourth quarter of 2021. Unemployment rates were assumed to average 14.0% during the second quarter of 2020, 9.1% during third quarter of 2020 and 9.5% during fourth quarter of 2020. Recent forecasts assume unemployment rates of 8.6% in the fourth quarter of 2021, 5.9% in the fourth quarter of 2022 and 4.6% in the fourth quarter of 2023. The timing of the release in early June 2020 of the third
8672
party’s baseline forecast utilized did not assumeunchanged until late 2023. Several U.S. fiscal and monetary policy changes during early 2020 were enacted to counter a severe, but short U.S. recession during the first half of 2020 and support a strong economic recovery during the second wavehalf of COVID-19 cases into2020 with U.S. budget deficits increasing to more than $3 trillion during the summer months, soyear. U.S. unemployment rates reached 14.8% in April 2020 before declining to 6.7% as of December 31, 2020, which was 3.1% higher than the model results were qualitatively adjustedunemployment rate as of December 31, 2019. Annualized real GDP growth rates declined 31.4% in the second quarter of 2020 and increased 33.4% in the third quarter of 2020. The U.S. presidential election later in 2020 resulted in several changes, as Presidential Candidate Joe Biden won the electoral vote to consider recent developmentsreplace President Donald Trump in Texas, uncertainty in Texas’2021 and majority control of the U.S. Congress moved from Republican to Democratic parties. As economic re-opening plan and such impacts on our most adversely impacted loan portfolios. Qualitative adjustments considered both significantgrowth slowed during the fourth quarter of 2020, additional government relief programs and stimulus as well as certain model limitations with the current economic forecast and recent commodity price shocks not observed in historical data.of approximately $900 billion was approved.
The increase in the allowance for credit losses for loans held for investment during the six months ended June 30, 2020 was primarily attributable to changes within the Bank. As previously discussed, we adopted the new CECL standard and recorded transition adjustment entries that resulted in an allowance for credit losses for loans held for investment of $73.7 million as of January 1, 2020, an increase of $12.6 million. This increase reflected credit losses of $18.9 million from the expansion of the loss horizon to life of loan and also takes into account forecasts of expected future macroeconomic conditions, partially offset by the elimination of the non-credit component within the historical allowance related to previously categorized PCI loans of $6.3 million. This increase, net of tax, was largely reflected within the banking segment and included a decrease of $5.7 million to opening retained earnings at January 1, 2020.
During the three and six months ended June 30, 2020,March 31, 2021, the significant buildallowance reflected a net reversal of credit losses of $5.1 million on loans held for investment. This net reversal of credit losses was primarily comprised of a net reversal of credit losses on expected losses of collectively evaluated loans of $6.5 million primarily due to improvements in the allowance includedmacroeconomic forecast assumptions from the prior quarter, partially offset by slower prepayment assumptions on certain commercial real estate and construction and land portfolios, as well as an increase in the provision for credit losses on individually evaluated loans of $6.2$1.4 million primarily related to changes in risk rating grades and $23.8 million, respectively, while the provision for credit losses on expected losses of collectively evaluated loans accounted for $59.9 million and $76.6 million, respectively, of the total respective provision primarily due to a deteriorating economic outlook associated with the impact of the market disruption caused by COVID-19 conditions.updated realizable values. The changeschange in the allowance for credit losses during the noted periodscurrent period was primarily attributable to the Bank and also were attributable toreflected other factors including, but not limited to, loan growth, loan mix, and changes in risk rating grades.qualitative factors from the prior quarter. The change in the allowance during the three and six months ended June 30, 2020March 31, 2021 was also impacted by net charge-offsrecoveries of $16.4 million and $17.9 million, respectively, primarily associated with loans specifically reserved for during the first quarter of 2020.$0.6 million.
As discussed under the section entitled “Loan Portfolio” earlier in this Item 2, the Bank’s actions duringbeginning in the second quarterand third quarters of 2020 included supporting our impacted banking clients experiencing an increased level of risk due to the COVID-19 pandemic through loan modifications. The significant build in the allowance included provision for credit losses associated with this deteriorating economic outlook and resulted in an allowance for credit losses as a percentage of our total loan portfolio, excluding margin loans in the broker-dealer segment margin loans and banking segment mortgage warehouse lending and PPP loans,lending programs, of 2.60%2.38%.
The respective distribution of the allowance for credit losses as a percentage of our total loan portfolio and total approvedactive loan modifications, excluding margin loans in the broker-dealer segment margin loans and banking segment mortgage warehouse lending and PPP loans,lending programs, are presented in the following table (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||
| | | | | | Allowance For | | | | | | Allowance | | Allowance For | | | | | | | Allowance For | | | | | Allowance | | Allowance For | | |||||||
| | | | | | Credit Losses | | | | | | For Credit | | Credit Losses | | | | | | | Credit Losses | | | | | For Credit | | Credit Losses | | |||||||
| | | | | Total | | as a % of |
| | | | | Losses on | | as a % of | | | | | | Total | | as a % of |
| | | | Losses on | | as a % of | | |||||
| | Total | | Allowance | | Total Loans | | | Approved | | Approved | | Approved | | | Total | | Allowance | | Total Loans | | | Active | | Active | | Active | | ||||||||
| | Loans Held | | for Credit | | Held For |
| | Loan | | Loan | | Loan | | | Loans Held | | for Credit | | Held For |
| | Loan | | Loan | | Loan | | ||||||||
June 30, 2020 | | For Investment | | Losses | | Investment | | | Modifications | | Modifications | | Modifications | | ||||||||||||||||||||||
March 31, 2021 | | For Investment | | Losses | | Investment | | | Modifications | | Modifications | | Modifications | | ||||||||||||||||||||||
Commercial real estate | | $ | 3,043,723 | | $ | 106,551 | | 3.50 | % | | $ | 733,285 | | $ | 51,965 | | 7.09 | % | | $ | 3,114,936 | | $ | 104,126 | | 3.34 | % | | $ | 89,496 | | $ | 15,587 | | 17.42 | % |
Commercial and industrial (1) | | 1,290,101 | | 31,476 | | 2.44 | % | | 139,992 | | 10,873 | | 7.77 | % | | 1,338,511 | | 28,141 | | 2.10 | % | | 5,708 | | 1,052 | | 18.43 | % | ||||||||
Construction and land development | |
| 931,899 | |
| 8,393 | | 0.90 | % | | | 42,693 | |
| 2,850 | | 6.68 | % | |
| 821,883 | |
| 7,249 | | 0.88 | % | | | 25,591 | |
| 731 | | 2.86 | % |
1-4 family residential | |
| 672,843 | |
| 7,399 | | 1.10 | % | | | 49,219 | |
| 2,734 | | 5.55 | % | |
| 745,544 | |
| 3,388 | | 0.45 | % | | | 9,493 | |
| 60 | | 0.63 | % |
Consumer | | | 42,459 | |
| 1,429 | | 3.37 | % | | | 2,916 | |
| 120 | | 4.12 | % | | | 33,890 | |
| 944 | | 2.79 | % | | | — | |
| — | | — | |
| |
| 5,981,025 | |
| 155,248 | | 2.60 | % | | | 968,105 | |
| 68,542 | | 7.08 | % | |
| 6,054,764 | |
| 143,848 | | 2.38 | % | | | 130,288 | |
| 17,430 | | 13.38 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||
Broker-dealer | | 422,891 | | 748 | | 0.18 | % | | — | | — | | - | % | | 520,175 | | 279 | | 0.05 | % | | — | | — | | — | | ||||||||
Mortgage warehouse lending | | 774,129 | | 387 | | 0.05 | % | | — | | — | | - | % | | 743,347 | | 372 | | 0.05 | % | | — | | — | | — | | ||||||||
Paycheck Protection Program | | | 671,859 | | | — | | - | % | | | — | | | — | | - | % | | | 492,371 | | | — | | — | | | | — | | | — | | — | |
| | $ | 7,849,904 | | $ | 156,383 | | 1.99 | % | | $ | 968,105 | | $ | 68,542 | | 7.08 | % | | $ | 7,810,657 | | $ | 144,499 | | 1.85 | % | | $ | 130,288 | | $ | 17,430 | | 13.38 | % |
(1) | Commercial and industrial portfolio amounts reflect balances excluding |
8773
Allowance Model Sensitivity
Our allowance model was designed to capture the historical relationship between economic and portfolio changes. As such, evaluating shifts in individual portfolio attributes or macroeconomic variables in isolation may not be indicative of past or future performance. It is difficult to estimate how potential changes in any one factor or input might affect the overall allowance for credit losses because we consider a wide variety of factors and inputs in the allowance for credit losses estimate. Changes in the factors and inputs considered may not occur at the same rate and may not be consistent across all geographies or product types, and changes in factors and input may be directionally inconsistent, such that improvement in one factor may offset deterioration in others.
However, to consider the sensitivity of credit loss estimates to alternative macroeconomic forecasts, we compared the Company’s allowance for credit loss estimates as of March 31, 2021, excluding margin loans in the broker-dealer segment, the banking segment mortgage warehouse, and PPP lending programs, with modeled results using both upside (“S1”) and downside (“S3”) economic scenario forecasts published by Moody’s Analytics.
Compared to our economic forecast, the upside scenario assumes consumer and business confidence increases as new cases, hospitalizations and deaths from COVID recede faster than expected, while vaccinations and consumer spending accelerate earlier than expected. Real GDP growth is expected to grow 8.9% in the second quarter of 2021, 10.0% in the third quarter of 2021 and 9.7% in the fourth quarter of 2021 and 9.4% in the first quarter 2022. Average unemployment rates decline to 3.5% by the end of 2021 and 3.2% by the end of 2022. Monetary and fiscal policy assumptions include the Federal Reserve maintaining a near 0% target for the federal funds rate until the fourth quarter of 2022 and additional government infrastructure and social program spending approved in the fourth quarter of 2021 of $1.5 trillion.
Compared to our economic forecast, the downside scenario assumes consumer and business confidence declines as hospitalizations and deaths from COVID rise again resulting in increased concerns associated with vaccine effectiveness. As the number of new cases rise, consumer confidence and spending erode causing the economy to fall back into recession. Real GDP growth is expected to decrease 3.5% in the second quarter of 2021, 2.3% in the third quarter of 2021 and 0.8% in the fourth quarter of 2021. Average unemployment rates increase to 8.2% by the fourth quarter of 2021 and improve modestly to 7.7% by the end of 2022. Unemployment is expected to remain elevated but improve to 6.2% in the fourth quarter of 2023 and reverts to historical average rates over time. Monetary and fiscal policy assumptions include the Federal Reserve maintaining a near 0% target for the federal funds rate through mid-2025, while disagreements in Congress prevent any additional stimulus from being enacted beyond the American Rescue Plan Act passed in March 2021.
The impact of applying all of the assumptions of the upside economic scenario during the reasonable and supportable forecast period would have resulted in a decrease in the allowance for credit losses of approximately $21 million or a weighted average expected loss rate of 1.62% as a percentage of our total loan portfolio, excluding margin loans in the broker-dealer segment and the banking segment mortgage warehouse lending and PPP lending programs.
The impact of applying all of the assumptions of the downside economic scenario during the reasonable and supportable forecast period would have resulted in an increase in the allowance for credit losses of approximately $73 million or a weighted average expected loss rate of 3.20% as a percentage of our total loan portfolio, excluding margin loans in the broker-dealer segment and the banking segment mortgage warehouse lending and PPP lending programs.
This analysis relates only to the modeled credit loss estimates and is not intended to estimate changes in the overall allowance for credit losses as they do not reflect any potential changes in the adjustment to the quantitative calculation, which would also be influenced by the judgment management applies to the modeled lifetime loss estimates to reflect the uncertainty and imprecision of these modeled lifetime loss estimates based on then-current circumstances and conditions. It also did not consider impacts from recent Bank deferral and customer accommodation efforts or government fiscal and monetary stimulus measures.
Our allowance for credit losses reflects our best estimate of current expected credit losses, which is highly dependent on the path of the virus and expectations around the production and distribution of reliable vaccines and medical treatments. We continue to monitor the impact of the COVID-19 pandemic and related policy measures on the economy and if pace and vigor of the expected recovery is worse than expected, further meaningful provisions could be required. Future allowance for credit losses may vary considerably for these reasons.
74
Allowance Activity
The following tabletables presents the activity in our allowance for credit losses within our loan portfolio for the periods presented (in thousands). Substantially all of the activity shown below occurred within the banking segment.
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended March 31, | | ||||||||||||
Loans Held for Investment |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
|
| 2021 |
| 2020 |
| ||||||
Balance, beginning of period | | $ | 106,739 | | $ | 58,809 | | $ | 61,136 | | $ | 59,486 | | | $ | 149,044 | | $ | 61,136 | |
Transition adjustment for adoption of CECL accounting standard | | | — | | | — | | | 12,562 | | | — | | | | — | | | 12,562 | |
Provision for (reversal of) credit losses | |
| 66,026 | |
| (672) | |
| 100,575 | |
| 279 | | |
| (5,109) | |
| 34,549 | |
Recoveries of loans previously charged off: | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | |
| 11 | |
| — | |
| 21 | |
| — | | |
| 14 | |
| 10 | |
Commercial and industrial | |
| 681 | |
| 322 | |
| 1,068 | |
| 970 | | |
| 433 | |
| 387 | |
Construction and land development | |
| 2 | |
| — | |
| 2 | |
| — | | |
| — | |
| — | |
1-4 family residential | |
| 5 | |
| 17 | |
| 15 | |
| 31 | | |
| 409 | |
| 10 | |
Consumer | | | 104 | |
| 12 | | | 224 | |
| 22 | | | | 76 | |
| 120 | |
Broker-dealer | | | — | |
| — | | | — | |
| — | | | | — | |
| — | |
Total recoveries | |
| 803 | |
| 351 | |
| 1,330 | |
| 1,023 | | |
| 932 | |
| 527 | |
Loans charged off: | | | | | | | | | | | | | | | | | | | | |
Commercial real estate | |
| 4,274 | |
| — | |
| 4,488 | |
| — | | |
| — | |
| 214 | |
Commercial and industrial | |
| 12,544 | |
| 2,430 | |
| 13,984 | |
| 4,248 | | |
| 179 | |
| 1,440 | |
Construction and land development | |
| — | |
| — | |
| 2 | |
| — | | |
| — | |
| 2 | |
1-4 family residential | |
| 170 | |
| 871 | |
| 373 | |
| 899 | | |
| 110 | |
| 203 | |
Consumer | | | 197 | |
| 10 | | | 373 | |
| 464 | | | | 79 | |
| 176 | |
Broker-dealer | | | — | |
| — | | | — | |
| — | | | | — | |
| — | |
Total charge-offs | |
| 17,185 | |
| 3,311 | |
| 19,220 | |
| 5,611 | | |
| 368 | |
| 2,035 | |
Net charge-offs | |
| (16,382) | |
| (2,960) | |
| (17,890) | |
| (4,588) | | |||||||
Net recoveries (charge-offs) | |
| 564 | |
| (1,508) | | |||||||||||||
Balance, end of period | | $ | 156,383 | | $ | 55,177 | | $ | 156,383 | | $ | 55,177 | | | $ | 144,499 | | $ | 106,739 | |
Allowance for credit losses as a percentage of gross loans held for investment | | | | | | | | | 1.99 | % | | 0.77 | % | | | 1.85 | % | | 1.45 | % |
The distribution of the allowance for credit losses among loan types and the percentage of the loans for that type to gross loans, excluding unearned income, within our loan portfolio are presented in the table below (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | December 31, 2019 | | | March 31, 2021 | | December 31, 2020 | | ||||||||||||
|
|
| |
| % of |
|
| |
| % of |
|
|
| |
| % of |
|
| |
| % of |
|
| | | | | Gross | | | | | Gross | | | | | | Gross | | | | | Gross | |
| | Reserve | | Loans | | Reserve | | Loans | | | Reserve | | Loans | | Reserve | | Loans | | ||||
Commercial real estate |
| $ | 106,551 |
| 38.77 | % | $ | 31,595 |
| 40.65 | % |
| $ | 104,126 |
| 39.88 | % | $ | 109,629 |
| 40.74 | % |
Commercial and industrial |
|
| 31,863 |
| 34.86 | % |
| 17,964 |
| 27.44 | % |
|
| 28,513 |
| 33.00 | % |
| 27,703 |
| 34.16 | % |
Construction and land development |
|
| 8,393 |
| 11.87 | % |
| 4,878 |
| 12.74 | % |
|
| 7,249 |
| 10.52 | % |
| 6,677 |
| 10.77 | % |
1-4 family residential |
|
| 7,399 |
| 8.57 | % |
| 6,386 |
| 10.72 | % |
|
| 3,388 |
| 9.51 | % |
| 3,946 |
| 8.19 | % |
Consumer | | | 1,429 |
| 0.54 | % |
| 265 |
| 0.64 | % | | | 944 |
| 0.43 | % |
| 876 |
| 0.46 | % |
Broker-dealer | | | 748 |
| 5.39 | % |
| 48 |
| 7.81 | % | | | 279 |
| 6.66 | % |
| 213 |
| 5.68 | % |
Total |
| $ | 156,383 |
| 100.00 | % | $ | 61,136 |
| 100.00 | % |
| $ | 144,499 |
| 100.00 | % | $ | 149,044 |
| 100.00 | % |
The following table summarizes historical levels of the allowance for credit losses on loans held for investment, distributed by portfolio segment (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, | | March 31, | | December 31, | | September 30, | | June 30, | | March 31, | | December 31, | | September 30, | | June 30, | | March 31, | ||||||||||
|
| 2020 |
| 2020 | | 2019 |
| 2019 |
| 2019 |
| 2021 |
| 2020 | | 2020 |
| 2020 |
| 2020 | ||||||||||
Commercial real estate | | $ | 106,551 | | $ | 53,939 | | $ | 31,595 | | $ | 25,862 | | $ | 25,114 | | $ | 104,126 | | $ | 109,629 | | $ | 104,566 | | $ | 106,551 | | $ | 53,939 |
Commercial and industrial | |
| 31,863 | |
| 38,550 | |
| 17,964 | |
| 19,182 | |
| 20,414 | |
| 28,513 | |
| 27,703 | |
| 38,178 | |
| 31,863 | |
| 38,550 |
Construction and land development | |
| 8,393 | |
| 6,360 | |
| 4,878 | |
| 4,788 | |
| 4,396 | |
| 7,249 | |
| 6,677 | |
| 6,270 | |
| 8,393 | |
| 6,360 |
1-4 family residential | |
| 7,399 | |
| 6,365 | |
| 6,386 | |
| 5,411 | |
| 4,924 | |
| 3,388 | |
| 3,946 | |
| 5,052 | |
| 7,399 | |
| 6,365 |
Consumer | | | 1,429 | | | 1,203 | | | 265 | | | 268 | | | 283 | | | 944 | | | 876 | | | 1,002 | | | 1,429 | | | 1,203 |
Broker-dealer | | | 748 | | | 322 | | | 48 | | | 93 | | | 46 | | | 279 | | | 213 | | | 146 | | | 748 | | | 322 |
| | $ | 156,383 | | $ | 106,739 | | $ | 61,136 | | $ | 55,604 | | $ | 55,177 | | $ | 144,499 | | $ | 149,044 | | $ | 155,214 | | $ | 156,383 | | $ | 106,739 |
8875
The increase in the allowance for credit losses for loans held for investment subsequent to December 31, 2019during 2020 in the table above was primarily attributable to the adoption of the new CECL standard as of January 1, 2020 and a deteriorating economic outlook associated with the impact of the market disruption caused by COVID-19 conditions. As previously noted, the adoption of CECL requires that we reflect the expansion of the loss horizon to life of loan and take into account forecasts of expected future macroeconomic conditions in our determination of the allowance for credit losses.
Unfunded Loan Commitments
In order to estimate the allowance for credit losses on unfunded loan commitments, the Bank uses a process similar to that used in estimating the allowance for credit losses on the funded portion. The allowance is based on the estimated exposure at default, multiplied by the lifetime probability of default grade and loss given default grade for that particular loan segment. The Bank estimates expected losses by calculating a commitment usage factor based on industry usage factors. The commitment usage factor is applied over the relevant contractual period. Loss factors from the underlying loans to which commitments are related are applied to the results of the usage calculation to estimate any liability for credit losses related for each loan type. The expected losses on unfunded commitments align with statistically calculated parameters used to calculate the allowance for credit losses on the funded portion. Letters of credit are not currently reserved because they are issued primarily as credit enhancements and the likelihood of funding is low.
Changes in the allowance for credit losses for loans with off-balance sheet credit exposures are shown below (in thousands).
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended March 31, | ||||||||||||
|
| 2020 |
| 2019 | | 2020 |
| 2019 |
| 2021 |
| 2020 | ||||||
Balance, beginning of period | | $ | 7,209 | | $ | 2,255 | | $ | 2,075 | | $ | 2,366 | | $ | 8,388 | | $ | 2,075 |
Transition adjustment CECL accounting standard | | | — | | | — | | | 3,837 | | | — | | | — | | | 3,837 |
Expense (reversal of expense) | | | 1,822 | | | 8 | | | 3,119 | | | (103) | ||||||
Other noninterest expense | | | 419 | | | 1,297 | ||||||||||||
Balance, end of period | | $ | 9,031 | | $ | 2,263 | | $ | 9,031 | | $ | 2,263 | | $ | 8,807 | | $ | 7,209 |
At June 30, 2020, the reserve for unfunded commitments was $9.0 million, compared to $2.1 million at December 31, 2019. As previously discussed, we adopted the new CECL standard and recorded a transition adjustment entry that resulted in an allowance for credit losses of $5.9 million as of January 1, 2020. During the three and six months ended June 30, 2020,March 31, 2021, the increasesincrease in the reserve for unfunded commitments was primarily due to a deteriorating economic outlook associated with the impact of the market disruption caused by COVID-19 conditions.increases in available commitment balances.
Potential Problem Loans
Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor’s potential operating or financial difficulties. Management monitors these loans and reviews their performance on a regular basis. Potential problem loans contain potential weaknesses that could improve, persist or further deteriorate. If such potential weaknesses persist without improving, the loan is subject to downgrade, typically to substandard, in three to six months. Potential problem loans are assigned a grade of special mention within our risk grading matrix. Potential problem loans do not include purchased credit deteriorated (“PCD”) loans because PCD loans exhibited evidence of more than insignificant credit deterioration at acquisition that made it probable that all contractually required principal payments would not be collected. Additionally, potential problem loans do not include loans that have been modified in connection with our COVID-19 payment deferment programs which allow for a deferral of principal and/or interest payments. Within our loan portfolio, we had sixthree credit relationships totaling $8.2$4.8 million of potential problem loans at June 30, 2020,March 31, 2021, compared with fiveseven credit relationships totaling $16.8$11.3 million of potential problem loans at December 31, 2019.2020.
Non-Performing Assets
In response to the COVID-19 pandemic, startingthe CARES Act was passed in March 2020, which among other things, allows the Bank to suspend the TDR requirements for certain loan modifications to be categorized as a TDR. Starting in March 2020, the Bank implemented several actions to better support our impacted banking clients. Such programs includeclients and allow for loan modifications such as principal and/or interest payment deferrals, participation in the PPP as an SBA preferred lender and personal banking assistance including waived fees, increased daily spending limits and suspension of residential foreclosure activities. The COVID-19 payment deferment programs allow for a deferral of principal and/or interest payments with such deferred principal payments due and payable on the maturity date of the existing loan.
8976
Specifically, as discussed under the section entitledtitled “Loan Portfolio” earlier in this Item 2, the Bank’s actions during the second quarter of 2020 included approval of an aggregate$1.0 billion of $968.1COVID-19 related loan modifications. The portfolio of active deferrals that have not reached the end of their deferral period was approximately $130 million inas of March 31, 2021. While the majority of the portfolio of COVID-19 related loan modifications for those banking clients impacted by the COVID-19 pandemic.no longer require deferral, such loans represent elevated risk, and therefore management continues to monitor these loans. The extent to which these measures will impact the Bank, and any progression of loans, whether receiving COVID-19 payment deferrals or not, into non-performing assets, during future periods is uncertain and will depend on future developments that cannot be predicted.
The following table presents components of our non-performing assets (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | |
| | June 30, | | December 31, | | | | | | | March 31, | | December 31, | | | | | | ||||
|
| 2020 |
| 2019 |
| | Variance |
|
| 2021 |
| 2020 |
| | Variance |
| ||||||
Loans accounted for on a non-accrual basis: | |
| | |
| | | | | | | |
| | |
| | | | | | |
Commercial real estate | | $ | 13,743 | | $ | 7,308 | | | $ | 6,435 | | | $ | 10,668 | | $ | 11,133 | | | $ | (465) | |
Commercial and industrial | |
| 32,259 | |
| 15,262 | | |
| 16,997 | | |
| 36,144 | |
| 34,049 | | |
| 2,095 | |
Construction and land development | |
| 1,404 | |
| 1,316 | | |
| 88 | | |
| 501 | |
| 507 | | |
| (6) | |
1-4 family residential | |
| 20,552 | |
| 12,204 | | |
| 8,348 | | |
| 30,937 | |
| 32,263 | | |
| (1,326) | |
Consumer | | | 308 | | | 26 | | | | 282 | | | | 26 | |
| 28 | | | | (2) | |
Broker-dealer | | | — | | | — | | | | — | | | | — | |
| — | | | | — | |
| | $ | 68,266 | | $ | 36,116 | | | $ | 32,150 | | | $ | 78,276 | | $ | 77,980 | | | $ | 296 | |
Troubled debt restructurings included in accruing loans held for investment | | | 1,584 | | | 1,954 | | | | (370) | | |||||||||||
Non-performing loans | | $ | 79,860 | | $ | 79,934 | | | $ | (74) | | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | |
Non-performing loans as a percentage of total loans | |
| 0.65 | % |
| 0.38 | % | |
| 0.27 | % | |
| 0.77 | % |
| 0.76 | % | |
| 0.01 | |
| | | | | | | | | | | | | | | | | | | | | | |
Other real estate owned | | $ | 26,602 | | $ | 18,202 | | | $ | 8,400 | | | $ | 19,899 | | $ | 21,289 | | | $ | (1,390) | |
| | | | | | | | | | | | | | | | | | | | | | |
Other repossessed assets | | $ | 315 | | $ | — | | | $ | 315 | | | $ | — | | $ | 101 | | | $ | (101) | |
| | | | | | | | | | | | | | | | | | | | | | |
Non-performing assets | | $ | 95,183 | | $ | 54,318 | | | $ | 40,865 | | | $ | 99,759 | | $ | 101,324 | | | $ | (1,565) | |
| | | | | | | | | | | | | | | | | | | | | | |
Non-performing assets as a percentage of total assets | |
| 0.56 | % |
| 0.36 | % | |
| 0.20 | % | |
| 0.56 | % |
| 0.60 | % | |
| (0.04) | |
| | | | | | | | | | | | | | | | | | | | | | |
Loans past due 90 days or more and still accruing | | $ | 124,682 | | $ | 102,707 | | | $ | 21,975 | | | $ | 265,230 | | $ | 243,630 | | | $ | 21,600 | |
| | | | | | | | | | | | | | | | | | | | | | |
Troubled debt restructurings included in accruing loans held for investment | | $ | 2,025 | | $ | 2,173 | | | $ | (148) | |
Loans accounted for on aAt March 31, 2021, non-accrual basis at June 30, 2020 were primarily comprised of two commercial real estate loans totaling $4.6 million, 5included 49 commercial and industrial relationships totaling $26.7 millionwith loans secured by accounts receivable, life insurance, oil and 194 1-4 family residential loans totaling $11.4 million. The 1-4 family residentialgas, livestock and equipment. Non-accrual loans at June 30, 2020 in the table aboveMarch 31, 2021 also included $9.2$8.3 million of loans secured by residential real estate which were classified as loans held for sale. At December 31, 2020, non-accrual loans included 60 commercial and industrial relationships with loans secured by accounts receivable, life insurance, oil and gas, livestock and equipment. Non-accrual loans at December 31, 2020 also included $10.9 million of loans secured by residential real estate which were classified as loans held for sale.
Loans accountedAt March 31, 2021, TDRs were comprised of $1.6 million of loans that are considered to be performing and accruing, and $15.8 million of loans considered to be non-performing reported in non-accrual loans. At December 31, 2020, TDRs were comprised of $2.0 million of loans that are considered to be performing and accruing, and $16.0 million of loans that were considered to be non-performing reported in non-accrual loans. In March 2020, the CARES Act was passed, which, among other things, allows the Bank to suspend the requirements for oncertain loan modifications to be categorized as a non-accrual basis increasedTDR. Therefore, the Bank is not reporting COVID-19 related modifications as TDRs in accordance with the CARES Act.
OREO decreased from December 31, 20192020 to June 30, 2020,March 31, 2021, primarily due to the addition of commercial real estate loansdisposals totaling $9.1 million, a single commercial and industrial relationship totaling $11.8 million and various 1-4 family residential loans. The increase in commercial real estate loans in non-accrual status at June 30, 2020 of $6.4 million was primarily related to the addition of 24 loans totaling $9.1 million, with a reserve of $1.4 million, that were previously accruing at December 31, 2019. This increase from December 31, 2019 was partially offset by the settlement of a single loan accounted for on a non-accrual basis with a carrying amount of $2.5 million. The increase in commercial and industrial loans in non-accrual status since December 31, 2019 was primarily due to a single relationship that included three loans totaling $11.8 million and had a $4.8 million reserve at June 30, 2020 and a CECL transition gross-up adjustment of $4.6 million related to a loan with an amortized cost of $6.8 million and a reserve of $4.4 million at June 30, 2020. The increase in 1-4 family residential loans in non-accrual status at June 30, 2020, compared to December 31, 2019, was primarily related to the classification of $4.0 million of loans as non-accrual based on CECL transition rules and $4.4 million of net loans classified as loans held for sale.
Other real estate owned (“OREO”) increased from December 31, 2019 to June 30, 2020, primarily due to additions totaling $12.5$1.8 million, partially offset by disposalsadditions of $4.1$0.5 million. At both June 30, 2020March 31, 2021 and December 31, 2019,2020, OREO was primarily comprised of commercial properties.
Loans past due 90 days or more and still accruing at June 30, 2020March 31, 2021 and December 31, 2019,2020, were primarily comprised of loans held for sale and guaranteed by U.S. government agencies, including GNMA-related loans subject to repurchase within our mortgage origination segment. As of June 30, 2020, $52.9March 31, 2021, $155.7 million of loans subject to repurchase were
77
under a forbearance agreement resulting from the COVID-19 pandemic. During May 2020, GNMA announced it will
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temporarily exclude any new GNMA lender delinquencies, occurring on or after April 2020, when calculating the delinquency ratios for the purposes of enforcing compliance with its delinquency rate thresholds. This exclusion is extended automatically to GNMA lenders that were compliant with GNMA’s delinquency rate thresholds as reflected by their April 2020 investor accounting report. The mortgage origination segment qualified for this exclusion as of June 30, 2020.March 31, 2021. As of June 30, 2020, $37.8March 31, 2021, $152.0 million of loans subject to repurchase under a forbearance agreement had delinquencies on or after April 2020.
At June 30, 2020, troubled debt restructurings (“TDRs”) were comprised of $2.0 million of loans that are considered to be performing and accruing, and $16.5 million of loans considered to be non-performing reported in non-accrual loans. At December 31, 2019, TDRs were comprised of $2.2 million of loans that are considered to be performing and accruing, and $11.9 million of loans that are considered to be non-performing reported in non-accrual loans. In March 2020, the CARES Act was passed, which, among other things, allows the Bank to suspend the requirements for certain loan modifications to be categorized as a TDR, including the related impairment for accounting purposes. Therefore, the Bank is not reporting COVID-19 related modifications as TDRs.
Deposits
The banking segment’s major source of funds and liquidity is its deposit base. Deposits provide funding for its investments in loans and securities. Interest paid for deposits must be managed carefully to control the level of interest expense and overall net interest margin. The composition of the deposit base (time deposits versus interest-bearing demand deposits and savings), as discussed in more detail within the section entitled “Liquidity and Capital Resources — Banking Segment” below, is constantly changing due to the banking segment’s needs and market conditions.
The table below presents the average balance of, and rate paid on, consolidated deposits (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | Three Months Ended March 31, | | ||||||||||||||||
| | 2020 | | 2019 | | | 2021 | | 2020 | | ||||||||||||
|
| Average |
| Average |
| Average |
| Average |
|
| Average |
| Average |
| Average |
| Average |
| ||||
| | Balance | | Rate Paid | | Balance | | Rate Paid | | | Balance | | Rate Paid | | Balance | | Rate Paid | | ||||
Noninterest-bearing demand deposits | | $ | 3,017,070 |
| 0.00 | % | $ | 2,535,007 |
| 0.00 | % | | $ | 3,729,994 |
| 0.00 | % | $ | 2,730,975 |
| 0.00 | % |
Interest-bearing demand deposits | |
| 5,120,125 |
| 0.49 | % |
| 4,250,036 |
| 1.04 | % | |
| 5,625,682 |
| 0.24 | % |
| 4,589,046 |
| 0.71 | % |
Savings deposits | |
| 206,715 |
| 0.12 | % |
| 182,356 |
| 0.19 | % | |
| 270,475 |
| 0.07 | % |
| 195,915 |
| 0.18 | % |
Time deposits | |
| 1,768,089 |
| 1.63 | % |
| 1,376,576 |
| 1.92 | % | |
| 1,730,418 |
| 1.04 | % |
| 1,479,866 |
| 1.88 | % |
| | $ | 10,111,999 |
| 0.54 | % | $ | 8,343,975 |
| 0.85 | % | | $ | 11,356,569 |
| 0.28 | % | $ | 8,995,802 |
| 0.67 | % |
Borrowings
Our consolidated borrowings are shown in the table below (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||
| | June 30, 2020 | | December 31, 2019 | | | | | | | March 31, 2021 | | December 31, 2020 | | | | | | ||||||||||||
|
| |
| Average |
|
| |
| Average |
| | | |
| |
| Average |
|
| |
| Average |
| | | | ||||
| | Balance | | Rate Paid | | Balance | | Rate Paid | | | Variance | | | Balance | | Rate Paid | | Balance | | Rate Paid | | | Variance | | ||||||
Short-term borrowings | | $ | 720,164 |
| 1.65 | % | $ | 1,424,010 |
| 2.41 | % | | $ | (703,846) | | | $ | 676,652 |
| 1.22 | % | $ | 695,798 |
| 1.46 | % | | $ | (19,146) | |
Notes payable | |
| 450,158 |
| 4.57 | % |
| 283,769 |
| 4.94 | % | | | 166,389 | | |
| 401,713 |
| 4.95 | % |
| 381,987 |
| 4.54 | % | | | 19,726 | |
Junior subordinated debentures | |
| 67,012 |
| 4.65 | % |
| 67,012 |
| 5.75 | % | | | — | | |
| 67,012 |
| 3.40 | % |
| 67,012 |
| 4.13 | % | | | — | |
| | $ | 1,237,334 |
| 2.54 | % | $ | 1,774,791 |
| 2.97 | % | | $ | (537,457) | | | $ | 1,145,377 |
| 2.66 | % | $ | 1,144,797 |
| 2.51 | % | | $ | 580 | |
Short-term borrowings consisted of federal funds purchased, securities sold under agreements to repurchase, borrowings at the Federal Home Loan Bank (“FHLB”) and, short-term bank loans.loans and commercial paper. The decrease in short-term borrowings at June 30, 2020,March 31, 2021, compared with December 31, 2019,2020, included a decrease in borrowings in our banking and broker-dealer segments primarily associated with the increasedcontinued utilization of available internal funds and a decrease in securities sold under agreements to repurchase by the Hilltop Broker-Dealers, partially offset by an increaseincreases in short-term bank loans and commercial paper used by the Hilltop Broker-Dealers to finance their activities. Notes payable at June 30, 2020March 31, 2021 was comprised of $148.9$149.0 million related to the Senior Notes, net of loan origination fees, Subordinated Notes, net of origination fees, of $196.7 million, FHLB borrowings with an original maturity greater than one year within the banking segment of $28.1$196.9 million and mortgage origination segment borrowings of $76.6$55.9 million.
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Liquidity and Capital Resources
Hilltop is a financial holding company whose assets primarily consist of the stock of its subsidiaries and invested assets. Hilltop’s primary investment objectives, as a holding company, are to support capital deployment for organic growth and to preserve capital to be deployed through acquisitions, dividend payments and stock repurchases. At June 30, 2020,March 31, 2021, Hilltop had $387.5$383.3 million in cash and cash equivalents, an increase of $281.9$8.5 million from $105.6$374.8 million at December 31, 2019.2020. This increase in cash and cash equivalents was primarily due to the receipt of $196.6$40.0 million associated with the Subordinated Notes offering and cash proceeds of $154.1 milliondividends from the completed sale of NLC, partiallysubsidiaries, significantly offset by $15.2 million of stock repurchases, $16.3$9.9 million in cash dividends declared, $5.0 million of stock repurchases, and other general corporate expenses. Subject to regulatory restrictions, Hilltop has received, and may also continue to receive, dividends from its subsidiaries. If necessary or appropriate, we may also finance acquisitions with the proceeds from equity or debt issuances. We believe that Hilltop’s liquidity is sufficient for the foreseeable future, with current short-term liquidity needs including operating expenses, interest on debt obligations, dividend payments to stockholders and potential stock repurchases.
COVID-19
As previously discussed, in light of the extreme volatility and disruptions in the capital and credit markets beginning in March 2020 resulting from the COVID-19 crisis, including a significant decline in corporate debt and equity issuances and a deterioration in the mortgage servicing and commercial paper markets, we took a number of precautionary actions in March 2020 to enhance our financial flexibility by bolstering our cash position to ensure we have adequate cash readily available to meet both expected and unexpected funding needs without adversely affecting our daily operations.
The FOMC reduced the target range for short-term rates by 150 basis points to a range of 0.00% to 0.25% during March 2020 to support the economy and potentially reduce the impacts from the COVID-19 pandemic. As a result of these rate adjustments and the stressed economic outlook, mortgage rates fell to historically low levels, which resulted in significant growth in mortgage originations at both PrimeLending and Hilltop Securities through its partnerships with certain housing finance authorities. To strengthen the Bank’s available liquidity position during 2020, we raised brokered deposits, that totaled $1.4 billion at June 30, 2020, as well as swept an additional $200 million of deposits from Hilltop Securities into the Bank. At March 31, 2021, given the continued strong cash and liquidity levels at the Bank, bringingbrokered deposits declined to $639 million and the total funds swept from Hilltop Securities tointo the Bank was approximately $1.5 billion until June 2020 when the total funds swept was reduced back to $1.3 billion.
Further, during March 2020,$700 million. In addition, we substantially reduced the trading portfolio inventory limits at Hilltop Securities in an effort to protect capital, minimize losses and ensure target liquidity levels throughout the crisis. During March 2020, the capital markets experienced significant friction and in certain portions of the market, liquidity was not prevalent. In particular for us, the market for municipal securities, collateralized mortgage obligations, mortgage derivatives and GNMA mortgage pools experienced significant liquidity stress at points during the month. The Federal Reserve, in partnership with the Treasury of the United States, has stepped in to provide additional liquidity in each of these critical markets. We will continue to evaluate market conditions andto determine the appropriateness of capital market inventory limits.limits at Hilltop Securities.
To meet demand for customer loan advances and satisfy our obligations to repay long-term debt maturing over the next 12 months, we believe we currently have sufficient liquidity from the available on- and off-balance sheet liquidity sources and our ability to issue debt in the capital markets. We continue to review actions that we may take to further enhance our financial flexibility in the event that market conditions deteriorate further or for an extended period.
NLC Sale
On June 30, 2020, we completed the sale of all of the outstanding capital stock of NLC, which comprises the operations of our insurance segment, for cash proceeds of $154.1 million. Hilltop recognized a gain associated with this transaction of $32.3 million, net of $5.1 million in transaction costs and subject to post-closing adjustments. The resulting book gain from this sale transaction was not recognized for tax purposes due to the excess tax basis over book basis being greater than the recorded book gain. Any tax loss related to this transaction is deemed disallowed pursuant to the rules under the Internal Revenue Code. We also agreed to enter into an agreement at closing to refrain for a specified period from certain activities that compete with the business of NLC. Accordingly, NLC’s results and its assets and liabilities have been presented as discontinued operations in the consolidated financial statements.
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Dividend Declaration
On July 23, 2020,April 22, 2021, our board of directors declared a quarterly cash dividend of $0.09$0.12 per common share, payable on August 31, 2020May 28, 2021 to all common stockholders of record as of the close of business on AugustMay 14, 2020.2021.
Future dividends on our common stock are subject to the determination by the board of directors based on an evaluation of our earnings and financial condition, liquidity and capital resources, the general economic and regulatory climate, our ability to service any equity or debt obligations senior to our common stock and other factors.
Stock Repurchases
In January 2020,2021, our board of directors authorized a new stock repurchase program through January 20212022 pursuant to which we are authorized to repurchase, in the aggregate, up to $75.0 million of our outstanding common stock, inclusive of repurchases to offset dilution related to grants of stock-based compensation. Under the stock repurchase program authorized, we may repurchase shares in the open market or through privately negotiated transactions as permitted under Rule 10b-18 promulgated under the Exchange Act. The extent to which we repurchase our shares and the timing of such repurchases depends upon market conditions and other corporate considerations, as determined by Hilltop’s management team. Repurchased shares will be returned to our pool of authorized but unissued shares of common stock.
During the sixthree months ended June 30, 2020,March 31, 2021, we paid $15.2$5.0 million to repurchase an aggregate of 720,901149,878 shares of common stock at a weightedan average price of $21.13$33.01 per share. The purchases were funded from available cash balances.
As previously announced on April 30, 2020, in light79
Senior Notes due 2025
The Senior Notes bear interest at a rate of 5% per year, payable semi-annually in arrears in cash on April 15 and October 15 of each year, commencing on October 15, 2015. The Senior Notes will mature on April 15, 2025, unless we redeem the Senior Notes, in whole at any time or in part from time to time, on or after January 15, 2025 (three months prior to the maturity date of the Senior Notes) at our election at a redemption price equal to 100% of the principal amount of the Senior Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date. At June 30, 2020,March 31, 2021, $150.0 million of our Senior Notes was outstanding.
Subordinated Notes due 2030 and 2035
On May 7, 2020, we completed a public offering of $50 million aggregate principal amount of 2030 Subordinated Notes and $150 million aggregate principal amount of 2035 Subordinated Notes. The price to the public for the Subordinated Notes was 100% of the principal amount of the Subordinated Notes. The net proceeds from the offering, after deducting underwriting discounts and fees and expenses of $3.4 million, were $196.6 million. We intend to use the net proceeds of the offerings for general corporate purposes.
The 2030 Subordinated Notes and the 2035 Subordinated Notes will mature on May 15, 2030 and May 15, 2035, respectively. We may redeem the Subordinated Notes, in whole or in part, from time to time, subject to obtaining Federal Reserve approval, beginning with the interest payment date of May 15, 2025 for the 2030 Subordinated Notes and beginning with the interest payment date of May 15, 2030 for the 2035 Subordinated Notes at a redemption price equal to 100% of the principal amount of the Subordinated Notes being redeemed plus accrued and unpaid interest to but excluding, the date of redemption.
The 2030 Subordinated Notes bear interest at a rate of 5.75% per year, payable semi-annually in arrears commencing on November 15, 2020. The interest rate for the 2030 Subordinated Notes will reset quarterly beginning May 15, 2025 to an interest rate, per year, equal to the then-current benchmark rate, which is expected to be three-month term SOFR rate, plus 5.68%, payable quarterly in arrears. The 2035 Subordinated Notes bear interest at a rate of 6.125% per year, payable semi-annually in arrears commencing on November 15, 2020. The interest rate for the 2035 Subordinated Notes
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will reset quarterly beginning May 15, 2030 to an interest rate, per year, equal to the then-current benchmark rate, which is expected to be three-month term SOFR rate plus 5.80%, payable quarterly in arrears. At June 30, 2020,March 31, 2021, $200 million of our Subordinated Notes was outstanding.
Junior Subordinated Debentures
The Debentures have a stated term of 30 years with maturities ranging from July 2031 to February 2038 with interest payable quarterly. The rate on the Debentures, which resets quarterly, is three-month LIBOR plus an average spread of 3.22%. The total average interest rate at June 30, 2020March 31, 2021 was 3.65%3.42%. The Debentures are callable at PCC’s discretion with a minimum of a 45- to 60- day notice. At June 30, 2020,March 31, 2021, $67.0 million of PCC’s Debentures were outstanding.
Regulatory Capital
We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material adverse effect on our financial condition and results of operations. Under capital adequacy and regulatory requirements, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
In order to avoid limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary bonus payments to executive officers, Basel III requires banking organizations to maintain a capital conservation buffer above minimum risk-based capital requirements measured relative to risk-weighted assets.
Bank holding companies with less than $15 billion in assets as of December 31, 2009 are allowed to continue to include junior subordinated debentures in Tier 1 capital, subject to certain restrictions. However, if an institution grows tobecause Hilltop has grown above $15 billion, in assets as a result ofif we make an acquisition or organically growsin the future, the debentures issued to above $15 billion in assets and then makes an acquisition, the combined trust preferred issuances must be phasedTrusts may out of Tier 1 and into Tier 2 capital. All of the debentures issued to the PCC Statutory Trusts I, II, III and IV (the “Trusts”), less the common
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stock of the Trusts, qualified as Tier 1 capital as of June 30, 2020,March 31, 2021, under guidance issued by the Board of Governors of the Federal Reserve System.
Actual capital amounts and ratios as of June 30, 2020March 31, 2021 reflect PlainsCapital’s and Hilltop’s decision to elect the transition option as issued by the federal banking regulatory agencies in March 2020 that permits banking institutions to mitigate the estimated cumulative regulatory capital effects from CECL over a five-year transitionary period.
At June 30, 2020,March 31, 2021, Hilltop had a total capital to risk weighted assets ratio of 21.82%22.96%, Tier 1 capital to risk weighted assets ratio of 19.06%20.22%, common equity Tier 1 capital to risk weighted assets ratio of 18.46%19.63% and a Tier 1 capital to average assets, or leverage, ratio of 12.60%13.01%. Accordingly, Hilltop’s actual capital amounts and ratios in accordance with Basel III exceeded the regulatory capital requirements including conservation buffer in effect at the end of the period.
At June 30, 2020,March 31, 2021, PlainsCapital had a total capital to risk weighted assets ratio of 14.88%15.64%, Tier 1 capital to risk weighted assets ratio of 14.03%14.74%, common equity Tier 1 capital to risk weighted assets ratio of 14.03%14.74% and a Tier 1 capital to average assets, or leverage, ratio of 10.37%10.50%. Accordingly, PlainsCapital’s actual capital amounts and ratios in accordance with Basel III resulted in it being considered “well-capitalized” and exceeded the regulatory capital requirements including conservation buffer in effect at the end of the period.
We discuss regulatory capital requirements in more detail in Note 1617 to our consolidated financial statements, as well as under the caption “Government Supervision and Regulation — Corporate — Capital Adequacy Requirements and BASEL III” set forth in Part I, Item I. of our 20192020 Form 10-K.
Banking Segment
Within our banking segment, our primary uses of cash are for customer withdrawals and extensions of credit as well as our borrowing costs and other operating expenses. Our asset and liabilitycorporate treasury group is responsible for continuously monitoring our liquidity position to ensure that our assets and liabilities are managed in a manner that will meet our short-term and long-term cash requirements. Our goal is to manage our liquidity position in a manner such that we can
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meet our customers’ short-term and long-term deposit withdrawals and anticipated and unanticipated increases in loan demand without penalizing earnings. Funds invested in short-term marketable instruments, the continuous maturing of other interest-earning assets, cash flows from self-liquidating investments such as mortgage-backed securities and collateralized mortgage obligations, the possible sale of available for sale securities and the ability to securitize certain types of loans provide sources of liquidity from an asset perspective. The liability base provides sources of liquidity through deposits and the maturity structure of short-term borrowed funds. For short-term liquidity needs, we utilize federal fund lines of credit with correspondent banks, securities sold under agreements to repurchase, borrowings from the Federal Reserve and borrowings under lines of credit with other financial institutions. For intermediate liquidity needs, we utilize advances from the FHLB. To supply liquidity over the longer term, we have access to brokered time deposits, term loans at the FHLB and borrowings under lines of credit with other financial institutions.
As previously discussed, to meet increased liquidity demands toand ensure we haveavailability of adequate cash readily available to meet both expected and unexpected funding needs without adversely affecting our daily operations and to improve the Bank’s already strong liquidity position, we raised brokered deposits during 2020 that totaled $1.4 billionhave a remaining balance of approximately $639 million at June 30,March 31, 2021, down from approximately $731 million at December 31, 2020. Further, beginning in March 2020, an additional $200 million of deposits waswere swept from Hilltop Securities into the Bank. Since June 30, 2020, given the continued strong cash and liquidity levels at the Bank, the total funds swept from Hilltop Securities into the Bank bringing the total funds swept from Hilltop Securities to approximately $1.5 billion until June 2020 when the total funds swept was reduced, back to $1.3 billion.and is approximately $700 million as of March 31, 2021. As a result, the Bank was able to further fortify its borrowing capacity through access to secured funding sources as summarized in the following table (in millions).
| | | | | | | | | | |||
| | June 30, | | December 31, | | March 31, | | December 31, | ||||
| | 2020 | | 2019 | | 2021 | | 2020 | ||||
FHLB capacity | | $ | 4,083 | | $ | 3,207 | | $ | 4,378 | | $ | 4,410 |
Investment portfolio | |
| 762 | |
| 683 | ||||||
Investment portfolio (available) | |
| 1,188 | |
| 982 | ||||||
Fed deposits (excess daily requirements) | | | 1,504 | | 217 | | | 1,415 | | | 875 | |
Fed discount window | |
| 294 | |
| 290 | ||||||
| | $ | 6,643 | | $ | 4,397 | | $ | 6,981 | | $ | 6,267 |
As noted in the table above, the Bank’s available liquidity position and borrowing capacity at June 30, 2020 isMarch 31, 2021 continues to be at a heightened level given the uncertain outlook for 20202021 due to the COVID-19 pandemic. While the extent to
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which COVID-19 will impact the Bank is uncertain, the Bank is targeting available liquidity of between approximately $5 billion and $6 billion during the remainder of 2020.2021. Available liquidity does not include borrowing capacity available through the discount window at the Federal Reserve.
Within our banking segment, deposit flows are affected by the level of market interest rates, the interest rates and products offered by competitors, the volatility of equity markets and other factors. While the Bank experienced an increase in non-brokered customer deposits during 2020, an economic recovery and improved commercial real estate investment outlook may result in an outflow of deposits at an accelerated pace as customers utilize such available funds for expanded operations and investment opportunities. The Bank regularly evaluates its deposit products and pricing structures relative to the market to maintain competitiveness over time.
The Bank’s 15 largest depositors, excluding Hilltop and Hilltop Securities, collectively accounted for 8.40%9.24% of the Bank’s total deposits, and the Bank’s five largest depositors, excluding Hilltop and Hilltop Securities, collectively accounted for 4.03%4.54% of the Bank’s total deposits at June 30, 2020.March 31, 2021. The loss of one or more of our largest Bank customers, or a significant decline in our deposit balances due to ordinary course fluctuations related to these customers’ businesses, could adversely affect our liquidity and might require us to raise deposit rates to attract new deposits, purchase federal funds or borrow funds on a short-term basis to replace such deposits.
Broker-Dealer Segment
The Hilltop Broker-Dealers rely on their equity capital, short-term bank borrowings, interest-bearing and non-interest-bearingnoninterest-bearing client credit balances, correspondent deposits, securities lending arrangements, repurchase agreement financing, commercial paper issuances and other payables to finance their assets and operations, subject to their respective compliance with broker-dealer net capital and customer protection rules. At June 30, 2020,March 31, 2021, Hilltop Securities had credit arrangements with fivefour unaffiliated banks, with maximum aggregate commitments of up to $725.0$600.0 million. These credit arrangements are used to finance securities owned, securities held for correspondent accounts, receivables in customer margin accounts and underwriting activities. These credit arrangements are provided on an “as offered” basis and are not committed lines of credit. In addition, Hilltop Securities has committed revolving credit facilities with three unaffiliated banks, with aggregate availability of up to $250.0 million. At June 30, 2020,March 31, 2021, Hilltop Securities had borrowed $15.0$58.0 million under its credit arrangements and had no borrowings under its credit facilities.
During the fourth quarter of 2019, Hilltop Securities initiated two commercial paper programs, in the ordinary course of its business, of whichuses the net proceeds (after deducting related issuance expenses) from the sale will be usedof two commercial paper programs for general
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corporate purposes, including working capital and the funding of a portion of its securities inventories. The commercial paper notes (“CP Notes”) may be issued with maturities of 14 days to 270 days from the date of issuance. The commercial paper notes (“CP NotesNotes”) are issued under two separate programs, Series 2019-1 CP Notes and Series 2019-2 CP Notes, in maximum aggregate amounts of $300 million and $200 million, respectively. The CP Notes are not redeemable prior to maturity or subject to voluntary prepayment and do not bear interest, but are sold at a discount to par. The discount to maturity will be based on LIBOR, plus an applicable margin. The CP Notes are secured by a pledge of collateral owned by Hilltop Securities. As of June 30, 2020,March 31, 2021, the weighted average maturity of the CP Notes was 139157 days at a rate of 2.23%.1.13% with a weighted average remaining life of 106 days. At June 30, 2020,March 31, 2021, the aggregate amount outstanding under these secured arrangements was $217.4$336.4 million, which was collateralized by securities held for firm accounts valued at $120.4$364.1 million.
Mortgage Origination Segment
PrimeLending funds the mortgage loans it originates through warehouse lines of credit maintained with the Bank, which have an aggregate commitment of $3.3 billion, of which $2.3 billion was drawn at June 30, 2020.March 31, 2021. PrimeLending sells substantially all mortgage loans it originates to various investors in the secondary market.market, historically with the majority with servicing released. As these mortgage loans are sold in the secondary market, PrimeLending pays down its warehouse line of credit with the Bank. In addition, PrimeLending has an available line of credit with an unaffiliated bank of up to $1.0 million, of which no borrowings were outstandingdrawn at June 30, 2020.March 31, 2021.
PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC (“Ventures Management”) which holds an ownership interest in and is the managing member of certain ABAs. At June 30, 2020,March 31, 2021, these ABAs had combined available lines of credit totaling $220.0$175.0 million, $100.0$85.0 million of which was with a single unaffiliated bank, and the remaining $120.0$90.0 million of which was with the Bank. At June 30, 2020,March 31, 2021, Ventures Management had outstanding borrowings of $121.9$64.4 million, $45.4$8.6 million of which was with the Bank.
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Impact of Inflation and Changing Prices
Our consolidated financial statements included herein have been prepared in accordance with GAAP, which presently require us to measure financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on our operations is reflected in increased operating costs. In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond our control, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the U.S. government, its agencies and various other governmental regulatory authorities.
Off-Balance Sheet Arrangements; Commitments; Guarantees
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets.
Banking Segment
We enter into contractual loan commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon customers maintaining specific credit standards until the time of loan funding. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. We assess the credit risk associated with certain commitments to extend credit and have recorded a liability related to such credit risk in our consolidated financial statements.
Standby letters of credit are written conditional commitments issued by us to guarantee the performance of a customer to a third party.third-party. In the event the customer does not perform in accordance with the terms of the agreement with the third party,third-party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would
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be entitled to seek recovery from the customer. Our policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.
In the aggregate, the Bank had outstanding unused commitments to extend credit of $2.0 billion at June 30, 2020March 31, 2021 and outstanding financial and performance standby letters of credit of $90.3$83.7 million at June 30, 2020.March 31, 2021.
Broker-Dealer
In the normal course of business, the Hilltop Broker-Dealers execute, settle and finance various securities transactions that may expose the Hilltop Broker-Dealers to off-balance sheet risk in the event that a customer or counterparty does not fulfill its contractual obligations. Examples of such transactions include the sale of securities not yet purchased by customers or for the account of the Hilltop Broker-Dealers, use of derivatives to support certain non-profit housing organization clients, clearing agreements between the Hilltop Broker-Dealers and various clearinghouses and broker-dealers, secured financing arrangements that involve pledged securities, and when-issued underwriting and purchase commitments.
Critical Accounting Policies and Estimates
Our accounting policies are fundamental to understanding our management’s discussion and analysis of our results of operations and financial condition. We have identified certain significant accounting policies which involve a higher degree of judgment and complexity in making certain estimates and assumptions that affect amounts reported in our consolidated financial statements. Actual amounts and values as of the balance sheet dates may be materially different than the amounts and values reported due to the inherent uncertainty in the estimation process. Also, future amounts and values could differ materially from those estimates due to changes in values and circumstances after the balance sheet date. The significant accounting policies which we believe to be the most critical in preparing our consolidated financial statements relate to allowance for credit losses, goodwill and identifiable intangible assets, mortgage loan indemnification liability, mortgage servicing rights asset and acquisition accounting. Since
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December 31, 2019, we have updated our critical accounting policies and estimates related to the allowance for credit losses as a result of the adoption of CECL on January 1, 2020. In addition, as a result of the sale of our insurance segment on June 30, 2020, we have concluded that the reserve for losses and LAE is not a significant accounting policy and estimate. Therethere have been no other changes in critical accounting policies as further described under “Critical Accounting Policies and Estimates” and Note 1 to the Consolidated Financial Statements in our 20192020 Form 10-K.
Allowance for Credit Losses
The allowance for credit losses for loans represents management’s estimate of all expected credit losses over the expected contractual life of our existing loan portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods.
We employ a disciplined process and methodology to establish our allowance for credit losses that has two basic components: first, an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement of expected credit losses for such individual loans; and second, a pooled component for estimated expected credit losses for pools of loans that share similar risk characteristics.
The credit loss estimation process for both on and off-balance sheet exposures involves procedures to appropriately consider the unique characteristics of our loan portfolio segments, which are further disaggregated into loan classes, the level at which credit risk is monitored. When computing allowance levels, credit loss assumptions are estimated using models that analyze loans according to credit risk ratings, loss history, delinquency status and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. Future factors and forecasts may result in significant changes in the allowance and provision for (reversal of) credit losses in those future periods.
Credit quality is assessed and monitored by evaluating various attributes, such as credit risk ratings, historic loss experience, past due status and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts about the future. The results of these continuous credit quality evaluations help form our
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underwriting criteria for new loans and also factor into the process for estimation of the allowance for credit losses. The allowance level is influenced by loan volumes, loan asset quality, delinquency status, historic loss experience and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The allowance for credit losses will primarily reflect estimated losses for pools of loans that share similar risk characteristics, but will also consider individual loans that do not share risk characteristics with other loans.
In estimating the component of the allowance for credit losses for loans that share similar risk characteristics with other loans, such loans are segregated into loan classes. Loans are designated into loan classes based on loans pooled by product types and similar risk characteristics or areas of risk concentration. In determining the allowance for credit losses, we derive an estimated credit loss assumption from a model that categorizes loan pools based on loan type and internal risk rating or delinquency bucket.
When a loan moves to a substandard non-accrual risk rating grade, it is removed from the collective evaluation allowance methodology and is subject to individual evaluation. A problem asset report is prepared for each loan in excess of a predetermined threshold and the net realizable value of the loan is determined. This value is compared to the appropriate loan basis (depending on whether the loan is a PCD loan or a non-PCD loan) to determine the required allowance for credit loss reserve amount.
Estimating the timing and amounts of future loss cash flows is subject to significant management judgment as these loss cash flows rely upon estimates such as default rates, loss severities, collateral valuations, the amounts and timing of principal payments (including any expected prepayments) or other factors that are reflective of current or future expected conditions. These estimates, in turn, depend on the duration of current overall economic conditions, industry, borrower, or portfolio specific conditions, the expected outcome of bankruptcy or insolvency proceedings, as well as, in certain circumstances, other economic factors, including the level of current and future real estate prices. All of these estimates and assumptions require significant management judgment and certain assumptions that are highly subjective. Model imprecision also exists in the allowance for credit losses estimation process due to the inherent time lag of available industry information and differences between expected and actual outcomes.
The provision for (reversal of) credit losses recorded through earnings, and reduced by the charge-off of loan amounts, net of recoveries, is the amount necessary to maintain the allowance for credit losses at the amount of expected credit losses inherent within the loans held for investment portfolio. The amount of expense and the corresponding level of allowance for credit losses for loans are based on our evaluation of the collectability of the loan portfolio based on historical loss experience, reasonable and supportable forecasts, and other significant qualitative and quantitative factors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our assessment of market risk as of June 30, 2020March 31, 2021 indicates there are no material changes in the quantitative and qualitative disclosures from those previously reported in our 20192020 Form 10-K, except as discussed below.
The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. Market risk represents the risk of loss that may result from changes in value of a financial instrument as a result of changes in interest rates, market prices and the credit perception of an issuer. The disclosure is not meant to be a precise indicator of expected future losses, but rather an indicator of reasonably possible losses, and therefore our actual results may differ from any of the following projections. This forward-looking information provides an indicator of how we view and manage our ongoing market risk exposures.
Banking Segment
The banking segment is engaged primarily in the business of investing funds obtained from deposits and borrowings in interest-earning loans and investments, and our primary component of market risk is sensitivity to changes in interest rates. Consequently, our earnings depend to a significant extent on our net interest income, which is the difference between interest income on loans and investments and our interest expense on deposits and borrowings. To the extent that our interest-bearing liabilities do not reprice or mature at the same time as our interest-bearing assets, we are subject to interest rate risk and corresponding fluctuations in net interest income.
There are several common sources of interest rate risk that must be effectively managed if there is to be minimal impact on our earnings and capital. Repricing risk arises largely from timing differences in the pricing of assets and liabilities.
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Reinvestment risk refers to the reinvestment of cash flows from interest payments and maturing assets at lower or higher rates. Basis risk exists when different yield curves or pricing indices do not change at precisely the same time or in the same magnitude such that assets and liabilities with the same maturity are not all affected equally. Yield curve risk refers to unequal movements in interest rates across a full range of maturities.
We have employed asset/liability management policies that attempt to manage our interest-earning assets and interest-bearing liabilities, thereby attempting to control the volatility of net interest income, without having to incur unacceptable levels of risk. We employ procedures which include interest rate shock analysis, repricing gap analysis and balance sheet decomposition techniques to help mitigate interest rate risk in the ordinary course of business. In addition, the asset/liability management policies permit the use of various derivative instruments to manage interest rate risk or hedge specified assets and liabilities.
An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market interest rates. The management of interest rate risk is performed by analyzing the maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time (“GAP”) and by analyzing the effects of interest rate changes on net interest income over specific periods of time by projecting the performance of the mix of assets and liabilities in varied interest rate environments. Interest rate sensitivity reflects the potential effect on net interest income resulting from a movement in interest rates. A company is considered to be asset sensitive, or have a positive GAP, when the amount of its interest-earning assets maturing or repricing within a given period exceeds the amount of its interest-bearing liabilities also maturing or repricing within that time period. Conversely, a company is considered to be liability sensitive, or have a negative GAP, when the amount of its interest-bearing liabilities maturing or repricing within a given period exceeds the amount of its interest-earning assets also maturing or repricing within that time period. During a period of rising interest rates, a negative GAP would tend to affect net interest income adversely, while a positive GAP would tend to result in an increase in net interest income. During a period of falling interest rates, a negative GAP would tend to result in an increase in net interest income, while a positive GAP would tend to affect net interest income adversely. However, it is our intent to remain relatively balanced so that changes in rates do not have a significant impact on earnings.
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As illustrated in the table below, the banking segment is asset sensitive overall. Loans that adjust daily or monthly to the Wall Street Journal Prime rate comprise a large percentage of interest sensitive assets and are the primary cause of the banking segment’s asset sensitivity. To help neutralize interest rate sensitivity, the banking segment has kept the terms of most of its borrowings under one year as shown in the following table (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||||
| | June 30, 2020 |
| | March 31, 2021 |
| ||||||||||||||||||||||||||||||||
|
| 3 Months or |
| > 3 Months to |
| > 1 Year to |
| > 3 Years to |
| | |
| | |
|
| 3 Months or |
| > 3 Months to |
| > 1 Year to |
| > 3 Years to |
| | |
| | |
| ||||||||
| | Less | | 1 Year | | 3 Years | | 5 Years | | > 5 Years | | Total |
| | Less | | 1 Year | | 3 Years | | 5 Years | | > 5 Years | | Total |
| ||||||||||||
Interest sensitive assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loans | | $ | 5,680,615 | | $ | 1,247,338 | | $ | 2,113,771 | | $ | 512,562 | | $ | 136,362 | | $ | 9,690,648 | | | $ | 5,831,382 | | $ | 1,272,479 | | $ | 1,759,078 | | $ | 624,047 | | $ | 113,503 | | $ | 9,600,489 | |
Securities | |
| 159,832 | |
| 199,632 | |
| 426,817 | |
| 270,157 | |
| 368,466 | |
| 1,424,904 | | |
| 243,895 | |
| 223,652 | |
| 495,426 | |
| 343,779 | |
| 680,197 | |
| 1,986,949 | |
Federal funds sold and securities purchased under agreements to resell | |
| 385 | |
| — | |
| — | |
| — | |
| — | |
| 385 | | |
| 396 | |
| — | |
| — | |
| — | |
| — | |
| 396 | |
Other interest sensitive assets | |
| 1,513,033 | |
| — | |
| — | |
| — | |
| 29,319 | |
| 1,542,352 | | |
| 1,424,757 | |
| — | |
| — | |
| — | |
| 29,450 | |
| 1,454,207 | |
Total interest sensitive assets | |
| 7,353,865 | |
| 1,446,970 | |
| 2,540,588 | |
| 782,719 | |
| 534,147 | |
| 12,658,289 | | |
| 7,500,430 | |
| 1,496,131 | |
| 2,254,504 | |
| 967,826 | |
| 823,150 | |
| 13,042,041 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest sensitive liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest bearing checking | | $ | 5,713,774 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 5,713,774 | | | $ | 5,715,596 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 5,715,596 | |
Savings | |
| 240,230 | |
| — | |
| — | |
| — | |
| — | |
| 240,230 | �� | |
| 271,910 | |
| — | |
| — | |
| — | |
| — | |
| 271,910 | |
Time deposits | |
| 339,680 | |
| 1,395,193 | |
| 318,198 | |
| 68,324 | |
| 73 | |
| 2,121,468 | | |
| 474,647 | |
| 941,381 | |
| 114,605 | |
| 35,641 | |
| — | |
| 1,566,274 | |
Notes payable and other borrowings | |
| 143,169 | |
| 1,438 | |
| 4,254 | |
| 21,051 | |
| 3,785 | |
| 173,697 | | |
| 158,900 | |
| 207 | |
| 642 | |
| 801 | |
| 2,977 | |
| 163,527 | |
Total interest sensitive liabilities | |
| 6,436,853 | |
| 1,396,631 | |
| 322,452 | |
| 89,375 | |
| 3,858 | |
| 8,249,169 | | |
| 6,621,053 | |
| 941,588 | |
| 115,247 | |
| 36,442 | |
| 2,977 | |
| 7,717,307 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest sensitivity gap | | $ | 917,012 | | $ | 50,339 | | $ | 2,218,136 | | $ | 693,344 | | $ | 530,289 | | $ | 4,409,120 | | | $ | 879,377 | | $ | 554,543 | | $ | 2,139,257 | | $ | 931,384 | | $ | 820,173 | | $ | 5,324,734 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative interest sensitivity gap | | $ | 917,012 | | $ | 967,351 | | $ | 3,185,487 | | $ | 3,878,831 | | $ | 4,409,120 | | | | | | $ | 879,377 | | $ | 1,433,920 | | $ | 3,573,177 | | $ | 4,504,561 | | $ | 5,324,734 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Percentage of cumulative gap to total interest sensitive assets | |
| 7.24 | % |
| 7.64 | % |
| 25.17 | % |
| 30.64 | % |
| 34.83 | % | | | | |
| 6.74 | % |
| 10.99 | % |
| 27.40 | % |
| 34.54 | % |
| 40.83 | % | | | |
The positive GAP in the interest rate analysis indicates that banking segment net interest income would generally rise if rates increase. Because of inherent limitations in interest rate GAP analysis, the banking segment uses multiple interest rate risk measurement techniques. Simulation analysis is used to subject the current repricing conditions to rising and falling interest rates in increments and decrements of 1%, 2% and 3%50 to 100 basis points to determine the effect on net interest income changes for the next twelve months. The banking segment also measures the effects of changes in interest rates on
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economic value of equity by discounting projected cash flows of deposits and loans. Economic value changes in the investment portfolio are estimated by discounting future cash flows and using duration analysis. Investment security prepayments are estimated using current market information. We believe the simulation analysis presents a more accurate picture than the GAP analysis. Simulation analysis recognizes that deposit products may not react to changes in interest rates as quickly or with the same magnitude as earning assets contractually tied to a market rate index. The sensitivity to changes in market rates varies across deposit products. Also, unlike GAP analysis, simulation analysis takes into account the effect of embedded options in the securities and loan portfolios as well as any off-balance sheet derivatives.
The table below shows the estimated impact of a range of changes in interest rates on net interest income and on economic value of equity for the banking segment at June 30, 2020March 31, 2021 (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | |
Change in | | Changes in | | Changes in |
| | Changes in | | | Changes in |
| ||||||||||||
Interest Rates | | Net Interest Income | | Economic Value of Equity |
| | Net Interest Income | | | Economic Value of Equity |
| ||||||||||||
(basis points) |
| Amount |
| Percent |
| Amount |
| Percent |
|
| Amount |
| Percent |
|
| Amount |
| Percent |
| ||||
+300 | | $ | 107,701 | | 29.11 | % | | $ | 665,753 | | 33.97 | % | |||||||||||
+200 | | $ | 16,624 |
| 4.74 | % | $ | 402,660 |
| 29.29 | % | | $ | 68,693 |
| 18.57 | % | | $ | 478,475 |
| 24.41 | % |
+100 | | $ | (3,343) |
| (0.95) | % | $ | 220,255 |
| 16.02 | % | | $ | 31,121 |
| 8.41 | % | | $ | 261,669 |
| 13.35 | % |
-50 | | $ | (623) |
| (0.18) | % | $ | (216,423) |
| (15.74) | % | | $ | (9,027) |
| (2.44) | % | | $ | (291,115) |
| (14.85) | % |
-100 | | $ | (3,289) |
| (0.94) | % | $ | (264,187) |
| (19.22) | % |
The projected changes in net interest income and economic value of equity to changes in interest rates at June 30, 2020March 31, 2021 were in compliance with established internal policy guidelines. These projected changes are based on numerous assumptions of growth and changes in the mix of assets or liabilities.
Our portfolio includes loans that periodically reprice or mature prior to the end of an amortized term. Some of our variable-rate loans remain at applicable rate floors, which may delay and/or limit changes in interest income during a period of changing rates. If interest rates were to fall, the impact on our interest income would be limited by these rate floors. In addition, declining interest rates may negatively affect our cost of funds on deposits. The extent of this impact will ultimately be driven by the timing, magnitude and frequency of interest rate and yield curve movements, as well as changes in market conditions and timing of management strategies. If interest rates were to rise, yields on the portion of
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our portfolio that remain at applicable rate floors would rise more slowly than increases in market interest rates. Any changes in interest rates across the term structure will continue to impact net interest income and net interest margin. The impact of rate movements will change with the shape of the yield curve, including any changes in steepness or flatness and inversions at any points on the yield curve.
Broker-Dealer Segment
Our broker-dealer segment is exposed to market risk primarily due to its role as a financial intermediary in customer transactions, which may include purchases and sales of securities, use of derivatives and securities lending activities, and in our trading activities, which are used to support sales, underwriting and other customer activities. We are subject to the risk of loss that may result from the potential change in value of a financial instrument as a result of fluctuations in interest rates, market prices, investor expectations and changes in credit ratings of the issuer.
Our broker-dealer segment is exposed to interest rate risk as a result of maintaining inventories of interest rate sensitive financial instruments and other interest-earning assets including customer and correspondent margin loans and receivables and securities borrowing activities. Our funding sources, which include customer and correspondent cash balances, bank borrowings, repurchase agreements and securities lending activities, also expose the broker-dealer to interest rate risk. Movement in short-term interest rates could reduce the positive spread between the broker-dealer segment’s interest income and interest expense.
With respect to securities held, our interest rate risk is managed by setting and monitoring limits on the size and duration of positions and on the length of time securities can be held. Much of the interest rates on customer and correspondent margin loans and receivables are indexed and can vary daily. Our funding sources are generally short term with interest rates that can vary daily.
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The following table categorizes the broker-dealer segment’s net trading securities which are subject to interest rate and market price risk (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||
| | June 30, 2020 | | | March 31, 2021 | | ||||||||||||||||||||||||||
| | 1 Year | | > 1 Year | | > 5 Years | | | | | | | 1 Year | | > 1 Year | | > 5 Years | | | | | | ||||||||||
| | or Less | | to 5 Years | | to 10 Years | | > 10 Years | | Total | | | or Less | | to 5 Years | | to 10 Years | | > 10 Years | | Total | | ||||||||||
Trading securities, at fair value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||
Municipal obligations | | $ | 800 | | $ | 8,685 | | $ | 29,600 | | $ | 88,870 | | $ | 127,955 | | | $ | 84 | | $ | 3,713 | | $ | 34,870 | | $ | 144,718 | | $ | 183,385 | |
U.S. government and government agency obligations | | | 65,124 | | | 12,274 | | | (12,118) | | | 365,670 | | | 430,950 | | | | 12,004 | | | (7,601) | | | (19,376) | | | 213,753 | | | 198,780 | |
Corporate obligations | | | 1,892 | | | 3,059 | | | 13,802 | | | 14,283 | | | 33,036 | | | | (4,786) | | | 7,653 | | | 5,893 | | | 36,465 | | | 45,225 | |
Total debt securities | | | 67,816 | | | 24,018 | | | 31,284 | | | 468,823 | | | 591,941 | | | | 7,302 | | | 3,765 | | | 21,387 | | | 394,936 | | | 427,390 | |
Corporate equity securities | | | (4,984) | | | — | | | — | | | — | | | (4,984) | | | | (1,905) | | | — | | | — | | | — | | | (1,905) | |
Other | | | 3,411 | | | — | | | — | | | — | | | 3,411 | | | | 5,148 | | | — | | | — | | | — | | | 5,148 | |
| | $ | 66,243 | | $ | 24,018 | | $ | 31,284 | | $ | 468,823 | | $ | 590,368 | | | $ | 10,545 | | $ | 3,765 | | $ | 21,387 | | $ | 394,936 | | $ | 430,633 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||
Weighted average yield | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||
Municipal obligations | | 0.00 | % | | 0.64 | % | | 1.38 | % | | 2.94 | % | | 2.42 | % | | 0.00 | % | | 1.62 | % | | 1.69 | % | | 3.05 | % | | 2.79 | % | ||
U.S. government and government agency obligations | | 0.13 | % | | 0.59 | % | | 0.63 | % | | 4.36 | % | | 3.49 | % | | 0.01 | % | | 0.59 | % | | 1.30 | % | | 3.20 | % | | 2.73 | % | ||
Corporate obligations | | 1.59 | % | | 2.76 | % | | 3.74 | % | | 3.03 | % | | 3.12 | % | | 0.78 | % | | 2.57 | % | | 2.79 | % | | 2.98 | % | | 2.68 | % |
Derivatives are used to support certain customer programs and hedge our related exposure to interest rate risks.
Our broker-dealer segment is engaged in various brokerage and trading activities that expose us to credit risk arising from potential non-performance from counterparties, customers or issuers of securities. This risk is managed by setting and monitoring position limits for each counterparty, conducting periodic credit reviews of counterparties, reviewing concentrations of securities and conducting business through central clearing organizations.
Collateral underlying margin loans to customers and correspondents and with respect to securities lending activities is marked to market daily and additional collateral is required as necessary.
Mortgage Origination Segment
Within our mortgage origination segment, our principal market exposure is to interest rate risk due to the impact on our mortgage-related assets and commitments, including mortgage loans held for sale, IRLCs and MSR. Changes in interest rates could also materially and adversely affect our volume of mortgage loan originations.
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IRLCs represent an agreement to extend credit to a mortgage loan applicant, whereby the interest rate on the loan is set prior to funding. Our mortgage loans held for sale, which we hold in inventory while awaiting sale into the secondary market, and our IRLCs are subject to the effects of changes in mortgage interest rates from the date of the commitment through the sale of the loan into the secondary market. As a result, we are exposed to interest rate risk and related price risk during the period from the date of the lock commitment until (i) the lock commitment cancellation or expiration date or (ii) the date of sale into the secondary mortgage market. Loan commitments generally range from 20 to 60 days, and our average holding period of the mortgage loan from funding to sale is approximately 30 days. An integral component of our interest rate risk management strategy is our execution of forward commitments to sell MBSs to minimize the impact on earnings resulting from significant fluctuations in the fair value of mortgage loans held for sale and IRLCs caused by changes in interest rates.
We have expanded, and may continue to expand, our residential mortgage servicing operations within our mortgage origination segment. As a result of our mortgage servicing business, we have a portfolio of retained MSR. One of the principal risks associated with MSR is that in a declining interest rate environment, they will likely lose a substantial portion of their value as a result of higher than anticipated prepayments. Moreover, if prepayments are greater than expected, the cash we receive over the life of the mortgage loans would be reduced. The mortgage origination segment uses derivative financial instruments, including U.S. Treasury bond futures and options, Eurodollar futures and forward MBS commitments, as a means to mitigate market risk associated with MSR assets. No hedging strategy can protect us completely, and hedging strategies may fail because they are improperly designed, improperly executed and documented or based on inaccurate assumptions and, as a result, could actually increase our risks and losses. The increasing size of our MSR portfolio may increase our interest rate risk and, correspondingly, the volatility of our earnings, especially if we cannot adequately hedge the interest rate risk relating to our MSR.
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The goal of our interest rate risk management strategy within our mortgage origination segment is not to eliminate interest rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, we have established policies and procedures, which include guidelines on the amount of exposure to interest rate changes we are willing to accept.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the supervision and participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report.
Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective because ofin recording, processing, summarizing and reporting, on a material weaknesstimely basis, information required to be disclosed by us in our internal control over financial reporting. During the fourth quarter of 2019, management identified a control deficiencyreports that constituted a material weakness as of December 31, 2018we file or submit under the Exchange Act and determinedare effective in ensuring that information required to be disclosed by us in the Company did not designreports that we file or submit under the Exchange Act is accumulated and maintain effective controls over certain aspects relatingcommunicated to the determination of the qualitative factors considered byCompany’s management, in the allowance for credit losses estimation process, specifically control activitiesincluding our Principal Executive Officer and Principal Financial Officer, as appropriate to adequately support the analysis and the impact of such support on the loss measurement. This control deficiency did not result in a misstatement of the Company’s consolidated financial statements. However, this control deficiency could result in misstatements of the interim or annual consolidated financial statements and disclosures that would result in a material misstatement that would not be prevented or detected.
Notwithstanding the identified material weakness, management believes that the consolidated financial statements included in this Quarterly Report on Form 10-Q provide a fair statement of, in all material respects, our financial position, results of operations and cash flows as of and for the periods presented in accordance with accounting principles generally accepted in the United States of America.
Update on Remediation of Previously Reported Material Weakness
The Company and its Board of Directors are committed to maintaining a strong internal control environment. Management has evaluated the material weakness described above and believes that it has completed its updates to the design and implementation of internal controls to remediate the aforementioned deficiency and enhance the Company’s internal control environment. As previously reported, the remediation plan was implemented during the fourth quarter of 2019 and included an enhanced analysis to support the qualitative factors considered in the estimation of the allowance for loan losses as of December 31, 2019. Management believes that such enhanced controls, including new controls implemented as a part of the adoption of CECL on January 1, 2020, have been designed to address the material weakness and were implemented as of June 30, 2020. However, in order to fully evaluate the remediation efforts, management will continue to test and validate that the enhanced controls are operating for a sufficient period of time. We expect the remediation of this material weakness will be completed prior to the end of fiscal year 2020.allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
The remediation efforts described above, as well as the implementation of a core system replacement within our broker-dealer segment, led toThere were no changes in our internal control over financial reporting during theour first fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We have not experienced any material impact to our internal controls over financial reporting resulting from the majority of our workforce working remotely since March 23, 2020. We are continually monitoring and assessing the impact of remote work arrangements during the COVID-19 pandemic on the design and operating effectiveness of our internal controls.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
For a description of material pending legal proceedings, see the discussion set forth under the heading “Legal Matters” in Note 1314 to our Consolidated Financial Statements, which is incorporated by reference herein.
Item 1A. Risk Factors.
The following risk factors representThere have been no material changes to the risk factors disclosed under “Item 1A. Risk Factors” of our 20192020 Form 10-K. For additional information concerning our risk factors, please refer to “Item 1A. Risk Factors” of our 20192020 Form 10-K.
The outbreak of the novel coronavirus ("COVID-19") has adversely affected, and will likely continue to adversely affect, our business, financial condition, liquidity and results of operations.
The worldwide COVID-19 pandemic has negatively affected the global economy and our business, and we believe that it is likely to continue to do so. Since the beginning of January 2020, the outbreak has caused significant volatility and disruption in the financial markets both globally and in the United States. If COVID-19, or another highly infectious or contagious disease, continues to spread or the response to contain it is unsuccessful, we could experience material adverse effects on our business, financial condition, liquidity, and results of operations. The extent of such effects depends on future developments that are highly uncertain and cannot be predicted, including the geographic spread of the virus, the overall severity of the disease, the duration of the outbreak, the measures that have be taken, or future measures, by various governmental authorities in response to the outbreak (such as quarantines, shelter-in-place orders and travel restrictions) and the possible further impacts on the global economy.
We are generally exposed to the credit risk that third parties that owe us money, securities or other assets will fail to meet their obligations to us due to numerous causes, and this risk may be exacerbated by the macroeconomic effects of COVID-19. We lend to businesses and individuals, including through offering commercial and industrial loans, commercial and residential mortgage loans and other loans generally collateralized by assets. We also incur credit risk through our investments. Our credit risk and credit losses may increase to the extent our loans or investments are to borrowers or issuers who as a group may be uniquely or disproportionately affected by declining economic or market conditions as a result of COVID-19, such as those operating in the travel, lodging, retail, entertainment and energy industries. Primarily as a result of the market disruption and related economic uncertainties caused by COVID-19, our Bank recorded a provision for credit losses of $99.9 million for the six months ended June 30, 2020. We may incur further unexpected losses, and the deterioration of an individually large exposure due to COVID-19 could lead to additional credit loss provisions and/or charges-offs, or credit impairment of our investments, and subsequently have a material impact on our net income, regulatory capital and liquidity.
The continuation of the adverse economic conditions caused by the pandemic can be expected to have a significant adverse effect on our businesses and results of operations, including:
We also could experience a material reduction in trading volume and lower securities prices in times of market volatility, which would result in lower brokerage revenues, including losses on firm inventory. The fair values of certain of our investments could also be negatively impacted, resulting in unrealized or realized losses on such investments.
Moreover, certain actions taken by U.S. or other governmental authorities, including the Federal Reserve, that are intended to ameliorate the macroeconomic effects of COVID-19 may cause additional harm to our business. Decreases in short-term interest rates, such as those announced by the Federal Reserve late in our 2019 fiscal year and during the
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first fiscal quarter of 2020, have had, and we expect that they will continue to have, a negative impact on our results of operations, as we have certain assets and liabilities that are sensitive to changes in interest rates.
The extent to which the COVID-19 pandemic negatively affects our businesses, results of operations and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments that are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic. To the extent the COVID-19 pandemic adversely affects our business, results of operations and financial condition, it may also have the effect of heightening many of the other risks described in the section titled “Risk Factors” in our most recent Annual Report on Form 10-K and any subsequent Quarterly Reports on Form 10-Q.
Our allowances for credit losses for loans and debt securities may prove inadequate or we may be negatively affected by credit risk exposures. Also, future additions to our allowance for credit losses will reduce our future earnings.
As a lender, we are exposed to the risk that we could sustain losses because our borrowers may not repay their loans in accordance with the terms of their loans. We maintain allowances for credit losses for loans and debt securities to provide for defaults and nonperformance, which represent an estimate of expected losses over the remaining contractual lives of the loan and debt security portfolios. This estimate is the result of our continuing evaluation of specific credit risks and loss experience, current loan and debt security portfolio quality, present economic, political and regulatory conditions, industry concentrations, reasonable and supportable forecasts for future conditions and other factors that may indicate losses. The determination of the appropriate levels of the allowances for loan and debt security credit losses inherently involves a high degree of subjectivity and judgment and requires us to make estimates of current credit risks and future trends, all of which may undergo material changes. Generally, our nonperforming loans and OREO reflect operating difficulties of individual borrowers and weaknesses in the economies of the markets we serve.
Under the acquisition method of accounting requirements, we were required to estimate the fair value of the loan portfolios acquired in each of the PlainsCapital Merger, the FNB Transaction, the SWS Merger and the BORO Acquisition (collectively, the “Bank Transactions”) as of the applicable acquisition date and write down the recorded value of each such acquired portfolio to the applicable estimate. For most loans, this process was accomplished by computing the net present value of estimated cash flows to be received from borrowers of such loans. The allowance for credit losses that had been maintained by PCC, FNB, SWS or BORO, as applicable, prior to their respective transactions, was eliminated in this accounting process. A new allowance for credit losses has been established for loans made by the Bank subsequent to consummation of the PlainsCapital Merger and for any decrease from that originally estimated as of the applicable acquisition date in the estimate of cash flows to be received from the loans acquired in the Bank Transactions.
The estimates of fair value as of the consummation of each of the Bank Transactions were based on economic conditions at such time and on Bank management’s projections concerning both future economic conditions and the ability of the borrowers to continue to repay their loans. If management’s assumptions and projections prove to be incorrect, however, the estimate of fair value may be higher than the actual fair value and we may suffer losses in excess of those estimated. Further, the allowance for credit losses established for new loans or for revised estimates may prove to be inadequate to cover actual losses, especially if economic conditions worsen.
While Bank management will endeavor to estimate the allowance to cover anticipated losses over the lives of our loan and debt security portfolios, no underwriting and credit monitoring policies and procedures that we could adopt to address credit risk could provide complete assurance that we will not incur unexpected losses. These losses could have a material adverse effect on our business, financial condition, results of operations and cash flows. In addition, federal regulators periodically evaluate the adequacy of our allowance for credit losses and may require us to increase our provision for (reversal of) credit losses or recognize further loan charge-offs based on judgments different from those of Bank management. Any such increase in our provision for (reversal of) credit losses or additional loan charge-offs could have a material adverse effect on our results of operations and financial condition.
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As a participating lender in the SBA Paycheck Protection Program (“PPP”), the Company and the Bank are subject to additional risks of litigation from the Bank’s clients, or other parties regarding our originating, processing, or servicing of loans under the PPP, and risks that the SBA may not fund some or all PPP loan guaranties.
On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through the SBA referred to as the PPP.
Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP which exposes the Company to risks relating to noncompliance with the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. Congress has approved additional funding for the PPP and President Trump signed the new legislation on April 24, 2020. Since the opening of the PPP, several larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP. The Company and the Bank may be exposed to the risk of litigation, from both clients and non-clients that solicited the Bank for PPP loans, regarding our process and procedures used to process applications for the PPP. If any such litigation is filed against the Company or the Bank and is not resolved in a manner favorable to the Company or the Bank, it may result in significant financial liability or adversely affect the Company’s reputation. In addition, litigation may be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have a material adverse impact on our business, financial condition and results of operations.
The Bank also may have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which loans were originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan or the calculation of the maximum PPP loans to which a borrower is entitled, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there is a deficiency in the manner in which the PPP loan was originated, funded, or serviced by the Company, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On June 30, 2020, we issued an aggregate of 8,106 shares of common stock under the Hilltop Holdings Inc. 2012 Equity Incentive Plan to certain non-employee directors as compensation for their service on our board of directors during the second quarter of 2020. The shares were issued pursuant to the exemption from registration under Section 4(a)(2) of the Securities Act.
The following table details our repurchases of shares of common stock during the three months ended June 30, 2020.March 31, 2021.
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Period |
| Total Number of Shares Purchased |
| Average Price Paid per Share |
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
| Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) |
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| Total Number of Shares Purchased |
| Average Price Paid per Share |
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
| Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1) | ||||
April 1 - April 30, 2020 |
| 20,000 | | $ | 14.59 | | 20,000 | | $ | 59,750,234 | | ||||||||||
May 1 - May 31, 2020 |
| — | | | — | | — | | 59,750,234 | | |||||||||||
June 1 - June 30, 2020 |
| — | | | — | | — | | 59,750,234 | | |||||||||||
January 1 - January 31, 2021 |
| — | | $ | — | | — | | $ | 75,000,000 | |||||||||||
February 1 - February 28, 2021 |
| 108,682 | | | 32.98 | | 108,682 | | 71,415,668 | ||||||||||||
March 1 - March 31, 2021 |
| 41,196 | | | 33.11 | | 41,196 | | 70,051,668 | ||||||||||||
Total | | 20,000 | | $ | 14.59 | | 20,000 | | | | | 149,878 | | $ | 33.01 | | 149,878 | | |
(1) | On January |
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Item 6. Exhibits.
Exhibit |
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101.INS | | XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH* | | Inline XBRL Taxonomy Extension Schema |
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101.CAL* | | Inline XBRL Taxonomy Extension Calculation Linkbase |
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101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase |
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101.LAB* | | Inline XBRL Taxonomy Extension Label Linkbase |
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101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase |
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104 | | Cover Page Interactive File (formatted as Inline XBRL and contained in Exhibit 101) |
* | Filed herewith. |
# | Schedules and similar attachments have been omitted from this Exhibit pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule or similar attachment will be furnished to the SEC upon request. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| HILLTOP HOLDINGS INC. | |
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Date: | By: | /s/ William B. Furr |
| | William B. Furr |
| | Chief Financial Officer (Principal Financial Officer and duly authorized officer) |
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