0Q
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 |
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172020
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐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) | | |
| | |
| | |
Dallas, TX | |
|
(Address of principal executive offices) | | (Zip Code) |
(214) (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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 October 26, 201723, 2020 was 95,910,314.90,238,435.
HILLTOP HOLDINGS INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 20172020
| | |
PART I — FINANCIAL INFORMATION | | |
| | |
Item 1. | Financial Statements | |
| 3 | |
| 4 | |
| 5 | |
| 6 | |
| 8 | |
| 9 | |
| ||
| | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 52 | |
| | |
100 | ||
| | |
103 | ||
| | |
| | |
| ||
| | |
105 | ||
| | |
105 | ||
| | |
107 | ||
| | |
108 |
2
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
(in thousands, except share and per share data)
(Unaudited)
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | ||
|
| 2017 |
| 2016 | ||
Assets |
|
|
|
|
|
|
Cash and due from banks |
| $ | 354,569 |
| $ | 669,357 |
Federal funds sold |
|
| 400 |
|
| 21,407 |
Securities purchased under agreements to resell |
|
| 134,654 |
|
| 89,430 |
Assets segregated for regulatory purposes |
|
| 207,336 |
|
| 180,993 |
Securities: |
|
|
|
|
|
|
Trading, at fair value |
|
| 676,411 |
|
| 265,534 |
Available for sale, at fair value (amortized cost of $762,984 and $598,198, respectively) |
|
| 765,542 |
|
| 598,007 |
Held to maturity, at amortized cost (fair value of $364,122 and $345,088, respectively) |
|
| 368,031 |
|
| 351,831 |
|
|
| 1,809,984 |
|
| 1,215,372 |
|
|
|
|
|
|
|
Loans held for sale |
|
| 1,939,321 |
|
| 1,795,463 |
Non-covered loans, net of unearned income |
|
| 6,148,813 |
|
| 5,843,499 |
Allowance for non-covered loan losses |
|
| (58,779) |
|
| (54,186) |
Non-covered loans, net |
|
| 6,090,034 |
|
| 5,789,313 |
|
|
|
|
|
|
|
Covered loans, net of allowance of $2,141 and $413, respectively |
|
| 188,269 |
|
| 255,714 |
Broker-dealer and clearing organization receivables |
|
| 1,672,123 |
|
| 1,497,741 |
Premises and equipment, net |
|
| 176,281 |
|
| 190,361 |
FDIC indemnification asset |
|
| 33,143 |
|
| 71,313 |
Covered other real estate owned |
|
| 40,343 |
|
| 51,642 |
Other assets |
|
| 596,095 |
|
| 613,453 |
Goodwill |
|
| 251,808 |
|
| 251,808 |
Other intangible assets, net |
|
| 38,440 |
|
| 44,695 |
Total assets |
| $ | 13,532,800 |
| $ | 12,738,062 |
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity |
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
Noninterest-bearing |
| $ | 2,279,633 |
| $ | 2,199,483 |
Interest-bearing |
|
| 5,383,814 |
|
| 4,864,328 |
Total deposits |
|
| 7,663,447 |
|
| 7,063,811 |
|
|
|
|
|
|
|
Broker-dealer and clearing organization payables |
|
| 1,517,698 |
|
| 1,347,128 |
Short-term borrowings |
|
| 1,477,201 |
|
| 1,417,289 |
Securities sold, not yet purchased, at fair value |
|
| 173,509 |
|
| 153,889 |
Notes payable |
|
| 300,196 |
|
| 317,912 |
Junior subordinated debentures |
|
| 67,012 |
|
| 67,012 |
Other liabilities |
|
| 424,381 |
|
| 496,501 |
Total liabilities |
|
| 11,623,444 |
|
| 10,863,542 |
Commitments and contingencies (see Notes 12 and 13) |
|
|
|
|
|
|
Stockholders' equity: |
|
|
|
|
|
|
Hilltop stockholders' equity: |
|
|
|
|
|
|
Common stock, $0.01 par value, 125,000,000 shares authorized; 95,904,322 and 98,543,774 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively |
|
| 959 |
|
| 985 |
Additional paid-in capital |
|
| 1,525,169 |
|
| 1,572,877 |
Accumulated other comprehensive income |
|
| 2,585 |
|
| 485 |
Retained earnings |
|
| 376,873 |
|
| 295,568 |
Deferred compensation employee stock trust, net |
|
| 840 |
|
| 903 |
Employee stock trust (12,066 and 15,492 shares, at cost, respectively) |
|
| (241) |
|
| (309) |
Total Hilltop stockholders' equity |
|
| 1,906,185 |
|
| 1,870,509 |
Noncontrolling interests |
|
| 3,171 |
|
| 4,011 |
Total stockholders' equity |
|
| 1,909,356 |
|
| 1,874,520 |
Total liabilities and stockholders' equity |
| $ | 13,532,800 |
| $ | 12,738,062 |
| | | | | | | |
| | September 30, | | December 31, |
| ||
|
| 2020 |
| 2019 |
| ||
Assets | | | | | | | |
Cash and due from banks | | $ | 1,277,865 | | $ | 433,626 | |
Federal funds sold | |
| 420 | |
| 394 | |
Assets segregated for regulatory purposes | | | 221,621 | | | 157,436 | |
Securities purchased under agreements to resell | | | 90,103 | | | 59,031 | |
Securities: | | | | | | | |
Trading, at fair value | |
| 667,751 | |
| 689,576 | |
Available for sale, at fair value, net (amortized cost of $1,280,420 and 899,817, respectively) | |
| 1,310,240 | |
| 911,493 | |
Held to maturity, at amortized cost, net (fair value of $338,929 and $388,930, respectively) | | | 323,299 | | | 386,326 | |
Equity, at fair value | | | 117 | | | 166 | |
| |
| 2,301,407 | | | 1,987,561 | |
| | | | | | | |
Loans held for sale | |
| 2,547,975 | |
| 2,106,361 | |
Loans held for investment, net of unearned income | |
| 7,945,560 | |
| 7,381,400 | |
Allowance for credit losses | |
| (155,214) | |
| (61,136) | |
Loans held for investment, net | |
| 7,790,346 | |
| 7,320,264 | |
| | | | | | | |
Broker-dealer and clearing organization receivables | |
| 1,363,478 | |
| 1,780,280 | |
Premises and equipment, net | |
| 208,078 | |
| 210,375 | |
Operating lease right-of-use assets | | | 109,354 | |
| 114,320 | |
Mortgage servicing rights | | | 127,712 | | | 55,504 | |
Other assets | |
| 607,932 | |
| 404,754 | |
Goodwill | |
| 267,447 | |
| 267,447 | |
Other intangible assets, net | |
| 21,814 | |
| 26,666 | |
Assets of discontinued operations | | | — | | | 248,429 | |
Total assets | | $ | 16,935,552 | | $ | 15,172,448 | |
| | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | |
Deposits: | | | | | | | |
Noninterest-bearing | | $ | 3,557,603 | | $ | 2,769,556 | |
Interest-bearing | |
| 7,704,312 | |
| 6,262,658 | |
Total deposits | |
| 11,261,915 | |
| 9,032,214 | |
| | | | | | | |
Broker-dealer and clearing organization payables | |
| 1,310,835 | |
| 1,605,518 | |
Short-term borrowings | |
| 780,109 | |
| 1,424,010 | |
Securities sold, not yet purchased, at fair value | | | 56,023 | | | 43,817 | |
Notes payable | |
| 396,006 | |
| 256,269 | |
Operating lease liabilities | | | 122,402 | |
| 125,619 | |
Junior subordinated debentures | |
| 67,012 | |
| 67,012 | |
Other liabilities | |
| 502,517 | |
| 348,519 | |
Liabilities of discontinued operations | | | — | | | 140,674 | |
Total liabilities | |
| 14,496,819 | |
| 13,043,652 | |
Commitments and contingencies (see Notes 13 and 14) | | | | | | | |
Stockholders' equity: | | | | | | | |
Hilltop stockholders' equity: | | | | | | | |
Common stock, $0.01 par value, 125,000,000 shares authorized; 90,238,435 and 90,640,944 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively | |
| 902 | |
| 906 | |
Additional paid-in capital | |
| 1,443,588 | |
| 1,445,233 | |
Accumulated other comprehensive income | |
| 23,790 | |
| 11,419 | |
Retained earnings | | | 942,461 | |
| 644,860 | |
Deferred compensation employee stock trust, net | | | 774 | |
| 776 | |
Employee stock trust (7,175 and 7,794 shares, at cost, at September 30, 2020 and December 31, 2019, respectively) | | | (143) | |
| (155) | |
Total Hilltop stockholders' equity | |
| 2,411,372 | |
| 2,103,039 | |
Noncontrolling interests | |
| 27,361 | |
| 25,757 | |
Total stockholders' equity | |
| 2,438,733 | |
| 2,128,796 | |
Total liabilities and stockholders' equity | | $ | 16,935,552 | | $ | 15,172,448 | |
See accompanying notes.
3
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, including fees |
| $ | 102,546 |
| $ | 97,590 |
| $ | 306,330 |
| $ | 287,591 |
|
Securities borrowed |
|
| 11,404 |
|
| 9,037 |
|
| 29,054 |
|
| 22,952 |
|
Securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable |
|
| 11,157 |
|
| 5,935 |
|
| 27,723 |
|
| 19,136 |
|
Tax-exempt |
|
| 1,471 |
|
| 1,518 |
|
| 4,090 |
|
| 4,692 |
|
Other |
|
| 2,366 |
|
| 1,183 |
|
| 6,294 |
|
| 3,248 |
|
Total interest income |
|
| 128,944 |
|
| 115,263 |
|
| 373,491 |
|
| 337,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
| 6,841 |
|
| 3,996 |
|
| 16,995 |
|
| 11,872 |
|
Securities loaned |
|
| 8,935 |
|
| 6,954 |
|
| 22,756 |
|
| 17,857 |
|
Short-term borrowings |
|
| 4,567 |
|
| 1,497 |
|
| 9,633 |
|
| 3,974 |
|
Notes payable |
|
| 2,680 |
|
| 2,793 |
|
| 8,320 |
|
| 7,993 |
|
Junior subordinated debentures |
|
| 774 |
|
| 673 |
|
| 2,229 |
|
| 1,973 |
|
Other |
|
| 167 |
|
| 180 |
|
| 502 |
|
| 543 |
|
Total interest expense |
|
| 23,964 |
|
| 16,093 |
|
| 60,435 |
|
| 44,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
| 104,980 |
|
| 99,170 |
|
| 313,056 |
|
| 293,407 |
|
Provision for loan losses |
|
| 1,260 |
|
| 3,990 |
|
| 8,818 |
|
| 36,273 |
|
Net interest income after provision for loan losses |
|
| 103,720 |
|
| 95,180 |
|
| 304,238 |
|
| 257,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized gains on securities |
|
| — |
|
| — |
|
| 14 |
|
| — |
|
Net gains from sale of loans and other mortgage production income |
|
| 138,498 |
|
| 175,412 |
|
| 416,336 |
|
| 469,721 |
|
Mortgage loan origination fees |
|
| 25,256 |
|
| 26,807 |
|
| 70,788 |
|
| 71,417 |
|
Securities commissions and fees |
|
| 38,735 |
|
| 39,722 |
|
| 115,596 |
|
| 118,481 |
|
Investment and securities advisory fees and commissions |
|
| 25,620 |
|
| 31,129 |
|
| 73,359 |
|
| 84,302 |
|
Net insurance premiums earned |
|
| 34,493 |
|
| 38,747 |
|
| 106,653 |
|
| 117,201 |
|
Other |
|
| 35,875 |
|
| 42,641 |
|
| 131,862 |
|
| 116,716 |
|
Total noninterest income |
|
| 298,477 |
|
| 354,458 |
|
| 914,608 |
|
| 977,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees' compensation and benefits |
|
| 209,747 |
|
| 225,194 |
|
| 611,352 |
|
| 625,353 |
|
Occupancy and equipment, net |
|
| 29,073 |
|
| 27,460 |
|
| 84,285 |
|
| 82,264 |
|
Loss and loss adjustment expenses |
|
| 31,234 |
|
| 16,055 |
|
| 86,118 |
|
| 75,225 |
|
Policy acquisition and other underwriting expenses |
|
| 10,917 |
|
| 11,064 |
|
| 33,397 |
|
| 33,632 |
|
Other |
|
| 72,871 |
|
| 84,360 |
|
| 225,433 |
|
| 240,213 |
|
Total noninterest expense |
|
| 353,842 |
|
| 364,133 |
|
| 1,040,585 |
|
| 1,056,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
| 48,355 |
|
| 85,505 |
|
| 178,261 |
|
| 178,285 |
|
Income tax expense |
|
| 18,003 |
|
| 33,017 |
|
| 58,792 |
|
| 65,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| 30,352 |
|
| 52,488 |
|
| 119,469 |
|
| 112,406 |
|
Less: Net income attributable to noncontrolling interest |
|
| 146 |
|
| 556 |
|
| 353 |
|
| 1,833 |
|
Income attributable to Hilltop |
| $ | 30,206 |
| $ | 51,932 |
| $ | 119,116 |
| $ | 110,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.31 |
| $ | 0.53 |
| $ | 1.22 |
| $ | 1.12 |
|
Diluted |
| $ | 0.31 |
| $ | 0.53 |
| $ | 1.22 |
| $ | 1.12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share |
| $ | 0.06 |
| $ | — |
| $ | 0.18 |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average share information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 96,096 |
|
| 98,490 |
|
| 97,554 |
|
| 98,367 |
|
Diluted |
|
| 96,306 |
|
| 98,625 |
|
| 97,803 |
|
| 98,573 |
|
| | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
Interest income: | | | | | | | | | | | | | |
Loans, including fees | | $ | 104,955 | | $ | 119,580 | | $ | 323,983 | | $ | 344,775 | |
Securities borrowed | | | 10,705 | | | 21,010 | | | 36,915 | | | 53,386 | |
Securities: | | | | | | | | | | | | | |
Taxable | |
| 11,035 | |
| 14,885 | |
| 38,428 | |
| 43,319 | |
Tax-exempt | |
| 1,687 | |
| 1,576 | |
| 4,836 | |
| 4,587 | |
Other | |
| 1,446 | |
| 3,889 | |
| 5,472 | |
| 12,811 | |
Total interest income | |
| 129,828 | |
| 160,940 | |
| 409,634 | |
| 458,878 | |
| | | | | | | | | | | | | |
Interest expense: | | | | | | | | | | | | | |
Deposits | |
| 10,700 | |
| 18,887 | |
| 37,771 | |
| 54,029 | |
Securities loaned | | | 8,729 | | | 17,889 | | | 30,802 | |
| 46,097 | |
Short-term borrowings | |
| 2,346 | |
| 8,166 | |
| 9,457 | |
| 20,534 | |
Notes payable | |
| 4,904 | |
| 2,265 | |
| 11,090 | |
| 6,611 | |
Junior subordinated debentures | |
| 608 | |
| 955 | |
| 2,163 | |
| 2,942 | |
Other | |
| 641 | |
| 132 | |
| 1,557 | |
| 446 | |
Total interest expense | |
| 27,928 | |
| 48,294 | |
| 92,840 | |
| 130,659 | |
| | | | | | | | | | | | | |
Net interest income | |
| 101,900 | |
| 112,646 | |
| 316,794 | |
| 328,219 | |
Provision for (reversal of) credit losses | |
| (602) | |
| 47 | |
| 99,973 | |
| 326 | |
Net interest income after provision for (reversal of) credit losses | |
| 102,502 | |
| 112,599 | |
| 216,821 | |
| 327,893 | |
| | | | | | | | | | | | | |
Noninterest income: | | | | | | | | | | | | | |
Net gains from sale of loans and other mortgage production income | |
| 307,896 | |
| 157,050 | |
| 753,699 | |
| 384,362 | |
Mortgage loan origination fees | |
| 47,681 | |
| 37,782 | |
| 121,576 | |
| 93,064 | |
Securities commissions and fees | |
| 32,496 | |
| 34,426 | |
| 106,799 | |
| 104,537 | |
Investment and securities advisory fees and commissions | | | 36,866 | |
| 28,685 | |
| 89,166 | |
| 71,704 | |
Other | |
| 77,772 | |
| 48,562 | |
| 171,309 | |
| 145,504 | |
Total noninterest income | |
| 502,711 | |
| 306,505 | |
| 1,242,549 | |
| 799,171 | |
| | | | | | | | | | | | | |
Noninterest expense: | | | | | | | | | | | | | |
Employees' compensation and benefits | |
| 294,907 | |
| 232,449 | |
| 768,156 | |
| 632,104 | |
Occupancy and equipment, net | |
| 26,124 | |
| 27,002 | |
| 71,820 | |
| 82,719 | |
Professional services | |
| 17,522 | |
| 15,472 | |
| 48,057 | |
| 43,354 | |
Other | |
| 60,792 | |
| 46,263 | |
| 163,422 | |
| 145,844 | |
Total noninterest expense | |
| 399,345 | |
| 321,186 | |
| 1,051,455 | |
| 904,021 | |
| | | | | | | | | | | | | |
Income from continuing operations before income taxes | |
| 205,868 | |
| 97,918 | |
| 407,915 | |
| 223,043 | |
Income tax expense | |
| 46,820 | |
| 21,472 | |
| 93,776 | |
| 50,135 | |
Income from continuing operations | | | 159,048 | | | 76,446 | | | 314,139 | | | 172,908 | |
Income from discontinued operations, net of income taxes | | | 736 | | | 5,261 | | | 34,662 | | | 8,367 | |
Net income | |
| 159,784 | |
| 81,707 | |
| 348,801 | |
| 181,275 | |
Less: Net income attributable to noncontrolling interest | |
| 6,505 | |
| 2,289 | |
| 17,410 | |
| 5,260 | |
Income attributable to Hilltop | | $ | 153,279 | | $ | 79,418 | | $ | 331,391 | | $ | 176,015 | |
| | | | | | | | | | | | | |
Earnings per common share: | | | | | | | | | | | | | |
Basic: | | | | | | | | | | | | | |
Earnings from continuing operations | | $ | 1.69 | | $ | 0.81 | | $ | 3.29 | | $ | 1.80 | |
Earnings from discontinued operations | | | 0.01 | | | 0.06 | | | 0.38 | | | 0.09 | |
| | $ | 1.70 | | $ | 0.87 | | $ | 3.67 | | $ | 1.89 | |
Diluted: | | | | | | | | | | | | | |
Earnings from continuing operations | | $ | 1.69 | | $ | 0.81 | | $ | 3.29 | | $ | 1.80 | |
Earnings from discontinued operations | | | 0.01 | | | 0.05 | | | 0.38 | | | 0.09 | |
| | $ | 1.70 | | $ | 0.86 | | $ | 3.67 | | $ | 1.89 | |
Weighted average share information: | | | | | | | | | | | | | |
Basic | |
| 90,200 | |
| 91,745 | |
| 90,291 | |
| 92,931 | |
Diluted | |
| 90,200 | |
| 91,824 | |
| 90,291 | |
| 92,959 | |
See accompanying notes.
4
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Net income |
| $ | 30,352 |
| $ | 52,488 |
| $ | 119,469 |
| $ | 112,406 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on securities available for sale, net of tax of $263, $(420), $1,190 and $3,004, respectively |
|
| 473 |
|
| (743) |
|
| 2,109 |
|
| 5,410 |
|
Reclassification adjustment for gains (losses) included in net income, net of tax of $0, $0, $(5) and $0, respectively |
|
| — |
|
| — |
|
| (9) |
|
| — |
|
Comprehensive income |
|
| 30,825 |
|
| 51,745 |
|
| 121,569 |
|
| 117,816 |
|
Less: comprehensive income attributable to noncontrolling interest |
|
| 146 |
|
| 556 |
|
| 353 |
|
| 1,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income applicable to Hilltop |
| $ | 30,679 |
| $ | 51,189 |
| $ | 121,216 |
| $ | 115,983 |
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Net income | | $ | 159,784 | | $ | 81,707 | | $ | 348,801 | | $ | 181,275 |
Other comprehensive income: | | | | | | | | | | | | |
Change in fair value of cash flow hedges, net of tax of $92, $0, $(951) and $0, respectively | | | 311 | | | — | | | (3,266) | | | — |
Net unrealized gains on securities available for sale, net of tax of $(99), $1,238, $4,554 and $6,030, respectively | |
| (338) | |
| 6,468 | |
| 15,512 | |
| 22,973 |
Reclassification adjustment for gains included in net income, net of tax of $1, $(531), $37 and $(536), respectively | |
| 4 | |
| (2,025) | |
| 125 | |
| (2,041) |
Comprehensive income | |
| 159,761 | |
| 86,150 | |
| 361,172 | |
| 202,207 |
Less: comprehensive income attributable to noncontrolling interest | |
| 6,505 | |
| 2,289 | |
| 17,410 | |
| 5,260 |
| | | | | | | | | | | | |
Comprehensive income applicable to Hilltop | | $ | 153,256 | | $ | 83,861 | | $ | 343,762 | | $ | 196,947 |
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 |
| Earnings |
| Trust, Net |
| Shares |
| Amount |
| Equity |
| Interest |
| Equity | |||||||||
Balance, December 31, 2015 | 98,896 |
| $ | 989 |
| $ | 1,577,270 |
| $ | 2,629 |
| $ | 155,475 |
| $ | 1,034 |
| 22 |
| $ | (443) |
| $ | 1,736,954 |
| $ | 1,171 |
| $ | 1,738,125 |
Net income | — |
|
| — |
|
| — |
|
| — |
|
| 110,573 |
|
| — |
| — |
|
| — |
|
| 110,573 |
|
| 1,833 |
|
| 112,406 |
Other comprehensive income | — |
|
| — |
|
| — |
|
| 5,410 |
|
| — |
|
| — |
| — |
|
| — |
|
| 5,410 |
|
| — |
|
| 5,410 |
Issuance of common stock | 538 |
|
| 5 |
|
| 4,134 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 4,139 |
|
| — |
|
| 4,139 |
Stock-based compensation expense | — |
|
| — |
|
| 7,274 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 7,274 |
|
| — |
|
| 7,274 |
Common stock issued to board members | 17 |
|
| — |
|
| 325 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 325 |
|
| — |
|
| 325 |
Issuance of common stock related to share-based awards, net | (94) |
|
| (1) |
|
| (2,710) |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| (2,711) |
|
| — |
|
| (2,711) |
Repurchases of common stock | (816) |
|
| (8) |
|
| (16,268) |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| (16,276) |
|
| — |
|
| (16,276) |
Deferred compensation plan | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (134) |
| (7) |
|
| 134 |
|
| — |
|
| — |
|
| — |
Net cash distributed from noncontrolling interest | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 676 |
|
| 676 |
Balance, September 30, 2016 | 98,541 |
| $ | 985 |
| $ | 1,570,025 |
| $ | 8,039 |
| $ | 266,048 |
| $ | 900 |
| 15 |
| $ | (309) |
| $ | 1,845,688 |
| $ | 3,680 |
| $ | 1,849,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2016 | 98,544 |
| $ | 985 |
| $ | 1,572,877 |
| $ | 485 |
| $ | 295,568 |
| $ | 903 |
| 15 |
| $ | (309) |
| $ | 1,870,509 |
| $ | 4,011 |
| $ | 1,874,520 |
Net income | — |
|
| — |
|
| — |
|
| — |
|
| 119,116 |
|
| — |
| — |
|
| — |
|
| 119,116 |
|
| 353 |
|
| 119,469 |
Other comprehensive income | — |
|
| — |
|
| — |
|
| 2,100 |
|
| — |
|
| — |
| — |
|
| — |
|
| 2,100 |
|
| — |
|
| 2,100 |
Stock-based compensation expense | — |
|
| — |
|
| 8,396 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 8,396 |
|
| — |
|
| 8,396 |
Common stock issued to board members | 12 |
|
| — |
|
| 327 |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 327 |
|
| — |
|
| 327 |
Issuance of common stock related to share-based awards, net | 264 |
|
| 3 |
|
| (2,433) |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| (2,430) |
|
| — |
|
| (2,430) |
Repurchases of common stock | (2,916) |
|
| (29) |
|
| (53,998) |
|
| — |
|
| (20,427) |
|
| — |
| — |
|
| — |
|
| (74,454) |
|
| — |
|
| (74,454) |
Dividends on common stock ($0.18 per share) | — |
|
| — |
|
| — |
|
| — |
|
| (17,384) |
|
| — |
| — |
|
| — |
|
| (17,384) |
|
| — |
|
| (17,384) |
Deferred compensation plan | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (63) |
| (3) |
|
| 68 |
|
| 5 |
|
| — |
|
| 5 |
Net cash distributed to noncontrolling interest | — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (1,193) |
|
| (1,193) |
Balance, September 30, 2017 | 95,904 |
| $ | 959 |
| $ | 1,525,169 |
| $ | 2,585 |
| $ | 376,873 |
| $ | 840 |
| 12 |
| $ | (241) |
| $ | 1,906,185 |
| $ | 3,171 |
| $ | 1,909,356 |
See accompanying notes.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | |
| | |
| 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, June 30, 2019 | 92,775 | | $ | 928 | | $ | 1,473,599 | | $ | 7,862 | | $ | 544,275 | | $ | 788 | | 9 | | $ | (171) | | $ | 2,027,281 | | $ | 24,524 | | $ | 2,051,805 |
Net income | — | | | — | | | — | | | — | | | 79,418 | | | — | | — | | | — | | | 79,418 | | | 2,289 | | | 81,707 |
Other comprehensive income | — | | | — | | | — | | | 4,443 | | | — | | | — | | — | | | — | | | 4,443 | | | — | | | 4,443 |
Stock-based compensation expense | — | | | — | | | 2,978 | | | — | | | — | | | — | | — | | | — | | | 2,978 | | | — | | | 2,978 |
Common stock issued to board members | 6 | | | — | | | 145 | | | — | | | — | | | — | | — | | | — | | | 145 | | | — | | | 145 |
Issuance of common stock related to share-based awards, net | 23 | | | — | | | (200) | | | — | | | — | | | — | | — | | | — | | | (200) | | | — | | | (200) |
Repurchases of common stock | (2,175) | | | (22) | | | (34,918) | | | — | | | (13,465) | | | — | | — | | | — | | | (48,405) | | | — | | | (48,405) |
Dividends on common stock ($0.08 per share) | — | | | — | | | — | | | — | | | (7,393) | | | — | | — | | | — | | | (7,393) | | | — | | | (7,393) |
Deferred compensation plan | — | | | — | | | — | | | — | | | — | | | 1 | | — | | | 1 | | | 2 | | | — | | | 2 |
Net cash distributed to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | (1,655) | | | (1,655) |
Balance, September 30, 2019 | 90,629 | | $ | 906 | | $ | 1,441,604 | | $ | 12,305 | | $ | 602,835 | | $ | 789 | | 9 | | $ | (170) | | $ | 2,058,269 | | $ | 25,158 | | $ | 2,083,427 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 |
Net income | — | | | — | | | — | | | — | | | 153,279 | | | — | | — | | | — | | | 153,279 | | | 6,505 | | | 159,784 |
Other comprehensive income | — | | | — | | | — | | | (23) | | | — | | | — | | — | | | — | | | (23) | | | — | | | (23) |
Stock-based compensation expense | — | | | — | | | 3,790 | | | — | | | — | | | — | | — | | | — | | | 3,790 | | | — | | | 3,790 |
Common stock issued to board members | 7 | | | — | | | 147 | | | — | | | — | | | — | | — | | | — | | | 147 | | | — | | | 147 |
Issuance of common stock related to share-based awards, net | 9 | | | — | | | (64) | | | — | | | — | | | — | | — | | | — | | | (64) | | | — | | | (64) |
Repurchases of common stock | — | | | — | | | 29 | | | — | | | (30) | | | — | | — | | | — | | | (1) | | | — | | | (1) |
Dividends on common stock ($0.09 per share) | — | | | — | | | — | | | — | | | (8,119) | | | — | | — | | | — | | | (8,119) | | | — | | | (8,119) |
Deferred compensation plan | — | | | — | | | — | | | — | | | — | | | (4) | | (1) | | | 7 | | | 3 | | | — | | | 3 |
Net cash distributed to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | (8,917) | | | (8,917) |
Balance, September 30, 2020 | 90,238 | | $ | 902 | | $ | 1,443,588 | | $ | 23,790 | | $ | 942,461 | | $ | 774 | | 7 | | $ | (143) | | $ | 2,411,372 | | $ | 27,361 | | $ | 2,438,733 |
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 | — | | | — | | | — | | | — | | | 176,015 | | | — | | — | | | — | | | 176,015 | | | 5,260 | | | 181,275 |
Other comprehensive income | — | | | — | | | — | | | 20,932 | | | — | | | — | | — | | | — | | | 20,932 | | | — | | | 20,932 |
Stock-based compensation expense | — | | | — | | | 7,717 | | | — | | | — | | | — | | — | | | — | | | 7,717 | | | — | | | 7,717 |
Common stock issued to board members | 21 | | | — | | | 426 | | | — | | | — | | | — | | — | | | — | | | 426 | | | — | | | 426 |
Issuance of common stock related to share-based awards, net | 388 | | | 4 | | | (1,938) | | | — | | | — | | | — | | — | | | — | | | (1,934) | | | — | | | (1,934) |
Repurchases of common stock | (3,390) | | | (34) | | | (54,417) | | | — | | | (18,934) | | | — | | — | | | — | | | (73,385) | | | — | | | (73,385) |
Dividends on common stock ($0.24 per share) | — | | | — | | | — | | | — | | | (22,376) | | | — | | — | | | — | | | (22,376) | | | — | | | (22,376) |
Deferred compensation plan | — | | | — | | | — | | | — | | | — | | | (36) | | (2) | | | 47 | | | 11 | | | — | | | 11 |
Adoption of accounting standards | — | | | — | | | — | | | — | | | 1,393 | | | — | | — | | | — | | | 1,393 | | | — | | | 1,393 |
Net cash distributed to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | (4,525) | | | (4,525) |
Balance, September 30, 2019 | 90,629 | | $ | 906 | | $ | 1,441,604 | | $ | 12,305 | | $ | 602,835 | | $ | 789 | | 9 | | $ | (170) | | $ | 2,058,269 | | $ | 25,158 | | $ | 2,083,427 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | — | | | — | | | — | | | — | | | 331,391 | | | — | | — | | | — | | | 331,391 | | | 17,410 | | | 348,801 |
Other comprehensive income | — | | | — | | | — | | | 12,371 | | | — | | | — | | — | | | — | | | 12,371 | | | — | | | 12,371 |
Stock-based compensation expense | — | | | — | | | 10,549 | | | — | | | — | | | — | | — | | | — | | | 10,549 | | | — | | | 10,549 |
Common stock issued to board members | 25 | | | — | | | 439 | | | — | | | — | | | — | | — | | | — | | | 439 | | | — | | | 439 |
Issuance of common stock related to share-based awards, net | 293 | | | 3 | | | (1,091) | | | — | | | — | | | — | | — | | | — | | | (1,088) | | | — | | | (1,088) |
Repurchases of common stock | (721) | | | (7) | | | (11,542) | | | — | | | (3,701) | | | — | | — | | | — | | | (15,250) | | | — | | | (15,250) |
Dividends on common stock ($0.27 per share) | — | | | — | | | — | | | — | | | (24,398) | | | — | | — | | | — | | | (24,398) | | | — | | | (24,398) |
Deferred compensation plan | — | | | — | | | — | | | — | | | — | | | (2) | | (1) | | | 12 | | | 10 | | | — | | | 10 |
Adoption of accounting standards (Note 2) | — | | | — | | | — | | | — | | | (5,691) | | | — | | — | | | — | | | (5,691) | | | — | | | (5,691) |
Net cash distributed to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | — | | | — | | | — | | | (15,806) | | | (15,806) |
Balance, September 30, 2020 | 90,238 | | $ | 902 | | $ | 1,443,588 | | $ | 23,790 | | $ | 942,461 | | $ | 774 | | 7 | | $ | (143) | | $ | 2,411,372 | | $ | 27,361 | | $ | 2,438,733 |
See accompanying notes.
7
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, | ||||
|
| 2017 |
| 2016 | ||
Operating Activities |
|
|
|
|
|
|
Net income |
| $ | 119,469 |
| $ | 112,406 |
Adjustments to reconcile net income to net cash used in operating activities: |
|
|
|
|
|
|
Provision for loan losses |
|
| 8,818 |
|
| 36,273 |
Depreciation, amortization and accretion, net |
|
| (11,300) |
|
| (37,616) |
Net realized gains on securities |
|
| (14) |
|
| — |
Deferred income taxes |
|
| 6,013 |
|
| 4,878 |
Other, net |
|
| 8,540 |
|
| 11,661 |
Net change in securities purchased under agreements to resell |
|
| (45,224) |
|
| (32,624) |
Net change in assets segregated for regulatory purposes |
|
| (26,343) |
|
| (15,227) |
Net change in trading securities |
|
| (410,877) |
|
| (187,958) |
Net change in broker-dealer and clearing organization receivables |
|
| (157,908) |
|
| 149,674 |
Net change in FDIC indemnification asset |
|
| 24,637 |
|
| 18,486 |
Net change in other assets |
|
| (35,967) |
|
| (50,760) |
Net change in broker-dealer and clearing organization payables |
|
| 223,043 |
|
| (117,398) |
Net change in other liabilities |
|
| (100,970) |
|
| (1,612) |
Net change in securities sold, not yet purchased |
|
| 19,620 |
|
| 34,589 |
Proceeds from sale of mortgage servicing rights asset |
|
| 17,499 |
|
| 7,586 |
Net gains from sales of loans |
|
| (416,336) |
|
| (469,721) |
Loans originated for sale |
|
| (11,251,438) |
|
| (11,995,553) |
Proceeds from loans sold |
|
| 11,520,363 |
|
| 12,292,342 |
Net cash used in operating activities |
|
| (508,375) |
|
| (240,574) |
Investing Activities |
|
|
|
|
|
|
Proceeds from maturities and principal reductions of securities held to maturity |
|
| 42,185 |
|
| 141,485 |
Proceeds from sales, maturities and principal reductions of securities available for sale |
|
| 248,578 |
|
| 367,307 |
Purchases of securities held to maturity |
|
| (58,831) |
|
| (175,781) |
Purchases of securities available for sale |
|
| (415,282) |
|
| (250,896) |
Net change in loans |
|
| (206,362) |
|
| (465,542) |
Purchases of premises and equipment and other assets |
|
| (20,093) |
|
| (31,119) |
Proceeds from sales of premises and equipment and other real estate owned |
|
| 27,333 |
|
| 58,490 |
Net cash received from (paid for) Federal Home Loan Bank and Federal Reserve Bank stock |
|
| 14,540 |
|
| (6,807) |
Net cash used in investing activities |
|
| (367,932) |
|
| (362,863) |
Financing Activities |
|
|
|
|
|
|
Net change in deposits |
|
| 547,163 |
|
| 108,834 |
Net change in short-term borrowings |
|
| 59,912 |
|
| 317,649 |
Proceeds from notes payable |
|
| 285,806 |
|
| 208,794 |
Payments on notes payable |
|
| (303,472) |
|
| (134,052) |
Proceeds from issuance of common stock |
|
| — |
|
| 4,139 |
Payments to repurchase common stock |
|
| (27,388) |
|
| — |
Dividends paid on common stock |
|
| (17,384) |
|
| — |
Net cash distributed (to) from noncontrolling interest |
|
| (1,193) |
|
| 676 |
Taxes paid on employee stock awards netting activity |
|
| (2,431) |
|
| (2,406) |
Other, net |
|
| (501) |
|
| (704) |
Net cash provided by financing activities |
|
| 540,512 |
|
| 502,930 |
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
| (335,795) |
|
| (100,507) |
Cash and cash equivalents, beginning of period |
|
| 690,764 |
|
| 669,445 |
Cash and cash equivalents, end of period |
| $ | 354,969 |
| $ | 568,938 |
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
Cash paid for interest |
| $ | 57,504 |
| $ | 42,399 |
Cash paid for income taxes, net of refunds |
| $ | 69,863 |
| $ | 53,899 |
Supplemental Schedule of Non-Cash Activities |
|
|
|
|
|
|
Conversion of loans to other real estate owned |
| $ | 8,319 |
| $ | 14,894 |
Additions to mortgage servicing rights |
| $ | 8,429 |
| $ | 20,309 |
| | | | | | | |
| | Nine Months Ended September 30, | | ||||
|
| 2020 |
| 2019 |
| ||
Operating Activities | | | | | | | |
Net income | | $ | 348,801 | | $ | 181,275 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | | | | |
Provision for credit losses | |
| 99,973 | |
| 326 | |
Depreciation, amortization and accretion, net | |
| 15,093 | |
| (2,465) | |
Net change in fair value of equity securities | | | 49 | |
| (30) | |
Deferred income taxes | |
| (73) | |
| 1,502 | |
Other, net | |
| 4,096 | |
| 10,624 | |
Net change in securities purchased under agreements to resell | |
| (31,072) | |
| 11,613 | |
Net change in trading securities | |
| 21,825 | |
| 38,198 | |
Net change in broker-dealer and clearing organization receivables | |
| 491,035 | |
| (271,474) | |
Net change in other assets | |
| (94,997) | |
| (35,263) | |
Net change in broker-dealer and clearing organization payables | |
| (273,013) | |
| 132,964 | |
Net change in other liabilities | |
| 147,058 | |
| 75,858 | |
Net change in securities sold, not yet purchased | | | 12,206 | |
| (22,418) | |
Proceeds from sale of mortgage servicing rights asset | |
| 18,650 | |
| — | |
Net gains from sales of loans | | | (753,699) | |
| (384,362) | |
Loans originated for sale | |
| (19,351,752) | |
| (11,858,761) | |
Proceeds from loans sold | | | 19,449,739 | |
| 11,638,303 | |
Net cash provided by (used in) operating activities for continuing operations | |
| 103,919 | |
| (484,110) | |
Net cash used in operating activities for discontinued operations | | | (29,269) | | | (421) | |
Net cash provided by (used in) operating activities | | | 74,650 | | | (484,531) | |
Investing Activities | | | | | | | |
Proceeds from maturities and principal reductions of securities held to maturity | |
| 69,937 | | | 53,051 | |
Proceeds from sales, maturities and principal reductions of securities available for sale | |
| 321,049 | | | 204,016 | |
Purchases of securities held to maturity | | | (7,553) | | | (73,652) | |
Purchases of securities available for sale | |
| (704,933) | | | (324,609) | |
Net change in loans held for investment | |
| (647,420) | | | (387,952) | |
Purchases of premises and equipment and other assets | |
| (25,331) | | | (27,200) | |
Proceeds from sales of premises and equipment and other real estate owned | |
| 20,912 | | | 12,570 | |
Net cash received from (paid to) Federal Home Loan Bank and Federal Reserve Bank stock | |
| 22,847 | | | (20,381) | |
Net cash used in investing activities for continuing operations | | | (950,492) | |
| (564,157) | |
Net cash provided by investing activities for discontinued operations | | | 1,941 | | | 16,888 | |
Net cash received from disposal of discontinued operations | | | 85,499 | | | — | |
Net cash used in investing activities | |
| (863,052) | |
| (547,269) | |
Financing Activities | | | | | | | |
Net change in deposits | |
| 2,208,031 | |
| 312,990 | |
Net change in short-term borrowings | |
| (645,160) | |
| 436,948 | |
Proceeds from notes payable | |
| 1,200,343 | |
| 675,086 | |
Payments on notes payable | |
| (1,060,681) | |
| (658,677) | |
Payments to repurchase common stock | |
| (15,250) | |
| (73,385) | |
Dividends paid on common stock | |
| (24,398) | |
| (22,376) | |
Net cash distributed to noncontrolling interest | | | (15,806) | |
| (4,525) | |
Taxes paid on employee stock awards netting activity | | | (1,090) | |
| (1,934) | |
Other, net | | | (470) | |
| (363) | |
Net cash provided by financing activities | |
| 1,645,519 | | | 663,764 | |
| | | | | | | |
Net change in cash, cash equivalents and restricted cash | |
| 857,117 | |
| (368,036) | |
Cash, cash equivalents and restricted cash, beginning of period | |
| 642,789 | |
| 778,466 | |
Cash, cash equivalents and restricted cash, end of period | | $ | 1,499,906 | | $ | 410,430 | |
| | | | | | | |
Reconciliation of Cash, Cash Equivalents and Restricted Cash to Consolidated Balance Sheets | | | | | | | |
Cash and due from banks | | $ | 1,277,865 | | $ | 281,445 | |
Cash and due from banks, included within assets of discontinued operations | | | 0 | | | 44,684 | |
Federal funds sold | | | 420 | | | 423 | |
Assets segregated for regulatory purposes | | | 221,621 | | | 83,878 | |
Total cash, cash equivalents and restricted cash | | $ | 1,499,906 | | $ | 410,430 | |
Supplemental Disclosures of Cash Flow Information | | | | | | | |
Cash paid for interest | | $ | 87,798 | | $ | 125,928 | |
Cash paid for income taxes, net of refunds | | $ | 87,581 | | $ | 32,227 | |
Supplemental Schedule of Non-Cash Activities | | | | | | | |
Conversion of loans to other real estate owned | | $ | 13,669 | | $ | 3,502 | |
Additions to mortgage servicing rights | | $ | 123,266 | | $ | 8,574 | |
See accompanying notes.notes.
78
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 and insurance subsidiaries.
On June 30, 2020, Hilltop completed the sale of all of the outstanding capital stock of National Lloyds Corporation (“NLC”), which comprises the operations of the insurance segment, for cash proceeds of $154.1 million, subject to post-closing adjustments. Accordingly, NLC’s results and its assets and liabilities have been presented as discontinued operations in the consolidated financial statements. For further details, see Note 3 to the consolidated financial statements.
The Company, headquartered in Dallas, Texas, provides its products and services through threeits 2 remaining primary business units included within continuing operations, PlainsCapital Corporation (“PCC”), and Hilltop Securities Holdings LLC (“Securities Holdings”) and National Lloyds Corporation (“NLC”). 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. NLC is
As a propertyresult of the spread of the novel coronavirus (“COVID-19”) pandemic, economic uncertainties continue to adversely impact the global economy and casualty insurance holding company that provides, through its subsidiaries, fire and homeowners insurancehave contributed to low value dwellings and manufactured homes primarilysignificant volatility in Texasbanking and other financial activity in the areas in which the Company operates. The effects of COVID-19 and the southern United States.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 reopened 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 flows.
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, 20162019 (“20162019 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 loancredit losses, the fair values of financial instruments, the amounts receivable from the Federal Deposit Insurance Corporation (the “FDIC”) under loss-share agreements (the “FDIC Indemnification Asset”), reserves for losses and loss adjustment expenses (“LAE”), the mortgage loan indemnification liability, and the potential impairment of goodwill and identifiable intangible assets are particularly subject to change. TheAs a result of the sale of NLC on June 30, 2020, the
9
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
reserve for losses and loss adjustment expenses (“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 PlainsCapital Equity, LLC.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
8
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
(“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-ownedwholly owned subsidiaries, Hilltop Securities Inc. (“Hilltop Securities”), Hilltop Securities Independent Network Inc. (“HTS Independent Network”) (collectively, and collectively with Hilltop Securities, the “Hilltop Broker-Dealers”) and First SouthwestHilltop Securities Asset Management, LLC. Hilltop Securities is a broker-dealer registered with the Securities and Exchange Commission (the “SEC”)SEC and Financial Industry Regulatory Authority (“FINRA”) and a member of the New York Stock Exchange (“NYSE”), HTS Independent Network is an introducing broker-dealer that is also registered with the SEC and FINRA,FINRA. Hilltop Securities, HTS Independent Network and First SouthwestHilltop Securities Asset Management, LLC is aare registered investment adviseradvisers under the Investment Advisers Act of 1940.
In addition, Hilltop also owns 100% of NLC, which operates through its wholly owned subsidiaries, National Lloyds Insurance Companythe membership interest in each of HTH Hillcrest Project LLC (“NLIC”HTH Project LLC”) and American Summit Insurance CompanyHilltop Investments I, LLC. Hilltop Investments I, LLC owns 50% of the membership interest in HTH Diamond Hillcrest Land LLC (“ASIC”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 18 to the consolidated financial statements included in the Company’s 2019 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.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. 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 2019 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.
10
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. For 1-4 family residential loans, the Company utilizes separate credit
13
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
models designed for these types of loans to estimate the PD and LGD grades for the allowance for credit losses calculation. The models calculate expected losses and prepayments using borrower 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. 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. 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.
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:
● | an adjustment to historical loss data to measure credit risk even if that risk is remote and does not meet the scope of assets with zero expected losses; |
● | the environmental factors and the areas in which credit is concentrated, such as the regulatory, environmental, or technological environment, the geographical area or key industries, or in the national or regional economic and business conditions where the borrower has exposure; |
● | the nature and volume of the company’s financial assets; |
● | the borrower’s financial condition, credit rating, credit score, asset quality, or business prospects; |
● | the borrower’s ability to make scheduled interest or principal payments; |
● | the remaining payment terms of the financial assets and the remaining time to maturity and the timing and extent of prepayments on the financial assets; |
● | the volume and severity of past due or adversely classified financial assets; |
● | the value of underlying collateral in which the collateral-dependent practical expedient has not been utilized; |
● | any updates to credit lending policies and procedures, including lending strategies, underwriting standards, collection and recovery practices, not reflected in the models; and |
● | the quality of the internal credit review system. |
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 is primarily 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 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 2020
In May 2017,March 2020, FASB issued Accounting Standards Update (“ASU”) 2017-09ASU 2020-03 which provides clarityincluded various clarifications and reduces both diversityimprovements 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 practicea lease for measuring expected credit losses, and cost and complexity associated with changesrecording 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 termsdate 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 conditionsdeferred 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 share-based payment award and, specifically, which changes require an entity to apply modification accounting. Thehosting arrangement that is a service contract is not affected by the amendments in this updateupdate. 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
14
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
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, 2017. Adoption2019. The Company adopted the provisions of the amendmentthese amendments as of January 1, 2020. The impact of these amendments is limited to presentation and disclosure changes that did not expected to have a significant effectan impact on the Company’s consolidated financial statements.
In April 2017, FASB issued ASU 2017-08 which shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. The amendment is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2018, using the modified retrospective transition method. As permitted within the amendment, the Company elected to early adopt and apply the provisions of this amendment as of January 1, 2017. This adoption had no effect on the Company’s consolidated financial statements.
In January 2017, FASB issued ASU 2017-01 which provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendment is effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2017, using the prospective method. Early adoption is permitted. Adoption of the amendment is not expected to have a significant effect on the Company’s consolidated financial statements.
In October 2016, FASB issued ASU No. 2016-16 which addresses improvement in accounting for income tax consequences of intra-equity transfers of assets other than inventory. The amendment requires that an entity recognize the income tax consequences of the intra-equity transfer of an asset other than inventory when the transfer occurs. The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2017, using the modified retrospective transition method. Early adoption is permitted, however, the Company does not intend to adopt the provisions of the amendment early and does not expect such provisions to have a significant effect on the Company’s consolidated financial statements.
9
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
In August 2016, FASB issued ASU 2016-15 to add or clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows and to eliminate the diversity in practice related to such classifications. The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2017 using a retrospective transition method. Early adoption is permitted, however, the Company does not intend to adopt the provisions of the amendment early and does not expect such provisions to have a significant effect on the Company’s consolidated financial statements.
In June 2016, FASB issued ASU 2016-13 which sets forth a “currentcurrent expected credit loss” (CECL)loss model whichthat 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. ThisThe 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 amendmentnew 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 amendments areCompany’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 asat 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 of the reporting period of adoption. Althoughon March 12, 2020, and the Company does not intendmay elect to adoptapply the provisions of the amendment early, a cross-functional teamamendments prospectively through December 31, 2022. The Company is currently evaluating the provisions of the amendment and the impact on its future consolidated financial statements through the identification of data requirements and determination of necessary modifications to its existing credit loss model and processes. The extent of the change in allowance for loan losses will be impacted by the portfolio composition and quality at the adoption date as well as economic conditions and forecasts at that time.statements.
In February 2016,January 2020, FASB issued ASU 2016-02 related2020-01 to leases.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 new standardamendment is intended to increase transparency and comparability among organizations and require lessees to record a right-to-use asset and liability representing the obligation to make lease payments for long-term leases. Accounting by lessors will remain largely unchanged. The amendments are effective for annual periods, and interim periods within those annualin periods beginning after December 15, 2018. Adoption will require a modified retrospective transition where the lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented. Early adoption is permitted, however, the2020. The Company does not intendexpect the adoption of ASU 2020-01 to adopt the provisions of the amendment early. The Company is currently evaluating the effects of the amendmenthave a material impact on its consolidated financial statements but upon adoption expects to report higher assets and liabilities as a result of including additional leases on the consolidated balance sheets.
In January 2016, FASB issued ASU 2016-01 related to financial instruments. This amendment requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income. The amendment also impacts financial liabilities under the Fair Value Option and the presentation and disclosure requirements for financial instruments and modifies the required process used to evaluate deferred tax assets on available for sale securities. The amendment is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Upon adoption, the Company will reclassify all equity investments out of trading and available for sale securities, with all subsequent changes in fair value recognized in net income. Additionally, the disclosure of the fair value of the loan portfolio will be presented using an exit price method instead of the current discounted cash flow method. The Company continues to evaluate the impact of ASU 2016-01 on other aspects of its consolidated financial statements.
In July 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 by one year, to clarify the principles for recognizing revenue from contracts with customers. The FASB has subsequently issued several amendments to the standard, including clarification of principal versus agent considerations, narrow scope improvements and other technical corrections. The amendments outline a single comprehensive model for entities to depict the transfer of goods or services to customers in amounts that reflect the payment to which a company expects to be entitled in exchange for those goods or services. The amendments also require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2017 and may be adopted using either a full retrospective transition method or a modified, cumulative-effect approach
10
16
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
wherein
T
3. Discontinued Operations
NLC Sale
On June 30, 2020, Hilltop completed the guidance is applied only to existing contracts assale of all of the dateoutstanding capital stock of initial application and to new contracts entered into thereafter. The Company does not intend to adoptNLC, which comprised the provisionsoperations of the amendment earlyinsurance segment, for cash proceeds of $154.1 million. Hilltop recognized a gain associated with this transaction of $32.3 million, net of customary transaction costs of $5.1 million and expectswas subject to adopt usingpost-closing adjustments. During the cumulative-effect approach.third quarter of 2020, Hilltop recognized a $0.7 million pre-tax post-closing adjustment to income from discontinued operations related to the finalization of the June 30, 2020 closing balance sheet, resulting in an aggregate gain on the sale of NLC of $33.1 million. The Company has gathered an inventoryresulting 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 contracts with customers and performed an in-depth assessment. The preliminary assessment suggests2020, management had determined that the revenue recognition policies withinpending sale of NLC met the Company’s broker-dealer segment will be affected when adopted. Specifically, the new guidance may require certain advisory and underwriting revenues and expensescriteria to be recorded on a gross basis whilepresented as discontinued operations. Therefore, NLC’s results and its assets and liabilities have been presented as discontinued operations in the current guidance requires recognizing these revenues net of theconsolidated financial statements. All related expenses. The Company is still interpreting certain aspects of this new accounting guidancenotes to address certain implementation issues, specifically the impact of any changes to the accounting for mutual fund fees and insurance product sales commissions received throughout the life of the contract. The Company will continue to evaluate the impact on its future consolidated financial statements for discontinued operations have been included in this note. The following table details the carrying amounts of both currentassets and newly issued guidance associatedliabilities of NLC reflected in the consolidated balance sheet under the caption “Assets of discontinued operations” and “Liabilities of discontinued operations”, respectively.
| | | |
| | 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 |
17
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 September 30, | | Nine Months Ended September 30, | ||||||||
| | 2020 |
| 2019 | | 2020 | | 2019 | ||||
Interest income: | | | | | | | | | | | | |
Securities: | | | | | | | | | | | | |
Taxable | | $ | — | | $ | 879 | | $ | 1,752 | | $ | 2,745 |
Other | | | — | | | 137 | | | 71 | | | 429 |
Total interest income | | | — | | | 1,016 | | | 1,823 | | | 3,174 |
| | | | | | | | | | | | |
Interest expense: | | | | | | | | | | | | |
Notes payable | | | — | | | 450 | | | 775 | | | 1,374 |
| | | | | | | | | | | | |
Noninterest income: | | | | | | | | | | | | |
Net insurance premiums earned | | | — | | | 32,654 | | | 65,077 | | | 99,323 |
Other | | | — | | | 2,242 | | | 3,051 | | | 8,246 |
Total noninterest income | | | — | | | 34,896 | | | 68,128 | | | 107,569 |
| | | | | | | | | | | | |
Noninterest expense: | | | | | | | | | | | | |
Employees' compensation and benefits | | | — | | | 2,748 | | | 6,002 | | | 8,734 |
Occupancy and equipment, net | | | — | | | 200 | | | 464 | | | 725 |
Professional services | | | — | | | 8,874 | | | 18,201 | | | 27,687 |
Loss and loss adjustment expenses | | | — | | | 14,677 | | | 38,419 | | | 54,584 |
Other | | | — | | | 2,424 | | | 3,987 | | | 7,120 |
Total noninterest expense | | | — | | | 28,923 | | | 67,073 | | | 98,850 |
| | | | | | | | | | | | |
Income from discontinued operations before income taxes | | | — | | | 6,539 | | | 2,103 | | | 10,519 |
Gain on disposal of discontinued operations | | | 736 | | | — | | | 33,077 | | | — |
Income tax expense | | | — | | | 1,278 | | | 518 | | | 2,152 |
Income from discontinued operations, net of income taxes | | $ | 736 | | $ | 5,261 | | $ | 34,662 | | $ | 8,367 |
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 amendment.equity securities held at December 31, 2019, measured using Level 1 inputs on a recurring basis. NaN activity was recognized for NLC equity securities for the three months ended September 30, 2020 as the sale was finalized June 30, 2020. NLC recognized net losses of $0.1 million during the three months ended September 30, 2019, and recognized net gains of $1.4 million during the nine months ended September 30, 2019 due to changes in the fair value of equity securities still held at the balance sheet date.
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).
3.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | ||||||||||||||||||||
| | 2020 | | 2019 | | 2020 | | 2019 | | ||||||||||||||||
|
| Written |
| Earned |
| Written |
| Earned |
| Written |
| Earned |
| Written |
| Earned |
| ||||||||
Premiums from direct business | | $ | — | | $ | — | | $ | 31,269 | | $ | 31,698 | | $ | 63,811 | | $ | 61,384 | | $ | 97,621 | | $ | 95,161 | |
Reinsurance assumed | |
| — | |
| — | |
| 3,440 | |
| 3,289 | |
| 6,396 | |
| 6,452 | |
| 10,191 | |
| 9,736 | |
Reinsurance ceded | |
| — | |
| — | |
| (2,333) | |
| (2,333) | |
| (2,759) | |
| (2,759) | |
| (5,574) | |
| (5,574) | |
Net premiums | | $ | — | | $ | — | | $ | 32,376 | | $ | 32,654 | | $ | 67,448 | | $ | 65,077 | | $ | 102,238 | | $ | 99,323 | |
18
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
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 September 30, | | Nine Months Ended September 30, |
| ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
Losses and LAE incurred | | $ | — | | $ | 14,508 | | $ | 38,225 | | $ | 53,450 | |
Reinsurance recoverables | |
| — | |
| 169 | |
| 194 | |
| 1,134 | |
Net loss and LAE incurred | | $ | — | | $ | 14,677 | | $ | 38,419 | | $ | 54,584 | |
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 createsincludes 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 assumptions about the assumptions that market participants would use in pricing the assets or liabilities. Level 3 inputs include pricing models and discounted cash flow techniques, among others. |
Fair Value Option
The Company has elected to measure substantially all of PrimeLending’s mortgage loans held for sale and 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 September 30, 20172020 and December 31, 2016,2019, the aggregate fair value of PrimeLending’s mortgage loans held for sale accounted for under the Fair Value Option was $1.86$2.34 billion and $1.75$1.94 billion, respectively, and the unpaid principal balance of those loans was $1.79$2.24 billion and $1.71$1.88 billion, respectively. The interest component of fair value is reported as interest income on loans in the accompanying consolidated statements of operations.
11
19
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
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. 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 |
| |||||||||||||||||
September 30, 2017 |
| Inputs |
| Inputs |
| Inputs |
| Fair Value |
| |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| |||||||||||||||||
September 30, 2020 | | Inputs | | Inputs | | Inputs | | Fair Value |
| |||||||||||||||||
Trading securities |
| $ | 3,526 |
| $ | 672,885 |
| $ | — |
| $ | 676,411 |
| | $ | 20,859 | | $ | 646,892 | | $ | — | | $ | 667,751 | |
Available for sale securities |
|
| 20,983 |
|
| 744,559 |
|
| — |
|
| 765,542 |
| | | — | | | 1,310,240 | | | — | | | 1,310,240 | |
Equity securities | | | 117 | | | — | | | — | | | 117 | | |||||||||||||
Loans held for sale |
|
| — |
|
| 1,828,275 |
|
| 31,545 |
|
| 1,859,820 |
| | | — | | | 2,272,002 | | | 72,186 | | | 2,344,188 | |
Derivative assets |
|
| — |
|
| 55,563 |
|
| — |
|
| 55,563 |
| | | — | | | 169,005 | | | — | | | 169,005 | |
MSR asset |
|
| — |
|
| — |
|
| 47,766 |
|
| 47,766 |
| | | — | | | — | | | 127,712 | | | 127,712 | |
Securities sold, not yet purchased |
|
| 85,471 |
|
| 88,038 |
|
| — |
|
| 173,509 |
| | | 32,178 | | | 23,845 | | | — | | | 56,023 | |
Derivative liabilities |
|
| — |
|
| 17,500 |
|
| — |
|
| 17,500 |
| | | — | | | 56,104 | | | — | | | 56,104 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
|
| Total |
| ||||||||||||||||
December 31, 2016 |
| Inputs |
| Inputs |
| Inputs |
|
| Fair Value |
| ||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| | Total | | ||||||||||||||||
December 31, 2019 | | Inputs | | Inputs | | Inputs | | | Fair Value | | ||||||||||||||||
Trading securities |
| $ | 9,481 |
| $ | 256,053 |
| $ | — |
| $ | 265,534 |
| | $ | — | | $ | 689,576 | | $ | — | | $ | 689,576 | |
Available for sale securities |
|
| 19,840 |
|
| 578,167 |
|
| — |
|
| 598,007 |
| | | — | | | 911,493 | | | — | | | 911,493 | |
Equity securities | | | 166 | | | — | | | — | | | 166 | | |||||||||||||
Loans held for sale |
|
| — |
|
| 1,712,697 |
|
| 35,801 |
|
| 1,748,498 |
| | | — | | | 1,868,518 | | | 67,195 | | | 1,935,713 | |
Derivative assets |
|
| — |
|
| 57,036 |
|
| — |
|
| 57,036 |
| | | — | | | 33,129 | | | — | | | 33,129 | |
MSR asset |
|
| — |
|
| — |
|
| 61,968 |
|
| 61,968 |
| | | — | | | — | | | 55,504 | | | 55,504 | |
Securities sold, not yet purchased |
|
| 60,715 |
|
| 93,174 |
|
| — |
|
| 153,889 |
| | | 29,080 | | | 14,737 | | | — | | | 43,817 | |
Derivative liabilities |
|
| — |
|
| 35,737 |
|
| — |
|
| 35,737 |
| | | — | | | 17,140 | | | — | | | 17,140 | |
12
20
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).
|
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|
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| Total Gains or Losses |
|
|
|
| ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| (Realized or Unrealized) |
|
|
|
| ||||||||||||||||||||||||||
|
| Balance at |
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|
|
|
|
|
|
|
|
| Included in Other |
|
|
|
| ||||||||||||||||||||||||
|
| Beginning of |
| Purchases/ |
| Sales/ |
| Included in |
| Comprehensive |
| Balance at |
| ||||||||||||||||||||||||||||
|
| Period |
| Additions |
| Reductions |
| Net Income |
| Income (Loss) |
| End of Period |
| ||||||||||||||||||||||||||||
Three months ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
| | | | | | | | | | | | | | 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 September 30, 2020 | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Loans held for sale |
| $ | 30,037 |
| $ | 8,881 |
| $ | (5,685) |
| $ | (1,688) |
| $ | — |
| $ | 31,545 |
| | $ | 91,936 | | $ | 5,338 | | $ | (20,182) | | $ | 1,097 | | $ | (6,003) | | $ | — | | $ | 72,186 | |
MSR asset |
|
| 43,580 |
|
| 5,939 |
|
| — |
|
| (1,753) |
|
| — |
|
| 47,766 |
| |
| 81,264 | | | 59,351 | | | — | | | — | | | (12,903) | | | — | |
| 127,712 | |
Total |
| $ | 73,617 |
| $ | 14,820 |
| $ | (5,685) |
| $ | (3,441) |
| $ | — |
| $ | 79,311 |
| | $ | 173,200 | | $ | 64,689 | | $ | (20,182) | | $ | 1,097 | | $ | (18,906) | | $ | — | | $ | 199,898 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Nine months ended September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Nine months ended September 30, 2020 | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Loans held for sale |
| $ | 35,801 |
| $ | 25,384 |
| $ | (23,108) |
| $ | (6,532) |
| $ | — |
| $ | 31,545 |
| | $ | 67,195 | | $ | 53,961 | | $ | (51,125) | | $ | 10,064 | | $ | (7,909) | | $ | — | | $ | 72,186 | |
MSR asset |
|
| 61,968 |
|
| 8,429 |
|
| (17,499) |
|
| (5,132) |
|
| — |
|
| 47,766 |
| | | 55,504 | | | 123,266 | | | (18,650) | | | — | | | (32,408) | | | — | | | 127,712 | |
Total |
| $ | 97,769 |
| $ | 33,813 |
| $ | (40,607) |
| $ | (11,664) |
| $ | — |
| $ | 79,311 |
| | $ | 122,699 | | $ | 177,227 | | $ | (69,775) | | $ | 10,064 | | $ | (40,317) | | $ | — | | $ | 199,898 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Three months ended September 30, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Trading securities |
| $ | 1 |
| $ | — |
| $ | — |
| $ | (1) |
| $ | — |
| $ | — |
| ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Three months ended September 30, 2019 | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Loans held for sale |
|
| 45,645 |
|
| 8,066 |
|
| (8,686) |
|
| (2,448) |
|
| — |
|
| 42,577 |
| | $ | 56,799 | | $ | 15,347 | | $ | (9,364) | | $ | 711 | | $ | (2,589) | | $ | — | | $ | 60,904 | |
MSR asset |
|
| 33,491 |
|
| 10,416 |
|
| — |
|
| (156) |
|
| — |
|
| 43,751 |
| | | 53,695 | | | 4,166 | | | — | | | — | | | (6,564) | | | — | | | 51,297 | |
Total |
| $ | 79,137 |
| $ | 18,482 |
| $ | (8,686) |
| $ | (2,605) |
| $ | — |
| $ | 86,328 |
| | $ | 110,494 | | $ | 19,513 | | $ | (9,364) | | $ | 711 | | $ | (9,153) | | $ | — | | $ | 112,201 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Nine months ended September 30, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Trading securities |
| $ | 1 |
| $ | — |
| $ | — |
| $ | (1) |
| $ | — |
| $ | — |
| ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Nine months ended September 30, 2019 | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Loans held for sale |
|
| 25,880 |
|
| 51,105 |
|
| (23,817) |
|
| (10,591) |
|
| — |
|
| 42,577 |
| | $ | 50,464 | | $ | 44,827 | | $ | (27,448) | | | 1,136 | | $ | (8,075) | | $ | — | | $ | 60,904 | |
MSR asset |
|
| 52,285 |
|
| 20,309 |
|
| (7,586) |
|
| (21,257) |
|
| — |
|
| 43,751 |
| | | 66,102 | | | 8,574 | | | — | | | — | | | (23,379) | | | — | | | 51,297 | |
Total |
| $ | 78,166 |
| $ | 71,414 |
| $ | (31,403) |
| $ | (31,849) |
| $ | — |
| $ | 86,328 |
| | $ | 116,566 | | $ | 53,401 | | $ | (27,448) | | $ | 1,136 | | $ | (31,454) | | $ | — | | $ | 112,201 | |
All net realized and unrealized gains (losses) in the tabletables above are reflected in the accompanying consolidated financial statements. Excluding the trading securities sold during the three months ended September 30, 2016, theThe unrealized gains (losses) relate to financial instruments still held at September 30, 2017.2020.
For Level 3 financial instruments measured at fair value on a recurring basis at September 30, 2017,2020 and December 31, 2019, the significant unobservable inputs used in the fair value measurements were as follows.
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| ||||||||||||||||||||
|
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| Range | ||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | ||||||||||||
| | | | | | Range (Weighted-Average) | ||||||||||||||||||||||||||
| | | | | | September 30, | | December 31, | ||||||||||||||||||||||||
Financial instrument |
| Valuation Technique |
| Unobservable Inputs |
| (Weighted-Average) |
| Valuation Technique |
| Unobservable Inputs |
| 2020 | | 2019 | ||||||||||||||||||
Loans held for sale |
| Discounted cash flows / Market comparable |
| Projected price |
| 90 | - | 95 | % | ( | 95 | %) | | Market comparable | | Projected price | | 88 | - | 96 | % | ( | 95 | %) | | 92 | - | 96 | % | ( | 95 | %) |
|
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|
|
|
|
|
|
| ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | ||||||||||||
MSR asset |
| Discounted cash flows |
| Constant prepayment rate |
|
|
| 10.85 | % |
|
| | Discounted cash flows | | Constant prepayment rate | | | | | 12.97 | % | | | | | | 13.16 | % | | |||
|
|
|
| Discount rate |
|
|
| 11.07 | % |
|
| |||||||||||||||||||||
| | | | Discount rate | | | | | 14.65 | % | | | | | | 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 valuesvalue of such loans areis 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,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 Company had no transfers between Levels 1 and 2 duringincrease in the periods presented.
13
weighted average discount rate used to value the MSR asset at September 30, 2020, compared to December 31, 2019, addresses the effect of the reduction in third-party servicing
21
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
outlets beginning in the second quarter of 2020 resulting from the impact of the Coronavirus Aid, Relief, and Economic Security Act (“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.
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.
The following tables presenttable 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).
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|
|
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|
|
|
|
|
|
|
| |||||||||||||||||||||||
|
| Three Months Ended September 30, 2017 |
| Three Months Ended September 30, 2016 |
| |||||||||||||||||||||||||||||||||
|
|
|
| Other |
| Total |
|
|
| Other |
| Total |
| |||||||||||||||||||||||||
|
| Net |
| Noninterest |
| Changes in |
| Net |
| Noninterest |
| Changes in |
| |||||||||||||||||||||||||
|
| Gains (Losses) |
| Income |
| Fair Value |
| Gains (Losses) |
| Income |
| Fair Value |
| |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||||||||
| | Three Months Ended September 30, 2020 | | Three Months Ended September 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 |
| $ | (4,443) |
| $ | — |
| $ | (4,443) |
| $ | 73 |
| $ | — |
| $ | 73 |
| | $ | (9,167) | | $ | — | | $ | (9,167) | | $ | 4,117 | | $ | — | | $ | 4,117 | |
MSR asset |
|
| (1,753) |
|
| — |
|
| (1,753) |
|
| (156) |
|
| — |
|
| (156) |
| |
| (12,903) | |
| — | |
| (12,903) | |
| (6,564) | |
| — | |
| (6,564) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
|
| Nine Months Ended September 30, 2017 |
| Nine Months Ended September 30, 2016 |
| |||||||||||||||||||||||||||||||||
|
|
|
| Other |
| Total |
|
|
| Other |
| Total |
| |||||||||||||||||||||||||
|
| Net |
| Noninterest |
| Changes in |
| Net |
| Noninterest |
| Changes in |
| |||||||||||||||||||||||||
|
| Gains (Losses) |
| Income |
| Fair Value |
| Gains (Losses) |
| Income |
| Fair Value |
| |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||||||||
| | Nine Months Ended September 30, 2020 | | Nine Months Ended September 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 |
| $ | 26,650 |
| $ | — |
| $ | 26,650 |
| $ | 16,003 |
| $ | — |
| $ | 16,003 |
| | $ | 49,311 | | $ | — | | $ | 49,311 | | $ | 7,972 | | $ | — | | $ | 7,972 | |
MSR asset |
|
| (5,132) |
|
| — |
|
| (5,132) |
|
| (21,257) |
|
| — |
|
| (21,257) |
| |
| (32,408) | |
| — | |
| (32,408) | |
| (23,379) | |
| — | |
| (23,379) | |
The Company also determines the fair value of certain assets and liabilities on a non-recurring basis. In addition, facts and circumstances may dictate a fair value measurement when there is evidence of impairment. Assets and liabilities measured on a non-recurring basis include the items discussed below.
Impaired Loans — The Company reports impaired loans based on the underlying fair value of the collateral through specific allowances within the allowance for loan losses. Purchased credit impaired (“PCI”) loans with a fair value of $172.9 million, $822.8 million and $73.5 million were acquired by the Company upon completion of the merger with PCC (the “PlainsCapital Merger”), the FDIC-assisted transaction whereby the Bank acquired certain assets and assumed certain liabilities of Edinburg, Texas-based First National Bank (“FNB”) on September 13, 2013 (the “FNB Transaction”), and the acquisition of SWS Group, Inc. (“SWS”) in a stock and cash transaction (the "SWS Merger"), whereby SWS’s banking subsidiary, Southwest Securities, FSB was merged into the Bank, respectively (collectively, the “Bank Transactions”). Substantially all PCI loans acquired in the FNB Transaction are covered by FDIC loss-share agreements. The fair value of PCI loans was determined using Level 3 inputs, including estimates of expected cash flows that incorporated significant unobservable inputs regarding default rates, loss severity rates assuming default, prepayment speeds on acquired loans accounted for in pools (“Pooled Loans”), and estimated collateral values.
At September 30, 2017, estimates for these significant unobservable inputs were as follows.
|
|
|
|
|
|
|
|
|
| PCI Loans |
| ||||
|
| PlainsCapital |
| FNB |
| SWS |
|
|
| Merger |
| Transaction |
| Merger |
|
Weighted average default rate |
| 64 | % | 45 | % | 59 | % |
Weighted average loss severity rate |
| 66 | % | 18 | % | 29 | % |
Weighted average prepayment speed |
| 0 | % | 8 | % | 0 | % |
At September 30, 2017, the resulting weighted average expected loss on PCI loans associated with the PlainsCapital Merger, FNB Transaction and SWS Merger was 43%, 8% and 17%, respectively.
The Company obtains updated appraisals of the fair value of collateral securing impaired collateral-dependent loans at least annually, in accordance with regulatory guidelines. The Company also reviews the fair value of such collateral on a quarterly basis. If the quarterly review indicates that the fair value of the collateral may have deteriorated, the Company orders an updated appraisal of the fair value of the collateral. Because the Company obtains updated appraisals when evidence of a decline in the fair value of collateral exists, it typically does not adjust appraised values.
Other Real Estate Owned — The Company determines fair value primarily using independent appraisals of other real estate owned (“OREO”) properties. The resulting fair value measurements are classified as Level 2 or Level 3 inputs, depending upon the extent to which unobservable inputs determine the fair value measurement. The Company considers a number of factors in determining the extent to which specific fair value measurements utilize unobservable inputs, including, but not limited to, the inherent subjectivity in appraisals, the length of time elapsed since the receipt of independent market price or appraised value, and current market conditions. At September 30, 2017, the most significant
14
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
unobservable input used in the determination of fair value of OREO was a discount to independent appraisals for estimated holding periods of OREO properties. Level 3 inputs were used to determine the initial fair value at acquisition of a large group of smaller balance properties that were acquired in the FNB Transaction. In the FNB Transaction, the Bank acquired OREO of $135.2 million, all of which is covered by FDIC loss-share agreements. At September 30, 2017 and December 31, 2016, the estimated fair value of covered OREO was $40.3 million and $51.6 million, respectively, and the underlying fair value measurements utilized Level 2 and Level 3 inputs. The fair value of non-covered OREO at September 30, 2017 and December 31, 2016 was $4.8 million and $4.5 million, respectively, and is included in other assets within the consolidated balance sheets. During the reported periods, all fair value measurements for non-covered OREO subsequent to initial recognition utilized Level 2 inputs.
The following table presents information regarding certain assets and liabilities measured at fair value on a non-recurring basis for which a change in fair value has been recorded during reporting periods subsequent to initial recognition (in thousands).
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Gains (Losses) for the |
| Total Gains (Losses) for the | ||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||||||
September 30, 2017 |
| Inputs |
| Inputs |
| Inputs |
| Fair Value |
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||||||
Non-covered impaired loans |
| $ | — |
| $ | — |
| $ | 42,953 |
| $ | 42,953 |
| $ | 793 |
| $ | 1,149 |
| $ | 323 |
| $ | 1,284 |
Covered impaired loans |
|
| — |
|
| — |
|
| 58,490 |
|
| 58,490 |
|
| (787) |
|
| 725 |
|
| (1,764) |
|
| 815 |
Non-covered other real estate owned |
|
| — |
|
| 3,512 |
|
| — |
|
| 3,512 |
|
| (135) |
|
| (427) |
|
| (258) |
|
| (439) |
Covered other real estate owned |
|
| — |
|
| 6,969 |
|
| — |
|
| 6,969 |
|
| (388) |
|
| (2,552) |
|
| (2,523) |
|
| (14,284) |
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 which areas described in detail in Note 3 to the consolidated financial statements included in the Company’s 20162019 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 |
|
|
|
| ||||||||||||||||||||
September 30, 2017 |
| Amount |
| Inputs |
| Inputs |
| Inputs |
| Total |
| |||||||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
| | | | | Estimated Fair Value |
| ||||||||||||||||||||||||||
|
| Carrying |
| Level 1 |
| Level 2 |
| Level 3 |
| | |
| ||||||||||||||||||||
September 30, 2020 | | Amount | | Inputs | | Inputs | | Inputs | | Total |
| |||||||||||||||||||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | |
Cash and cash equivalents |
| $ | 354,969 |
| $ | 354,969 |
| $ | — |
| $ | — |
| $ | 354,969 |
| | $ | 1,278,285 | | $ | 1,278,285 | | $ | — | | $ | — | | $ | 1,278,285 | |
Assets segregated for regulatory purposes | | | 221,621 | | | 221,621 | | | — | | | — | | | 221,621 | | ||||||||||||||||
Securities purchased under agreements to resell |
|
| 134,654 |
|
| — |
|
| 134,654 |
|
| — |
|
| 134,654 |
| | | 90,103 | | | — | | | 90,103 | | | — | | | 90,103 | |
Assets segregated for regulatory purposes |
|
| 207,336 |
|
| 207,336 |
|
| — |
|
| — |
|
| 207,336 |
| ||||||||||||||||
Held to maturity securities |
|
| 368,031 |
|
| — |
|
| 364,122 |
|
| — |
|
| 364,122 |
| | | 323,299 | | | — | | | 338,929 | | | — | | | 338,929 | |
Loans held for sale |
|
| 79,501 |
|
| — |
|
| 79,501 |
|
| — |
|
| 79,501 |
| | | 203,787 | | | — | | | 203,787 | | | — | | | 203,787 | |
Non-covered loans, net |
|
| 6,090,034 |
|
| — |
|
| 485,604 |
|
| 5,802,891 |
|
| 6,288,495 |
| ||||||||||||||||
Covered loans, net |
|
| 188,269 |
|
| — |
|
| — |
|
| 284,424 |
|
| 284,424 |
| ||||||||||||||||
Loans held for investment, net | | | 7,790,346 | | | — | | | 502,295 | | | 7,388,992 | | | 7,891,287 | | ||||||||||||||||
Broker-dealer and clearing organization receivables |
|
| 1,672,123 |
|
| — |
|
| 1,672,123 |
|
| — |
|
| 1,672,123 |
| |
| 1,363,478 | |
| — | |
| 1,363,478 | |
| — | |
| 1,363,478 | |
FDIC indemnification asset |
|
| 33,143 |
|
| — |
|
| — |
|
| 22,866 |
|
| 22,866 |
| ||||||||||||||||
Other assets |
|
| 64,907 |
|
| — |
|
| 59,300 |
|
| 5,607 |
|
| 64,907 |
| |
| 73,173 | |
| — | |
| 71,628 | |
| 1,545 | |
| 73,173 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | |
Deposits |
|
| 7,663,447 |
|
| — |
|
| 7,662,392 |
|
| — |
|
| 7,662,392 |
| |
| 11,261,915 | |
| — | |
| 11,280,154 | |
| — | |
| 11,280,154 | |
Broker-dealer and clearing organization payables |
|
| 1,517,698 |
|
| — |
|
| 1,517,698 |
|
| — |
|
| 1,517,698 |
| |
| 1,310,835 | |
| — | |
| 1,310,835 | |
| — | |
| 1,310,835 | |
Short-term borrowings |
|
| 1,477,201 |
|
| — |
|
| 1,477,201 |
|
| — |
|
| 1,477,201 |
| |
| 780,109 | |
| — | |
| 780,109 | |
| — | |
| 780,109 | |
Debt |
|
| 367,208 |
|
| — |
|
| 364,731 |
|
| — |
|
| 364,731 |
| |
| 463,018 | |
| — | |
| 463,018 | |
| — | |
| 463,018 | |
Other liabilities |
|
| 6,630 |
|
| — |
|
| 6,630 |
|
| — |
|
| 6,630 |
| |
| 13,885 | |
| — | |
| 13,885 | |
| — | |
| 13,885 | |
15
22
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 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Estimated Fair Value |
| ||||||||||
|
| Carrying |
| Level 1 |
| Level 2 |
| Level 3 |
|
|
|
| ||||
December 31, 2016 |
| Amount |
| Inputs |
| Inputs |
| Inputs |
| Total |
| |||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 690,764 |
| $ | 690,764 |
| $ | — |
| $ | — |
| $ | 690,764 |
|
Securities purchased under agreements to resell |
|
| 89,430 |
|
| — |
|
| 89,430 |
|
| — |
|
| 89,430 |
|
Assets segregated for regulatory purposes |
|
| 180,993 |
|
| 180,993 |
|
| — |
|
| — |
|
| 180,993 |
|
Held to maturity securities |
|
| 351,831 |
|
| — |
|
| 345,088 |
|
| — |
|
| 345,088 |
|
Loans held for sale |
|
| 46,965 |
|
| — |
|
| 46,965 |
|
| — |
|
| 46,965 |
|
Non-covered loans, net |
|
| 5,789,313 |
|
| — |
|
| 502,077 |
|
| 5,459,975 |
|
| 5,962,052 |
|
Covered loans, net |
|
| 255,714 |
|
| — |
|
| — |
|
| 367,444 |
|
| 367,444 |
|
Broker-dealer and clearing organization receivables |
|
| 1,497,741 |
|
| — |
|
| 1,497,741 |
|
| — |
|
| 1,497,741 |
|
FDIC indemnification asset |
|
| 71,313 |
|
| — |
|
| — |
|
| 60,173 |
|
| 60,173 |
|
Other assets |
|
| 62,904 |
|
| — |
|
| 58,697 |
|
| 4,207 |
|
| 62,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
| 7,063,811 |
|
| — |
|
| 7,058,837 |
|
| — |
|
| 7,058,837 |
|
Broker-dealer and clearing organization payables |
|
| 1,347,128 |
|
| — |
|
| 1,347,128 |
|
| — |
|
| 1,347,128 |
|
Short-term borrowings |
|
| 1,417,289 |
|
| — |
|
| 1,417,289 |
|
| — |
|
| 1,417,289 |
|
Debt |
|
| 384,924 |
|
| — |
|
| 378,822 |
|
| — |
|
| 378,822 |
|
Other liabilities |
|
| 3,708 |
|
| — |
|
| 3,708 |
|
| — |
|
| 3,708 |
|
The Company held equity investments other than securities of $62.7 million and $36.6 million at September 30, 2020 and December 31, 2019, respectively, which are included within other assets in the consolidated balance sheets. Of the $62.7 million of such equity investments held at September 30, 2020, $22.0 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 September 30, | | Nine Months Ended September 30, | ||||||||
|
| 2020 |
| 2019 | | 2020 |
| 2019 | ||||
Balance, beginning of period |
| $ | 20,613 |
| $ | 19,906 | | $ | 19,771 |
| $ | 20,376 |
Additional investments | | | — | | | — | | | — | | | — |
Upward adjustments | | | 2,221 | | | 101 | | | 3,852 | | | 303 |
Impairments and downward adjustments | | | (826) | | | (346) | | | (1,615) | | | (1,018) |
Dispositions | |
| — | |
| — | |
| — | |
| — |
Balance, end of period | | $ | 22,008 | | $ | 19,661 | | $ | 22,008 | | $ | 19,661 |
5. Securities
4. Securities
The fair value of trading securities is summarized as follows (in thousands).
| | | | | | | | |
| | September 30, | | December 31, | | | ||
|
| 2020 |
| 2019 |
|
| ||
U.S. Treasury securities |
| $ | 20,859 |
| $ | — |
|
|
U.S. government agencies: | | | | | | | | |
Bonds | | | 51,707 | | | 24,680 | | |
Residential mortgage-backed securities | |
| 13,951 | |
| 331,601 | | |
Commercial mortgage-backed securities | |
| 891 | |
| 2,145 | | |
Collateralized mortgage obligations | | | 372,219 | | | 191,154 | | |
Corporate debt securities | | | 62,837 | | | 36,973 | | |
States and political subdivisions | | | 135,068 | | | 93,117 | | |
Unit investment trusts | | | — | | | 3,468 | | |
Private-label securitized product | | | 6,752 | | | 2,992 | | |
Other | | | 3,467 | | | 3,446 | | |
Totals | | $ | 667,751 | | $ | 689,576 | | |
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
|
| ||
|
| 2017 |
| 2016 |
|
| ||
U.S. Treasury securities |
| $ | 200 |
| $ | 5,940 |
|
|
U.S. government agencies: |
|
|
|
|
|
|
|
|
Bonds |
|
| 53,275 |
|
| 36,303 |
|
|
Residential mortgage-backed securities |
|
| 407,275 |
|
| 2,539 |
|
|
Commercial mortgage-backed securities |
|
| 9,599 |
|
| 15,171 |
|
|
Collateralized mortgage obligations |
|
| 1,098 |
|
| 5,607 |
|
|
Corporate debt securities |
|
| 77,435 |
|
| 60,699 |
|
|
States and political subdivisions |
|
| 90,144 |
|
| 89,946 |
|
|
Unit investment trusts |
|
| 31,626 |
|
| 41,409 |
|
|
Private-label securitized product |
|
| 2,398 |
|
| 4,292 |
|
|
Other |
|
| 3,361 |
|
| 3,628 |
|
|
Totals |
| $ | 676,411 |
| $ | 265,534 |
|
|
23
TheHilltop 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 $173.5$56.0 million and $153.9$43.8 million at September 30, 20172020 and December 31, 2016,2019, respectively.
16
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
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 |
|
|
|
| ||||||||||||||||
September 30, 2017 |
| Cost |
| Gains |
| Losses |
| Fair Value |
| |||||||||||||||||
U.S. Treasury securities |
| $ | 22,751 |
| $ | 168 |
| $ | (39) |
| $ | 22,880 |
| |||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | Available for Sale | | |||||||||||||||||||||||
| | Amortized | | Unrealized | | Unrealized | | | |
| ||||||||||||||||
September 30, 2020 | | Cost | | Gains | | Losses | | Fair Value |
| |||||||||||||||||
U.S. government agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Bonds |
|
| 100,289 |
|
| 851 |
|
| (133) |
|
| 101,007 |
| | $ | 56,781 | | $ | 1,204 | | $ | (45) | | $ | 57,940 | |
Residential mortgage-backed securities |
|
| 247,272 |
|
| 940 |
|
| (2,304) |
|
| 245,908 |
| |
| 579,725 | |
| 17,553 | |
| (285) | |
| 596,993 | |
Commercial mortgage-backed securities |
|
| 12,091 |
|
| 78 |
|
| (24) |
|
| 12,145 |
| | | 63,570 | |
| 926 | |
| (204) | |
| 64,292 | |
Collateralized mortgage obligations |
|
| 222,187 |
|
| 203 |
|
| (2,656) |
|
| 219,734 |
| |
| 540,326 | |
| 8,454 | |
| (303) | |
| 548,477 | |
Corporate debt securities |
|
| 72,266 |
|
| 2,489 |
|
| (2) |
|
| 74,753 |
| |||||||||||||
States and political subdivisions |
|
| 66,173 |
|
| 1,493 |
|
| (39) |
|
| 67,627 |
| |
| 40,018 | |
| 2,520 | |
| — | |
| 42,538 | |
Commercial mortgage-backed securities |
|
| 499 |
|
| 6 |
|
| — |
|
| 505 |
| |||||||||||||
Equity securities |
|
| 19,456 |
|
| 1,532 |
|
| (5) |
|
| 20,983 |
| |||||||||||||
Totals |
| $ | 762,984 |
| $ | 7,760 |
| $ | (5,202) |
| $ | 765,542 |
| | $ | 1,280,420 | | $ | 30,657 | | $ | (837) | | $ | 1,310,240 | |
| | | | | | | | | | | | | |
| | 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 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Available for Sale |
| |||||||||||||||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
|
|
|
| ||||||||||||||||
December 31, 2016 |
| Cost |
| Gains |
| Losses |
| Fair Value |
| |||||||||||||||||
U.S. Treasury securities |
| $ | 31,701 |
| $ | 144 |
| $ | (44) |
| $ | 31,801 |
| |||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | Held to Maturity |
| |||||||||||||||||||||||
| | Amortized | | Unrealized | | Unrealized | | | |
| ||||||||||||||||
September 30, 2020 |
| Cost |
| Gains |
| Losses |
| Fair Value |
| |||||||||||||||||
U.S. government agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | |
|
Bonds |
|
| 121,838 |
|
| 881 |
|
| (67) |
|
| 122,652 |
| |||||||||||||
Residential mortgage-backed securities |
|
| 135,371 |
|
| 708 |
|
| (2,941) |
|
| 133,138 |
| | $ | 14,659 | | $ | 790 | | $ | — | | $ | 15,449 |
|
Commercial mortgage-backed securities |
|
| 8,771 |
|
| 2 |
|
| (58) |
|
| 8,715 |
| | | 153,318 | |
| 10,245 | |
| — | |
| 163,563 |
|
Collateralized mortgage obligations |
|
| 117,879 |
|
| 29 |
|
| (3,206) |
|
| 114,702 |
| |
| 84,670 | |
| 2,288 | |
| — | |
| 86,958 |
|
Corporate debt securities |
|
| 76,866 |
|
| 2,354 |
|
| (91) |
|
| 79,129 |
| |||||||||||||
States and political subdivisions |
|
| 86,353 |
|
| 1,498 |
|
| (336) |
|
| 87,515 |
| |
| 70,652 | |
| 2,321 | |
| (14) | |
| 72,959 |
|
Commercial mortgage-backed securities |
|
| 499 |
|
| 16 |
|
| — |
|
| 515 |
| |||||||||||||
Equity securities |
|
| 18,920 |
|
| 1,263 |
|
| (343) |
|
| 19,840 |
| |||||||||||||
Totals |
| $ | 598,198 |
| $ | 6,895 |
| $ | (7,086) |
| $ | 598,007 |
| | $ | 323,299 | | $ | 15,644 | | $ | (14) | | $ | 338,929 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Held to Maturity |
| |||||||||||||||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
|
|
|
| ||||||||||||||||
September 30, 2017 |
| Cost |
| Gains |
| Losses |
| Fair Value |
| |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | Held to Maturity |
| |||||||||||||||||||||||
| | Amortized | | Unrealized | | Unrealized | | | |
| ||||||||||||||||
December 31, 2019 |
| Cost |
| Gains |
| Losses |
| Fair Value |
| |||||||||||||||||
U.S. government agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Bonds |
| $ | 40,515 |
| $ | 28 |
| $ | (891) |
| $ | 39,652 |
| | $ | 24,020 | | $ | 10 | | $ | (35) | | $ | 23,995 | |
Residential mortgage-backed securities |
|
| 16,973 |
|
| 198 |
|
| — |
|
| 17,171 |
| |
| 17,776 | |
| 295 | |
| — | |
| 18,071 | |
Commercial mortgage-backed securities |
|
| 71,613 |
|
| 404 |
|
| (510) |
|
| 71,507 |
| | | 161,624 | | | 2,810 | | | (655) | | | 163,779 | |
Collateralized mortgage obligations |
|
| 183,926 |
|
| 152 |
|
| (2,550) |
|
| 181,528 |
| |
| 113,894 | |
| 226 | |
| (904) | |
| 113,216 | |
States and political subdivisions |
|
| 55,004 |
|
| 289 |
|
| (1,029) |
|
| 54,264 |
| |
| 69,012 | |
| 1,013 | |
| (156) | |
| 69,869 | |
Totals |
| $ | 368,031 |
| $ | 1,071 |
| $ | (4,980) |
| $ | 364,122 |
| | $ | 386,326 | | $ | 4,354 | | $ | (1,750) | | $ | 388,930 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Held to Maturity |
| ||||||||||
|
| Amortized |
| Unrealized |
| Unrealized |
|
|
|
| |||
December 31, 2016 |
| Cost |
| Gains |
| Losses |
| Fair Value |
| ||||
U.S. government agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds |
| $ | 40,513 |
| $ | — |
| $ | (1,287) |
| $ | 39,226 |
|
Residential mortgage-backed securities |
|
| 19,606 |
|
| 13 |
|
| (6) |
|
| 19,613 |
|
Commercial mortgage-backed securities |
|
| 31,767 |
|
| 102 |
|
| (593) |
|
| 31,276 |
|
Collateralized mortgage obligations |
|
| 217,954 |
|
| 128 |
|
| (3,372) |
|
| 214,710 |
|
States and political subdivisions |
|
| 41,991 |
|
| 70 |
|
| (1,798) |
|
| 40,263 |
|
Totals |
| $ | 351,831 |
| $ | 313 |
| $ | (7,056) |
| $ | 345,088 |
|
17
24
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Additionally, the Company had unrealized net gains of $0.1 million at both September 30, 2020 and December 31, 2020 from equity securities with fair values of $0.1 million and $0.2 million held at September 30, 2020 and December 31, 2019, respectively. The Company recognized nominal net losses during the three and nine months ended September 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 nine months ended September 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).
| | | | | | | | | | | | | | | | | |
| | September 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 |
| 3 | | $ | 24,955 | | $ | 45 |
| 2 | | $ | 24,937 | | $ | 64 | |
Unrealized loss for twelve months or longer |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
|
| 3 | | | 24,955 | | | 45 |
| 2 | |
| 24,937 | |
| 64 | |
Residential mortgage-backed securities: | | | | | | | | | | | | | | | | | |
Unrealized loss for less than twelve months |
| 6 | |
| 58,891 | |
| 285 |
| 37 | |
| 36,187 | |
| 87 | |
Unrealized loss for twelve months or longer |
| — | |
| — | |
| — |
| 2 | |
| 13,683 | |
| 58 | |
|
| 6 | | | 58,891 | | | 285 |
| 39 | |
| 49,870 | |
| 145 | |
Commercial mortgage-backed securities: | | | | | | | | | | | | | | | | | |
Unrealized loss for less than twelve months |
| 2 | |
| 18,913 | |
| 204 |
| 1 | |
| 9,967 | |
| 2 | |
Unrealized loss for twelve months or longer |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
|
| 2 | | | 18,913 | | | 204 |
| 1 | |
| 9,967 | |
| 2 | |
Collateralized mortgage obligations: | | | | | | | | | | | | | | | | | |
Unrealized loss for less than twelve months |
| 6 | |
| 74,131 | |
| 248 |
| 15 | |
| 94,545 | |
| 446 | |
Unrealized loss for twelve months or longer |
| 5 | |
| 14,659 | |
| 55 |
| 13 | |
| 46,217 | |
| 369 | |
|
| 11 | | | 88,790 | | | 303 |
| 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 |
| 17 | |
| 176,890 | |
| 782 |
| 55 | |
| 165,636 | |
| 599 | |
Unrealized loss for twelve months or longer |
| 5 | |
| 14,659 | |
| 55 |
| 16 | |
| 60,387 | |
| 427 | |
|
| 22 | | $ | 191,549 | | $ | 837 |
| 71 | | $ | 226,023 | | $ | 1,026 | |
| | | | | | | | | | | | | | | | | |
| | September 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 |
| 9 | |
| 2,993 | |
| 14 |
| 38 | |
| 15,996 | |
| 124 | |
Unrealized loss for twelve months or longer |
| — | |
| — | |
| — |
| 4 | |
| 1,099 | |
| 31 | |
|
| 9 | |
| 2,993 | |
| 14 |
| 42 | |
| 17,095 | |
| 155 | |
Total held to maturity: | | | | | | | | | | | | | | | | | |
Unrealized loss for less than twelve months |
| 9 | |
| 2,993 | |
| 14 |
| 52 | |
| 94,175 | |
| 1,102 | |
Unrealized loss for twelve months or longer |
| — | |
| — | |
| — |
| 12 | |
| 60,659 | |
| 648 | |
|
| 9 | | $ | 2,993 | | $ | 14 |
| 64 | | $ | 154,834 | | $ | 1,750 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 |
| ||||||||||||
|
| Number of |
|
|
|
| Unrealized |
| Number of |
|
|
|
| Unrealized |
| ||
|
| Securities |
| Fair Value |
| Losses |
| Securities |
| Fair Value |
| Losses |
| ||||
Available for Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss for less than twelve months |
| 6 |
| $ | 17,354 |
| $ | 37 |
| 7 |
| $ | 21,694 |
| $ | 44 |
|
Unrealized loss for twelve months or longer |
| 1 |
|
| 399 |
|
| 2 |
| — |
|
| — |
|
| — |
|
|
| 7 |
|
| 17,753 |
|
| 39 |
| 7 |
|
| 21,694 |
|
| 44 |
|
U.S. government agencies: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss for less than twelve months |
| 10 |
|
| 77,870 |
|
| 133 |
| 1 |
|
| 14,908 |
|
| 67 |
|
Unrealized loss for twelve months or longer |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
|
| 10 |
|
| 77,870 |
|
| 133 |
| 1 |
|
| 14,908 |
|
| 67 |
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss for less than twelve months |
| 9 |
|
| 76,966 |
|
| 557 |
| 12 |
|
| 109,398 |
|
| 2,941 |
|
Unrealized loss for twelve months or longer |
| 8 |
|
| 67,899 |
|
| 1,747 |
| — |
|
| — |
|
| — |
|
|
| 17 |
|
| 144,865 |
|
| 2,304 |
| 12 |
|
| 109,398 |
|
| 2,941 |
|
Commercial mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss for less than twelve months |
| 1 |
|
| 5,076 |
|
| 24 |
| 2 |
|
| 7,127 |
|
| 58 |
|
Unrealized loss for twelve months or longer |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
|
| 1 |
|
| 5,076 |
|
| 24 |
| 2 |
|
| 7,127 |
|
| 58 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss for less than twelve months |
| 13 |
|
| 96,857 |
|
| 440 |
| 11 |
|
| 91,144 |
|
| 2,340 |
|
Unrealized loss for twelve months or longer |
| 14 |
|
| 60,719 |
|
| 2,216 |
| 8 |
|
| 19,320 |
|
| 866 |
|
|
| 27 |
|
| 157,576 |
|
| 2,656 |
| 19 |
|
| 110,464 |
|
| 3,206 |
|
Corporate debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss for less than twelve months |
| 1 |
|
| 1,996 |
|
| 2 |
| 3 |
|
| 5,899 |
|
| 91 |
|
Unrealized loss for twelve months or longer |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
|
| 1 |
|
| 1,996 |
|
| 2 |
| 3 |
|
| 5,899 |
|
| 91 |
|
States and political subdivisions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss for less than twelve months |
| 11 |
|
| 5,714 |
|
| 20 |
| 32 |
|
| 17,549 |
|
| 322 |
|
Unrealized loss for twelve months or longer |
| 8 |
|
| 2,374 |
|
| 19 |
| 1 |
|
| 450 |
|
| 14 |
|
|
| 19 |
|
| 8,088 |
|
| 39 |
| 33 |
|
| 17,999 |
|
| 336 |
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss for less than twelve months |
| 1 |
|
| 181 |
|
| — |
| — |
|
| — |
|
| — |
|
Unrealized loss for twelve months or longer |
| 2 |
|
| 6,900 |
|
| 5 |
| 2 |
|
| 11,107 |
|
| 343 |
|
|
| 3 |
|
| 7,081 |
|
| 5 |
| 2 |
|
| 11,107 |
|
| 343 |
|
Total available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss for less than twelve months |
| 52 |
|
| 282,014 |
|
| 1,213 |
| 68 |
|
| 267,719 |
|
| 5,863 |
|
Unrealized loss for twelve months or longer |
| 33 |
|
| 138,291 |
|
| 3,989 |
| 11 |
|
| 30,877 |
|
| 1,223 |
|
|
| 85 |
| $ | 420,305 |
| $ | 5,202 |
| 79 |
| $ | 298,596 |
| $ | 7,086 |
|
25
18
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 |
| ||||||||||||
|
| 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 |
| — |
| $ | — |
| $ | — |
| 4 |
| $ | 33,225 |
| $ | 1,287 |
|
Unrealized loss for twelve months or longer |
| 3 |
|
| 32,124 |
|
| 891 |
| — |
|
| — |
|
| — |
|
|
| 3 |
|
| 32,124 |
|
| 891 |
| 4 |
|
| 33,225 |
|
| 1,287 |
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss for less than twelve months |
| — |
|
| — |
|
| — |
| 2 |
|
| 13,178 |
|
| 6 |
|
Unrealized loss for twelve months or longer |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
|
| — |
|
| — |
|
| — |
| 2 |
|
| 13,178 |
|
| 6 |
|
Commercial mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss for less than twelve months |
| 3 |
|
| 13,805 |
|
| 130 |
| 5 |
|
| 18,891 |
|
| 588 |
|
Unrealized loss for twelve months or longer |
| 2 |
|
| 12,823 |
|
| 380 |
| 1 |
|
| 1,401 |
|
| 5 |
|
|
| 5 |
|
| 26,628 |
|
| 510 |
| 6 |
|
| 20,292 |
|
| 593 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss for less than twelve months |
| 12 |
|
| 100,054 |
|
| 1,066 |
| 19 |
|
| 187,669 |
|
| 3,372 |
|
Unrealized loss for twelve months or longer |
| 5 |
|
| 57,570 |
|
| 1,484 |
| — |
|
| — |
|
| — |
|
|
| 17 |
|
| 157,624 |
|
| 2,550 |
| 19 |
|
| 187,669 |
|
| 3,372 |
|
States and political subdivisions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss for less than twelve months |
| 36 |
|
| 17,311 |
|
| 188 |
| 71 |
|
| 29,862 |
|
| 1,790 |
|
Unrealized loss for twelve months or longer |
| 40 |
|
| 15,723 |
|
| 841 |
| 1 |
|
| 462 |
|
| 8 |
|
|
| 76 |
|
| 33,034 |
|
| 1,029 |
| 72 |
|
| 30,324 |
|
| 1,798 |
|
Total held to maturity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss for less than twelve months |
| 51 |
|
| 131,170 |
|
| 1,384 |
| 101 |
|
| 282,825 |
|
| 7,043 |
|
Unrealized loss for twelve months or longer |
| 50 |
|
| 118,240 |
|
| 3,596 |
| 2 |
|
| 1,863 |
|
| 13 |
|
|
| 101 |
| $ | 249,410 |
| $ | 4,980 |
| 103 |
| $ | 284,688 |
| $ | 7,056 |
|
During the three and nine months ended September 30, 2017 and 2016, the Company did not record any other-than-temporary impairments (“OTTI”). While some of the securities held in the Company’s investment portfolio have decreased in value since the date of acquisition, the severity of loss and the duration of the loss position are not significant enough to warrant recording any OTTI of the securities. Factors considered in the Company’s analysis include the reasons for the unrealized loss position, the severity and duration of the unrealized loss position, credit worthiness, and forecasted performance of the investee. The Company does not intend to sell, nor does the Company believe that it is likely that the Company will be required to sell, these securities before the recovery of the cost basis.
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 available for sale equity securities, at September 30, 20172020 are shown by contractual maturity below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Available for Sale |
| Held to Maturity |
| |||||||||||||||||||||
|
| Amortized |
|
|
|
| Amortized |
|
|
|
| |||||||||||||||
|
| Cost |
| Fair Value |
| Cost |
| Fair Value |
| |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | Available for Sale | | Held to Maturity | | |||||||||||||||||||||
|
| Amortized |
| | |
| Amortized |
| | |
| |||||||||||||||
| | Cost | | Fair Value |
| Cost | | Fair Value |
| |||||||||||||||||
Due in one year or less |
| $ | 108,593 |
| $ | 108,958 |
| $ | 4,947 |
| $ | 4,954 |
| | $ | 4,994 | | $ | 5,097 | | $ | 651 | | $ | 654 | |
Due after one year through five years |
|
| 86,378 |
|
| 88,189 |
|
| 2,850 |
|
| 2,884 |
| |
| 55,385 | |
| 56,825 | |
| 1,215 | |
| 1,274 | |
Due after five years through ten years |
|
| 40,798 |
|
| 42,418 |
|
| 26,721 |
|
| 26,253 |
| |
| 19,117 | |
| 19,915 | |
| 8,208 | |
| 8,504 | |
Due after ten years |
|
| 25,710 |
|
| 26,702 |
|
| 61,001 |
|
| 59,825 |
| |
| 17,303 | |
| 18,641 | |
| 60,578 | |
| 62,527 | |
|
|
| 261,479 |
|
| 266,267 |
|
| 95,519 |
|
| 93,916 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| |
| 96,799 | |
| 100,478 | |
| 70,652 | |
| 72,959 | | |||||||||||||
| | | | | | | | | | | | | | |||||||||||||
Residential mortgage-backed securities |
|
| 247,272 |
|
| 245,908 |
|
| 16,973 |
|
| 17,171 |
| |
| 579,725 | |
| 596,993 | |
| 14,659 | |
| 15,449 | |
Collateralized mortgage obligations |
|
| 222,187 |
|
| 219,734 |
|
| 183,926 |
|
| 181,528 |
| |
| 540,326 | |
| 548,477 | |
| 84,670 | |
| 86,958 | |
Commercial mortgage-backed securities |
|
| 12,590 |
|
| 12,650 |
|
| 71,613 |
|
| 71,507 |
| |
| 63,570 | |
| 64,292 | |
| 153,318 | |
| 163,563 | |
|
| $ | 743,528 |
| $ | 744,559 |
| $ | 368,031 |
| $ | 364,122 |
| |||||||||||||
| | $ | 1,280,420 | | $ | 1,310,240 | | $ | 323,299 | | $ | 338,929 | |
The Company realizedrecognized net gains of $5.8$86.2 million and $6.0$4.4 million from its trading securities portfolio during the three months ended September 30, 20172020 and 2016,2019, respectively and net gains from its trading securities portfolio of $18.7$106.7 million and $17.5$15.1 million during the nine months ended September 30, 20172020 and 2016,2019, respectively. In addition, the
19
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Hilltop Broker-Dealers realized a net gains from trading activities primarily associated with the structured finance businessloss of $21.8$14.4 million and $33.7$43.3 million during the three months ended September 30, 20172020 and 2016,2019, respectively, and $38.8$27.8 million and $63.0$99.0 million during the nine months ended September 30, 20172020 and 2016, respectively.2019, respectively, from structured product trading activities. The Company had nominal other realized gains on securities during the three months ended September 30, 2020 and other realized gains on securities was $0.2 million during the nine months ended September 30, 2020, while other realized losses on securities were $2.6 million during the three and nine months ended September 30, 2019. All such realized net gains and losses are recorded as a component of other noninterest income within the consolidated statements of operations.
Securities with a carrying amount of $600.6$541.3 million and $695.1$576.0 million (with a fair value of $597.1$562.9 million and $688.1$583.6 million, respectively) at September 30, 20172020 and December 31, 2016,2019, 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 ourthe available for sale and held to maturity securities portfolios at September 30, 20172020 and December 31, 2016.2019.
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 agencies,enterprises, and conditionally guaranteed by the full faith and credit of the United States.
AtAllowance 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. NaN of the available for sale debt securities held were past due at September 30, 2017 and December 31, 2016, NLC had investments on deposit in custody for various state insurance departments with aggregate carrying values2020. In addition, as of $9.3 million and $9.2 million, respectively.
5. Non-Covered Loans and Allowance for Non-Covered Loan Losses
Non-covered loans refer to loans not covered by the FDIC loss-share agreements. Covered loans are discussed in Note 6 to the consolidated financial statements. Non-covered loans summarized by portfolio segment are as follows (in thousands).
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
Commercial and industrial |
| $ | 1,735,468 |
| $ | 1,696,453 |
|
Real estate |
|
| 2,944,155 |
|
| 2,816,767 |
|
Construction and land development |
|
| 941,628 |
|
| 786,850 |
|
Consumer |
|
| 41,958 |
|
| 41,352 |
|
Broker-dealer (1) |
|
| 485,604 |
|
| 502,077 |
|
|
|
| 6,148,813 |
|
| 5,843,499 |
|
Allowance for non-covered loan losses |
|
| (58,779) |
|
| (54,186) |
|
Total non-covered loans, net of allowance |
| $ | 6,090,034 |
| $ | 5,789,313 |
|
|
|
In connection with the Bank Transactions,September 30, 2020, the Company acquired non-covered loans both withhad evaluated its held to maturity debt securities, considering the current credit ratings and without evidencerecognized losses, and determined the potential credit loss to be minimal. With respect to these securities, the Company considered the risk of credit quality deterioration since origination. The following table presentsloss to be negligible, and therefore, no allowance was recognized on the carrying values and the outstanding balances of non-covered PCI loans (in thousands).debt securities portfolio at September 30, 2020.
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
Carrying amount |
| $ | 37,937 |
| $ | 51,432 |
|
Outstanding balance |
|
| 52,096 |
|
| 67,988 |
|
20
26
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
6. Loans Held for Investment
Changes in the accretable yield
Loans held for non-covered PCI loans wereinvestment summarized by portfolio segment are as follows (in thousands).
| | | | | | | |
| | September 30, | | December 31, | | ||
|
| 2020 |
| 2019 | | ||
Commercial real estate | | $ | 3,073,038 | | $ | 3,000,523 | |
Commercial and industrial (1) | |
| 2,848,289 | |
| 2,025,720 | |
Construction and land development | |
| 841,385 | |
| 940,564 | |
1-4 family residential | | | 643,833 | |
| 791,020 | |
Consumer | | | 36,720 | |
| 47,046 | |
Broker-dealer (2) | | | 502,295 | |
| 576,527 | |
| |
| 7,945,560 | |
| 7,381,400 | |
Allowance for credit losses | |
| (155,214) | |
| (61,136) | |
Total loans held for investment, net of allowance | | $ | 7,790,346 | | $ | 7,320,264 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Balance, beginning of period |
| $ | 9,793 |
| $ | 15,229 |
| $ | 13,116 |
| $ | 17,744 |
|
Reclassifications from nonaccretable difference, net(1) |
|
| 277 |
|
| 708 |
|
| 854 |
|
| 4,655 |
|
Disposals of loans |
|
| (603) |
|
| — |
|
| (664) |
|
| — |
|
Accretion |
|
| (1,851) |
|
| (1,884) |
|
| (5,690) |
|
| (8,346) |
|
Balance, end of period |
| $ | 7,616 |
| $ | 14,053 |
| $ | 7,616 |
| $ | 14,053 |
|
(1) |
|
(2) | Primarily represents margin loans to customers and correspondents associated with broker-dealer segment operations. |
The remaining nonaccretable difference for non-covered PCI loans was $20.2 million and $22.8 million at September 30, 2017 and December 31, 2016, respectively.
Impaired loans exhibit a clear indication that the borrower’s cash flow may not be sufficient to meet contractual principal and interest payments, which generally occurs when a loan is 90 days past due unless the asset is both well secured and in the process of collection. Non-covered impaired loans include non-accrual loans, troubled debt restructurings (“TDRs”), PCI loans and partially charged-off loans. The amounts shown in the following tables include loans accounted for on an individual basis, as well as acquired Pooled Loans. For Pooled Loans, the recorded investment with allowance and the related allowance consider impairment measured at the pool level. Non-covered impaired loans, segregated between those considered to be PCI loans and those without credit impairment at acquisition, are summarized by class in the following tables (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unpaid |
| Recorded |
| Recorded |
| Total |
|
|
|
| ||||
|
| Contractual |
| Investment with |
| Investment with |
| Recorded |
| Related |
| |||||
September 30, 2017 |
| Principal Balance |
| No Allowance |
| Allowance |
| Investment |
| Allowance |
| |||||
PCI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
| $ | 19,390 |
| $ | 3,556 |
| $ | 2,676 |
| $ | 6,232 |
| $ | 111 |
|
Unsecured |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by commercial properties |
|
| 28,362 |
|
| 6,548 |
|
| 13,388 |
|
| 19,936 |
|
| 1,422 |
|
Secured by residential properties |
|
| 12,964 |
|
| 7,703 |
|
| 2,315 |
|
| 10,018 |
|
| 284 |
|
Construction and land development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction loans |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Commercial construction loans and land development |
|
| 3,462 |
|
| 477 |
|
| 1,111 |
|
| 1,588 |
|
| 237 |
|
Consumer |
|
| 2,588 |
|
| 19 |
|
| 144 |
|
| 163 |
|
| 44 |
|
Broker-dealer |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
|
|
| 66,766 |
|
| 18,303 |
|
| 19,634 |
|
| 37,937 |
|
| 2,098 |
|
Non-PCI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
|
| 21,218 |
|
| 17,844 |
|
| — |
|
| 17,844 |
|
| — |
|
Unsecured |
|
| 745 |
|
| 708 |
|
| — |
|
| 708 |
|
| — |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by commercial properties |
|
| 15,402 |
|
| 11,380 |
|
| 3,386 |
|
| 14,766 |
|
| 846 |
|
Secured by residential properties |
|
| 1,536 |
|
| 1,151 |
|
| — |
|
| 1,151 |
|
| — |
|
Construction and land development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction loans |
|
| 15 |
|
| — |
|
| — |
|
| — |
|
| — |
|
Commercial construction loans and land development |
|
| 659 |
|
| — |
|
| 626 |
|
| 626 |
|
| 112 |
|
Consumer |
|
| 167 |
|
| 63 |
|
| — |
|
| 63 |
|
| — |
|
Broker-dealer |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
|
|
| 39,742 |
|
| 31,146 |
|
| 4,012 |
|
| 35,158 |
|
| 958 |
|
|
| $ | 106,508 |
| $ | 49,449 |
| $ | 23,646 |
| $ | 73,095 |
| $ | 3,056 |
|
21
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unpaid |
| Recorded |
| Recorded |
| Total |
|
|
|
| ||||
|
| Contractual |
| Investment with |
| Investment with |
| Recorded |
| Related |
| |||||
December 31, 2016 |
| Principal Balance |
| No Allowance |
| Allowance |
| Investment |
| Allowance |
| |||||
PCI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
| $ | 25,354 |
| $ | 3,234 |
| $ | 5,438 |
| $ | 8,672 |
| $ | 557 |
|
Unsecured |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by commercial properties |
|
| 38,005 |
|
| 11,097 |
|
| 17,413 |
|
| 28,510 |
|
| 1,907 |
|
Secured by residential properties |
|
| 13,606 |
|
| 7,401 |
|
| 3,088 |
|
| 10,489 |
|
| 200 |
|
Construction and land development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction loans |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Commercial construction loans and land development |
|
| 5,780 |
|
| 1,391 |
|
| 2,076 |
|
| 3,467 |
|
| 377 |
|
Consumer |
|
| 3,223 |
|
| 237 |
|
| 57 |
|
| 294 |
|
| 56 |
|
Broker-dealer |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
|
|
| 85,968 |
|
| 23,360 |
|
| 28,072 |
|
| 51,432 |
|
| 3,097 |
|
Non-PCI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
|
| 6,311 |
|
| 3,313 |
|
| 1,372 |
|
| 4,685 |
|
| 115 |
|
Unsecured |
|
| 946 |
|
| 925 |
|
| — |
|
| 925 |
|
| — |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by commercial properties |
|
| 10,134 |
|
| 10,000 |
|
| — |
|
| 10,000 |
|
| — |
|
Secured by residential properties |
|
| 1,344 |
|
| 1,116 |
|
| — |
|
| 1,116 |
|
| — |
|
Construction and land development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction loans |
|
| 28 |
|
| 28 |
|
| — |
|
| 28 |
|
| — |
|
Commercial construction loans and land development |
|
| 738 |
|
| 48 |
|
| 679 |
|
| 727 |
|
| 167 |
|
Consumer |
|
| 246 |
|
| 244 |
|
| — |
|
| 244 |
|
| — |
|
Broker-dealer |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
|
|
| 19,747 |
|
| 15,674 |
|
| 2,051 |
|
| 17,725 |
|
| 282 |
|
|
| $ | 105,715 |
| $ | 39,034 |
| $ | 30,123 |
| $ | 69,157 |
| $ | 3,379 |
|
Average recorded investment in non-covered impaired loans is summarized by class in the following table (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Commercial and industrial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
| $ | 20,452 |
| $ | 25,338 |
| $ | 18,717 |
| $ | 25,903 |
|
Unsecured |
|
| 713 |
|
| 38 |
|
| 817 |
|
| 38 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by commercial properties |
|
| 35,458 |
|
| 34,491 |
|
| 36,606 |
|
| 37,329 |
|
Secured by residential properties |
|
| 11,412 |
|
| 11,746 |
|
| 11,387 |
|
| 12,179 |
|
Construction and land development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction loans |
|
| — |
|
| — |
|
| 14 |
|
| 111 |
|
Commercial construction loans and land development |
|
| 2,590 |
|
| 4,161 |
|
| 3,204 |
|
| 4,692 |
|
Consumer |
|
| 324 |
|
| 412 |
|
| 382 |
|
| 583 |
|
Broker-dealer |
|
| — |
|
| — |
|
| — |
|
| — |
|
|
| $ | 70,949 |
| $ | 76,186 |
| $ | 71,127 |
| $ | 80,835 |
|
22
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Non-coveredprovides details associated with non-accrual loans, excluding those classified as held for sale are summarized by class (in the following table (in thousands).
| | | | | | | | | | | | | | | | | | |
| | Non-accrual Loans | | | | | | | ||||||||||
| | September 30, 2020 | | | | | Interest Income Recognized (1) | |||||||||||
| | With | | With No | | | | | December 31, | | Three Months Ended | | Nine Months Ended | |||||
|
| Allowance |
| Allowance |
| Total | | 2019 | | September 30, 2020 | | September 30, 2020 | ||||||
Commercial real estate: | | | | | | | | | | | | | | | | | | |
Non-owner occupied | | $ | 1,049 | | $ | 1,598 | | $ | 2,647 | | $ | 3,813 | | $ | 99 | | $ | 88 |
Owner occupied | |
| 2,155 | | | 9,277 | | | 11,432 | | | 3,495 | | | 156 | | | 241 |
Commercial and industrial | | | 23,006 | | | 15,702 | | | 38,708 | | | 15,262 | | | 312 | | | 714 |
Construction and land development | |
| 105 | | | 423 | | | 528 | | | 1,316 | | | 36 | | | 89 |
1-4 family residential | |
| 6,205 | | | 14,394 | | | 20,599 | | | 7,382 | | | 134 | | | 1,299 |
Consumer | |
| 53 | | | — | | | 53 | | | 26 | | | 2 | | | (1) |
Broker-dealer | |
| — | | | — | | | — | | | — | | | — | | | — |
| | $ | 32,573 | | $ | 41,394 | | $ | 73,967 | | $ | 31,294 | | $ | 739 | | $ | 2,430 |
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
Commercial and industrial: |
|
|
|
|
|
|
|
Secured |
| $ | 20,726 |
| $ | 8,590 |
|
Unsecured |
|
| 708 |
|
| 925 |
|
Real estate: |
|
|
|
|
|
|
|
Secured by commercial properties |
|
| 14,766 |
|
| 11,034 |
|
Secured by residential properties |
|
| 1,608 |
|
| 1,197 |
|
Construction and land development: |
|
|
|
|
|
|
|
Residential construction loans |
|
| — |
|
| 28 |
|
Commercial construction loans and land development |
|
| 626 |
|
| 727 |
|
Consumer |
|
| 63 |
|
| 244 |
|
Broker-dealer |
|
| — |
|
| — |
|
|
| $ | 38,497 |
| $ | 22,745 |
|
(1) | Interest income recognized on non-accrual loans during the three and nine months ended September 30, 2019 was $0.3 million and $1.1 million, respectively. |
At September 30, 20172020 and December 31, 2016, non-covered non-accrual loans included non-covered PCI loans of $3.32019, an additional $8.1 million and $5.0$4.8 million, respectively, for which discount accretion has been suspended because the extent and timing of cash flows from these non-covered PCI loans can no longer be reasonably estimated. In addition to the non-covered non-accrual loans in the table above, $1.6 million and $1.7 million 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 September 30, 2020, primarily due to the addition of 2 commercial and industrial relationships totaling $19.3 million, commercial real estate loans totaling $12.7 million and various 1-4 family residential loans. The increase in commercial real estate loans in non-accrual status at September 30, 2017 and2020 of $6.8 million was primarily related to the addition of 24 loans totaling $12.7 million, with a reserve of $1.4 million, that were previously accruing at December 31, 2016, respectively.
Interest income, including recoveries2019. 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 cash payments, recorded on non-covered impairedindustrial loans in non-accrual status since December 31, 2019 was nominal during the three months endedprimarily due to 2 relationships that included 6 loans totaling $19.3 million and had a $4.2 million reserve at September 30, 20172020 and $0.1a CECL transition gross-up adjustment of $4.6 million during the three months endedrelated to a loan with an amortized cost of $6.8 million and a reserve of $5.2 million at September 30, 2016. Interest income, including recoveries and cash payments, recorded on non-covered impaired2020. The increase in 1-4 family residential loans was $0.3 million during both the nine months endedin non-accrual status at September 30, 20172020, compared to December 31, 2019, was primarily related to the classification of $4.0 million of loans as non-accrual, that were previously classified as accruing.
27
Hilltop Holdings Inc. and 2016, respectively. Except as noted above, non-covered PCISubsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The Company considers non-accrual loans are considered to be performing duecollateral-dependent unless there are underlying mitigating circumstances. The practical expedient to measure the applicationallowance using the fair value of the accretion method.collateral has been implemented.
The Bank classifies loan modifications as TDRstroubled 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 two2 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. 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. The Bank’s actions included approval of $968.1 million in COVID-19 related loan modifications as of June 30, 2020. During the third quarter of 2020, the Bank continued to support its impacted banking clients through the approval of COVID-19 related loan modifications, which resulted in an additional $57.7 million of new COVID-19 related loan modifications since June 30, 2020. The portfolio of active deferrals that have not reached the end of their deferral period was $291.4 million as of September 30, 2020, of which approximately $208 million had received an additional deferral. COVID-19 related loan modifications of approximately $662 million have returned to agreed-upon contractual terms and had made at least one required principal and/or interest payment since the end of their initial deferral period. Such loans represent elevated risk, 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-accrual status during future periods is uncertain and will depend on future developments that cannot be predicted.
23There were 0 TDRs granted during the three months ended September 30, 2020, as compared to 2 commercial and industrial TDRs granted during the comparable period in 2019, with a balance of $1.6 million at date of extension and at September 30, 2019. Information regarding TDRs granted during the nine months ended September 30, 2020 and 2019, is shown in the following table (dollars in thousands).
| | | | | | | | | | | | | | | | | |
| | | Nine Months Ended September 30, 2020 | | Nine Months Ended September 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 | | 5 | |
| 9,632 | |
| 9,113 |
Construction and land development | | | — | |
| — | |
| — | | — | |
| — | |
| — |
1-4 family residential | | | — | |
| — | |
| — | | — | |
| — | |
| — |
Consumer | | | — | |
| — | |
| — | | — | |
| — | |
| — |
Broker-dealer | | | — | |
| — | |
| — | | — | |
| — | |
| — |
| | | 2 |
| $ | 7,839 |
| $ | 3,166 |
| 5 |
| $ | 9,632 |
| $ | 9,113 |
The Bank had nominal unadvanced commitments to borrowers whose loans had been restructured in TDRs at September 30, 2020 and at December 31, 2019. There were 0 TDRs granted during the twelve months preceding September 30, 2020 and September 30, 2019, for which a payment was at least 30 days past due.
28
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
There were no TDRs granted during the three months ended September 30, 2017 and 2016, respectively. Information regarding TDRs granted during the nine months ended September 30, 2017 and 2016, respectively, is shown in the following table (dollars in thousands). At September 30, 2017 and December 31, 2016, the Bank had nominal unadvanced commitments to borrowers whose loans have been restructured in TDRs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, 2017 |
| Nine Months Ended September 30, 2016 | ||||||||||||
|
|
| Number of |
| Balance at |
| Balance at |
| Number of |
| Balance at |
| Balance at | ||||
|
|
| Loans |
| Extension |
| End of Period |
| Loans |
| Extension |
| End of Period | ||||
Commercial and industrial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
|
| 1 |
| $ | 1,357 |
| $ | 1,235 |
| 1 |
| $ | 1,196 |
| $ | 944 |
Unsecured |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by commercial properties |
|
| 1 |
|
| 1,481 |
|
| 1,385 |
| — |
|
| — |
|
| — |
Secured by residential properties |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
Construction and land development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction loans |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
Commercial construction loans and land development |
|
| 1 |
|
| 655 |
|
| 626 |
| — |
|
| — |
|
| — |
Consumer |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
Broker-dealer |
|
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
|
| 3 |
| $ | 3,493 |
| $ | 3,246 |
| 1 |
| $ | 1,196 |
| $ | 944 |
All of the non-covered loan modifications included in the table above involved payment term extensions. The Bank did not grant principal reductions on any restructured non-covered loans during the nine months ended September 30, 2017 and 2016.
The following table presents information regarding TDRs granted during the twelve months preceding September 30, 2017 and 2016, respectively, for which a payment was at least 30 days past due (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Twelve Months Preceding September 30, 2017 |
| Twelve Months Preceding September 30, 2016 |
|
| ||||||||||||
|
| Number of |
| Balance at |
| Balance at |
| Number of |
| Balance at |
| Balance at |
|
| ||||
|
| Loans |
| Extension |
| End of Period |
| Loans |
| Extension |
| End of Period |
|
| ||||
Commercial and industrial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
| — |
| $ | — |
| $ | — |
| 1 |
| $ | 1,196 |
| $ | 944 |
|
|
Unsecured |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by commercial properties |
| 1 |
|
| 1,481 |
|
| 1,385 |
| — |
|
| — |
|
| — |
|
|
Secured by residential properties |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
|
Construction and land development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction loans |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
|
Commercial construction loans and land development |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
|
Consumer |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
|
Broker-dealer |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
|
|
| 1 |
| $ | 1,481 |
| $ | 1,385 |
| 1 |
| $ | 1,196 |
| $ | 944 |
|
|
24
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
An analysis of the aging of the Bank’s non-coveredCompany’s loan portfolio is shown in the following tables (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accruing Loans |
| |
|
| Loans Past Due |
| Loans Past Due |
| Loans Past Due |
| Total |
| Current |
| PCI |
| Total |
| Past Due |
| ||||||||
September 30, 2017 |
| 30-59 Days |
| 60-89 Days |
| 90 Days or More |
| Past Due Loans |
| Loans |
| Loans |
| Loans |
| 90 Days or More |
| ||||||||
Commercial and industrial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
| $ | 9,180 |
| $ | 348 |
| $ | 5,441 |
| $ | 14,969 |
| $ | 1,587,935 |
| $ | 6,232 |
| $ | 1,609,136 |
| $ | 125 |
|
Unsecured |
|
| 1,843 |
|
| 11 |
|
| — |
|
| 1,854 |
|
| 124,478 |
|
| — |
|
| 126,332 |
|
| — |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by commercial properties |
|
| 13,017 |
|
| — |
|
| 5,361 |
|
| 18,378 |
|
| 2,151,678 |
|
| 19,936 |
|
| 2,189,992 |
|
| — |
|
Secured by residential properties |
|
| 1,168 |
|
| 582 |
|
| 541 |
|
| 2,291 |
|
| 741,854 |
|
| 10,018 |
|
| 754,163 |
|
| — |
|
Construction and land development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction loans |
|
| 232 |
|
| 945 |
|
| — |
|
| 1,177 |
|
| 172,302 |
|
| — |
|
| 173,479 |
|
| — |
|
Commercial construction loans and land development |
|
| 510 |
|
| — |
|
| — |
|
| 510 |
|
| 766,051 |
|
| 1,588 |
|
| 768,149 |
|
| — |
|
Consumer |
|
| 58 |
|
| 107 |
|
| 28 |
|
| 193 |
|
| 41,602 |
|
| 163 |
|
| 41,958 |
|
| — |
|
Broker-dealer |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 485,604 |
|
| — |
|
| 485,604 |
|
| — |
|
|
| $ | 26,008 |
| $ | 1,993 |
| $ | 11,371 |
| $ | 39,372 |
| $ | 6,071,504 |
| $ | 37,937 |
| $ | 6,148,813 |
| $ | 125 |
|
| | | | | | | | | | | | | | | | | | | | | | |
|
| | |
| | |
| | |
| | |
| | |
| | |
| Accruing Loans |
| |
| | Loans Past Due | | Loans Past Due | | Loans Past Due | | Total | | Current | | Total | | Past Due |
| |||||||
September 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 | | $ | 2,389 | | $ | 2,876 | | $ | 200 | | $ | 5,465 | | $ | 1,749,896 | | $ | 1,755,361 | | $ | — | |
Owner occupied | |
| 3,227 | |
| 2,272 | | | 6,267 | |
| 11,766 | |
| 1,305,911 | | | 1,317,677 | | | — | |
Commercial and industrial | | | 1,953 | |
| 3,271 | | | 19,337 | |
| 24,561 | |
| 2,823,728 | | | 2,848,289 | | | 2 | |
Construction and land development | |
| 2 | |
| — | | | — | |
| 2 | |
| 841,383 | | | 841,385 | | | — | |
1-4 family residential | |
| 3,600 | |
| 3,404 | | | 15,150 | |
| 22,154 | |
| 621,679 | | | 643,833 | | | — | |
Consumer | |
| 12 | |
| 251 | | | 52 | |
| 315 | |
| 36,405 | | | 36,720 | | | — | |
Broker-dealer | |
| — | |
| — | | | — | |
| — | |
| 502,295 | | | 502,295 | | | — | |
| | $ | 11,183 | | $ | 12,074 | | $ | 41,006 | | $ | 64,263 | | $ | 7,881,297 | | $ | 7,945,560 | | $ | 2 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accruing Loans |
| |
|
| Loans Past Due |
| Loans Past Due |
| Loans Past Due |
| Total |
| Current |
| PCI |
| Total |
| Past Due |
| ||||||||
December 31, 2016 |
| 30-59 Days |
| 60-89 Days |
| 90 Days or More |
| Past Due Loans |
| Loans |
| Loans |
| Loans |
| 90 Days or More |
| ||||||||
Commercial and industrial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
| $ | 4,727 |
| $ | 704 |
| $ | 6,770 |
| $ | 12,201 |
| $ | 1,576,239 |
| $ | 8,672 |
| $ | 1,597,112 |
| $ | 3,095 |
|
Unsecured |
|
| 596 |
|
| 1 |
|
| 909 |
|
| 1,506 |
|
| 97,835 |
|
| — |
|
| 99,341 |
|
| 1 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by commercial properties |
|
| 550 |
|
| 9,417 |
|
| 1,492 |
|
| 11,459 |
|
| 1,915,126 |
|
| 28,510 |
|
| 1,955,095 |
|
| — |
|
Secured by residential properties |
|
| 506 |
|
| 361 |
|
| 369 |
|
| 1,236 |
|
| 849,947 |
|
| 10,489 |
|
| 861,672 |
|
| — |
|
Construction and land development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction loans |
|
| — |
|
| 28 |
|
| — |
|
| 28 |
|
| 128,624 |
|
| — |
|
| 128,652 |
|
| — |
|
Commercial construction loans and land development |
|
| 2,500 |
|
| 1,784 |
|
| 48 |
|
| 4,332 |
|
| 650,399 |
|
| 3,467 |
|
| 658,198 |
|
| — |
|
Consumer |
|
| 176 |
|
| 31 |
|
| — |
|
| 207 |
|
| 40,851 |
|
| 294 |
|
| 41,352 |
|
| — |
|
Broker-dealer |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 502,077 |
|
| — |
|
| 502,077 |
|
| — |
|
|
| $ | 9,055 |
| $ | 12,326 |
| $ | 9,588 |
| $ | 30,969 |
| $ | 5,761,098 |
| $ | 51,432 |
| $ | 5,843,499 |
| $ | 3,096 |
|
| | | | | | | | | | | | | | | | | | | | | | |
|
| | |
| | |
| | |
| | |
| | |
| | |
| Accruing Loans |
| |
| | 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 |
| |||||||
Commercial real estate: | | | | | | | | | | | | | | | | | | | | | | |
Non-owner occupied | | $ | 4,062 | | $ | — | | $ | 2,790 | | $ | 6,852 | | $ | 1,702,500 | | $ | 1,709,352 | | $ | — | |
Owner occupied | |
| 1,813 | | | 880 | | | 3,265 | |
| 5,958 | |
| 1,285,213 | | | 1,291,171 | | | — | |
Commercial and industrial | | | 5,967 | | | 1,735 | | | 3,395 | |
| 11,097 | |
| 2,014,623 | | | 2,025,720 | | | 3 | |
Construction and land development | |
| 7,580 | | | 1,827 | | | — | |
| 9,407 | |
| 931,157 | | | 940,564 | | | — | |
1-4 family residential | |
| 12,058 | | | 3,442 | | | 6,520 | |
| 22,020 | |
| 769,000 | | | 791,020 | | | — | |
Consumer | |
| 455 | | | 34 | | | — | |
| 489 | |
| 46,557 | | | 47,046 | | | — | |
Broker-dealer | |
| — | | | — | | | — | |
| — | |
| 576,527 | | | 576,527 | | | — | |
| | $ | 31,935 | | $ | 7,918 | | $ | 15,970 | | $ | 55,823 | | $ | 7,325,577 | | $ | 7,381,400 | | $ | 3 | |
In addition to the non-covered loans shown in the tables above, $45.0PrimeLending had $187.1 million and $44.4$102.7 million of loans included in loans held for sale (with an aggregate unpaid principal balance of $45.6$188.5 million and $44.9$104.0 million, respectively) that were 90 days past due and accruing interest at September 30, 20172020 and December 31, 2016,2019, respectively. These loans are guaranteed by U.S. government agencies and include loans that are subject to repurchase, or have been repurchased, by PrimeLending.
Management tracks credit quality trends on a quarterly basis related to: (i) past due levels, (ii) non-performing asset levels, (iii) classified loan levels (iv) net charge-offs, and (v)(iv) general economic conditions in state and local markets.
The Bank utilizesCompany defines classified loans as loans with a risk grading matrix to assign a risk grade to eachrating of the loans in its portfolio. A risk rating is assigned based on an assessment of the borrower’s management, collateral position, financial capacity, and economic factors. The general characteristics of the various risk grades are described below.substandard, doubtful or loss.
Pass – “Pass” loans present a range of acceptable risks to the Bank. Loans that would be considered virtually risk-free are rated Pass – low risk. Loans that exhibit sound standards based on the grading factors above and present a reasonable risk to the Bank are rated Pass – normal risk. Loans that exhibit a minor weakness in one or more of the grading criteria but still present an acceptable risk to the Bank are rated Pass – high risk.
25
29
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Special Mention – “Special Mention” loans have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in a deteriorationA description of the repayment prospectsrisk rating internal grades for thecommercial loans and weaken the Bank’s credit position at some future date. Special Mention loans are not adversely classified and do not expose the Bank to sufficient risk to require adverse classification.
Substandard – “Substandard” loans are inadequately protected by the current sound worth and paying capacity of the obligor or the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Many substandard loans are considered impaired.
PCI – “PCI” loans exhibited evidence of credit deterioration at acquisition that made it probable that all contractually required principal payments would not be collected.
The following tables present the internal risk grades of non-covered loans, as previously described,is presented in the portfolio by class (in thousands).following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017 |
| Pass |
| Special Mention |
| Substandard |
| PCI |
| Total |
| |||||
Commercial and industrial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
| $ | 1,532,920 |
| $ | 19,964 |
| $ | 50,020 |
| $ | 6,232 |
| $ | 1,609,136 |
|
Unsecured |
|
| 124,113 |
|
| 996 |
|
| 1,223 |
|
| — |
|
| 126,332 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by commercial properties |
|
| 2,125,077 |
|
| 4,808 |
|
| 40,171 |
|
| 19,936 |
|
| 2,189,992 |
|
Secured by residential properties |
|
| 737,712 |
|
| 3,263 |
|
| 3,170 |
|
| 10,018 |
|
| 754,163 |
|
Construction and land development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction loans |
|
| 173,479 |
|
| — |
|
| — |
|
| — |
|
| 173,479 |
|
Commercial construction loans and land development |
|
| 763,142 |
|
| 2,652 |
|
| 767 |
|
| 1,588 |
|
| 768,149 |
|
Consumer |
|
| 41,700 |
|
| — |
|
| 95 |
|
| 163 |
|
| 41,958 |
|
Broker-dealer |
|
| 485,604 |
|
| — |
|
| — |
|
| — |
|
| 485,604 |
|
|
| $ | 5,983,747 |
| $ | 31,683 |
| $ | 95,446 |
| $ | 37,937 |
| $ | 6,148,813 |
|
| | |
Risk Rating | Internal Grade | Risk Rating Description |
Pass low risk | 1 - 3 | Represents loans to very high credit quality commercial borrowers of investment or near investment grade. These borrowers have significant capital strength, moderate leverage, stable earnings and growth, and readily available financing alternatives. Commercial borrowers entirely cash secured are also included in this category. |
Pass normal risk | 4 - 7 | Represents loans to commercial borrowers of solid credit quality with moderate risk. Borrowers in these grades are differentiated from higher grades on the basis of size (capital and/or revenue), leverage, asset quality and the stability of the industry or market area. |
Pass high risk | 8 - 10 | Represents "pass grade" loans to commercial borrowers of higher, but acceptable credit quality and risk. Such borrowers are differentiated from Pass Normal Risk in terms of size, secondary sources of repayment or they are of lesser stature in other key credit metrics. |
Watch | 11 | Represents loans on management's "watch list" and is intended to be utilized on a temporary basis for pass grade commercial borrowers where a significant risk-modifying action is anticipated in the near term. |
Special mention | 12 | Represents loans with potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in a deterioration of the repayment prospects for the loans and weaken the Company's credit position at some future date. |
Substandard accrual | 13 | Represents loans for which the accrual of interest has not been stopped, but are inadequately protected by the current sound worth and paying capacity of the obligor or the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. |
Substandard non-accrual | 14 | Represents loans for which the accrual of interest has been stopped and includes loans where interest is more than 90 days past due and not fully secured and loans where a specific valuation allowance may be necessary. |
Doubtful | 15 | Represents loans that are placed on non-accrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. |
Loss | 16 | Represents loans that are to be charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. Rating is not intended to imply that the loan or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of debt. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016 |
| Pass |
| Special Mention |
| Substandard |
| PCI |
| Total |
| |||||
Commercial and industrial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
| $ | 1,531,895 |
| $ | 72 |
| $ | 56,473 |
| $ | 8,672 |
| $ | 1,597,112 |
|
Unsecured |
|
| 97,646 |
|
| — |
|
| 1,695 |
|
| — |
|
| 99,341 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by commercial properties |
|
| 1,888,231 |
|
| 3,693 |
|
| 34,661 |
|
| 28,510 |
|
| 1,955,095 |
|
Secured by residential properties |
|
| 846,420 |
|
| — |
|
| 4,763 |
|
| 10,489 |
|
| 861,672 |
|
Construction and land development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction loans |
|
| 128,624 |
|
| — |
|
| 28 |
|
| — |
|
| 128,652 |
|
Commercial construction loans and land development |
|
| 653,808 |
|
| — |
|
| 923 |
|
| 3,467 |
|
| 658,198 |
|
Consumer |
|
| 40,789 |
|
| 6 |
|
| 263 |
|
| 294 |
|
| 41,352 |
|
Broker-dealer |
|
| 502,077 |
|
| — |
|
| — |
|
| — |
|
| 502,077 |
|
|
| $ | 5,689,490 |
| $ | 3,771 |
| $ | 98,806 |
| $ | 51,432 |
| $ | 5,843,499 |
|
Allowance for Loan Losses
The allowance for both originated and acquired loans is subject to regulatory examinations, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance. The Company’s analysis of the level of the allowance for loan losses to ensure that it is appropriate for the estimated credit losses in the portfolio consistent with the Interagency Policy Statement on the Allowance for Loan and Lease Losses and the Receivables and
26
30
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Contingencies TopicsThe following table presents loans held for investment grouped by asset class and credit quality indicator, segregated by year of the ASC is described in detail in Note 5 to the consolidated financial statements included in the Company’s 2016 Form 10-K.
During 2016, the Bank discovered irregularities with respect to a non-covered loan that is currently in default. As a result, the Bank increased its provision for loan losses and recorded a $24.5 million charge-off during the second quarter of 2016, representing the entire outstanding principal balance of the loan. During the second quarter of 2017, the Bank recorded other noninterest income of $15.0 million from coverage provided by an insurance policy for forgery.
Changes in the allowance for non-covered loan losses, distributed by portfolio segment, are shown beloworigination or renewal (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost Basis by Origination Year | | | | | | | ||||||||||||||||
| | | | | | | | | | | | | | | | | | 2015 and | | | | | | |
September 30, 2020 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | | Prior | | Revolving | | Total | |||||||
Commercial real estate: non-owner occupied | | | | | | | | | | | | | | | | | | | | | | | | |
Internal Grade 1-3 (Pass low risk) | | $ | 13,190 | | $ | 33,533 | | $ | 3,044 | | $ | 2,300 | | $ | 13,184 | | $ | 15,748 | | $ | 401 | | $ | 81,400 |
Internal Grade 4-7 (Pass normal risk) | | | 211,586 | | | 138,426 | | | 118,655 | | | 102,274 | | | 124,166 | | | 91,656 | | | 32,904 | | | 819,667 |
Internal Grade 8-11 (Pass high risk and watch) | | | 127,747 | | | 160,637 | | | 118,055 | | | 91,650 | | | 124,628 | | | 62,187 | | | 483 | | | 685,387 |
Internal Grade 12 (Special mention) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
Internal Grade 13 (Substandard accrual) | | | 30,756 | | | 16,328 | | | 27,592 | | | 29,928 | | | 30,808 | | | 30,848 | | | — | | | 166,260 |
Internal Grade 14 (Substandard non-accrual) | | | — | | | — | | | — | | | — | | | — | | | 2,647 | | | — | | | 2,647 |
Commercial real estate: owner occupied | | | | | | | | | | | | | | | | | | | | | | | | |
Internal Grade 1-3 (Pass low risk) | | $ | 46,605 | | $ | 32,541 | | $ | 10,711 | | $ | 42,978 | | $ | 24,894 | | $ | 39,509 | | $ | 1 | | $ | 197,239 |
Internal Grade 4-7 (Pass normal risk) | | | 136,710 | | | 161,028 | | | 148,623 | | | 64,900 | | | 54,981 | | | 94,698 | | | 30,820 | | | 691,760 |
Internal Grade 8-11 (Pass high risk and watch) | | | 95,828 | | | 76,806 | | | 47,453 | | | 26,881 | | | 29,485 | | | 31,409 | | | 927 | | | 308,789 |
Internal Grade 12 (Special mention) | | | 370 | | | — | | | 2,316 | | | — | | | — | | | 538 | | | — | | | 3,224 |
Internal Grade 13 (Substandard accrual) | | | 7,573 | | | 3,588 | | | 69,465 | | | 7,717 | | | 6,732 | | | 10,158 | | | — | | | 105,233 |
Internal Grade 14 (Substandard non-accrual) | | | 508 | | | 2,248 | | | 517 | | | 5,361 | | | 1,888 | | | 910 | | | — | | | 11,432 |
Commercial and industrial | | | | | | | | | | | | | | | | | | | | | | | | |
Internal Grade 1-3 (Pass low risk) | | $ | 32,808 | | $ | 16,361 | | $ | 5,850 | | $ | 12,387 | | $ | 4,315 | | $ | 87 | | $ | 16,874 | | $ | 88,682 |
Internal Grade 4-7 (Pass normal risk) | | | 135,087 | | | 76,615 | | | 63,222 | | | 26,560 | | | 15,081 | | | 13,306 | | | 330,928 | | | 660,799 |
Internal Grade 8-11 (Pass high risk and watch) | | | 76,601 | | | 68,298 | | | 29,181 | | | 15,989 | | | 30,392 | | | 2,548 | | | 197,296 | | | 420,305 |
Internal Grade 12 (Special mention) | | | 802 | | | 16 | | | 4,126 | | | — | | | 267 | | | — | | | 2,323 | | | 7,534 |
Internal Grade 13 (Substandard accrual) | | | 25,592 | | | 4,553 | | | 12,663 | | | 6,327 | | | 7,546 | | | 358 | | | 21,994 | | | 79,033 |
Internal Grade 14 (Substandard non-accrual) | | | 23,736 | | | 6,906 | | | 1,850 | | | 350 | | | 920 | | | 3,538 | | | 1,408 | | | 38,708 |
Construction and land development | | | | | | | | | | | | | | | | | | | | | | | | |
Internal Grade 1-3 (Pass low risk) | | $ | 16,747 | | $ | 1,979 | | $ | 22,828 | | $ | 272 | | $ | 1,088 | | $ | 290 | | $ | 2,027 | | $ | 45,231 |
Internal Grade 4-7 (Pass normal risk) | | | 147,952 | | | 127,287 | | | 66,772 | | | 22,092 | | | 6,100 | | | 3,918 | | | 36,221 | | | 410,342 |
Internal Grade 8-11 (Pass high risk and watch) | | | 165,359 | | | 107,915 | | | 45,176 | | | 25,883 | | | 3,656 | | | 929 | | | 3,635 | | | 352,553 |
Internal Grade 12 (Special mention) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
Internal Grade 13 (Substandard accrual) | | | 3,088 | | | 2,396 | | | — | | | 5,385 | | | — | | | 74 | | | — | | | 10,943 |
Internal Grade 14 (Substandard non-accrual) | | | — | | | 423 | | | — | | | — | | | — | | | 105 | | | — | | | 528 |
Construction and land development - individuals | | | | | | | | | | | | | | | | | | | | | | | | |
FICO less than 620 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
FICO between 620 and 720 | | | 2,142 | | | 82 | | | 1,460 | | | — | | | — | | | — | | | — | | | 3,684 |
FICO greater than 720 | | | 11,426 | | | 279 | | | 5,975 | | | — | | | — | | | — | | | — | | | 17,680 |
Substandard non-accrual | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
Other (1) | | | 424 | | | — | | | — | | | — | | | — | | | — | | | — | | | 424 |
1-4 family residential | | | | | | | | | | | | | | | | | | | | | | | | |
FICO less than 620 | | $ | 991 | | $ | 851 | | $ | 3,679 | | $ | 57 | | $ | 931 | | $ | 34,503 | | $ | 532 | | $ | 41,544 |
FICO between 620 and 720 | | | 15,184 | | | 20,358 | | | 10,077 | | | 8,858 | | | 12,689 | | | 40,560 | | | 1,317 | | | 109,043 |
FICO greater than 720 | | | 83,373 | | | 97,176 | | | 80,949 | | | 44,821 | | | 37,037 | | | 77,530 | | | 4,810 | | | 425,696 |
Substandard non-accrual | | | — | | | — | | | — | | | 97 | | | 723 | | | 19,779 | | | — | | | 20,599 |
Other (1) | | | 9,080 | | | 17,001 | | | 8,491 | | | 1,924 | | | 1,103 | | | 8,879 | | | 473 | | | 46,951 |
Consumer | | | | | | | | | | | | | | | | | | | | | | | | |
FICO less than 620 | | $ | 736 | | $ | 1,382 | | $ | 121 | | $ | 143 | | $ | 48 | | $ | 86 | | $ | 333 | | $ | 2,849 |
FICO between 620 and 720 | | | 3,879 | | | 3,044 | | | 663 | | | 718 | | | 141 | | | 94 | | | 2,166 | | | 10,705 |
FICO greater than 720 | | | 5,334 | | | 2,729 | | | 3,235 | | | 349 | | | 87 | | | 44 | | | 4,511 | | | 16,289 |
Substandard non-accrual | | | — | | | — | | | — | | | 31 | | | — | | | 22 | | | — | | | 53 |
Other (1) | | | 4,582 | | | 1,686 | | | 271 | | | 51 | | | 37 | | | — | | | 197 | | | 6,824 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total loans with credit quality measures | | $ | 1,435,796 | | $ | 1,182,472 | | $ | 913,020 | | $ | 546,283 | | $ | 532,927 | | $ | 586,958 | | $ | 692,581 | | $ | 5,890,037 |
Commercial and industrial (mortgage warehouse lending) | | | | | | | | | | | | | | | | | | | | | | | $ | 882,503 |
Commercial and industrial (Paycheck Protection Program loans) | | | | | | | | | | | | | | | | | | | | | | | $ | 670,725 |
Broker-Dealer (margin loans and correspondent receivables) | | | | | | | | | | | | | | | | | | | | | | | $ | 502,295 |
Total loans held for investment | | | | | | | | | | | | | | | | | | | | | | | $ | 7,945,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial and |
|
|
|
| Construction and |
|
|
|
|
|
|
|
|
|
| ||
Three Months Ended September 30, 2017 |
| Industrial |
| Real Estate |
| Land Development |
| Consumer |
| Broker-Dealer |
| Total |
| ||||||
Balance, beginning of period |
| $ | 21,834 |
| $ | 28,734 |
| $ | 7,645 |
| $ | 524 |
| $ | 471 |
| $ | 59,208 |
|
Provision charged to (recapture from) operations |
|
| 2,165 |
|
| (1,278) |
|
| 144 |
|
| (147) |
|
| (405) |
|
| 479 |
|
Loans charged off |
|
| (1,264) |
|
| (5) |
|
| (3) |
|
| (33) |
|
| — |
|
| (1,305) |
|
Recoveries on charged off loans |
|
| 280 |
|
| 88 |
|
| 4 |
|
| 25 |
|
| — |
|
| 397 |
|
Balance, end of period |
| $ | 23,015 |
| $ | 27,539 |
| $ | 7,790 |
| $ | 369 |
| $ | 66 |
| $ | 58,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial and |
|
|
|
| Construction and |
|
|
|
|
|
|
|
|
|
| ||
Nine Months Ended September 30, 2017 |
| Industrial |
| Real Estate |
| Land Development |
| Consumer |
| Broker-Dealer |
| Total |
| ||||||
Balance, beginning of period |
| $ | 21,369 |
| $ | 25,236 |
| $ | 7,002 |
| $ | 424 |
| $ | 155 |
| $ | 54,186 |
|
Provision charged to (recapture from) operations |
|
| 3,376 |
|
| 2,424 |
|
| 796 |
|
| 74 |
|
| (89) |
|
| 6,581 |
|
Loans charged off |
|
| (3,070) |
|
| (305) |
|
| (13) |
|
| (194) |
|
| — |
|
| (3,582) |
|
Recoveries on charged off loans |
|
| 1,340 |
|
| 184 |
|
| 5 |
|
| 65 |
|
| — |
|
| 1,594 |
|
Balance, end of period |
| $ | 23,015 |
| $ | 27,539 |
| $ | 7,790 |
| $ | 369 |
| $ | 66 |
| $ | 58,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial and |
|
|
|
| Construction and |
|
|
|
|
|
|
|
|
|
| ||
Three Months Ended September 30, 2016 |
| Industrial |
| Real Estate |
| Land Development |
| Consumer |
| Broker-Dealer |
| Total |
| ||||||
Balance, beginning of period |
| $ | 20,720 |
| $ | 23,302 |
| $ | 6,288 |
| $ | 325 |
| $ | 378 |
| $ | 51,013 |
|
Provision charged to (recapture from) operations |
|
| 3,973 |
|
| (116) |
|
| 823 |
|
| 228 |
|
| (189) |
|
| 4,719 |
|
Loans charged off |
|
| (3,550) |
|
| (1) |
|
| — |
|
| (67) |
|
| — |
|
| (3,618) |
|
Recoveries on charged off loans |
|
| 295 |
|
| 196 |
|
| — |
|
| 20 |
|
| — |
|
| 511 |
|
Balance, end of period |
| $ | 21,438 |
| $ | 23,381 |
| $ | 7,111 |
| $ | 506 |
| $ | 189 |
| $ | 52,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial and |
|
|
|
| Construction and |
|
|
|
|
|
|
|
|
|
| ||
Nine Months Ended September 30, 2016 |
| Industrial |
| Real Estate |
| Land Development |
| Consumer |
| Broker-Dealer |
| Total |
| ||||||
Balance, beginning of period |
| $ | 19,845 |
| $ | 18,983 |
| $ | 6,064 |
| $ | 314 |
| $ | 209 |
| $ | 45,415 |
|
Provision charged to (recapture from) operations |
|
| 30,494 |
|
| 5,333 |
|
| 1,047 |
|
| 243 |
|
| (19) |
|
| 37,098 |
|
Loans charged off |
|
| (30,333) |
|
| (1,299) |
|
| — |
|
| (155) |
|
| (1) |
|
| (31,788) |
|
Recoveries on charged off loans |
|
| 1,432 |
|
| 364 |
|
| — |
|
| 104 |
|
| — |
|
| 1,900 |
|
Balance, end of period |
| $ | 21,438 |
| $ | 23,381 |
| $ | 7,111 |
| $ | 506 |
| $ | 189 |
| $ | 52,625 |
|
(1) Loans classified in this category were assigned a FICO score based on various factors specific to the borrower for credit modeling purposes.
The non-covered loan portfolio was distributed by portfolio segment and impairment methodology as shown below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial and |
|
|
|
| Construction and |
|
|
|
|
|
|
|
|
|
| ||
September 30, 2017 |
| Industrial |
| Real Estate |
| Land Development |
| Consumer |
| Broker-Dealer |
| Total |
| ||||||
Loans individually evaluated for impairment |
| $ | 17,311 |
| $ | 13,722 |
| $ | 626 |
| $ | — |
| $ | — |
| $ | 31,659 |
|
Loans collectively evaluated for impairment |
|
| 1,711,925 |
|
| 2,900,479 |
|
| 939,414 |
|
| 41,795 |
|
| 485,604 |
|
| 6,079,217 |
|
PCI Loans |
|
| 6,232 |
|
| 29,954 |
|
| 1,588 |
|
| 163 |
|
| — |
|
| 37,937 |
|
|
| $ | 1,735,468 |
| $ | 2,944,155 |
| $ | 941,628 |
| $ | 41,958 |
| $ | 485,604 |
| $ | 6,148,813 |
|
27
31
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial and |
|
|
|
| Construction and |
|
|
|
|
|
|
|
|
|
| ||
December 31, 2016 |
| Industrial |
| Real Estate |
| Land Development |
| Consumer |
| Broker-Dealer |
| Total |
| ||||||
Loans individually evaluated for impairment |
| $ | 4,508 |
| $ | 9,704 |
| $ | 727 |
| $ | 205 |
| $ | — |
| $ | 15,144 |
|
Loans collectively evaluated for impairment |
|
| 1,683,273 |
|
| 2,768,064 |
|
| 782,656 |
|
| 40,853 |
|
| 502,077 |
|
| 5,776,923 |
|
PCI Loans |
|
| 8,672 |
|
| 38,999 |
|
| 3,467 |
|
| 294 |
|
| — |
|
| 51,432 |
|
|
| $ | 1,696,453 |
| $ | 2,816,767 |
| $ | 786,850 |
| $ | 41,352 |
| $ | 502,077 |
| $ | 5,843,499 |
|
Allowance for Credit Losses for Loans Held for Investment
The allowance for non-covered loancredit losses was distributed by portfolio segment and impairment methodology as shown below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial and |
|
|
|
| Construction and |
|
|
|
|
|
|
|
|
|
| ||
September 30, 2017 |
| Industrial |
| Real Estate |
| Land Development |
| Consumer |
| Broker-Dealer |
| Total |
| ||||||
Loans individually evaluated for impairment |
| $ | — |
| $ | 846 |
| $ | 112 |
| $ | — |
| $ | — |
| $ | 958 |
|
Loans collectively evaluated for impairment |
|
| 22,904 |
|
| 24,987 |
|
| 7,441 |
|
| 325 |
|
| 66 |
|
| 55,723 |
|
PCI Loans |
|
| 111 |
|
| 1,706 |
|
| 237 |
|
| 44 |
|
| — |
|
| 2,098 |
|
|
| $ | 23,015 |
| $ | 27,539 |
| $ | 7,790 |
| $ | 369 |
| $ | 66 |
| $ | 58,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial and |
|
|
|
| Construction and |
|
|
|
|
|
|
|
|
|
| ||
December 31, 2016 |
| Industrial |
| Real Estate |
| Land Development |
| Consumer |
| Broker-Dealer |
| Total |
| ||||||
Loans individually evaluated for impairment |
| $ | 115 |
| $ | — |
| $ | 167 |
| $ | — |
| $ | — |
| $ | 282 |
|
Loans collectively evaluated for impairment |
|
| 20,697 |
|
| 23,129 |
|
| 6,458 |
|
| 368 |
|
| 155 |
|
| 50,807 |
|
PCI Loans |
|
| 557 |
|
| 2,107 |
|
| 377 |
|
| 56 |
|
| — |
|
| 3,097 |
|
|
| $ | 21,369 |
| $ | 25,236 |
| $ | 7,002 |
| $ | 424 |
| $ | 155 |
| $ | 54,186 |
|
6. Covered Assets and Indemnification Asset
The Bank acquired certain assets and assumed certain liabilitiesfor loans held for investment represents management’s best estimate of FNB in connection with an FDIC-assisted transaction on September 13, 2013 (the “Bank Closing Date”). As part of the Purchase and Assumption Agreement by and among the FDIC (as receiver of FNB), the Bank and the FDIC (the “P&A Agreement”), the Bank and the FDIC entered into loss-share agreements covering future losses incurred on certain acquired loans and OREO. The Company refers to acquired commercial and single family residential loan portfolios and OREO that are subject to the loss-share agreements as “covered loans” and “covered OREO”, respectively, and these assets are presented as separate line items in the Company’s consolidated balance sheets. Collectively, covered loans and covered OREO are referred to as “covered assets”. Pursuant to the loss-share agreements, the FDIC has agreed to reimburse the Bank the following amounts with respect to the covered assets: (i) 80% of net losses on the first $240.4 million of net losses incurred; (ii) 0% of net losses in excess of $240.4 million up to and including $365.7 million of net losses incurred; and (iii) 80% of net losses in excess of $365.7 million of net losses incurred. Net losses are defined as book value losses plus certain defined expenses incurred in the resolution of assets, less subsequent recoveries. Under the loss-share agreement for commercial assets, the amount of subsequent recoveries that are reimbursable to the FDIC for a particular asset is limited to book value losses and expenses actually billed plus any book value charge-offs incurred prior to the Bank Closing Date. There is no limit on the amount of subsequent recoveries reimbursable to the FDIC under the loss-share agreement for single family residential assets. The loss-share agreements for commercial and single family residential assets are in effect for five years and ten years, respectively, from the Bank Closing Date, and the loss recovery provisions to the FDIC are in effect for eight years and ten years, respectively, from the Bank Closing Date. The asset arising from the loss-share agreements, referred to as the “FDIC Indemnification Asset,” is measured separately from the covered loan portfolio because the agreements are not contractually embedded in the covered loans and are not transferable should the Bank choose to dispose of the covered loans.
In accordance with the loss-share agreements, the Bank may be required to make a “true-up” payment to the FDIC approximately ten years following the Bank Closing Date if its actual net realizedall expected credit losses over the expected contractual life of our existing portfolio. Management revised its methodology for determining the loss-share agreements are less thanallowance for credit losses upon the FDIC’s initialimplementation of CECL. 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 September 30, 2020. While the Company believes it has an appropriate allowance for the existing loan portfolio at September 30, 2020, additional provision for losses on covered assets. The “true-up” payment is calculated using a defined formula set forthexisting loans may be necessary in the P&A Agreement. Atfuture. 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). 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.
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 September 30, 2017,2020, the BankCompany utilized a single macroeconomic baseline scenario published by a third party in September 2020 that was updated to reflect the U.S. economic outlook due to COVID-19 conditions. This baseline scenario utilizes multiple economic variables in forecasting the economic outlook. 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 recordedresulted in a related “true-up” payment accrualweak labor market and weak overall economic conditions that will affect borrowers across our lending portfolios and significant judgment is required to estimate the severity and duration of $16.1 million based on the current estimateeconomic 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 aggregate realizedthe economic downturn are rapidly changing and remain highly uncertain as the resurgence of COVID-19 cases evolves 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 nine months ended September 30, 2020 was primarily attributable to changes within the Bank. During 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 months ended September 30, 2020, the allowance included a net reversal of credit losses on covered assets overindividually evaluated loans of $1.2 million, while the lifeprovision for credit losses on expected losses of collectively evaluated loans accounted for $0.6 million of the loss-share agreements.
28
total provision primarily due to the identified changes in the Bank’s loan portfolio composition and credit quality being offset by improvements in macroeconomic factor assumptions and qualitative factors from the prior quarter. The change in the allowance during the three months ended September 30, 2020 was also impacted by net charge-offs of $0.6 million. During the nine months ended September 30, 2020, the significant build in the allowance included provision for credit losses on individually evaluated loans of $22.6 million, while the provision for credit losses on expected losses of collectively evaluated loans accounted for $77.2 million of the total provision 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.
32
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Covered Loans and Allowance for Covered Loan Losses
Loans acquiredThe changes in the FNB Transaction that are subjectallowance for credit losses during the noted periods were also attributable to a loss-share agreement are referredother factors including, but not limited to, as “covered loans”loan growth and reported separatelyloan mix. The change in the consolidated balance sheets. Coveredallowance during the nine months ended September 30, 2020 was also impacted by net charge-offs of $18.5 million, primarily associated with loans are reported exclusivespecifically reserved for during the first quarter of the cash flow reimbursements that may be received from the FDIC.2020.
The Bank’s portfolio of acquired covered loans had a fair value of $1.1 billion as of the Bank Closing Date, with no carryover of any allowance for loan losses. Acquired covered loans were preliminarily segregated between those considered to be PCI loans and those without credit impairment at acquisition.
In connection with the FNB Transaction, the Bank acquired loans both with and without evidence of credit quality deterioration since origination. The Company’s accounting policies for acquired covered loans, including covered PCI loans, are consistent with the accounting policies for acquired non-covered loans, as described in Note 5 to the consolidated financial statements. The Company has established under its PCI accounting policy a framework to aggregate certain acquired covered loans into various loan pools based on a minimum of two layers of common risk characteristics for the purpose of determining their respective fair values as of their acquisition dates, and for applying the subsequent recognition and measurement provisions for income accretion and impairment testing.
The following table presents the carrying value of the covered loans summarized by portfolio segment (in thousands).
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
Commercial and industrial |
| $ | 1,242 |
| $ | 2,697 |
|
Real estate |
|
| 186,777 |
|
| 244,469 |
|
Construction and land development |
|
| 2,391 |
|
| 8,961 |
|
|
|
| 190,410 |
|
| 256,127 |
|
Allowance for covered loans |
|
| (2,141) |
|
| (413) |
|
Total covered loans, net of allowance |
| $ | 188,269 |
| $ | 255,714 |
|
The following table presents the carrying value and the outstanding contractual balance of covered PCI loans (in thousands).
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
Carrying amount |
| $ | 90,583 |
| $ | 133,754 |
|
Outstanding balance |
|
| 190,352 |
|
| 266,098 |
|
Changes in the accretable yieldallowance for covered PCIcredit losses for loans were as followsheld for investment, distributed by portfolio segment, are shown below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Balance, beginning of period |
| $ | 128,307 |
| $ | 157,604 |
| $ | 143,731 |
| $ | 176,719 |
|
Reclassifications from nonaccretable difference, net(1) |
|
| 4,096 |
|
| 6,954 |
|
| 27,120 |
|
| 25,397 |
|
Transfer of loans to covered OREO(2) |
|
| (77) |
|
| (250) |
|
| (857) |
|
| (421) |
|
Accretion |
|
| (10,040) |
|
| (17,460) |
|
| (47,708) |
|
| (54,847) |
|
Balance, end of period |
| $ | 122,286 |
| $ | 146,848 |
| $ | 122,286 |
| $ | 146,848 |
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | |
|
| Balance, |
| Transition |
| Provision for |
| |
| Recoveries on |
| Balance, | | ||||||
| | Beginning of | | Adjustment | | (Reversal of) | | Loans | | Charged Off | | End of | | ||||||
Three Months Ended September 30, 2020 | | Period | | CECL | | Credit Losses | | Charged Off | | Loans | | Period | | ||||||
Commercial real estate | | $ | 106,551 | | $ | — | | $ | (2,527) | | $ | (29) | | $ | 571 | | $ | 104,566 | |
Commercial and industrial | |
| 31,863 | |
| — | |
| 7,274 | |
| (1,341) | |
| 382 | |
| 38,178 | |
Construction and land development | |
| 8,393 | |
| — | |
| (2,123) | |
| — | |
| — | |
| 6,270 | |
1-4 family residential | |
| 7,399 | |
| — | |
| (2,213) | |
| (144) | |
| 10 | |
| 5,052 | |
Consumer | | | 1,429 | | | — | | | (411) | | | (100) | | | 84 | | | 1,002 | |
Broker-dealer | | | 748 | | | — | | | (602) | | | — | | | — | | | 146 | |
Total | | $ | 156,383 | | $ | — | | $ | (602) | | $ | (1,614) | | $ | 1,047 | | $ | 155,214 | |
| | | | | | | | | | | | | | | | | | | |
|
| Balance, |
| Transition |
| Provision for |
| |
| Recoveries on |
| Balance, |
| ||||||
| | Beginning of | | Adjustment | | (Reversal of) | | Loans | | Charged Off | | End of | | ||||||
Nine Months Ended September 30, 2020 | | Period | | CECL | | Credit Losses | | Charged Off | | Loans | | Period | | ||||||
Commercial real estate | | $ | 31,595 | | $ | 8,073 | | $ | 68,823 | | $ | (4,517) | | $ | 592 | | $ | 104,566 | |
Commercial and industrial | |
| 17,964 | |
| 3,193 | |
| 30,896 | |
| (15,325) | |
| 1,450 | |
| 38,178 | |
Construction and land development | |
| 4,878 | |
| 577 | |
| 815 | |
| (2) | |
| 2 | |
| 6,270 | |
1-4 family residential | |
| 6,386 | |
| (29) | |
| (813) | |
| (517) | |
| 25 | |
| 5,052 | |
Consumer | | | 265 | | | 748 | | | 154 | | | (473) | | | 308 | | | 1,002 | |
Broker-dealer | | | 48 | | | — | | | 98 | | | — | | | — | | | 146 | |
Total | | $ | 61,136 | | $ | 12,562 | | $ | 99,973 | | $ | (20,834) | | $ | 2,377 | | $ | 155,214 | |
| | | | | | | | | | | | | | | | | | | |
|
| Balance, |
| Transition |
| Provision for |
| |
| Recoveries on |
| Balance, |
| ||||||
| | Beginning of | | Adjustment | | (Reversal of) | | Loans | | Charged Off | | End of | | ||||||
Three Months Ended September 30, 2019 | | Period | | CECL | | Credit Losses | | Charged Off | | Loans | | Period | | ||||||
Commercial real estate | | $ | 25,114 | | $ | — | | $ | 757 | | $ | (9) | | $ | — | | $ | 25,862 | |
Commercial and industrial | |
| 20,414 | |
| — | |
| (1,625) | |
| (1,000) | |
| 1,393 | |
| 19,182 | |
Construction and land development | |
| 4,396 | |
| — | |
| 392 | |
| — | |
| — | |
| 4,788 | |
1-4 family residential | |
| 4,924 | |
| — | |
| 485 | |
| (12) | |
| 14 | |
| 5,411 | |
Consumer | | | 283 | | | — | | | (9) | | | (12) | | | 6 | | | 268 | |
Broker-dealer | | | 46 | | | — | | | 47 | | | — | | | — | | | 93 | |
Total | | $ | 55,177 | | $ | — | | $ | 47 | | $ | (1,033) | | $ | 1,413 | | $ | 55,604 | |
29
| | | | | | | | | | | | | | | | | | | |
|
| Balance, |
| Transition |
| Provision for |
| |
| Recoveries on |
| Balance, |
| ||||||
| | Beginning of | | Adjustment | | (Reversal of) | | Loans | | Charged Off | | End of | | ||||||
Nine Months Ended September 30, 2019 | | Period | | CECL | | Credit Losses | | Charged Off | | Loans | | Period | | ||||||
Commercial real estate | | $ | 27,100 | | $ | — | | $ | (1,229) | | $ | (9) | | $ | — | | $ | 25,862 | |
Commercial and industrial | |
| 21,980 | |
| — | |
| 87 | |
| (5,247) | |
| 2,362 | |
| 19,182 | |
Construction and land development | |
| 6,061 | |
| — | |
| (1,273) | |
| — | |
| — | |
| 4,788 | |
1-4 family residential | |
| 3,956 | |
| — | |
| 2,321 | |
| (911) | |
| 45 | |
| 5,411 | |
Consumer | | | 267 | | | — | | | 449 | | | (476) | | | 28 | | | 268 | |
Broker-dealer | | | 122 | | | — | | | (29) | | | — | | | — | | | 93 | |
Total | | $ | 59,486 | | $ | — | | $ | 326 | | $ | (6,643) | | $ | 2,435 | | $ | 55,604 | |
33
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The remaining nonaccretable difference for covered PCI loans was $53.1 million and $94.5 million at September 30, 2017 and December 31, 2016, respectively. During the three and nine months ended September 30, 2017 and 2016, a combination of factors affecting the inputs to the Bank’s quarterly recast process led to the reclassifications from nonaccretable difference to accretable yield. These transfers resulted from revised cash flows that reflect better-than-expected performance of the covered PCI loan portfolio as a result of the Bank’s strategic decision to dedicate resources to the liquidation of covered loans during the noted periods.
Covered impaired loans include non-accrual loans, TDRs, PCI loans and partially charged-off loans. The amounts shown in the following tables include Pooled Loans, as well as loans accounted for on an individual basis. For Pooled Loans, the recorded investment with allowance and the related allowance consider impairment measured at the pool level.
Covered impaired loans, segregated between those considered to be PCI loans and those without credit impairment at acquisition, are summarized by class in the following tables (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unpaid |
| Recorded |
| Recorded |
| Total |
|
|
|
| ||||
|
| Contractual |
| Investment with |
| Investment with |
| Recorded |
| Related |
| |||||
September 30, 2017 |
| Principal Balance |
| No Allowance |
| Allowance |
| Investment |
| Allowance |
| |||||
PCI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
| $ | 4,010 |
| $ | — |
| $ | 240 |
| $ | 240 |
| $ | 46 |
|
Unsecured |
|
| 6,324 |
|
| — |
|
| 41 |
|
| 41 |
|
| 29 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by commercial properties |
|
| 90,640 |
|
| 1,484 |
|
| 24,214 |
|
| 25,698 |
|
| 1,368 |
|
Secured by residential properties |
|
| 129,275 |
|
| 47,295 |
|
| 17,023 |
|
| 64,318 |
|
| 384 |
|
Construction and land development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction loans |
|
| 694 |
|
| — |
|
| — |
|
| — |
|
| — |
|
Commercial construction loans and land development |
|
| 11,940 |
|
| — |
|
| 286 |
|
| 286 |
|
| 281 |
|
|
|
| 242,883 |
|
| 48,779 |
|
| 41,804 |
|
| 90,583 |
|
| 2,108 |
|
Non-PCI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
|
| 43 |
|
| 44 |
|
| — |
|
| 44 |
|
| — |
|
Unsecured |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by commercial properties |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Secured by residential properties |
|
| 4,695 |
|
| 3,929 |
|
| — |
|
| 3,929 |
|
| — |
|
Construction and land development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction loans |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Commercial construction loans and land development |
|
| 19 |
|
| 13 |
|
| — |
|
| 13 |
|
| — |
|
|
|
| 4,757 |
|
| 3,986 |
|
| — |
|
| 3,986 |
|
| — |
|
|
| $ | 247,640 |
| $ | 52,765 |
| $ | 41,804 |
| $ | 94,569 |
| $ | 2,108 |
|
30
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Unpaid |
| Recorded |
| Recorded |
| Total |
|
|
|
| ||||
|
| Contractual |
| Investment with |
| Investment with |
| Recorded |
| Related |
| |||||
December 31, 2016 |
| Principal Balance |
| No Allowance |
| Allowance |
| Investment |
| Allowance |
| |||||
PCI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
| $ | 10,579 |
| $ | 1,024 |
| $ | 189 |
| $ | 1,213 |
| $ | 13 |
|
Unsecured |
|
| 3,259 |
|
| 299 |
|
| — |
|
| 299 |
|
| — |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by commercial properties |
|
| 143,934 |
|
| 26,415 |
|
| 26,222 |
|
| 52,637 |
|
| 271 |
|
Secured by residential properties |
|
| 148,384 |
|
| 73,240 |
|
| 1,161 |
|
| 74,401 |
|
| 60 |
|
Construction and land development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction loans |
|
| 766 |
|
| — |
|
| — |
|
| — |
|
| — |
|
Commercial construction loans and land development |
|
| 23,522 |
|
| 5,204 |
|
| — |
|
| 5,204 |
|
| — |
|
|
|
| 330,444 |
|
| 106,182 |
|
| 27,572 |
|
| 133,754 |
|
| 344 |
|
Non-PCI |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
|
| 52 |
|
| 52 |
|
| — |
|
| 52 |
|
| — |
|
Unsecured |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by commercial properties |
|
| 396 |
|
| 310 |
|
| — |
|
| 310 |
|
| — |
|
Secured by residential properties |
|
| 4,175 |
|
| 3,537 |
|
| — |
|
| 3,537 |
|
| — |
|
Construction and land development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction loans |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Commercial construction loans and land development |
|
| 24 |
|
| 20 |
|
| — |
|
| 20 |
|
| — |
|
|
|
| 4,647 |
|
| 3,919 |
|
| — |
|
| 3,919 |
|
| — |
|
|
| $ | 335,091 |
| $ | 110,101 |
| $ | 27,572 |
| $ | 137,673 |
| $ | 344 |
|
Average investment in covered impaired loans is summarized by class in the following table (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Commercial and industrial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
| $ | 396 |
| $ | 3,286 |
| $ | 775 |
| $ | 4,299 |
|
Unsecured |
|
| 105 |
|
| 1,331 |
|
| 170 |
|
| 1,511 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by commercial properties |
|
| 28,110 |
|
| 76,693 |
|
| 39,323 |
|
| 82,477 |
|
Secured by residential properties |
|
| 68,843 |
|
| 84,129 |
|
| 73,093 |
|
| 91,424 |
|
Construction and land development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction loans |
|
| — |
|
| — |
|
| — |
|
| 331 |
|
Commercial construction loans and land development |
|
| 1,384 |
|
| 10,568 |
|
| 2,762 |
|
| 15,269 |
|
|
| $ | 98,838 |
| $ | 176,007 |
| $ | 116,123 |
| $ | 195,311 |
|
Covered non-accrual loans are summarized by class in the following table (in thousands).
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
Commercial and industrial: |
|
|
|
|
|
|
|
Secured |
| $ | 44 |
| $ | 52 |
|
Unsecured |
|
| — |
|
| — |
|
Real estate: |
|
|
|
|
|
|
|
Secured by commercial properties |
|
| — |
|
| 730 |
|
Secured by residential properties |
|
| 3,438 |
|
| 3,035 |
|
Construction and land development: |
|
|
|
|
|
|
|
Residential construction loans |
|
| — |
|
| — |
|
Commercial construction loans and land development |
|
| 299 |
|
| 19 |
|
|
| $ | 3,781 |
| $ | 3,836 |
|
31
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
At September 30, 2017 and December 31, 2016, covered non-accrual loans included covered PCI loans of $0.3 million and $0.4 million, respectively, for which discount accretion had been suspended because the extent and timing of cash flows from these covered PCI loans could no longer be reasonably estimated.
Interest income, including recoveries and cash payments, recorded on covered impaired loans was $0.9 million and $1.2 million during the three and nine months ended September 30, 2017, respectively, while interest income recorded on covered impaired loans during the three and nine months ended September 30, 2016 was nominal. Except as noted above, covered PCI loans are considered to be performing due to the application of the accretion method.
The Bank classifies loan modifications of covered loans as TDRs in a manner consistent with that of non-covered loans as discussed in Note 5 to the consolidated financial statements. The Bank did not grant any TDRs during the three and nine months ended September 30, 2017 and 2016. Pooled Loans are not in the scope of the disclosure requirements for TDRs. At September 30, 2017 and December 31, 2016, the Bank had nominal unadvanced commitments to borrowers whose loans have been restructured in TDRs.
The following table presents information regarding TDRs granted during the twelve months preceding September 30, 2017 and 2016, respectively, for which a payment was at least 30 days past due (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Twelve Months Preceding September 30, 2017 |
| Twelve Months Preceding September 30, 2016 |
| ||||||||||||
|
| Number of |
| Balance at |
| Balance at |
| Number of |
| Balance at |
| Balance at |
| ||||
|
| Loans |
| Extension |
| End of Period |
| Loans |
| Extension |
| End of Period |
| ||||
Commercial and industrial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Secured |
| — |
| $ | — |
| $ | — |
| — |
| $ | — |
| $ | — |
|
Unsecured |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by commercial properties |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
Secured by residential properties |
| — |
|
| — |
|
| — |
| 2 |
|
| 204 |
|
| 197 |
|
Construction and land development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction loans |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
Commercial construction loans and land development |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
|
| — |
| $ | — |
| $ | — |
| 2 |
| $ | 204 |
| $ | 197 |
|
An analysis of the aging of the Bank’s covered loan portfolio is shown in the following tables (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accruing Loans |
| |
|
| Loans Past Due |
| Loans Past Due |
| Loans Past Due |
| Total |
| Current |
| PCI |
| Total |
| (Non‑PCI) Past Due |
| ||||||||
September 30, 2017 |
| 30‑59 Days |
| 60‑89 Days |
| 90 Days or More |
| Past Due Loans |
| Loans |
| Loans |
| Loans |
| 90 Days or More |
| ||||||||
Commercial and industrial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
| $ | — |
| $ | — |
| $ | 43 |
| $ | 43 |
| $ | 918 |
| $ | 240 |
| $ | 1,201 |
| $ | — |
|
Unsecured |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 41 |
|
| 41 |
|
| — |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by commercial properties |
|
| 71 |
|
| — |
|
| — |
|
| 71 |
|
| 12,724 |
|
| 25,698 |
|
| 38,493 |
|
| — |
|
Secured by residential properties |
|
| 3,945 |
|
| 2,296 |
|
| 1,440 |
|
| 7,681 |
|
| 76,285 |
|
| 64,318 |
|
| 148,284 |
|
| — |
|
Construction and land development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction loans |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Commercial construction loans and land development |
|
| 8 |
|
| — |
|
| — |
|
| 8 |
|
| 2,097 |
|
| 286 |
|
| 2,391 |
|
| — |
|
|
| $ | 4,024 |
| $ | 2,296 |
| $ | 1,483 |
| $ | 7,803 |
| $ | 92,024 |
| $ | 90,583 |
| $ | 190,410 |
| $ | — |
|
32
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accruing Loans |
| |
|
| Loans Past Due |
| Loans Past Due |
| Loans Past Due |
| Total |
| Current |
| PCI |
| Total |
| (Non‑PCI) Past Due |
| ||||||||
December 31, 2016 |
| 30‑59 Days |
| 60‑89 Days |
| 90 Days or More |
| Past Due Loans |
| Loans |
| Loans |
| Loans |
| 90 Days or More |
| ||||||||
Commercial and industrial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
| $ | — |
| $ | 6 |
| $ | 96 |
| $ | 102 |
| $ | 1,083 |
| $ | 1,213 |
| $ | 2,398 |
| $ | 44 |
|
Unsecured |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 299 |
|
| 299 |
|
| — |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by commercial properties |
|
| 96 |
|
| 229 |
|
| — |
|
| 325 |
|
| 19,132 |
|
| 52,637 |
|
| 72,094 |
|
| — |
|
Secured by residential properties |
|
| 3,511 |
|
| 1,345 |
|
| 1,479 |
|
| 6,335 |
|
| 91,639 |
|
| 74,401 |
|
| 172,375 |
|
| 129 |
|
Construction and land development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction loans |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Commercial construction loans and land development |
|
| 15 |
|
| — |
|
| — |
|
| 15 |
|
| 3,742 |
|
| 5,204 |
|
| 8,961 |
|
| — |
|
|
| $ | 3,622 |
| $ | 1,580 |
| $ | 1,575 |
| $ | 6,777 |
| $ | 115,596 |
| $ | 133,754 |
| $ | 256,127 |
| $ | 173 |
|
The Bank assigns a risk grade to each of its covered loans in a manner consistent with the existing loan review program and risk grading matrix used for non-covered loans, as described in Note 5 to the consolidated financial statements. The following tables present the internal risk grades of covered loans in the portfolio by class (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017 |
| Pass |
| Special Mention |
| Substandard |
| PCI |
| Total |
| |||||
Commercial and industrial: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
| $ | 464 |
| $ | — |
| $ | 497 |
| $ | 240 |
| $ | 1,201 |
|
Unsecured |
|
| — |
|
| — |
|
| — |
|
| 41 |
|
| 41 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by commercial properties |
|
| 11,832 |
|
| — |
|
| 963 |
|
| 25,698 |
|
| 38,493 |
|
Secured by residential properties |
|
| 75,322 |
|
| 438 |
|
| 8,206 |
|
| 64,318 |
|
| 148,284 |
|
Construction and land development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction loans |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Commercial construction loans and land development |
|
| 1,863 |
|
| — |
|
| 242 |
|
| 286 |
|
| 2,391 |
|
|
| $ | 89,481 |
| $ | 438 |
| $ | 9,908 |
| $ | 90,583 |
| $ | 190,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016 |
| Pass |
| Special Mention |
| Substandard |
| PCI |
| Total |
| |||||
Commercial and industrial: |
| �� |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured |
| $ | 592 |
| $ | — |
| $ | 593 |
| $ | 1,213 |
| $ | 2,398 |
|
Unsecured |
|
| — |
|
| — |
|
| — |
|
| 299 |
|
| 299 |
|
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured by commercial properties |
|
| 17,996 |
|
| — |
|
| 1,461 |
|
| 52,637 |
|
| 72,094 |
|
Secured by residential properties |
|
| 90,563 |
|
| 461 |
|
| 6,950 |
|
| 74,401 |
|
| 172,375 |
|
Construction and land development: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential construction loans |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Commercial construction loans and land development |
|
| 2,281 |
|
| — |
|
| 1,476 |
|
| 5,204 |
|
| 8,961 |
|
|
| $ | 111,432 |
| $ | 461 |
| $ | 10,480 |
| $ | 133,754 |
| $ | 256,127 |
|
The Bank’s impairment methodology for covered loans is consistent with the methodology for non-covered loans, and is discussed in detail in Notes 5 and 6 to the consolidated financial statements included in the Company’s 2016 Form 10-K.
33
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Changes in the allowance for covered loan losses, distributed by portfolio segment, are shown below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial and |
|
|
|
| Construction and |
|
|
|
| ||
Three months ended September 30, 2017 |
| Industrial |
| Real Estate |
| Land Development |
| Total |
| ||||
Balance, beginning of period |
| $ | 47 |
| $ | 684 |
| $ | 628 |
| $ | 1,359 |
|
Provision charged to (recapture from) operations |
|
| 34 |
|
| 1,093 |
|
| (346) |
|
| 781 |
|
Loans charged off |
|
| — |
|
| — |
|
| — |
|
| — |
|
Recoveries on charged off loans |
|
| — |
|
| — |
|
| 1 |
|
| 1 |
|
Balance, end of period |
| $ | 81 |
| $ | 1,777 |
| $ | 283 |
| $ | 2,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial and |
|
|
|
| Construction and |
|
|
|
| ||
Nine months ended September 30, 2017 |
| Industrial |
| Real Estate |
| Land Development |
| Total |
| ||||
Balance, beginning of period |
| $ | 35 |
| $ | 378 |
| $ | — |
| $ | 413 |
|
Provision charged to operations |
|
| 46 |
|
| 1,915 |
|
| 276 |
|
| 2,237 |
|
Loans charged off |
|
| (6) |
|
| (521) |
|
| — |
|
| (527) |
|
Recoveries on charged off loans |
|
| 6 |
|
| 5 |
|
| 7 |
|
| 18 |
|
Balance, end of period |
| $ | 81 |
| $ | 1,777 |
| $ | 283 |
| $ | 2,141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial and |
|
|
|
| Construction and |
|
|
|
| ||
Three months ended September 30, 2016 |
| Industrial |
| Real Estate |
| Land Development |
| Total |
| ||||
Balance, beginning of period |
| $ | 55 |
| $ | 1,400 |
| $ | — |
| $ | 1,455 |
|
Provision charged to (recapture from) operations |
|
| 162 |
|
| (888) |
|
| (3) |
|
| (729) |
|
Loans charged off |
|
| — |
|
| — |
|
| — |
|
| — |
|
Recoveries on charged off loans |
|
| — |
|
| — |
|
| 3 |
|
| 3 |
|
Balance, end of period |
| $ | 217 |
| $ | 512 |
| $ | — |
| $ | 729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial and |
|
|
|
| Construction and |
|
|
|
| ||
Nine months ended September 30, 2016 |
| Industrial |
| Real Estate |
| Land Development |
| Total |
| ||||
Balance, beginning of period |
| $ | 758 |
| $ | 774 |
| $ | — |
| $ | 1,532 |
|
Provision charged to (recapture from) operations |
|
| (535) |
|
| (237) |
|
| (53) |
|
| (825) |
|
Loans charged off |
|
| (6) |
|
| (42) |
|
| (51) |
|
| (99) |
|
Recoveries on charged off loans |
|
| — |
|
| 17 |
|
| 104 |
|
| 121 |
|
Balance, end of period |
| $ | 217 |
| $ | 512 |
| $ | — |
| $ | 729 |
|
The covered loan portfolio was distributed by portfolio segment and impairment methodology as shown below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial and |
|
|
|
| Construction and |
|
|
|
| ||
September 30, 2017 |
| Industrial |
| Real Estate |
| Land Development |
| Total |
| ||||
Loans individually evaluated for impairment |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Loans collectively evaluated for impairment |
|
| 961 |
|
| 96,761 |
|
| 2,105 |
|
| 99,827 |
|
PCI Loans |
|
| 281 |
|
| 90,016 |
|
| 286 |
|
| 90,583 |
|
|
| $ | 1,242 |
| $ | 186,777 |
| $ | 2,391 |
| $ | 190,410 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial and |
|
|
|
| Construction and |
|
|
|
| ||
December 31, 2016 |
| Industrial |
| Real Estate |
| Land Development |
| Total |
| ||||
Loans individually evaluated for impairment |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Loans collectively evaluated for impairment |
|
| 1,185 |
|
| 117,431 |
|
| 3,757 |
|
| 122,373 |
|
PCI Loans |
|
| 1,512 |
|
| 127,038 |
|
| 5,204 |
|
| 133,754 |
|
|
| $ | 2,697 |
| $ | 244,469 |
| $ | 8,961 |
| $ | 256,127 |
|
The allowance for covered loan losses was distributed by portfolio segment and impairment methodology as shown below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial and |
|
|
|
| Construction and |
|
|
|
| ||
September 30, 2017 |
| Industrial |
| Real Estate |
| Land Development |
| Total |
| ||||
Loans individually evaluated for impairment |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Loans collectively evaluated for impairment |
|
| 6 |
|
| 25 |
|
| 2 |
|
| 33 |
|
PCI Loans |
|
| 75 |
|
| 1,752 |
|
| 281 |
|
| 2,108 |
|
|
| $ | 81 |
| $ | 1,777 |
| $ | 283 |
| $ | 2,141 |
|
34
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial and |
|
|
|
| Construction and |
|
|
|
| ||
December 31, 2016 |
| Industrial |
| Real Estate |
| Land Development |
| Total |
| ||||
Loans individually evaluated for impairment |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Loans collectively evaluated for impairment |
|
| 22 |
|
| 47 |
|
| — |
|
| 69 |
|
PCI Loans |
|
| 13 |
|
| 331 |
|
| — |
|
| 344 |
|
|
| $ | 35 |
| $ | 378 |
| $ | — |
| $ | 413 |
|
Covered Other Real Estate Owned
A summary of the activity in covered OREO is as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Balance, beginning of period |
| $ | 42,304 |
| $ | 67,634 |
| $ | 51,642 |
| $ | 99,090 |
|
Additions to covered OREO |
|
| 1,039 |
|
| 2,422 |
|
| 6,166 |
|
| 11,703 |
|
Dispositions of covered OREO |
|
| (2,612) |
|
| (5,516) |
|
| (14,942) |
|
| (34,521) |
|
Valuation adjustments in the period |
|
| (388) |
|
| (2,552) |
|
| (2,523) |
|
| (14,284) |
|
Balance, end of period |
| $ | 40,343 |
| $ | 61,988 |
| $ | 40,343 |
| $ | 61,988 |
|
During the three and nine months ended September 30, 2017 and 2016, the Bank wrote down certain covered OREO assets to fair value to reflect new appraisals on certain OREO acquired in the FNB Transaction and OREO acquired from the foreclosure on certain FNB loans acquired in the FNB Transaction. Although the Bank recorded a fair value discount on the acquired assets upon acquisition, in some cases additional downward valuations were required. The majority of the downward valuations recorded during the three and nine months ended September 30, 2017 and 2016 were related to covered assets subject to the loss-share agreements with the FDIC.
These additional downward valuation adjustments reflect changes to the assumptions regarding the fair value of the OREO, including in some cases the intended use of the OREO due to the availability of more information, as well as the passage of time. The process of determining fair value is subjective in nature and requires the use of significant estimates and assumptions. Although the Bank makes market-based assumptions when valuing acquired assets, new information may come to light that causes estimates to increase or decrease. When the Bank determines, based on subsequent information, that its estimates require adjustment, the Bank records the adjustment. The accounting for such adjustments requires that the decreases to the initially recorded fair value be recorded at the time such new information is received, while increases to fair value are recorded when the asset is subsequently sold.
FDIC Indemnification Asset
A summary of the activity in the FDIC Indemnification Asset is as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Balance, beginning of period |
| $ | 40,304 |
| $ | 74,460 |
| $ | 71,313 |
| $ | 91,648 |
|
FDIC Indemnification Asset accretion (amortization) |
|
| (5,348) |
|
| 33 |
|
| (13,533) |
|
| 189 |
|
Transfers to due from FDIC and other |
|
| (1,813) |
|
| (1,142) |
|
| (24,637) |
|
| (18,486) |
|
Balance, end of period |
| $ | 33,143 |
| $ | 73,351 |
| $ | 33,143 |
| $ | 73,351 |
|
As of September 30, 2017, the Bank had billed and collected $145.5 million from the FDIC, which represented reimbursable covered losses and expenses through June 30, 2017.
35
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
7. 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 September 30, |
| Nine Months Ended September 30, |
| ||||||||
| 2020 | | 2019 |
| 2020 | | 2019 |
| ||||
Balance, beginning of period | $ | 81,264 | | $ | 53,695 | | $ | 55,504 | | $ | 66,102 | |
Additions |
| 59,351 | |
| 4,166 | |
| 123,266 | |
| 8,574 | |
Sales |
| — | |
| — | |
| (18,650) | |
| — | |
Changes in fair value: | | | | | | | | | | | | |
Due to changes in model inputs or assumptions (1) |
| (10,145) | |
| (3,769) | |
| (26,023) | |
| (17,541) | |
Due to customer payoffs |
| (2,758) | |
| (2,795) | |
| (6,385) | |
| (5,838) | |
Balance, end of period | $ | 127,712 | | $ | 51,297 | | $ | 127,712 | | $ | 51,297 | |
| | | | | | | | | | | | |
| September 30, | | December 31, | | | | | | | | ||
| 2020 | | 2019 | | | | | | | | ||
Mortgage loans serviced for others (2) | $ | 13,650,523 | | $ | 4,948,441 | | | | | | | |
MSR asset as a percentage of serviced mortgage loans |
| 0.94 | % |
| 1.12 | % | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Balance, beginning of period | $ | 43,580 |
| $ | 33,491 |
| $ | 61,968 |
| $ | 52,285 |
|
Additions |
| 5,939 |
|
| 10,416 |
|
| 8,429 |
|
| 20,309 |
|
Sales |
| — |
|
| — |
|
| (17,499) |
|
| (7,586) |
|
Changes in fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
Due to changes in model inputs or assumptions (1) |
| (550) |
|
| 1,413 |
|
| (1,757) |
|
| (16,923) |
|
Due to customer payoffs |
| (1,203) |
|
| (1,569) |
|
| (3,375) |
|
| (4,334) |
|
Balance, end of period | $ | 47,766 |
| $ | 43,751 |
| $ | 47,766 |
| $ | 43,751 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
|
|
|
|
|
|
| ||
| 2017 |
| 2016 |
|
|
|
|
|
|
| ||
Mortgage loans serviced for others | $ | 4,175,195 |
| $ | 5,480,943 |
|
|
|
|
|
|
|
MSR asset as a percentage of serviced mortgage loans |
| 1.14 | % |
| 1.13 | % |
|
|
|
|
|
|
(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.
|
|
|
|
|
|
| |||||||
|
| September 30, |
|
| December 31, |
| |||||||
|
| 2017 |
|
| 2016 |
| |||||||
| | | | | | | |||||||
|
| September 30, | | | December 31, | | |||||||
| | 2020 | |
| 2019 | | |||||||
Weighted average constant prepayment rate |
| 10.85 | % |
| 10.47 | % |
|
| 12.97 | % | | 13.16 | % |
Weighted average discount rate |
| 11.07 | % |
| 10.95 | % |
|
| 14.65 | % | | 11.14 | % |
Weighted average life (in years) |
| 6.9 |
|
| 6.9 |
|
| 6.1 | | | 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).
|
|
|
|
|
| |||||||||
|
| September 30, |
| December 31, |
| |||||||||
|
| 2017 |
| 2016 |
| |||||||||
| | | | | | |||||||||
| | September 30, | | December 31, | | |||||||||
|
| 2020 |
| 2019 | | |||||||||
Constant prepayment rate: |
|
|
|
|
|
|
| | | | | | | |
Impact of 10% adverse change |
| $ | (1,747) |
| $ | (2,297) |
| | $ | (4,859) | | $ | (3,072) | |
Impact of 20% adverse change |
|
| (3,441) |
|
| (4,471) |
| |
| (9,487) | |
| (5,943) | |
Discount rate: |
|
|
|
|
|
|
| | | | | | | |
Impact of 10% adverse change |
|
| (1,889) |
|
| (2,539) |
| |
| (4,844) | |
| (2,094) | |
Impact of 20% adverse change |
|
| (3,630) |
|
| (4,882) |
| |
| (9,252) | |
| (4,028) | |
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 $4.2$10.3 million and $5.7$6.3 million during the three months ended September 30, 20172020 and 2016,2019, respectively, and $15.7$21.3 million and $17.3$19.2 million during the nine months ended September 30, 20172020 and 2016,2019, respectively, were included in net gains from sale of loans and other noninterestmortgage production income within the consolidated statements of operations.
36
34
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
8. Deposits
Deposits are summarized as follows (in thousands).
|
|
|
|
|
|
|
| |||||||
|
| September 30, |
| December 31, |
| |||||||||
|
| 2017 |
| 2016 |
| |||||||||
| | | | | | | | |||||||
| | September 30, | | December 31, | | |||||||||
|
| 2020 |
| 2019 | | |||||||||
Noninterest-bearing demand |
| $ | 2,279,633 |
| $ | 2,199,483 |
| | $ | 3,557,603 | | $ | 2,769,556 | |
Interest-bearing: |
|
|
|
|
|
|
| | | | | | | |
NOW accounts |
|
| 1,004,410 |
|
| 1,252,832 |
| |||||||
Demand accounts | |
| 2,058,874 | |
| 1,881,614 | | |||||||
Brokered - demand | |
| 269,472 | |
| — | | |||||||
Money market |
|
| 2,215,455 |
|
| 1,626,218 |
| |
| 2,885,824 | |
| 2,641,116 | |
Brokered - money market |
|
| 109,788 |
|
| 125,272 |
| |
| 162,184 | |
| 5,000 | |
Demand |
|
| 419,303 |
|
| 384,847 |
| |||||||
Savings |
|
| 210,316 |
|
| 279,911 |
| |
| 251,027 | |
| 199,076 | |
Time |
|
| 1,293,877 |
|
| 1,145,859 |
| |
| 1,505,225 | |
| 1,505,375 | |
Brokered - time |
|
| 130,665 |
|
| 49,389 |
| |
| 571,706 | |
| 30,477 | |
|
| $ | 7,663,447 |
| $ | 7,063,811 |
| |||||||
| | $ | 11,261,915 | | $ | 9,032,214 | |
9. Short-term Borrowings
Short-term borrowings are summarized as follows (in thousands).
|
|
|
|
|
|
|
| |||||||
|
| September 30, |
| December 31, |
| |||||||||
|
| 2017 |
| 2016 |
| |||||||||
| | | | | | | ||||||||
| | September 30, | | December 31, |
| |||||||||
|
| 2020 |
| 2019 |
| |||||||||
Federal funds purchased |
| $ | 72,000 |
| $ | 87,125 |
| | $ | 149,150 | | $ | 81,625 | |
Securities sold under agreements to repurchase |
|
| 611,701 |
|
| 195,164 |
| |
| 261,703 | |
| 612,125 | |
Federal Home Loan Bank |
|
| 650,000 |
|
| 1,000,000 |
| |
| — | |
| 600,000 | |
Short-term bank loans |
|
| 143,500 |
|
| 135,000 |
| | | 103,500 | | | 111,000 | |
|
| $ | 1,477,201 |
| $ | 1,417,289 |
| |||||||
Commercial paper | |
| 265,756 | |
| 19,260 | | |||||||
| | $ | 780,109 | | $ | 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).
|
|
|
|
|
|
| |||||||||||
|
| Nine Months Ended September 30, |
| ||||||||||||||
|
| 2017 |
| 2016 |
| ||||||||||||
| | | | | | | | | | | |||||||
|
| Nine Months Ended September 30, | | | | | |||||||||||
| | 2020 | | 2019 |
| | | | |||||||||
Average balance during the period |
| $ | 549,425 |
| $ | 351,430 |
| | $ | 547,925 | | $ | 609,162 | | | | |
Average interest rate during the period |
|
| 0.98 | % |
| 0.55 | % | |
| 1.03 | % | | 2.57 | % | | | |
|
|
|
|
|
|
| |||||||||||
|
| September 30, |
| December 31, |
| ||||||||||||
|
| 2017 |
| 2016 |
| ||||||||||||
| | | | | | | | | | | |||||||
| | September 30, | | December 31, | | | | | |||||||||
|
| 2020 |
| 2019 | | | | | |||||||||
Average interest rate at end of period |
|
| 1.10 | % |
| 0.42 | % |
| | 0.30 | % | | 1.97 | % | | | |
Securities underlying the agreements at end of period: |
|
|
|
|
|
|
| | | | | | | | | | |
Carrying value |
| $ | 621,429 |
| $ | 209,877 |
| | $ | 261,771 | | $ | 612,515 | | | | |
Estimated fair value |
| $ | 648,517 |
| $ | 206,641 |
| | $ | 279,403 | | $ | 661,023 | | | | |
37
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Federal Home Loan Bank (“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.
35
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The FHLB borrowings were fully paid during the three months ended September 30, 2020. Other information regarding FHLB short-term borrowings is shown in the following tables (dollars in thousands).
|
|
|
|
|
|
|
| ||||||||
|
| Nine Months Ended September 30, |
| ||||||||||||
|
| 2017 |
| 2016 |
| ||||||||||
| | | | | | | | | |||||||
| | Nine Months Ended September 30, | | | |||||||||||
| | 2020 | | 2019 | | | |||||||||
Average balance during the period |
| $ | 435,531 |
| $ | 303,011 |
| | $ | 51,606 | | $ | 280,824 | | |
Average interest rate during the period |
|
| 1.05 | % |
| 0.45 | % | | | 1.62 | % | | 2.34 | % | |
|
|
|
|
|
|
|
| ||||||||
|
|
| September 30, |
|
| December 31, |
| ||||||||
|
|
| 2017 |
|
| 2016 |
| ||||||||
| | | | | | | | | |||||||
| | | September 30, | | | December 31, | | | |||||||
| | | 2020 | | | 2019 | | | |||||||
Average interest rate at end of period |
|
| 1.22 | % |
| 0.55 | % | | | — | % | | 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 September 30, 20172020 and December 31, 20162019 was 2.08%1.25% and 1.59%2.52%, respectively.
During the fourth quarter of 2019, Hilltop Securities initiated 2 commercial paper programs, in the ordinary course of its business, of which the net proceeds (after deducting related issuance expenses) from the sale will be used for general 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 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 September 30, 2020, the weighted average maturity of the CP Notes was 154 days at a rate of 1.65%. At September 30, 2020, the aggregate amount outstanding under these secured arrangements was $265.8 million, which was collateralized by securities held for firm accounts valued at $171.6 million.
10. Notes Payable
Notes payable consisted of the following (in thousands).
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | ||
|
| 2017 |
| 2016 | ||
Senior Notes due April 2025, net of discount of $1,581 and $1,689, respectively |
| $ | 148,419 |
| $ | 148,311 |
FHLB notes, net of premium of $469 and $627, respectively, with maturities ranging from October 2017 to June 2030 |
|
| 98,073 |
|
| 102,596 |
Insurance company note payable due March 2035, paid off in June 2017 |
|
| — |
|
| 20,000 |
NLIC note payable due May 2033 |
|
| 10,000 |
|
| 10,000 |
NLIC note payable due September 2033 |
|
| 10,000 |
|
| 10,000 |
ASIC note payable due April 2034 |
|
| 7,500 |
|
| 7,500 |
Insurance company line of credit due December 31, 2017 |
|
| 3,000 |
|
| 3,000 |
Ventures Management line of credit due January 2018 |
|
| 23,204 |
|
| 16,505 |
|
| $ | 300,196 |
| $ | 317,912 |
| | | | | | |
| | September 30, | | December 31, | ||
|
| 2020 |
| 2019 | ||
Senior Notes due April 2025, net of discount of $1,107 and $1,232, respectively | | $ | 148,893 | | $ | 148,768 |
Subordinated Notes due May 2030, net of discount of $814 | | | 49,186 | | | — |
Subordinated Notes due May 2035, net of discount of $2,433 | | | 147,567 | | | — |
FHLB notes, including premium of $0 and $146, respectively | |
| — | |
| 28,848 |
Ventures Management lines of credit due August 2021 | | | 50,360 | | | 78,653 |
| | $ | 396,006 | | $ | 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.
36
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
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.
11. Leases
Supplemental balance sheet information related to finance leases is as follows (in thousands).
| | | | | | |
| | September 30, | | | December 31, | |
| | 2020 | | | 2019 | |
Finance leases: | | | | | | |
Premises and equipment | | $ | 7,780 | | $ | 7,780 |
Accumulated depreciation | | | (4,620) | | | (4,178) |
Premises and equipment, net | | $ | 3,160 | | $ | 3,602 |
The components of lease costs, including short-term lease costs, are as follows (in thousands).
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
| | 2020 | | 2019 | | 2020 | | 2019 | ||||
Operating lease cost | | $ | 11,067 | | $ | 11,123 | | $ | 32,318 | | $ | 32,253 |
Less operating lease and sublease income | | | (363) | | | (846) | | | (1,336) | | | (1,897) |
Net operating lease cost | | $ | 10,704 | | $ | 10,277 | | $ | 30,982 | | $ | 30,356 |
| | | | | | | | | | | | |
Finance lease cost: | | | | | | | | | | | | |
Amortization of ROU assets | | $ | 147 | | $ | 147 | | $ | 442 | | $ | 442 |
Interest on lease liabilities | | | 139 | | | 148 | | | 424 | | | 450 |
Total finance lease cost | | $ | 286 | | $ | 295 | | $ | 866 | | $ | 892 |
Supplemental cash flow information related to leases is as follows (in thousands).
| | | | | | | |
| | Nine Months Ended September 30, | | ||||
| | 2020 | | 2019 | | ||
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
Operating cash flows from operating leases | | $ | 27,994 | | $ | 29,047 | |
Operating cash flows from finance leases | | | 424 | | | 450 | |
Financing cash flows from finance leases | | | 472 | | | 438 | |
Right-of-use assets obtained in exchange for new lease obligations: | | | | | | | |
Operating leases | | $ | 8,773 | | $ | 25,951 | |
Finance leases | | | — | | | — | |
37
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Information regarding the lease terms and discount rates of the Company’s leases is as follows.
| | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 | ||||||
| | Weighted Average | | | | Weighted Average | | | ||
| | Remaining Lease | | Weighted Average | | Remaining Lease | | Weighted Average | ||
Lease Classification | | Term (Years) | | Discount Rate | | Term (Years) | | Discount Rate | ||
Operating | | 5.6 | | 4.87 | % | | 5.9 | | 5.29 | % |
Finance | | 5.9 | | 4.80 | % | | 6.5 | | 4.79 | % |
Future minimum lease payments under the Leasing Standard as of September 30, 2020, under lease agreements that had commenced as of or subsequent to January 1, 2019, are presented below (in thousands).
| | | | | |
| Operating Leases | | Finance Leases | ||
2020 | $ | 4,450 | | $ | 301 |
2021 | | 33,880 | | | 1,212 |
2022 | | 27,373 | | | 1,241 |
2023 | | 21,920 | | | 1,280 |
2024 | | 14,765 | | | 1,163 |
Thereafter | | 39,110 | | | 2,297 |
Total minimum lease payments | $ | 141,498 | | $ | 7,494 |
Less amount representing interest | | (19,096) | | | (2,471) |
Lease liabilities | $ | 122,402 | | $ | 5,023 |
As of September 30, 2020, the Company had additional operating leases that have not yet commenced with aggregate future minimum lease payments of approximately $24.4 million. These operating leases are expected to commence between October 2020 and October 2021 with lease terms ranging from five to eleven 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 September 30, 2020.
12. 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 rate was 37.2%rates from continuing operations were 22.7% and 38.6% during21.9% for the three months ended September 30, 20172020 and 2016,2019, respectively, and 33.0%23.0% and 37.0% during22.5% for the nine months ended September 30, 20172020 and 2016,2019, respectively. The effective tax rate duringrates approximated statutory rates and include the three months ended September 30, 2017 was higher than the statutory rate primarily due to state income taxes. The effective tax rate during the nine months ended September 30, 2017 was lower than the statutory rate primarily due to the gain recordedeffect of investments in the resolution of the SWS matter as discussed in Note 12 to the consolidated financial statements, as the SWS Merger was a tax-free reorganization under Section 368(a) of the Internal Revenue Code. The effective tax rates during the three and nine months ended September 30, 2016 were slightly higher than the statutory rate primarily due to non-deductible transaction costs associated with the SWS Merger,tax-exempt instruments, offset by the recognition of excess tax benefits on share-based payment awards. non-deductible expenses.
38
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
12.13. 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 thancoverage. 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 provided by reinsurersit is reasonably possible it could incur losses in excess of amounts accrued, the insurance segment.Company is required to make a disclosure of
38
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
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.
Following completion of Hilltop’s acquisition of SWS, several purported holders of shares of SWS common stock (the “Petitioners”) filed petitions in the Court of Chancery of the State of Delaware (the “Court”) seeking appraisal for their shares pursuant to Section 262 of the Delaware General Corporation Law. These petitions were consolidated as In re SWS Group, Inc., C.A. No. 10554-VCG. On May 30, 2017, the Court issued its Memorandum Opinion in the matter. The Court found the “fair value” of the shares of SWS common stock as of the date of the transaction was $6.38 per share. Accordingly, Hilltop paid cash of $6.38 per share, plus statutory interest from the effective date of the merger until the date of payment, to the Petitioners and the other stockholders of SWS who properly demanded appraisal rights under Delaware law, collectively representing 7,438,453 shares. Each outstanding share of SWS common stock, other than shares held by Hilltop, in treasury by SWS or by stockholders who properly demanded appraisal rights under Delaware law, was converted into the right to receive 0.2496 shares of Hilltop common stock and $1.94 in cash, the aggregate value of which was $6.92 per share of SWS common stock as of the effective date of the merger. The resolution of this matter resulted in 1,856,638 shares of HTH common stock, which had been held in escrow during the pendency of the proceeding, being returned to the Company’s pool of authorized but unissued shares of common stock and a pre-tax net increase to other noninterest income of $11.6 million during the second quarter of 2017. This change in common stock is reflected in repurchases of common stock within the consolidated statements of stockholders’ equity. Certain Petitioners filed an appeal to the Court’s Memorandum Opinion. The Company also filed a cross-appeal in the matter and intends to vigorously defend the Petitioners’ appeal.
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 well 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, including the Inquiry described below, 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.
As a part of an industry-wide Inquiry, PrimeLending received a subpoena from the Office of Inspector General of the U.S. Department of Housing and Urban Development regarding mortgage-related practices, including those relating to
39
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
origination practices for loans insured by the Federal Housing Administration (the “FHA”). On August 20, 2014, PrimeLending received a Civil Investigative Demand from the United States Department of Justice (the “DOJ”) related to this Inquiry. According to the Civil Investigative Demand, the DOJ is conducting an investigation to determine whether PrimeLending has violated the False Claims Act in connection with originating and underwriting single-family residential mortgage loans insured by the FHA. The DOJ has advised PrimeLending that, based upon its review of a sample of loans for which an FHA insurance claim was paid by the U.S. Department of Housing and Urban Development (“HUD”), some of the loans do not meet FHA underwriting guidelines. PrimeLending, based upon its own review of the loan sample, does not agree with the sampling methodology and loan analysis employed by the DOJ. Remedies in these proceedings or settlements may include statutory damages, indemnification, fines and/or penalties. Many institutions have settled these matters on terms that included large monetary penalties. PrimeLending has fully cooperated with this Inquiry, continues to discuss this matter with the DOJ and adjusts its indemnification reserve based upon such discussions.
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 September 30, 20172020 and December 31, 2016,2019, the mortgage origination segment’s indemnification liability reserve totaled $24.7$18.0 million and $18.2$11.8 million, respectively. The provision for indemnification losses was $2.5$3.1 million and $1.3$1.0 million during the three months ended September 30, 20172020 and 2016,2019, respectively, and $4.5$7.7 million and $3.5$2.2 million during the nine months ended September 30, 20172020 and 2016,2019, respectively.
40
39
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 |
| |||||||||||||||||||||||
|
| Activity - Origination Loan Balance |
| |||||||||||||||||||||||
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| |||||||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | Representation and Warranty Specific Claims |
| |||||||||||||||||||||||
| | Activity - Origination Loan Balance |
| |||||||||||||||||||||||
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| |||||||||||||||||||||
|
| 2020 |
| 2019 | | 2020 |
| 2019 |
| |||||||||||||||||
Balance, beginning of period |
| $ | 32,554 |
| $ | 53,876 |
| $ | 40,669 |
| $ | 57,298 |
| | $ | 35,194 | | $ | 33,074 | | $ | 32,144 | | $ | 33,784 | |
Claims made |
|
| 10,618 |
|
| 3,339 |
|
| 27,647 |
|
| 12,893 |
| |
| 2,558 | |
| 6,423 | |
| 14,770 | |
| 16,110 | |
Claims resolved with no payment |
|
| (10,991) |
|
| (4,545) |
|
| (29,079) |
|
| (15,162) |
| |
| (45) | |
| (7,022) | |
| (1,702) | |
| (14,289) | |
Repurchases |
|
| (1,326) |
|
| (789) |
|
| (3,014) |
|
| (2,660) |
| |
| (1,582) | |
| (1,506) | |
| (8,965) | |
| (4,150) | |
Indemnification payments |
|
| — |
|
| (2,115) |
|
| (5,368) |
|
| (2,603) |
| |
| - | |
| (243) | |
| (122) | |
| (729) | |
Balance, end of period |
| $ | 30,855 |
| $ | 49,766 |
| $ | 30,855 |
| $ | 49,766 |
| | $ | 36,125 | | $ | 30,726 | | $ | 36,125 | | $ | 30,726 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Indemnification Liability Reserve Activity |
| |||||||||||||||||||||||
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| |||||||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | Indemnification Liability Reserve Activity | | |||||||||||||||||||||||
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| |||||||||||||||||||||
| | 2020 |
| 2019 |
| 2020 |
| 2019 |
| |||||||||||||||||
Balance, beginning of period |
| $ | 22,367 |
| $ | 18,216 |
| $ | 18,239 |
| $ | 16,640 |
| | $ | 15,463 | | $ | 10,833 | | $ | 11,776 | | $ | 10,701 | |
Additions for new sales |
|
| 2,488 |
|
| 1,348 |
|
| 4,480 |
|
| 3,471 |
| |
| 3,066 | |
| 954 | |
| 6,688 | |
| 2,236 | |
Repurchases |
|
| (158) |
|
| (78) |
|
| (283) |
|
| (260) |
| |
| (133) | |
| (117) | |
| (613) | |
| (325) | |
Early payment defaults |
|
| (41) |
|
| (72) |
|
| (170) |
|
| (205) |
| |
| (413) | |
| (51) | |
| (815) | |
| (290) | |
Indemnification payments |
|
| — |
|
| (250) |
|
| (713) |
|
| (482) |
| |
| - | |
| (87) | |
| (40) | |
| (182) | |
Change in reserves for loans sold in prior years |
|
| — |
|
| — |
|
| 3,103 |
|
| — |
| |
| - | |
| (81) | |
| 987 | |
| (689) | |
Balance, end of period |
| $ | 24,656 |
| $ | 19,164 |
| $ | 24,656 |
| $ | 19,164 |
| | $ | 17,983 | | $ | 11,451 | | $ | 17,983 | | $ | 11,451 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| September 30, |
| December 31, |
|
|
|
|
|
|
| |||||||||||||||
|
| 2017 |
| 2016 |
|
|
|
|
|
|
| |||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | September 30, | | December 31, | | | | | | | | |||||||||||||||
|
| 2020 | | 2019 |
| | | | | |
| |||||||||||||||
Reserve for Indemnification Liability: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Specific claims |
| $ | 536 |
| $ | 1,661 |
|
|
|
|
|
|
| | $ | 1,426 | | $ | 1,071 | | | | | | | |
Incurred but not reported claims |
|
| 24,120 |
|
| 16,578 |
|
|
|
|
|
|
| |
| 16,557 | |
| 10,705 | | | | | | | |
Total |
| $ | 24,656 |
| $ | 18,239 |
|
|
|
|
|
|
| | $ | 17,983 | | $ | 11,776 | | | | | | | |
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.
Other Contingencies
In connection with the FNB Transaction, the Bank entered into two loss-share agreements with the FDIC that collectively cover $1.2 billion of loans and OREO acquired in the FNB Transaction. Pursuant to the loss-share agreements, the FDIC has agreed to reimburse the Bank the following amounts with respect to the covered assets: (i) 80% of net losses on the first $240.4 million of net losses incurred; (ii) 0% of net losses in excess of $240.4 million up to and including $365.7 million of net losses incurred; and (iii) 80% of net losses in excess of $365.7 million of net losses incurred. Net losses are defined as book value losses plus certain defined expenses incurred in the resolution of assets, less subsequent recoveries. Under the loss-share agreement for commercial assets, the amount of subsequent recoveries that are reimbursable to the FDIC for a particular asset is limited to book value losses and expenses actually billed plus any book value charge-offs incurred prior to the Bank Closing Date. There is no limit on the amount of subsequent recoveries reimbursable to the FDIC under the loss-share agreement for single family residential assets. The loss-share agreements for commercial and single family residential assets are in effect for five years and ten years, respectively, from the Bank Closing Date and the loss recovery provisions to the FDIC are in effect for eight years and ten years, respectively, from the Bank Closing Date. As part of the loss-share agreements, the Bank is subject to annual
41
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
FDIC compliance audits. As discussed in Note 6 to the consolidated financial statements, and in accordance with the loss-share agreements, the Bank may be required to make a “true-up” payment to the FDIC approximately ten years following the Bank Closing Date if its actual net realized losses over the life of the loss-share agreements are less than the FDIC’s initial estimate of losses on covered assets. The “true-up” payment is calculated using a defined formula set forth in the P&A Agreement. While the ultimate amount of any “true-up” payment is unknown at this time and will vary based upon the amount of future losses or recoveries within our covered loan portfolio, the Bank has recorded a related “true-up” payment accrual of $16.1 million at September 30, 2017 based on the current estimate of aggregate realized losses on covered assets over the life of the loss-share agreements. The initial estimate of the FDIC Indemnification Asset at the Bank Closing Date was recorded at the present value of 80% of $240.4 million. As of September 30, 2017, the Bank projects that the sum of actual plus projected covered losses and reimbursable expenses subject to the loss-share agreements will be less than $240.4 million. As of September 30, 2017, the Bank had billed $181.9 million of covered net losses to the FDIC, of which 80%, or $145.5 million, were reimbursable under the loss-share agreements. As of September 30, 2017, the Bank had received aggregate reimbursements of $145.5 million from the FDIC, which represented reimbursable covered losses and expenses through June 30, 2017.
13.14. 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
40
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$1.9 billion at September 30, 20172020 and outstanding financial and performance standby letters of credit of $28.8$90.1 million at September 30, 2017.2020.
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 September 30, | | Nine Months Ended September 30, | ||||||||
|
| 2020 |
| 2019 | | 2020 |
| 2019 | ||||
Balance, beginning of period | | $ | 9,031 | | $ | 2,263 | | $ | 2,075 | | $ | 2,366 |
Transition adjustment CECL accounting standard | | | — | | | — | | | 3,837 | | | — |
Other noninterest expense | | | 287 | | | (77) | | | 3,406 | | | (180) |
Balance, end of period | | $ | 9,318 | | $ | 2,186 | | $ | 9,318 | | $ | 2,186 |
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 nine months ended September 30, 2020, the increases in the reserve for unfunded commitments were primarily due to the macroeconomic uncertainties associated with the impact of the market disruption caused by COVID-19 conditions.
The Bank uses the same credit policies in making commitments and standby letters of credit as it does for on-balance sheet instruments. 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)
14.15. 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 mayadopted the Hilltop Holdings Inc. 2020 Equity Incentive Plan (the “2020 Plan”). The 2020 Plan serves as successor to the 2012 Plan. The 2012 Plan and the 2020 Plan are referred to collectively as “the Equity Plans.” The Equity Plans provide for the grant of nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance awards, dividend equivalent rights and other awards to employees of the Company, its subsidiaries and outside directors
41
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
of the Company. InShares available for grant under the aggregate, 4,000,000 shares2012 Plan that were reserved but not issued as of common stockthe effective date of the 2020 Plan were added to the reserves of the 2020 Plan. NaN additional awards may be deliveredmade under the 2012 Plan following the effective date of the 2020 Plan, but the 2012 Plan remains in effect as to outstanding awards. Outstanding awards under the Equity Plans continue to be subject to the terms and conditions of the respective plans. The number of shares authorized for issuance pursuant to awards grantedunder the 2020 Plan is 3,650,000 plus any shares that become available upon the forfeiture, expiration, cancellation or settlement in cash of awards outstanding under the 2012 Plan.Plan as of April 30, 2020. At September 30, 2017, 1,582,2812020, 3,514,437 shares of common stock remained available for issuance pursuant to awards granted under the 20122020 Plan, includingexcluding shares that may be delivered pursuant to outstanding awards. Compensation expense related to the 2012 PlanEquity Plans was $2.8$3.9 million and $2.6$3.1 million during the three months ended September 30, 20172020 and 2016,2019, respectively, and $8.7$11.0 million and $7.6$8.1 million during the nine months ended September 30, 20172020 and 2016,2019, respectively.
During the nine months ended September 30, 20172020 and 2016,2019, Hilltop granted 11,95925,817 and 16,50620,806 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 Awards and RSUsUnits
The following table summarizes information about nonvested Restricted Stock Award and RSU activity for the nine months ended September 30, 20172020 (shares in thousands).
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|
| Restricted Stock Awards |
| RSUs | ||||||
|
|
|
|
| Weighted |
|
|
| Weighted | ||
|
|
|
|
| Average |
|
|
| Average | ||
|
|
|
|
| Grant Date |
|
|
| Grant Date | ||
|
|
| Outstanding |
| Fair Value |
| Outstanding |
| Fair Value | ||
Balance, December 31, 2016 |
| 4 |
| $ | 19.95 |
| 1,456 |
| $ | 19.83 | |
| Granted |
| - |
| $ | - |
| 439 |
| $ | 27.08 |
| Vested/Released |
| (4) |
| $ | 19.95 |
| (345) |
| $ | 23.36 |
| Forfeited |
| - |
| $ | - |
| (68) |
| $ | 23.09 |
Balance, September 30, 2017 |
| - |
| $ | - |
| 1,482 |
| $ | 21.00 |
| | | | | | |
| | | RSUs | |||
| | | | | Weighted | |
| | | | | Average | |
| | | | | Grant Date | |
|
|
| Outstanding |
| Fair Value | |
Balance, December 31, 2019 | | 1,437 | | $ | 22.64 | |
| Granted | | 690 | | $ | 21.66 |
| Vested/Released | | (350) | | $ | 26.83 |
| Forfeited | | (24) | | $ | 22.48 |
Balance, September 30, 2020 | | 1,753 | | $ | 21.42 |
Vested/Released Restricted Stock Awards and RSUs include an aggregate of 88,68157,873 shares withheld to satisfy employee statutory tax obligations during the nine months ended September 30, 2017.2020. Pursuant to certain RSU award agreements, an aggregate of 5,482 vested RSUs at September 30, 2020 require deferral of the settlement in shares and statutory tax obligations to a future date.
During the nine months ended September 30, 2017,2020, the Compensation Committee of the board of directors of the Company awarded certain executives and key employees an aggregate of 421,189675,805 RSUs pursuant to the 2012 Plan. AtEquity Plans. Of the RSUs granted during the nine months ended September 30, 2017, 322,493 of these2020, 550,673 that were outstanding RSUsat September 30, 2020, are subject to time-based vesting conditions and generally cliff vest on the third anniversary of the grant date, and 89,439 of thesedate. Of the RSUs granted during the nine months ended September 30, 2020, 122,232 that were outstanding RSUs willat September 30, 2020, provide for cliff vestvesting based upon the achievement of certain performance goals over a three-year period.
At September 30, 2017,2020, in the aggregate, 1,177,6411,463,271 of the outstanding RSUs are subject to time-based vesting conditions and generally cliff vest on the third anniversary of the grant date, and 303,800289,493 outstanding RSUs cliff vest based upon the achievement of certain performance goals over a three-year period. At September 30, 2017,2020, unrecognized compensation expense related to outstanding RSUs of $16.2$21.7 million is expected to be recognized over a weighted average period of 1.421.68 years.
Employee Stock Purchase Plan
43
In July 2020, pursuant to stockholders’ approval, the Company adopted the Hilltop Holdings Inc. Employee Stock Purchase Plan (the “ESPP”) to provide a means for eligible employees of the Company to purchase shares of Hilltop
42
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
common stock at a discounted price by accumulating funds, normally through payroll deductions and is intended to qualify under Section 423 of the Internal Revenue Code. The initial offering period will commence January 1, 2021.
15.
16. 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 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.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 also implementedrequires banking organizations to maintain a capital conservation buffer which requires a banking organization to hold a buffer above its minimum risk-based capital requirements. This buffer will help to ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of economic stress. The buffer isrequirements measured relative to risk-weighted assets. The phase-in of the capital conservation buffer requirements began on January 1, 2016 for Hilltop and the Bank. Based on the actual ratios as shown in the table below, Hilltop and the Bank exceed each of the capital conservation buffer requirements in effect as of September 30, 2017, as well as the fully phased-in requirements through 2019.
The following table showstables show 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 and on a fully phased-in basis as if such requirements were currently in effect as measured at September 30, 2017 and December 31, 2016, respectively (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 September 30, 2020 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 |
| |
September 30, 2020 | | | | | | | | | | |
Tier 1 capital (to average assets): | | | | | | | | | | |
PlainsCapital | | $ | 1,382,293 |
| 10.19 | % | 4.0 | % | 5.0 | % |
Hilltop | |
| 2,193,424 |
| 13.03 | % | 4.0 | % | N/A | |
Common equity Tier 1 capital (to risk-weighted assets): | | | | | | | | | | |
PlainsCapital | | | 1,382,293 |
| 14.64 | % | 7.0 | % | 6.5 | % |
Hilltop | | | 2,128,424 |
| 19.85 | % | 7.0 | % | N/A | |
Tier 1 capital (to risk-weighted assets): | | | | | | | | | | |
PlainsCapital | |
| 1,382,293 |
| 14.64 | % | 8.5 | % | 8.0 | % |
Hilltop | |
| 2,193,424 |
| 20.46 | % | 8.5 | % | N/A | |
Total capital (to risk-weighted assets): | | | | | | | | | | |
PlainsCapital | |
| 1,462,750 |
| 15.49 | % | 10.5 | % | 10.0 | % |
Hilltop | |
| 2,488,900 |
| 23.22 | % | 10.5 | % | N/A | |
| | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Minimum Capital Requirements |
|
|
| ||
|
|
|
|
|
|
| Including Conservation Buffer |
|
|
| ||
|
|
|
|
|
|
| In Effect at |
| Fully |
| To Be Well |
|
|
| Actual |
| End of Period |
| Phased In |
| Capitalized |
| |||
|
| Amount |
| Ratio |
| Ratio |
| Ratio |
| Ratio |
| |
September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to average assets): |
|
|
|
|
|
|
|
|
|
|
|
|
PlainsCapital |
| $ | 1,150,229 |
| 12.18 | % | 4.0 | % | 4.0 | % | 5.0 | % |
Hilltop |
|
| 1,682,910 |
| 12.87 | % | 4.0 | % | 4.0 | % | N/A |
|
Common equity Tier 1 capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
PlainsCapital |
|
| 1,150,229 |
| 14.44 | % | 5.75 | % | 7.0 | % | 6.5 | % |
Hilltop |
|
| 1,633,561 |
| 17.66 | % | 5.75 | % | 7.0 | % | N/A |
|
Tier 1 capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
PlainsCapital |
|
| 1,150,229 |
| 14.44 | % | 7.25 | % | 8.5 | % | 8.0 | % |
Hilltop |
|
| 1,682,910 |
| 18.20 | % | 7.25 | % | 8.5 | % | N/A |
|
Total capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
PlainsCapital |
|
| 1,213,069 |
| 15.23 | % | 9.25 | % | 10.5 | % | 10.0 | % |
Hilltop |
|
| 1,730,164 |
| 18.71 | % | 9.25 | % | 10.5 | % | N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
44
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
|
|
|
|
|
|
| Minimum Capital Requirements |
|
|
| ||
|
|
|
|
|
|
| Including Conservation Buffer |
|
|
| ||
|
|
|
|
|
|
| In Effect at |
| Fully |
| To Be Well |
|
|
| Actual |
| End of Period |
| Phased In |
| Capitalized |
| |||
|
| Amount |
| Ratio |
| Ratio |
| Ratio |
| Ratio |
| |
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 capital (to average assets): |
|
|
|
|
|
|
|
|
|
|
|
|
PlainsCapital |
| $ | 1,108,484 |
| 12.35 | % | 4.0 | % | 4.0 | % | 5.0 | % |
Hilltop |
|
| 1,652,101 |
| 13.51 | % | 4.0 | % | 4.0 | % | N/A |
|
Common equity Tier 1 capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
PlainsCapital |
|
| 1,108,484 |
| 14.64 | % | 5.125 | % | 7.0 | % | 6.5 | % |
Hilltop |
|
| 1,602,400 |
| 18.30 | % | 5.125 | % | 7.0 | % | N/A |
|
Tier 1 capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
PlainsCapital |
|
| 1,108,484 |
| 14.64 | % | 6.625 | % | 8.5 | % | 8.0 | % |
Hilltop |
|
| 1,652,101 |
| 18.87 | % | 6.625 | % | 8.5 | % | N/A |
|
Total capital (to risk-weighted assets): |
|
|
|
|
|
|
|
|
|
|
|
|
PlainsCapital |
|
| 1,164,767 |
| 15.38 | % | 8.625 | % | 10.5 | % | 10.0 | % |
Hilltop |
|
| 1,693,240 |
| 19.34 | % | 8.625 | % | 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 | |
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. HTS 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 minimum net capital of $250,000 or 1/156-2/3% of aggregate indebtedness.
At September 30, 2017,2020, the net capital position of each of the Hilltop Broker-Dealers was as follows (in thousands).
|
|
|
|
|
|
|
| |||||||
|
|
|
|
| HTS |
| ||||||||
|
| Hilltop |
| Independent |
| |||||||||
|
| Securities |
| Network |
| |||||||||
| | | | | | | | |||||||
| | | | | HTS | | ||||||||
| | Hilltop | | Independent | | |||||||||
|
| Securities |
| Network |
| |||||||||
Net capital |
| $ | 181,288 |
| $ | 3,353 |
| | $ | 310,559 | | $ | 3,366 | |
Less: required net capital |
|
| 9,679 |
|
| 250 |
| | | 7,427 | | | 250 | |
Excess net capital |
| $ | 171,609 |
| $ | 3,103 |
| | $ | 303,132 | | $ | 3,116 | |
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Net capital as a percentage of aggregate debit items |
|
| 37.5 | % |
|
|
| | | 83.6 | % | | | |
Net capital in excess of 5% aggregate debit items |
| $ | 157,089 |
|
|
|
| | $ | 291,991 | | | | |
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 under the provisions of the Exchange Act are not available for general corporate purposes. At September 30, 20172020 and December 31, 2016,2019, the Hilltop SecuritiesBroker-Dealers held cash of $207.3$221.6 million and $181.0$157.4 million, respectively, segregated in special reserve bank accounts for the benefit of customers. The Hilltop Securities wasBroker-Dealers were not required to segregate cash and securities in special reserve accounts for the benefit of proprietary accounts of introducing broker-dealers at September 30, 2017 and2020 or December 31, 2016. The fair values of any segregated assets included in special reserve accounts were determined using Level 1 inputs.2019.
45
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 the HUD and the 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 its
44
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
minimum net worth and liquidity requirements. As of September 30, 2017,2020, PrimeLending and its subsidiaries’ net worth and liquidity exceeded the amounts required by both HUD and GNMA, as applicable.
Insurance
applicable, with one exception. The statutory financial statementsnet worth of an ABA that was divested by PrimeLending on October 1, 2020, did not meet the Company's insurance subsidiaries, which are domiciled in the StateHUD net worth requirements as of Texas, are presented on the basis of accounting practices prescribed or permitted by the Texas Department of Insurance. Texas has adopted the statutory accounting practices of the National Association of Insurance Commissioners (“NAIC”) as the basis of its statutory accounting practices with certain differences that are not significant to the insurance company subsidiaries’ statutory equity.
A summary of statutory capital and surplus and statutory net income (loss) of each insurance subsidiary is as follows (in thousands).
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
Capital and surplus: |
|
|
|
|
|
|
|
National Lloyds Insurance Company |
| $ | 86,879 |
| $ | 131,328 |
|
American Summit Insurance Company |
|
| 21,831 |
|
| 30,462 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Statutory net income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
National Lloyds Insurance Company |
| $ | (4,147) |
| $ | 8,146 |
| $ | (10,663) |
| $ | 4,507 |
|
American Summit Insurance Company |
|
| (1,216) |
|
| (357) |
|
| (693) |
|
| 729 |
|
Regulations of the Texas Department of Insurance require insurance companies to maintain minimum levels of statutory surplus to ensure their ability to meet their obligations to policyholders. At September 30, 2017,2020. This instance and the Company's insurance subsidiaries had statutory surplus in excess ofdivestiture have been reported to HUD.
17. Stockholders’ Equity
Dividends
During the minimum required.
The NAIC has adopted a risk based capital (“RBC”) formula for insurance companies that establishes minimum capital requirements indicating various levels of available regulatory action on an annual basis relating to insurance risk, asset credit risk, interest rate risk and business risk. The RBC formula is used by the NAIC and certain state insurance regulators as an early warning tool to identify companies that require additional scrutiny or regulatory action. Atnine months ended September 30, 2017,2020 and 2019, the Company's insurance subsidiaries' RBC ratio exceeded the level at which regulatory action would be required.Company declared and paid cash dividends of $0.27 and $0.24 per common share, or an aggregate of $24.4 million and $22.4 million, respectively.
16. Stockholders’ Equity
Dividend Declaration
On October 26, 2017, the Company announced that its22, 2020, Hilltop’s board of directors declared a quarterly cash dividend of $0.06$0.09 per common share, payable on November 30, 2017,2020, to all common stockholders of record as of the close of business on November 15, 2017.16, 2020.
Stock Repurchase ProgramRepurchases
The Company’sIn January 2020, the Hilltop board of directors reauthorized theauthorized a new stock repurchase program originally approved during the second quarter of 2016 through January 2018, under2021, pursuant to which the Company mayis authorized to repurchase, in the aggregate, up to $50.0$75.0 million
46
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
of its outstanding common stock. Under the stock, repurchase program, the Company may repurchase shares in open-market purchases or through privately negotiated transactions as permitted under Rule 10b-18 promulgated under the Exchange Act. The extentinclusive of repurchases to which the Company repurchases its shares and the timingoffset dilution related to grants of such repurchases depends upon market conditions and other corporate considerations, as determined by Hilltop’s management team. stock-based compensation.
During the nine months ended September 30, 2017,2020, the Company paid $27.4$15.2 million to repurchase an aggregate of 1,057,656720,901 shares of common stock at an average price of $25.87$21.13 per share. These shares were returned to the Company’s pool of authorized but unissued shares of common stock. The purchases were funded from available cash balances. The Company’s stock repurchase program, prior year repurchases and related accounting treatment and policy regarding stock repurchases isare discussed in detail in Note 1 and Note 23 to the consolidated financial statements included in the Company’s 20162019 Form 10-K.
17.As previously announced on April 30, 2020, in light of the uncertain outlook for 2020 due to the COVID-19 pandemic, 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.
Tender Offer
On September 23, 2020, the Company announced the commencement of a modified “Dutch auction” tender offer to purchase shares of its common stock for an aggregate cash purchase price of up to $350 million and at a per share price not less than $18.25 and not more than $21.00, net to the seller in cash, less any applicable tax withholding and without interest, upon the terms and subject to the conditions described in the tender offer documentation. Unless the offer is extended or terminated, the tender offer is scheduled to expire at the end of the day on October 30, 2020. The Federal Reserve has informed the Company that it is has no objection to the tender offer.
18. 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. 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 swaptions, 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 U.S. Treasury bond, Eurodollar futures and municipal market data, or MMD, rate locks to hedge changes in the fair value of its securities.
45
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Non-Hedging Derivative Instruments and the Fair Value Option
As discussed in Note 34 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 complex hedge accounting provisions. The fair values of PrimeLending’s IRLCs and forward commitments interest rate swaps and swaptions, and U.S. Treasury bond futures and options 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. The fair value of PrimeLending’s derivative instruments decreased $9.9 million during the three months ended September 30, 2017, compared with an increase of $1.2 million during the three months ended September 30, 2016, while the fair values of PrimeLending’s derivatives decreased $0.4 million and $13.0 million during the nine months ended September 30, 2017 and 2016, respectively. ChangesThese changes in 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 34 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. The fair values of the Hilltop Broker-Dealers’ derivatives decreased $3.6 million and $8.5 million during the three months ended September 30, 2017 and 2016, respectively, whileChanges in the fair valuesvalue of derivatives are presented in the Bank’s derivatives increased $49 thousand during the three months ended September 30, 2017, compared with an increase of $0.3 million during the three months ended September 30, 2016. The fair values of the Hilltop Broker-Dealers’ derivatives increased $12.6 million and $1.0 million during the nine months ended September 30, 2017 and 2016, respectively, while the fair values of the Bank’s derivatives increased $0.2 million during the nine months ended September 30, 2017, compared with a decrease of $0.3 million during the nine months ended September 30, 2016. The changes in fair value were recorded as a component of other noninterest income.following table (in thousands).
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
| | 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Increase (decrease) in fair value of derivatives during period: | | | | | | | | | | | | |
PrimeLending | | $ | 23,286 | | $ | 5,881 | | $ | 90,429 | | $ | 23,285 |
Hilltop Broker-Dealers | | | (3,542) | | | (5,984) | | | 8,466 | | | 4,790 |
Bank | | | 118 | | | (25) | | | (17) | | | (171) |
47
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Derivative positions are presented in the following table (in thousands).
| | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 | ||||||||
|
| Notional |
| Estimated |
| Notional |
| Estimated | ||||
| | Amount | | Fair Value | | Amount | | Fair Value | ||||
Derivative instruments (not designated as hedges): | | | | | | | | | | | | |
IRLCs | | $ | 3,513,711 | | $ | 115,699 | | $ | 914,526 | | $ | 18,222 |
Customer-based written options | |
| — | |
| — | |
| 31,200 | |
| — |
Customer-based purchased options | |
| — | |
| — | |
| 31,200 | |
| — |
Commitments to purchase MBSs | |
| 2,645,029 | |
| 9,238 | |
| 3,346,946 | |
| 3,321 |
Commitments to sell MBSs | | | 7,470,095 | |
| (8,277) | |
| 5,988,198 | |
| (5,904) |
Interest rate swaps | | | 51,122 | |
| (70) | |
| 15,012 | |
| (178) |
U.S. Treasury bond futures and options (1) | | | 160,400 | |
| — | |
| 283,500 | |
| — |
Eurodollar futures (1) | | | 12,000 | |
| — | |
| 934,000 | |
| — |
| | | | | | | | | | | | |
Derivative instruments (designated as hedges): | | | | | | | | | | | | |
Interest rate swaps designated as cash flow hedges | | $ | 105,000 | | $ | (3,689) | | $ | 50,000 | | $ | 528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 | ||||||||
|
| Notional |
| Estimated |
| Notional |
| Estimated | ||||
|
| Amount |
| Fair Value |
| Amount |
| Fair Value | ||||
Derivative instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
IRLCs |
| $ | 1,248,422 |
| $ | 28,601 |
| $ | 944,550 |
| $ | 23,269 |
Customer-based written options |
|
| 14,930 |
|
| 30 |
|
| — |
|
| — |
Customer-based purchased options |
|
| 14,930 |
|
| (30) |
|
| — |
|
| — |
Commitments to purchase MBSs |
|
| 3,198,208 |
|
| 7,040 |
|
| 3,616,922 |
|
| (1,155) |
Commitments to sell MBSs |
|
| 5,878,986 |
|
| 2,517 |
|
| 5,609,250 |
|
| (532) |
Interest rate swaps and swaptions |
|
| 28,152 |
|
| (95) |
|
| 32,452 |
|
| (283) |
U.S. Treasury bond futures and options (1) |
|
| 194,000 |
|
| — |
|
| 297,000 |
|
| — |
(1) Changes in the fair value of these contracts are settled daily with PrimeLending’s counterparty.the respective counterparties of PrimeLending and the Hilltop Broker-Dealers.
The increase in the estimated fair value of the IRLCs at September 30, 2020, compared to December 31, 2019, was driven by the accelerated decrease in mortgage interest rates during the nine months ended September 30, 2020 triggered by the economic impact of the COVID-19 pandemic, and an increase in the average value of individual IRLCs. The increase in average value of individual IRLCs 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.
PrimeLending had cash collateral advances totaling $3.7$15.5 million and $4.5 million to offset net liability derivative positions on its commitments to sell MBSs at September 30, 2017, compared to a payable of $19.1 million on its net liability derivative position on its commitments to sell MBSs at2020 and December 31, 2016.2019, respectively. In addition, PrimeLending and the Hilltop Broker-Dealers advanced cash collateral totaling $3.2$1.9 million and $3.7 million on its U.S. Treasury bond futures and options and Eurodollar futures at both September 30, 20172020 and December 31, 2016.2019, respectively. These amounts are included in other assets within the consolidated balance sheets.
46
18.Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
19. 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 |
|
| |||||||||||||||||||||||||
|
|
|
|
|
| Net Amounts |
| the Balance Sheet |
|
| ||||||||||||||||||||||||||
|
| Gross Amounts |
| Gross Amounts |
| of Assets |
|
|
|
| Cash |
|
| |||||||||||||||||||||||
|
| of Recognized |
| Offset in the |
| Presented in the |
| Financial |
| Collateral |
| Net | ||||||||||||||||||||||||
|
| Assets |
| Balance Sheet |
| Balance Sheet |
| Instruments |
| Pledged |
| Amount | ||||||||||||||||||||||||
September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
| | | | | | | | | | | | | ||||||||||||||||||||||||
| | | | | | | | Gross Amounts Not Offset in | | | ||||||||||||||||||||||||||
| | | | | | Net Amounts | | the Balance Sheet | | | ||||||||||||||||||||||||||
|
| Gross Amounts |
| Gross Amounts |
| of Assets |
| |
| Cash |
| | ||||||||||||||||||||||||
| | of Recognized | | Offset in the | | Presented in the | | Financial | | Collateral | | Net | ||||||||||||||||||||||||
| | Assets | | Balance Sheet | | Balance Sheet | | Instruments | | Pledged | | Amount | ||||||||||||||||||||||||
September 30, 2020 | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Securities borrowed: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | |
Institutional counterparties |
| $ | 1,611,885 |
| $ | — |
| $ | 1,611,885 |
| $ | (1,554,629) |
| $ | — |
| $ | 57,256 | | $ | 1,285,509 | | $ | — | | $ | 1,285,509 | | $ | (1,235,409) | | $ | — | | $ | 50,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Interest rate options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Customer counterparties |
| 30 |
| — |
|
| 30 |
|
| — |
|
| — |
| 30 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
| | | | | | | | | | | | | ||||||||||||||||||||||||
Interest rate swaps: | | | | | | | | | | | | | ||||||||||||||||||||||||
Institutional counterparties | | 13 | | — | | 13 | | (13) | | — | | — | ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Reverse repurchase agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | |
Institutional counterparties |
| 134,654 |
| — |
|
| 134,654 |
|
| (134,040) |
|
| — |
| 614 | | 90,103 | | — | | 90,103 | | (89,111) | | — | | 992 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Forward MBS derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | |
Institutional counterparties |
|
| 11,567 |
|
| (1,170) |
|
| 10,397 |
|
| (7,673) |
|
| — |
|
| 2,724 | |
| 11,848 | |
| — | |
| 11,848 | |
| (11,848) | |
| — | |
| 0 |
|
| $ | 1,758,136 |
| $ | (1,170) |
| $ | 1,756,966 |
| $ | (1,696,342) |
| $ | — |
| $ | 60,624 | ||||||||||||||||||
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
| | $ | 1,387,473 | | $ | — | | $ | 1,387,473 | | $ | (1,336,381) | | $ | — | | $ | 51,092 | ||||||||||||||||||
December 31, 2019 | | | | | | | | | | | | | | | | | | | ||||||||||||||||||
Securities borrowed: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | |
Institutional counterparties |
| $ | 1,436,069 |
| $ | — |
| $ | 1,436,069 |
| $ | (1,385,664) |
| $ | — |
| $ | 50,405 | | $ | 1,634,782 | | $ | — | | $ | 1,634,782 | | $ | (1,586,820) | | $ | — | | $ | 47,962 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
| | | | | | | | | | | | | ||||||||||||||||||||||||
Reverse repurchase agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |||||||||
Institutional counterparties |
| 89,430 |
| — |
|
| 89,430 |
|
| (89,369) |
|
| — |
| 61 | | 59,031 | | — | | 59,031 | | (58,619) | | — | | 412 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
| | | | | | | | | | | | | ||||||||||||||||||||||||
Forward MBS derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |||||||||
Institutional counterparties |
|
| 21,366 |
|
| (3,893) |
|
| 17,473 |
|
| (9,012) |
|
| — |
|
| 8,461 | | | 3,640 | | | — | | | 3,640 | | | (3,640) | | | — | | | 0 |
|
| $ | 1,546,865 |
| $ | (3,893) |
| $ | 1,542,972 |
| $ | (1,484,045) |
| $ | — |
| $ | 58,927 | ||||||||||||||||||
| | $ | 1,697,453 | | $ | — | | $ | 1,697,453 | | $ | (1,649,079) | | $ | — | | $ | 48,374 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Gross Amounts Not Offset in | | | | ||||
| | | | | | | | Net Amounts | | the Balance Sheet | | | | |||||
|
| Gross Amounts |
| Gross Amounts |
| of Liabilities |
|
| |
| Cash |
|
| | ||||
| | of Recognized | | Offset in the | | Presented in the | | Financial | | Collateral | | Net | ||||||
| | Liabilities | | Balance Sheet | | Balance Sheet | | Instruments | | Pledged | | Amount | ||||||
September 30, 2020 | | | | | | | | | | | | | | | | | | |
Securities loaned: | | | | | | | | | | | | | | | | | | |
Institutional counterparties | | $ | 1,177,098 | | $ | — | | $ | 1,177,098 | | $ | (1,129,147) | | $ | — | | $ | 47,951 |
| | | | | | | | | | | | | | | | | | |
Interest rate swaps: | | | | | | | | | | | | | | | | | | |
Institutional counterparties | |
| 83 | |
| — | |
| 83 | |
| — | |
| — | |
| 83 |
| | | | | | | | | | | | | | | | | | |
Repurchase agreements: | | | | | | | | | | | | | | | | | | |
Institutional counterparties | |
| 261,703 | |
| — | |
| 261,703 | |
| (261,703) | |
| — | |
| 0 |
| | | | | | | | | | | | | | | | | | |
Forward MBS derivatives: | | | | | | | | | | | | | | | | | | |
Institutional counterparties | |
| 12,601 | |
| (1,714) | |
| 10,887 | |
| — | |
| — | |
| 10,887 |
| | $ | 1,451,485 | | $ | (1,714) | | $ | 1,449,771 | | $ | (1,390,850) | | $ | — | | $ | 58,921 |
December 31, 2019 | | | | | | | | | | | | | | | | | | |
Securities loaned: | | | | | | | | | | | | | | | | | | |
Institutional counterparties | | $ | 1,555,964 | | $ | — | | $ | 1,555,964 | | $ | (1,509,933) | | $ | — | | $ | 46,031 |
| | | | | | | | | | | | | | | | | | |
Interest rate swaps: | | | | | | | | | | | | | | | | | | |
Institutional counterparties | | | 178 | |
| — | |
| 178 | |
| (112) | |
| — | |
| 66 |
| | | | | | | | | | | | | | | | | | |
Repurchase agreements: | | | | | | | | | | | | | | | | | | |
Institutional counterparties | |
| 586,651 | |
| — | |
| 586,651 | |
| (586,651) | |
| — | |
| 0 |
Customer counterparties | | | 25,474 | |
| — | |
| 25,474 | |
| (25,474) | |
| — | |
| 0 |
| | | | | | | | | | | | | | | | | | |
Forward MBS derivatives: | | | | | | | | | | | | | | | | | | |
Institutional counterparties | |
| 6,890 | |
| (667) | |
| 6,223 | |
| (2,384) | |
| — | |
| 3,839 |
| | $ | 2,175,157 | | $ | (667) | | $ | 2,174,490 | | $ | (2,124,554) | | $ | — | | $ | 49,936 |
48
47
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Gross Amounts Not Offset in |
|
|
| ||||
|
|
|
|
|
|
|
| Net Amounts |
| the Balance Sheet |
|
|
| |||||
|
| Gross Amounts |
| Gross Amounts |
| of Liabilities |
|
|
|
| Cash |
|
|
| ||||
|
| of Recognized |
| Offset in the |
| Presented in the |
| Financial |
| Collateral |
| Net | ||||||
|
| Liabilities |
| Balance Sheet |
| Balance Sheet |
| Instruments |
| Pledged |
| Amount | ||||||
September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities loaned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional counterparties |
| $ | 1,447,570 |
| $ | — |
| $ | 1,447,570 |
| $ | (1,393,258) |
| $ | — |
| $ | 54,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional counterparties |
|
| 30 |
|
| — |
|
| 30 |
|
| — |
|
| — |
|
| 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps and swaptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional counterparties |
|
| 118 |
|
| (23) |
|
| 95 |
|
| (1,149) |
|
| — |
|
| (1,054) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional counterparties |
|
| 476,181 |
|
| — |
|
| 476,181 |
|
| (476,181) |
|
| — |
|
| — |
Customer counterparties |
|
| 135,520 |
|
| — |
|
| 135,520 |
|
| (135,520) |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward MBS derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional counterparties |
|
| 839 |
|
| — |
|
| 839 |
|
| (839) |
|
| — |
|
| — |
|
| $ | 2,060,258 |
| $ | (23) |
| $ | 2,060,235 |
| $ | (2,006,947) |
| $ | — |
| $ | 53,288 |
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities loaned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional counterparties |
| $ | 1,283,676 |
| $ | — |
| $ | 1,283,676 |
| $ | (1,237,868) |
| $ | — |
| $ | 45,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps and swaptions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional counterparties |
|
| 297 |
|
| (14) |
|
| 283 |
|
| (3,000) |
|
| — |
|
| (2,717) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase agreements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional counterparties |
|
| 39,970 |
|
| — |
|
| 39,970 |
|
| (39,970) |
|
| — |
|
| — |
Customer counterparties |
|
| 155,194 |
|
| — |
|
| 155,194 |
|
| (155,194) |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward MBS derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Institutional counterparties |
|
| 19,159 |
|
| — |
|
| 19,159 |
|
| (19,159) |
|
| — |
|
| — |
|
| $ | 1,498,296 |
| $ | (14) |
| $ | 1,498,282 |
| $ | (1,455,191) |
| $ | — |
| $ | 43,091 |
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 day to thirty 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.
49
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 no0 repurchase-to-maturity transactions outstanding at both September 30, 20172020 and December 31, 2016.2019.
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
|
| Remaining Contractual Maturities | ||||||||||||||||||||||||||||
|
| Overnight and |
|
|
|
|
| Greater Than |
|
|
| |||||||||||||||||||
September 30, 2017 |
| Continuous |
| Up to 30 Days |
| 30-90 Days |
| 90 Days |
| Total | ||||||||||||||||||||
| | | | | | | | | | | | |||||||||||||||||||
| | Remaining Contractual Maturities | ||||||||||||||||||||||||||||
| | Overnight and | | | | | | Greater Than | | | | |||||||||||||||||||
September 30, 2020 | | Continuous | | Up to 30 Days | | 30-90 Days | | 90 Days | | Total | ||||||||||||||||||||
Repurchase agreement transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | |
U.S. Treasury and agency securities |
| $ | 186,089 |
| $ | — |
| $ | — |
| $ | — |
| $ | 186,089 | |||||||||||||||
Asset-backed securities |
| 425,612 |
| — |
| — |
| — |
| 425,612 | | $ | 157,890 | | $ | 96,720 | | $ | 7,093 | | $ | — | | $ | 261,703 | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||||
Securities lending transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | |
Corporate securities |
|
| 15,469 |
|
| — |
|
| — |
|
| — |
|
| 15,469 | | | 113 | | | — | | | — | | | — | | | 113 |
Equity securities |
|
| 1,432,101 |
|
| — |
|
| — |
|
| — |
|
| 1,432,101 | | | 1,176,985 | | | — | | | — | | | — | | | 1,176,985 |
Total |
| $ | 2,059,271 |
| $ | — |
| $ | — |
| $ | — |
| $ | 2,059,271 | | $ | 1,334,988 | | $ | 96,720 | | $ | 7,093 | | $ | — | | $ | 1,438,801 |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
| | | | | | | | | | | | |||||||||||||||||||
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 |
|
|
| $ | 2,059,271 | Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above | | | | $ | 1,438,801 | ||||||||||||||||||
Amount related to agreements not included in offsetting disclosure above |
|
|
|
|
|
|
|
|
| $ | — | | | | | | | | | | | $ | — | |||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
|
| Remaining Contractual Maturities | ||||||||||||||||||||||||||||
|
| Overnight and |
|
|
|
|
| Greater Than |
|
|
| |||||||||||||||||||
December 31, 2016 |
| Continuous |
| Up to 30 Days |
| 30-90 Days |
| 90 Days |
| Total | ||||||||||||||||||||
| | | | | | | | | | | | |||||||||||||||||||
| | Remaining Contractual Maturities | ||||||||||||||||||||||||||||
| | Overnight and | | | | | | Greater Than | | | | |||||||||||||||||||
December 31, 2019 | | Continuous | | Up to 30 Days | | 30-90 Days | | 90 Days | | Total | ||||||||||||||||||||
Repurchase agreement transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | |
U.S. Treasury and agency securities |
| $ | 195,164 |
| $ | — |
| $ | — |
| $ | — |
| $ | 195,164 | | $ | 45,950 | | $ | — | | $ | — | | $ | — | | $ | 45,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Asset-backed securities | | | 257,396 | | 12,892 | | 295,887 | | — | | 566,175 | |||||||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||||
Securities lending transactions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | |
Corporate securities |
|
| 14,816 |
|
| — |
|
| — |
|
| — |
|
| 14,816 | | | 120 | | | — | | | — | | | — | | | 120 |
Equity securities |
|
| 1,268,860 |
|
| — |
|
| — |
|
| — |
|
| 1,268,860 | | | 1,555,844 | | | — | | | — | | | — | | | 1,555,844 |
Total |
| $ | 1,478,840 |
| $ | — |
| $ | — |
| $ | — |
| $ | 1,478,840 | | $ | 1,859,310 | | $ | 12,892 | | $ | 295,887 | | $ | — | | $ | 2,168,089 |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
| | | | | | | | | | | | |||||||||||||||||||
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 |
|
|
| $ | 1,478,840 | Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above | | | | $ | 2,168,089 | ||||||||||||||||||
Amount related to agreements not included in offsetting disclosure above |
|
|
|
|
|
|
|
|
| $ | — | | | | | | | | | | | $ | — |
19. Broker-Dealer and Clearing Organization Receivables and Payables
Broker-dealer and clearing organization receivables and payables consisted of the following (in thousands).
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | ||
|
| 2017 |
| 2016 | ||
Receivables: |
|
|
|
|
|
|
Securities borrowed |
| $ | 1,611,885 |
| $ | 1,436,069 |
Securities failed to deliver |
|
| 25,478 |
|
| 33,834 |
Trades in process of settlement |
|
| 16,545 |
|
| 10,223 |
Other |
|
| 18,215 |
|
| 17,615 |
|
| $ | 1,672,123 |
| $ | 1,497,741 |
Payables: |
|
|
|
|
|
|
Securities loaned |
| $ | 1,447,570 |
| $ | 1,283,676 |
Correspondents |
|
| 27,225 |
|
| 31,040 |
Securities failed to receive |
|
| 39,312 |
|
| 31,724 |
Other |
|
| 3,591 |
|
| 688 |
|
| $ | 1,517,698 |
| $ | 1,347,128 |
50
48
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
20. Broker-Dealer and Clearing Organization Receivables and Payables
20. Reserve for Losses
Broker-dealer and Loss Adjustment Expenses
A summaryclearing organization receivables and payables consisted of NLC’s reserve for unpaid losses and LAE, as included in other liabilities within the consolidated balance sheets, is as followsfollowing (in thousands).
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
Reserve for unpaid losses and allocated LAE balance, net |
| $ | 29,849 |
| $ | 25,203 |
|
Reinsurance recoverables on unpaid losses |
|
| 35,297 |
|
| 9,434 |
|
Unallocated LAE |
|
| 1,860 |
|
| 1,189 |
|
Reserve for unpaid losses and LAE balance, gross |
| $ | 67,006 |
| $ | 35,826 |
|
| | | | | | | |
| | September 30, | | December 31, |
| ||
|
| 2020 |
| 2019 |
| ||
Receivables: | | | | | | | |
Securities borrowed | | $ | 1,285,509 | | $ | 1,634,782 | |
Securities failed to deliver | |
| 74,650 | |
| 18,726 | |
Trades in process of settlement | |
| — | |
| 104,922 | |
Other | |
| 3,319 | |
| 21,850 | |
| | $ | 1,363,478 | | $ | 1,780,280 | |
Payables: | | | | | | | |
Securities loaned | | $ | 1,177,098 | | $ | 1,555,964 | |
Correspondents | |
| 36,928 | |
| 37,036 | |
Securities failed to receive | |
| 68,365 | |
| 8,568 | |
Trades in process of settlement | |
| 23,628 | |
| — | |
Other | |
| 4,816 | |
| 3,950 | |
| | $ | 1,310,835 | | $ | 1,605,518 | |
This increase in the gross reserve for unpaid losses and LAE was primarily due to losses attributable to non-catastrophic weather-related events that occurred in 2017 and Hurricane Harvey which occurred in August and September 2017. See Note 21 for further details regarding the effects of reinsurance.
A summary of claims loss reserve development activity is presented in the following table (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 | ||||
|
|
|
|
|
|
|
| Total of |
|
|
| |
|
|
|
|
|
|
|
| IBNR Reserves |
|
| ||
|
|
|
|
|
|
|
| Plus Expected |
| Cumulative | ||
Accident |
| Nine Months Ended September 30, 2017 |
| Development on |
| Number of | ||||||
Year |
| Paid |
| Incurred |
| Reported Claims |
| Reported Claims | ||||
2012 |
| $ | 113,037 |
| $ | 114,693 |
| $ | 7 |
|
| 16,658 |
2013 |
|
| 110,483 |
|
| 111,128 |
|
| 44 |
|
| 15,701 |
2014 |
|
| 83,044 |
|
| 84,289 |
|
| 197 |
|
| 13,146 |
2015 |
|
| 84,986 |
|
| 88,028 |
|
| 1,231 |
|
| 14,997 |
2016 |
|
| 80,786 |
|
| 86,301 |
|
| 3,696 |
|
| 21,363 |
2017 |
|
| 61,158 |
|
| 78,816 |
|
| 5,462 |
|
| 18,624 |
Total |
|
| 533,494 |
| $ | 563,255 |
|
|
|
|
|
|
|
|
| 88 |
| All outstanding reserves prior to 2012, net of reinsurance | |||||||
|
| $ | 29,849 |
| Reserve for unpaid losses and allocated LAE, net of reinsurance |
21. Reinsurance Activity
NLC limits the maximum net loss that can arise from large risks or risks in concentrated areas of exposure by reinsuring (ceding) certain levels of risk. Substantial amounts of business are ceded, and these reinsurance contracts do not relieve NLC from its obligations to policyholders. Such reinsurance includes quota share, excess of loss, catastrophe, and other forms of reinsurance on essentially all property and casualty lines of insurance. Net insurance premiums earned, losses and LAE and policy acquisition and other underwriting expenses are reported net of the amounts related to reinsurance ceded to other companies. Amounts recoverable from reinsurers related to the portions of the liability for losses and LAE and unearned insurance premiums ceded to them are reported as assets. Failure of reinsurers to honor their obligations could result in losses to NLC; consequently, allowances are established for amounts deemed uncollectible as NLC evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. At September 30, 2017, total reinsurance recoverables and receivables had a carrying value of $35.8 million, which is included in other assets within the consolidated balance sheet. There was no allowance for uncollectible accounts at September 30, 2017, based on NLC’s quality requirements.
51
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The effects of reinsurance on premiums written and earned are summarized as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||||||||||||||
|
| Written |
| Earned |
| Written |
| Earned |
| Written |
| Earned |
| Written |
| Earned |
| ||||||||
Premiums from direct business |
| $ | 33,909 |
| $ | 36,096 |
| $ | 38,200 |
| $ | 39,839 |
| $ | 107,497 |
| $ | 110,048 |
| $ | 119,955 |
| $ | 120,902 |
|
Reinsurance assumed |
|
| 3,200 |
|
| 2,993 |
|
| 2,927 |
|
| 2,798 |
|
| 9,427 |
|
| 8,721 |
|
| 8,752 |
|
| 8,180 |
|
Reinsurance ceded |
|
| (4,028) |
|
| (4,596) |
|
| (4,038) |
|
| (3,890) |
|
| (10,215) |
|
| (12,116) |
|
| (11,783) |
|
| (11,881) |
|
Net premiums |
| $ | 33,081 |
| $ | 34,493 |
| $ | 37,089 |
| $ | 38,747 |
| $ | 106,709 |
| $ | 106,653 |
| $ | 116,924 |
| $ | 117,201 |
|
The effects of reinsurance on incurred losses are as follows (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Losses and LAE incurred |
| $ | 67,152 |
| $ | 19,953 |
| $ | 122,806 |
| $ | 98,903 |
|
Reinsurance recoverables |
|
| (35,918) |
|
| (3,898) |
|
| (36,688) |
|
| (23,678) |
|
Net loss and LAE incurred |
| $ | 31,234 |
| $ | 16,055 |
| $ | 86,118 |
| $ | 75,225 |
|
Catastrophic coverage
At September 30, 2017, NLC had catastrophic excess of loss reinsurance coverage of losses per event in excess of $8 million retention by NLIC and $1.5 million retention by ASIC. ASIC maintained an underlying layer of coverage, providing $6.5 million in excess of its $1.5 million retention to bridge to the primary program. The reinsurance in excess of $8 million is comprised of three layers of protection: $17 million in excess of $8 million retention and/or loss; $30 million in excess of $25 million loss; and $50 million in excess of $55 million loss. NLIC and ASIC retain no participation in any of the layers, beyond the first $8 million and $1.5 million, respectively. At September 30, 2017, total retention for any one catastrophe that affects both NLIC and ASIC was limited to $8 million in the aggregate.
Effective January 1, 2017, NLC renewed its underlying excess of loss contract that provides $10 million aggregate coverage in excess of NLC’s per event retention and aggregate retention for sub-catastrophic events. NLC retains no participation beyond the first $1 million, which is consistent with 2016.
During August and September 2017, NLC experienced losses related to Hurricane Harvey in excess of retention. As of September 30, 2017, the total gross losses and LAE incurred associated with Hurricane Harvey was $19.0 million. However, because the losses exceeded retention, net exposure to NLC was $3.9 million retention and $1.5 million in reinstatement premiums.
22. Segment and Related Information
The Company currently has four3 reportable business segments that are organized primarily by the core products offered to the segments’ respective customers. These segments reflect the manner in which operations are managed and the criteria used by the Company’s chief operating decision maker, functionthe Company’s President and Chief Executive Officer, to evaluate segment performance, develop strategy and allocate resources. The chief operating decision maker function consists of the Company’s President and Co-Chief Executive Officer and the Company’s Vice Chairman and Co-Chief Executive Officer.
The banking segment includes the operations of the Bank, theBank. The broker-dealer segment includes the operations of Securities Holdings and the mortgage origination segment is composed of PrimeLending, andPrimeLending.
As discussed in Note 3 to the consolidated financial statements, during the first quarter of 2020, management had determined that the insurance segment is composedmet the criteria to be presented as discontinued operations. On June 30, 2020, Hilltop completed the sale of NLC. Accordingly, insurance segment results and its assets and liabilities have been presented as discontinued operations in the consolidated financial statements and in the tables below.
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 including, but not limited to, certain executive management, corporate relations, legal, finance and acquisition costs.Company.
52
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
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 reportable business segment revenues, operating results, goodwill and assets (in thousands).
| | | | | | | | | | | | | | | | | | | | | | |
| |
| |
| |
| Mortgage |
| |
|
| |
| All Other and |
| Hilltop |
| |||||
Three Months Ended September 30, 2020 | | Banking | | Broker-Dealer | | Origination | | Insurance | | Corporate | | Eliminations | | Consolidated |
| |||||||
Net interest income (expense) | | $ | 96,416 | | $ | 8,168 | | $ | (2,349) | | $ | — | | $ | (4,594) | | $ | 4,259 | | $ | 101,900 | |
Provision for (reversal of) credit losses | |
| — | | | (602) | | | — | | | — | | | — | | | — | |
| (602) | |
Noninterest income | |
| 9,819 | | | 141,022 | | | 355,471 | | | — | | | 477 | | | (4,078) | |
| 502,711 | |
Noninterest expense | |
| 55,980 | |
| 114,393 | |
| 207,176 | | | — | | | 21,999 | | | (203) | |
| 399,345 | |
Income (loss) from continuing operations before taxes | | | 50,255 | | | 35,399 | | | 145,946 | | | — | | | (26,116) | | | 384 | | | 205,868 | |
Income from discontinued operations before taxes | | | — | | | — | | | — | | | — | | | 736 | | | — | | | 736 | |
| | $ | 50,255 | | $ | 35,399 | | $ | 145,946 | | $ | — | | $ | (25,380) | | $ | 384 | | $ | 206,604 | |
| | | | | | | | | | | | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mortgage |
|
|
|
|
|
| All Other and |
| Hilltop |
| |||||
Three Months Ended September 30, 2017 |
| Banking |
| Broker-Dealer |
| Origination |
| Insurance |
| Corporate |
| Eliminations |
| Consolidated |
| |||||||
Net interest income (expense) |
| $ | 89,322 |
| $ | 12,215 |
| $ | 94 |
| $ | 864 |
| $ | (2,589) |
| $ | 5,074 |
| $ | 104,980 |
|
Provision for loan losses |
|
| 1,665 |
|
| (405) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 1,260 |
|
Noninterest income |
|
| 11,414 |
|
| 91,418 |
|
| 163,758 |
|
| 36,839 |
|
| 182 |
|
| (5,134) |
|
| 298,477 |
|
Noninterest expense |
|
| 62,750 |
|
| 83,836 |
|
| 151,056 |
|
| 47,015 |
|
| 9,325 |
|
| (140) |
|
| 353,842 |
|
Income (loss) before income taxes |
| $ | 36,321 |
| $ | 20,202 |
| $ | 12,796 |
| $ | (9,312) |
| $ | (11,732) |
| $ | 80 |
| $ | 48,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mortgage |
|
|
|
|
|
| All Other and |
| Hilltop |
| |||||
Nine Months Ended September 30, 2017 |
| Banking |
| Broker-Dealer |
| Origination |
| Insurance |
| Corporate |
| Eliminations |
| Consolidated |
| |||||||
Net interest income (expense) |
| $ | 273,595 |
| $ | 31,052 |
| $ | (791) |
| $ | 1,982 |
| $ | (7,413) |
| $ | 14,631 |
| $ | 313,056 |
|
Provision for loan losses |
|
| 8,907 |
|
| (89) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 8,818 |
|
Noninterest income |
|
| 49,323 |
|
| 266,779 |
|
| 487,033 |
|
| 113,562 |
|
| 12,792 |
|
| (14,881) |
|
| 914,608 |
|
Noninterest expense |
|
| 186,075 |
|
| 252,395 |
|
| 444,263 |
|
| 133,444 |
|
| 25,010 |
|
| (602) |
|
| 1,040,585 |
|
Income (loss) before income taxes |
| $ | 127,936 |
| $ | 45,525 |
| $ | 41,979 |
| $ | (17,900) |
| $ | (19,631) |
| $ | 352 |
| $ | 178,261 |
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mortgage |
|
|
|
|
|
| All Other and |
| Hilltop |
| |||||
Three Months Ended September 30, 2016 |
| Banking |
| Broker-Dealer |
| Origination |
| Insurance |
| Corporate |
| Eliminations |
| Consolidated |
| |||||||
Net interest income (expense) |
| $ | 90,549 |
| $ | 7,823 |
| $ | (3,076) |
| $ | 716 |
| $ | (1,854) |
| $ | 5,012 |
| $ | 99,170 |
|
Provision for loan losses |
|
| 4,179 |
|
| (189) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 3,990 |
|
Noninterest income |
|
| 12,711 |
|
| 103,511 |
|
| 202,560 |
|
| 41,170 |
|
| — |
|
| (5,494) |
|
| 354,458 |
|
Noninterest expense |
|
| 61,536 |
|
| 94,094 |
|
| 168,303 |
|
| 30,415 |
|
| 10,041 |
|
| (256) |
|
| 364,133 |
|
Income (loss) before income taxes |
| $ | 37,545 |
| $ | 17,429 |
| $ | 31,181 |
| $ | 11,471 |
| $ | (11,895) |
| $ | (226) |
| $ | 85,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mortgage |
|
|
|
|
|
| All Other and |
| Hilltop |
| |||||
Nine Months Ended September 30, 2016 |
| Banking |
| Broker-Dealer |
| Origination |
| Insurance |
| Corporate |
| Eliminations |
| Consolidated |
| |||||||
Net interest income (expense) |
| $ | 268,682 |
| $ | 22,314 |
| $ | (7,941) |
| $ | 2,213 |
| $ | (5,413) |
| $ | 13,552 |
| $ | 293,407 |
|
Provision for loan losses |
|
| 36,292 |
|
| (19) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 36,273 |
|
Noninterest income |
|
| 39,012 |
|
| 287,293 |
|
| 541,779 |
|
| 124,366 |
|
| 2 |
|
| (14,614) |
|
| 977,838 |
|
Noninterest expense |
|
| 181,016 |
|
| 270,135 |
|
| 465,463 |
|
| 118,506 |
|
| 22,373 |
|
| (806) |
|
| 1,056,687 |
|
Income (loss) before income taxes |
| $ | 90,386 |
| $ | 39,491 |
| $ | 68,375 |
| $ | 8,073 |
| $ | (27,784) |
| $ | (256) |
| $ | 178,285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Mortgage |
|
|
|
|
|
| All Other and |
| Hilltop |
| |||||
|
| Banking |
| Broker-Dealer |
| Origination |
| Insurance |
| Corporate |
| Eliminations |
| Consolidated |
| |||||||
September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
| $ | 207,741 |
| $ | 7,008 |
| $ | 13,071 |
| $ | 23,988 |
| $ | — |
| $ | — |
| $ | 251,808 |
|
Total assets |
| $ | 9,708,778 |
| $ | 3,432,228 |
| $ | 2,176,943 |
| $ | 327,767 |
| $ | 2,041,901 |
| $ | (4,154,817) |
| $ | 13,532,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
| $ | 207,741 |
| $ | 7,008 |
| $ | 13,071 |
| $ | 23,988 |
| $ | — |
| $ | — |
| $ | 251,808 |
|
Total assets |
| $ | 9,527,518 |
| $ | 2,777,849 |
| $ | 2,042,458 |
| $ | 347,252 |
| $ | 2,032,749 |
| $ | (3,989,764) |
| $ | 12,738,062 |
|
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
| | | |
| |
| Mortgage |
| |
|
| |
| All Other and |
| Hilltop | | |||||
Nine Months Ended September 30, 2020 | | Banking | | Broker-Dealer | | Origination | | Insurance | | Corporate | | Eliminations | | Consolidated | | |||||||
Net interest income (expense) | | $ | 284,440 | | $ | 31,005 | | $ | (3,647) | | $ | — | | $ | (9,482) | | $ | 14,478 | | $ | 316,794 | |
Provision for credit losses | |
| 99,875 | | | 98 | | | — | | | — | | | — | | | — | |
| 99,973 | |
Noninterest income | |
| 29,246 | | | 350,192 | | | 874,926 | | | — | | | 3,315 | | | (15,130) | |
| 1,242,549 | |
Noninterest expense | |
| 169,569 | |
| 299,743 | |
| 547,222 | | | — | | | 35,741 | | | (820) | |
| 1,051,455 | |
Income (loss) from continuing operations before taxes | | | 44,242 | | | 81,356 | | | 324,057 | | | — | | | (41,908) | | | 168 | | | 407,915 | |
Income from discontinued operations before taxes | | | — | | | — | | | — | | | 2,103 | | | 33,077 | | | — | | | 35,180 | |
| | $ | 44,242 | | $ | 81,356 | | $ | 324,057 | | $ | 2,103 | | $ | (8,831) | | $ | 168 | | $ | 443,095 | |
| | | | | | | | | | | | | | | | | | | | | | |
|
|
| |
| |
| Mortgage |
| |
|
| |
| All Other and |
| Hilltop |
| |||||
Three Months Ended September 30, 2019 | | Banking | | Broker-Dealer | | Origination | | Insurance | | Corporate | | Eliminations | | Consolidated |
| |||||||
Net interest income (expense) | | $ | 97,642 | | $ | 13,724 | | $ | (2,725) | | $ | — | | $ | (1,384) | | $ | 5,389 | | $ | 112,646 | |
Provision for credit losses | |
| — | | | 47 | | | — | | | — | | | — | | | — | |
| 47 | |
Noninterest income | |
| 8,856 | | | 107,742 | | | 194,857 | | | — | | | 460 | | | (5,410) | |
| 306,505 | |
Noninterest expense | |
| 53,767 | |
| 94,411 | |
| 160,634 | | | — | | | 12,561 | | | (187) | |
| 321,186 | |
Income (loss) from continuing operations before taxes | | | 52,731 | | | 27,008 | | | 31,498 | | | — | | | (13,485) | | | 166 | | | 97,918 | |
Income from discontinued operations before taxes | | | — | | | — | | | — | | | 6,539 | | | — | | | — | | | 6,539 | |
| | $ | 52,731 | | $ | 27,008 | | $ | 31,498 | | $ | 6,539 | | $ | (13,485) | | $ | 166 | | $ | 104,457 | |
| | | | | | | | | | | | | | | | | | | | | | |
| |
| |
| |
| Mortgage |
| |
|
| |
| All Other and |
| Hilltop |
| |||||
Nine Months Ended September 30, 2019 | | Banking | | Broker-Dealer | | Origination | | Insurance | | Corporate | | Eliminations | | Consolidated |
| |||||||
Net interest income (expense) | | $ | 283,755 | | $ | 37,984 | | $ | (4,224) | | $ | — | | $ | (4,045) | | $ | 14,749 | | $ | 328,219 | |
Provision for (reversal of) credit losses | |
| 355 | | | (29) | | | — | | | — | | | — | | | — | |
| 326 | |
Noninterest income | |
| 30,219 | | | 304,607 | | | 477,438 | | | — | | | 1,820 | | | (14,913) | |
| 799,171 | |
Noninterest expense | |
| 172,744 | |
| 277,088 | |
| 417,032 | | | — | | | 37,397 | | | (240) | |
| 904,021 | |
Income (loss) from continuing operations before taxes | | | 140,875 | | | 65,532 | | | 56,182 | | | — | | | (39,622) | | | 76 | | | 223,043 | |
Income from discontinued operations before taxes | | | — | | | — | | | — | | | 10,519 | | | — | | | — | | | 10,519 | |
| | $ | 140,875 | | $ | 65,532 | | $ | 56,182 | | $ | 10,519 | | $ | (39,622) | | $ | 76 | | $ | 233,562 | |
| | | | | | | | | | | | | | | | | | | | | | |
| |
| |
| |
| Mortgage |
| |
|
| |
| All Other and |
| Hilltop |
| |||||
| | Banking | | Broker-Dealer | | Origination | | Insurance | | Corporate | | Eliminations | | Consolidated |
| |||||||
September 30, 2020 | | | | | | | | | | | | | | | | | | | | | | |
Goodwill | | $ | 247,368 | | $ | 7,008 | | $ | 13,071 | | $ | — | | $ | — | | $ | — | | $ | 267,447 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 13,380,146 | | $ | 3,098,564 | | $ | 2,983,663 | | $ | — | | $ | 2,938,698 | | $ | (5,465,519) | | $ | 16,935,552 | |
| | | | | | | | | | | | | | | | | | | | | | |
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 | |
23.22. Earnings per Common Share
Nonvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and are included in the computation of earnings per share pursuant to the two-class method prescribed by the Earnings Per Share Topic of the ASC. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Restricted Stock Awards, all of which are vested as of September 30, 2017, were the only instruments issued by Hilltop which qualified as participating securities.
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.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 nine months ended September 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 nine months ended September 30, 2017,2020 and 2019, RSUs were the only potentially dilutive non-participating instruments issued by
53
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Hilltop, while during the three and nine months ended September 30, 2016, stock options and RSUs were potentially dilutive non-participating instruments. 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.
50
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 September 30, |
| Nine Months Ended September 30, |
| |||||||||||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| |||||||||||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| |||||||||||||||||
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Income from continuing operations | | | 152,543 | | $ | 74,157 | | $ | 296,729 | | $ | 167,648 | | |||||||||||||
Income from discontinued operations | | | 736 | | | 5,261 | | | 34,662 | | | 8,367 | | |||||||||||||
Income attributable to Hilltop |
| $ | 30,206 |
| $ | 51,932 |
| $ | 119,116 |
| $ | 110,573 |
| | $ | 153,279 | | $ | 79,418 | | $ | 331,391 | | $ | 176,015 | |
Less: income applicable to participating shares |
|
| — |
|
| (5) |
|
| — |
|
| (11) |
| |||||||||||||
Net earnings available to Hilltop common stockholders |
| $ | 30,206 |
| $ | 51,927 |
| $ | 119,116 |
| $ | 110,562 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| | | | | | | | | | | | | | |||||||||||||
Weighted average shares outstanding - basic |
|
| 96,096 |
|
| 98,490 |
|
| 97,554 |
|
| 98,367 |
| |
| 90,200 | |
| 91,745 | |
| 90,291 | |
| 92,931 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Basic earnings per common share |
| $ | 0.31 |
| $ | 0.53 |
| $ | 1.22 |
| $ | 1.12 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| | | | | | | | | | | | | | |||||||||||||
Basic earnings per common share: | | | | | | | | | | | | | | |||||||||||||
Income from continuing operations | | $ | 1.69 | | $ | 0.81 | | $ | 3.29 | | $ | 1.80 | | |||||||||||||
Income from discontinued operations | | | 0.01 | | | 0.06 | | | 0.38 | | | 0.09 | | |||||||||||||
| | $ | 1.70 | | $ | 0.87 | | $ | 3.67 | | $ | 1.89 | | |||||||||||||
| | | | | | | | | | | | | | |||||||||||||
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
Income from continuing operations | | $ | 152,543 | | $ | 74,157 | | $ | 296,729 | | $ | 167,648 | | |||||||||||||
Income from discontinued operations | | | 736 | | | 5,261 | | | 34,662 | | | 8,367 | | |||||||||||||
Income attributable to Hilltop |
| $ | 30,206 |
| $ | 51,932 |
| $ | 119,116 |
| $ | 110,573 |
| | $ | 153,279 | | $ | 79,418 | | $ | 331,391 | | $ | 176,015 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| | | | | | | | | | | | | | |||||||||||||
Weighted average shares outstanding - basic |
|
| 96,096 |
|
| 98,490 |
|
| 97,554 |
|
| 98,367 |
| |
| 90,200 | |
| 91,745 | |
| 90,291 | |
| 92,931 | |
Effect of potentially dilutive securities |
|
| 210 |
|
| 135 |
|
| 249 |
|
| 206 |
| |
| — | | | 79 | |
| — | |
| 28 | |
Weighted average shares outstanding - diluted |
|
| 96,306 |
|
| 98,625 |
|
| 97,803 |
|
| 98,573 |
| |
| 90,200 | |
| 91,824 | |
| 90,291 | |
| 92,959 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Diluted earnings per common share |
| $ | 0.31 |
| $ | 0.53 |
| $ | 1.22 |
| $ | 1.12 |
| |||||||||||||
| | | | | | | | | | | | | | |||||||||||||
Diluted earnings per common share: | | | | | | | | | | | | | | |||||||||||||
Income from continuing operations | | $ | 1.69 | | $ | 0.81 | | $ | 3.29 | | $ | 1.80 | | |||||||||||||
Income from discontinued operations | | | 0.01 | | | 0.05 | | | 0.38 | | | 0.09 | | |||||||||||||
| | $ | 1.70 | | $ | 0.86 | | $ | 3.67 | | $ | 1.89 | |
54
51
SCHEDULE I – Insurance Incurred and Cumulative Paid Losses and Allocated Loss Adjustment Expenses,
Net of Reinsurance
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Incurred Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance |
| September 30, 2017 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total of |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Incurred |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| But Not |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Reported |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Reserves Plus |
| Cumulative | |
|
| Nine Months Ended September 30, 2017 |
| Development |
| Number of | ||||||||||||||||||
Accident |
| 2012 |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
| 2017 |
| On Reported |
| Reported | ||||||||
Year |
| Unaudited |
| Unaudited |
| Unaudited |
| Unaudited |
| Unaudited |
| Unaudited |
| Claims |
| Claims | ||||||||
2012 |
| $ | 107,873 |
|
| $ | 108,753 |
| $ | 114,031 |
| $ | 114,067 |
| $ | 114,517 |
| $ | 114,693 |
| $ | 7 |
| 16,658 |
2013 |
|
|
|
|
|
| 107,793 |
|
| 108,951 |
|
| 111,006 |
|
| 111,011 |
|
| 111,128 |
|
| 44 |
| 15,701 |
2014 |
|
|
|
|
|
|
|
|
| 83,784 |
|
| 85,037 |
|
| 84,221 |
|
| 84,289 |
|
| 197 |
| 13,146 |
2015 |
|
|
|
|
|
|
|
|
|
|
|
| 89,646 |
|
| 88,477 |
|
| 88,028 |
|
| 1,231 |
| 14,997 |
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 84,771 |
|
| 86,301 |
|
| 3,696 |
| 21,363 |
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 78,816 |
|
| 5,462 |
| 18,624 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 563,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance |
|
|
|
|
| |||||||||||||||||
|
| Nine Months Ended September 30, 2017 |
|
|
|
|
| |||||||||||||||||
Accident |
| 2012 |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
| 2017 |
|
|
|
|
| |||||||
Year |
| Unaudited |
| Unaudited |
| Unaudited |
| Unaudited |
| Unaudited |
| Unaudited |
|
|
|
|
| |||||||
2012 |
| $ | 89,603 |
|
| $ | 101,968 |
| $ | 107,126 |
| $ | 110,782 |
| $ | 112,062 |
| $ | 113,037 |
|
|
|
|
|
2013 |
|
|
|
|
|
| 94,238 |
|
| 104,938 |
|
| 108,099 |
|
| 109,662 |
|
| 110,483 |
|
|
|
|
|
2014 |
|
|
|
|
|
|
|
|
| 70,831 |
|
| 79,713 |
|
| 81,684 |
|
| 83,044 |
|
|
|
|
|
2015 |
|
|
|
|
|
|
|
|
|
|
|
| 71,820 |
|
| 82,940 |
|
| 84,986 |
|
|
|
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 71,543 |
|
| 80,786 |
|
|
|
|
|
2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 61,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| $ | 533,494 |
|
|
|
|
|
All outstanding reserves prior to 2012, net of reinsurance |
|
| 88 |
|
|
|
|
| ||||||||||||||||
Reserve for unpaid losses and allocated loss adjustment expenses, net of reinsurance |
| $ | 29,849 |
|
|
|
|
|
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 that was formerly known as Southwest Securities, Inc.)Holdings), references to “HTS Independent Network” refer to Hilltop Securities Independent Network Inc. (a wholly owned subsidiary of Securities Holdings that was formerly knownHoldings), Hilltop Securities and HTS Independent Network are collectively referred to as SWS Financial Services, Inc.)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 “FSC” refer to First Southwest Company, LLC (a former wholly owned subsidiary of First Southwest Holdings, LLC), 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 (a(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).
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 efforts to make strategic acquisitions, the costs of integration of the operations acquired in the SWS Merger (as defined below), 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 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, funding sources for our tender offer, dividend payments, use of proceeds from offerings, expectations concerning mortgage loan origination volume, servicer advances and interest rate compression, expected losses on covered loans and related reimbursements from the Federal Deposit Insurance Corporation (“FDIC”), anticipated amortization of the value of the receivable under our loss-share agreements with the FDIC (“FDIC Indemnification Asset”), expected levels of refinancing as a percentage of total loan origination volume, projected losses on mortgage loans originated, loss estimates related to natural disasters,total expenses, the effects of government regulation applicable to our operations, the appropriateness of, and changes in, our allowance for loancredit losses and provision for loan(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 credit risks of lending activities, including our ability to estimate loan losses as well as the effects of changes in the level of, and trends in, loan delinquencies and write-offs;
changes in general economic, market and business conditions in areas or markets where we compete, including changes in the price of crude oil;
changes in the interest rate environment;
● | changes in general economic, market and business conditions in areas or markets where we compete, including changes in the price of crude oil; |
● | 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; |
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| the credit risks of lending activities, including our ability to estimate credit losses and increases to the allowance for credit losses as a result of the implementation of CECL, as well as the effects of changes in the level of, and trends in, loan delinquencies and write-offs; |
● | changes in the interest rate environment and transitions away from London Interbank Offered Rate (“LIBOR”); |
● | risks associated with concentration in real estate related loans; |
risks associated with merger and acquisition integration;
severe catastrophic events in Texas and other areas of the southern United States;
effectiveness of our data security controls in the face of cyber attacks;
| effectiveness of our data security controls in the face of cyber attacks; |
● | the effects of our indebtedness on our ability to manage our business successfully, including the restrictions imposed by the indenture governing our indebtedness; |
| cost and availability of capital; |
● | 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”); |
● | 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. |
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”);
changes in key management;
competition in our banking, broker-dealer, mortgage origination and insurance segments from other banks and financial institutions as well as investment banking and financial advisory firms, mortgage bankers, asset-based non-bank lenders, government agencies and insurance companies;
legal and regulatory proceedings;
our obligations under loss-share agreements with the FDIC, including the possibility that we may be required to make a “true-up” payment to the FDIC;
failure of our insurance segment reinsurers to pay obligations under reinsurance contracts; 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, 20162019 (“20162019 Form 10-K”), which was filed with the Securities and Exchange Commission (the “SEC”) on February 16, 2017,27, 2020, 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.
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OVERVIEW
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 and insurance 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, equity trading, clearing, securities lending, structured finance and retail brokerage services throughout the United States.
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NLC. NLC is a property and casualty insurance holding company that provides, through its subsidiaries, fire and homeowners insurance to low value dwellings and manufactured homes primarily in Texas and other areasall of the southern United States.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 was subject to post-closing adjustments. During the third quarter of 2020, Hilltop recognized a $0.7 million pre-tax post-closing adjustment to income from discontinued operations related to the finalization of the June 30, 2020 closing balance sheet, resulting in an aggregate gain on sale of NLC of $33.1 million. 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 nine months ended September 30, 2017,2020, our net income from continuing operations to common stockholders was $30.2$152.5 million, or $0.31$1.69 per diluted share, and $119.1$296.7 million, or $1.22$3.29 per diluted share, respectively. After income from discontinued operations, net of income taxes, of $0.7 million, or $0.01 per diluted share, and $34.7 million, or $0.38 per diluted share, income applicable to common stockholders for the three and nine months ended September 30, 2020 was $153.3 million, or $1.70 per diluted share, and $331.4 million, or $3.67 per diluted share, respectively. We declared total common dividends of $0.06$0.09 and $0.18$0.27 per share during the three and nine months ended September 30, 2017,2020, respectively, which resultedresulting in a dividend payout ratiosratio of 19.09%5.30% and 14.74%7.35%, respectively. Dividend payout ratio is defined as cash dividends declared per common share divided by basic earnings per common share.share, including discontinued operations. We also paid an aggregate of $27.4$15.2 million to repurchase shares of our common stock during the nine months ended September 30, 2017. 2020.
We reported $48.4$205.9 million and $178.3$407.9 million of consolidated income from continuing operations before income taxes during the three and nine months ended September 30, 2017,2020, respectively, including the following contributions from our four reportable business segments.
| The banking segment contributed |
| 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, contributed $2.1 million of income before income taxes |
During August and September 2017, Hurricanes Harvey and Irma affected both the Company and its customers. While we continue to monitor and evaluate the financial impact and exposures related to these hurricanes, all of our businesses are fully operational. The estimated pre-tax earnings impact from these hurricanes on our third quarter operating results was $9.8 million. Specifically, within our insurance segment, the total loss and loss adjustment expenses (“LAE”) incurred associated with the hurricanes was $19.6 million. However, since the losses exceeded excess of loss retention coverage, net exposure to the insurance segment was $4.5 million retention and $1.5 million in reinstatement premiums. The effect on our broker-dealer segment’s operating results were limited to $0.3 million associated with waived customer fees. While the mortgage origination and banking segments did not identify any immediate losses based on client interactions and the review of collateral domiciled in the affected areas, each has recorded loss estimates within its third quarter operating results. The mortgage origination segment’s results included a $1.5 million indemnification liability reserve associated with loss exposures related to funded loans, not yet sold into the secondary markets, as well as loans upon which it owns the mortgage servicing rights. The banking segment has reflected $2.0 million associated with estimated hurricane loss exposures within the qualitative factors used to determine its allowance for loan losses during the three and nine months ended September 30, 2017. Loan balances in the affected areas represented approximately 12% of total bank loans as of September 30, 2017 and are summarized by portfolio segment in the following table (dollars in millions).
|
|
|
Commercial and industrial | $ | 110 |
Real estate |
| 590 |
Construction and land development |
| — |
Consumer |
| 1 |
Broker-dealer |
| — |
Total loans in affected areas | $ | 701 |
Additionally, during the nine months ended September 30, 2017, our consolidated income before taxes included the recognition within corporate of a pre-tax net increase to other noninterest income of $11.6 million related to the resolution of the appraisal proceedings from the SWS Merger as discussed in detail in Note 12, Commitments and Contingencies.
During the three months ended June 30, 2016, the Bank discovered irregularities with respect to a non-covered loan that is currently in default, including the genuineness of certain underlying documents that supported the loan and the
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2020.
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operations of the borrower’s business. As a result of the payment default and other irregularities, the Bank increased its provision for loan losses and recorded a $24.5 million charge-off, representing the entire outstanding principal balance of the loan. The banking segment’s financial results for the nine months ended September 30, 2016 reflect this charge-off. During the three months ended June 30, 2017, the Bank recorded other noninterest income of $15.0 million from coverage provided by an insurance policy for forgery. The Bank is actively pursuing legal remedies to recover losses arising from this isolated incident, including litigation against the borrower and guarantors. The Bank cannot currently estimate the amount of any future recoveries or additional expenses related to this charged-off loan.
At September 30, 2017,2020, on a consolidated basis, we had total assets of $13.5$16.9 billion, total deposits of $7.7$11.3 billion, total loans, including loans held for sale, of $8.2$10.3 billion and stockholders’ equity of $1.9$2.4 billion.
Segment InformationRecent Developments
COVID-19
COVID-19 has spread globally, including to every state in the United States, 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 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 reopened but may be operating at limited capacity levels. We are following guidelines established by the Centers for Disease Control and WHO and orders issued by the state and local governments where we operate. We have threetaken 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. On March 23, 2020, most of our employees began working remotely, with only certain operationally critical employees working on site at our principal business headquarters and business segment locations. In early September 2020, a majority of our employees began the process of returning to their respective office locations based on rotational team schedules to better ensure that appropriate social distancing measures are available. We are monitoring and assessing the impact of the COVID-19 pandemic on a daily 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 in March 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. Additionally, as previously announced on April 30, 2020, in light of the uncertain outlook for 2020 due to the COVID-19 pandemic, 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% 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 that totaled $1.0 billion at September 30, 2020, down from $1.4 billion at June 30, 2020. Further, beginning in March 2020, an additional $200 million of deposits was swept from Hilltop Securities into the Bank, bringing the total funds swept from Hilltop
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Securities to approximately $1.5 billion until June 2020 when the total funds swept was reduced back to $1.3 billion at June 30, 2020. During the third quarter of 2020, given the continued strong cash and liquidity levels at the Bank, the total funds swept from Hilltop Securities into the Bank was reduced further to approximately $900 million as of September 30, 2020.
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 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 and determine the appropriateness of capital market inventory limits.
Asset Valuation
At each reporting date between annual impairment tests, the Company considers potential indicators of impairment. Given the current economic uncertainty and volatility surrounding COVID-19, the Company assessed 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 banking 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’s stock and other relevant events. Specifically, our banking segment has experienced lower-than-forecasted operating results during the first nine months of 2020, due to conditions discussed in detail within the discussion of banking segment results that follows.
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 September 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, the COVID-19 crisis could cause 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, the 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 troubled debt restructuring (“TDR”). Starting in March, the Bank implemented several actions to better support our impacted banking clients 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. The Bank’s actions originally included approval of approximately $968 million in COVID-19 related loan modifications as of June 30, 2020.
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As noted in the table below, during the third quarter of 2020, the Bank continued to support its impacted banking clients through the approval of COVID-19 related loan modifications, which resulted in an additional $57.7 million of new COVID-19 related loan modifications since June 30, 2020. The portfolio of active deferrals that have not reached the end of their deferral period was approximately $291 million as of September 30, 2020, of which approximately $208 million had received an additional deferral. COVID-19 related loan modifications of approximately $662 million have returned to agreed-upon contractual terms and had made at least one required principal and/or interest payment since the end of their initial deferral period. Such loans represent elevated risk, therefore management continues to monitor these loans. The extent to which these measures will impact the Bank is uncertain, and any progression of loans, whether receiving COVID-19 payment deferrals or not, into non-performing assets, during future periods is uncertain and will depend on future developments that cannot be predicted.
While all industries could experience adverse impacts due to the COVID-19 pandemic, certain of our loan portfolio industry sectors and subsectors, including real estate collateralized by office buildings, have an increased level of risk. The following table provides information on those loans held for investment balances, by portfolio industry sector, including collectively evaluated allowance for credit losses, that include active COVID-19 payment deferrals (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | Allowance for | | | Allowance for | |
| | | | | Active | | | | | | | | | | | | | Credit Losses | | | Credit Losses | | ||
| | Active | | 90 Day | | | | | | Classified | | Allowance | | as a % of | | | as a % of | | ||||||
| | 90 Day | | Interest and | | Total | | and | | for | | Total | | | Classified | | ||||||||
|
| Principal | | Principal | | Active Modifications | | Criticized | | Credit | | Active | | | and Criticized | | ||||||||
September 30, 2020 | | Deferrals | | Deferrals | | ($) | | (#) | | Loans | | Losses | | Modifications | | | Loans | | ||||||
Hotel | | $ | 96,707 | | $ | 60,954 | | $ | 157,661 | | | 21 | | $ | 107,801 | | $ | 19,630 | | 12.5 | % | | 18.2 | % |
Restaurants | | | 74,226 | | | 274 | | | 74,500 | | | 14 | | | 74,489 | | | 16,151 | | 21.7 | % | | 21.7 | % |
Transportation & Warehousing | | | 27,769 | | | - | | | 27,769 | | | 38 | | | 27,769 | | | 5,432 | | 19.6 | % | | 19.6 | % |
1-4 Family Residential | | | 57 | | | 8,201 | | | 8,258 | | | 38 | | | 4,799 | | | 214 | | 2.6 | % | | 4.5 | % |
Retail | | | 4,231 | | | - | | | 4,231 | | | 3 | | | 3,336 | | | 818 | | 19.3 | % | | 24.5 | % |
Real Estate & Rental & Leasing | | | 2,868 | | | - | | | 2,868 | | | 4 | | | - | | | 98 | | 3.4 | % | | - | % |
All Other | | | 7,850 | | | 8,306 | | | 16,156 | | | 18 | | | 12,502 | | | 6,409 | | 39.7 | % | | 51.3 | % |
| | $ | 213,708 | | $ | 77,735 | | $ | 291,443 | | | 136 | | $ | 230,696 | | $ | 48,752 | | 16.7 | % | | 21.1 | % |
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 decline in crude oil prices coupled with the economic uncertainties associated with COVID-19 have increased pressures on this portfolio. The following table summarizes energy loan portfolio exposures by sector (dollars in thousands).
| | | | | | | | | | | | | | | | | | | | | | |
| | Loans Held for Investment Balances | | |||||||||||||||||||
| | | | | | | | | | | | Allowance For Credit Losses as | | |||||||||
| | Total | | | | | | | | Classified | | Allowance | | a Percentage of | | |||||||
| | Loans Held | | Unfunded | | Total | | and Criticized | | For Credit | | Total Loans Held | | Classified and | | |||||||
September 30, 2020 | | For Investment | | Commitments | | Commitments | | Loans | | Losses | | For Investment | | Criticized Loans | | |||||||
Exploration / Production | | $ | 9,538 | | $ | 9,055 | | $ | 18,593 | | $ | — | | $ | 2,317 | | | 24.3 | % | | — | % |
Midstream | | | 18,795 | | | 2,500 | | | 21,295 | | | 10,968 | | | 4,616 | | | 24.6 | % | | 42.1 | % |
Services | |
| 34,655 | |
| 14,701 | |
| 49,356 | |
| 7,854 | |
| 1,201 | | | 3.5 | % | | 15.3 | % |
Other | | | 27,041 | | | 24,076 | | | 51,117 | | | 1,501 | | | 41 | | | 0.2 | % | | 2.7 | % |
| | $ | 90,029 | | $ | 50,332 | | $ | 140,361 | | $ | 20,323 | | $ | 8,175 | | | 9.1 | % | | 40.2 | % |
As noted above, the Bank’s actions during the second quarter of 2020 also included supporting our impacted banking clients through the 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 $671 million remaining outstanding at September 30, 2020. 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 PPP forgiveness applications and remitting forgiveness payments to PPP lenders for PPP borrowers.
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.
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Outlook for 2020
The spread of COVID-19 has had, and is expected to continue to have, adverse effects 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 2020 is likewise currently uncertain and will depend on certain developments, including, among others, the ultimate impact of COVID-19 on our 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” for additional discussion of the potential adverse impact of COVID-19 on our business, results of operations and financial condition.
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 and at a per share price not less than $18.25 and not more than $21.00, net to the seller in cash, less any applicable tax withholding and without interest, upon the terms and subject to the conditions described in the tender offer documentation. Unless the offer is extended or terminated, the tender offer is scheduled to expire at the end of the day on October 30, 2020. We expect to fund the tender offer with cash on hand. Under capital adequacy and regulatory requirements, we must meet specific capital requirements that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. As of September 30, 2020, Hilltop and PlainsCapital capital positions and ratios exceeded regulatory capital requirements including conservation buffer assuming a fully subscribed tender offer closed on September 30, 2020. The Federal Reserve has informed Hilltop that it is has no objection to the tender offer.
NLC Sale
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 our insurance segment. Accordingly, NLC’s results and its assets and liabilities have been presented as discontinued operations in the consolidated financial statements.
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 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
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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 costs incurred related to these Core System Improvements and the consolidation of common back office functions will continue to represent a significant portion of our noninterest expenses throughout 2020 and into 2021, but we are making such investments with the expectation that they will result in cost savings over the long term. 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 technology vendors, clients, and internal stakeholders. Additionally, through the third quarter of 2020, 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. 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 September 30, 2020 | | Banking | | Broker-Dealer | | Origination | | Insurance | | Corporate | | Consolidated | ||||||
Premises, equipment and other assets | | $ | — | | $ | — | | $ | 37 | | $ | — | | $ | — | | $ | 37 |
Noninterest expense | | | — | | | — | | | 362 | | | — | | | 651 | | | 1,013 |
Total | | $ | — | | $ | — | | $ | 399 | | $ | — | | $ | 651 | | $ | 1,050 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Mortgage | | | | | | | | Hilltop | ||
Nine Months Ended September 30, 2020 | | Banking | | Broker-Dealer | | Origination | | Insurance | | Corporate | | Consolidated | ||||||
Premises, equipment and other assets | | $ | — | | $ | 1,223 | | $ | 925 | | $ | — | | $ | 3,400 | | $ | 5,548 |
Noninterest expense | | | — | | | 4,027 | | | 874 | | | — | | | 1,428 | | | 6,329 |
Total | | $ | — | | $ | 5,250 | | $ | 1,799 | | $ | — | | $ | 4,828 | | $ | 11,877 |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Mortgage | | | | | | | | Hilltop | ||
Three Months Ended September 30, 2019 | | Banking | | Broker-Dealer | | Origination | | Insurance | | Corporate | | Consolidated | ||||||
Premises, equipment and other assets | | $ | — | | $ | 810 | | $ | 1,033 | | $ | — | | $ | 1,488 | | $ | 3,331 |
Noninterest expense | | | — | | | 1,431 | | | 708 | | | — | | | 873 | | | 3,012 |
Total | | $ | — | | $ | 2,241 | | $ | 1,741 | | $ | — | | $ | 2,361 | | $ | 6,343 |
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| | | | | | | | Mortgage | | | | | | | | Hilltop | ||
Nine Months Ended September 30, 2019 | | Banking | | Broker-Dealer | | Origination | | Insurance | | Corporate | | Consolidated | ||||||
Premises, equipment and other assets | | $ | — | | $ | 2,664 | | $ | 5,401 | | $ | — | | $ | 2,825 | | $ | 10,890 |
Noninterest expense | | | — | | | 3,557 | | | 2,478 | | | — | | | 2,732 | | | 8,767 |
Total | | $ | — | | $ | 6,221 | | $ | 7,879 | | $ | — | | $ | 5,557 | | $ | 19,657 |
Factors Affecting Comparability of Results of Operations
Changes in Management and Efficiency Initiative-Related Charges
In 2019, we successfully completed several leadership transitions through effective succession planning. During the nine months ended September 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 first quarter of 2019, related 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 nine months ended September 30, 2019, corporate
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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, during the nine months ended September 30, 2019, Corporate and the broker-dealer segment recognized $0.4 million and $1.0 million, respectively, in efficiency initiative-related charges.
LIBOR
In July 2017, the Financial Conduct Authority (“FCA”) announced that it intends to cease compelling banks to submit rates for the calculation of LIBOR after 2021. 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 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 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.
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.
We have made a preliminary assessment of areas across the organization that will be affected by the migration away from LIBOR. We are now in the impact assessment and early implementation stages. 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 also continuing work on an enterprise-wide contract model and software review to better evaluate both the impacts of the LIBOR phase-out and transition requirements. As a result of 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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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 liabilities have been presented as discontinued operations in the consolidated financial statements and in the table below. Additional details are presented in Note 3, Discontinued Operations, in the notes to our consolidated financial statements.
As a result of the above noted sale of NLC, we have two primary business units within continuing operations, PCC (banking and mortgage origination), and Securities Holdings (broker-dealer) and NLC (insurance). Under accounting principles generally accepted in the United States (“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, mortgage origination and insurance.insurance (discontinued operations). 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 and insurance segments. Operating results for the mortgage origination segment have historically been more volatile than operating results for the banking broker-dealer and insurancebroker-dealer segments.
The banking segment includes the operations of the Bank, whichBank. 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, whileincome. The Bank also derivingderives revenue from other sources, including service charges on customer deposit accounts and trust fees.
The broker-dealer segment includes the operations of Securities Holdings.Holdings, which operates through its wholly owned subsidiaries Hilltop Securities, HTS 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 SecuritiesSEC and Exchange Commission (the “SEC”the Financial Industry Regulatory Authority (“FINRA”) and FINRA and a member of the New York Stock Exchange (“NYSE”),. HTS Independent Network is an introducing broker-dealer that is also registered with the SEC and FINRA,FINRA. Hilltop Securities, HTS Independent Network and First SouthwestHilltop Securities Asset Management, LLC a wholly-owned subsidiary of Hilltop Securities, is aare registered investment adviseradvisers 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.
The insurance segment includes the operations of NLC, which operates through its wholly owned subsidiaries, NLIC and ASIC, in Texas and other areas of the southern United States. Insurance segment income is primarily generated from revenue earned on net insurance premiums less loss and loss adjustment expenses (“LAE”) and policy acquisition and other underwriting expenses.
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 including, but not limited to, certain executive management, corporate relations, legal, finance, and acquisition costs.Company.
The eliminationeliminations of intercompany transactions are included in “All Other and Eliminations.” Additional information concerning our reportable segments is presented in Note 22,21, Segment and Related Information, in the notes to our consolidated financial statements.
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The following tables presenttable presents certain information about the 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.
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| | Three Months Ended September 30, | | Variance 2020 vs 2019 | | | Nine Months Ended September 30, | | Variance 2020 vs 2019 | | ||||||||||||||
| | 2020 | | 2019 | | Amount | | Percent | | | 2020 | | 2019 | | Amount | | Percent | | ||||||
Net interest income (expense): | | | | | | | | | | | | | | | | | | | | | | | | |
Banking | | $ | 96,416 | | $ | 97,642 | | $ | (1,226) | | (1) | % | | $ | 284,440 | | $ | 283,755 | | $ | 685 | | 0 | % |
Broker-Dealer | | | 8,168 | | | 13,724 | | | (5,556) | | (40) | % | | | 31,005 | | | 37,984 | | | (6,979) | | (18) | % |
Mortgage Origination | | | (2,349) | | | (2,725) | | | 376 | | 14 | % | | | (3,647) | | | (4,224) | | | 577 | | 14 | % |
Corporate | | | (4,594) | | | (1,384) | | | (3,210) | | (232) | % | | | (9,482) | | | (4,045) | | | (5,437) | | (134) | % |
All Other and Eliminations | | | 4,259 | | | 5,389 | | | (1,130) | | (21) | % | | | 14,478 | | | 14,749 | | | (271) | | (2) | % |
Hilltop Consolidated | | $ | 101,900 | | $ | 112,646 | | $ | (10,746) | | (10) | % | | $ | 316,794 | | $ | 328,219 | | $ | (11,425) | | (3) | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Provision for (reversal of) credit losses: | | | | | | | | | | | | | | | | | | | | | | | | |
Banking | | $ | — | | $ | — | | $ | — | | — | | | $ | 99,875 | | $ | 355 | | $ | 99,520 | | NM | |
Broker-Dealer | | | (602) | | | 47 | | | (649) | | NM | | | | 98 | | | (29) | | | 127 | | NM | |
Mortgage Origination | | | — | | | — | | | — | | — | | | | — | | | — | | | — | | — | |
Corporate | | | — | | | — | | | — | | — | | | | — | | | — | | | — | | — | |
All Other and Eliminations | | | — | | | — | | | — | | — | | | | — | | | — | | | — | | — | |
Hilltop Consolidated | | $ | (602) | | $ | 47 | | $ | (649) | | NM | | | $ | 99,973 | | $ | 326 | | $ | 99,647 | | NM | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Noninterest income: | | | | | | | | | | | | | | | | | | | | | | | | |
Banking | | $ | 9,819 | | $ | 8,856 | | $ | 963 | | 11 | % | | $ | 29,246 | | $ | 30,219 | | $ | (973) | | (3) | % |
Broker-Dealer | | | 141,022 | | | 107,742 | | | 33,280 | | 31 | % | | | 350,192 | | | 304,607 | | | 45,585 | | 15 | % |
Mortgage Origination | | | 355,471 | | | 194,857 | | | 160,614 | | 82 | % | | | 874,926 | | | 477,438 | | | 397,488 | | 83 | % |
Corporate | | | 477 | | | 460 | | | 17 | | 4 | % | | | 3,315 | | | 1,820 | | | 1,495 | | 82 | % |
All Other and Eliminations | | | (4,078) | | | (5,410) | | | 1,332 | | 25 | % | | | (15,130) | | | (14,913) | | | (217) | | (1) | % |
Hilltop Consolidated | | $ | 502,711 | | $ | 306,505 | | $ | 196,206 | | 64 | % | | $ | 1,242,549 | | $ | 799,171 | | $ | 443,378 | | 55 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Noninterest expense: | | | | | | | | | | | | | | | | | | | | | | | | |
Banking | | $ | 55,980 | | $ | 53,767 | | $ | 2,213 | | 4 | % | | $ | 169,569 | | $ | 172,744 | | $ | (3,175) | | (2) | % |
Broker-Dealer | | | 114,393 | | | 94,411 | | | 19,982 | | 21 | % | | | 299,743 | | | 277,088 | | | 22,655 | | 8 | % |
Mortgage Origination | | | 207,176 | | | 160,634 | | | 46,542 | | 29 | % | | | 547,222 | | | 417,032 | | | 130,190 | | 31 | % |
Corporate | | | 21,999 | | | 12,561 | | | 9,438 | | 75 | % | | | 35,741 | | | 37,397 | | | (1,656) | | (4) | % |
All Other and Eliminations | | | (203) | | | (187) | | | (16) | | (9) | % | | | (820) | | | (240) | | | (580) | | NM | |
Hilltop Consolidated | | $ | 399,345 | | $ | 321,186 | | $ | 78,159 | | 24 | % | | $ | 1,051,455 | | $ | 904,021 | | $ | 147,434 | | 16 | % |
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Income (loss) from continuing operations before taxes: | | | | | | | | | | | | | | | | | | | | | | | | |
Banking | | $ | 50,255 | | $ | 52,731 | | $ | (2,476) | | (5) | % | | $ | 44,242 | | $ | 140,875 | | $ | (96,633) | | (69) | % |
Broker-Dealer | | | 35,399 | | | 27,008 | | | 8,391 | | 31 | % | | | 81,356 | | | 65,532 | | | 15,824 | | 24 | % |
Mortgage Origination | | | 145,946 | | | 31,498 | | | 114,448 | | 363 | % | | | 324,057 | | | 56,182 | | | 267,875 | | 477 | % |
Corporate | | | (26,116) | | | (13,485) | | | (12,631) | | (94) | % | | | (41,908) | | | (39,622) | | | (2,286) | | (6) | % |
All Other and Eliminations | | | 384 | | | 166 | | | 218 | | 131 | % | | | 168 | | | 76 | | | 92 | | 121 | % |
Hilltop Consolidated | | $ | 205,868 | | $ | 97,918 | | $ | 107,950 | | 110 | % | | $ | 407,915 | | $ | 223,043 | | $ | 184,872 | | 83 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from discontinued operations before taxes: | | | | | | | | | | | | | | | | | | | | | | | | |
Insurance | | $ | — | | $ | 6,539 | | $ | (6,539) | | NM | | | $ | 2,103 | | $ | 10,519 | | $ | (8,416) | | NM | |
Corporate (1) | | | 736 | | | — | | | 736 | | - | | | | 33,077 | | | — | | | 33,077 | | - | |
Hilltop Consolidated | | $ | 736 | | $ | 6,539 | | $ | (5,803) | | NM | | | $ | 35,180 | | $ | 10,519 | | $ | 24,661 | | NM | |
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(1) | Includes the respective gains from sale of the insurance segment, net of transaction costs. |
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 outstanding ratio is also considered a key measure for our banking segment as it indicates the performance of our loan portfolio.
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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 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.
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| Hilltop |
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Three Months Ended September 30, 2017 |
| Banking |
| Broker-Dealer |
| Origination |
| Insurance |
| Corporate |
| Eliminations |
| Consolidated |
| |||||||
Net interest income (expense) |
| $ | 89,322 |
| $ | 12,215 |
| $ | 94 |
| $ | 864 |
| $ | (2,589) |
| $ | 5,074 |
| $ | 104,980 |
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Provision for loan losses |
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| 1,665 |
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| (405) |
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| — |
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| — |
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| — |
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| — |
|
| 1,260 |
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Noninterest income |
|
| 11,414 |
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| 91,418 |
|
| 163,758 |
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| 36,839 |
|
| 182 |
|
| (5,134) |
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| 298,477 |
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Noninterest expense |
|
| 62,750 |
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| 83,836 |
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| 151,056 |
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| 47,015 |
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| 9,325 |
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| (140) |
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| 353,842 |
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Income (loss) before income taxes |
| $ | 36,321 |
| $ | 20,202 |
| $ | 12,796 |
| $ | (9,312) |
| $ | (11,732) |
| $ | 80 |
| $ | 48,355 |
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Nine Months Ended September 30, 2017 |
| Banking |
| Broker-Dealer |
| Origination |
| Insurance |
| Corporate |
| Eliminations |
| Consolidated |
| |||||||
Net interest income (expense) |
| $ | 273,595 |
| $ | 31,052 |
| $ | (791) |
| $ | 1,982 |
| $ | (7,413) |
| $ | 14,631 |
| $ | 313,056 |
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Provision for loan losses |
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| 8,907 |
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| (89) |
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| — |
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| — |
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| — |
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| — |
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| 8,818 |
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Noninterest income |
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| 49,323 |
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| 266,779 |
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| 487,033 |
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| 113,562 |
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| 12,792 |
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| (14,881) |
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| 914,608 |
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Noninterest expense |
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| 186,075 |
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| 252,395 |
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| 444,263 |
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| 133,444 |
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| 25,010 |
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| (602) |
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| 1,040,585 |
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Income (loss) before income taxes |
| $ | 127,936 |
| $ | 45,525 |
| $ | 41,979 |
| $ | (17,900) |
| $ | (19,631) |
| $ | 352 |
| $ | 178,261 |
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Three Months Ended September 30, 2016 |
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| Broker-Dealer |
| Origination |
| Insurance |
| Corporate |
| Eliminations |
| Consolidated |
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Net interest income (expense) |
| $ | 90,549 |
| $ | 7,823 |
| $ | (3,076) |
| $ | 716 |
| $ | (1,854) |
| $ | 5,012 |
| $ | 99,170 |
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Provision for loan losses |
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| 4,179 |
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| (189) |
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| — |
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| — |
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| — |
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| — |
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| 3,990 |
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Noninterest income |
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| 12,711 |
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| 103,511 |
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| 202,560 |
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| 41,170 |
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| — |
|
| (5,494) |
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| 354,458 |
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Noninterest expense |
|
| 61,536 |
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| 94,094 |
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| 168,303 |
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| 30,415 |
|
| 10,041 |
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| (256) |
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| 364,133 |
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Income (loss) before income taxes |
| $ | 37,545 |
| $ | 17,429 |
| $ | 31,181 |
| $ | 11,471 |
| $ | (11,895) |
| $ | (226) |
| $ | 85,505 |
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Nine Months Ended September 30, 2016 |
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| Origination |
| Insurance |
| Corporate |
| Eliminations |
| Consolidated |
| |||||||
Net interest income (expense) |
| $ | 268,682 |
| $ | 22,314 |
| $ | (7,941) |
| $ | 2,213 |
| $ | (5,413) |
| $ | 13,552 |
| $ | 293,407 |
|
Provision for loan losses |
|
| 36,292 |
|
| (19) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 36,273 |
|
Noninterest income |
|
| 39,012 |
|
| 287,293 |
|
| 541,779 |
|
| 124,366 |
|
| 2 |
|
| (14,614) |
|
| 977,838 |
|
Noninterest expense |
|
| 181,016 |
|
| 270,135 |
|
| 465,463 |
|
| 118,506 |
|
| 22,373 |
|
| (806) |
|
| 1,056,687 |
|
Income (loss) before income taxes |
| $ | 90,386 |
| $ | 39,491 |
| $ | 68,375 |
| $ | 8,073 |
| $ | (27,784) |
| $ | (256) |
| $ | 178,285 |
|
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.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. We generated $313.1 million and $293.4 million in netNet interest income from continuing operations decreased during the nine months ended September 30, 20172020, compared with the same period in 2019, primarily due to decreases within our broker-dealer segment and 2016, respectively. Changes in net interest income primarily includedcorporate, partially offset by increases within our banking broker-dealer and mortgage origination segments.
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. |
(ii) | Income from mortgage operations. Through PrimeLending, we generate noninterest income by originating and selling mortgage loans. During the nine months ended September 30, |
|
|
In the aggregate, we generated $914.6 million and $977.8 millionThe increase in noninterest income from continuing operations during the nine months ended September 30, 20172020, compared to the same period in 2019, noted in the segment results table previously presented was primarily due to an increase of $397.8 million in net gains from sale of loans, other mortgage production income and 2016, respectively. This year-over-year decrease in noninterest income was predominantly attributable to decreases in noninterest income inmortgage loan origination fees within our mortgage origination broker-dealer and insurance segments,
60
partially offset by increases in noninterest income due to the previously mentioned increase in other noninterest income of $15.0 million within the banking segment and the $11.6 million within corporate related to the resolution of the appraisal proceedings from the SWS Merger.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
Net incomeIncome from continuing operations applicable to common stockholders during the three months ended September 30, 20172020 was $30.2$152.5 million, or $0.31$1.69 per diluted share, compared with net income applicable to common stockholders of $51.9$74.2 million, or $0.53$0.81 per diluted share, during the three months ended September 30, 2016. The consolidated operating results during the three months ended September 30, 2017 included the previously mentioned estimated pre-tax earnings impact2019. Income from the hurricanes of $9.8 million. Net incomecontinuing operations applicable to common stockholders during the nine months ended September 30, 20172020 was $119.1$296.7 million, or $1.22$3.29 per diluted share, compared with net income applicable to common stockholders of $110.6$167.6 million, or $1.12$1.80 per diluted share, during the nine months ended September 30, 2016. The consolidated operating2019. Hilltop’s financial results during the nine months ended September 30, 2017 included the previously mentioned increase to other noninterest income of $15.0 million from coverage provided by an insurance policycontinuing operations for forgery related to a single, large loan charged off by the Bank in 2016 and the pre-tax net increase to other noninterest income of $11.6 million (or $14.3 million after income tax benefit of $2.6 million) related to the resolution of the appraisal proceedings from the SWS Merger, partially offset by the hurricane losses noted above. The consolidated operating results during the three and nine months ended September 30, 20162020 reflect both a significant increase in mortgage origination segment net gains from sales of loans and other mortgage production income, while the nine months ended September 30, 2020 also included a significant build in the allowance for credit losses associated with the deterioration of the economic outlook attributable to the market disruption and economic uncertainties caused by COVID-19. The nine months ended September 30, 2019 results included the previously mentioned $24.5costs incurred associated with the significant Leadership Changes and other efficiency initiative-related charges which, in the aggregate, totaled $9.4 million charge-offbefore income taxes.
Including income from discontinued operations, net of income taxes, income applicable to common stockholders was $153.3 million, or $1.70 per diluted share, during the single, large loan bythree months ended September 30, 2020, compared to $79.4
63
million, or $0.86 per diluted share, during the Bank.
Our consolidated operating resultsthree months ended September 30, 2019. Including income from discontinued operations, net of income taxes, income applicable to common stockholders was $331.4 million, or $3.67 per diluted share, during the nine months ended September 30, 2017 also included transaction costs related2020, compared to the acquisition of SWS (the “SWS Merger”), while our consolidated operating results$176.0 million, or $1.89 per diluted share, during the nine months ended September 30, 2016 included both transaction costs and integration-related costs associated with employee expenses (such as severance and retention), professional fees (such as consulting and legal) and contractual costs (such as vendor contract termination and lease), incurred as a result of the integration of the operations and systems acquired in the SWS Merger.2019.
During the nine months ended September 30, 2017, we incurred $1.6 million in pre-tax transaction costs related to the SWS Merger. During the nine months ended September 30, 2016, we incurred transaction costs and integration-related costs related to the SWS Merger totaling $12.5 million resulting from $6.7 million in pre-tax transaction costs and pre-tax integration-related costs associated with employee, professional fee and contractual expenses of $2.9 million, $2.8 million and $0.1 million, respectively. Effective as of the close of business on January 22, 2016, we merged FSC and Hilltop Securities into a combined firm operating under the “Hilltop Securities” name. The integration is complete and Hilltop Securities does not expect to incur any additional integration costs in relation to the SWS Merger.
Certain items included in net income for 2017the three and 2016nine months ended September 30, 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 FDIC-assistedFederal Deposit Insurance Corporation (“FDIC”) -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 SWS Mergeracquisition of The Bank of River Oaks (“BORO”) in an all-cash transaction (“BORO Acquisition”), respectively (collectively, the “Bank Transactions”). Income before taxes during the three months ended September 30, 2017 included net accretion of $1.3 million, $8.1 million and $0.8 million on earning assets and liabilities acquired in the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, offset by amortization of identifiable intangibles of $1.6 million, $0.1 million and $0.2 million, respectively. During the three months ended September 30, 2016, income before taxes included net accretion of $1.9 million, $12.2 million and $1.1 million on earning assets and liabilities acquired in the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, offset by amortization of identifiable intangibles of $2.0 million, $0.2 million and $0.2 million, respectively. Income before taxes during the nine months ended September 30, 2017 included net accretion of $3.2 million, $38.5 million and $2.6 million on earning assets and liabilities acquired in the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, offset by amortization of identifiable intangibles of $4.8 million, $0.5 million and $0.6 million, respectively. During the nine months ended September 30, 2016, income before taxes included net accretion of $7.8 million, $36.2 million and $3.5 million on earning assets and liabilities acquired in the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, offset by amortization of identifiable intangibles of $6.0 million, $0.6 million and $0.7 million, respectively.
61
In addition, the Bank recorded a “true-up” accrualfollowing purchase accounting items related to the loss-share agreements with the FDIC and amortization of the FDIC Indemnification Asset, both related to the FNB Transaction, of $5.5 million and $15.4 million during the three and nine months ended September 30, 2017, respectively, compared to $1.4 million and $5.3 million during the same periods in 2016.Bank Transactions (in thousands).
| | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2020 | | | PlainsCapital Merger | | | FNB Transaction | | | SWS Merger | | | BORO Acquisition | | | Total | |
Net accretion on earning assets and liabilities | | $ | 358 | | $ | 2,031 | | $ | 591 | | $ | 601 | | $ | 3,581 | |
Amortization of identifiable intangibles | | | (858) | | | (31) | | | (156) | | | (516) | | | (1,561) | |
| | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2020 | | | PlainsCapital Merger | | | FNB Transaction | | | SWS Merger | | | BORO Acquisition | | | Total | |
Net accretion on earning assets and liabilities | | $ | 1,065 | | $ | 9,811 | | $ | 756 | | $ | 1,833 | | $ | 13,465 | |
Amortization of identifiable intangibles | | | (2,575) | | | (107) | | | (469) | | | (1,706) | | | (4,857) | |
| | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2019 | | | PlainsCapital Merger | | | FNB Transaction | | | SWS Merger | | | BORO Acquisition | | | Total | |
Net accretion on earning assets and liabilities | | $ | 732 | | $ | 5,874 | | $ | 300 | | $ | 928 | | $ | 7,834 | |
Amortization of identifiable intangibles | | | (1,000) | | | (69) | | | (174) | | | (635) | | | (1,878) | |
| | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2019 | | | PlainsCapital Merger | | | FNB Transaction | | | SWS Merger | | | BORO Acquisition | | | Total | |
Net accretion on earning assets and liabilities | | $ | 1,834 | | $ | 15,813 | | $ | 1,307 | | $ | 3,909 | | $ | 22,863 | |
Amortization of identifiable intangibles | | | (3,002) | | | (221) | | | (522) | | | (2,063) | | | (5,808) | |
We consider the ratiosThe information shown in the table below to beincludes certain key performance indicators of our performance.on a consolidated basis.
| | | | | | | | | | | | | |||||||
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | ||||||||||||
|
| 2020 |
| 2019 |
| | 2020 |
| | 2019 |
| | |||||||
Return on average stockholders' equity (1) |
| 25.94 | % | 15.55 | % | | 19.85 | % | | 11.81 | % | | |||||||
Return on average assets (2) |
| 3.71 | % | 2.26 | % | | 2.90 | % | | 1.76 | % | | |||||||
Net interest margin (3) (4) | | 2.56 | % | 3.45 | % | | 2.90 | % | | 3.54 | % | | |||||||
Leverage ratio (5) (end of period) | | | | | | | 13.03 | % | | 12.67 | % | | |||||||
Common equity Tier 1 risk-based capital ratio (6) (end of period) |
| | | | | | 19.85 | % | | 16.15 | % | |
|
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|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
Performance Ratios: |
|
|
|
|
|
|
|
|
|
Return on average stockholder's equity |
| 6.32 | % | 11.41 | % | 8.44 | % | 8.32 | % |
Return on average assets |
| 0.90 | % | 1.69 | % | 1.24 | % | 1.24 | % |
Net interest margin (1) (3) (4) |
| 3.50 | % | 3.65 | % | 3.69 | % | 3.71 | % |
Net interest margin (taxable equivalent) (2) (3) (4) |
| 3.52 | % | 3.67 | % | 3.71 | % | 3.74 | % |
(1) |
|
(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. |
|
|
(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) |
|
|
(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 in the table above, and 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 basis.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
64
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 September 30, 2017, the2020 and 2019, purchase accounting contributed 10 and 26 basis points, respectively, to our consolidated taxable equivalent net interest margin of 3.52% was 37 basis points greater due to the impact of purchase accounting2.57% and primarily related to accretion of discount on loans of $1.7 million, $8.1 million and $0.8 million associated with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of $0.4 million. The consolidated taxable equivalent net interest margin during the three months ended September 30, 2016 of 3.67% was 64 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of $2.7 million, $12.2 million and $1.1 million associated with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of $0.8 million.
3.46%, respectively. During the nine months ended September 30, 2017, the2020 and 2019, purchase accounting contributed 14 and 27 basis points, respectively, to our consolidated taxable equivalent net interest margin of 3.71% was 56 basis points greater due to the impact of purchase accounting2.90% and 3.55%, respectively, and primarily related to accretion of discount on loans of $4.9 million, $38.5 million and $2.4 millionthe following purchase accounting items associated with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of $1.6 million. During the nine months ended September 30, 2016, the consolidated taxable equivalent net interest margin of 3.74% was 70 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of $10.5 million, $36.2 million and $3.2 million associated with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of $2.5 million.Bank Transactions (in thousands).
| | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2020 | | | PlainsCapital Merger | | | FNB Transaction | | | SWS Merger | | | BORO Acquisition | | | Total | |
Accretion of discount on loans | | $ | 301 | | $ | 2,031 | | $ | 414 | | $ | 600 | | $ | 3,346 | |
Accretion of discount on acquired securities | | | 57 | | | — | | | — | | | — | | | 57 | |
The FNB Transaction-related accretion of discount on loans of $38.5 million and $36.2 million during the nine months ended September 30, 2017 and 2016, respectively, included accretion of approximately $4 million and $11 million, respectively, due to better-than-expected resolution of covered purchased credit impaired (“PCI”) loans during the respective periods. The performance of the covered PCI loan portfolio since 2014, which has exceeded our expectations at the time of acquisition, has led to higher yields calculated as a result of the Bank’s quarterly cash flow recast process. The recast process performed during the nine months ended September 30, 2017 and 2016 resulted in the reclassification of $27.1 million and $25.4 million, respectively, from nonaccretable difference to accretable yield.
| | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2020 | | | PlainsCapital Merger | | | FNB Transaction | | | SWS Merger | | | BORO Acquisition | | | Total | |
Accretion of discount on loans | | $ | 949 | | $ | 9,811 | | $ | 609 | | $ | 1,833 | | $ | 13,202 | |
Accretion of discount on acquired securities | | | 116 | | | — | | | — | | | — | | | 116 | |
| | | | | | | | | | | | | | | | |
Three Months Ended September 30, 2019 | | | PlainsCapital Merger | | | FNB Transaction | | | SWS Merger | | | BORO Acquisition | | | Total | |
Accretion of discount on loans | | $ | 847 | | $ | 5,874 | | $ | 276 | | $ | 870 | | $ | 7,868 | |
Accretion (amortization) of discount (premium) on acquired securities | | | (115) | | | — | | | 8 | | | 58 | | | (49) | |
| | | | | | | | | | | | | | | | |
Nine Months Ended September 30, 2019 | | | PlainsCapital Merger | | | FNB Transaction | | | SWS Merger | | | BORO Acquisition | | | Total | |
Accretion of discount on loans | | $ | 2,287 | | $ | 15,813 | | $ | 1,225 | | $ | 3,723 | | $ | 23,047 | |
Accretion (amortization) of discount (premium) on acquired securities | | | (453) | | | — | | | 22 | | | 186 | | | (245) | |
62
The tables below provide additional details regarding our consolidated net interest income (dollars in thousands).
| | | | | | | | | | | | | | | | | | ||
| | Three Months Ended September 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 | | $ | 2,530,805 | | $ | 20,108 |
| 3.18 | % | $ | 1,754,975 | | $ | 18,178 |
| 4.14 | % | ||
Loans held for investment, gross (1) | | | 7,730,711 | | | 84,847 |
| 4.32 | % | | 7,167,169 | | | 101,402 |
| 5.57 | % | ||
Investment securities - taxable | |
| 1,974,911 | |
| 11,017 |
| 2.23 | % |
| 1,815,454 | |
| 15,733 |
| 3.47 | % | ||
Investment securities - non-taxable (2) | |
| 243,716 | |
| 2,011 |
| 3.30 | % |
| 240,595 | |
| 1,694 |
| 2.82 | % | ||
Federal funds sold and securities purchased under agreements to resell | |
| 154,588 | |
| 10 |
| 0.03 | % |
| 50,522 | |
| 251 |
| 1.97 | % | ||
Interest-bearing deposits in other financial institutions | |
| 1,794,652 | |
| 626 |
| 0.14 | % |
| 330,968 | |
| 1,928 |
| 2.31 | % | ||
Securities borrowed | | | 1,297,112 | | | 10,705 | | 3.23 | % | | 1,565,608 | | | 21,010 | | 5.25 | % | ||
Other | |
| 49,701 | |
| 823 |
| 6.59 | % |
| 83,379 | |
| 1,862 |
| 8.89 | % | ||
Interest-earning assets, gross (2) | |
| 15,776,196 | |
| 130,147 |
| 3.26 | % |
| 13,008,670 | |
| 162,058 |
| 4.92 | % | ||
Allowance for credit losses | |
| (156,071) | | | | | | |
| (55,710) | | | | | | | ||
Interest-earning assets, net | |
| 15,620,125 | | | | | | |
| 12,952,960 | | | | | | | ||
Noninterest-earning assets | |
| 1,493,194 | | | | | | |
| 1,389,963 | | | | | | | ||
Total assets | | $ | 17,113,319 | | | | | | | $ | 14,342,923 | | | | | | | ||
| | | | | | | | | | | | | | | | | | ||
Liabilities and Stockholders' Equity | | | | | | | | | | | | | | | | | | ||
Interest-bearing liabilities | | | | | | | | | | | | | | | | | | ||
Interest-bearing deposits | | $ | 7,868,100 | | $ | 10,700 |
| 0.54 | % | $ | 5,943,901 | | $ | 18,887 |
| 1.26 | % | ||
Securities loaned | | | 1,193,497 | | | 8,729 | | 2.91 | % | | 1,448,345 | | | 17,889 | | 4.90 | % | ||
Notes payable and other borrowings | |
| 1,259,559 | |
| 8,500 |
| 2.69 | % |
| 1,605,598 | |
| 11,968 |
| 2.94 | % | ||
Total interest-bearing liabilities | |
| 10,321,156 | |
| 27,929 |
| 1.08 | % |
| 8,997,844 | |
| 48,744 |
| 2.15 | % | ||
Noninterest-bearing liabilities | | | | | | | | | | | | | | | | | | ||
Noninterest-bearing deposits | |
| 3,508,282 | | | | | | |
| 2,680,729 | | | | | | | ||
Other liabilities | |
| 903,571 | | | | | | |
| 611,337 | | | | | | | ||
Total liabilities | |
| 14,733,009 | | | | | | |
| 12,289,910 | | | | | | | ||
Stockholders’ equity | |
| 2,350,900 | | | | | | |
| 2,029,511 | | | | | | | ||
Noncontrolling interest | |
| 29,410 | | | | | | |
| 23,502 | | | | | | | ||
Total liabilities and stockholders' equity | | $ | 17,113,319 | | | | | | | $ | 14,342,923 | | | | | | | ||
| | | | | | | | | | | | | | | | | | ||
Net interest income (2) | | | | | $ | 102,218 | | | | | | | $ | 113,314 | | | | ||
Net interest spread (2) | | | | | | |
| 2.18 | % | | | | | |
| 2.77 | % | ||
Net interest margin (2) | | | | | | |
| 2.57 | % | | | | | |
| 3.46 | % |
| | | | | | | | | | | | | | | | | |
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| Three Months Ended September 30, |
| ||||||||||||||
|
| 2017 |
| 2016 |
| ||||||||||||
|
| Average |
| Interest |
| Annualized |
| Average |
| Interest |
| Annualized |
| ||||
|
| Outstanding |
| Earned or |
| Yield or |
| Outstanding |
| Earned or |
| Yield or |
| ||||
|
| Balance |
| Paid |
| Rate |
| Balance |
| Paid |
| Rate |
| ||||
Assets |
|
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|
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|
|
|
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|
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|
|
Interest-earning assets |
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Loans, gross (1) |
| $ | 8,077,804 |
| $ | 102,546 |
| 5.01 | % | $ | 7,315,433 |
| $ | 97,590 |
| 5.26 | % |
Investment securities - taxable |
|
| 1,538,890 |
|
| 11,134 |
| 2.88 | % |
| 999,394 |
|
| 5,915 |
| 2.36 | % |
Investment securities - non-taxable (2) |
|
| 229,089 |
|
| 2,032 |
| 3.54 | % |
| 296,013 |
|
| 2,052 |
| 2.77 | % |
Federal funds sold and securities purchased under agreements to resell |
|
| 139,398 |
|
| — |
| 0.00 | % |
| 185,533 |
|
| 52 |
| 0.11 | % |
Interest-bearing deposits in other financial institutions |
|
| 282,806 |
|
| 853 |
| 1.20 | % |
| 478,560 |
|
| 567 |
| 0.47 | % |
Securities borrowed |
|
| 1,548,039 |
|
| 11,404 |
| 2.88 | % |
| 1,476,297 |
|
| 9,037 |
| 2.44 | % |
Other |
|
| 87,281 |
|
| 1,536 |
| 7.00 | % |
| 65,858 |
|
| 585 |
| 3.54 | % |
Interest-earning assets, gross (2) |
|
| 11,903,307 |
|
| 129,505 |
| 4.30 | % |
| 10,817,088 |
|
| 115,798 |
| 4.22 | % |
Allowance for loan losses |
|
| (61,243) |
|
|
|
|
|
|
| (53,470) |
|
|
|
|
|
|
Interest-earning assets, net |
|
| 11,842,064 |
|
|
|
|
|
|
| 10,763,618 |
|
|
|
|
|
|
Noninterest-earning assets |
|
| 1,506,552 |
|
|
|
|
|
|
| 1,588,921 |
|
|
|
|
|
|
Total assets |
| $ | 13,348,616 |
|
|
|
|
|
| $ | 12,352,539 |
|
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|
|
Liabilities and Stockholders' Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
| $ | 5,350,959 |
| $ | 6,841 |
| 0.51 | % | $ | 4,851,952 |
| $ | 3,996 |
| 0.33 | % |
Securities loaned |
|
| 1,398,922 |
|
| 8,935 |
| 2.53 | % |
| 1,390,071 |
|
| 6,955 |
| 1.99 | % |
Notes payable and other borrowings |
|
| 1,781,498 |
|
| 8,188 |
| 1.81 | % |
| 1,339,395 |
|
| 5,142 |
| 1.53 | % |
Total interest-bearing liabilities |
|
| 8,531,379 |
|
| 23,964 |
| 1.11 | % |
| 7,581,418 |
|
| 16,093 |
| 0.84 | % |
Noninterest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
| 2,290,151 |
|
|
|
|
|
|
| 2,251,744 |
|
|
|
|
|
|
Other liabilities |
|
| 627,907 |
|
|
|
|
|
|
| 705,985 |
|
|
|
|
|
|
Total liabilities |
|
| 11,449,437 |
|
|
|
|
|
|
| 10,539,147 |
|
|
|
|
|
|
Stockholders’ equity |
|
| 1,896,838 |
|
|
|
|
|
|
| 1,810,266 |
|
|
|
|
|
|
Noncontrolling interest |
|
| 2,341 |
|
|
|
|
|
|
| 3,126 |
|
|
|
|
|
|
Total liabilities and stockholders' equity |
| $ | 13,348,616 |
|
|
|
|
|
| $ | 12,352,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (2) |
|
|
|
| $ | 105,541 |
|
|
|
|
|
| $ | 99,705 |
|
|
|
Net interest spread (2) |
|
|
|
|
|
|
| 3.19 | % |
|
|
|
|
|
| 3.38 | % |
Net interest margin (2) |
|
|
|
|
|
|
| 3.52 | % |
|
|
|
|
|
| 3.67 | % |
65
63
| | Nine Months Ended September 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 | | $ | 2,153,565 | | $ | 55,775 |
| 3.45 | % | $ | 1,361,789 | | $ | 45,706 |
| 4.48 | % |
Loans held for investment, gross (1) | | | 7,580,436 | | | 268,208 |
| 4.67 | % | | 7,030,961 | | | 299,069 |
| 5.63 | % |
Investment securities - taxable | |
| 1,818,953 | |
| 40,112 |
| 2.94 | % |
| 1,780,581 | |
| 45,972 |
| 3.44 | % |
Investment securities - non-taxable (2) | |
| 222,818 | |
| 5,729 |
| 3.43 | % |
| 230,119 | |
| 5,040 |
| 2.92 | % |
Federal funds sold and securities purchased under agreements to resell | |
| 92,722 | |
| 138 |
| 0.20 | % |
| 62,021 | |
| 1,008 |
| 2.17 | % |
Interest-bearing deposits in other financial institutions | |
| 1,277,130 | |
| 2,679 |
| 0.28 | % |
| 386,587 | |
| 7,061 |
| 2.44 | % |
Securities borrowed | | | 1,413,473 | | | 36,915 | | 3.43 | % | | 1,537,131 | | | 53,386 | | 4.58 | % |
Other | |
| 62,690 | |
| 2,774 |
| 5.91 | % |
| 71,292 | |
| 5,215 |
| 9.77 | % |
Interest-earning assets, gross (2) | |
| 14,621,787 | |
| 412,330 |
| 3.73 | % |
| 12,460,481 | |
| 462,457 |
| 4.92 | % |
Allowance for credit losses | |
| (111,070) | | | | | | |
| (58,218) | | | | | | |
Interest-earning assets, net | |
| 14,510,717 | | | | | | |
| 12,402,263 | | | | | | |
Noninterest-earning assets | |
| 1,576,485 | | | | | | |
| 1,407,649 | | | | | | |
Total assets | | $ | 16,087,202 | | | | | | | $ | 13,809,912 | | | | | | |
| | | | | | | | | | | | | | | | | |
Liabilities and Stockholders' Equity | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | | |
Interest-bearing deposits | | $ | 7,354,534 | | $ | 37,771 |
| 0.69 | % | $ | 5,854,440 | | $ | 54,029 |
| 1.23 | % |
Securities loaned | | | 1,316,032 | | | 30,802 | | 3.13 | % | | 1,402,467 | | | 46,097 | | 4.39 | % |
Notes payable and other borrowings | |
| 1,246,087 | |
| 25,043 |
| 2.67 | % |
| 1,355,420 | |
| 31,907 |
| 3.13 | % |
Total interest-bearing liabilities | |
| 9,916,653 | |
| 93,616 |
| 1.26 | % |
| 8,612,327 | |
| 132,033 |
| 2.05 | % |
Noninterest-bearing liabilities | | | | | | | | | | | | | | | | | |
Noninterest-bearing deposits | |
| 3,182,002 | | | | | | |
| 2,584,114 | | | | | | |
Other liabilities | |
| 732,530 | | | | | | |
| 595,419 | | | | | | |
Total liabilities | |
| 13,831,185 | | | | | | |
| 11,791,860 | | | | | | |
Stockholders’ equity | |
| 2,229,882 | | | | | | |
| 1,994,877 | | | | | | |
Noncontrolling interest | |
| 26,135 | | | | | | |
| 23,175 | | | | | | |
Total liabilities and stockholders' equity | | $ | 16,087,202 | | | | | | | $ | 13,809,912 | | | | | | |
| | ��� | | | | | | | | | | | | | | | |
Net interest income (2) | | | | | $ | 318,714 | | | | | | | $ | 330,424 | | | |
Net interest spread (2) | | | | | | |
| 2.47 | % | | | | | |
| 2.87 | % |
Net interest margin (2) | | | | | | |
| 2.90 | % | | | | | |
| 3.55 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, |
| ||||||||||||||
|
| 2017 |
| 2016 |
| ||||||||||||
|
| 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, gross (1) |
| $ | 7,659,277 |
| $ | 306,330 |
| 5.30 | % | $ | 7,007,669 |
| $ | 287,591 |
| 5.41 | % |
Investment securities - taxable |
|
| 1,343,753 |
|
| 27,654 |
| 2.75 | % |
| 1,041,245 |
|
| 19,075 |
| 2.44 | % |
Investment securities - non-taxable (2) |
|
| 226,977 |
|
| 5,684 |
| 3.34 | % |
| 283,033 |
|
| 6,532 |
| 3.08 | % |
Federal funds sold and securities purchased under agreements to resell |
|
| 134,826 |
|
| 50 |
| 0.05 | % |
| 152,010 |
|
| 115 |
| 0.10 | % |
Interest-bearing deposits in other financial institutions |
|
| 386,695 |
|
| 2,640 |
| 0.91 | % |
| 431,056 |
|
| 1,524 |
| 0.47 | % |
Securities borrowed |
|
| 1,516,004 |
|
| 29,054 |
| 2.53 | % |
| 1,574,084 |
|
| 22,952 |
| 1.95 | % |
Other |
|
| 86,587 |
|
| 3,673 |
| 5.66 | % |
| 63,235 |
|
| 1,671 |
| 3.53 | % |
Interest-earning assets, gross (2) |
|
| 11,354,119 |
|
| 375,085 |
| 4.38 | % |
| 10,552,332 |
|
| 339,460 |
| 4.25 | % |
Allowance for loan losses |
|
| (58,303) |
|
|
|
|
|
|
| (51,198) |
|
|
|
|
|
|
Interest-earning assets, net |
|
| 11,295,816 |
|
|
|
|
|
|
| 10,501,134 |
|
|
|
|
|
|
Noninterest-earning assets |
|
| 1,535,649 |
|
|
|
|
|
|
| 1,593,065 |
|
|
|
|
|
|
Total assets |
| $ | 12,831,465 |
|
|
|
|
|
| $ | 12,094,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
| $ | 5,144,173 |
| $ | 16,995 |
| 0.44 | % | $ | 4,819,336 |
| $ | 11,872 |
| 0.33 | % |
Securities loaned |
|
| 1,383,329 |
|
| 22,756 |
| 2.20 | % |
| 1,485,463 |
|
| 17,857 |
| 1.61 | % |
Notes payable and other borrowings |
|
| 1,515,767 |
|
| 20,684 |
| 1.81 | % |
| 1,146,993 |
|
| 14,483 |
| 1.69 | % |
Total interest-bearing liabilities |
|
| 8,043,269 |
|
| 60,435 |
| 1.00 | % |
| 7,451,792 |
|
| 44,212 |
| 0.79 | % |
Noninterest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
| 2,266,361 |
|
|
|
|
|
|
| 2,203,011 |
|
|
|
|
|
|
Other liabilities |
|
| 632,384 |
|
|
|
|
|
|
| 663,043 |
|
|
|
|
|
|
Total liabilities |
|
| 10,942,014 |
|
|
|
|
|
|
| 10,317,846 |
|
|
|
|
|
|
Stockholders’ equity |
|
| 1,886,874 |
|
|
|
|
|
|
| 1,774,196 |
|
|
|
|
|
|
Noncontrolling interest |
|
| 2,577 |
|
|
|
|
|
|
| 2,157 |
|
|
|
|
|
|
Total liabilities and stockholders' equity |
| $ | 12,831,465 |
|
|
|
|
|
| $ | 12,094,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (2) |
|
|
|
| $ | 314,650 |
|
|
|
|
|
| $ | 295,248 |
|
|
|
Net interest spread (2) |
|
|
|
|
|
|
| 3.38 | % |
|
|
|
|
|
| 3.46 | % |
Net interest margin (2) |
|
|
|
|
|
|
| 3.71 | % |
|
|
|
|
|
| 3.74 | % |
(1) |
| Average balance includes non-accrual loans. |
(2) |
| Presented on a taxable equivalent basis with annualized taxable equivalent adjustments based on |
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 nine months ended September 30, 2020 were also negatively impacted by certain actions taken by management 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, were 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 increased $5.8 million and $19.6 milliondecreased during the three and nine months ended September 30, 2017, respectively,2020, compared with the same periods in 2016. Changes2019, primarily due to decreases on interest earned on loans held for investment, interest incurred beginning in May 2020 related to the new Subordinated Notes at corporate and decreases in net interest earned on money markets and margin loans within the broker-dealer segment. Refer to the discussion in the “Banking Segment” section that follows for more details on the changes in net interest income, were primarily related to increasesincluding the component changes in the net interest earned on mortgage-backed securitiesvolume of average interest-earning assets and increasesinterest-bearing liabilities and changes in the average stock borrowing balances in our broker-dealer segment and net volume and yield changesrates earned or paid on the loan portfolio within our banking segment as a result of the changes in year-over-year accretion of discount on loans. those items.
The provision for loan(reversal of) credit losses is determined by management as the amount necessary to be added tomaintain the allowance for loancredit losses after net charge-offs have been deducted to bringat the allowance to a level which, in management’s best estimate, is necessary to absorb probableamount of expected credit losses inherent within the existingloans 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. Theportfolio based on historical loss experience, reasonable and supportable
66
forecasts, and other significant qualitative and quantitative factors. Substantially all of our consolidated provision for loan(reversal of) credit losses substantially all of whichis related to the banking segment, was $1.3 million and $4.0 million during the three months ended September 30, 2017 and 2016, respectively. During the three months ended September 30, 2017, the provision for loan losses was comprised of charges relating to newly originated loans and acquired loans without credit impairment at acquisition of $1.4 million, partially offset by the recapture of charges on PCI loans of $0.1 million, compared to charges relating to newly originated loans and acquired loans without credit impairment at acquisition of $6.4 million, partially offset by the recapture of charges on PCI loans of $2.4 million during the three months ended September 30, 2016.segment. During the nine months ended September 30, 2017 and 2016,2020, the consolidated provision for loancredit losses substantially all of which relatedwas significantly impacted by the banking segment’s build 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 the banking segment, was $8.8 millionmarket disruption and $36.3 million, respectively. The provisionrelated economic uncertainties caused by COVID-19 through June 2020. Refer to the discussion in the “Financial Condition – Allowance for loan losses
64
duringCredit Losses on Loans” section that follows for more details regarding the significant assumptions and estimates involved in estimating credit losses. During the nine months ended September 30, 20172019, the provision for (reversal of) credit losses was comprised of charges relating to newly originated loans and acquired loans without credit impairment at acquisition of $7.5 million and charges on PCI loans of $1.3 million, compared to charges relating to newly originated loans and acquired loans without credit impairment at acquisition of $37.5 million, partially offsetimpacted by the recapture of charges on PCI loans of $1.2 millionbanking segment’s release during the nine months ended September 30, 2016. In addition, as previously mentioned, the consolidated provision for loan losses during the nine months ended September 30, 2016 included a $24.5 million charge-offfirst quarter of 2019 of a single large loan by the Bank.$2.0 million reserve associated with previously estimated hurricane loss exposures due to improved customer performance.
Consolidated noninterestNoninterest income decreased $56.0 million and $63.2 millionfrom continuing operations increased during the three and nine months ended September 30, 2017, respectively,2020, compared with the same periods in 2016. Consolidated noninterest income during the nine months ended September 30, 2017 included the previously mentioned increase2019, primarily due to other noninterest income of $15.0 millionincreases in our banking segment and the pre-tax net increase to other noninterest income of $11.6 million within corporate related to the resolution of the appraisal proceedings from the SWS Merger. The year-over-yeartotal mortgage loan sales volume, changes in noninterest income, other than the previously mentioned non-recurring items,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 with our broker-dealer segment.
Noninterest expense from continuing operations increased during the three and nine months ended September 30, 2017,2020, compared with the same periods in 2016, were2019, primarily driven by decreasesdue to increases in noninterest income within each of ourvariable compensation and segment operating segments.
Consolidated noninterest expense decreased $10.3 million and $16.1 million during the three and nine months ended September 30, 2017, respectively, comparedcosts associated with the same periodsincreased mortgage loan originations within our mortgage origination segment and increases in 2016. The year-over-year decrease in noninterest expense during the three and nine months ended September 30, 2017, compared with the same periods in 2016, primarily included decreases in noninterest expensevariable compensation within our broker-dealer and mortgage origination segments, partially offset by an increase within our banking segment and an increase in our insurance segment due to the effects of hurricanes as well as other weather-related losses experienced during 2017. During the nine months ended September 30, 2017, we incurred pre-tax transaction and integration costs related to the SWS Merger of $1.6 million, compared with $12.5 million during the same period in 2016.segment.
ConsolidatedEffective income tax expenserates from continuing operations during the three months ended September 30, 20172020 and 2016 was $18.0 million2019 were 22.7% and $33.0 million,21.9%, respectively, reflecting effective tax rates of 37.2% and 38.6%, respectively. Duringfor the nine months ended September 30, 20172020 and 2016, consolidated income tax expense was $58.8 million2019, were 23.0% and $65.9 million, respectively, reflecting effective tax rates of 33.0% and 37.0%22.5%, respectively. The effective tax rate duringrates approximated statutory rates and include the three months ended September 30, 2017 was higher than the statutory rate primarily due to state income taxes. The effective tax rate during the nine months ended September 30, 2017 was lower than the statutory rate primarily due to a nontaxable gain recordedeffect of investments in the resolution of the SWS matter as discussed in Note 12 to the consolidated financial statements, as the SWS Merger was a tax-free reorganization under Section 368(a) of the Internal Revenue Code. The effective tax rates during the three and nine months ended September 30, 2016 were slightly higher than the statutory rate primarily due to non-deductible transaction costs associated with the SWS Merger,tax-exempt instruments, offset by the recognition of excess tax benefits on share-based payment awards.non-deductible expenses.
Segment Results from Continuing Operations
Banking Segment
Income before income taxes inThe following table presents certain information about the operating results of our banking segment during the three months ended September 30, 2017 and 2016 was $36.3 million and $37.5 million, respectively, while income before income taxes in our banking segment during the nine months ended September 30, 2017 and 2016 was $127.9 million and $90.4 million, respectively. (in thousands).
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| Variance | | Nine Months Ended September 30, |
| Variance | | ||||||||||
| | 2020 | | 2019 | | 2020 vs 2019 | | 2020 | | 2019 | | 2020 vs 2019 | | ||||||
Net interest income | | $ | 96,416 | | $ | 97,642 | | $ | (1,226) | | $ | 284,440 | | $ | 283,755 | | $ | 685 | |
Provision for credit losses | |
| — | |
| — | |
| — | |
| 99,875 | |
| 355 | |
| 99,520 | |
Noninterest income | |
| 9,819 | |
| 8,856 | |
| 963 | |
| 29,246 | |
| 30,219 | |
| (973) | |
Noninterest expense | | | 55,980 | |
| 53,767 | |
| 2,213 | | | 169,569 | |
| 172,744 | |
| (3,175) | |
Income before income taxes | | $ | 50,255 | | $ | 52,731 | | $ | (2,476) | | $ | 44,242 | | $ | 140,875 | | $ | (96,633) | |
The increasedecline in income before income taxes during the nine months ended September 30, 2017,2020, compared with the same period in 2016,2019, was primarily due to the inclusion of the previously mentionedsignificant increase to other noninterest income of $15.0 million during the nine months ended September 30, 2017 and the $24.5 million charge-off withinin the provision for loancredit losses associated with the adoption of CECL and the market disruption caused by COVID-19 during the nine months ended September 30, 2016. Income before income taxes during the nine months ended September 30, 2017, compared with the same period in 2016, also increased duefirst and second quarters of 2020. Changes to an increase in net interest income associated with net volume and yield changes. See discussionrelated to the component changes in the Overview forvolume of average interest-earning assets and interest-bearing liabilities and changes in the effect of recent hurricanesrates earned or paid on the banking segment’s operating results.those items are discussed in more detail below.
65
We consider the ratiosThe information shown in the table below to beincludes certain key indicators of the performance and asset quality of our banking segment.
| | | | | | | | | | |
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | | ||||
|
| 2020 |
| 2019 |
| | 2020 |
| 2019 | |
Efficiency ratio (1) |
| 52.69 | % | 50.49 | % | | 54.06 | % | 55.02 | % |
Return on average assets (2) |
| 1.14 | % | 1.51 | % | | 0.36 | % | 1.43 | % |
Net interest margin (3) | | 3.03 | % | 3.97 | % | | 3.28 | % | 4.08 | % |
Net recoveries (charge-offs) to average loans outstanding (4) | | (0.03) | % | 0.02 | % | | (0.35) | % | (0.09) | % |
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
Performance Ratios: |
|
|
|
|
|
|
|
|
|
Efficiency ratio (1) |
| 62.29 | % | 59.59 | % | 57.62 | % | 58.83 | % |
Return on average assets |
| 0.94 | % | 1.09 | % | 1.17 | % | 0.91 | % |
Net interest margin (2) (4) |
| 4.03 | % | 4.50 | % | 4.34 | % | 4.69 | % |
Net interest margin (taxable equivalent) (3) (4) |
| 4.05 | % | 4.53 | % | 4.36 | % | 4.71 | % |
(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. |
67
(2) |
|
(3) | Net interest margin is defined as net interest income divided by average interest-earning assets. |
|
|
(4) | Net recoveries (charge-offs) to average loans outstanding is defined as |
|
|
The banking segment presents net interest margin in the table above, and 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-equivalenttaxable 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 September 30, 2017,2020 and 2019, purchase accounting contributed 13 and 35 basis points, respectively, to the banking segment’s taxable equivalent net interest margin of 4.05% was 51 basis points greater due to the impact of purchase accounting3.03% and primarily related to accretion of discount on loans of $1.7 million, $8.1 million and $0.8 million associated with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of $0.4 million. The banking segment’s taxable equivalent net interest margin during the three months ended September 30, 2016 of 4.53% was 90 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of $2.7 million, $12.2 million and $1.1 million associated with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of $0.8 million.
3.98%, respectively. During the nine months ended September 30, 2017,2020 and 2019, purchase accounting contributed 17 and 37 basis points, respectively, to the banking segment’s taxable equivalent net interest margin of 4.36% was 77 basis points greater due to the impact of3.29% and 4.09%, respectively. These purchase accounting and primarily related to accretion of discount on loans of $4.9 million, $38.5 million and $2.4 millionitems are associated with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of $1.6 million. The banking segment’s taxable equivalent net interest margin during the nine months ended September 30, 2016 of 4.71% was 99 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of $10.5 million, $36.2 million and $3.2 million associated with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of $2.5 million.
The FNB Transaction-related accretion of discount on loans of $38.5 million and $36.2 million during the nine months ended September 30, 2017 and 2016, respectively, included accretion of approximately $4 million and $11 million, respectively, due to better-than-expected resolution of covered PCI loans during the respective periods. The performance of the covered PCI loan portfolio since 2014, which has exceeded our expectations at the time of acquisition, has led to higher yields calculatedBank Transactions as a result of the Bank’s quarterly cash flow recast process. The recast process performed during the nine months ended September 30, 2017 and 2016 resulteddetailed in the reclassification of $27.1 million and $25.4 million, respectively, from nonaccretable difference to accretable yield.
66
tables previously presented in the Consolidated Operating Results section.
The tables below provide additional details regarding our banking segment’s net interest income (dollars in thousands).
| | | | | | | | | | | | | | | | | |
| | Three Months Ended September 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) | | $ | 7,287,758 | | $ | 81,216 |
| 4.39 | % | $ | 6,611,749 | | $ | 94,087 |
| 5.60 | % |
Subsidiary warehouse lines of credit | |
| 2,188,068 | |
| 20,977 |
| 3.75 | % |
| 1,591,926 | |
| 18,282 |
| 4.49 | % |
Investment securities - taxable | |
| 1,451,049 | |
| 7,170 |
| 1.98 | % |
| 1,210,813 | |
| 7,613 |
| 2.51 | % |
Investment securities - non-taxable (2) | |
| 112,113 | |
| 960 |
| 3.43 | % |
| 93,574 | |
| 799 |
| 3.42 | % |
Federal funds sold and securities purchased under agreements to resell | |
| 400 | |
| — |
| 0.06 | % |
| 460 | |
| — |
| 0.24 | % |
Interest-bearing deposits in other financial institutions | |
| 1,561,910 | |
| 396 |
| 0.10 | % |
| 172,373 | |
| 950 |
| 2.19 | % |
Other | |
| 36,676 | |
| 42 |
| 0.46 | % |
| 63,659 | |
| 703 |
| 4.42 | % |
Interest-earning assets, gross (2) | |
| 12,637,974 | |
| 110,761 |
| 3.45 | % |
| 9,744,554 | |
| 122,434 |
| 4.95 | % |
Allowance for credit losses | |
| (155,531) | | | | | | |
| (55,565) | | | | | | |
Interest-earning assets, net | |
| 12,482,443 | | | | | | |
| 9,688,989 | | | | | | |
Noninterest-earning assets | |
| 1,049,072 | | | | | | |
| 949,816 | | | | | | |
Total assets | | $ | 13,531,515 | | | | | | | $ | 10,638,805 | | | | | | |
| | | | | | | | | | | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | | |
Interest-bearing deposits | | $ | 7,878,593 | | $ | 13,723 |
| 0.69 | % | $ | 5,682,456 | | $ | 20,963 |
| 1.46 | % |
Notes payable and other borrowings | |
| 166,687 | |
| 425 |
| 1.01 | % |
| 646,286 | |
| 3,679 |
| 2.23 | % |
Total interest-bearing liabilities | |
| 8,045,280 | |
| 14,148 |
| 0.70 | % |
| 6,328,742 | |
| 24,642 |
| 1.54 | % |
Noninterest-bearing liabilities | | | | | | | | | | | | | | | | | |
Noninterest-bearing deposits | |
| 3,682,422 | | | | | | |
| 2,681,915 | | | | | | |
Other liabilities | |
| 144,439 | | | | | | |
| 102,976 | | | | | | |
Total liabilities | |
| 11,872,141 | | | | | | |
| 9,113,633 | | | | | | |
Stockholders’ equity | |
| 1,659,374 | | | | | | |
| 1,525,172 | | | | | | |
Total liabilities and stockholders’ equity | | $ | 13,531,515 | | | | | | | $ | 10,638,805 | | | | | | |
| | | | | | | | | | | | | | | | | |
Net interest income (2) | | | | | $ | 96,613 | | | | | | | $ | 97,792 | | | |
Net interest spread (2) | | | | | | |
| 2.75 | % | | | | | |
| 3.40 | % |
Net interest margin (2) | | | | | | |
| 3.03 | % | | | | | |
| 3.98 | % |
68
| | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 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) | | $ | 7,107,779 | | $ | 254,553 |
| 4.72 | % | $ | 6,512,444 | | $ | 277,708 |
| 5.64 | % |
Subsidiary warehouse lines of credit | |
| 1,922,809 | |
| 55,309 |
| 3.78 | % |
| 1,238,650 | |
| 43,431 |
| 4.62 | % |
Investment securities - taxable | |
| 1,303,455 | |
| 21,249 |
| 2.17 | % |
| 1,170,534 | |
| 22,356 |
| 2.55 | % |
Investment securities - non-taxable (2) | |
| 111,158 | |
| 2,837 |
| 3.40 | % |
| 94,773 | |
| 2,424 |
| 3.41 | % |
Federal funds sold and securities purchased under agreements to resell | |
| 454 | |
| 1 |
| 0.18 | % |
| 444 | |
| 1 |
| 0.18 | % |
Interest-bearing deposits in other financial institutions | |
| 1,066,096 | |
| 1,642 |
| 0.21 | % |
| 218,231 | |
| 3,868 |
| 2.37 | % |
Other | |
| 45,065 | |
| 293 |
| 0.87 | % |
| 51,326 | |
| 1,856 |
| 4.82 | % |
Interest-earning assets, gross (2) | |
| 11,556,816 | |
| 335,884 |
| 3.84 | % |
| 9,286,402 | |
| 351,644 |
| 5.01 | % |
Allowance for credit losses | |
| (110,729) | | | | | | |
| (58,099) | | | | | | |
Interest-earning assets, net | |
| 11,446,087 | | | | | | |
| 9,228,303 | | | | | | |
Noninterest-earning assets | |
| 987,269 | | | | | | |
| 942,364 | | | | | | |
Total assets | | $ | 12,433,356 | | | | | | | $ | 10,170,667 | | | | | | |
| | | | | | | | | | | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | | | | | | | |
Interest-bearing liabilities | | | | | | | | | | | | | | | | | |
Interest-bearing deposits | | $ | 7,237,043 | | $ | 48,624 |
| 0.90 | % | $ | 5,577,755 | | $ | 59,897 |
| 1.44 | % |
Notes payable and other borrowings | |
| 221,177 | |
| 2,249 |
| 1.34 | % |
| 441,910 | |
| 7,530 |
| 2.25 | % |
Total interest-bearing liabilities | |
| 7,458,220 | |
| 50,873 |
| 0.91 | % |
| 6,019,665 | |
| 67,427 |
| 1.50 | % |
Noninterest-bearing liabilities | | | | | | | | | | | | | | | | | |
Noninterest-bearing deposits | |
| 3,252,584 | | | | | | |
| 2,563,305 | | | | | | |
Other liabilities | |
| 122,908 | | | | | | |
| 90,067 | | | | | | |
Total liabilities | |
| 10,833,712 | | | | | | |
| 8,673,037 | | | | | | |
Stockholders’ equity | |
| 1,599,644 | | | | | | |
| 1,497,630 | | | | | | |
Total liabilities and stockholders’ equity | | $ | 12,433,356 | | | | | | | $ | 10,170,667 | | | | | | |
| | | | | | | | | | | | | | | | | |
Net interest income (2) | | | | | $ | 285,011 | | | | | | | $ | 284,217 | | | |
Net interest spread (2) | | | | | | |
| 2.93 | % | | | | | |
| 3.51 | % |
Net interest margin (2) | | | | | | |
| 3.29 | % | | | | | |
| 4.09 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| ||||||||||||||
|
| 2017 |
| 2016 |
| ||||||||||||
|
| 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, gross (1) |
| $ | 5,806,508 |
| $ | 78,769 |
| 5.34 | % | $ | 5,363,523 |
| $ | 78,749 |
| 5.78 | % |
Subsidiary warehouse lines of credit |
|
| 1,669,633 |
|
| 15,991 |
| 3.75 | % |
| 1,363,413 |
|
| 13,235 |
| 3.80 | % |
Investment securities - taxable |
|
| 877,080 |
|
| 4,308 |
| 1.96 | % |
| 680,587 |
|
| 3,121 |
| 1.83 | % |
Investment securities - non-taxable (2) |
|
| 125,848 |
|
| 1,195 |
| 3.80 | % |
| 137,009 |
|
| 1,245 |
| 3.63 | % |
Federal funds sold and securities purchased under agreements to resell |
|
| 571 |
|
| — |
| 0.27 | % |
| 38,246 |
|
| 52 |
| 0.54 | % |
Interest-bearing deposits in other financial institutions |
|
| 244,017 |
|
| 780 |
| 1.27 | % |
| 389,713 |
|
| 516 |
| 0.53 | % |
Other |
|
| 72,362 |
|
| 646 |
| 3.57 | % |
| 57,839 |
|
| 527 |
| 3.65 | % |
Interest-earning assets, gross (2) |
|
| 8,796,019 |
|
| 101,689 |
| 4.55 | % |
| 8,030,330 |
|
| 97,445 |
| 4.77 | % |
Allowance for loan losses |
|
| (61,099) |
|
|
|
|
|
|
| (53,279) |
|
|
|
|
|
|
Interest-earning assets, net |
|
| 8,734,920 |
|
|
|
|
|
|
| 7,977,051 |
|
|
|
|
|
|
Noninterest-earning assets |
|
| 948,062 |
|
|
|
|
|
|
| 1,031,002 |
|
|
|
|
|
|
Total assets |
| $ | 9,682,982 |
|
|
|
|
|
| $ | 9,008,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
| $ | 5,056,539 |
| $ | 9,479 |
| 0.74 | % | $ | 4,558,000 |
| $ | 5,075 |
| 0.44 | % |
Notes payable and other borrowings |
|
| 915,818 |
|
| 2,478 |
| 1.06 | % |
| 775,175 |
|
| 1,024 |
| 0.52 | % |
Total interest-bearing liabilities (3) |
|
| 5,972,357 |
|
| 11,957 |
| 0.79 | % |
| 5,333,175 |
|
| 6,099 |
| 0.45 | % |
Noninterest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
| 2,293,091 |
|
|
|
|
|
|
| 2,280,750 |
|
|
|
|
|
|
Other liabilities |
|
| 49,031 |
|
|
|
|
|
|
| 70,971 |
|
|
|
|
|
|
Total liabilities |
|
| 8,314,479 |
|
|
|
|
|
|
| 7,684,896 |
|
|
|
|
|
|
Stockholders’ equity |
|
| 1,368,503 |
|
|
|
|
|
|
| 1,323,157 |
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
| $ | 9,682,982 |
|
|
|
|
|
| $ | 9,008,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (2) |
|
|
|
| $ | 89,732 |
|
|
|
|
|
| $ | 91,346 |
|
|
|
Net interest spread (2) |
|
|
|
|
|
|
| 3.76 | % |
|
|
|
|
|
| 4.33 | % |
Net interest margin (2) |
|
|
|
|
|
|
| 4.05 | % |
|
|
|
|
|
| 4.53 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, |
| ||||||||||||||
|
| 2017 |
| 2016 |
| ||||||||||||
|
| 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, gross (1) |
| $ | 5,643,019 |
| $ | 243,017 |
| 5.70 | % | $ | 5,242,000 |
| $ | 236,436 |
| 5.93 | % |
Subsidiary warehouse lines of credit |
|
| 1,425,476 |
|
| 40,622 |
| 3.76 | % |
| 1,169,400 |
|
| 34,226 |
| 3.85 | % |
Investment securities - taxable |
|
| 841,048 |
|
| 12,014 |
| 1.90 | % |
| 717,097 |
|
| 10,788 |
| 2.01 | % |
Investment securities - non-taxable (2) |
|
| 125,310 |
|
| 3,565 |
| 3.79 | % |
| 138,377 |
|
| 3,798 |
| 3.66 | % |
Federal funds sold and securities purchased under agreements to resell |
|
| 7,808 |
|
| 50 |
| 0.86 | % |
| 28,266 |
|
| 115 |
| 0.54 | % |
Interest-bearing deposits in other financial institutions |
|
| 307,624 |
|
| 2,389 |
| 1.04 | % |
| 341,372 |
|
| 1,371 |
| 0.54 | % |
Other |
|
| 71,533 |
|
| 1,804 |
| 3.36 | % |
| 53,631 |
|
| 1,525 |
| 3.79 | % |
Interest-earning assets, gross (2) |
|
| 8,421,818 |
|
| 303,461 |
| 4.77 | % |
| 7,690,143 |
|
| 288,259 |
| 4.94 | % |
Allowance for loan losses |
|
| (58,144) |
|
|
|
|
|
|
| (50,982) |
|
|
|
|
|
|
Interest-earning assets, net |
|
| 8,363,674 |
|
|
|
|
|
|
| 7,639,161 |
|
|
|
|
|
|
Noninterest-earning assets |
|
| 959,370 |
|
|
|
|
|
|
| 1,046,027 |
|
|
|
|
|
|
Total assets |
| $ | 9,323,044 |
|
|
|
|
|
| $ | 8,685,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits |
| $ | 4,863,393 |
| $ | 23,136 |
| 0.64 | % | $ | 4,515,661 |
| $ | 14,764 |
| 0.44 | % |
Notes payable and other borrowings |
|
| 796,086 |
|
| 5,501 |
| 0.91 | % |
| 600,720 |
|
| 2,423 |
| 0.53 | % |
Total interest-bearing liabilities (3) |
|
| 5,659,479 |
|
| 28,637 |
| 0.67 | % |
| 5,116,381 |
|
| 17,187 |
| 0.45 | % |
Noninterest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
| 2,249,786 |
|
|
|
|
|
|
| 2,220,755 |
|
|
|
|
|
|
Other liabilities |
|
| 53,063 |
|
|
|
|
|
|
| 55,315 |
|
|
|
|
|
|
Total liabilities |
|
| 7,962,328 |
|
|
|
|
|
|
| 7,392,451 |
|
|
|
|
|
|
Stockholders’ equity |
|
| 1,360,716 |
|
|
|
|
|
|
| 1,292,737 |
|
|
|
|
|
|
Total liabilities and stockholders’ equity |
| $ | 9,323,044 |
|
|
|
|
|
| $ | 8,685,188 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (2) |
|
|
|
| $ | 274,824 |
|
|
|
|
|
| $ | 271,072 |
|
|
|
Net interest spread (2) |
|
|
|
|
|
|
| 4.09 | % |
|
|
|
|
|
| 4.49 | % |
Net interest margin (2) |
|
|
|
|
|
|
| 4.36 | % |
|
|
|
|
|
| 4.71 | % |
(1) |
| Average balance includes non-accrual loans. |
67
(2) |
| Presented on a taxable equivalent basis with annualized taxable equivalent adjustments based on |
|
|
|
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 margins for the three and nine months ended September 30, 2020 were also negatively impacted by certain actions taken by management to strengthen the Bank’s 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, were 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 September 30, | | Nine Months Ended September 30, |
| ||||||||||||||
| | 2020 vs. 2019 | | 2020 vs. 2019 |
| ||||||||||||||
| | Change Due To (1) | | | | | Change Due To (1) | | | |
| ||||||||
|
| Volume |
| Yield/Rate |
| Change |
| Volume |
| Yield/Rate |
| Change |
| ||||||
Interest income | | | | | | | | | | | | | | | | | | | |
Loans held for investment, gross | | $ | 9,542 | | $ | (22,413) | | $ | (12,871) | | $ | 8,463 | | $ | (31,618) | | $ | (23,155) | |
Subsidiary warehouse lines of credit | |
| 6,752 | |
| (4,057) | |
| 2,695 | |
| 7,973 | |
| 3,905 | |
| 11,878 | |
Investment securities - taxable | |
| 1,523 | |
| (1,966) | |
| (443) | |
| 853 | |
| (1,960) | |
| (1,107) | |
Investment securities - non-taxable (2) | |
| 160 | |
| 1 | |
| 161 | |
| 141 | |
| 272 | |
| 413 | |
Federal funds sold and securities purchased under agreements to resell | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
Interest-bearing deposits in other financial institutions | |
| 7,658 | |
| (8,212) | |
| (554) | |
| 5,064 | |
| (7,290) | |
| (2,226) | |
Other | |
| (300) | |
| (361) | |
| (661) | |
| (76) | |
| (1,487) | |
| (1,563) | |
Total interest income (2) | |
| 25,335 | | | (37,008) | | | (11,673) | | | 22,418 | | | (38,178) | | | (15,760) | |
| | | | | | | | | | | | | | | | | | | |
Interest expense | | | | | | | | | | | | | | | | | | | |
Deposits | | $ | 8,102 | | $ | (15,342) | | $ | (7,240) | | $ | 6,005 | | $ | (17,278) | | $ | (11,273) | |
Notes payable and other borrowings | |
| (2,694) | |
| (560) | |
| (3,254) | |
| (1,251) | |
| (4,030) | |
| (5,281) | |
Total interest expense | |
| 5,408 | |
| (15,902) | |
| (10,494) | |
| 4,754 | |
| (21,308) | |
| (16,554) | |
| | | | | | | | | | | | | | | | | | | |
Net interest income (2) | | $ | 19,927 | | $ | (21,106) | | $ | (1,179) | | $ | 17,664 | | $ | (16,870) | | $ | 794 | |
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|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||||||||
|
| 2017 vs. 2016 |
| 2017 vs. 2016 |
| ||||||||||||||
|
| Change Due To (1) |
|
|
|
| Change Due To (1) |
|
|
|
| ||||||||
|
| Volume |
| Yield/Rate |
| Change |
| Volume |
| Yield/Rate |
| Change |
| ||||||
Interest income |
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Loans, gross |
| $ | 6,450 |
| $ | (6,430) |
| $ | 20 |
| $ | 17,801 |
| $ | (11,220) |
| $ | 6,581 |
|
Subsidiary warehouse lines of credit |
|
| 2,932 |
|
| (176) |
|
| 2,756 |
|
| 7,365 |
|
| (969) |
|
| 6,396 |
|
Investment securities - taxable |
|
| 908 |
|
| 279 |
|
| 1,187 |
|
| 1,860 |
|
| (634) |
|
| 1,226 |
|
Investment securities - non-taxable (2) |
|
| (102) |
|
| 52 |
|
| (50) |
|
| (358) |
|
| 125 |
|
| (233) |
|
Federal funds sold and securities purchased under agreements to resell |
|
| (51) |
|
| (1) |
|
| (52) |
|
| (83) |
|
| 18 |
|
| (65) |
|
Interest-bearing deposits in other financial institutions |
|
| (194) |
|
| 458 |
|
| 264 |
|
| (135) |
|
| 1,153 |
|
| 1,018 |
|
Other |
|
| 133 |
|
| (14) |
|
| 119 |
|
| 508 |
|
| (229) |
|
| 279 |
|
Total interest income (2) |
|
| 10,076 |
|
| (5,832) |
|
| 4,244 |
|
| 26,958 |
|
| (11,756) |
|
| 15,202 |
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
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|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
| $ | 557 |
| $ | 3,847 |
| $ | 4,404 |
| $ | 1,136 |
| $ | 7,236 |
| $ | 8,372 |
|
Notes payable and other borrowings |
|
| 184 |
|
| 1,270 |
|
| 1,454 |
|
| 778 |
|
| 2,300 |
|
| 3,078 |
|
Total interest expense |
|
| 741 |
|
| 5,117 |
|
| 5,858 |
|
| 1,914 |
|
| 9,536 |
|
| 11,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (2) |
| $ | 9,335 |
| $ | (10,949) |
| $ | (1,614) |
| $ | 25,044 |
| $ | (21,292) |
| $ | 3,752 |
|
(1) |
| Changes attributable to both volume and yield/rate are included in yield/rate column. |
(2) |
| Annualized taxable equivalent. |
Taxable equivalent net interest income decreased $1.6 million during the three months ended September 30, 2017, compared to the same period in 2016, while taxable equivalent net interest income increased $3.8 million during the nine months ended September 30, 2017, compared with the same period in 2016. Changes in the yields earned on interest-earning assets decreased taxable equivalent net interest income by $5.8 million during the three and nine months ended September 30, 2017,2020, compared withto the same periodperiods in 2016,2019, primarily as a result of lower loan yields due to adecreased market rates, the addition of 1% note rate PPP loans, and the decrease in accretion of discount on loans of $5.4 million. Changes in yields earned on interest-earning assets decreased taxable equivalent net interest income by $11.8$4.5 million during the nine months ended September 30, 2017, compared with the same period in 2016, primarily due to a decrease in accretion of discount on loans of $4.1 million.and $9.8 million, respectively. 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. We experiencedChanges in the volume of interest-earning assets, primarily due to seasonal increases in mortgage warehouse lending volume and new PPP loan originations, increased taxable equivalent net interest rate margin compressionincome during the three and nine months ended September 30, 2017,2020, compared with the same periods in 2019. Changes in rates paid on interest-bearing liabilities increased taxable equivalent net interest income during the three and nine months ended September 30, 2020, compared with the same periods in 2019, 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 wasmay delay and/or limit changes in 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 risingtiming, magnitude and frequency of interest rate environment 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 in effect for a portion of the Bank’s loan portfolio, thereby causing yields on our interest-earning assets towould rise more slowly than increases in market interest rates. Absent a declineAny changes in interest rates we believe this interest rate compressionacross the term structure will continue untilto impact net interest income and net interest margin. The impact of rate movements will change with the riseshape of the yield curve, including any changes in marketsteepness 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 rates is sufficient to allow our loan portfolio to reprice above applicable rate floors. Increasespayment deferrals, participation in the volumePPP as an SBA preferred lender and personal banking assistance including waived fees, increased daily spending limits and suspension of interest-earning assets, primarilyresidential 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 on the banking segment’s business and results of operations, including significantly reduced demand for loan portfolioproducts and additional amounts drawnservices 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 the subsidiary warehousetheir lines of credit increased taxable equivalent net interest incomeor 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. 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 fair value of the banking reporting unit may decline, and we may be required to record a goodwill impairment charge. Additionally, with regards 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 extent to which 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 $10.1governmental authorities and other third parties in response to the pandemic, as discussed in more detail in the “Recent Developments” section above.
During the three months ended September 30, 2020 and 2019, the banking segment retained approximately $12.8 million and $27.0$27.9 million, respectively, in mortgage loans originated by the mortgage origination segment. During the nine months ended September 30, 2020 and 2019, the banking segment retained approximately $155.3 million and $47.8 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. 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 for credit losses during the three months ended September 30, 2020 included a net reversal of credit losses on individually evaluated loans of $1.2 million, while the provision for credit losses on expected losses of collectively evaluated loans accounted for $0.6 million of the total provision primarily due to the identified changes in the Bank’s loan portfolio composition and credit quality being offset by improvements in macroeconomic factor assumptions and qualitative factors from the prior quarter. The change in the allowance during the three months ended September 30, 2020 was also impacted by net charge-offs of $0.6 million. During the nine months ended September 30, 2020, the significant build in the allowance included provision for credit losses on individually evaluated loans of $22.6 million, while the provision for credit losses on expected losses of collectively evaluated loans accounted for $77.2 million of the total provision 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 provision 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 nine months ended September 30, 2020 was also impacted by net charge-offs of $18.5 million, primarily associated with loans specifically reserved for during the first quarter of 2020. 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 flat during the three and nine months ended September 30, 2017,
68
respectively,2020, compared withto the same periods in 2016. Changes2019, and included sales activity in rates paid on interest-bearing liabilities decreased taxable equivalent net interest income by $5.1 millionthe available-for-sale investment portfolio during the third quarter of 2020 as well as changes in our intercompany financing charges and $9.5 millionservice charge relief provided to consumers in response to COVID-19 during the three and nine months ended September 30, 2017, respectively, compared with the same periods in 2016, due to increases in market interest rates.2020.
The banking segment’s noninterest income was $11.4 million and $12.7 millionexpenses increased during the three months ended September 30, 20172020, compared to the same period in 2019, primarily due to an increase in FDIC assessment expenses due to a small bank credit received in 2019 and 2016, respectively, and $49.3 million and $39.0 millionprepayment expenses associated with the early payoff of FHLB notes. Noninterest expenses decreased during the nine months ended September 30, 2017 and 2016, respectively. Other than the previously mentioned increase to other noninterest income of $15.0 million, the changes in noninterest income for the nine months ended September 30, 20172020, compared to the same period in 2016, were2019, primarily driven by year-over-year decreases in exchange fee income due to a reduction in legal, 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 impactreserve for unfunded commitments.
71
Broker-Dealer Segment
The banking segment’s noninterest expenses were $62.8 million and $61.5following table provides additional detail regarding our broker-dealer segment operating results (in thousands).
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Variance | | Nine Months Ended September 30, | | Variance | | ||||||||||
|
| 2020 |
| 2019 |
| 2020 vs 2019 | | 2020 |
| 2019 |
| 2020 vs 2019 | | ||||||
Net interest income: | | | | | | | | | | | | | | | | | | | |
Wealth management: | | | | | | | | | | | | | | | | | | | |
Securities lending | | $ | 1,976 | | $ | 3,121 | | $ | (1,145) | | $ | 6,113 | | $ | 7,289 | | $ | (1,176) | |
Clearing services | | | 1,150 | | | 3,034 | | | (1,884) | | | 5,720 | | | 8,770 | | | (3,050) | |
Structured finance (5) | | | 298 | | | 1,421 | | | (1,123) | | | 4,346 | | | 5,046 | | | (700) | |
Fixed income services (5) | | | 3,223 | | | 1,577 | | | 1,646 | | | 8,906 | | | 3,728 | | | 5,178 | |
Other (5) | | | 1,521 | | | 4,571 | | | (3,050) | | | 5,920 | | | 13,151 | | | (7,231) | |
Total net interest income | | | 8,168 | | | 13,724 | | | (5,556) | | | 31,005 | | | 37,984 | | | (6,979) | |
Noninterest income: | | | | | | | | | | | | | | | | | | | |
Securities commissions and fees by business line (1): | | | | | | | | | | | | | | | | | | | |
Fixed income services (5) | | | 10,961 | | | 8,463 | | | 2,498 | | | 36,734 | | | 27,826 | | | 8,908 | |
Wealth management: | | | | | | | | | | | | | | | | | | | |
Retail | | | 16,332 | | | 19,092 | | | (2,760) | | | 53,890 | | | 55,948 | | | (2,058) | |
Clearing services | | | 6,478 | | | 8,494 | | | (2,016) | | | 23,443 | | | 25,763 | | | (2,320) | |
Other (5) | | | 1,584 | | | 1,260 | | | 324 | | | 3,642 | | | 3,575 | | | 67 | |
| | | 35,355 | | | 37,309 | | | (1,954) | | | 117,709 | | | 113,112 | | | 4,597 | |
Investment and securities advisory fees and commissions by business line: | | | | | | | | | | | | | | | | | | | |
Public finance services (5) | | | 23,158 | | | 19,058 | | | 4,100 | | | 55,951 | | | 47,263 | | | 8,688 | |
Fixed income services | | | 5,463 | | | 2,768 | | | 2,695 | | | 9,958 | | | 5,663 | | | 4,295 | |
Wealth management: | | | | | | | | | | | | | | | | | | | |
Retail | | | 6,193 | | | 5,487 | | | 706 | | | 17,237 | | | 15,190 | | | 2,047 | |
Clearing services | | | 431 | | | 330 | | | 101 | | | 1,140 | | | 925 | | | 215 | |
Structured finance (5) | | | 1,527 | | | 1,011 | | | 516 | | | 4,617 | | | 2,579 | | | 2,038 | |
Other | | | 94 | | | 31 | | | 63 | | | 263 | | | 84 | | | 179 | |
| | | 36,866 | | | 28,685 | | | 8,181 | | | 89,166 | | | 71,704 | | | 17,462 | |
Other: | | | | | | | | | | | | | | | | | | | |
Structured finance | | | 59,669 | | | 31,100 | | | 28,569 | | | 112,117 | | | 92,647 | | | 19,470 | |
Fixed income services | | | 8,404 | | | 10,634 | | | (2,230) | | | 30,586 | | | 26,198 | | | 4,388 | |
Other | | | 728 | | | 14 | | | 714 | | | 614 | | | 946 | | | (332) | |
| | | 68,801 | | | 41,748 | | | 27,053 | | | 143,317 | | | 119,791 | | | 23,526 | |
Total noninterest income | | | 141,022 | | | 107,742 | | | 33,280 | | | 350,192 | | | 304,607 | | | 45,585 | |
Net revenue (2) | | | 149,190 | | | 121,466 | | | 27,724 | | | 381,197 | | | 342,591 | | | 38,606 | |
Noninterest expense: | | | | | | | | | | | | | | | | | | | |
Variable compensation (3) | | | 60,774 | | | 44,921 | | | 15,853 | | | 145,169 | | | 124,335 | | | 20,834 | |
Non-variable compensation and benefits | | | 27,289 | | | 25,033 | | | 2,256 | | | 79,141 | | | 79,027 | | | 114 | |
Segment operating costs (4) | | | 25,728 | | | 24,504 | | | 1,224 | | | 75,531 | | | 73,697 | | | 1,834 | |
Total noninterest expense | | | 113,791 | | | 94,458 | | | 19,333 | | | 299,841 | | | 277,059 | | | 22,782 | |
| | | | | | | | | | | | | | | | | | | |
Income before income taxes | | $ | 35,399 | | $ | 27,008 | | $ | 8,391 | | $ | 81,356 | | $ | 65,532 | | $ | 15,824 | |
(1) | Securities commissions and fees includes income of $2.9 million during both the three months ended September 30, 2020 and 2019, respectively, and $10.9 million and $8.6 million during the nine months ended September 30, 2020 and 2019, respectively, that is eliminated in consolidation. |
(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 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 segment. |
(5) | Noted balances during all prior periods include certain reclassifications to conform to current period presentation. |
During the three months ended September 30, 20172020, the broker-dealer’s public finance services business line experienced improved results in line with a modest improvement in both Texas and 2016, respectively,national issuance activity and $186.1 million and $181.0 million during the nine months ended September 30, 2017 and 2016, respectively. The change in noninterest expenses during the nine months ended September 30, 2017,market share compared to the same period in 2016, included increases in employees’ compensation and benefits of $3.0 million primarily due to increased benefit costs, net expenses associated with covered assets of $10.1 million, repossession and foreclosure expenses of $1.1 million, as well as legal expenses associated with the Bank’s previously mentioned efforts to recover losses associated with a charged-off loan, partially offset by a year-over-year decrease of $9.3 million associated with downward valuation adjustments on a significant covered OREO property recorded during the prior year, despite the economic disruptions related to the pandemic. The structured finance business line experienced robust results given strong issuance volumes and improved demand for mortgage products following market volatility in the first nine monthsquarter of 2016,2020. Structuring activity results also improved as well as decreasesdemand for structured agency products rebounded in occupancy expenses associated with closed branchesthe second and expenses associated with organizational changes.
Broker-Dealer Segment
Income beforethird quarters of 2020. Additionally, in both the second and third quarters of 2020, the fixed income taxes in our broker-dealer segment was $20.2 million and $45.5 million duringservices business line demonstrated improved operating results. During the three and nine months ended September 30, 2017, respectively,2020, transactional revenues in the fixed income business line improved compared with the same periods in 2019 as we experienced relative strength in municipal and $17.4 million and $39.5 million duringtaxable products. The wealth management business line’s net revenues were lower in the three and nine months ended September 30, 2016, respectively. 2020, compared to the same periods in 2019, as transactional revenues declined following the volatile markets experienced in the first quarter of 2020 and 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.
72
The changesspecific components of the overall increase in the broker-dealer segment’s income before income taxes during the three and nine months ended September 30, 2017,2020, compared with the same periods in 2016, were2019, was primarily theas a result of decreases in pre-tax integration-related costs of $1.0 million and $5.8 million, respectively, increases in the federal funds rate during the first nine months of 2017, which led to increases of $3.7 million and $8.8 million, respectively, in fees earned on money market and FDIC insured bank deposits, and decreases of $6.0 million and $12.2 million, respectively, in investment banking and advisory fees primarily earned on the underwriting of municipal bond transactions and the secondary trading of these and other municipal securities within our public finance and capital markets business lines.following:
● | a $4.6 million and $22.8 million, respectively, increase in net revenue in our fixed income services business line due to strong performances in our municipal and taxable products, which noted significant increases beginning in March 2020 through September 2020. Improved client demand combined with active position management and effective hedging tools led to improved municipal revenue; |
● | an $18.1 million and $20.9 million increase, respectively, in compensation expense, of which $15.9 million and $20.8 million, respectively, was due to the increase in variable compensation, primarily resulting from an increase in the trading gains earned from our derivative and trading portfolio activities in our structured finance business. For the nine months ended September 30, 2020, the increase in compensation expense was partially offset by the costs associated with 2019 Leadership Changes as discussed in “Factors Affecting Results of Operations” of $2.2 million in compensation expense; |
● | a $7.2 million and $6.9 million decrease, respectively, in net revenue in our wealth management business line, which experienced lower transactional revenues in the second and third quarters of 2020 combined with lower customer balance revenues as a result of the low interest rate environment. For the nine months ended September 30, 2020, the decrease in the wealth management business line’s net revenues, discussed above, were partially offset by the activity in the first quarter of 2020 from improved transactional revenues and record management fees, due to peak asset valuations in managed accounts, as well as the significant re-allocation of customer assets into cash and cash equivalents as clients exited risk markets; and |
● | a $27.9 million and $20.8 million increase, respectively, in the broker-dealer segment’s structured finance net revenues. For the nine months ended September 30, 2020, activity in the month of March 2020 was weaker on the structuring side of the TBA business, as demand for structured agency products declined. After March 2020, structured finance revenues improved in line with increased volumes reflecting robust activity in mortgage originations combined with improved product demand from the buy-side, resulting in an overall $16.8 million increase in gains from sales of the mortgage-backed securities for the nine months ended September 30, 2020 compared to the same period in 2019. The momentum gained in the second quarter continued into the third quarter of 2020, resulting in a $23.4 million increase in gains from sales of mortgage-backed securities compared to the same period in 2019. |
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 paid to it by its clients, in large part upon the successful completion of the client’s transaction.client transactions. 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, and other borrowings.as well as the interest revenue earned on trading securities, net of financing costs.
69
The following table provides additional details regarding our broker-dealer operating results (in thousands).
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| Three Months Ended September 30, |
| Variance |
| Nine Months Ended September 30, |
| Variance | ||||||||||
|
| 2017 |
| 2016 |
| 2017 vs 2016 |
| 2017 |
| 2016 |
| 2017 vs 2016 | ||||||
Net interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities lending |
| $ | 2,469 |
| $ | 2,083 |
| $ | 386 |
| $ | 6,298 |
| $ | 5,095 |
| $ | 1,203 |
Other |
|
| 9,746 |
|
| 5,740 |
|
| 4,006 |
|
| 24,754 |
|
| 17,219 |
|
| 7,535 |
Total net interest income |
|
| 12,215 |
|
| 7,823 |
|
| 4,392 |
|
| 31,052 |
|
| 22,314 |
|
| 8,738 |
Noninterest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities commissions and fees by business line (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital markets |
|
| 10,711 |
|
| 13,854 |
|
| (3,143) |
|
| 32,369 |
|
| 42,435 |
|
| (10,066) |
Retail |
|
| 21,836 |
|
| 19,095 |
|
| 2,741 |
|
| 61,153 |
|
| 55,314 |
|
| 5,839 |
Clearing |
|
| 7,948 |
|
| 6,999 |
|
| 949 |
|
| 25,058 |
|
| 20,752 |
|
| 4,306 |
Other |
|
| 957 |
|
| 825 |
|
| 132 |
|
| 3,293 |
|
| 2,832 |
|
| 461 |
|
|
| 41,452 |
|
| 40,773 |
|
| 679 |
|
| 121,873 |
|
| 121,333 |
|
| 540 |
Investment banking and advisory fees by business line: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Public finance |
|
| 19,911 |
|
| 24,599 |
|
| (4,688) |
|
| 56,599 |
|
| 64,727 |
|
| (8,128) |
Capital markets |
|
| 104 |
|
| 1,366 |
|
| (1,262) |
|
| 611 |
|
| 4,684 |
|
| (4,073) |
Retail |
|
| 4,170 |
|
| 3,637 |
|
| 533 |
|
| 12,017 |
|
| 10,864 |
|
| 1,153 |
Structured finance |
|
| 1,123 |
|
| 1,292 |
|
| (169) |
|
| 3,265 |
|
| 3,763 |
|
| (498) |
Clearing |
|
| 311 |
|
| 234 |
|
| 77 |
|
| 863 |
|
| 265 |
|
| 598 |
Other |
|
| 1 |
|
| 1 |
|
| — |
|
| 4 |
|
| (1) |
|
| 5 |
|
|
| 25,620 |
|
| 31,129 |
|
| (5,509) |
|
| 73,359 |
|
| 84,302 |
|
| (10,943) |
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Structured finance |
|
| 17,731 |
|
| 24,998 |
|
| (7,267) |
|
| 52,197 |
|
| 61,502 |
|
| (9,305) |
Capital markets |
|
| 6,285 |
|
| 6,260 |
|
| 25 |
|
| 17,982 |
|
| 19,516 |
|
| (1,534) |
Other |
|
| 330 |
|
| 351 |
|
| (21) |
|
| 1,368 |
|
| 640 |
|
| 728 |
|
|
| 24,346 |
|
| 31,609 |
|
| (7,263) |
|
| 71,547 |
|
| 81,658 |
|
| (10,111) |
Total noninterest income |
|
| 91,418 |
|
| 103,511 |
|
| (12,093) |
|
| 266,779 |
|
| 287,293 |
|
| (20,514) |
Net revenue (2) |
|
| 103,633 |
|
| 111,334 |
|
| (7,701) |
|
| 297,831 |
|
| 309,607 |
|
| (11,776) |
Noninterest expense (3): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits expenses |
|
| 60,365 |
|
| 68,051 |
|
| (7,686) |
|
| 180,445 |
|
| 189,843 |
|
| (9,398) |
Other |
|
| 23,066 |
|
| 25,854 |
|
| (2,788) |
|
| 71,861 |
|
| 80,273 |
|
| (8,412) |
Total noninterest expense |
|
| 83,431 |
|
| 93,905 |
|
| (10,474) |
|
| 252,306 |
|
| 270,116 |
|
| (17,810) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
| $ | 20,202 |
| $ | 17,429 |
| $ | 2,773 |
| $ | 45,525 |
| $ | 39,491 |
| $ | 6,034 |
|
|
|
|
|
|
The broker-dealer segment had net interest income of $12.2 million and $7.8 million during the three months ended September 30, 2017 and 2016, respectively, and $31.1 million and $22.3 million during the nine months ended September 30, 2017 and 2016, respectively. 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. The increasesNet interest income decreased between the three and nine months ended September 30, 20172020, and the comparable periods in 2016 were2019, primarily due to increasesdecreases in the net interest earned on mortgage-backed securities and increases in the average stock borrowing balances.
Noninterest income was $91.4 millionlending business, customer margin loans and $103.5 millionother customer activities. The net decreases in interest earned during both the three months ended September 30, 2017 and 2016, respectively, and $266.8 million and $287.3 million during the nine months ended September 30, 2017 and 2016, respectively. The decreases in noninterest2020 were partially offset by the net interest earned from the broker-dealer’s taxable securities.
Noninterest income increased between the three and nine months ended September 30, 20172020, and the comparable periods in 2016 were2019, primarily due to decreases of $5.5 million and $10.9 million, respectively,increases in investment banking and advisory fees and decreases of $7.3 millioncommissions and $10.1 million, respectively in other noninterest income. income, partially offset by decreases in securities commissions and fees for the three months ended September 30, 2020 and increases in all noninterest income captions for the nine months ended September 30, 2020.
Securities commissions and fees decreased during the three months ended September 30, 2020, compared with the same period in 2019, primarily due to decreases in our wealth management business line attributable to lower customer
73
transaction revenues for the three months ended September 30, 2020. These decreases were partially offset by 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 nine months ended September 30, 2020, securities commissions and fees increased $0.7 millioncompared with the same period in 2019, primarily due to the increases in commissions earned in our fixed income services line of business offset by the decreases in commissions earned by our wealth management business line from lower customer transaction revenues. Additionally, for both comparable three and $0.5 millionnine month periods ended September 30, 2020, the broker-dealer noted a decline in money market and FDIC sweep revenues, primarily in the wealth management business line.
Investment and securities advisory fees and commissions increased during the three and nine months ended September 30, 2017, respectively,2020, compared with the same periods in 2016. The2019, primarily due to increases during both periods were primarily attributable to fees earned on money market accountsin municipal advisory and FDIC insured bank deposits by the clearing and retail businesses resulting from the 51-basis point increase in the federal funds rate during the first nine months of 2017. These increases were partially offset by a reduction in securities commissions and fees earned in the capital markets business on the sale of over-the-counter, municipal and mortgage backed security products. underwriting transactions.
Investment banking and advisory fees decreased $5.5 million and $10.9 millionOther noninterest income increased during the three and nine months ended September 30, 2017, respectively,2020, compared with the same periods in 2016,2019. The increases during the three and nine months ended September 30, 2020 were primarily the result of a $28.6 million and $19.5 million increase, respectively, in trading gains earned from our structured finance business line’s derivative activities due to reductionsa stabilization from strong volumes and adjustments made in the number andbusiness line from heightened market volatility in the aggregate dollar amount of municipal bond transactions and the municipal finance and underwriting fees associated with those and other taxable transactions.
70
first quarter. The decrease in other noninterest income duringincrease for the three months ended September 30, 2017 compared with the same period in 20162020 was primarily due to a decrease of $7.3 million in income earned from trading gains associated with the structured finance business. The decrease in other noninterest income during the nine months ended September 30, 2017 compared with the same period in 2016 was primarily due to a decrease of $10.8 million in income earned from trading gains associated with the structured finance and capital markets businesses, partially offset by an increase of $0.7a $2.2 million decrease in the value of broker-dealer segment investments held at corporate, including investments heldfixed income services business line’s trading portfolio activities, primarily in the broker-dealer segment’s deferred compensation plan.
Noninterest expenses were $83.4 million and $93.9 million during the three months ended September 30, 2017 and 2016, respectively, and $252.3 million and $270.1our securitized mortgage backed securities portfolio. Additionally, other interest income within our fixed income services business line increased $4.4 million during the nine months ended September 30, 20172020 compared with the same period in 2019 associated with both our taxable and 2016, respectively. Themunicipal securities trading portfolio activities, partially offset by a decrease in noninterestour securitized mortgage-backed securities portfolio.
Noninterest expenses of $10.5 millionincreased during the three and nine months ended September 30, 2017,2020, compared to the same periodperiods in 2016, was2019, primarily due to a decrease of $3.0increases in variable compensation partially offset, for the nine months ended September 30, 2020, by the $2.2 million in legal expensespre-tax costs in the first quarter of 2019 associated with settled litigation and a decrease of $7.7 million in compensation and benefits expenses, which was in part a product of the integration and merger of FSC and Hilltop Securities and in part due to the decreaseLeadership Changes as discussed in the variable compensation and benefits expense components that are based on each business line’s performance. The decrease in“Factors Affecting Results of Operations” section above. Other noninterest expenses of $17.8 millionincreased during the nine months ended September 30, 2017,2020, compared to the same period in 2016, was2019, primarily due to deployment of a decrease in pre-tax integration-related professional costs of $2.8 million, a decrease of $6.3 million in legal expenses associated with settled litigation and a decrease of $9.4 million in compensation and benefits expenses, which was in part a product of the integration and merger of FSC and Hilltop Securities and in part due to the decrease in the variable compensation and benefits expense components that are basednew back-office system on each business lines’ performance. During the three months ended September 30, 2016, the broker-dealer segment incurred pre-tax integration-related costs totaling $1.0 million resulting from employee expenses and professional fees of $0.8 million and $0.2 million, respectively. During the nine months ended September 30, 2016, the broker-dealer segment incurred pre-tax integration-related costs totaling $5.8 million resulting from employee expenses, professional fees and contractual expenses of $2.9 million, $2.8 million and $0.1 million, respectively.June 1, 2020.
Effective as of January 22, 2016, we merged FSC and Hilltop Securities into a combined firm operating under the “Hilltop Securities” name. The integration is complete and Hilltop Securities does not expect to incur any additional integration costs in relation to the SWS Merger.
Selected information concerning the broker-dealer segment, including key performance indicators, follows (dollars in thousands).
| | | | | | | | | | | | | |
| Three Months Ended September 30, | | | Nine Months Ended September 30, | | ||||||||
| 2020 |
| | 2019 |
| | 2020 |
| | 2019 | | ||
Total compensation as a % of net revenue (1) | | 59.0 | % | | 57.6 | % | | | 58.8 | % | | 59.4 | % |
Pre-tax margin (2) | | | | | | | | | 21.3 | % | | 19.1 | % |
FDIC insured program balances at the Bank (end of period) | | | | | | | | $ | 900,008 | | $ | 1,308,226 | |
Other FDIC insured program balances (end of period) | | | | | | | | $ | 1,683,981 | | $ | 692,004 | |
Customer funds on deposit, including short credits (end of period) | | | | | | | | $ | 419,078 | | $ | 318,528 | |
| | | | | | | | | | | | | |
Public finance services: | | | | | | | | | | | | | |
Number of issues | | 340 | | | 308 | | | | 936 | | | 871 | |
Aggregate amount of offerings | $ | 15,174,488 | | $ | 14,041,781 | | | $ | 41,352,113 | | $ | 40,167,405 | |
| | | | | | | | | | | | | |
Structured finance: | | | | | | | | | | | | | |
Lock production/TBA volume | $ | 2,662,729 | | $ | 1,555,727 | | | $ | 6,687,631 | | $ | 4,354,538 | |
| | | | | | | | | | | | | |
Fixed income services: | | | | | | | | | | | | | |
Total volumes | $ | 52,496,966 | | $ | 22,623,984 | | | $ | 105,941,044 | | $ | 65,226,806 | |
Net inventory (end of period) | | | | | | | | $ | 610,641 | | $ | 645,576 | |
| | | | | | | | | | | | | |
Wealth management (Retail and Clearing services groups): | | | | | | | | | | | | | |
Retail employee representatives (end of period) | | | | | | | | | 123 | | | 125 | |
Independent registered representatives (end of period) | | | | | | | | | 193 | | | 200 | |
Correspondents (end of period) | | | | | | | | | 130 | | | 147 | |
Correspondent receivables (end of period) | | | | | | | | $ | 243,480 | | $ | 218,075 | |
Customer margin balances (end of period) | | | | | | | | $ | 268,542 | | $ | 339,686 | |
| | | | | | | | | | | | | |
Wealth management (Securities lending group): | | | | | | | | | | | | | |
Interest-earning assets - stock borrowed (end of period) | | | | | | | | $ | 1,285,509 | | $ | 1,636,795 | |
Interest-bearing liabilities - stock loaned (end of period) | | | | | | | | $ | 1,177,098 | | $ | 1,505,118 | |
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
| 2017 |
|
| 2016 |
| 2017 |
|
| 2016 | ||
Compensation as a % of net revenue |
| 58.2% |
|
| 61.1% |
|
| 60.6% |
|
| 61.3% |
FDIC insured program balances at PlainsCapital Bank (end of period) |
|
|
|
|
|
| $ | 1,300,732 |
| $ | 950,501 |
Other FDIC insured program balances (end of period) |
|
|
|
|
|
| $ | 1,134,884 |
| $ | 1,420,496 |
Customer margin balances (end of period) |
|
|
|
|
|
| $ | 230,303 |
| $ | 337,751 |
Customer funds on deposit, including short credits (end of period) |
|
|
|
|
|
| $ | 419,324 |
| $ | 403,883 |
|
|
|
|
|
|
|
|
|
|
|
|
Public finance: |
|
|
|
|
|
|
|
|
|
|
|
Number of issues |
| 337 |
|
| 447 |
|
| 1,129 |
|
| 1,358 |
Aggregate amount of offerings | $ | 20,812,898 |
| $ | 22,663,624 |
| $ | 60,650,662 |
| $ | 65,650,303 |
|
|
|
|
|
|
|
|
|
|
|
|
Capital markets: |
|
|
|
|
|
|
|
|
|
|
|
Total volumes | $ | 15,610,712 |
| $ | 18,196,667 |
| $ | 50,052,574 |
| $ | 61,149,636 |
Net inventory (end of period) |
|
|
|
|
|
| $ | 492,844 |
| $ | 221,263 |
|
|
|
|
|
|
|
|
|
|
|
|
Retail: |
|
|
|
|
|
|
|
|
|
|
|
Retail employee representatives (end of period) |
|
|
|
|
|
|
| 122 |
|
| 119 |
Independent registered representatives (end of period) |
|
|
|
|
|
|
| 222 |
|
| 231 |
|
|
|
|
|
|
|
|
|
|
|
|
Structured finance: |
|
|
|
|
|
|
|
|
|
|
|
Lock production/TBA volume | $ | 1,293,493 |
| $ | 1,663,926 |
| $ | 4,753,980 |
| $ | 4,536,631 |
|
|
|
|
|
|
|
|
|
|
|
|
Clearing: |
|
|
|
|
|
|
|
|
|
|
|
Total tickets (1) |
| 302,809 |
|
| 348,877 |
|
| 967,594 |
|
| 1,308,929 |
Correspondents (end of period) |
|
|
|
|
|
|
| 168 |
|
| 179 |
|
|
|
|
|
|
|
|
|
|
|
|
Securities lending: |
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets - stock borrowed (end of period) |
|
|
|
|
|
| $ | 1,611,885 |
| $ | 1,266,145 |
Interest-bearing liabilities - stock loaned (end of period) |
|
|
|
|
|
| $ | 1,447,570 |
| $ | 1,150,826 |
(1) |
|
(2) |
|
7174
Mortgage Origination Segment
Income before income taxes inThe following table presents certain information regarding the operating results of our mortgage origination segment was $12.8 million and $31.2 million during the three months ended September 30, 2017 and 2016, respectively, and $42.0 million and $68.4 million during the nine months ended September 30, 2017 and 2016, respectively. The decreases in income before income taxes for both periods were primarily due to decreases in noninterest income, partially offset by decreases in noninterest expense and net interest expense. Net interest income of $0.1 million and net interest expense of $3.1 million during the three months ended September 30, 2017 and 2016, respectively, and net interest expense of $0.8 million and $7.9 million during the nine months ended September 30, 2017 and 2016, respectively, was primarily comprised of interest incurred on a warehouse line of credit held with the Bank as well as related intercompany financing costs, partially offset by interest income earned on loans held for sale. The year-over-year improvement in net interest income (expense) included the effects of increased average hold periods and improved net yields on mortgage loans held for sale. (in thousands).
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| Variance | | Nine Months Ended September 30, |
| Variance | | ||||||||||
| | 2020 | | 2019 | | 2020 vs 2019 | | 2020 | | 2019 | | 2020 vs 2019 | | ||||||
Net interest income (expense) | | $ | (2,349) | | $ | (2,725) | | $ | 376 | | $ | (3,647) | | $ | (4,224) | | $ | 577 | |
Noninterest income | |
| 355,471 | |
| 194,857 | |
| 160,614 | |
| 874,926 | |
| 477,438 | |
| 397,488 | |
Noninterest expense | | | 207,176 | |
| 160,634 | |
| 46,542 | | | 547,222 | |
| 417,032 | |
| 130,190 | |
Income before income taxes | | $ | 145,946 | | $ | 31,498 | | $ | 114,448 | | $ | 324,057 | | $ | 56,182 | | $ | 267,875 | |
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 typically 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. During 2016, refinancing volume was $4.2 billion, representing 27.1% of total loan origination volume. Due to increases in mortgage interest rates since the fourth quarter of 2016, refinancing volume and refinancing volume as a percentage of total loan origination volume decreased in the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016, and we anticipate that this year-over-year trend will continue for the remainder of 2017. We also anticipate the recent percentage mix of refinancing and purchase volumes relative to total loan origination volume will continue into 2018. We do not anticipate that these recent increases in mortgage interest rates will significantly impact home purchases volume during the remainder of 2017, as changesChanges in mortgage interest rates have historically had a lesser impact on home purchasespurchase volume than on refinancing volume. As discussed in more detail in the “Recent Developments” section above, and as a result of the spread of COVID-19, economic uncertainties continue to have disruptive effects in locations in which the mortgage origination segment operates and the global economy more widely, as well as causing increased volatility and declines in financial markets. Loan origination volume during both the three and nine months ended September 30, 2020, increased significantly compared to the same periods in 2019, as mortgage interest rates have continued to decline since the end of 2019. This trend, 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 COVID-19 pandemic’s impact on such customers could have a material adverse effect on the operations of the mortgage origination segment.
Income before income taxes increased $114.5 million, or 363.4%, during the three months ended September 30, 2020, compared with the same period in 2019. Income before income taxes increased $267.9 million, or 476.8%, during the nine months ended September 30, 2020, compared with the same period in 2019. These increases were primarily the result of a significant increase in interest rate lock commitments (“IRLCs”) related to substantial increases in mortgage loan applications. 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%. Further, 10-year interest rates also declined significantly during the first quarter 2020, which led to an accelerated decrease in mortgage interest rates since that time.
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 has 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 2020, we increased the amount of retained servicing on mortgage loan sales. During both the second and third quarters of 2020, PrimeLending retained servicing on 89% of total mortgage loans sold. We expect that PrimeLending will retain servicing on approximately 50% to 75% of its mortgage loan sales during the remainder of 2020. PrimeLending utilizes a third party to manage its servicing portfolio and we therefore do not expect to incur additional infrastructure costs to manage an increase in PrimeLending’s servicing portfolio. PrimeLending’s liquidity has not been, and we do not expect that it will be, significantly impacted by the anticipated increase in forbearance requests. In addition, GNMA, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation have imposed certain restrictions on loans the agencies will accept 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 September 30, 2020 and the comparable period in 2019, refinancing volume as a percentage of total origination volume increased from 29.2% to 35.1%. As average mortgage interest rates decreased between the nine months ended September 30, 2020 and the comparable period in 2019, refinancing volume as a percentage of total origination volume increased from 21.6% to 39.8%. See details regarding refinancing volume in the table below. If current mortgage interest rates remain relatively unchanged, we anticipate a higher percentage of refinancing volumes relative to total loan origination volume for the remainder of 2020 as compared to the same period in 2019. A higher refinance percentage could also be driven by a slowing of
75
purchase volume due to the negative impact on new and existing home sales resulting from the COVID-19 pandemic. While PrimeLending experienced an increase in purchase volume as a percentage of total loan origination volume between the second and third quarters 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 relationshipsarrangements (“ABAs”). For the nine months ended September 30, 2017,2020, funded volume through ABAs was less than 5%approximately 8% of the mortgage origination segment’s total loan volume. Currently,As of September 30, 2020, PrimeLending ownsowned a 51% membership interest in threefour ABAs. OneOn October 1, 2020, the mortgage origination segment divested its interest in one of these ABAs is scheduled to be dissolved by the end of 2017 and accounted for less than 1% of total loan volume during the nine months ended September 30, 2017.its ABAs. We expect production within the ABA channel will decrease slightly to represent approximately 5%7% of the total loan volume of the mortgage origination segment during 2017.the remainder of 2020.
72
The following table provides certain details regarding our mortgage loan originations and selected information for the periods indicated below (dollars in thousands).
The mortgage origination segment primarily originates its mortgage loans through a retail channel, with limited lending through its joint venture channel. For the nine months ended September 30, 2017, joint venture funded volume was less than 5% of the mortgage origination segments total loan volume. Currently, PrimeLending owns a 51% membership interest in two joint ventures. We do not expect the joint venture channel to produce more than 5% of the total loan volume through the remainder of 2017. The following table provides certain details regarding our mortgage loan originations and selected information for the periods indicated below (dollars in thousands). |
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|
| % of |
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|
| % of |
| ||||||||||||||||||||||||||||
|
| 2017 |
| Total |
| 2016 |
| Total |
|
| 2017 |
| Total |
| 2016 |
| Total |
| |||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||
| | Three Months Ended September 30, |
| | | | Nine Months Ended September 30, | | | | | ||||||||||||||||||||||||||||||||||||||
| | 2020 | | 2019 | | | | | 2020 | | 2019 | | | | | ||||||||||||||||||||||||||||||||||
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| |
| % of |
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| |
| % 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 | | ||||||||||||||||||||||||||
Mortgage Loan Originations - units |
|
| 16,904 |
|
|
|
| 19,330 |
|
|
|
|
| 46,890 |
|
|
|
| 50,441 |
|
|
|
| | 23,673 | | | | | 18,251 | | | | | 5,422 |
| | 59,802 | | | | | 44,289 | | | | | 15,513 | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||
Mortgage Loan Originations - volume |
| $ | 3,972,505 |
|
|
| $ | 4,492,553 |
|
|
|
| $ | 10,854,920 |
|
|
| $ | 11,572,132 |
|
|
| | $ | 6,450,353 | | | | $ | 4,771,801 | | | | $ | 1,678,552 | | $ | 16,172,000 | | | | $ | 11,178,932 | | | | $ | 4,993,068 | |
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| |||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||
Mortgage Loan Originations: |
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| | | | | | | | | | | | | | | | | | | | | | | | | �� | | |
Conventional |
| $ | 2,359,220 |
| 59.39 | % | $ | 3,003,506 |
| 66.86 | % |
| $ | 6,460,144 |
| 59.51 | % | $ | 7,431,755 |
| 64.22 | % | | $ | 4,844,635 |
| 75.11 | % | $ | 2,957,245 |
| 61.97 | % | $ | 1,887,390 | | $ | 11,426,726 |
| 70.66 | % | $ | 6,836,395 |
| 61.15 | % | $ | 4,590,331 | |
Government |
|
| 952,888 |
| 23.99 | % |
| 1,010,682 |
| 22.50 | % |
|
| 2,629,338 |
| 24.22 | % |
| 2,731,967 |
| 23.61 | % | |
| 1,225,055 |
| 18.99 | % |
| 1,157,693 |
| 24.26 | % |
| 67,362 | |
| 3,547,353 |
| 21.94 | % |
| 2,732,608 |
| 24.44 | % |
| 814,745 | |
Jumbo |
|
| 409,947 |
| 10.32 | % |
| 308,800 |
| 6.87 | % |
|
| 1,064,035 |
| 9.80 | % |
| 924,194 |
| 7.99 | % | |
| 189,518 |
| 2.94 | % |
| 402,091 |
| 8.43 | % |
| (212,573) | |
| 650,992 |
| 4.03 | % |
| 931,938 |
| 8.34 | % |
| (280,946) | |
Other |
|
| 250,450 |
| 6.30 | % |
| 169,565 |
| 3.77 | % |
|
| 701,403 |
| 6.47 | % |
| 484,216 |
| 4.18 | % | |
| 191,145 |
| 2.96 | % |
| 254,772 |
| 5.34 | % |
| (63,627) | |
| 546,929 |
| 3.37 | % |
| 677,991 |
| 6.07 | % |
| (131,062) | |
|
| $ | 3,972,505 |
| 100.00 | % | $ | 4,492,553 |
| 100.00 | % |
| $ | 10,854,920 |
| 100.00 | % | $ | 11,572,132 |
| 100.00 | % | |||||||||||||||||||||||||||
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
| | $ | 6,450,353 |
| 100.00 | % | $ | 4,771,801 |
| 100.00 | % | $ | 1,678,552 | | $ | 16,172,000 |
| 100.00 | % | $ | 11,178,932 |
| 100.00 | % | $ | 4,993,068 | | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||
Home purchases |
| $ | 3,332,441 |
| 83.89 | % | $ | 3,191,851 |
| 71.05 | % |
| $ | 9,103,707 |
| 83.87 | % | $ | 8,504,061 |
| 73.49 | % | | $ | 4,183,560 |
| 64.86 | % | $ | 3,380,812 |
| 70.85 | % | $ | 802,748 | | $ | 9,729,981 |
| 60.17 | % | $ | 8,760,596 |
| 78.37 | % | $ | 969,385 | |
Refinancings |
|
| 640,064 |
| 16.11 | % |
| 1,300,702 |
| 28.95 | % |
|
| 1,751,213 |
| 16.13 | % |
| 3,068,071 |
| 26.51 | % | |
| 2,266,793 |
| 35.14 | % |
| 1,390,989 |
| 29.15 | % |
| 875,804 | |
| 6,442,019 |
| 39.83 | % |
| 2,418,336 |
| 21.63 | % |
| 4,023,683 | |
|
| $ | 3,972,505 |
| 100.00 | % | $ | 4,492,553 |
| 100.00 | % |
| $ | 10,854,920 |
| 100.00 | % | $ | 11,572,132 |
| 100.00 | % | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||
| | $ | 6,450,353 |
| 100.00 | % | $ | 4,771,801 |
| 100.00 | % | $ | 1,678,552 | | $ | 16,172,000 |
| 100.00 | % | $ | 11,178,932 |
| 100.00 | % | $ | 4,993,068 | | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||
Texas |
| $ | 819,586 |
| 20.63 | % | $ | 984,974 |
| 21.91 | % |
| $ | 2,331,162 |
| 21.47 | % | $ | 2,516,881 |
| 21.75 | % | | $ | 1,223,544 |
| 18.97 | % | $ | 894,846 |
| 18.75 | % | $ | 328,698 | | $ | 3,078,700 |
| 19.04 | % | $ | 2,122,314 |
| 18.98 | % | $ | 956,386 | |
California |
|
| 531,584 |
| 13.38 | % |
| 658,074 |
| 14.65 | % |
|
| 1,375,134 |
| 12.67 | % |
| 1,654,059 |
| 14.30 | % | |
| 640,081 |
| 9.92 | % |
| 487,579 |
| 10.22 | % |
| 152,502 | |
| 1,656,438 |
| 10.24 | % |
| 1,101,699 |
| 9.86 | % |
| 554,739 | |
Florida |
|
| 222,150 |
| 5.59 | % |
| 219,544 |
| 4.89 | % |
|
| 637,097 |
| 5.87 | % |
| 584,541 |
| 5.05 | % | |
| 419,537 |
| 6.50 | % |
| 315,523 |
| 6.61 | % |
| 104,014 | |
| 1,123,061 |
| 6.94 | % |
| 801,560 |
| 7.17 | % |
| 321,501 | |
Ohio |
|
| 179,538 |
| 4.52 | % |
| 192,950 |
| 4.29 | % |
|
| 490,750 |
| 4.52 | % |
| 493,733 |
| 4.27 | % | |||||||||||||||||||||||||||
Arizona |
|
| 143,645 |
| 3.62 | % |
| 160,766 |
| 3.58 | % |
|
| 416,327 |
| 3.84 | % |
| 407,736 |
| 3.52 | % | |
| 278,065 |
| 4.31 | % |
| 210,296 |
| 4.41 | % |
| 67,769 | |
| 729,920 |
| 4.51 | % |
| 499,755 |
| 4.47 | % |
| 230,165 | |
South Carolina |
|
| 130,967 |
| 3.30 | % |
| 118,550 |
| 2.64 | % |
|
| 357,796 |
| 3.30 | % |
| 327,050 |
| 2.83 | % | |
| 257,531 |
| 3.99 | % |
| 180,493 |
| 3.78 | % |
| 77,038 | |
| 654,840 |
| 4.05 | % |
| 430,824 |
| 3.85 | % |
| 224,016 | |
Ohio | |
| 255,388 |
| 3.96 | % |
| 187,400 |
| 3.93 | % |
| 67,988 | |
| 617,369 |
| 3.82 | % |
| 465,517 |
| 4.16 | % |
| 151,852 | | ||||||||||||||||||||||
Maryland | |
| 229,705 |
| 3.56 | % |
| 140,694 |
| 2.95 | % |
| 89,011 | |
| 580,487 |
| 3.59 | % |
| 349,043 |
| 3.12 | % |
| 231,444 | | ||||||||||||||||||||||
Missouri |
|
| 122,555 |
| 3.09 | % |
| 130,325 |
| 2.90 | % |
|
| 340,099 |
| 3.13 | % |
| 341,770 |
| 2.95 | % | |
| 232,253 |
| 3.60 | % |
| 166,004 |
| 3.48 | % |
| 66,249 | |
| 557,772 |
| 3.45 | % |
| 376,065 |
| 3.36 | % |
| 181,707 | |
Washington |
|
| 135,267 |
| 3.41 | % |
| 155,257 |
| 3.46 | % |
|
| 340,075 |
| 3.13 | % |
| 401,879 |
| 3.47 | % | |
| 199,425 |
| 3.09 | % |
| 199,883 |
| 4.19 | % |
| (458) | |
| 505,782 |
| 3.13 | % |
| 444,888 |
| 3.98 | % |
| 60,894 | |
North Carolina |
|
| 112,273 |
| 2.83 | % |
| 142,315 |
| 3.17 | % |
|
| 337,548 |
| 3.11 | % |
| 392,637 |
| 3.39 | % | |
| 186,522 |
| 2.89 | % |
| 151,089 |
| 3.17 | % |
| 35,433 | |
| 493,161 |
| 3.05 | % |
| 352,928 |
| 3.16 | % |
| 140,233 | |
Maryland |
|
| 115,862 |
| 2.92 | % |
| 155,246 |
| 3.46 | % |
|
| 325,432 |
| 3.00 | % |
| 384,273 |
| 3.32 | % | |||||||||||||||||||||||||||
All other states |
|
| 1,459,078 |
| 36.71 | % |
| 1,574,552 |
| 35.05 | % |
|
| 3,903,500 |
| 35.96 | % |
| 4,067,573 |
| 35.15 | % | |
| 2,528,302 |
| 39.21 | % |
| 1,837,994 |
| 38.51 | % |
| 690,308 | |
| 6,174,470 |
| 38.18 | % |
| 4,234,339 |
| 37.89 | % |
| 1,940,131 | |
|
| $ | 3,972,505 |
| 100.00 | % | $ | 4,492,553 |
| 100.00 | % |
| $ | 10,854,920 |
| 100.00 | % | $ | 11,572,132 |
| 100.00 | % | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
| ||||||||||||||||||||||||||||
Mortgage Loan Sales - volume |
| $ | 4,002,195 |
|
|
| $ | 4,349,794 |
|
|
|
| $ | 10,662,622 |
|
|
| $ | 11,431,589 |
|
|
| |||||||||||||||||||||||||||
| | $ | 6,450,353 |
| 100.00 | % | $ | 4,771,801 |
| 100.00 | % | $ | 1,678,552 | | $ | 16,172,000 |
| 100.00 | % | $ | 11,178,932 |
| 100.00 | % | $ | 4,993,068 | | ||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||
Mortgage Loan Sales - volume: | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||
External third parties | | $ | 6,508,983 | | 99.80 | % | $ | 4,288,205 | | 99.35 | % | $ | 2,220,778 | | $ | 15,787,591 |
| 99.03 | % | $ | 10,317,490 |
| 99.54 | % | $ | 5,470,101 | | ||||||||||||||||||||||
Banking segment | |
| 12,790 | | 0.20 | % |
| 27,913 | | 0.65 | % |
| (15,123) | |
| 155,345 |
| 0.97 | % |
| 47,812 |
| 0.46 | % |
| 107,533 | | ||||||||||||||||||||||
| | $ | 6,521,773 | | 100.00 | % | $ | 4,316,118 | | 100.00 | % | $ | 2,205,655 | | $ | 15,942,936 |
| 100.00 | % | $ | 10,365,302 |
| 100.00 | % | $ | 5,577,634 | |
Refinancing volume decreased to $640.1 million duringWe consider the three months ended September 30, 2017 from $1.3 billion during the three months ended September 30, 2016 (representing 16.1% and 29.0%, respectively, ofmortgage origination segment’s total loan origination volume), while refinancing volume decreased to $1.8 billion duringbe a key performance measure. Loan origination volume is central to the nine months ended September 30, 2017segment’s ability to generate income by originating and selling mortgage loans, resulting in net gains from $3.1 billion during the nine months ended September 30, 2016 (representing 16.1%sale of loans, other mortgage production income and 26.5%, respectively, of totalmortgage loan origination volume). Home purchasesfees. Total loan origination volume increased 4.4% to $3.3 billion duringis a measure utilized by management, our investors and analysts in assessing market share and growth of the three months ended September 30, 2017 from $3.2 billion during the three months ended September 30, 2016, while home purchases volume increased 7.1% to $9.1 billion during the nine months ended September 30, 2017 from $8.5 billion during the nine months ended September 30, 2016.mortgage origination segment.
The mortgage origination segment’s total loan origination volume during the three and nine months ended September 30, 2017 decreased 11.6%2020 increased 35.2% and 6.2%44.7%, respectively, compared to the same periods in 2016, while2019. Income before income taxes during the three and nine months ended September 30, 2020 increased 363.4% and 476.8%, respectively, compared to
76
the same periods in 2019. The increase in income before income taxes during the three and nine months ended September 30, 2017 decreased 59.0% and 38.6%, respectively,2020, compared to the same periods in 2016. The decrease in income before taxes during the three months ended September 30, 2017 was2019, were primarily due a decreaseto increases in net gains on sale of loans, the change in net fair value and related derivative activity of interest rate lock commitments (“IRLCs”)IRLCs and loans held for sale, in addition to a decrease in net gains from sale of loans.and mortgage loan origination fees and other related income. These changes were partially offset by a decreasean increase in variable compensation that varies with the volume of mortgage loan originations (“variable compensation”), a decrease in segment operating costs, a decrease in lender paid closing costs, and an increase in net interest income. The decrease in income before taxes during the nine months ended September 30, 2017 was primarily due to a decrease in net gains from sale of loans, in addition to a decrease in the change in net fair value of interest rate lock commitments and loans held for sale. These changes were partially offset by a decrease in variable compensation, a decrease in lender paid closing costs, and a decrease in net interest expense.
73
Noninterest income was $163.8 million and $202.6 million during the three months ended September 30, 2017 and 2016, respectively, and $487.0 million and $541.8 million during the nine months ended September 30, 2017 and 2016, respectively, and was comprised of the following (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Variance |
| Nine Months Ended September 30, |
| Variance |
| ||||||||||
| 2017 |
| 2016 |
| 2017 vs 2016 |
| 2017 |
| 2016 |
| 2017 vs 2016 |
| ||||||
Net gains from sale of loans | $ | 149,958 |
| $ | 167,238 |
| $ | (17,280) |
| $ | 392,081 |
| $ | 432,488 |
| $ | (40,407) |
|
Mortgage loan origination fees |
| 25,256 |
|
| 26,807 |
|
| (1,551) |
|
| 70,788 |
|
| 71,417 |
|
| (629) |
|
Other mortgage production income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net fair value and related derivative activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate lock commitments and loans held for sale |
| (14,003) |
|
| 5,147 |
|
| (19,150) |
|
| 10,526 |
|
| 26,641 |
|
| (16,115) |
|
Mortgage servicing rights asset |
| (1,631) |
|
| (2,308) |
|
| 677 |
|
| (2,059) |
|
| (6,111) |
|
| 4,052 |
|
Servicing fees |
| 4,178 |
|
| 5,676 |
|
| (1,498) |
|
| 15,697 |
|
| 17,344 |
|
| (1,647) |
|
| $ | 163,758 |
| $ | 202,560 |
| $ | (38,802) |
| $ | 487,033 |
| $ | 541,779 |
| $ | (54,746) |
|
Net gains from sale of loans decreased 10.3% and 9.3%interest expense during the three and nine months ended September 30, 2017, respectively, compared to2020 and 2019 was primarily comprised of interest earned on loans held for sale offset by interest incurred on warehouse lines of credit held with the same periodsBank, as well as related intercompany financing costs. The primary reasons for the decrease in 2016. Mortgage loan origination fees decreased 5.8% and 0.9%net interest expense during the three and nine months ended September 30, 2017, respectively, compared with2020 were a decrease in intercompany financing costs and an increase in the same periodsaverage balance of loans held for sale, partially offset by a decrease the average net spread between the yield on loans held for sale and the Bank warehouse lines of credit interest rates.
Noninterest income was comprised of the items set forth in 2016. the table below (in thousands).
| | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Variance | | Nine Months Ended September 30, | | Variance | | ||||||||||
| 2020 |
| 2019 |
| 2020 vs 2019 |
| 2020 |
| 2019 |
| 2020 vs 2019 |
| ||||||
Net gains from sale of loans | $ | 287,255 | | $ | 144,389 | | $ | 142,866 | | $ | 618,846 | | $ | 344,737 | | $ | 274,109 | |
Mortgage loan origination fees and other related income | | 47,703 | | | 37,782 | | | 9,921 | | | 121,841 | | | 93,065 | | | 28,776 | |
Other mortgage production income: | | | | | | | | | | | | | | | | | | |
Change in net fair value and related derivative activity: | | | | | | | | | | | | | | | | | | |
IRLCs and loans held for sale | | 22,466 | | | 10,082 | | | 12,384 | | | 136,409 | | | 32,006 | | | 104,403 | |
Mortgage servicing rights asset | | (12,301) | | | (3,657) | | | (8,644) | | | (23,511) | | | (11,521) | | | (11,990) | |
Servicing fees | | 10,348 | | | 6,261 | | | 4,087 | | | 21,341 | | | 19,151 | | | 2,190 | |
Total noninterest income | $ | 355,471 | | $ | 194,857 | | $ | 160,614 | | $ | 874,926 | | $ | 477,438 | | $ | 397,488 | |
The decreasesincreases in net gains from sale of loans during the three and nine months ended September 30, 20172020, compared with the same periods in 2019, were primarily a result of decreasesan increase in total loan sales volume, of 8.0% and 6.7%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 nine months ended September 30, 2017, respectively, compared2020 are consistent with increases in loan origination volume during the same periods in 2016,2019. The increase in additionaverage loans sales margin was primarily driven by PrimeLending managing increased loan origination volumes to a slight decrease in averagelevel that could be supported by its loan sales margin duringfulfillment operations and addressing anticipated enhanced credit and liquidity risks triggered by the same periods. Decreaseseconomic impact of the COVID-19 pandemic. The increases in mortgage loan origination fees were primarily a result of decreases in total loan origination volume during three and nine months ended September 30, 2017, compared with the same periods in 2016, offset by increases in average mortgage loan origination fees during the same periods.
Noninterest income included a decrease of $14.0 million and an increase of $10.5 million during the three and nine months ended September 30, 2017, respectively,2020, compared with increases of $5.1 million and $26.6 million during the same periods in 2016,2019, 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, including loans sold to the banking segment, during the three months ended September 30, 2020 and 2019 were 440 bps and 335 bps, respectively. The mortgage origination segment’s net gains from sale of loans margins, including loans sold to the banking segment, during the nine months ended September 30, 2020 and 2019 were 388 bps and 333 bps, respectively. During the three months ended September 30, 2020 and 2019, the mortgage origination segment originated approximately $12.8 million and $27.9 million, respectively, in loans on behalf of the banking segment, representing approximately 0.2% and 1.0%, respectively, of PrimeLending’s total loan origination volume during each applicable period. During the nine months ended September 30, 2020 and 2019, the mortgage origination segment originated approximately $155.3 million and $47.8 million, respectively, in loans on behalf of the banking segment, representing approximately 1.0% of PrimeLending’s total loan origination volume during both periods. 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 minimis to the net gain from sale of loans margin during both the three and nine months ended September 30, 2020, and for the same periods in 2019. Loan volumes to be originated on behalf of and retained by the banking segment are evaluated each quarter. While we anticipate an increase in loans sold to the banking segment during the fourth quarter, we do not expect these sales to exceed 5% of total origination volume during 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
77
$210 million. 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 decrease during the three months ended September 30, 2017 was the result of decreases in the total volume and average value of individual IRLCs and mortgage loans. The increase during the nine months ended September 30, 2017 was primarily the result of an increase in the total volume of individual IRLCs and mortgage loans, partially offset by a decrease in the average value of individual IRLCs and mortgage loans. The increases during the three and nine months ended September 30, 20162020 were primarily athe result of increases in the volume of IRLCs and mortgage loans held during this period, partially offset by decreasesfor sale, as well as increases in the average value of individual IRLCs and mortgage loans.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. During the three months ended September 30, 2017,In addition, the mortgage origination segment retained servicingoriginates loans on approximately 14%behalf of loans sold, compared to 22% during the same period in 2016. During the nine months ended September 30, 2017, the mortgage origination segment retained servicing on approximately 7% of loans sold, compared to 19% during the same period in 2016.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 refinancing and market activity. During the three months ended September 30, 2020, the mortgage origination segment retained servicing on 89% of loans sold, compared to 7% during the same period in 2019. During the nine months ended September 30, 2020, the mortgage origination segment retained servicing on 71% of loans sold, compared to 6% during the same period in 2019. The increase in rates of retained servicing during both periods was due to the reduction in third 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. We expect that PrimeLending will retain servicing on approximately 50% to 75% of its mortgage loan sales during the remainder of 2020. The related MSR asset was valued at $48.9$128.3 million on $4.3$13.7 billion of serviced loan volume at September 30, 2017,2020, compared with a value of $63.3$56.7 million on $5.6$5.1 billion of serviced loan volume at December 31, 2016.2019. 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 various combinations of interest rate swaps, swaptions, forward commitments to sell mortgage-backed securities, and U.S. Treasury bond futures and options, 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 net losses of $1.6$12.3 million and $2.1$23.5 million during the three and nine months ended September 30, 2017,2020, respectively, compared to net losses of $2.3$3.7 million and $6.1$11.5 million during the three and nine months ended September 30, 2016,2019, respectively. Additionally, net servicing income was $1.8$4.6 million and $6.7$8.2 million during the three and nine months ended September
74
30, 2017,2020, respectively, compared with $2.3$2.9 million and $7.2$9.5 million respectively, during the same periodsperiod in 2016. In March 2017 and May 2016,2019. On February 14, 2020, the mortgage origination segment sold MSR assets of $17.5$18.7 million, and $7.6 million, respectively, which represented $1.7$1.5 billion and $917.4 million, respectively, of its serviced loan volume at the time. In addition, on September 29, 2020, the mortgage origination segment executed an agreement to sell MSR assets of approximately $18.0 million, which represented $2.3 billion of its current serviced loan volume. The MSR sale is scheduled to close on October 31, 2020.
Noninterest expenses were $151.1 million and $168.3 million during the three months ended September 30, 2017 and 2016, respectively, and $444.3 million and $465.5 million during the nine months ended September 30, 2017 and 2016, respectively, and were comprised of the followingitems set forth in the table below (in thousands).
|
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|
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|
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|
| ||||||||||||||||||
| Three Months Ended September 30, |
| Variance |
| Nine Months Ended September 30, |
| Variance |
| ||||||||||||||||||||||||||||
| 2017 |
| 2016 |
| 2017 vs 2016 |
| 2017 |
| 2016 |
| 2017 vs 2016 |
| ||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | ||||||||||||||||||
| Three Months Ended September 30, | | Variance | | Nine Months Ended September 30, | | Variance | | ||||||||||||||||||||||||||||
| 2020 |
| 2019 |
| 2020 vs 2019 |
| 2020 |
| 2019 |
| 2020 vs 2019 |
| ||||||||||||||||||||||||
Variable compensation | $ | 66,420 |
| $ | 75,271 |
| $ | (8,851) |
| $ | 185,203 |
| $ | 201,564 |
| $ | (16,361) |
| $ | 116,275 | | $ | 81,287 | | $ | 34,988 | | $ | 288,380 | | $ | 185,732 | | $ | 102,648 | |
Non-variable compensation and benefits | | 45,463 | | | 42,603 | | | 2,860 | | | 134,511 | | | 123,650 | | | 10,861 | | ||||||||||||||||||
Segment operating costs |
| 75,596 |
|
| 79,308 |
|
| (3,712) |
|
| 230,453 |
|
| 226,522 |
|
| 3,931 |
| | 33,414 | | | 27,658 | | | 5,756 | | | 94,062 | | | 83,827 | | | 10,235 | |
Lender paid closing costs |
| 6,705 |
|
| 10,302 |
|
| (3,597) |
|
| 19,594 |
|
| 27,216 |
|
| (7,622) |
| | 6,227 | | | 5,760 | | | 467 | | | 17,145 | | | 14,182 | | | 2,963 | |
Servicing expense |
| 2,335 |
|
| 3,422 |
|
| (1,087) |
|
| 9,013 |
|
| 10,161 |
|
| (1,148) |
| | 5,797 | | | 3,326 | | | 2,471 | | | 13,124 | | | 9,641 | | | 3,483 | |
| $ | 151,056 |
| $ | 168,303 |
| $ | (17,247) |
| $ | 444,263 |
| $ | 465,463 |
| $ | (21,200) |
| ||||||||||||||||||
Total noninterest expense | $ | 207,176 | | $ | 160,634 | | $ | 46,542 | | $ | 547,222 | | $ | 417,032 | | $ | 130,190 | |
Employees’Total employees’ compensation and benefits accounted for the majority of noninterest expenses incurred during all periods presented. VariableSpecifically, variable compensation decreased $8.9 millioncomprised 71.9% and $16.4 million during the three and nine months ended September 30, 2017, respectively, compared with the same periods in 2016, and comprised 59.8% and 62.8%65.6% of total employees’ compensation and benefits expenses during the three months ended September 30, 20172020 and 2016,2019, respectively, and 58.4%68.2% and 61.7% of total employees’ compensation and benefits expenses60.0% during the nine months ended September 30, 20172020 and 2016,2019, respectively. The increases in the percentage concentration of variable compensation and benefits were primarily due to an increase in loan origination volume. Variable compensation, which 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
78
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 increases in loan origination volume between the three and nine months ended September 30, 2020 and 2019, primarily driving the increase in variable compensation and benefits, there was also a slight increase in the average incentive rate paid.
While total loan origination volume decreased 11.6%increased 35.2% and 6.2%44.7% for the three and nine months ended September 30, 2017,2020, respectively, compared to the same periods in 2016,2019, the aggregate non-variable compensation and benefits and segment operating costs of the mortgage origination segment’s operating costs decreased 4.7%segment increased by 12.3% and increased 1.7%10.2%, respectively. The change in segment operating costsaforementioned increases during the three months ended September 30, 2017, compared to the same period in 2016, was primarily due to a decrease in non-variable salaries and benefits, a decrease in loan related expenses, and a decrease in third party professional fees. The change in segment operating expenses during the nine months ended September 30, 2017,2020, compared to the same periodperiods in 2016, was2019, 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, an increase in the average cost of employee benefits, and an increase in technology infrastructure support. In addition, to support the increase in loan origination volume during the last two quarters, the mortgage origination segment increased underwriting and loan fulfillment staff during the third quarter. The increases in loan origination costs were primarily due to an increase in non-variable salaries and benefits and occupancy expense. The increase in non-variable salaries and benefits was primarily the result of an increase in headcount related to loan processing functions. The increase in loan processing headcount was initiated during the second quarter of 2016, primarily to address growth in loan origination volume. This additional headcount has remained in place through the third quarter of 2017 to support anticipated 2017 loan origination volumes. Historically, segment operating costs tend to fluctuate with, but at a lesser magnitude than, loan origination volume, as these costs are comprised of salaries, benefits, occupancy and administrative costs, which are not normally highly sensitive to changes in loan origination volume.
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 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, 20082011 and September 30, 2017,2020, the mortgage origination segment sold mortgage loans totaling $97.7$130.6 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 2008,2011, it does not anticipate experiencing significant losses in the future on loans originated prior to 20082011 as a result of investor claims under these provisions of its sales contracts.
When an agency, investor, or other partya 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
75
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, 20082011 and September 30, 20172020 (dollars in thousands).
| | | | | | | | | | | |
| | Original Loan Balance | | Loss Recognized | | ||||||
| | | | | % of | | | | | % of | |
| | | | | Loans | | | | | Loans | |
|
| Amount |
| Sold |
| Amount |
| Sold |
| ||
Claims resolved with no payment | | $ | 209,924 | | 0.16% | | $ | — | | 0.00% | |
| | | | | | | | | | | |
Claims resolved because of a loan repurchase or payment to an investor for losses incurred (1) | | | 260,281 | | 0.20% | | | 9,785 | | 0.01% | |
| | $ | 470,205 | | 0.36% | | $ | 9,785 | | 0.01% | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Original Loan Balance |
| Loss Recognized |
| ||||||
|
|
|
|
| % of |
|
|
|
| % of |
|
|
|
|
|
| Loans |
|
|
|
| Loans |
|
|
| Amount |
| Sold |
| Amount |
| Sold |
| ||
Claims resolved with no payment |
| $ | 205,085 |
| 0.21% |
| $ | — |
| 0.00% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims resolved as a result of a loan repurchase or payment to an investor for losses incurred (1) |
|
| 235,810 |
| 0.24% |
|
| 16,107 |
| 0.02% |
|
|
| $ | 440,895 |
| 0.45% |
| $ | 16,107 |
| 0.02% |
|
(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, 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.
79
At September 30, 20172020 and December 31, 2016,2019, the mortgage origination segment’s indemnification liability reserve totaled $24.7$18.0 million and $18.2$11.8 million, respectively. The related provision for indemnification losses was $2.5$3.1 million and $1.3$1.0 million during the three months ended September 30, 20172020 and 2016,2019, respectively, and $4.5$7.7 million and $3.5$2.2 million during the nine months ended September 30, 20172020 and 2016,2019, respectively. The increases to the provision for indemnification losses during both periods were primarily related to a $1.5 million indemnification liability reserve recorded in connection with 2017 hurricane loss exposures.
Corporate
Insurance Segment
Losses before income taxes in our insurance segment were $9.3 million during the three months ended September 30, 2017 compared with income before income taxes of $11.5 million during the three months ended September 30, 2016. Losses before income taxes were $17.9 million during the nine months ended September 30, 2017 compared with income before income taxes of $8.1 million during the nine months ended September 30, 2016. These year-over-year changes during the three and nine months ended September 30, 2017, compared with the same periods in 2016, were driven primarily by a decline in net insurance premiums earned, loss and LAE effects of Hurricane Harvey, and other non-catastrophic weather-related losses experienced during 2017.
The insurance segment is subject to claims arising out of severe weather, the incidence and severity of which are inherently unpredictable. Generally, the insurance segment’s insured risks exhibit higher losses in the second and third calendar quarters due to a seasonal concentration of weather-related events in its primary geographic markets. Although weather-related losses (including hail, high winds, tornadoes and hurricanes) can occur in any calendar quarter, the second calendar quarter, historically, has experienced the highest frequency of losses associated with these events. Hurricanes, however, are more likely to occur in the third calendar quarter of the year.
The insurance segment periodically reviews the pricing of its primary products in each state of operation utilizing a consulting actuarial firm to supplement normal review processes resulting in filings to adjust rates as deemed necessary. The benefit of these rate actions are not fully realized until all policies under the old rates expire, which typically occurs one year from the date of rate change implementation. Concurrently, business concentrations are reviewed and actions initiated, including cancellation of agents, non-renewal of policies and cessation of new business writing on certain products in problematic geographic areas. The insurance segment has historically utilized rate actions to reduce the rate of premium growth for targeted areas when compared with the patterns exhibited in prior quarters and years and reduced the insurance segment’s exposure to volatile weather in these areas, but competition and customer response to rate increases has negatively impacted customer retention and new business. The insurance segment aims to manage and diversify its business concentrations and products to minimize the effects of future weather-related events.
The noted negative impact on premiums written and earned and the significance of the higher net loss and LAE incurred due to current year weather-related events, including Hurricane Harvey, have had a negative impact on current year operating results. In response, we continue to undertake initiatives to help grow net insurance premiums written and earned, streamline business activities and expenses, mitigate the impact of future significant weather-related events,
76
as well as evaluate product offerings and pricing to improve our long-term financial condition and operating results. These initiatives, as well as other assumptions and conditions, will be reflected in the insurance segment’s annual impairment evaluation of goodwill and other intangible assets as of October 1, 2017.
The insurance segment’s operations resulted in combined ratios of 131.0% and 75.0% during the three months ended September 30, 2017 and 2016, respectively, and 120.2% and 97.8% during the nine months ended September 30, 2017 and 2016, respectively. The increase in the combined ratio during the three months ended September 30, 2017, compared with the same period in 2016, included increases in the loss and LAE ratio and the underwriting expense ratio driven by the reduction in premiums earned and increase in loss and LAE incurred. The increase in the combined ratio during the nine months ended September 30, 2017, compared with the same period in 2016, included increases in the loss and LAE ratio and the underwriting expense ratio as previously discussed. 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 of $36.8 million and $41.2 million during the three months ended September 30, 2017 and 2016, respectively, included net insurance premiums earned of $34.5 million and $38.7 million, respectively, while noninterest income of $113.6 million and $124.4 million during the nine months ended September 30, 2017 and 2016, respectively, included net insurance premiums earned of $106.7 million and $117.2 million, respectively. The year-over-year decrease in net insurance premiums earned was due to the effect of the decrease in net premiums written.
Direct insurance premiums written by major product line are presented in the table below (in thousands).
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|
|
|
| Three Months Ended September 30, |
| Variance |
| Nine Months Ended September 30, |
| Variance |
| ||||||||||
|
| 2017 |
| 2016 |
| 2017 vs 2016 |
| 2017 |
| 2016 |
| 2017 vs 2016 |
| ||||||
Direct Insurance Premiums Written: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowners |
| $ | 13,889 |
| $ | 16,727 |
| $ | (2,838) |
| $ | 43,047 |
| $ | 50,964 |
| $ | (7,917) |
|
Fire |
|
| 10,618 |
|
| 11,744 |
|
| (1,126) |
|
| 33,254 |
|
| 36,679 |
|
| (3,425) |
|
Mobile Home |
|
| 8,547 |
|
| 8,796 |
|
| (249) |
|
| 28,711 |
|
| 29,576 |
|
| (865) |
|
Commercial |
|
| 785 |
|
| 856 |
|
| (71) |
|
| 2,338 |
|
| 2,568 |
|
| (230) |
|
Other |
|
| 70 |
|
| 77 |
|
| (7) |
|
| 147 |
|
| 168 |
|
| (21) |
|
|
| $ | 33,909 |
| $ | 38,200 |
| $ | (4,291) |
| $ | 107,497 |
| $ | 119,955 |
| $ | (12,458) |
|
The total direct insurance premiums written for our three largest insurance product lines decreased by $4.2 million and $12.2 million during the three and nine months ended September 30, 2017, respectively, compared with the same periods in 2016, due primarily to the effects of competitive pressures in our Texas market.
Net insurance premiums earned by major product line are presented in the table below (in thousands).
|
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|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Variance |
| Nine Months Ended September 30, |
| Variance |
| ||||||||||
|
| 2017 |
| 2016 |
| 2017 vs 2016 |
| 2017 |
| 2016 |
| 2017 vs 2016 |
| ||||||
Net Insurance Premiums Earned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowners |
| $ | 14,117 |
| $ | 16,940 |
| $ | (2,823) |
| $ | 42,709 |
| $ | 49,792 |
| $ | (7,083) |
|
Fire |
|
| 10,796 |
|
| 11,909 |
|
| (1,113) |
|
| 32,993 |
|
| 35,838 |
|
| (2,845) |
|
Mobile Home |
|
| 8,713 |
|
| 8,955 |
|
| (242) |
|
| 28,486 |
|
| 28,897 |
|
| (411) |
|
Commercial |
|
| 797 |
|
| 866 |
|
| (69) |
|
| 2,319 |
|
| 2,509 |
|
| (190) |
|
Other |
|
| 70 |
|
| 77 |
|
| (7) |
|
| 146 |
|
| 165 |
|
| (19) |
|
|
| $ | 34,493 |
| $ | 38,747 |
| $ | (4,254) |
| $ | 106,653 |
| $ | 117,201 |
| $ | (10,548) |
|
Net insurance premiums earned during the three and nine months ended September 30, 2017 decreased compared to the same periods in 2016, primarily due to the decrease in net premiums written noted above.
Noninterest expenses of $47.0 million and $30.4 million during the three months ended September 30, 2017 and 2016, respectively, and $133.4 million and $118.5 million during the nine months ended September 30, 2017 and 2016, respectively, include 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 during the three months ended September 30, 2017 was $31.2 million,
77
compared with $16.1 million during the same period in 2016, resulting in loss and LAE ratios of 90.6% and 41.4%, respectively. Loss and LAE during the nine months ended September 30, 2017 was $86.1 million, compared with $75.2 million during the same period in 2016, resulting in loss and LAE ratios of 80.7% and 64.2%, respectively. The increase in the loss and LAE ratio during the three months ended September 30, 2017, compared to the same period in 2016, was primarily driven by a 94.5% increase in loss and LAE expense, compared to premiums earned decreasing by 11.0%. The increase in the loss and LAE ratio during the nine months ended September 30, 2017, compared to the same period in 2016, was primarily driven by a 14.5% increase in loss and LAE expense, compared to premiums earned decreasing by 9.0%. The increases in the loss and LAE ratio during the three and nine months ended September 30, 2017 were attributable to non-catastrophic weather-related losses as well as Hurricanes Harvey and Irma. The actual loss related to these hurricanes, excluding reinstatement premium, was $4.5 million after reinsurance.
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 in the consolidated statements of operations.
The following table detailspresents certain financial information regarding the calculationoperating results of the underwriting expense ratio for the periods presented (dollars incorporate (in thousands).
|
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|
|
|
|
|
|
| Three Months Ended September 30, |
| Variance |
|
| Nine Months Ended September 30, |
| Variance |
| ||||||||||
|
| 2017 |
| 2016 |
| 2017 vs 2016 |
|
| 2017 |
| 2016 |
| 2017 vs 2016 |
| ||||||
Amortization of deferred policy acquisition costs |
| $ | 8,830 |
| $ | 9,337 |
| $ | (507) |
|
| $ | 27,457 |
| $ | 29,217 |
| $ | (1,760) |
|
Other underwriting expenses |
|
| 6,102 |
|
| 4,606 |
|
| 1,496 |
|
|
| 17,570 |
|
| 12,780 |
|
| 4,790 |
|
Total |
|
| 14,932 |
|
| 13,943 |
|
| 989 |
|
|
| 45,027 |
|
| 41,997 |
|
| 3,030 |
|
Agency expenses |
|
| (989) |
|
| (908) |
|
| (81) |
|
|
| (2,914) |
|
| (2,672) |
|
| (242) |
|
Total less agency expenses |
| $ | 13,943 |
| $ | 13,035 |
| $ | 908 |
|
| $ | 42,113 |
| $ | 39,325 |
| $ | 2,788 |
|
Net insurance premiums earned |
| $ | 34,493 |
| $ | 38,747 |
| $ | (4,254) |
|
| $ | 106,653 |
| $ | 117,201 |
| $ | (10,548) |
|
Expense ratio |
|
| 40.4 | % |
| 33.6 | % |
| 6.8 | % |
|
| 39.5 | % |
| 33.6 | % |
| 5.9 | % |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| Variance | | Nine Months Ended September 30, |
| Variance | ||||||||||
| | 2020 | | 2019 | | 2020 vs 2019 | | 2020 | | 2019 | | 2020 vs 2019 | ||||||
Net interest expense | | $ | (4,594) | | $ | (1,384) | | $ | (3,210) | | $ | (9,482) | | $ | (4,045) | | $ | (5,437) |
Noninterest income | |
| 477 | |
| 460 | |
| 17 | |
| 3,315 | |
| 1,820 | |
| 1,495 |
Noninterest expense | | | 21,999 | |
| 12,561 | |
| 9,438 | | | 35,741 | |
| 37,397 | |
| (1,656) |
Income (loss) from continuing operations before income taxes | | $ | (26,116) | | $ | (13,485) | | $ | (12,631) | | $ | (41,908) | | $ | (39,622) | | $ | (2,286) |
Corporate
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 including, but not limited to, certain executive management, corporate relations, legal, finance, and acquisition costs.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.
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 have cash resources available to make acquisitions. Investment and interest income earned was $0.1 million and $0.1 million during the three months ended September 30, 2017 and 2016, respectively, and $0.3 million and $0.3 million during the nine months ended September 30, 2017 and 2016, respectively.potential stock repurchases. Investment and interest income during the three and nine months ended September 30, 2016 included $0.2 million2020 was primarily comprised of intercompanydividend income from merchant banking investment activities, in addition to interest income earned on note receivables held with Securities Holdings that were paid off in January 2016 and March 2016, respectively.intercompany notes.
As a result of previously disclosed strategic leadership and organizational changes, certain interest expenses, headcount and related noninterest expenses of PCC, which were previously allocated to the banking and mortgage origination segments, are included within corporate effective January 1, 2017.
Interest expense was $2.7 million and $1.9 million during the three months ended September 30, 2017 and 2016, respectively, and $7.7 million and $5.7 million during the nine months ended September 30, 2017 and 2016, respectively, and was primarily associated witheach 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”). In addition, interest expense duringDuring the three and nine months ended September 30, 20172020, we incurred interest expense of $0.8$3.1 million and $2.3$4.8 million, respectively, on our recently completed public offering in May 2020 of $200 million aggregate principal amount of Subordinated Notes. Additionally, we incurred interest expense of $0.6 million and $1.0 million during the three months ended September 30, 2020 and 2019, respectively, and $2.2 million and $3.0 million during the nine months ended September 30, 2020 and 2019, respectively, on junior subordinated debentures of $67.0 million issued by PCC (the “Debentures”) was included within corporate as a result of the organizational changes noted above. During the three and nine months ended September 30, 2016, interest expense on the Debentures of $0.7 million and $2.0 million was reported within our operating segments..
Noninterest income during the three months ended September 30, 2017 was nominal. Noninterest incomefrom continuing operations during the three and nine months ended September 30, 2017 was primarily comprised of2020 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 previously mentioned pre-taxBank, and net
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increase to other noninterest income of $11.6 million related to the resolution of the appraisal proceedingsassociated with activity within our merchant bank subsidiary.
Noninterest expenses from the SWS Merger. Noninterest incomecontinuing operations during the three and nine months ended September 30, 2016 was nominal.
Noninterest expenses of $9.3 million2020 and $10.0 million during the three months ended September 30, 2017 and 2016, respectively, and $25.0 million and $22.4 million during the nine months ended September 30, 2017 and 2016, respectively,2019 were primarily comprised of employees’ compensation and benefits, occupancy expenses and professional fees, including corporate governance, legal and transaction costs. DuringNoninterest expenses increased during the ninethree months ended September 30, 2017,2020, compared withto the same period in 2016, the change2019, primarily due to increases in noninterest expenses primarily included increases associated with the organizational changes noted above related to employees’ incentive compensation and benefits costs of $6.4 million, professional fees of $3.5 million, and occupancy and equipment expenses of $2.9 million, partially offset by afees. The decrease of $5.1 million in transaction-related costs directly attributable to the SWS Merger. Specifically, during the nine months ended September 30, 2017, Hilltop incurred pre-tax transaction costs related2020, compared to the SWS Mergersame period in 2019, included $6.8 million of $1.6aggregate pre-tax costs associated with the Leadership Changes and efficiency initiative-related charges discussed in the “Factors Affecting Comparability of Results of Operations” section, partially offset by the increases previously noted.
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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 liabilities 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. Income from discontinued operations before income taxes was $6.5 million compared with $6.7during the three months ended September 30, 2019, while income from discontinued operations before income taxes was $2.1 million and $10.5 million during the nine months ended September 30, 2016. 2020 and 2019, respectively.
Corporate
As a result of the previously noted sale of NLC on June 30, 2020 for cash proceeds of $154.1 million, Hilltop recognized a pre-tax gain within discontinued operations of corporate of $32.3 million, net of customary transaction costs of $5.1 million and was subject to post-closing adjustments, during the second quarter of 2020. Included within discontinued operations of corporate for the third quarter of 2020 is the recognition of a pre-tax post-closing adjustment gain of $0.7 million related to the finalization of the June 30, 2020 closing balance sheet, resulting in an aggregate gain on sale of NLC of $33.1 million. The resulting book gain from this sale transaction was not recognized for tax purposes pursuant to the rules under the Internal Revenue Code. Income from discontinued operations before income taxes was $0.7 million and $33.1 million during the three and nine months ended September 30, 2020, respectively.
Financial Condition
The following discussion contains a more detailed analysis of our financial condition at September 30, 20172020, as compared with December 31, 2016.2019.
Securities Portfolio
At September 30, 2017,2020, 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, and held to maturity.maturity and equity securities.
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 thatclassified 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 other similar factors are classified as available for sale andto 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). However,Equity investments are carried at fair value, with the adoption of Accounting Standards Update 2016-01 in January 2018, the Company will reclassify all equity investments out of trading and available for sale securities, with all subsequent 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.
79
81
The table below summarizes our securities portfolio (in thousands).
|
|
|
|
|
|
|
| |||||||
|
| September 30, |
| December 31, |
| |||||||||
|
| 2017 |
| 2016 |
| |||||||||
| | | | | | | | |||||||
| | September 30, | | December 31, | | |||||||||
|
| 2020 |
| 2019 |
| |||||||||
Trading securities, at fair value |
|
|
|
|
|
|
| | | | | | | |
U.S. Treasury securities |
| $ | 200 |
| $ | 5,940 |
| | $ | 20,859 | | $ | — | |
U.S. government agencies: |
|
|
|
|
|
|
| | | | | | | |
Bonds |
|
| 53,275 |
|
| 36,303 |
| | | 51,707 | | | 24,680 | |
Residential mortgage-backed securities |
|
| 407,275 |
|
| 2,539 |
| | | 13,951 | | | 331,601 | |
Commercial mortgage-backed securities |
|
| 9,599 |
|
| 15,171 |
| | | 891 | | | 2,145 | |
Collateralized mortgage obligations |
|
| 1,098 |
|
| 5,607 |
| | | 372,219 | | | 191,154 | |
Corporate debt securities |
|
| 77,435 |
|
| 60,699 |
| | | 62,837 | | | 36,973 | |
States and political subdivisions |
|
| 90,144 |
|
| 89,946 |
| | | 135,068 | | | 93,117 | |
Unit investment trusts |
|
| 31,626 |
|
| 41,409 |
| | | — | | | 3,468 | |
Private-label securitized product |
|
| 2,398 |
|
| 4,292 |
| | | 6,752 | | | 2,992 | |
Other |
|
| 3,361 |
|
| 3,628 |
| |
| 3,467 | |
| 3,446 | |
|
|
| 676,411 |
|
| 265,534 |
| |||||||
| |
| 667,751 | |
| 689,576 | | |||||||
Securities available for sale, at fair value |
|
|
|
|
|
|
| | | | | | | |
U.S. Treasury securities |
|
| 22,880 |
|
| 31,801 |
| |||||||
U.S. government agencies: |
|
|
|
|
|
|
| | | | | | | |
Bonds |
|
| 101,007 |
|
| 122,652 |
| |
| 57,940 | |
| 85,575 | |
Residential mortgage-backed securities |
|
| 245,908 |
|
| 133,138 |
| |
| 596,993 | |
| 437,029 | |
Commercial mortgage-backed securities |
|
| 12,145 |
|
| 8,715 |
| | | 64,292 | | | 12,031 | |
Collateralized mortgage obligations |
|
| 219,734 |
|
| 114,702 |
| |
| 548,477 | |
| 335,616 | |
Corporate debt securities |
|
| 74,753 |
|
| 79,129 |
| |||||||
States and political subdivisions |
|
| 67,627 |
|
| 87,515 |
| |
| 42,538 | |
| 41,242 | |
Commercial mortgage-backed securities |
|
| 505 |
|
| 515 |
| |||||||
Equity securities |
|
| 20,983 |
|
| 19,840 |
| |||||||
|
|
| 765,542 |
|
| 598,007 |
| |||||||
| |
| 1,310,240 | |
| 911,493 | | |||||||
Securities held to maturity, at amortized cost |
|
|
|
|
|
|
| | | | | | | |
U.S. government agencies: |
|
|
|
|
|
|
| | | | | | | |
Bonds |
|
| 40,515 |
|
| 40,513 |
| | | — | | | 24,020 | |
Residential mortgage-backed securities |
|
| 16,973 |
|
| 19,606 |
| |
| 14,659 | | | 17,776 | |
Commercial mortgage-backed securities |
|
| 71,613 |
|
| 31,767 |
| | | 153,318 | | | 161,624 | |
Collateralized mortgage obligations |
|
| 183,926 |
|
| 217,954 |
| |
| 84,670 | | | 113,894 | |
States and political subdivisions |
|
| 55,004 |
|
| 41,991 |
| |
| 70,652 | | | 69,012 | |
|
|
| 368,031 |
|
| 351,831 |
| |||||||
| |
| 323,299 | |
| 386,326 | | |||||||
| | | | | | | | |||||||
Equity securities, at fair value | | | 117 | | | 166 | | |||||||
| | | | | | | | |||||||
Total securities portfolio |
| $ | 1,809,984 |
| $ | 1,215,372 |
| | $ | 2,301,407 | | $ | 1,987,561 | |
We had a net unrealized gaingains of $2.6$29.8 million and $11.7 million at September 30, 2017, compared with a net unrealized loss of $0.2 million at2020 and December 31, 2016,2019, respectively, related to the available for sale investment portfolio, and net unrealized lossesgains of $15.6 million and $2.6 million associated with the securities held to maturity portfolio of $3.9 million and $6.7 million at September 30, 20172020 and December 31, 2016,2019, respectively. We had net unrealized gains of $0.1 million at both September 30, 2020 and December 31, 2019 related to equity securities.
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 portfolio servesportfolios 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 September 30, 2017,2020, the banking segment’s securities portfolio of $1.0$1.6 billion was comprised of trading securities of $10.0$1.1 million, available for sale securities of $624.4$1.3 billion, equity securities of $0.1 million and held to maturity securities of $368.0 million.$323.3 million, in addition to $14.8 million of other investments included in other assets within the consolidated balance sheets.
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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
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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 $666.4$666.7 million at September 30, 2017.2020. 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 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 sheet,sheets, had a value of $173.5$56.0 million at September 30, 2017. The Hilltop Broker-Dealers continue to evaluate market opportunities and from time to time will hold residential mortgage-backed securities in firm inventory which is sold to institutional clients and other counterparties.2020.
Insurance SegmentCorporate
The insurance segment’s primary investment objective is to preserve capital and manage for a total rate of return. NLC’s strategy is to purchase securities in sectors that represent the most attractive relative value. The insurance segment invests the premiums it receives from policyholders until they are needed to pay policyholder claims or other expenses. At September 30, 2017,2020, the insurance segment’s securitiescorporate portfolio was comprised of $141.1 million in available for sale securities and $5.6 million ofincluded other investments, includedincluding those associated with merchant banking, of $38.8 million in other assets within the consolidated balance sheet.sheets.
Non-Covered 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. None of the available for sale debt securities held were past due at September 30, 2020. In addition, as of September 30, 2020, 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 September 30, 2020.
Loan Portfolio
Consolidated non-covered loans held for investment are detailed in the tables below, classified by portfolio segment and segregated between those considered to be PCI loans and all other originated or acquired loans (in thousands). PCI loans showed evidence of credit deterioration on the date of acquisition that made it probable that all contractually required principal and interest payments would not be collected.segment.
|
|
|
|
|
|
|
|
|
|
|
|
| Loans, excluding |
| PCI |
| Total |
| |||
September 30, 2017 |
| PCI Loans |
| Loans |
| Loans |
| |||
Commercial and industrial |
| $ | 1,729,236 |
| $ | 6,232 |
| $ | 1,735,468 |
|
Real estate |
|
| 2,914,201 |
|
| 29,954 |
|
| 2,944,155 |
|
Construction and land development |
|
| 940,040 |
|
| 1,588 |
|
| 941,628 |
|
Consumer |
|
| 41,795 |
|
| 163 |
|
| 41,958 |
|
Broker-dealer |
|
| 485,604 |
|
| — |
|
| 485,604 |
|
Non-covered loans, gross |
|
| 6,110,876 |
|
| 37,937 |
|
| 6,148,813 |
|
Allowance for loan losses |
|
| (56,681) |
|
| (2,098) |
|
| (58,779) |
|
Non-covered loans, net of allowance |
| $ | 6,054,195 |
| $ | 35,839 |
| $ | 6,090,034 |
|
| | | | | | | |
|
| September 30, |
| December 31, |
| ||
| | 2020 | | 2019 |
| ||
Commercial real estate | | $ | 3,073,038 | | $ | 3,000,523 | |
Commercial and industrial | |
| 2,848,289 | |
| 2,025,720 | |
Construction and land development | |
| 841,385 | |
| 940,564 | |
1-4 family residential | |
| 643,833 | |
| 791,020 | |
Consumer | | | 36,720 | | | 47,046 | |
Broker-dealer | | | 502,295 | | | 576,527 | |
Loans held for investment, gross | |
| 7,945,560 | |
| 7,381,400 | |
Allowance for credit losses | |
| (155,214) | |
| (61,136) | |
Loans held for investment, net of allowance | | $ | 7,790,346 | | $ | 7,320,264 | |
|
|
|
|
|
|
|
|
|
|
|
|
| Loans, excluding |
| PCI |
| Total |
| |||
December 31, 2016 |
| PCI Loans |
| Loans |
| Loans |
| |||
Commercial and industrial |
| $ | 1,687,781 |
| $ | 8,672 |
| $ | 1,696,453 |
|
Real estate |
|
| 2,777,768 |
|
| 38,999 |
|
| 2,816,767 |
|
Construction and land development |
|
| 783,383 |
|
| 3,467 |
|
| 786,850 |
|
Consumer |
|
| 41,058 |
|
| 294 |
|
| 41,352 |
|
Broker-dealer |
|
| 502,077 |
|
| — |
|
| 502,077 |
|
Non-covered loans, gross |
|
| 5,792,067 |
|
| 51,432 |
|
| 5,843,499 |
|
Allowance for loan losses |
|
| (51,089) |
|
| (3,097) |
|
| (54,186) |
|
Non-covered loans, net of allowance |
| $ | 5,740,978 |
| $ | 48,335 |
| $ | 5,789,313 |
|
Banking Segment
The loan portfolio constitutes the major 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 billion at September 30, 2020 and December 31, 2019, respectively. The banking segment’s loan portfolio consists of the non-covered loan portfolio and the covered loan portfolio. The covered loan portfolio consists of loans acquired in the FNB Transaction that are subject to loss-share agreements with the FDIC and is discussed below. The non-covered loan portfolio includes all other loans held by the Bank and is discussed herein.
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The banking segment’s total non-covered loans, net of the allowance for non-covered loan losses, were $7.4 billion and $6.9 billion at September 30, 2017 and December 31, 2016, respectively. The banking segment’s non-covered loan portfolio includes a warehouse linelines of credit extended to PrimeLending of $3.3 billion, of which $1.8$2.2 billion and $1.6$1.8 billion was drawn at September 30, 20172020 and December 31, 2016,2019, respectively. Effective April 1, 2017, this warehouse line of credit was increased to $2.2 billion to address seasonal fluctuations in loan origination volumes. Amounts advanced against the warehouse linelines 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.
The banking segment’s loan portfolio includes $670.7 million in PPP loans at September 30, 2020. While these loans have terms up to 60 months, borrowers can apply for forgiveness of these loans with the SBA. We anticipate a
83
significant amount of these loans being forgiven over the next three quarters. The forgiveness/payoff of these loans would generate an increase in interest income as we would recognize the remaining unamortized origination fee at time of payoff.
At September 30, 2017,2020, the banking segment had non-covered loan concentrations (loans to borrowers engaged in similar activities) that exceeded 10% of total non-covered loans in its real estate portfolio. The areas of concentration within our non-covered real estate portfolio were non-construction commercial real estate loans, non-construction residential real estate loans and construction and land development loans, which represented 35.6%, 12.3%41.3% and 15.3%11.3%, respectively, of the banking segment’s total non-covered loans held for investment (excluding warehouse lines of credit extended to PrimeLending) at September 30, 2017.2020. The banking segment’s non-covered loan concentrations were within regulatory guidelines at September 30, 2017.2020.
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 non-covered loans held for investment, net of the allowance for non-covered loancredit losses, were $485.5$502.1 million and $501.9$576.5 million at September 30, 20172020 and December 31, 2016,2019, respectively. This decrease from December 31, 2019 to September 30, 2020 was primarily attributable to decreasesa decrease of $12.5$52.3 million, or 16.8%, in borrowings incustomer margin accounts and $3.5a decrease of $20.7 million, or 7.8%, 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).
|
|
|
|
|
|
|
| |||||||
|
| September 30, |
| December 31, |
| |||||||||
|
| 2017 |
| 2016 |
| |||||||||
| | | | | | | | |||||||
| | September 30, | | December 31, | | |||||||||
|
| 2020 |
| 2019 |
| |||||||||
Loans held for sale: |
|
|
|
|
|
|
| | | | | | | |
Unpaid principal balance |
| $ | 1,791,055 |
| $ | 1,706,383 |
| | $ | 2,237,395 | | $ | 1,878,231 | |
Fair value adjustment |
|
| 68,765 |
|
| 42,115 |
| |
| 106,793 | |
| 57,482 | |
|
| $ | 1,859,820 |
| $ | 1,748,498 |
| |||||||
| | $ | 2,344,188 | | $ | 1,935,713 | | |||||||
IRLCs: |
|
|
|
|
|
|
| | | | | | | |
Unpaid principal balance |
| $ | 1,248,422 |
| $ | 944,550 |
| | $ | 3,513,711 | | $ | 914,526 | |
Fair value adjustment |
|
| 28,601 |
|
| 23,269 |
| |
| 115,699 | |
| 18,222 | |
|
| $ | 1,277,023 |
| $ | 967,819 |
| |||||||
| | $ | 3,629,410 | | $ | 932,748 | |
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 September 30, 20172020 and December 31, 20162019 were $2.5$4.9 billion and $2.1$2.2 billion, respectively, while the related estimated fair values were $2.7($10.9) million and $8.5($3.8) million, respectively.
Allowance for Credit Losses on Loans
Covered Loan Portfolio
Banking Segment
Loans acquired inSince December 31, 2019, we have updated our Critical Accounting Policies and Estimates related to the FNB Transaction that are subject to loss-share agreements with the FDIC are referred toallowance for credit losses as “covered loans” and reported separately in our consolidated balance sheets. Under the termsa result of the loss-share agreements,implementation of CECL on January 1, 2020. For additional information regarding the FDIC has agreed to reimburse the Bank the following amounts with respectallowance for credit losses, refer to the covered assets (including covered loans): (i) 80% of net losses on the first $240.4 million of net losses incurred; (ii) 0% of net lossessection captioned “Critical Accounting Policies and Estimates” included in excess of $240.4 million up to and including $365.7 million of net losses incurred; and (iii) 80% of net losses in excessthis Form 10-Q.
82
of $365.7 million of net losses incurred. Net losses are defined as book value losses plus certain defined expenses incurred in the resolution of assets, less subsequent recoveries. Under the loss-share agreementLoans Held for commercial assets, the amount of subsequent recoveries that are reimbursable to the FDIC for a particular asset is limited to book value losses and expenses actually billed plus any book value charge-offs incurred prior to September 13, 2013 (the “Bank Closing Date”). There is no limit on the amount of subsequent recoveries reimbursable to the FDIC under the loss-share agreement for single family residential assets. The loss-share agreements for commercial and single family residential assets are in effect for five years and ten years, respectively, and the loss recovery provisions to the FDIC are in effect for eight years and ten years, respectively, from the Bank Closing Date. As part of the loss-share agreements, the Bank is subject to annual FDIC compliance audits. In accordance with the loss-share agreements, the Bank may be required to make a “true-up” payment to the FDIC approximately ten years following the Bank Closing Date if our actual net realized losses over the life of the loss-share agreements are less than the FDIC’s initial estimate of losses on covered assets. The “true-up” payment is calculated using a defined formula set forth in the Purchase and Assumption Agreement by and among the FDIC (as receiver of FNB), the Bank and the FDIC (the “P&A Agreement”). As of September 30, 2017, the Bank projects that the sum of actual plus projected covered losses and reimbursable expenses subject to the loss-share agreements will be less than $240.4 million. As a result, the Bank has recorded, and expects that it will continue to record, amortization associated with its FDIC Indemnification Asset. As of September 30, 2017, the Bank had billed $181.9 million of covered net losses to the FDIC, of which 80%, or $145.5 million, were reimbursable under the loss-share agreements. As of September 30, 2017, the Bank had received aggregate reimbursements of $145.5 million from the FDIC. While the ultimate amount of any “true-up” payment is unknown at this time and will vary based upon the amount of future losses or recoveries within our covered loan portfolio, the Bank has recorded a related “true-up” payment accrual of $16.1 million at September 30, 2017 based on the current estimate of aggregate realized losses on covered assets over the life of the loss-share agreements. Additionally, as estimates of realized losses on covered assets change, the value of the FDIC Indemnification Asset will be adjusted and therefore may not be realized. As noted above, if the Bank continues to experience favorable resolutions within its covered assets portfolio and covered losses, the Bank will be required to increase its “true-up” payment accrual and recognize amortization on the FDIC Indemnification Asset.Investment
In connection with the FNB Transaction, the Bank acquired loans both with and without evidence of credit quality deterioration since origination. Based on purchase date valuations, the banking segment’s portfolio of acquired covered loans had a fair value of $1.1 billion as of the Bank Closing Date, with no carryover of anyThe allowance for loan losses. Unless the banking segment acquires additional loans subject to loss-share agreements with the FDIC, the covered portfolio will continue to decrease as covered loans are liquidated.
Coveredcredit losses for loans held for investment are detailed in the table below and classified by portfolio segment (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
| Loans, excluding |
| PCI |
| Total |
| |||
September 30, 2017 |
| PCI Loans |
| Loans |
| Loans |
| |||
Commercial and industrial |
| $ | 961 |
| $ | 281 |
| $ | 1,242 |
|
Real estate |
|
| 96,761 |
|
| 90,016 |
|
| 186,777 |
|
Construction and land development |
|
| 2,105 |
|
| 286 |
|
| 2,391 |
|
Covered loans, gross |
|
| 99,827 |
|
| 90,583 |
|
| 190,410 |
|
Allowance for loan losses |
|
| (33) |
|
| (2,108) |
|
| (2,141) |
|
Covered loans, net of allowance |
| $ | 99,794 |
| $ | 88,475 |
| $ | 188,269 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Loans, excluding |
| PCI |
| Total |
| |||
December 31, 2016 |
| PCI Loans |
| Loans |
| Loans |
| |||
Commercial and industrial |
| $ | 1,185 |
| $ | 1,512 |
| $ | 2,697 |
|
Real estate |
|
| 117,431 |
|
| 127,038 |
|
| 244,469 |
|
Construction and land development |
|
| 3,757 |
|
| 5,204 |
|
| 8,961 |
|
Covered loans, gross |
|
| 122,373 |
|
| 133,754 |
|
| 256,127 |
|
Allowance for loan losses |
|
| (69) |
|
| (344) |
|
| (413) |
|
Covered loans, net of allowance |
| $ | 122,304 |
| $ | 133,410 |
| $ | 255,714 |
|
At September 30, 2017, the banking segment had covered loan concentrations (loans to borrowers engaged in similar activities) that exceeded 10% of total covered loans in its real estate portfolio. The areas of concentration within our covered real estate portfolio were non-construction residential real estate loans and non-construction commercial real estate loans, which represented 77.9% and 20.2%, respectively, of the banking segment’s total covered loans at
83
September 30, 2017. The banking segment’s covered loan concentrations were within regulatory guidelines at September 30, 2017.
Allowance for Loan Losses
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probableall expected credit losses inherent inover the expected contractual life of our existing non-covered and covered loan portfolios. Management has responsibility for determiningportfolio. Determining the levelappropriateness of the allowance for loan losses, subject to reviewis complex and requires judgment by management about the Loan Review Committeeeffect of matters that are inherently uncertain.
84
Subsequent evaluations of the Bank’s boardthen-existing loan portfolio, in light of directors.
It is management’s responsibility to, at the end of each quarter, or more frequently as deemed necessary, analyze the level offactors then prevailing, may result in significant changes in the allowance for loan losses to ensure that it is appropriate for the estimated credit losses in those future periods. Such future changes in the portfolio. Estimatedallowance for credit losses are expected to be volatile given dependence upon, among other things, the probableportfolio composition and quality, as well as the impact of significant drivers, including prepayment assumptions and macroeconomic conditions and forecasts.
The COVID-19 pandemic has resulted in a weak labor market and weak overall economic conditions that will affect borrowers across our lending portfolios and significant judgment is required to estimate the severity and duration of the current amounteconomic 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 loans that wethe economic downturn are rapidly changing and remain highly uncertain as the resurgence of COVID-19 cases evolves nationally and in key geographies. It is difficult to predict exactly how borrower behavior will be unable to collect given factsimpacted by these economic conditions as the effectiveness of government stimulus, customer relief and circumstancesenhanced 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 evaluation date. When management determines that a loan, or portion thereof, is uncollectible,most significant judgments involved in estimating our allowance for credit losses relates to the loan, or portion thereof, is charged-off againstmacroeconomic forecasts used to estimate credit losses over the reasonable and supportable forecast period. To determine the allowance for credit losses as of September 30, 2020, we utilized a single macroeconomic baseline scenario published by a third party in September 2020.
The following table summarizes the U.S. Real Gross Domestic Product (“GDP”) growth rates and unemployment rate assumptions used in our baseline economic forecast to determine our best estimate of expected credit losses.
| | | | | | | |
| | | As of | ||||
| | | March 31, | | June 30, | | September 30, |
| | | 2020 | | 2020 | | 2020 |
GDP growth rates: | | | | | | | |
| Q1 2020 | | -2.5% | | | | |
| Q2 2020 | | -18.3% | | -33.4% | | |
| Q3 2020 | | 10.9% | | 19.8% | | 26.6% |
| Q4 2020 | | 2.4% | | 0.1% | | 2.9% |
| Q1 2021 | | 2.6% | | 0.2% | | 3.6% |
| Q2 2021 | | 3.3% | | 1.8% | | 3.1% |
| Q3 2021 | | 5.1% | | 8.5% | | 4.4% |
| Q4 2021 | | | | 7.3% | | 6.0% |
| Q1 2022 | | | | | | 5.5% |
| | | | | | | |
Unemployment rates: | | | | | | | |
| Q1 2020 | | 3.8% | | | | |
| Q2 2020 | | 8.7% | | 14.0% | | |
| Q3 2020 | | 6.3% | | 9.1% | | 8.9% |
| Q4 2020 | | 6.5% | | 9.5% | | 9.1% |
| Q1 2021 | | 6.7% | | 9.7% | | 8.9% |
| Q2 2021 | | 6.7% | | 9.7% | | 8.7% |
| Q3 2021 | | 6.6% | | 9.2% | | 8.3% |
| Q4 2021 | | | | 8.7% | | 7.8% |
| Q1 2022 | | | | | | 7.3% |
The baseline economic forecast used to determine our best estimate of expected credit losses as of March 31, 2020 assumed a severe, but short U.S. recession during the first half of 2020 with growth rates down, followed by a strong economic recovery as businesses re-open and consumer spending increases during the second half of 2020 and positive GDP growth rates. The unemployment rates were expected to remain elevated into the fourth quarter of 2021, then revert to historical data in the fourth quarter of 2022. Management’s recovery assumptions included some expected benefit of COVID-19 related fiscal and monetary stimulus measures and the expected beneficial impacts of the CARES Act and certain regulatory interagency guidance.
As of June 30, 2020, our best estimate of expected credit losses used a baseline economic forecast that continued to assume the Federal Reserve target range of the federal funds rate at 0% to 0.25% into 2023, but was updated for continued deterioration in the U.S. economic outlook due to COVID-19 conditions. Compared to assumptions as of
85
March 31, 2020, GDP growth rates declined significantly in the second quarter of 2020, but reflected higher recovery in the third quarter of 2020. Unemployment rates were forecasted to be at higher levels than those assumed as of March 31, 2020 into the fourth quarter of 2022. The timing of the release in early June 2020 of the third party’s baseline forecast utilized did not assume a second wave of COVID-19 cases into the summer months, so the model results as of June 30, 2020 were qualitatively adjusted to consider recent developments in Texas, uncertainty in Texas’ economic re-opening plan and such impacts on our most adversely impacted loan portfolios. Qualitative adjustments considered both significant 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.
As of September 30, 2020, our near-term baseline economic forecast improved from June 30, 2020, reflecting better than expected economic data as states progress with their re-opening plans. Projected real GDP growth rates were revised for the third quarter of 2020 as recent economic data suggested the assumed peak-to-trough decline in real GDP during the second quarter of 2020 was significant, but not as severe as expected. As such, projected real GDP growth in the third and fourth quarters of 2020 were revised upward to reflect monthly recovery trends in consumer and government spending observed in July and August. Projected near-term unemployment rates were adjusted lower to reflect the initial phase of the labor market recovery as states re-open and temporarily furloughed workers are recalled to their jobs. Our interest rate expectations continue to assume monetary policy supports the Federal Reserve target range of the federal funds rate at 0% to 0.25% into late 2023. However, baseline assumptions around fiscal policy and additional government stimulus were revised lower as it is uncertain whether additional stimulus legislation will be passed before early next year and how its delay will affect our most adversely impacted loan portfolios.
The increase in the allowance for credit losses or for acquiredloans held for investment during the nine months ended September 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 months ended September 30, 2020, the allowance included a net reversal of credit losses on individually evaluated loans of $1.2 million, while the provision for credit losses on expected losses of collectively evaluated loans accounted for in pools, charged against$0.6 million of the pool discount. Recoveries on charge-offs of loans acquiredtotal provision primarily due to the identified changes in the Bank Transactions that occurred prior to their acquisition represent contractual cash flows not expected to be collectedBank’s loan portfolio composition and are recorded as accretion income. Recoveries on acquired loans charged-off subsequent to their acquisition are credited to the allowance for loan loss, except for recoveries on loans accounted for in pools, which are credited to the pool discount.
In connection with the Bank Transactions, we acquired loans both with and without evidence of credit quality deterioration since origination. PCI loans acquiredbeing offset by improvements in macroeconomic factor assumptions and qualitative factors from the prior quarter. The change in the PlainsCapital Merger are accounted for on an individual loan basis, while PCI loans acquired in each of the FNB Transaction and the SWS Merger are accounted for in pools as well as on an individual loan basis. We have established under our PCI accounting policy a framework to aggregate certain acquired loans into various loan pools based on a minimum of two layers of common risk characteristics for the purpose of determining their respective fair values as of their acquisition dates, and for applying the subsequent recognition and measurement provisions for income accretion and impairment testing. The common risk characteristics used for the pooling of the FNB and SWS PCI loans are risk grade and loan collateral type. The loans acquired in the Bank Transactions were initially recorded at fair value with no carryover of any allowance for loan losses.
Provisions for loan losses are charged to operations to record the total allowance for loan losses at a level deemed appropriate by the banking segment’s management based on such factors as the volume and type of lending it conducted, the amount of non-performing loans and related collateral security, the present level of the allowance for loan losses, the results of recent regulatory examinations, generally accepted accounting principles, general economic conditions and other factors related to the ability to collect loans in its portfolio. The provision for loan losses, primarily attributable to the banking segment, was $1.3 million and $4.0 million during the three months ended September 30, 20172020 was also impacted by net charge-offs of $0.6 million. During the nine months ended September 30, 2020, the significant build in the allowance included provision for credit losses on individually evaluated loans of $22.6 million, while the provision for credit losses on expected losses of collectively evaluated loans accounted for $77.2 million of the total provision 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 and 2016, respectively, and $8.8 million and $36.3 millionloan mix. The change in the allowance during the nine months ended September 30, 20172020 was also impacted by net charge-offs of $18.5 million, primarily associated with loans specifically reserved for during the first quarter of 2020.
As discussed under the section entitled “Loan Portfolio” earlier in this Item 2, the Bank’s actions during the second and 2016, respectively.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 decreasebuild in the allowance included provision for credit losses duringassociated 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 nine months endedbroker-dealer segment and banking segment mortgage warehouse lending and PPP lending programs, of 2.63%.
86
The respective distribution of the allowance for credit losses as a percentage of our total loan portfolio and total active loan modifications, excluding margin loans in the broker-dealer segment and banking segment mortgage warehouse lending and PPP lending programs, are presented in the following table (dollars in thousands).
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Allowance For | | | | | Allowance | | Allowance For | | ||
| | | | | | | | Credit Losses | | | | | For Credit | | Credit Losses | | ||
| | | | | Total | | as a % of |
| | | | Losses on | | as a % of | | |||
| | Total | | Allowance | | Total Loans | | | Active | | Active | | Active | | ||||
| | Loans Held | | for Credit | | Held For |
| | Loan | | Loan | | Loan | | ||||
September 30, 2020 | | For Investment | | Losses | | Investment | | | Modifications | | Modifications | | Modifications | | ||||
Commercial real estate | | $ | 3,073,038 | | $ | 104,566 | | 3.40 | % | | $ | 217,388 | | $ | 36,188 | | 16.65 | % |
Commercial and industrial (1) | | | 1,295,061 | | | 37,737 | | 2.91 | % | | | 41,007 | | | 11,651 | | 28.41 | % |
Construction and land development | |
| 841,385 | |
| 6,270 | | 0.75 | % | | | 24,692 | |
| 697 | | 2.82 | % |
1-4 family residential | |
| 643,833 | |
| 5,052 | | 0.78 | % | | | 8,258 | |
| 214 | | 2.59 | % |
Consumer | | | 36,720 | |
| 1,002 | | 2.73 | % | | | 98 | |
| 2 | | 1.70 | % |
| |
| 5,890,037 | |
| 154,627 | | 2.63 | % | | | 291,443 | |
| 48,752 | | 16.73 | % |
| | | | | | | | | | | | | | | | | | |
Broker-dealer | | | 502,295 | | | 146 | | 0.03 | % | | | — | | | — | | - | % |
Mortgage warehouse lending | | | 882,503 | | | 441 | | 0.05 | % | | | — | | | — | | - | % |
Paycheck Protection Program | | | 670,725 | | | — | | - | % | | | — | | | — | | - | % |
| | $ | 7,945,560 | | $ | 155,214 | | 1.95 | % | | $ | 291,443 | | $ | 48,752 | | 16.73 | % |
(1) | Commercial and industrial portfolio amounts reflect balances excluding broker-dealer segment margin loans and banking segment mortgage warehouse lending and Paycheck Protection Program loans. |
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 September 30, 2017, compared2020, excluding loans in the broker-dealer segment margin, 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 baseline economic forecast, the same periodupside scenario assumes consumer and business confidence increases as successful developments in 2016, was primarilyvaccines and medical treatments slow the resultprogression of the previously mentioned $24.5 million charge-offvirus and most businesses affected by local restrictions reopen earlier than expected. Real GDP growth is expected to increase 8.4% in Q4 2020. It is expected to grow 7.3% in the first quarter of a single large loan during2021, 6.0% in the second quarter of 2016.
The allowance for loan losses is subject to regulatory examination, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance. While we believe we have an appropriate allowance for our existing non-covered and covered portfolios at September 30, 2017, additional provisions for losses on existing loans may be necessary2021, 6.4% in the future.third quarter of 2021 and 4.9% in the fourth quarter of 2021. Average unemployment rates decline to 6.0% by the end of 2021 and 4.4% by the end of 2022. The Federal Reserve maintains a near 0% target for the federal funds rate through 2022, additional government stimulus is approved in 2020, and expanded support to unemployment insurance, small business lending, and lower to middle income households continue.
��
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Compared to our baseline economic forecast, the downside scenario assumes consumer and business confidence continues to decline as infections rise and developments in vaccines and medical treatments are unsuccessful in the short-term. As the number of new cases rise, some nonessential businesses are forced to close again, and most businesses affected by local restrictions reopen slower than expected. Real GDP growth is expected to decrease -4.5% in the fourth quarter of 2020, -2.8% in the first quarter of 2021 and -1.5% in the second quarter of 2021, then is expected to grow 1.9% in the third quarter of 2021, 2.8% in the fourth quarter of 2021 and 4.7% in the first quarter of 2022. Average unemployment rates increase to 11.3% by midyear 2021 and improve modestly to 10.9% by the end of 2021. Unemployment is expected to remain elevated at 8.7% in the fourth quarter of 2022 and 6.4% in the fourth quarter of 2023, and reverts to historical average rates over time. The Federal Reserve maintains a near 0% target for the federal funds rate through early 2025 and disagreements in Congress prevent any additional government stimulus, resulting in no expanded programs for unemployment insurance benefits, small business lending, and lower to middle income households at the end of this year.
87
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 1.92% 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 $85 million or a weighted average expected loss rate of 3.72% 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 development 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.
Allowance Activity
The following tables presenttable presents the activity in our allowance for loancredit losses within our non-covered and covered loan portfoliosportfolio for the periods presented (in thousands). Substantially all of the activity shown below occurred within the banking segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| |||||||||||||||||||||
Non-Covered Portfolio |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | |||||||||||||||||||||
Loans Held for Investment |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| |||||||||||||||||
Balance, beginning of period |
| $ | 59,208 |
| $ | 51,013 |
| $ | 54,186 |
| $ | 45,415 |
| | $ | 156,383 | | $ | 55,177 | | $ | 61,136 | | $ | 59,486 | |
Provisions charged to operations |
|
| 479 |
|
| 4,719 |
|
| 6,581 |
|
| 37,098 |
| |||||||||||||
Recoveries of non-covered loans previously charged off: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Transition adjustment for adoption of CECL accounting standard | | | — | | | — | | | 12,562 | | | — | | |||||||||||||
Provision for (reversal of) credit losses | |
| (602) | |
| 47 | |
| 99,973 | |
| 326 | | |||||||||||||
Recoveries of loans previously charged off: | | | | | | | | | | | | | | |||||||||||||
Commercial real estate | |
| 571 | |
| — | |
| 592 | |
| — | | |||||||||||||
Commercial and industrial |
|
| 280 |
|
| 295 |
|
| 1,340 |
|
| 1,432 |
| |
| 382 | |
| 1,393 | |
| 1,450 | |
| 2,362 | |
Real estate |
|
| 88 |
|
| 196 |
|
| 184 |
|
| 364 |
| |||||||||||||
Construction and land development |
|
| 4 |
|
| — |
|
| 5 |
|
| — |
| |
| — | |
| — | |
| 2 | |
| — | |
1-4 family residential | |
| 10 | |
| 14 | |
| 25 | |
| 45 | | |||||||||||||
Consumer |
|
| 25 |
|
| 20 |
|
| 65 |
|
| 104 |
| | | 84 | |
| 6 | | | 308 | |
| 28 | |
Broker-dealer |
|
| — |
|
| — |
|
| — |
|
| — |
| | | — | |
| — | | | — | |
| — | |
Total recoveries |
|
| 397 |
|
| 511 |
|
| 1,594 |
|
| 1,900 |
| |
| 1,047 | |
| 1,413 | |
| 2,377 | |
| 2,435 | |
Non-covered loans charged off: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Loans charged off: | | | | | | | | | | | | | | |||||||||||||
Commercial real estate | |
| 29 | |
| 9 | |
| 4,517 | |
| 9 | | |||||||||||||
Commercial and industrial |
|
| 1,264 |
|
| 3,550 |
|
| 3,070 |
|
| 30,333 |
| |
| 1,341 | |
| 1,000 | |
| 15,325 | |
| 5,247 | |
Real estate |
|
| 5 |
|
| 1 |
|
| 305 |
|
| 1,299 |
| |||||||||||||
Construction and land development |
|
| 3 |
|
| — |
|
| 13 |
|
| — |
| |
| — | |
| — | |
| 2 | |
| — | |
1-4 family residential | |
| 144 | |
| 12 | |
| 517 | |
| 911 | | |||||||||||||
Consumer |
|
| 33 |
|
| 67 |
|
| 194 |
|
| 155 |
| | | 100 | |
| 12 | | | 473 | |
| 476 | |
Broker-dealer |
|
| — |
|
| — |
|
| — |
|
| 1 |
| | | — | |
| — | | | — | |
| — | |
Total charge-offs |
|
| 1,305 |
|
| 3,618 |
|
| 3,582 |
|
| 31,788 |
| |
| 1,614 | |
| 1,033 | |
| 20,834 | |
| 6,643 | |
Net charge-offs |
|
| (908) |
|
| (3,107) |
|
| (1,988) |
|
| (29,888) |
| |||||||||||||
Net recoveries (charge-offs) | |
| (567) | |
| 380 | |
| (18,457) | |
| (4,208) | | |||||||||||||
Balance, end of period |
| $ | 58,779 |
| $ | 52,625 |
| $ | 58,779 |
| $ | 52,625 |
| | $ | 155,214 | | $ | 55,604 | | $ | 155,214 | | $ | 55,604 | |
Non-covered allowance for loan losses as a percentage of gross non-covered loans |
|
|
|
|
|
|
|
| 0.96 | % |
| 0.93 | % | |||||||||||||
Allowance for credit losses as a percentage of gross loans held for investment | | | | | | | | | 1.95 | % | | 0.76 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
Covered Portfolio |
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Balance, beginning of period |
| $ | 1,359 |
| $ | 1,455 |
| $ | 413 |
| $ | 1,532 |
|
Provisions charged to (recapture from) operations |
|
| 781 |
|
| (729) |
|
| 2,237 |
|
| (825) |
|
Recoveries of covered loans previously charged off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
| — |
|
| — |
|
| 6 |
|
| — |
|
Real estate |
|
| — |
|
| — |
|
| 5 |
|
| 17 |
|
Construction and land development |
|
| 1 |
|
| 3 |
|
| 7 |
|
| 104 |
|
Total recoveries |
|
| 1 |
|
| 3 |
|
| 18 |
|
| 121 |
|
Covered loans charged off: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
| — |
|
| — |
|
| 6 |
|
| 6 |
|
Real estate |
|
| — |
|
| — |
|
| 521 |
|
| 42 |
|
Construction and land development |
|
| — |
|
| — |
|
| — |
|
| 51 |
|
Total charge-offs |
|
| — |
|
| — |
|
| 527 |
|
| 99 |
|
Net recoveries (charge-offs) |
|
| 1 |
|
| 3 |
|
| (509) |
|
| 22 |
|
Balance, end of period |
| $ | 2,141 |
| $ | 729 |
| $ | 2,141 |
| $ | 729 |
|
Covered allowance for loan losses as a percentage of gross covered loans |
|
|
|
|
|
|
|
| 1.12 | % |
| 0.25 | % |
85
88
The distribution of the allowance for loancredit losses among loan types and the percentage of the loans for that type to gross loans, excluding unearned income, within our non-covered and covered loan portfoliosportfolio are presented in the tablestable below (dollars in thousands).
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| September 30, 2017 |
| December 31, 2016 |
| |||||||||||||||||
|
|
|
| % of |
|
|
|
| % of |
| ||||||||||||
|
|
|
| Gross |
|
|
|
| Gross |
| ||||||||||||
|
|
|
| Non- |
|
|
|
| Non- |
| ||||||||||||
|
|
|
| Covered |
|
|
|
| Covered |
| ||||||||||||
Non-Covered Portfolio |
| Reserve |
| Loans |
| Reserve |
| Loans |
| |||||||||||||
| | | | | | | | | | | | |||||||||||
| | September 30, 2020 | | December 31, 2019 | | |||||||||||||||||
|
|
| |
| % of |
|
| |
| % of |
| |||||||||||
| | | | | Gross | | | | | Gross | | |||||||||||
| | Reserve | | Loans | | Reserve | | Loans | | |||||||||||||
Commercial real estate |
| $ | 104,566 |
| 38.68 | % | $ | 31,595 |
| 40.65 | % | |||||||||||
Commercial and industrial |
| $ | 23,015 |
| 28.22 | % | $ | 21,369 |
| 29.03 | % |
|
| 38,178 |
| 35.85 | % |
| 17,964 |
| 27.44 | % |
Real estate (including construction and land development) |
|
| 35,329 |
| 63.20 | % |
| 32,238 |
| 61.67 | % | |||||||||||
Construction and land development |
|
| 6,270 |
| 10.59 | % |
| 4,878 |
| 12.74 | % | |||||||||||
1-4 family residential |
|
| 5,052 |
| 8.10 | % |
| 6,386 |
| 10.72 | % | |||||||||||
Consumer |
|
| 369 |
| 0.68 | % |
| 424 |
| 0.71 | % | | | 1,002 |
| 0.46 | % |
| 265 |
| 0.64 | % |
Broker-dealer |
|
| 66 |
| 7.90 | % |
| 155 |
| 8.59 | % | | | 146 |
| 6.32 | % |
| 48 |
| 7.81 | % |
Total |
| $ | 58,779 |
| 100.00 | % | $ | 54,186 |
| 100.00 | % |
| $ | 155,214 |
| 100.00 | % | $ | 61,136 |
| 100.00 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 |
| ||||||
|
|
|
|
| % of |
|
|
|
| % of |
|
|
|
|
|
| Gross |
|
|
|
| Gross |
|
|
|
|
|
| Covered |
|
|
|
| Covered |
|
Covered Portfolio |
| Reserve |
| loans |
| Reserve |
| Loans |
| ||
Commercial and industrial |
| $ | 81 |
| 0.65 | % | $ | 35 |
| 1.05 | % |
Real estate (including construction and land development) |
|
| 2,060 |
| 99.35 | % |
| 378 |
| 98.95 | % |
Total |
| $ | 2,141 |
| 100.00 | % | $ | 413 |
| 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).
| | | | | | | | | | | | | | | |
| | September 30, | | June 30, | | March 31, | | December 31, | | September 30, | |||||
|
| 2020 |
| 2020 | | 2020 |
| 2019 |
| 2019 | |||||
Commercial real estate | | $ | 104,566 | | $ | 106,551 | | $ | 53,939 | | $ | 31,595 | | $ | 25,862 |
Commercial and industrial | |
| 38,178 | |
| 31,863 | |
| 38,550 | |
| 17,964 | |
| 19,182 |
Construction and land development | |
| 6,270 | |
| 8,393 | |
| 6,360 | |
| 4,878 | |
| 4,788 |
1-4 family residential | |
| 5,052 | |
| 7,399 | |
| 6,365 | |
| 6,386 | |
| 5,411 |
Consumer | | | 1,002 | | | 1,429 | | | 1,203 | | | 265 | | | 268 |
Broker-dealer | | | 146 | | | 748 | | | 322 | | | 48 | | | 93 |
| | $ | 155,214 | | $ | 156,383 | | $ | 106,739 | | $ | 61,136 | | $ | 55,604 |
The increase in the allowance for credit losses for loans held for investment subsequent to December 31, 2019 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, 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 September 30, | | Nine Months Ended September 30, | ||||||||
|
| 2020 |
| 2019 | | 2020 |
| 2019 | ||||
Balance, beginning of period | | $ | 9,031 | | $ | 2,263 | | $ | 2,075 | | $ | 2,366 |
Transition adjustment CECL accounting standard | | | — | | | — | | | 3,837 | | | — |
Other noninterest expense | | | 287 | | | (77) | | | 3,406 | | | (180) |
Balance, end of period | | $ | 9,318 | | $ | 2,186 | | $ | 9,318 | | $ | 2,186 |
89
At September 30, 2020, the reserve for unfunded commitments was $9.3 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 nine months ended September 30, 2020, the increases in the reserve for unfunded commitments was primarily due to economic uncertainties associated with the impact of the market disruption caused by COVID-19 conditions.
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 PCIpurchased credit deteriorated (“PCD”) loans because PCIPCD 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 non-covered loan portfolio, we had elevenseven credit relationships totaling $31.7$10.8 million of potential problem loans at September 30, 2017,2020, compared with fourfive credit relationships totaling $3.8 million of non-covered potential problem loans at December 31, 2016. Within our covered loan portfolio, we had two credit relationships totaling $0.4 million of potential problem loans at September 30, 2017, compared with one credit relationship totaling $0.5$16.8 million of potential problem loans at December 31, 2016.2019.
Non-Performing Assets
86
In response to the COVID-19 pandemic, the 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 troubled debt restructuring (“TDR”). Starting in March, the Bank implemented several actions to better support our impacted banking clients 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.
Specifically, as discussed under the section entitled “Loan Portfolio” earlier in this Item 2, the Bank’s actions during the third quarter of 2020 included approval of an additional $57.7 million of new COVID-19 related loan modifications since June 30, 2020. The portfolio of active deferrals that have not reached the end of their deferral period was approximately $291 million as of September 30, 2020, of which approximately $208 million had received an additional deferral. COVID-19 related loan modifications of approximately $662 million have returned to agreed-upon contractual terms and had made at least one required principal and/or interest payment since the end of their initial deferral period. Such loans represent elevated risk, 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.
90
Non-Performing Assets
The following table presents components of our non-covered non-performing assets (dollars in thousands).
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
Non-covered loans accounted for on a non-accrual basis: |
|
|
|
|
|
|
|
Commercial and industrial |
| $ | 21,434 |
| $ | 9,515 |
|
Real estate |
|
| 17,996 |
|
| 13,932 |
|
Construction and land development |
|
| 626 |
|
| 755 |
|
Consumer |
|
| 63 |
|
| 244 |
|
Broker-dealer |
|
| — |
|
| — |
|
|
| $ | 40,119 |
| $ | 24,446 |
|
|
|
|
|
|
|
|
|
Non-covered non-performing loans as a percentage of total non-covered loans |
|
| 0.50 | % |
| 0.32 | % |
|
|
|
|
|
|
|
|
Non-covered other real estate owned |
| $ | 4,827 |
| $ | 4,507 |
|
|
|
|
|
|
|
|
|
Other repossessed assets |
| $ | 437 |
| $ | 1,117 |
|
|
|
|
|
|
|
|
|
Non-covered non-performing assets |
| $ | 45,383 |
| $ | 30,070 |
|
|
|
|
|
|
|
|
|
Non-covered non-performing assets as a percentage of total assets |
|
| 0.34 | % |
| 0.24 | % |
|
|
|
|
|
|
|
|
Non-covered loans past due 90 days or more and still accruing |
| $ | 45,134 |
| $ | 47,486 |
|
|
|
|
|
|
|
|
|
Troubled debt restructurings included in accruing non-covered loans |
| $ | 1,163 |
| $ | 1,196 |
|
| | | | | | | | | | | |
| | September 30, | | December 31, | | | | | | ||
|
| 2020 |
| 2019 |
| | Variance |
| |||
Loans accounted for on a non-accrual basis: | |
| | |
| | | | | | |
Commercial real estate | | $ | 14,079 | | $ | 7,308 | | | $ | 6,771 | |
Commercial and industrial | |
| 38,708 | |
| 15,262 | | |
| 23,446 | |
Construction and land development | |
| 528 | |
| 1,316 | | |
| (788) | |
1-4 family residential | |
| 28,707 | |
| 12,204 | | |
| 16,503 | |
Consumer | | | 53 | | | 26 | | | | 27 | |
Broker-dealer | | | — | | | — | | | | — | |
| | $ | 82,075 | | $ | 36,116 | | | $ | 45,959 | |
| | | | | | | | | | | |
Non-performing loans as a percentage of total loans | |
| 0.78 | % |
| 0.38 | % | |
| 0.40 | % |
| | | | | | | | | | | |
Other real estate owned | | $ | 25,387 | | $ | 18,202 | | | $ | 7,185 | |
| | | | | | | | | | | |
Other repossessed assets | | $ | 239 | | $ | — | | | $ | 239 | |
| | | | | | | | | | | |
Non-performing assets | | $ | 107,701 | | $ | 54,318 | | | $ | 53,383 | |
| | | | | | | | | | | |
Non-performing assets as a percentage of total assets | |
| 0.64 | % |
| 0.36 | % | |
| 0.28 | % |
| | | | | | | | | | | |
Loans past due 90 days or more and still accruing | | $ | 187,105 | | $ | 102,707 | | | $ | 84,398 | |
| | | | | | | | | | | |
Troubled debt restructurings included in accruing loans held for investment | | $ | 1,919 | | $ | 2,173 | | | $ | (254) | |
At September 30, 2017, total non-covered non-performing assets increased $15.3 million to $45.4 million, compared with $30.1 million at December 31, 2016, primarily related toLoans accounted for on a single commercial and industrial loan secured by oil and gas. Non-covered non-performing loans totaled $40.1 millionnon-accrual basis at September 30, 2017 and $24.42020 were primarily comprised of two commercial real estate loans totaling $4.6 million, at December 31, 2016. At September 30, 2017, non-covered non-accrual loans included 248 commercial and industrial relationships withtotaling $33.4 million and 287 1-4 family residential loans of $21.4 million secured by accounts receivable, life insurance, oil and gas, livestock and equipment. Non-covered non-accrualtotaling $10.2 million. The 1-4 family residential loans at September 30, 20172020 in the table above also included $17.9$8.1 million characterized as real estate loans, including seven commercial real estate loan relationships of $14.8 million and $3.1 million in loans secured by residential real estate $1.6 million of which were classified as loans held for sale, as well as construction and land development loans of $0.6 million. Atsale.
Loans accounted for on a non-accrual basis increased from December 31, 2016, non-covered non-accrual loans included 192019 to September 30, 2020, primarily due to the addition of two commercial and industrial relationships totaling $19.3 million, commercial real estate loans totaling $12.7 million, and various 1-4 family residential loans. The increase in commercial real estate loans in non-accrual status at September 30, 2020 of $6.8 million was primarily related to the addition of 24 loans totaling $12.7 million, with loansa reserve of $9.5$1.4 million, secured by accounts receivable, life insurance, oil and gas, livestock, and equipment. Non-covered non-accrual loansthat were previously accruing at December 31, 2016 also2019. 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 two relationships that included $13.9 million characterized as real estatesix loans including five commercial real estate loan relationships totaling $11.0$19.3 million and $2.9had a $4.2 million reserve at September 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 $5.2 million at September 30, 2020. The increase in 1-4 family residential loans secured by residential real estate, $1.7in non-accrual status at September 30, 2020, compared to December 31, 2019, was primarily related to the classification of $4.0 million of which wereloans as non-accrual based on CECL transition rules and $3.3 million of net loans classified as loans held for sale, as well as construction and land development loans of $0.8 million.sale.
Non-covered OREO increased $0.3 million to $4.8 million at September 30, 2017, compared with $4.5 million at December 31, 2016. Changes in non-covered OREO included the addition of six properties totaling $2.2 million and the disposal of six properties of $1.5 million. At September 30, 2017, non-covered OREO included commercial properties of $4.0 million and other real estate properties of $0.8 million, while at December 31, 2016, non-covered OREO included commercial properties of $4.2 million and other real estate properties of $0.3 million.
Non-covered non-PCI loans past due 90 days or more and still accruing were $45.1 million and $47.5 million at September 30, 2017 and December 31, 2016, respectively, substantially all of which were loans held for sale and guaranteed by U.S. Government agencies, including loans that are subject to repurchase, or have been repurchased, by PrimeLending.
At September 30, 2017, troubled debt restructurings (“TDRs”) on non-covered loans totaled $7.5 million. These TDRs were comprised of $1.2 million of non-covered loans that are considered to be performing and non-covered non-performing loans of $6.3 million reported in non-accrual loans. At December 31, 2016, TDRs on non-covered loans
87
totaled $6.4 million, of which $1.2 million related to non-covered loans that are considered to be performing and non-covered non-performing loans of $5.2 million reported in non-accrual loans.
The following table presents components of our covered non-performing assets (dollars in thousands).
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
Covered loans accounted for on a non-accrual basis: |
|
|
|
|
|
|
|
Commercial and industrial |
| $ | 44 |
| $ | 52 |
|
Real estate |
|
| 3,438 |
|
| 3,765 |
|
Construction and land development |
|
| 299 |
|
| 19 |
|
|
| $ | 3,781 |
| $ | 3,836 |
|
|
|
|
|
|
|
|
|
Covered non-performing loans as a percentage of total covered loans |
|
| 1.99 | % |
| 1.50 | % |
|
|
|
|
|
|
|
|
Covered other real estate owned: |
|
|
|
|
|
|
|
Real estate - residential |
| $ | 4,144 |
| $ | 7,396 |
|
Real estate - commercial |
|
| 7,418 |
|
| 9,558 |
|
Construction and land development - residential |
|
| 4,771 |
|
| 7,926 |
|
Construction and land development - commercial |
|
| 24,010 |
|
| 26,762 |
|
|
| $ | 40,343 |
| $ | 51,642 |
|
|
|
|
|
|
|
|
|
Other repossessed assets |
| $ | — |
| $ | — |
|
|
|
|
|
|
|
|
|
Covered non-performing assets |
| $ | 44,124 |
| $ | 55,478 |
|
|
|
|
|
|
|
|
|
Covered non-performing assets as a percentage of total assets |
|
| 0.33 | % |
| 0.44 | % |
|
|
|
|
|
|
|
|
Covered loans past due 90 days or more and still accruing |
| $ | — |
| $ | 173 |
|
|
|
|
|
|
|
|
|
Troubled debt restructurings included in accruing covered loans |
| $ | 493 |
| $ | 503 |
|
At September 30, 2017, covered non-performing assets decreased by $11.4 million to $44.1 million, compared with $55.5 million at December 31, 2016, due to decreases in covered non-accrual loans of $0.1 million and covered otherOther real estate owned of $11.3 million. Covered non-performing loans totaled $3.8 million at(“OREO”) increased from December 31, 2019 to September 30, 2017 and $3.8 million at December 31, 2016. At September 30, 2017, covered non-performing loans included 38 residential real estate loan relationship of $3.4 million. At December 31, 2016, covered non-performing loans included one commercial and industrial relationship of $0.1 million, three commercial real estate loan relationships of $0.7 million and 31 residential real estate loan relationships of $3.0 million.
OREO acquired in the FNB Transaction that is subject to the FDIC loss-share agreements is referred to as “covered OREO” and reported separately in our consolidated balance sheets. Covered OREO decreased $11.3 million to $40.3 million at September 30, 2017, compared with $51.6 million at December 31, 2016. The decrease was2020, primarily due to the disposal of 123 propertiesadditions totaling $14.9 million and fair value valuation decreases of $2.5$13.7 million, partially offset by the additiondisposals of 46 properties totaling $6.1$6.5 million. At both September 30, 2020 and December 31, 2019, OREO was primarily comprised of commercial properties.
There were no covered non-PCI loansLoans past due 90 days or more and still accruing at September 30, 2017. At2020 and December 31, 2016, covered non-PCI2019, were primarily comprised of loans past due 90 daysheld for sale and guaranteed by U.S. government agencies, including GNMA-related loans subject to repurchase within our mortgage origination segment. As of September 30, 2020, $106.0 million of loans subject to repurchase were under a forbearance agreement resulting from the COVID-19 pandemic. During May 2020, GNMA announced it will temporarily exclude any new GNMA lender delinquencies, occurring on or more and still accruing totaled $0.2after 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
91
as of September 30, 2020. As of September 30, 2020, $95.2 million and included one residential real estate loan and one commercial and industrial loan.of loans subject to repurchase under a forbearance agreement had delinquencies on or after April 2020.
At September 30, 2017,2020, TDRs on covered loans totaled $1.3were comprised of $1.9 million of which $0.5 million relate to covered loans that are considered to be performing and coveredaccruing, and $16.4 million of loans considered to be non-performing loans of $0.8 million includedreported in non-accrual loans. At December 31, 2016,2019, TDRs on covered loans totaled $1.4were comprised of $2.2 million of which $0.5 million related to covered loans that are considered to be performing and coveredaccruing, and $11.9 million of loans that are considered to be non-performing loans of $0.9 million includedreported 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. Therefore, the Bank is not reporting COVID-19 related modifications as TDRs.
Deposits
88
Insurance Losses and Loss Adjustment Expenses
At September 30, 2017 and December 31, 2016, our gross reserve for unpaid losses and LAE was $67.0 million and $35.8 million, respectively, including estimated recoveries from reinsurance of $35.3 million and $9.4 million, respectively. This increase in the gross reserve for unpaid losses and LAE was primarily due to losses attributable to non-catastrophic weather-related events that occurred in 2017 and Hurricane Harvey. The liability for insurance losses and LAE represents estimates of the ultimate unpaid cost of all losses incurred, including losses for claims that have not yet been reported, less a reduction for reinsurance recoverables related to those liabilities. Separately for each of NLIC and ASIC and each line of business, our actuaries estimate the liability for unpaid losses and LAE by first estimating ultimate losses and LAE amounts for each year, prior to recognizing the impact of reinsurance. The amount of liabilities for reported claims is based primarily on a claim-by-claim evaluation of coverage, liability, injury severity or scope of property damage, and any other information considered relevant to estimating exposure presented by the claim.
NLC’s liabilities for unpaid losses represent the best estimate at a given point in time of what it expects to pay claimants, based on facts, circumstances and historical trends then known. During the loss settlement period, additional facts regarding individual claims may become known and, consequently, it often becomes necessary to refine and adjust the estimates of liability. This process is commonly referred to as loss development. To project ultimate losses and LAE, our actuaries examine the paid and reported losses and LAE for each accident year and multiply these values by a loss development factor. The selected loss development factors are based upon a review of the loss development patterns indicated in the companies’ historical loss triangles (which utilize historical trends, adjusted for changes in loss costs, underwriting standards, policy provisions, product mix and other factors) and applicable insurance industry loss development factors. Estimating the liability for unpaid losses and LAE is inherently judgmental and is influenced by factors that are subject to significant variation. Liabilities for LAE are intended to cover the ultimate cost of settling claims, including investigation and defense of lawsuits resulting from such claims.
The reserve analysis performed by our actuaries provides preliminary central estimates of the unpaid losses and LAE. At each quarter-end, the results of the reserve analysis are summarized and discussed with our senior management. The senior management group considers many factors in determining the amount of reserves to record for financial statement purposes. These factors include the extent and timing of any recent catastrophic events, historical pattern and volatility of the actuarial indications, the sensitivity of the actuarial indications to changes in paid and reported loss patterns, the consistency of claims handling processes, the consistency of case reserving practices, changes in our pricing and underwriting, and overall pricing and underwriting trends in the insurance market.
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. Average deposits totaled $7.4 billion during the nine months ended September 30, 2017, and were higher than the average deposits of $7.0 billion during the nine months ended September 30, 2016 and $7.1 billion during the year ended December 31, 2016. For the periods presented in the table below, the average rates paid associated with time deposits include the effects of amortization of the deposit premiums booked as a part of the Bank Transactions.
The table below presents the average balance of, and rate paid on, consolidated deposits (dollars in thousands).
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| Year Ended December 31, |
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| | 2020 | | 2019 | | ||||||||||||||||||||||
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| | Balance | | Rate Paid | | Balance | | Rate Paid | | ||||||||||||||||||
Noninterest-bearing demand deposits |
| $ | 2,266,361 |
| 0.00 | % | $ | 2,203,011 |
| 0.00 | % | $ | 2,241,561 |
| 0.00 | % | | $ | 3,182,002 |
| 0.00 | % | $ | 2,584,114 |
| 0.00 | % |
Interest-bearing demand deposits |
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| 3,629,012 |
| 0.27 | % |
| 3,139,554 |
| 0.15 | % |
| 3,185,006 |
| 0.14 | % | |
| 5,263,228 |
| 0.42 | % |
| 4,260,216 |
| 1.03 | % |
Savings deposits |
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| 239,817 |
| 0.10 | % |
| 308,592 |
| 0.16 | % |
| 301,877 |
| 0.15 | % | |
| 221,429 |
| 0.10 | % |
| 184,161 |
| 0.19 | % |
Time deposits |
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| 1,275,344 |
| 1.00 | % |
| 1,371,190 |
| 0.79 | % |
| 1,337,491 |
| 0.81 | % | |
| 1,869,877 |
| 1.50 | % |
| 1,410,063 |
| 1.98 | % |
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| $ | 7,410,534 |
| 0.31 | % | $ | 7,022,347 |
| 0.23 | % | $ | 7,065,935 |
| 0.22 | % | |||||||||||
| | $ | 10,536,536 |
| 0.48 | % | $ | 8,438,554 |
| 0.86 | % |
Borrowings
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Borrowings
Our consolidated borrowings are shown in the table below (dollars in thousands).
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| | September 30, 2020 | | December 31, 2019 | | | | | | ||||||||||||||||||
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| | Balance | | Rate Paid | | Balance | | Rate Paid | | | Variance | | |||||||||||||||
Short-term borrowings |
| $ | 1,477,201 |
| 1.13 | % | $ | 1,417,289 |
| 0.65 | % |
| | $ | 780,109 |
| 1.53 | % | $ | 1,424,010 |
| 2.41 | % | | $ | (643,901) | |
Notes payable |
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| 300,196 |
| 3.62 | % |
| 317,912 |
| 3.89 | % |
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| 396,006 |
| 4.52 | % |
| 283,769 |
| 4.94 | % | | | 112,237 | |
Junior subordinated debentures |
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| 67,012 |
| 4.45 | % |
| 67,012 |
| 3.99 | % |
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| 67,012 |
| 4.30 | % |
| 67,012 |
| 5.75 | % | | | — | |
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| $ | 1,844,409 |
| 1.79 | % | $ | 1,802,213 |
| 1.57 | % |
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| | $ | 1,243,127 |
| 2.52 | % | $ | 1,774,791 |
| 2.97 | % | | $ | (531,664) | |
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 $59.9 million increasedecrease in short-term borrowings at September 30, 20172020, compared with December 31, 20162019, included an increase of $425.0 million in short-term bank loans and securities sold under agreements to repurchase used by the Hilltop Broker-Dealers to finance their activities, partially offset by a decrease in borrowings of $365.1 million in our banking segmentand broker-dealer segments primarily associated with the increased utilization of available internal funds.funds, a decrease in FHLB borrowings and a decrease in securities sold under agreements to repurchase by the Hilltop Broker-Dealers, partially offset by an increase in commercial paper used by the Hilltop Broker-Dealers to finance their activities. Notes payable at September 30, 2017 of $300.2 million2020 was comprised of $148.4$148.9 million related to the Senior Notes, net of loan origination fees, FHLB borrowings with an original maturity greater than one year within the banking segmentSubordinated Notes, net of $98.1 million, insurance segment term notesorigination fees, of $27.5$196.8 million and mortgage origination segment borrowings of $23.2$50.4 million. The decrease in notes payable at September 30, 2017 compared to December 31, 2016 included the payoff by NLC
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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 have cash resources available to make acquisitions.stock repurchases. At September 30, 2017,2020, Hilltop had $99.4$488.4 million in cash and cash equivalents, a decreasean increase of $4.5$382.8 million from $103.9$105.6 million at December 31, 2016.2019. This decreaseincrease in cash and cash equivalents was primarily due to the net effects of Hilltop’s receipt of $75.7$196.6 million inassociated with the Subordinated Notes offering, cash proceeds of $154.1 million from the completed sale of NLC and $104.2 million of dividends from its subsidiaries, partially offset by Hilltop’s payment of $55.0 million related to the resolution of the SWS appraisal proceeding, $27.4 million associated with our stock repurchase program, $17.4$24.4 million in cash dividends declared, $15.2 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. Subject to regulatory restrictions, Hilltop has received, and may also continue to receive, dividends from its subsidiaries. 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 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% 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, 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, 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 at June 30, 2020. At September 30, 2020, given the continued strong cash and liquidity levels at the Bank, brokered deposits declined to $1.0 billion and the total funds swept from Hilltop Securities into the Bank was reduced further to approximately $900 million.
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 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 and determine the appropriateness of capital market inventory limits.
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.
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 and at a per share price not less than $18.25 and not more than $21.00, net to the seller in cash, less any applicable tax withholding and without interest, upon the terms and subject to the conditions described in the tender offer documentation. Unless the offer is extended or terminated, the tender offer is scheduled to expire at the end of the day on October 30, 2020. We expect to fund the tender offer with cash on hand. Under capital adequacy and regulatory requirements, we must meet specific capital requirements that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated
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under regulatory accounting practices. As of September 30, 2020, Hilltop and PlainsCapital capital positions and ratios exceeded regulatory capital requirements including conservation buffer assuming a fully subscribed tender offer closed on September 30, 2020. The Federal Reserve has informed Hilltop that it is has no objection to the tender offer.
NLC Sale
On June 30, 2020, we completed the sale of all of the outstanding capital stock of NLC, which comprised 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 customary transaction costs of $5.1 million and subject to post-closing adjustments. During the third quarter of 2020, Hilltop recognized a $0.7 million pre-tax post-closing adjustment to income from discontinued operations related to the finalization of the June 30, 2020 closing balance sheet, resulting in an aggregate gain on sale of NLC of $33.1 million. 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.
Dividend Declaration
On October 26, 2017,22, 2020, our board of directors declared a quarterly cash dividend of $0.06$0.09 per common share, payable on November 30, 20172020 to all common stockholders of record as of the close of business on November 15, 2017. 16, 2020.
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.
NLC Insurance Company Note PayableStock Repurchases
On June 14, 2017, NLCIn January 2020, our board of directors authorized a new stock repurchase program through January 2021 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 nine months ended September 30, 2020, we paid off$15.2 million to repurchase an aggregate of 720,901 shares of common stock at a weighted average price of $21.13 per share. The purchases were funded from available cash balances.
As previously announced on April 30, 2020, in light of the $20.0 million insurance company note payableuncertain outlook for 2020 due March 2035. to the COVID-19 pandemic, 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.
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.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
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redeemed plus accrued and unpaid interest to, but excluding, the redemption date. At September 30, 2017,2020, $150.0 million of our Senior Notes was outstanding. During
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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 three months endedpublic 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 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 September 30, 2017, we accrued interest expense of $1.9 million on the Senior Notes.
Stock Repurchase Program
During January 2017, our board of directors reauthorized the stock repurchase program originally approved during the second quarter of 2016 through January 2018. Pursuant to the stock repurchase program, we are authorized to repurchase, in the aggregate, up to $50.02020, $200 million of our outstanding common stock. UnderSubordinated 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 stock repurchase program authorized, we may repurchase shares in open-market purchases or through privately negotiated transactions as permitted under Rule 10b-18 promulgated under the Exchange Act. The extent toDebentures, which the Company repurchases its 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 the pool of authorized but unissued shares of common stock. During the nine months ended September 30, 2017, the Company paid $27.4 million to repurchase an aggregate of 1,057,656 shares of common stock atresets quarterly, is three-month LIBOR plus an average pricespread of $25.87 per share.3.22%. The purchases were funded from available cash balances.
Loss-Share Agreements
In connection with the FNB Transaction, the Bank entered into two loss-share agreements with the FDIC that collectively cover $1.2 billion of loans and OREO acquired in the FNB Transaction, which we refer to as “covered assets”. Pursuant to the loss-share agreements, the FDIC has agreed to reimburse the Bank the following amounts with respect to the covered assets: (i) 80% of net losses on the first $240.4 million of net losses incurred; (ii) 0% of net losses in excess of $240.4 million up to and including $365.7 million of net losses incurred; and (iii) 80% of net losses in excess of $365.7 million of net losses incurred. Net losses are defined as book value losses plus certain defined expenses incurred in the resolution of assets, less subsequent recoveries. Under the loss-share agreement for commercial assets, the amount of subsequent recoveries that are reimbursable to the FDIC for a particular asset is limited to book value losses and expenses actually billed plus any book value charge-offs incurred prior to the Bank Closing Date. There is no limit on the amount of subsequent recoveries reimbursable to the FDIC under the loss-share agreement for single family assets. The loss-share agreements for commercial and single family residential loans are in effect for 5 years and 10 years, respectively, from the Bank Closing Date and the loss recovery provisions to the FDIC are in effect for 8 years and 10 years, respectively, from the Bank Closing Date. As part of the loss-share agreements, the Bank is subject to annual FDIC compliance audits. In accordance with the loss-share agreements, the Bank may be required to make a “true-up” payment to the FDIC approximately ten years following the Bank Closing Date if our actual net realized losses over the life of the loss-share agreements are less than the FDIC’s initial estimate of losses on covered assets. The “true-up” payment is calculated using a defined formula set forth in the P&A Agreement. While the ultimate amount of any “true-up” payment is unknown at this time and will vary based upon the amount of future losses or recoveries within our covered loan portfolio, the Bank has recorded a related “true-up” payment accrual of $16.1 milliontotal average interest rate at September 30, 2017 based on the current estimate2020 was 3.47%. The Debentures are callable at PCC’s discretion with a minimum of aggregate realized losses on covered assets over the lifea 45- to 60- day notice. At September 30, 2020, $67.0 million of the loss-share agreements.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 also implementedrequires banking organizations to maintain a capital conservation buffer which requires a banking organization to hold a buffer above its minimum risk-based capital requirements. This buffer helps to ensure that banking organizations conserve capital when it is most needed, allowing them to better weather periods of economic stress. The buffer isrequirements measured relative to risk-weighted assets. The phase-in of the capital conservation buffer requirements began on January 1, 2016 for Hilltop and PlainsCapital. Based on the actual ratios as noted above, Hilltop
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and PlainsCapital exceed each of the capital conservation buffer requirements in effect as of September 30, 2017, as well as the fully phased-in requirements through 2019.
In addition, under the final rules, bankBank 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 to above $15 billion in assets as a result of an acquisition, or organically grows to above $15 billion in assets and then makes an acquisition, the combined trust preferred issuances must be phased 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 stock of the Trusts, qualified as Tier 1 capital as of September 30, 2017,2020, under guidance issued by the Board of Governors of the Federal Reserve System.
Actual capital amounts and ratios as of September 30, 2020 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.
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At September 30, 2017,2020, Hilltop had a total capital to risk weighted assets ratio of 18.71%23.22%, Tier 1 capital to risk weighted assets ratio of 18.20%20.46%, common equity Tier 1 capital to risk weighted assets ratio of 17.66%19.85% and a Tier 1 capital to average assets, or leverage, ratio of 12.87%13.03%. 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 and on a fully phased-in basis as if such requirements were currently in effect.period.
At September 30, 2017,2020, PlainsCapital had a total capital to risk weighted assets ratio of 15.23%15.49%, Tier 1 capital to risk weighted assets ratio of 14.44%14.64%, common equity Tier 1 capital to risk weighted assets ratio of 14.44%14.64% and a Tier 1 capital to average assets, or leverage, ratio of 12.18%10.19%. 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 and on a fully phased-in basis as if such requirements were currently in effect.period.
We discuss regulatory capital requirements in more detail in Note 1516 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 20162019 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 liability 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 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.
We hadAs previously discussed, to meet increased liquidity demands, to ensure we have 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 of $7.7that totaled $1.0 billion at September 30, 2017, an increase of $599.6 million2020, down from $7.1$1.4 billion at December 31, 2016. DepositJune 30, 2020. Further, beginning in March 2020, an additional $200 million of deposits was 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 at June 30, 2020. During the third quarter of 2020, given the continued strong cash and liquidity levels at the Bank, the total funds swept from Hilltop Securities into the Bank was reduced further to approximately $900 million as of September 30, 2020. 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).
| | | | | | |
| | September 30, | | December 31, | ||
| | 2020 | | 2019 | ||
FHLB capacity | | $ | 4,216 | | $ | 3,207 |
Investment portfolio | |
| 1,011 | |
| 683 |
Fed deposits (excess daily requirements) | | | 1,123 | | | 217 |
Fed discount window | |
| 292 | |
| 290 |
| | $ | 6,642 | | $ | 4,397 |
As noted in the table above, the Bank’s available liquidity position and borrowing capacity at September 30, 2020 is at a heightened level given the uncertain outlook for 2020 and 2021 due to the COVID-19 pandemic. While the extent to 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.
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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. The Bank consistentlyregularly evaluates its deposit products and pricing structures relative to the market to maintain competitiveness over time. At September 30, 2017, money market deposits, including brokered deposits, were $2.3 billion; time deposits, including brokered deposits, were $1.4 billion; and noninterest bearing demand deposits were $2.3 billion. Money market deposits, including brokered deposits, increased by $573.8 million from $1.8 billion and time deposits, including brokered deposits, increased $229.3 million from $1.2 billion at December 31, 2016.
The Bank’s 15 largest depositors, excluding Hilltop and Hilltop Securities, collectively accounted for 8.29%9.86% of the Bank’s total deposits, and the Bank’s five largest depositors, excluding Hilltop and Hilltop Securities, collectively accounted for 4.44%4.75% of the Bank’s total deposits at September 30, 2017.2020. The loss of one or more of our largest Bank customers, or a significant
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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-bearing client credit balances, correspondent deposits, securities lending arrangements, repurchase agreement financingsfinancing, 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 September 30, 2017,2020, Hilltop Securities had credit arrangements with five unaffiliated banks, with maximum aggregate commitments of up to $725.0 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 a committed revolving credit facilityfacilities with anthree unaffiliated bankbanks, with aggregate availability of up to $50.0$250.0 million. At September 30, 2017,2020, Hilltop Securities had borrowed $143.5$103.5 million under its credit arrangements and had no borrowings under its credit facility.facilities.
During the fourth quarter of 2019, Hilltop Securities initiated two commercial paper programs, in the ordinary course of its business, of which the net proceeds (after deducting related issuance expenses) from the sale will be used for general 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 CP Notes 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 an interest factor and the CP Notes are secured by a pledge of collateral owned by Hilltop Securities. As of September 30, 2020, the weighted average maturity of the CP Notes was 154 days at a rate of 1.65%. At September 30, 2020, the aggregate amount outstanding under these secured arrangements was $265.8 million, which was collateralized by securities held for firm accounts valued at $171.6 million.
Mortgage Origination Segment
PrimeLending funds the mortgage loans it originates through a warehouse linelines of credit maintained with the Bank. AtBank, which have an aggregate commitment of $3.3 billion, of which $2.2 billion was drawn at September 30, 2017, PrimeLending had outstanding borrowings of $1.8 billion against the warehouse line of credit. Effective April 1, 2017, this warehouse line of credit was increased to $2.2 billion to address seasonal fluctuations in loan origination volumes.2020. PrimeLending sells substantially all mortgage loans it originates to various investors in the secondary market, the majority with servicing released.market. 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 JPMorgan Chase Bank, NA (“JPMorgan Chase”)an unaffiliated bank of up to $1.0 million, of which no borrowings were outstandingdrawn at September 30, 2017.2020.
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 September 30, 2017,2020, these ABAs havehad combined available lines of credit totaling $180.0 million, $60.0 million of which $23.2was with a single unaffiliated bank, and the remaining $120.0 million of which was outstanding atwith the Bank. At September 30, 2017. 2020, Ventures Management had outstanding borrowings of $61.9 million, $11.5 million of which was with the Bank.
Insurance Segment97
Our insurance operating subsidiary’s primary investment objectives are to preserve capital and manage for a total rateTable of return. NLC’s strategy is to purchase securities in sectors that represent the most attractive relative value. Bonds, cash and short-term investments of $177.5 million, or 87.0%, equity investments of $20.9 million and other investments of $5.6 million comprised NLC’s $204.0 million in total cash and investments at September 30, 2017. NLC does not currently have any significant concentration in both direct and indirect guarantor exposure or any investments in subprime mortgages. NLC has custodial agreements with Wells Fargo Bank, N.A. and an investment management agreement with DTF Holdings, LLC.Contents
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.
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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
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. In the event the customer does not perform in accordance with the terms of the agreement with the 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 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$1.9 billion at September 30, 20172020 and outstanding financial and performance standby letters of credit of $28.8$90.1 million at September 30, 2017.2020.
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
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statements relate to allowance for loancredit losses, FDIC Indemnification Asset, reserve for losses and LAE, goodwill and identifiable intangible assets, mortgage loan indemnification liability, mortgage servicing rights asset and acquisition accounting. Since December 31, 2016, there2019, 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. There 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 20162019 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. 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. 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 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.
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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 September 30, 20172020 indicates there are no material changes in the quantitative and qualitative disclosures from those previously reported in our 20162019 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.
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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. 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
100
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).
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| > 1 Year to |
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Interest sensitive assets: |
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Loans |
| $ | 4,638,153 |
| $ | 1,042,615 |
| $ | 1,395,330 |
| $ | 334,576 |
| $ | 220,417 |
| $ | 7,631,091 |
| | $ | 5,745,228 | | $ | 1,259,028 | | $ | 2,201,813 | | $ | 383,884 | | $ | 86,246 | | $ | 9,676,199 | |
Securities |
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| 128,473 |
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| 151,482 |
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| 242,277 |
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| 93,480 |
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| 388,600 |
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| 1,004,312 |
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| 278,752 | |
| 233,591 | |
| 436,714 | |
| 273,622 | |
| 392,142 | |
| 1,614,821 | |
Federal funds sold and securities purchased under agreements to resell |
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| 400 |
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| — |
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| — |
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| — |
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| — |
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| 400 |
| |
| 420 | |
| — | |
| — | |
| — | |
| — | |
| 420 | |
Other interest sensitive assets |
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| 149,802 |
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| — |
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| — |
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| — |
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| 29,136 |
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| 178,938 |
| |
| 1,132,488 | |
| — | |
| — | |
| — | |
| 29,376 | |
| 1,161,864 | |
Total interest sensitive assets |
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| 4,916,828 |
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| 1,194,097 |
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| 1,637,607 |
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| 428,056 |
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| 638,153 |
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| 8,814,741 |
| |
| 7,156,888 | |
| 1,492,619 | |
| 2,638,527 | |
| 657,506 | |
| 507,764 | |
| 12,453,304 | |
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Interest sensitive liabilities: |
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Interest bearing checking |
| $ | 3,420,343 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 3,420,343 |
| | $ | 5,379,301 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 5,379,301 | |
Savings |
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| 210,316 |
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| — |
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| — |
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| — |
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| — |
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| 210,316 |
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| 251,027 | |
| — | |
| — | |
| — | |
| — | |
| 251,027 | |
Time deposits |
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| 255,025 |
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| 550,270 |
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| 576,110 |
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| 29,573 |
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| 13,564 |
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| 1,424,542 |
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| 512,266 | |
| 1,137,507 | |
| 358,207 | |
| 68,878 | |
| 73 | |
| 2,076,931 | |
Notes payable and other borrowings |
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| 886,765 |
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| 63,181 |
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| 5,040 |
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| 1,302 |
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| 6,299 |
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| 962,587 |
| |
| 149,221 | |
| 225 | |
| 695 | |
| 862 | |
| 3,170 | |
| 154,173 | |
Total interest sensitive liabilities |
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| 4,772,449 |
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| 613,451 |
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| 581,150 |
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| 30,875 |
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| 19,863 |
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| 6,017,788 |
| |
| 6,291,815 | |
| 1,137,732 | |
| 358,902 | |
| 69,740 | |
| 3,243 | |
| 7,861,432 | |
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Interest sensitivity gap |
| $ | 144,379 |
| $ | 580,646 |
| $ | 1,056,457 |
| $ | 397,181 |
| $ | 618,290 |
| $ | 2,796,953 |
| | $ | 865,073 | | $ | 354,887 | | $ | 2,279,625 | | $ | 587,766 | | $ | 504,521 | | $ | 4,591,872 | |
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Cumulative interest sensitivity gap |
| $ | 144,379 |
| $ | 725,025 |
| $ | 1,781,482 |
| $ | 2,178,663 |
| $ | 2,796,953 |
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| | $ | 865,073 | | $ | 1,219,960 | | $ | 3,499,585 | | $ | 4,087,351 | | $ | 4,591,872 | | | | |
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Percentage of cumulative gap to total interest sensitive assets |
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| 1.64 | % |
| 8.23 | % |
| 20.21 | % |
| 24.72 | % |
| 31.73 | % |
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| 6.95 | % |
| 9.80 | % |
| 28.10 | % |
| 32.82 | % |
| 36.87 | % | | | |
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% 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 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-sheetoff-balance sheet derivatives.
The table below shows the estimated impact of increasesa range of 1%, 2% and 3% and a decrease of 0.5%changes in interest rates on net interest income and on economic value of equity for the banking segment at September 30, 20172020 (dollars in thousands).
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Change in | | Changes in | | Changes in |
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Interest Rates | | Net Interest Income | | Economic Value of Equity |
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(basis points) |
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+200 | | $ | 28,036 |
| 8.00 | % | $ | 487,177 |
| 31.79 | % |
+100 | | $ | 4,408 |
| 1.26 | % | $ | 264,246 |
| 17.24 | % |
-50 | | $ | (2,664) |
| (0.76) | % | $ | (216,951) |
| (14.16) | % |
-100 | | $ | (5,265) |
| (1.50) | % | $ | (305,994) |
| (19.97) | % |
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+300 |
| $ | 56,592 |
| 18.12 | % | $ | 236,763 |
| 12.63 | % |
+200 |
| $ | 36,454 |
| 11.68 | % | $ | 162,769 |
| 8.68 | % |
+100 |
| $ | 4,996 |
| 5.01 | % | $ | 77,898 |
| 4.16 | % |
-50 |
| $ | (1,914) |
| (0.61) | % | $ | (118,044) |
| (6.30) | % |
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The projected changes in net interest income and economic value of equity to changes in interest rates at September 30, 20172020 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 historically low levelextent 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 combined withwere to rise, yields on the existenceportion of our portfolio that remain at applicable rate floors that are in effect for a portion of the loan portfolio, are projected to cause yields on our earning assets towould rise more slowly than increases in market interest rates. As a result,Any changes in a rising interest rate environment, our interest rate margins are projected to compress until the rise in market interest rates is sufficientacross the term structure will continue to allow our loan portfolio to reprice above applicableimpact net interest income and net interest margin. The impact of rate floors.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.
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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 earninginterest-earning assets including customer and correspondent margin loans and receivables and securities borrowing activities. Our exposure to interest rate risk is also from our funding sources, includingwhich include customer and correspondent cash balances, bank borrowings, repurchase agreements and securities lending activities. Interestactivities, also expose the broker-dealer to interest rate risk. Movement in short-term interest rates on customer and correspondent balances and securities produce acould reduce the positive spread with rates generally fluctuating in parallel.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.
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):.
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| September 30, 2017 | ||||||||||||||||||||||||
|
| 1 Year |
| > 1 Year |
| > 5 Years |
|
|
|
| ||||||||||||||||
|
| or Less |
| to 5 Years |
| to 10 Years |
| > 10 Years |
| Total | ||||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||
| | September 30, 2020 | | |||||||||||||||||||||||
| | 1 Year | | > 1 Year | | > 5 Years | | | | | | |||||||||||||||
| | or Less | | to 5 Years | | to 10 Years | | > 10 Years | | Total | | |||||||||||||||
Trading securities, at fair value |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | |
Municipal obligations |
| $ 388 |
| $ 3,204 |
| $ 11,898 |
| $ 74,655 |
| $ 90,145 | | $ | 1,574 | | $ | 5,984 | | $ | 38,997 | | $ | 88,513 | | $ | 135,068 | |
U.S. government and government agency obligations |
| 1,861 |
| (11,392) |
| (30,092) |
| 398,477 |
| 358,854 | | | 70,673 | | | (8,080) | | | (3,579) | | | 371,663 | | | 430,677 | |
Corporate obligations |
| (6,068) |
| (494) |
| (156) |
| 15,576 |
| 8,858 | | | 1,057 | | | 16,690 | | | 5,407 | | | 22,650 | | | 45,804 | |
Total debt securities |
| (3,819) |
| (8,682) |
| (18,350) |
| 488,708 |
| 457,857 | | | 73,304 | | | 14,594 | | | 40,825 | | | 482,826 | | | 611,549 | |
Corporate equity securities |
| 1 |
| - |
| - |
| - |
| 1 | | | (4,375) | | | — | | | — | | | — | | | (4,375) | |
Other |
| 34,986 |
| - |
| - |
| - |
| 34,986 | | | 3,467 | | | — | | | — | | | — | | | 3,467 | |
|
| $ 31,168 |
| $ (8,682) |
| $ (18,350) |
| $ 488,708 |
| $ 492,844 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| | $ | 72,396 | | $ | 14,594 | | $ | 40,825 | | $ | 482,826 | | $ | 610,641 | | ||||||||||
| | | | | | | | | | | | | | | | |||||||||||
Weighted average yield |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | |
Municipal obligations |
| 1.32% |
| 1.86% |
| 2.22% |
| 3.44% |
| 3.22% | | 0.00 | % | | 0.81 | % | | 1.43 | % | | 3.00 | % | | 2.41 | % | |
U.S. government and government agency obligations |
| 1.32% |
| 1.57% |
| 2.30% |
| 3.91% |
| 3.36% | | 0.06 | % | | 0.26 | % | | 0.70 | % | | 2.55 | % | | 2.10 | % | |
Corporate obligations |
| 2.75% |
| 3.07% |
| 3.82% |
| 5.55% |
| 3.81% | | 1.20 | % | | 3.55 | % | | 2.89 | % | | 2.99 | % | | 3.03 | % |
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
102
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.
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.
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.Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the supervision and participation of our Co-PrincipalPrincipal Executive OfficersOfficer 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 Co-PrincipalPrincipal Executive OfficersOfficer and Principal Financial Officer concluded that as of the end of suchthe period covered by this report our disclosure controls and procedures were not effective because of a material weakness in recording, processing, summarizingour internal control over financial reporting.
As previously reported, during the fourth quarter of 2019, management identified a control deficiency that constituted a material weakness as of December 31, 2018 and reporting, on a timely basis, information requireddetermined that the Company did not design and maintain effective controls over certain aspects relating to be disclosedthe determination of the qualitative factors considered by usmanagement in the reportsallowance for credit losses estimation process, specifically control activities 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
103
interim or annual consolidated financial statements and disclosures that we filewould result in a material misstatement that would not be prevented or submit underdetected.
Notwithstanding the Exchange Actidentified material weakness, management believes that the condensed 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 are effectivecash flows as of and for the periods presented in ensuring that information required to be disclosed by usaccordance with accounting principles generally accepted in the reportsUnited 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 we file or submit under the Exchange Act is accumulated and communicatedit 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 March 31, 2020. However, in order to fully evaluate the remediation efforts , management including our Co-
97
Principal Executive Officers and Principal Financial Officer, as appropriatetime. We expect the remediation of this material weakness will be completed prior to allow timely decisions regarding required disclosure.the end of fiscal year 2020.
Changes in Internal Control overOver Financial Reporting
There were noThe remediation efforts described above, as well as the implementation of general ledger replacements within our banking and mortgage origination segments, as well as at corporate, led to changes in our internal control over financial reporting during the fiscal quarter covered by this 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. In early September 2020, a majority of our employees began the process of returning to their respective office locations based on rotational team schedules. 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.
104
PART II. OTHER INFORMATION
For a description of material pending legal proceedings, see the discussion set forth under the heading “Legal Matters” in Note 1213 to our Consolidated Financial Statements, which is incorporated by reference herein.
There have been noThe following risk factors represent material changes to the risk factors disclosed under “Item 1A. Risk Factors” of our 20162019 Form 10-K. For additional information concerning our risk factors, please refer to “Item 1A. Risk Factors” of our 20162019 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. During the nine months ended September 30, 2020, the significant build in the allowance for credit losses at our Bank was primarily due to the market disruption and related economic uncertainties caused by COVID-19. 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:
● | further increases in the allowance for credit losses and possible recognition of credit losses, especially if businesses remain closed or substantially limited in their operating capacity, unemployment continues to rise and clients and customers draw on their lines of credit or seek additional loans to help finance their businesses; |
● | possible constraints on liquidity and capital, whether due to increases in risk-weighted assets related to supporting client activities or to regulatory actions, and |
● | the possibility that significant portions of our workforce are unable to work effectively, including because of illness, quarantines, sheltering-in-place arrangements, government actions or other restrictions related to the pandemic. |
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
105
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.
106
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.
In addition, the Company’s participation in the PPP as a lender may adversely affect the Company’s revenue and results of operations depending on the timing and amount of forgiveness, if any, to which borrowers are entitled.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.Proceeds.
On July 14, 2017, we issued an aggregate of 4,446 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 2017. 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 September 30, 2017.2020.
| | | | | | | | | | | |
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) |
| ||
July 1 - July 31, 2020 |
| — | | $ | — | | — | | $ | 59,750,234 | |
August 1 - August 31, 2020 |
| — | | | — | | — | | | 59,750,234 | |
September 1 - September 30, 2020 |
| — | | | — | | — | | | 59,750,234 | |
Total | | — | | $ | — | | — | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
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) |
| ||
July 1 - July 31, 2017 |
| — |
| $ | — |
| — |
| $ | 33,990,469 |
|
August 1 - August 31, 2017 |
| 452,225 |
|
| 25.14 |
| 452,225 |
|
| 22,610,603 |
|
September 1 - September 30, 2017 |
| — |
|
| — |
| — |
|
| 22,610,603 |
|
Total |
| 452,225 |
| $ | 25.14 |
| 452,225 |
|
|
|
|
(1) |
|
|
99107
Exhibit | Description of Exhibit | |
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2.1# | ||
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10.1 | | |
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10.2 | | |
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10.3 | | |
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10.4 | | |
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10.5 | | |
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31.1* | | |
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31.2* | | |
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32.1* | | |
| | |
| | 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. |
*Filed herewith.
100108
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.
| | | |
| HILLTOP HOLDINGS INC. | ||
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| ||
| | ||
Date: October | By: | /s/ William B. Furr | |
| | William B. Furr | |
| | Chief Financial Officer (Principal Financial Officer and duly authorized officer) |
101109