Section 2 – Financial Information
Item 2.02 Results of Operations and Financial Condition.
On October 31, 2019, Hilltop Holdings Inc., or the Company, issued a press release announcing its results of operations and financial condition as of and for the three months ended September 30, 2019. The text of the release is set forth in Exhibit 99.1 attached to this Current Report on Form 8-K and is incorporated herein by reference.
The information in this Current Report on Form 8-K (including Exhibit 99.1) is being furnished pursuant to Item 2.02 and shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, except as expressly set forth in such filing.
Section 8 – Other Events
Item 8.01 Other Events.
On October 24, 2019, the Board of Directors of the Company declared a quarterly cash dividend of $0.08 per common share, payable on December 3, 2019, to stockholders of record as of the close of business on November 15, 2019.
Based upon a review recently conducted, the Company determined that it did not design and maintain effective internal control over certain aspects relating to the determination of the qualitative factors considered by management in the allowance for loan losses estimation process, particularly quantitative support for such qualitative factors. Based upon the foregoing, management and the Audit Committee of the Board of Directors concluded on October 31, 2019, that this control deficiency constituted a material weakness as of December 31, 2018. As of the date of this filing, the Company does not expect this control deficiency to result in a restatement of the Company’s consolidated financial statements.
As a result, Management’s Report on Internal Control Over Financial Reporting included in Item 9A of the Form 10-K for the fiscal year ended December 31, 2018 should no longer be relied upon. Additionally, the statements within the Evaluation of Disclosure Controls and Procedures included in Item 4 of the Company’s Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019, are no longer effective due to the material weakness described above. The Company expects to file an amendment to its Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019 to include disclosures concerning this material weakness. In addition, the Company anticipates that the report of PricewaterhouseCoopers LLP on the Company’s internal control over financial reporting at December 31, 2018 will be revised to reflect the identification of this 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 has made significant progress updating its design and implementation of internal controls to remediate the aforementioned control deficiency and enhance the Company’s internal control environment. The remediation plan is being implemented and includes enhanced documentation and quantitative analysis of the qualitative factors considered in the estimation of the allowance for loan losses. Management expects to successfully implement the remediation plan prior to filing its Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2019, and currently plans to evaluate its updated internal controls design and determine whether the controls have operated effectively during the fourth quarter of 2019.
Effective January 1, 2020, the Company will adopt the current expected credit loss model, or CECL, which will replace the current process for estimating allowance for loan losses in its entirety. Based upon the work completed to date and the current loan portfolios, the Company estimates that the allowance for credit losses will be between $80 million and $110 million, inclusive of the change in reserve for unfunded commitments, when CECL is adopted on January 1, 2020. The estimated increase over the current allowance for loan losses is driven by the fact that under CECL the allowance will cover expected credit losses over the entire expected life of the loan portfolios and also will take into account forecasts of expected future macroeconomic conditions. While not expected to be material, the impact of the adoption of CECL also will affect the Company’s regulatory capital, performance and other asset quality ratios.
