hth_Current folio_10Q

Table of Contents

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

 

For the quarterly period ended June 30, 2017

 

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)

 

 

 

 

 

200 Crescent Court, Suite 1330

 

 

Dallas, TX

 

75201

(Address of principal executive offices)

 

(Zip Code)

 

(214) 855-2177

(Registrant’s telephone number, including area code)

 

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 ☐
(Do not check if a smaller reporting company)

 

Smaller reporting company ☐

 

 

 

 

Emerging growth company ☐

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐  No ☒

 

The number of shares of the registrant's common stock outstanding at July 27, 2017 was 96,347,034.

 

 

 

 

 


 

Table of Contents

HILLTOP HOLDINGS INC.

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2017

 

TABLE OF CONTENTS

 

 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Operations

4

 

Consolidated Statements of Comprehensive Income

5

 

Consolidated Statements of Stockholders’ Equity

6

 

Consolidated Statements of Cash Flows

7

 

Notes to Consolidated Financial Statements

8

 

Schedule I - Insurance Incurred and Cumulative Paid Losses and Allocated Loss and Loss Adjustment Expenses, Net of Reinsurance

55

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

56

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

92

 

 

 

Item 4. 

Controls and Procedures

95

 

 

 

 

 

 

PART II — OTHER INFORMATION 

 

 

 

Item 1. 

Legal Proceedings

96

 

 

 

Item 1A. 

Risk Factors

96

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

96

 

 

 

Item 6. 

Exhibits

96

2


 

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

    

2017

    

2016

Assets

 

 

 

 

 

 

Cash and due from banks

 

$

405,938

 

$

669,357

Federal funds sold

 

 

388

 

 

21,407

Securities purchased under agreements to resell

 

 

125,188

 

 

89,430

Assets segregated for regulatory purposes

 

 

167,565

 

 

180,993

Securities:

 

 

 

 

 

 

Trading, at fair value

 

 

471,485

 

 

265,534

Available for sale, at fair value (amortized cost of $761,217 and $598,198, respectively)

 

 

763,206

 

 

598,007

Held to maturity, at amortized cost (fair value of $355,860 and $345,088, respectively)

 

 

359,847

 

 

351,831

 

 

 

1,594,538

 

 

1,215,372

 

 

 

 

 

 

 

Loans held for sale

 

 

2,000,257

 

 

1,795,463

Non-covered loans, net of unearned income

 

 

6,118,211

 

 

5,843,499

Allowance for non-covered loan losses

 

 

(59,208)

 

 

(54,186)

Non-covered loans, net

 

 

6,059,003

 

 

5,789,313

 

 

 

 

 

 

 

Covered loans, net of allowance of $1,359 and $413, respectively

 

 

205,877

 

 

255,714

Broker-dealer and clearing organization receivables

 

 

1,552,525

 

 

1,497,741

Premises and equipment, net

 

 

183,994

 

 

190,361

FDIC indemnification asset

 

 

40,304

 

 

71,313

Covered other real estate owned

 

 

42,304

 

 

51,642

Other assets

 

 

618,368

 

 

613,453

Goodwill

 

 

251,808

 

 

251,808

Other intangible assets, net

 

 

40,516

 

 

44,695

Total assets

 

$

13,288,573

 

$

12,738,062

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

Noninterest-bearing

 

$

2,251,208

 

$

2,199,483

Interest-bearing

 

 

5,323,414

 

 

4,864,328

Total deposits

 

 

7,574,622

 

 

7,063,811

 

 

 

 

 

 

 

Broker-dealer and clearing organization payables

 

 

1,395,314

 

 

1,347,128

Short-term borrowings

 

 

1,515,069

 

 

1,417,289

Securities sold, not yet purchased, at fair value

 

 

149,869

 

 

153,889

Notes payable

 

 

300,283

 

 

317,912

Junior subordinated debentures

 

 

67,012

 

 

67,012

Other liabilities

 

 

393,351

 

 

496,501

Total liabilities

 

 

11,395,520

 

 

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; 96,333,042 and 98,543,774 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively

 

 

963

 

 

985

Additional paid-in capital

 

 

1,529,903

 

 

1,572,877

Accumulated other comprehensive income

 

 

2,112

 

 

485

Retained earnings

 

 

356,564

 

 

295,568

Deferred compensation employee stock trust, net

 

 

845

 

 

903

Employee stock trust (12,455 and 15,492 shares, at cost, respectively)

 

 

(248)

 

 

(309)

Total Hilltop stockholders' equity

 

 

1,890,139

 

 

1,870,509

Noncontrolling interests

 

 

2,914

 

 

4,011

Total stockholders' equity

 

 

1,893,053

 

 

1,874,520

Total liabilities and stockholders' equity

 

$

13,288,573

 

$

12,738,062

 

See accompanying notes.

3


 

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

113,793

 

$

98,468

 

$

203,784

 

$

190,001

 

Securities borrowed

 

 

9,597

 

 

6,326

 

 

17,650

 

 

13,915

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

9,539

 

 

6,834

 

 

16,566

 

 

13,201

 

Tax-exempt

 

 

1,375

 

 

1,537

 

 

2,619

 

 

3,174

 

Other

 

 

2,002

 

 

1,037

 

 

3,928

 

 

2,065

 

Total interest income

 

 

136,306

 

 

114,202

 

 

244,547

 

 

222,356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

5,464

 

 

4,037

 

 

10,154

 

 

7,876

 

Securities loaned

 

 

7,481

 

 

4,916

 

 

13,821

 

 

10,903

 

Short-term borrowings

 

 

3,648

 

 

1,392

 

 

5,066

 

 

2,477

 

Notes payable

 

 

2,826

 

 

2,618

 

 

5,640

 

 

5,200

 

Junior subordinated debentures

 

 

744

 

 

655

 

 

1,455

 

 

1,300

 

Other

 

 

167

 

 

187

 

 

335

 

 

363

 

Total interest expense

 

 

20,330

 

 

13,805

 

 

36,471

 

 

28,119

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

115,976

 

 

100,397

 

 

208,076

 

 

194,237

 

Provision for loan losses

 

 

5,853

 

 

28,876

 

 

7,558

 

 

32,283

 

Net interest income after provision for loan losses

 

 

110,123

 

 

71,521

 

 

200,518

 

 

161,954

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gains (losses) on securities

 

 

14

 

 

(46)

 

 

14

 

 

 —

 

Net gains from sale of loans and other mortgage production income

 

 

153,688

 

 

167,012

 

 

277,838

 

 

294,309

 

Mortgage loan origination fees

 

 

25,976

 

 

25,797

 

 

45,532

 

 

44,610

 

Securities commissions and fees

 

 

37,804

 

 

40,442

 

 

76,861

 

 

78,759

 

Investment and securities advisory fees and commissions

 

 

25,537

 

 

29,354

 

 

47,739

 

 

53,173

 

Net insurance premiums earned

 

 

36,020

 

 

38,721

 

 

72,160

 

 

78,454

 

Other

 

 

65,653

 

 

44,725

 

 

95,987

 

 

74,075

 

Total noninterest income

 

 

344,692

 

 

346,005

 

 

616,131

 

 

623,380

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Employees' compensation and benefits

 

 

214,413

 

 

217,398

 

 

400,972

 

 

400,159

 

Occupancy and equipment, net

 

 

27,919

 

 

26,971

 

 

55,212

 

 

54,804

 

Loss and loss adjustment expenses

 

 

33,184

 

 

37,211

 

 

54,884

 

 

59,170

 

Policy acquisition and other underwriting expenses

 

 

11,251

 

 

11,316

 

 

22,480

 

 

22,568

 

Other

 

 

79,484

 

 

74,469

 

 

153,195

 

 

155,853

 

Total noninterest expense

 

 

366,251

 

 

367,365

 

 

686,743

 

 

692,554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

88,564

 

 

50,161

 

 

129,906

 

 

92,780

 

Income tax expense

 

 

25,754

 

 

18,439

 

 

40,789

 

 

32,862

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

62,810

 

 

31,722

 

 

89,117

 

 

59,918

 

Less: Net income attributable to noncontrolling interest

 

 

334

 

 

648

 

 

207

 

 

1,277

 

Income attributable to Hilltop

 

$

62,476

 

$

31,074

 

$

88,910

 

$

58,641

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.64

 

$

0.32

 

$

0.90

 

$

0.60

 

Diluted

 

$

0.63

 

$

0.32

 

$

0.90

 

$

0.60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.06

 

$

 —

 

$

0.12

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average share information:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

98,154

 

 

98,457

 

 

98,295

 

 

98,305

 

Diluted

 

 

98,414

 

 

98,586

 

 

98,576

 

 

98,619

 

 

See accompanying notes.

 

 

4


 

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

Net income

 

$

62,810

 

$

31,722

 

$

89,117

 

$

59,918

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains on securities available for sale, net of tax of $696,  $1,034,  $927 and $3,424, respectively

 

 

1,224

 

 

1,874

 

 

1,636

 

 

6,153

 

Reclassification adjustment for gains (losses) included in net income, net of tax of $(5),  $16,  $(5) and $0, respectively

 

 

(9)

 

 

30

 

 

(9)

 

 

 —

 

Comprehensive income

 

 

64,025

 

 

33,626

 

 

90,744

 

 

66,071

 

Less: comprehensive income attributable to noncontrolling interest

 

 

334

 

 

648

 

 

207

 

 

1,277

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income applicable to Hilltop

 

$

63,691

 

$

32,978

 

$

90,537

 

$

64,794

 

 

See accompanying notes.

 

 

5


 

Table of Contents

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

 —

 

 

 —

 

 

 —

 

 

 —

 

 

58,641

 

 

 —

 

 —

 

 

 —

 

 

58,641

 

 

1,277

 

 

59,918

Other comprehensive income

 —

 

 

 —

 

 

 —

 

 

6,153

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

6,153

 

 

 —

 

 

6,153

Issuance of common stock

500

 

 

 5

 

 

3,845

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

3,850

 

 

 —

 

 

3,850

Stock-based compensation expense

 —

 

 

 —

 

 

4,768

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

4,768

 

 

 —

 

 

4,768

Common stock issued to board members

12

 

 

 —

 

 

217

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

217

 

 

 —

 

 

217

Issuance of common stock related to share-based awards, net

(94)

 

 

(1)

 

 

(1,779)

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(1,780)

 

 

 —

 

 

(1,780)

Repurchases of common stock

(816)

 

 

(8)

 

 

(16,268)

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(16,276)

 

 

 —

 

 

(16,276)

Deferred compensation plan

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(96)

 

(5)

 

 

96

 

 

 —

 

 

 —

 

 

 —

Net cash distributed from noncontrolling interest

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

1,471

 

 

1,471

Balance, June 30, 2016

98,498

 

$

985

 

$

1,568,053

 

$

8,782

 

$

214,116

 

$

938

 

17

 

$

(347)

 

$

1,792,527

 

$

3,919

 

$

1,796,446

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 —

 

 

 —

 

 

 —

 

 

 —

 

 

88,910

 

 

 —

 

 —

 

 

 —

 

 

88,910

 

 

207

 

 

89,117

Other comprehensive income

 —

 

 

 —

 

 

 —

 

 

1,627

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,627

 

 

 —

 

 

1,627

Stock-based compensation expense

 —

 

 

 —

 

 

5,687

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

5,687

 

 

 —

 

 

5,687

Common stock issued to board members

 7

 

 

 —

 

 

212

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

212

 

 

 —

 

 

212

Issuance of common stock related to share-based awards, net

244

 

 

 3

 

 

(2,134)

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(2,131)

 

 

 —

 

 

(2,131)

Repurchases of common stock

(2,462)

 

 

(25)

 

 

(46,739)

 

 

 —

 

 

(16,311)

 

 

 —

 

 —

 

 

 —

 

 

(63,075)

 

 

 —

 

 

(63,075)

Dividends on common stock ($0.12 per share)

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(11,603)

 

 

 —

 

 —

 

 

 —

 

 

(11,603)

 

 

 —

 

 

(11,603)

Deferred compensation plan

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(58)

 

(3)

 

 

61

 

 

 3

 

 

 —

 

 

 3

Net cash distributed to noncontrolling interest

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(1,304)

 

 

(1,304)

Balance, June 30, 2017

96,333

 

$

963

 

$

1,529,903

 

$

2,112

 

$

356,564

 

$

845

 

12

 

$

(248)

 

$

1,890,139

 

$

2,914

 

$

1,893,053

 

See accompanying notes.

 

 

6


 

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

    

2017

    

2016

Operating Activities

 

 

 

 

 

 

Net income

 

$

89,117

 

$

59,918

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

Provision for loan losses

 

 

7,558

 

 

32,283

Depreciation, amortization and accretion, net

 

 

(14,436)

 

 

(26,686)

Net realized gains on securities

 

 

(14)

 

 

 —

Deferred income taxes

 

 

2,615

 

 

2,421

Other, net

 

 

5,264

 

 

7,663

Net change in securities purchased under agreements to resell

 

 

(35,758)

 

 

(43,814)

Net change in assets segregated for regulatory purposes

 

 

13,428

 

 

38,399

Net change in trading securities

 

 

(205,951)

 

 

(91,273)

Net change in broker-dealer and clearing organization receivables

 

 

(45,566)

 

 

(796,440)

Net change in FDIC indemnification asset

 

 

22,824

 

 

17,344

Net change in other assets

 

 

(48,794)

 

 

(90,113)

Net change in broker-dealer and clearing organization payables

 

 

75,004

 

 

676,621

Net change in other liabilities

 

 

(132,731)

 

 

(45,653)

Net change in securities sold, not yet purchased

 

 

(4,020)

 

 

48,191

Proceeds from sale of mortgage servicing rights asset

 

 

17,499

 

 

7,586

Net gains from sales of loans

 

 

(277,838)

 

 

(294,309)

Loans originated for sale

 

 

(7,151,419)

 

 

(7,487,620)

Proceeds from loans sold

 

 

7,221,859

 

 

7,610,371

Net cash used in operating activities

 

 

(461,359)

 

 

(375,111)

Investing Activities

 

 

 

 

 

 

Proceeds from maturities and principal reductions of securities held to maturity

 

 

27,975

 

 

104,160

Proceeds from sales, maturities and principal reductions of securities available for sale

 

 

197,327

 

 

250,911

Purchases of securities held to maturity

 

 

(36,299)

 

 

(126,880)

Purchases of securities available for sale

 

 

(361,530)

 

 

(86,798)

Net change in loans

 

 

(195,832)

 

 

(281,489)

Purchases of premises and equipment and other assets

 

 

(13,771)

 

 

(19,097)

Proceeds from sales of premises and equipment and other real estate owned

 

 

18,071

 

 

51,192

Net cash received from Federal Home Loan Bank and Federal Reserve Bank stock

 

 

8,165

 

 

6,342

Net cash used in investing activities

 

 

(355,894)

 

 

(101,659)

Financing Activities

 

 

 

 

 

 

Net change in deposits

 

 

483,993

 

 

271,198

Net change in short-term borrowings

 

 

97,780

 

 

65,489

Proceeds from notes payable

 

 

173,052

 

 

132,460

Payments on notes payable

 

 

(190,631)

 

 

(51,458)

Proceeds from issuance of common stock

 

 

 —

 

 

3,850

Payments to repurchase common stock

 

 

(16,009)

 

 

 —

Dividends paid on common stock

 

 

(11,603)

 

 

 —

Net cash distributed from (to) noncontrolling interest

 

 

(1,304)

 

 

1,471

Taxes paid on employee stock awards netting activity

 

 

(2,131)

 

 

(1,765)

Other, net

 

 

(332)

 

 

(259)

Net cash provided by financing activities

 

 

532,815

 

 

420,986

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(284,438)

 

 

(55,784)

Cash and cash equivalents, beginning of period

 

 

690,764

 

 

669,445

Cash and cash equivalents, end of period

 

$

406,326

 

$

613,661

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

Cash paid for interest

 

$

36,299

 

$

28,206

Cash paid for income taxes, net of refunds

 

$

26,703

 

$

28,685

Supplemental Schedule of Non-Cash Activities

 

 

 

 

 

 

Conversion of loans to other real estate owned

 

$

5,644

 

$

11,615

Additions to mortgage servicing rights

 

$

2,490

 

$

9,893

 

See accompanying notes.

 

7


 

Table of Contents

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, mortgage origination and insurance subsidiaries.

 

The Company, headquartered in Dallas, Texas, provides its products and services through three primary business units, PlainsCapital Corporation (“PCC”), 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 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 areas of the southern United States.

 

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, 2016 (“2016 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 loan 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 assets are particularly subject to change. The Company has applied its critical accounting policies and estimation methods consistently in all periods presented in these consolidated financial statements.

 

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. 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”). Ventures Management is the managing member and owns 51% of the membership interest in both PrimeLending Ventures, LLC (“Ventures”) and Mutual of Omaha Mortgage, LLC.

 

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


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Subsections of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), because the primary beneficiaries of the Trusts are not within the consolidated group.

 

Hilltop has a 100% membership interest in Securities Holdings, which operates through its wholly-owned subsidiaries, Hilltop Securities Inc. (“Hilltop Securities”), Hilltop Securities Independent Network Inc. (“HTS Independent Network”) (collectively, the “Hilltop Broker-Dealers”) and First Southwest Asset Management, LLC. Hilltop Securities is a broker-dealer registered with the Securities and Exchange Commission (the “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, and First Southwest Asset Management, LLC is a registered investment adviser under the Investment Advisers Act of 1940.

 

Hilltop also owns 100% of NLC, which operates through its wholly owned subsidiaries, National Lloyds Insurance Company (“NLIC”) and American Summit Insurance Company (“ASIC”).

 

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. 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.

 

 

 

2. Recently Issued Accounting Standards

 

In May 2017, FASB issued ASU 2017-09 which provides clarity and reduces both diversity in practice and cost and complexity associated with changes to the terms or conditions of a share-based payment award and, specifically, which changes require an entity to apply modification accounting. The amendments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Adoption of the amendment is not expected to have a significant effect 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 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. 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


 

Table of Contents

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. 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 “current expected credit loss” (CECL) model which 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. This 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. The amendment 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 are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2019 with a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption. Although the Company does not intend to adopt the provisions of the amendment early, a cross-functional team is 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.

 

In February 2016, FASB issued ASU 2016-02 related to leases. The new standard 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 annual periods, beginning after December 15, 2018. Early adoption is permitted. 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. The Company does not intend to adopt the provisions of the amendment early. The Company is currently evaluating the provisions of the amendment 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. The amendment is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Adoption of the amendment is not expected to have a significant effect on the Company’s 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 wherein the guidance is applied only to existing contracts as of the date of initial application and to new contracts entered into thereafter. The Company does not intend to adopt the provisions of the amendment early and expects to adopt using the cumulative-effect approach. The Company has gathered an inventory of contracts with customers and performed an in-depth assessment. The preliminary assessment suggests that the revenue recognition policies within the

10


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Company’s broker-dealer segment will be affected when adopted. Specifically, the new guidance may require certain advisory and underwriting revenues and expenses to be recorded on a gross basis while the current guidance requires recognizing these revenues net of the related expenses. However, there are many aspects of this new accounting guidance that are still being interpreted to clarify and address certain implementation issues. The Company will continue to evaluate the impact on its future consolidated financial statements of both current and newly issued guidance associated with the amendment.

 

 

 

 

3. 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 creates 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 at fair value, under the provisions of the Fair Value Option. The Company elected to apply the provisions of the Fair Value Option to these items so that it would have the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. At June 30, 2017 and December 31, 2016, the aggregate fair value of PrimeLending’s mortgage loans held for sale accounted for under the Fair Value Option was $1.93 billion and $1.75 billion, respectively, and the unpaid principal balance of those loans was $1.85 billion and $1.71 billion, respectively. The interest component of fair value is reported as interest income on loans in the accompanying consolidated statements of operations.

 

The Company holds a number of financial instruments that are measured at fair value on a recurring basis, either by the application of the Fair Value Option or other authoritative pronouncements. The fair values of those instruments are determined primarily using Level 2 inputs. Those inputs include quotes from mortgage loan investors and derivatives dealers and data from independent pricing services.

11


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

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

 

June 30, 2017

 

Inputs

 

Inputs

 

Inputs

 

Fair Value

 

Trading securities

 

$

5,205

 

$

466,280

 

$

 —

 

$

471,485

 

Available for sale securities

 

 

20,503

 

 

742,703

 

 

 —

 

 

763,206

 

Loans held for sale

 

 

 —

 

 

1,897,752

 

 

30,037

 

 

1,927,789

 

Derivative assets

 

 

 —

 

 

71,724

 

 

 —

 

 

71,724

 

MSR asset

 

 

 —

 

 

 —

 

 

43,580

 

 

43,580

 

Securities sold, not yet purchased

 

 

73,477

 

 

76,392

 

 

 —

 

 

149,869

 

Derivative liabilities

 

 

 —

 

 

19,642

 

 

 —

 

 

19,642

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Level 1

    

Level 2

    

Level 3

    

 

Total

 

December 31, 2016

 

Inputs

 

Inputs

 

Inputs

 

 

Fair Value

 

Trading securities

 

$

9,481

 

$

256,053

 

$

 —

 

$

265,534

 

Available for sale securities

 

 

19,840

 

 

578,167

 

 

 —

 

 

598,007

 

Loans held for sale

 

 

 —

 

 

1,712,697

 

 

35,801

 

 

1,748,498

 

Derivative assets

 

 

 —

 

 

57,036

 

 

 —

 

 

57,036

 

MSR asset

 

 

 —

 

 

 —

 

 

61,968

 

 

61,968

 

Securities sold, not yet purchased

 

 

60,715

 

 

93,174

 

 

 —

 

 

153,889

 

Derivative liabilities

 

 

 —

 

 

35,737

 

 

 —

 

 

35,737

 

 

The following tables include a rollforward for those financial instruments measured at fair value using Level 3 inputs (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Gains or Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Realized or Unrealized)

 

 

 

 

 

    

Balance at

    

 

 

    

 

 

    

 

 

    

Included in Other

    

 

 

 

 

 

Beginning of

 

Purchases/

 

Sales/

 

Included in

 

Comprehensive

 

Balance at

 

 

 

Period

 

Additions

 

Reductions

 

Net Income

 

Income (Loss)

 

End of Period

 

Three months ended  June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

30,214

 

$

8,675

 

$

(6,722)

 

$

(2,130)

 

$

 —

 

$

30,037

 

MSR asset

 

 

45,573

 

 

1,266

 

 

 —

 

 

(3,259)

 

 

 —

 

 

43,580

 

Total

 

$

75,787

 

$

9,941

 

$

(6,722)

 

$

(5,389)

 

$

 —

 

$

73,617

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

35,801

 

$

16,503

 

$

(17,423)

 

$

(4,844)

 

$

 —

 

$

30,037

 

MSR asset

 

 

61,968

 

 

2,490

 

 

(17,499)

 

 

(3,379)

 

 

 —

 

 

43,580

 

Total

 

$

97,769

 

$

18,993

 

$

(34,922)

 

$

(8,223)

 

$

 —

 

$

73,617

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities

 

$

 1

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 1

 

Loans held for sale

 

 

40,545

 

 

19,803

 

 

(10,894)

 

 

(3,809)

 

 

 —

 

 

45,645

 

MSR asset

 

 

39,863

 

 

8,254

 

 

(7,586)

 

 

(7,040)

 

 

 —

 

 

33,491

 

Total

 

$

80,409

 

$

28,057

 

$

(18,480)

 

$

(10,849)

 

$

 —

 

$

79,137

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities

 

$

 1

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 1

 

Loans held for sale

 

 

25,880

 

 

43,039

 

 

(15,131)

 

 

(8,143)

 

 

 —

 

 

45,645

 

MSR asset

 

 

52,285

 

 

9,893

 

 

(7,586)

 

 

(21,101)

 

 

 —

 

 

33,491

 

Total

 

$

78,166

 

$

52,932

 

$

(22,717)

 

$

(29,244)

 

$

 —

 

$

79,137

 

 

12


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

All net realized and unrealized gains (losses) in the table above are reflected in the accompanying consolidated financial statements. Excluding the trading securities sold during the three months ended September 30, 2016, the unrealized gains (losses) relate to financial instruments still held at June 30, 2017.

 

For Level 3 financial instruments measured at fair value on a recurring basis at June 30, 2017, the significant unobservable inputs used in the fair value measurements were as follows.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Range

Financial instrument

    

Valuation Technique

    

Unobservable Inputs

    

(Weighted-Average)

Loans held for sale

 

Discounted cash flows / Market comparable

 

Projected price

 

92

-

95

%

(

95

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

MSR asset

 

Discounted cash flows

 

Constant prepayment rate

 

 

 

10.92

%

 

 

 

 

 

 

Discount rate

 

 

 

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 values of such loans are generally based upon estimates of expected cash flows using unobservable inputs, including listing prices of comparable assets, uncorroborated expert opinions, and/or management’s knowledge of underlying collateral.

 

The MSR asset, which is included in other assets within the Company’s consolidated balance sheets, is 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 during the periods presented.

 

The following tables present those changes in fair value of instruments recognized in the consolidated statements of operations that are accounted for under the Fair Value Option (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2017

 

Three Months Ended June 30, 2016

 

 

   

 

   

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

 

$

22,231

 

$

 —

 

$

22,231

 

$

15,483

 

$

 —

 

$

15,483

 

MSR asset

 

 

(3,259)

 

 

 —

 

 

(3,259)

 

 

(7,040)

 

 

 —

 

 

(7,040)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2017

 

Six Months Ended June 30, 2016

 

 

   

 

   

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

 

$

31,093

 

$

 —

 

$

31,093

 

$

15,930

 

$

 —

 

$

15,930

 

MSR asset

 

 

(3,379)

 

 

 —

 

 

(3,379)

 

 

(21,101)

 

 

 —

 

 

(21,101)

 

 

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

13


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

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 June 30, 2017, estimates for these significant unobservable inputs were as follows.

 

 

 

 

 

 

 

 

 

 

 

PCI Loans

 

 

 

PlainsCapital

 

FNB

 

SWS

 

 

    

Merger

    

Transaction

    

Merger

 

Weighted average default rate

 

53

%  

44

%  

59

%

Weighted average loss severity rate

 

63

%  

20

%  

29

%

Weighted average prepayment speed

 

0

%  

8

%  

0

%

 

At June 30, 2017, the resulting weighted average expected loss on PCI loans associated with the PlainsCapital Merger, FNB Transaction and SWS Merger was 33%, 9% 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 June 30, 2017, the most significant 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 June 30, 2017 and December 31, 2016, the estimated fair value of covered OREO was $42.3 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 June 30, 2017 and December 31, 2016 was $4.6 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).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Gains (Losses) for the 

 

Total Gains (Losses) for the 

 

 

Level 1 

 

Level 2 

 

Level 3 

 

Total 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

June 30, 2017

    

Inputs

    

Inputs

   

Inputs

   

Fair Value

   

2017

    

2016

   

2017

    

2016

Non-covered impaired loans

 

$

 —

 

$

 —

 

$

55,013

 

$

55,013

 

$

(274)

 

$

168

 

$

(470)

 

$

135

Covered impaired loans

 

 

 —

 

 

 —

 

 

48,677

 

 

48,677

 

 

(611)

 

 

(242)

 

 

(977)

 

 

90

Non-covered other real estate owned

 

 

 —

 

 

3,258

 

 

 —

 

 

3,258

 

 

(108)

 

 

(12)

 

 

(123)

 

 

(12)

Covered other real estate owned

 

 

 —

 

 

5,385

 

 

 —

 

 

5,385

 

 

(943)

 

 

(1,967)

 

 

(2,135)

 

 

(11,732)

 

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 are described in detail in Note 3 to the consolidated financial statements included in the Company’s 2016 Form 10-K.

 

14


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

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

    

 

 

 

June 30, 2017

 

Amount

 

Inputs

 

Inputs

 

Inputs

 

Total

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

406,326

 

$

406,326

 

$

 —

 

$

 —

 

$

406,326

 

Securities purchased under agreements to resell

 

 

125,188

 

 

 —

 

 

125,188

 

 

 —

 

 

125,188

 

Assets segregated for regulatory purposes

 

 

167,565

 

 

167,565

 

 

 —

 

 

 —

 

 

167,565

 

Held to maturity securities

 

 

359,847

 

 

 —

 

 

355,860

 

 

 —

 

 

355,860

 

Loans held for sale

 

 

72,468

 

 

 —

 

 

72,468

 

 

 —

 

 

72,468

 

Non-covered loans, net

 

 

6,059,003

 

 

 —

 

 

492,859

 

 

5,755,032

 

 

6,247,891

 

Covered loans, net

 

 

205,877

 

 

 —

 

 

 —

 

 

309,698

 

 

309,698

 

Broker-dealer and clearing organization receivables

 

 

1,552,525

 

 

 —

 

 

1,552,525

 

 

 —

 

 

1,552,525

 

FDIC indemnification asset

 

 

40,304

 

 

 —

 

 

 —

 

 

24,875

 

 

24,875

 

Other assets

 

 

62,882

 

 

 —

 

 

57,420

 

 

5,462

 

 

62,882

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

7,574,622

 

 

 —

 

 

7,567,319

 

 

 —

 

 

7,567,319

 

Broker-dealer and clearing organization payables

 

 

1,395,314

 

 

 —

 

 

1,395,314

 

 

 —

 

 

1,395,314

 

Short-term borrowings

 

 

1,515,069

 

 

 —

 

 

1,515,069

 

 

 —

 

 

1,515,069

 

Debt

 

 

367,295

 

 

 —

 

 

364,785

 

 

 —

 

 

364,785

 

Other liabilities

 

 

3,881

 

 

 —

 

 

3,881

 

 

 —

 

 

3,881

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

15


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

4. Securities

 

The fair value of trading securities is summarized as follows (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

 

    

2017

    

2016

 

 

U.S. Treasury securities

 

$

1,874

 

$

5,940

 

 

U.S. government agencies:

 

 

 

 

 

 

 

 

Bonds

 

 

32,944

 

 

36,303

 

 

Residential mortgage-backed securities

 

 

233,443

 

 

2,539

 

 

Commercial mortgage-backed securities

 

 

9,739

 

 

15,171

 

 

Collateralized mortgage obligations

 

 

1,668

 

 

5,607

 

 

Corporate debt securities

 

 

75,240

 

 

60,699

 

 

States and political subdivisions

 

 

98,619

 

 

89,946

 

 

Unit investment trusts

 

 

8,920

 

 

41,409

 

 

Private-label securitized product

 

 

4,843

 

 

4,292

 

 

Other

 

 

4,195

 

 

3,628

 

 

Totals

 

$

471,485

 

$

265,534

 

 

 

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 $149.9 million and $153.9 million at June 30, 2017 and December 31, 2016, respectively.

 

The amortized cost and fair value of available for sale and held to maturity securities are summarized as follows (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

June 30, 2017

 

Cost

 

Gains

 

Losses

 

Fair Value

 

U.S. Treasury securities

 

$

31,740

 

$

173

 

$

(42)

 

$

31,871

 

U.S. government agencies:

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds

 

 

91,077

 

 

873

 

 

(138)

 

 

91,812

 

Residential mortgage-backed securities

 

 

242,019

 

 

879

 

 

(2,452)

 

 

240,446

 

Commercial mortgage-backed securities

 

 

12,200

 

 

22

 

 

(23)

 

 

12,199

 

Collateralized mortgage obligations

 

 

212,647

 

 

104

 

 

(2,636)

 

 

210,115

 

Corporate debt securities

 

 

75,534

 

 

2,551

 

 

(11)

 

 

78,074

 

States and political subdivisions

 

 

76,234

 

 

1,557

 

 

(112)

 

 

77,679

 

Commercial mortgage-backed securities

 

 

499

 

 

 8

 

 

 —

 

 

507

 

Equity securities

 

 

19,267

 

 

1,250

 

 

(14)

 

 

20,503

 

Totals

 

$

761,217

 

$

7,417

 

$

(5,428)

 

$

763,206

 

 

 

16


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

December 31, 2016

 

Cost

 

Gains

 

Losses

 

Fair Value

 

U.S. Treasury securities

 

$

31,701

 

$

144

 

$

(44)

 

$

31,801

 

U.S. government agencies:

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds

 

 

121,838

 

 

881

 

 

(67)

 

 

122,652

 

Residential mortgage-backed securities

 

 

135,371

 

 

708

 

 

(2,941)

 

 

133,138

 

Commercial mortgage-backed securities

 

 

8,771

 

 

 2

 

 

(58)

 

 

8,715

 

Collateralized mortgage obligations

 

 

117,879

 

 

29

 

 

(3,206)

 

 

114,702

 

Corporate debt securities

 

 

76,866

 

 

2,354

 

 

(91)

 

 

79,129

 

States and political subdivisions

 

 

86,353

 

 

1,498

 

 

(336)

 

 

87,515

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

June 30, 2017

    

Cost

    

Gains

    

Losses

    

Fair Value

 

U.S. government agencies:

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds

 

$

40,514

 

$

43

 

$

(915)

 

$

39,642

 

Residential mortgage-backed securities

 

 

18,009

 

 

179

 

 

 —

 

 

18,188

 

Commercial mortgage-backed securities

 

 

57,867

 

 

396

 

 

(399)

 

 

57,864

 

Collateralized mortgage obligations

 

 

194,664

 

 

150

 

 

(2,466)

 

 

192,348

 

States and political subdivisions

 

 

48,793

 

 

205

 

 

(1,180)

 

 

47,818

 

Totals

 

$

359,847

 

$

973

 

$

(4,960)

 

$

355,860

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Information regarding available for sale and held to maturity securities that were in an unrealized loss position is shown in the following tables (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 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

 

$

24,143

 

$

39

 

 7

 

$

21,694

 

$

44

 

Unrealized loss for twelve months or longer

 

 2

 

 

2,598

 

 

 3

 

 —

 

 

 —

 

 

 —

 

 

 

 8

 

 

26,741

 

 

42

 

 7

 

 

21,694

 

 

44

 

U.S. government agencies:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

 9

 

 

74,954

 

 

138

 

 1

 

 

14,908

 

 

67

 

Unrealized loss for twelve months or longer

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 

 9

 

 

74,954

 

 

138

 

 1

 

 

14,908

 

 

67

 

Residential mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

13

 

 

122,941

 

 

2,232

 

12

 

 

109,398

 

 

2,941

 

Unrealized loss for twelve months or longer

 

 1

 

 

5,846

 

 

220

 

 —

 

 

 —

 

 

 —

 

 

 

14

 

 

128,787

 

 

2,452

 

12

 

 

109,398

 

 

2,941

 

Commercial mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

 2

 

 

9,091

 

 

23

 

 2

 

 

7,127

 

 

58

 

Unrealized loss for twelve months or longer

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 

 2

 

 

9,091

 

 

23

 

 2

 

 

7,127

 

 

58

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

17

 

 

134,762

 

 

1,537

 

11

 

 

91,144

 

 

2,340

 

Unrealized loss for twelve months or longer

 

 9

 

 

29,341

 

 

1,099

 

 8

 

 

19,320

 

 

866

 

 

 

26

 

 

164,103

 

 

2,636

 

19

 

 

110,464

 

 

3,206

 

Corporate debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

 1

 

 

1,987

 

 

11

 

 3

 

 

5,899

 

 

91

 

Unrealized loss for twelve months or longer

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 

 1

 

 

1,987

 

 

11

 

 3

 

 

5,899

 

 

91

 

States and political subdivisions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

24

 

 

11,727

 

 

103

 

32

 

 

17,549

 

 

322

 

Unrealized loss for twelve months or longer

 

 1

 

 

458

 

 

 9

 

 1

 

 

450

 

 

14

 

 

 

25

 

 

12,185

 

 

112

 

33

 

 

17,999

 

 

336

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

 1

 

 

195

 

 

 —

 

 —

 

 

 —

 

 

 —

 

Unrealized loss for twelve months or longer

 

 2

 

 

6,947

 

 

14

 

 2

 

 

11,107

 

 

343

 

 

 

 3

 

 

7,142

 

 

14

 

 2

 

 

11,107

 

 

343

 

Total available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

73

 

 

379,800

 

 

4,083

 

68

 

 

267,719

 

 

5,863

 

Unrealized loss for twelve months or longer

 

15

 

 

45,190

 

 

1,345

 

11

 

 

30,877

 

 

1,223

 

 

 

88

 

$

424,990

 

$

5,428

 

79

 

$

298,596

 

$

7,086

 

 

18


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 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

 

 3

 

$

32,099

 

$

915

 

 4

 

$

33,225

 

$

1,287

 

Unrealized loss for twelve months or longer

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 

 3

 

 

32,099

 

 

915

 

 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

 

 2

 

 

12,882

 

 

399

 

 5

 

 

18,891

 

 

588

 

Unrealized loss for twelve months or longer

 

 —

 

 

 —

 

 

 —

 

 1

 

 

1,401

 

 

 5

 

 

 

 2

 

 

12,882

 

 

399

 

 6

 

 

20,292

 

 

593

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

17

 

 

166,859

 

 

2,466

 

19

 

 

187,669

 

 

3,372

 

Unrealized loss for twelve months or longer

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 

17

 

 

166,859

 

 

2,466

 

19

 

 

187,669

 

 

3,372

 

States and political subdivisions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

63

 

 

27,712

 

 

1,176

 

71

 

 

29,862

 

 

1,790

 

Unrealized loss for twelve months or longer

 

 2

 

 

671

 

 

 4

 

 1

 

 

462

 

 

 8

 

 

 

65

 

 

28,383

 

 

1,180

 

72

 

 

30,324

 

 

1,798

 

Total held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

85

 

 

239,552

 

 

4,956

 

101

 

 

282,825

 

 

7,043

 

Unrealized loss for twelve months or longer

 

 2

 

 

671

 

 

 4

 

 2

 

 

1,863

 

 

13

 

 

 

87

 

$

240,223

 

$

4,960

 

103

 

$

284,688

 

$

7,056

 

 

During the three and six months ended June 30, 2017 and 2016, the Company did not record any other-than-temporary impairments (“OTTI”). 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. 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 believed to be significant enough to warrant recording any OTTI of the securities. 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 June 30, 2017 are shown by contractual maturity below (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale

 

Held to Maturity

 

 

    

Amortized

    

 

 

    

Amortized

    

 

 

 

 

 

Cost

 

Fair Value

 

Cost

 

Fair Value

 

Due in one year or less

 

$

107,694

 

$

107,905

 

$

4,258

 

$

4,262

 

Due after one year through five years

 

 

97,514

 

 

99,481

 

 

3,323

 

 

3,346

 

Due after five years through ten years

 

 

39,674

 

 

41,380

 

 

26,786

 

 

26,327

 

Due after ten years

 

 

29,703

 

 

30,670

 

 

54,940

 

 

53,525

 

 

 

 

274,585

 

 

279,436

 

 

89,307

 

 

87,460

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

 

242,019

 

 

240,446

 

 

18,009

 

 

18,188

 

Collateralized mortgage obligations

 

 

212,647

 

 

210,115

 

 

194,664

 

 

192,348

 

Commercial mortgage-backed securities

 

 

12,699

 

 

12,706

 

 

57,867

 

 

57,864

 

 

 

$

741,950

 

$

742,703

 

$

359,847

 

$

355,860

 

 

The Company realized net gains of $7.0 million and $5.8 million from its trading securities portfolio during the three months ended June 30, 2017 and 2016, respectively, and net gains from its trading securities portfolio of $12.9 million and $11.5 million during the six months ended June 30, 2017 and 2016, respectively. In addition, the Hilltop Broker-

19


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Dealers realized net gains from trading activities primarily associated with the structured finance business of $10.5 million and $23.7 million during the three months ended June 30, 2017 and 2016, respectively, and $17.0 million and $29.3 million during the six months ended June 30, 2017 and 2016, respectively. All such realized net gains are recorded as a component of other noninterest income within the consolidated statements of operations.

 

Securities with a carrying amount of $624.0 million and $695.1 million (with a fair value of $619.7 million and $688.1 million, respectively) at June 30, 2017 and December 31, 2016, respectively, were pledged 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 our available for sale and held to maturity securities portfolios at June 30, 2017 and December 31, 2016.

 

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, and conditionally guaranteed by the full faith and credit of the United States.

 

At June 30, 2017 and December 31, 2016, NLC had investments on deposit in custody for various state insurance departments with aggregate carrying values 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).

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2017

    

2016

 

Commercial and industrial

 

$

1,750,305

 

$

1,696,453

 

Real estate

 

 

2,969,199

 

 

2,816,767

 

Construction and land development

 

 

863,082

 

 

786,850

 

Consumer

 

 

42,766

 

 

41,352

 

Broker-dealer (1)

 

 

492,859

 

 

502,077

 

 

 

 

6,118,211

 

 

5,843,499

 

Allowance for non-covered loan losses

 

 

(59,208)

 

 

(54,186)

 

Total non-covered loans, net of allowance

 

$

6,059,003

 

$

5,789,313

 


(1)

Represents margin loans to customers and correspondents associated with our broker-dealer segment operations.

 

In connection with the Bank Transactions, the Company acquired non-covered loans both with and without evidence of credit quality deterioration since origination. The following table presents the carrying values and the outstanding balances of non-covered PCI loans (in thousands).

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2017

    

2016

 

Carrying amount

 

$

44,345

 

$

51,432

 

Outstanding balance

 

 

59,426

 

 

67,988

 

 

20


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Changes in the accretable yield for non-covered PCI loans were as follows (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

Balance, beginning of period

 

$

11,442

 

$

16,168

 

$

13,116

 

$

17,744

 

Reclassifications from nonaccretable difference, net(1)

 

 

438

 

 

1,604

 

 

577

 

 

3,947

 

Disposals of loans

 

 

(61)

 

 

 —

 

 

(61)

 

 

 —

 

Accretion

 

 

(2,026)

 

 

(2,543)

 

 

(3,839)

 

 

(6,462)

 

Balance, end of period

 

$

9,793

 

$

15,229

 

$

9,793

 

$

15,229

 


(1)

Reclassifications from nonaccretable difference are primarily due to net increases in expected cash flows in the quarterly recasts. Reclassifications to nonaccretable difference occur when accruing loans are moved to non-accrual and expected cash flows are no longer predictable and the accretable yield is eliminated.

 

The remaining nonaccretable difference for non-covered PCI loans was $21.0 million and $22.8 million at June 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

 

June 30, 2017

 

Principal Balance

 

No Allowance

 

Allowance

 

Investment

 

Allowance

 

PCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

$

20,269

 

$

3,382

 

$

3,738

 

$

7,120

 

$

66

 

Unsecured

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

33,575

 

 

8,512

 

 

16,056

 

 

24,568

 

 

2,249

 

Secured by residential properties

 

 

13,102

 

 

2,272

 

 

7,838

 

 

10,110

 

 

270

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 

4,357

 

 

1,073

 

 

1,260

 

 

2,333

 

 

303

 

Consumer

 

 

2,679

 

 

32

 

 

182

 

 

214

 

 

102

 

Broker-dealer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

73,982

 

 

15,271

 

 

29,074

 

 

44,345

 

 

2,990

 

Non-PCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

 

12,253

 

 

6,797

 

 

2,911

 

 

9,708

 

 

750

 

Unsecured

 

 

745

 

 

717

 

 

 —

 

 

717

 

 

 —

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

12,136

 

 

11,235

 

 

410

 

 

11,645

 

 

 3

 

Secured by residential properties

 

 

1,816

 

 

1,545

 

 

 —

 

 

1,545

 

 

 —

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

15

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 

659

 

 

 —

 

 

632

 

 

632

 

 

106

 

Consumer

 

 

317

 

 

208

 

 

 —

 

 

208

 

 

 —

 

Broker-dealer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

27,941

 

 

20,502

 

 

3,953

 

 

24,455

 

 

859

 

 

 

$

101,923

 

$

35,773

 

$

33,027

 

$

68,800

 

$

3,849

 

 

 

21


 

Table of Contents

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 June 30,

 

Six Months Ended June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Commercial and industrial:

    

 

    

    

 

    

    

 

    

    

 

    

 

Secured

 

$

16,950

 

$

25,590

 

$

15,093

 

$

25,538

 

Unsecured

 

 

748

 

 

41

 

 

821

 

 

47

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

37,189

 

 

37,533

 

 

37,362

 

 

38,680

 

Secured by residential properties

 

 

11,461

 

 

12,092

 

 

11,630

 

 

12,133

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

 —

 

 

14

 

 

111

 

Commercial construction loans and land development

 

 

3,170

 

 

4,090

 

 

3,580

 

 

4,512

 

Consumer

 

 

462

 

 

483

 

 

480

 

 

609

 

Broker-dealer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

$

69,980

 

$

79,829

 

$

68,980

 

$

81,630

 

 

22


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Non-covered non-accrual loans, excluding those classified as held for sale, are summarized by class in the following table (in thousands).

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

 

2017

 

2016

 

Commercial and industrial:

    

 

    

    

 

    

 

Secured

 

$

13,101

 

$

8,590

 

Unsecured

 

 

717

 

 

925

 

Real estate:

 

 

 

 

 

 

 

Secured by commercial properties

 

 

11,645

 

 

11,034

 

Secured by residential properties

 

 

2,020

 

 

1,197

 

Construction and land development:

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

28

 

Commercial construction loans and land development

 

 

632

 

 

727

 

Consumer

 

 

208

 

 

244

 

Broker-dealer

 

 

 —

 

 

 —

 

 

 

$

28,323

 

$

22,745

 

 

At June 30, 2017 and December 31, 2016, non-covered non-accrual loans included non-covered PCI loans of $3.9 million and $5.0 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, $1.2 million and $1.7 million of real estate loans secured by residential properties and classified as held for sale were in non-accrual status at June 30, 2017 and December 31, 2016, respectively.

 

Interest income, including recoveries and cash payments, recorded on non-covered impaired loans was $0.1 million and $0.1 million during the three months ended June 30, 2017 and 2016, respectively, and $0.4 million and $0.2 million during the six months ended June 30, 2017 and 2016, respectively. Except as noted above, non-covered PCI loans are considered to be performing due to the application of the accretion method.

 

The Bank classifies loan modifications as 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 two 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.

 

23


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Information regarding TDRs granted during the three and six months ended June 30, 2017 and 2016, respectively, is shown in the following tables  (dollars in thousands). At June 30, 2017 and December 31, 2016, the Bank had nominal unadvanced commitments to borrowers whose loans have been restructured in TDRs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2017

 

Three Months Ended June 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

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Commercial construction loans and land development

 

 

 1

 

 

655

 

 

632

 

 —

 

 

 —

 

 

 —

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Broker-dealer

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 

 1

 

$

655

 

$

632

 

 —

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2017

 

Six Months Ended June 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

 

$

1,279

 

 1

 

$

1,196

 

$

950

Unsecured

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

 1

 

 

1,481

 

 

1,417

 

 —

 

 

 —

 

 

 —

Secured by residential properties

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Commercial construction loans and land development

 

 

 1

 

 

655

 

 

632

 

 —

 

 

 —

 

 

 —

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

Broker-dealer

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 

 3

 

$

3,493

 

$

3,328

 

 1

 

$

1,196

 

$

950

 

All of the non-covered loan modifications included in the tables above involved payment term extensions. The Bank did not grant principal reductions on any restructured non-covered loans during the six months ended June 30, 2017 and 2016.

 

24


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

The following table presents information regarding TDRs granted during the twelve months preceding June 30, 2017 and 2016, respectively, for which a payment was at least 30 days past due (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Twelve Months Preceding June 30, 2017

 

Twelve Months Preceding June 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

 

 —

 

$

 —

 

$

 —

 

 2

 

$

1,286

 

$

1,022

 

 

Unsecured

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 1

 

 

1,481

 

 

1,417

 

 1

 

 

1,084

 

 

995

 

 

Secured by residential properties

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

Commercial construction loans and land development

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

Consumer

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

Broker-dealer

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 

 

 1

 

$

1,481

 

$

1,417

 

 3

 

$

2,370

 

$

2,017

 

 

 

An analysis of the aging of the Bank’s non-covered loan portfolio is shown in the following tables (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Accruing Loans
(Non-PCI)

 

 

 

Loans Past Due

 

Loans Past Due

 

Loans Past Due

 

Total

 

Current

 

PCI

 

Total

 

Past Due

 

June 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

 

$

2,242

 

$

5,269

 

$

2,745

 

$

10,256

 

$

1,630,746

 

$

7,120

 

$

1,648,122

 

$

2,745

 

Unsecured

 

 

102

 

 

 2

 

 

 —

 

 

104

 

 

102,079

 

 

 —

 

 

102,183

 

 

 —

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

410

 

 

5,150

 

 

 —

 

 

5,560

 

 

2,161,203

 

 

24,568

 

 

2,191,331

 

 

 —

 

Secured by residential properties

 

 

546

 

 

452

 

 

557

 

 

1,555

 

 

766,203

 

 

10,110

 

 

777,868

 

 

557

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

1,788

 

 

 —

 

 

 —

 

 

1,788

 

 

158,735

 

 

 —

 

 

160,523

 

 

 —

 

Commercial construction loans and land development

 

 

945

 

 

 3

 

 

 —

 

 

948

 

 

699,278

 

 

2,333

 

 

702,559

 

 

 —

 

Consumer

 

 

239

 

 

31

 

 

 —

 

 

270

 

 

42,282

 

 

214

 

 

42,766

 

 

 —

 

Broker-dealer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

492,859

 

 

 —

 

 

492,859

 

 

 —

 

 

 

$

6,272

 

$

10,907

 

$

3,302

 

$

20,481

 

$

6,053,385

 

$

44,345

 

$

6,118,211

 

$

3,302

 

 

 

25


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Accruing Loans
(Non-PCI)

 

 

 

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

 

 

In addition to the non-covered loans shown in the tables above, $45.5 million and $44.4 million of loans included in loans held for sale (with an unpaid principal balance of $46.0 million and $44.9 million, respectively) were 90 days past due and accruing interest at June 30, 2017 and December 31, 2016, 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) general economic conditions in the state and local markets.

 

The Bank utilizes a risk grading matrix to assign a risk grade to each 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.

 

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.

 

Special Mention – “Special Mention” loans have 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 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.

 

26


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

The following tables present the internal risk grades of non-covered loans, as previously described, in the portfolio by class (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

    

Pass

    

Special Mention

    

Substandard

    

PCI

    

Total

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

$

1,581,767

 

$

7,939

 

$

51,296

 

$

7,120

 

$

1,648,122

 

Unsecured

 

 

99,865

 

 

1,060

 

 

1,258

 

 

 —

 

 

102,183

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

2,126,761

 

 

1,514

 

 

38,488

 

 

24,568

 

 

2,191,331

 

Secured by residential properties

 

 

761,621

 

 

3,292

 

 

2,845

 

 

10,110

 

 

777,868

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

160,523

 

 

 —

 

 

 —

 

 

 —

 

 

160,523

 

Commercial construction loans and land development

 

 

696,643

 

 

2,792

 

 

791

 

 

2,333

 

 

702,559

 

Consumer

 

 

42,312

 

 

 —

 

 

240

 

 

214

 

 

42,766

 

Broker-dealer

 

 

492,859

 

 

 —

 

 

 —

 

 

 —

 

 

492,859

 

 

 

$

5,962,351

 

$

16,597

 

$

94,918

 

$

44,345

 

$

6,118,211

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 Contingencies Topics 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 three months ended June 30, 2017, the Bank recorded an insurance receivable and related other noninterest income of $15.0 million from coverage provided by an insurance policy for forgery.

 

27


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Changes in the allowance for non-covered loan losses, distributed by portfolio segment, are shown below (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

    

 

 

    

Construction and

    

 

 

    

 

 

    

 

 

 

Three Months Ended June 30, 2017

 

Industrial

 

Real Estate

 

Land Development

 

Consumer

 

Broker-Dealer

 

Total

 

Balance, beginning of period

 

$

21,679

 

$

26,112

 

$

6,879

 

$

464

 

$

23

 

$

55,157

 

Provision charged to operations

 

 

735

 

 

2,779

 

 

766

 

 

165

 

 

448

 

 

4,893

 

Loans charged off

 

 

(1,200)

 

 

(218)

 

 

 —

 

 

(127)

 

 

 —

 

 

(1,545)

 

Recoveries on charged off loans

 

 

620

 

 

61

 

 

 —

 

 

22

 

 

 —

 

 

703

 

Balance, end of period

 

$

21,834

 

$

28,734

 

$

7,645

 

$

524

 

$

471

 

$

59,208

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

    

 

 

    

Construction and

    

 

 

    

 

 

    

 

 

 

Six Months Ended June 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 operations

 

 

1,210

 

 

3,701

 

 

654

 

 

221

 

 

316

 

 

6,102

 

Loans charged off

 

 

(1,805)

 

 

(300)

 

 

(11)

 

 

(161)

 

 

 —

 

 

(2,277)

 

Recoveries on charged off loans

 

 

1,060

 

 

97

 

 

 —

 

 

40

 

 

 —

 

 

1,197

 

Balance, end of period

 

$

21,834

 

$

28,734

 

$

7,645

 

$

524

 

$

471

 

$

59,208

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

    

 

 

    

Construction and

    

 

 

    

 

 

    

 

 

 

Three Months Ended June 30, 2016

 

Industrial

 

Real Estate

 

Land Development

 

Consumer

 

Broker-Dealer

 

Total

 

Balance, beginning of period

 

$

20,169

 

$

22,272

 

$

5,561

 

$

334

 

$

114

 

$

48,450

 

Provision charged to (recapture from) operations

 

 

25,503

 

 

2,216

 

 

727

 

 

(16)

 

 

263

 

 

28,693

 

Loans charged off

 

 

(25,433)

 

 

(1,298)

 

 

 —

 

 

(37)

 

 

 1

 

 

(26,767)

 

Recoveries on charged off loans

 

 

481

 

 

112

 

 

 —

 

 

44

 

 

 —

 

 

637

 

Balance, end of period

 

$

20,720

 

$

23,302

 

$

6,288

 

$

325

 

$

378

 

$

51,013

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

    

 

 

    

Construction and

    

 

 

    

 

 

    

 

 

 

Six Months Ended June 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 operations

 

 

26,520

 

 

5,448

 

 

224

 

 

16

 

 

170

 

 

32,378

 

Loans charged off

 

 

(26,783)

 

 

(1,298)

 

 

 —

 

 

(89)

 

 

(1)

 

 

(28,171)

 

Recoveries on charged off loans

 

 

1,138

 

 

169

 

 

 —

 

 

84

 

 

 —

 

 

1,391

 

Balance, end of period

 

$

20,720

 

$

23,302

 

$

6,288

 

$

325

 

$

378

 

$

51,013

 

 

 

The non-covered loan portfolio was distributed by portfolio segment and impairment methodology as shown below (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

    

 

 

    

Construction and

    

 

 

    

 

 

    

 

 

 

June 30, 2017

 

Industrial

 

Real Estate

 

Land Development

 

Consumer

 

Broker-Dealer

 

Total

 

Loans individually evaluated for impairment

 

$

9,718

 

$

10,984

 

$

632

 

$

171

 

$

 —

 

$

21,505

 

Loans collectively evaluated for impairment

 

 

1,733,467

 

 

2,923,537

 

 

860,117

 

 

42,381

 

 

492,859

 

 

6,052,361

 

PCI Loans

 

 

7,120

 

 

34,678

 

 

2,333

 

 

214

 

 

 —

 

 

44,345

 

 

 

$

1,750,305

 

$

2,969,199

 

$

863,082

 

$

42,766

 

$

492,859

 

$

6,118,211

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

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

 

 

28


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

The allowance for non-covered loan losses was distributed by portfolio segment and impairment methodology as shown below (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

   

 

 

   

Construction and

   

 

 

   

 

 

   

 

 

 

June 30, 2017

 

Industrial

 

Real Estate

 

Land Development

 

Consumer

 

Broker-Dealer

 

Total

 

Loans individually evaluated for impairment

 

$

750

 

$

 3

 

$

106

 

$

 —

 

$

 —

 

$

859

 

Loans collectively evaluated for impairment

 

 

21,018

 

 

26,212

 

 

7,236

 

 

422

 

 

471

 

 

55,359

 

PCI Loans

 

 

66

 

 

2,519

 

 

303

 

 

102

 

 

 —

 

 

2,990

 

 

 

$

21,834

 

$

28,734

 

$

7,645

 

$

524

 

$

471

 

$

59,208

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

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 liabilities 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 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. At June 30, 2017, the Bank has recorded a related “true-up” payment accrual of $15.9 million based on the current estimate of aggregate realized losses on covered assets over the life of the loss-share agreements.

 

Covered Loans and Allowance for Covered Loan Losses

 

Loans acquired in the FNB Transaction that are subject to a loss-share agreement are referred to as “covered loans” and reported separately in the consolidated balance sheets. Covered loans are reported exclusive of the cash flow reimbursements that may be received from the FDIC.

 

29


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

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).

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2017

    

2016

 

Commercial and industrial

    

$

1,649

 

$

2,697

 

Real estate

 

 

199,845

 

 

244,469

 

Construction and land development

 

 

5,742

 

 

8,961

 

 

 

 

207,236

 

 

256,127

 

Allowance for covered loans

 

 

(1,359)

 

 

(413)

 

Total covered loans, net of allowance

 

$

205,877

 

$

255,714

 

 

The following table presents the carrying value and the outstanding contractual balance of covered PCI loans (in thousands).

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

 

2017

    

2016

 

Carrying amount

    

$

99,595

 

$

133,754

 

Outstanding balance

 

 

208,689

 

 

266,098

 

 

Changes in the accretable yield for covered PCI loans were as follows (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Balance, beginning of period

    

$

142,466

 

$

169,133

 

$

143,731

 

$

176,719

 

Reclassifications from nonaccretable difference, net(1)

 

 

11,618

 

 

8,810

 

 

23,024

 

 

18,443

 

Transfer of loans to covered OREO(2)

 

 

(662)

 

 

(62)

 

 

(780)

 

 

(171)

 

Accretion

 

 

(25,115)

 

 

(20,277)

 

 

(37,668)

 

 

(37,387)

 

Balance, end of period

 

$

128,307

 

$

157,604

 

$

128,307

 

$

157,604

 


(1)

Reclassifications from nonaccretable difference are primarily due to net increases in expected cash flows in the quarterly recasts, but may also include the reclassification and immediate income recognition of nonaccretable difference due to the favorable resolution of loans accounted for individually. Reclassifications to nonaccretable difference occur when accruing loans are moved to non-accrual and expected cash flows are no longer predictable and the accretable yield is eliminated.

(2)

Transfer of loans to covered OREO is the difference between the value removed from the pool and the expected cash flows for the loan.

 

The remaining nonaccretable difference for covered PCI loans was $58.6 million and $94.5 million at June 30, 2017 and December 31, 2016, respectively. During the three and six months ended June 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.

30


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

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

 

June 30, 2017

 

Principal Balance

 

No Allowance

 

Allowance

 

Investment

 

Allowance

 

PCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

$

4,498

 

$

 —

 

$

412

 

$

412

 

$

28

 

Unsecured

 

 

6,562

 

 

 —

 

 

169

 

 

169

 

 

10

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

97,991

 

 

3,339

 

 

27,182

 

 

30,521

 

 

652

 

Secured by residential properties

 

 

133,871

 

 

66,016

 

 

23

 

 

66,039

 

 

 5

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

698

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 

18,240

 

 

1,404

 

 

1,050

 

 

2,454

 

 

626

 

 

 

 

261,860

 

 

70,759

 

 

28,836

 

 

99,595

 

 

1,321

 

Non-PCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

 

93

 

 

96

 

 

 —

 

 

96

 

 

 —

 

Unsecured

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Secured by residential properties

 

 

4,146

 

 

3,400

 

 

 —

 

 

3,400

 

 

 —

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 

19

 

 

14

 

 

 —

 

 

14

 

 

 —

 

 

 

 

4,258

 

 

3,510

 

 

 —

 

 

3,510

 

 

 —

 

 

 

$

266,118

 

$

74,269

 

$

28,836

 

$

103,105

 

$

1,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

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

 

 

31


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Average investment in covered impaired loans is summarized by class in the following table (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

Commercial and industrial:

    

 

 

    

 

 

    

 

 

    

 

 

 

Secured

 

$

644

 

$

4,497

 

$

887

 

$

4,783

 

Unsecured

 

 

171

 

 

1,606

 

 

234

 

 

1,601

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

37,752

 

 

87,157

 

 

41,734

 

 

91,587

 

Secured by residential properties

 

 

71,734

 

 

88,493

 

 

73,689

 

 

92,354

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

343

 

 

 —

 

 

331

 

Commercial construction loans and land development

 

 

2,537

 

 

12,664

 

 

3,846

 

 

16,209

 

 

 

$

112,838

 

$

194,760

 

$

120,390

 

$

206,865

 

 

Covered non-accrual loans are summarized by class in the following table (in thousands).

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

 

2017

    

2016

 

Commercial and industrial:

    

 

    

    

 

    

 

Secured

 

$

96

 

$

52

 

Unsecured

 

 

 —

 

 

 —

 

Real estate:

 

 

 

 

 

 

 

Secured by commercial properties

 

 

 —

 

 

730

 

Secured by residential properties

 

 

2,904

 

 

3,035

 

Construction and land development:

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 

14

 

 

19

 

 

 

$

3,014

 

$

3,836

 

 

At June 30, 2017, there were no covered PCI loans included within non-accrual loans for which discount accretion has been suspended. At December 31, 2016, covered non-accrual loans included covered PCI loans of $0.4 million, for which discount accretion has been suspended because the extent and timing of cash flows from these covered PCI loans can no longer be reasonably estimated.

 

Interest income, including recoveries and cash payments, recorded on covered impaired loans was $0.2 million and $0.3 million during the three and six months ended June 30, 2017, respectively, while interest income recorded on covered impaired loans during the three and six months ended June 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 six months ended June 30, 2017 and 2016. Pooled Loans are not in the scope of the disclosure requirements for TDRs. At June 30, 2017 and December 31, 2016, the Bank had nominal unadvanced commitments to borrowers whose loans have been restructured in TDRs.

 

There were no TDRs granted during the twelve months preceding June 30, 2017 and 2016, respectively, for which a payment was at least 30 days past due.

 

32


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

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

 

(NonPCI) Past Due

 

June 30, 2017

 

3059 Days

 

6089 Days

 

90 Days or More

 

Past Due Loans

 

Loans

 

Loans

 

Loans

 

90 Days or More

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

$

 —

 

$

 —

 

$

96

 

$

96

 

$

972

 

$

412

 

$

1,480

 

$

 —

 

Unsecured

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

169

 

 

169

 

 

 —

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

14,541

 

 

30,521

 

 

45,062

 

 

 —

 

Secured by residential properties

 

 

1,600

 

 

796

 

 

944

 

 

3,340

 

 

85,404

 

 

66,039

 

 

154,783

 

 

38

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,288

 

 

2,454

 

 

5,742

 

 

 —

 

 

 

$

1,600

 

$

796

 

$

1,040

 

$

3,436

 

$

104,205

 

$

99,595

 

$

207,236

 

$

38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Accruing Loans

 

 

 

Loans Past Due

 

Loans Past Due

 

Loans Past Due

 

Total

 

Current

 

PCI

 

Total

 

(NonPCI) Past Due

 

December 31, 2016

 

3059 Days

 

6089 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).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

    

Pass

    

Special Mention

    

Substandard

    

PCI

    

Total

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

$

507

 

$

 —

 

$

561

 

$

412

 

$

1,480

 

Unsecured

 

 

 —

 

 

 —

 

 

 —

 

 

169

 

 

169

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

13,550

 

 

 —

 

 

991

 

 

30,521

 

 

45,062

 

Secured by residential properties

 

 

81,821

 

 

445

 

 

6,478

 

 

66,039

 

 

154,783

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 

2,214

 

 

 —

 

 

1,074

 

 

2,454

 

 

5,742

 

 

 

$

98,092

 

$

445

 

$

9,104

 

$

99,595

 

$

207,236

 

 

 

33


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

Changes in the allowance for covered loan losses, distributed by portfolio segment, are shown below (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

    

 

 

    

Construction and

    

 

 

 

Three months ended  June 30, 2017

 

Industrial

 

Real Estate

 

Land Development

 

Total

 

Balance, beginning of period

 

$

16

 

$

736

 

$

 1

 

$

753

 

Provision charged to operations

 

 

28

 

 

309

 

 

623

 

 

960

 

Loans charged off

 

 

 —

 

 

(362)

 

 

 —

 

 

(362)

 

Recoveries on charged off loans

 

 

 3

 

 

 1

 

 

 4

 

 

 8

 

Balance, end of period

 

$

47

 

$

684

 

$

628

 

$

1,359

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

   

 

 

   

Construction and

   

 

 

 

Six months ended June 30, 2017

 

Industrial

 

Real Estate

 

Land Development

 

Total

 

Balance, beginning of period

 

$

35

 

$

378

 

$

 —

 

$

413

 

Provision charged to operations

 

 

12

 

 

822

 

 

622

 

 

1,456

 

Loans charged off

 

 

(6)

 

 

(521)

 

 

 —

 

 

(527)

 

Recoveries on charged off loans

 

 

 6

 

 

 5

 

 

 6

 

 

17

 

Balance, end of period

 

$

47

 

$

684

 

$

628

 

$

1,359

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

    

 

 

    

Construction and

    

 

 

 

Three months ended  June 30, 2016

 

Industrial

 

Real Estate

 

Land Development

 

Total

 

Balance, beginning of period

 

$

438

 

$

742

 

$

37

 

$

1,217

 

Provision charged to (recapture from) operations

 

 

(383)

 

 

674

 

 

(108)

 

 

183

 

Loans charged off

 

 

 —

 

 

(26)

 

 

(30)

 

 

(56)

 

Recoveries on charged off loans

 

 

 —

 

 

10

 

 

101

 

 

111

 

Balance, end of period

 

$

55

 

$

1,400

 

$

 —

 

$

1,455

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

    

 

 

    

Construction and

    

 

 

 

Six months ended June 30, 2016

 

Industrial

 

Real Estate

 

Land Development

 

Total

 

Balance, beginning of period

 

$

758

 

$

774

 

$

 —

 

$

1,532

 

Provision charged to (recapture from) operations

 

 

(697)

 

 

651

 

 

(49)

 

 

(95)

 

Loans charged off

 

 

(6)

 

 

(42)

 

 

(52)

 

 

(100)

 

Recoveries on charged off loans

 

 

 —

 

 

17

 

 

101

 

 

118

 

Balance, end of period

 

$

55

 

$

1,400

 

$

 —

 

$

1,455

 

 

34


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

The covered loan portfolio was distributed by portfolio segment and impairment methodology as shown below (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

    

 

 

    

Construction and

    

 

 

 

June 30, 2017

 

Industrial

 

Real Estate

 

Land Development

 

Total

 

Loans individually evaluated for impairment

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Loans collectively evaluated for impairment

 

 

1,068

 

 

103,285

 

 

3,288

 

 

107,641

 

PCI Loans

 

 

581

 

 

96,560

 

 

2,454

 

 

99,595

 

 

 

$

1,649

 

$

199,845

 

$

5,742

 

$

207,236

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

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

    

 

 

 

June 30, 2017

 

Industrial

 

Real Estate

 

Land Development

 

Total

 

Loans individually evaluated for impairment

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Loans collectively evaluated for impairment

 

 

 9

 

 

27

 

 

 2

 

 

38

 

PCI Loans

 

 

38

 

 

657

 

 

626

 

 

1,321

 

 

 

$

47

 

$

684

 

$

628

 

$

1,359

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

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 June 30,

 

Six Months Ended June 30,

 

 

    

2017

 

2016

 

2017

 

2016

 

Balance, beginning of period

 

$

45,374

 

$

78,890

 

$

51,642

 

$

99,090

 

Additions to covered OREO

 

 

3,404

 

 

4,739

 

 

5,127

 

 

9,281

 

Dispositions of covered OREO

 

 

(5,531)

 

 

(14,028)

 

 

(12,330)

 

 

(29,005)

 

Valuation adjustments in the period

 

 

(943)

 

 

(1,967)

 

 

(2,135)

 

 

(11,732)

 

Balance, end of period

 

$

42,304

 

$

67,634

 

$

42,304

 

$

67,634

 

 

During the three and six months ended June 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.

 

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

35


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

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 June 30,

 

Six Months Ended June 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

Balance, beginning of period

 

$

47,940

 

$

80,522

 

$

71,313

 

$

91,648

 

FDIC Indemnification Asset accretion (amortization)

 

 

(4,236)

 

 

69

 

 

(8,185)

 

 

156

 

Transfers to due from FDIC and other

 

 

(3,400)

 

 

(6,131)

 

 

(22,824)

 

 

(17,344)

 

Balance, end of period

 

$

40,304

 

$

74,460

 

$

40,304

 

$

74,460

 

 

As of June 30, 2017, the Bank had billed and collected $143.7 million from the FDIC, which represented reimbursable covered losses and expenses through March 31, 2017.

 

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 June 30,

 

Six Months Ended June 30,

 

 

2017

 

2016

 

2017

 

2016

 

Balance, beginning of period

$

45,573

 

$

39,863

 

$

61,968

 

$

52,285

 

Additions

 

1,266

 

 

8,254

 

 

2,490

 

 

9,893

 

Sales

 

 —

 

 

(7,586)

 

 

(17,499)

 

 

(7,586)

 

Changes in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

Due to changes in model inputs or assumptions (1)

 

(2,064)

 

 

(5,494)

 

 

(1,207)

 

 

(18,336)

 

Due to customer payoffs

 

(1,195)

 

 

(1,546)

 

 

(2,172)

 

 

(2,765)

 

Balance, end of period

$

43,580

 

$

33,491

 

$

43,580

 

$

33,491

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

 

 

 

 

 

 

2017

 

2016

 

 

 

 

 

 

 

Mortgage loans serviced for others

$

3,761,484

 

$

5,480,943

 

 

 

 

 

 

 

MSR asset as a percentage of serviced mortgage loans

 

1.16

%  

 

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.

 

The key assumptions used in measuring the fair value of the Company’s MSR asset were as follows.

 

 

 

 

 

 

 

 

 

 

    

June 30,

 

 

December 31,

 

 

 

 

2017

 

    

2016

 

 

Weighted average constant prepayment rate

 

10.92

%  

 

10.47

%

 

Weighted average discount rate

 

11.14

%  

 

10.95

%

 

Weighted average life (in years)

 

6.8

 

 

6.9

 

 

 

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

A sensitivity analysis of the fair value of the Company’s MSR asset to certain key assumptions is presented in the following table (in thousands).

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2017

    

2016

 

Constant prepayment rate:

 

 

 

 

 

 

 

Impact of 10% adverse change

 

$

(1,648)

 

$

(2,297)

 

Impact of 20% adverse change

 

 

(3,222)

 

 

(4,471)

 

Discount rate:

 

 

 

 

 

 

 

Impact of 10% adverse change

 

 

(1,701)

 

 

(2,539)

 

Impact of 20% adverse change

 

 

(3,269)

 

 

(4,882)

 

 

This sensitivity analysis presents the effect of hypothetical changes in key assumptions on the fair value of the MSR asset. The effect of such hypothetical change in assumptions generally cannot be extrapolated because the relationship of the change in one key assumption to the change in the fair value of the MSR asset is not linear. In addition, in the analysis, the impact of an adverse change in one key assumption is calculated independent of any impact on other assumptions. In reality, changes in one assumption may change another assumption.

 

Contractually specified servicing fees, late fees and ancillary fees earned of $5.0 million and $5.7 million during the three months ended June 30, 2017 and 2016, respectively, and $11.5 million and $11.7 million during the six months ended June 30, 2017 and 2016, respectively, were included in other noninterest income within the consolidated statements of operations.

 

8. Deposits

 

Deposits are summarized as follows (in thousands).

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2017

    

2016

 

Noninterest-bearing demand

 

$

2,251,208

 

$

2,199,483

 

Interest-bearing:

 

 

 

 

 

 

 

NOW accounts

 

 

1,049,901

 

 

1,252,832

 

Money market

 

 

2,156,458

 

 

1,626,218

 

Brokered - money market

 

 

125,601

 

 

125,272

 

Demand

 

 

394,313

 

 

384,847

 

Savings

 

 

226,108

 

 

279,911

 

Time

 

 

1,216,037

 

 

1,145,859

 

Brokered - time

 

 

154,996

 

 

49,389

 

 

 

$

7,574,622

 

$

7,063,811

 

 

 

9. Short-term Borrowings

 

Short-term borrowings are summarized as follows (in thousands).

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2017

    

2016

 

Federal funds purchased

 

$

97,475

 

$

87,125

 

Securities sold under agreements to repurchase

 

 

416,594

 

 

195,164

 

Federal Home Loan Bank

 

 

800,000

 

 

1,000,000

 

Short-term bank loans

 

 

201,000

 

 

135,000

 

 

 

$

1,515,069

 

$

1,417,289

 

 

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

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

agreements to repurchase with both customers and other broker-dealers. Securities involved in these transactions are held by the Bank, the Hilltop Broker-Dealers or a third-party dealer.

 

Information concerning federal funds purchased and securities sold under agreements to repurchase is shown in the following tables (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

    

Six Months Ended June 30,

 

 

 

2017

 

2016

 

Average balance during the period

 

$

500,830

 

$

363,665

 

Average interest rate during the period

 

 

0.86

%  

 

0.53

%

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2017

    

2016

 

Average interest rate at end of period

 

 

0.83

%  

 

0.42

%

Securities underlying the agreements at end of period:

 

 

 

 

 

 

 

Carrying value

 

$

420,387

 

$

209,877

 

Estimated fair value

 

$

431,891

 

$

206,641

 

 

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. Other information regarding FHLB short-term borrowings is shown in the following tables (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

 

 

2017

 

2016

 

Average balance during the period

 

$

355,249

 

$

231,456

 

Average interest rate during the period

 

 

0.92

%

 

0.46

%

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

 

December 31,

 

 

 

 

2017

 

 

2016

 

Average interest rate at end of period

 

 

1.20

%

 

0.55

%

 

The Hilltop Broker-Dealers use short-term bank loans periodically to finance securities owned, margin loans to customers and correspondents, and underwriting activities. Interest on the borrowings varies with the federal funds rate. The weighted average interest rate on the borrowings at June 30, 2017 and December 31, 2016 was 2.07% and 1.59%, respectively.

 

10. Notes Payable

 

Notes payable consisted of the following (in thousands).

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

    

2017

    

2016

Senior Notes due April 2025, net of discount of $1,618 and $1,689, respectively

 

$

148,382

 

$

148,311

FHLB notes, net of premium of $506 and $627, respectively, with maturities ranging from October 2017 to June 2030

 

 

99,802

 

 

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 line of credit due January 2018

 

 

18,073

 

 

16,505

Mutual line of credit due October 2017

 

 

3,526

 

 

 —

 

 

$

300,283

 

$

317,912

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

11. 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 29.1% and 36.8% during the three months ended June 30, 2017 and 2016, respectively, and 31.4% and 35.4% during the six months ended June 30, 2017 and 2016, respectively. The effective tax rates during the three and six months ended June 30, 2017 were lower than the statutory rate primarily due to a nontaxable increase to other noninterest income recorded as a part of 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 six months ended June 30, 2016 were slightly lower than the statutory rate primarily due to the recognition of excess tax benefits on share-based payment awards.

 

12. Commitments and Contingencies

 

Legal Matters

 

The Company is subject to loss contingencies related to litigation, claims, investigations and legal and administrative cases and proceedings arising in the ordinary course of business. The Company evaluates these contingencies based on information currently available, including advice of counsel. The Company establishes accruals for those matters when a loss contingency is considered probable and the related amount is reasonably estimable. Any accruals are periodically reviewed and may be adjusted as circumstances change. A portion of the Company’s exposure with respect to loss contingencies may be offset by applicable insurance coverage. In determining the amounts of any accruals or estimates of possible loss contingencies, the Company does not take into account the availability of insurance coverage, other than that provided by reinsurers in the insurance segment.

 

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. On July 20, 2017, certain Petitioners filed a notice to appeal the Court’s Memorandum Opinion. The Company intends to vigorously defend this matter.

 

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

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 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

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

claims, and the mortgage origination segment’s history of successfully curing defects identified in claim requests. While the mortgage origination segment’s sales contracts typically include borrower early payment default repurchase provisions, these provisions have not been a primary driver of claims to date, and therefore, are not a primary factor considered in the calculation of this reserve.

 

At June 30, 2017 and December 31, 2016, the mortgage origination segment’s indemnification liability reserve totaled $22.4 million and $18.2 million, respectively. The provision for indemnification losses was $1.1 million and $1.2 million during the three months ended June 30, 2017 and 2016, respectively, and $2.0 million and $2.1 million during the six months ended June 30, 2017 and 2016, respectively.

 

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 June 30,

 

Six Months Ended June 30,

 

 

    

2017

    

2016

 

2017

    

2016

 

Balance, beginning of period

 

$

39,245

 

$

54,202

 

$

40,669

 

$

57,298

 

Claims made

 

 

8,650

 

 

5,006

 

 

17,029

 

 

9,554

 

Claims resolved with no payment

 

 

(9,991)

 

 

(4,502)

 

 

(18,088)

 

 

(10,617)

 

Repurchases

 

 

(226)

 

 

(714)

 

 

(1,688)

 

 

(1,871)

 

Indemnification payments

 

 

(5,124)

 

 

(116)

 

 

(5,368)

 

 

(488)

 

Balance, end of period

 

$

32,554

 

$

53,876

 

$

32,554

 

$

53,876

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indemnification Liability Reserve Activity

 

 

    

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2017

    

2016

    

2017

    

2016

 

Balance, beginning of period

 

$

18,952

 

$

17,147

 

$

18,239

 

$

16,640

 

Additions for new sales

 

 

1,145

 

 

1,245

 

 

1,992

 

 

2,123

 

Repurchases

 

 

(23)

 

 

(70)

 

 

(125)

 

 

(182)

 

Early payment defaults

 

 

(60)

 

 

(43)

 

 

(129)

 

 

(133)

 

Indemnification payments

 

 

(671)

 

 

(63)

 

 

(713)

 

 

(232)

 

Change in reserves for loans sold in prior years

 

 

3,024

 

 

 —

 

 

3,103

 

 

 —

 

Balance, end of period

 

$

22,367

 

$

18,216

 

$

22,367

 

$

18,216

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

 

 

 

 

 

 

    

2017

 

2016

  

 

 

 

 

 

 

Reserve for Indemnification Liability:

 

 

 

 

 

 

 

 

 

 

 

 

 

Specific claims

 

$

1,039

 

$

1,661

 

 

 

 

 

 

 

Incurred but not reported claims

 

 

21,328

 

 

16,578

 

 

 

 

 

 

 

Total

 

$

22,367

 

$

18,239

 

 

 

 

 

 

 

 

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:

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

(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 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 $15.9 million at June 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 June 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 June 30, 2017, the Bank had billed $179.6  million of covered net losses to the FDIC, of which 80%, or $143.7 million, were reimbursable under the loss-share agreements. As of June 30, 2017, the Bank had received aggregate reimbursements of $143.7 million from the FDIC, which represented reimbursable covered losses and expenses through March 31, 2017.

 

13. Financial Instruments with Off-Balance Sheet Risk

 

The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit that involve varying degrees of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received. The contract amounts of those instruments reflect the extent of involvement (and therefore the exposure to credit loss) the Bank has in particular classes of financial instruments.

 

Commitments to extend credit are agreements to lend to a customer provided that the terms established in the contract are met. Commitments generally have fixed expiration dates and may require payment of fees. Because some commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.

 

In the aggregate, the Bank had outstanding unused commitments to extend credit of $2.0 billion at June 30, 2017 and outstanding financial and performance standby letters of credit of $33.9 million at June 30, 2017.

 

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.

 

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

42


 

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

customers or for the accounts 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.

 

14. Stock-Based Compensation

 

Pursuant to the Hilltop Holdings Inc. 2012 Equity Incentive Plan (the “2012 Plan”), the Company may grant nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance awards, dividend equivalent rights and other awards to employees of the Company, its subsidiaries and outside directors of the Company. In the aggregate, 4,000,000 shares of common stock may be delivered pursuant to awards granted under the 2012 Plan. At June 30, 2017, 1,578,148 shares of common stock remained available for issuance pursuant to the 2012 Plan, including shares that may be delivered pursuant to outstanding awards. Compensation expense related to the 2012 Plan was $3.2 million and $2.7 million during the three months ended June 30, 2017 and 2016, respectively, and $5.9 million and $5.0 million during the six months ended June 30, 2017 and 2016, respectively.

 

During the six months ended June 30, 2017 and 2016, Hilltop granted 7,513 and 11,343 shares of common stock, respectively, pursuant to the 2012 Plan to certain non-employee members of the Company’s Board of Directors for services rendered to the Company.

 

Restricted Stock Awards and RSUs

 

The following table summarizes information about nonvested Restricted Stock Award and RSU activity for the six months ended June 30, 2017 (shares in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 -

 

$

 -

 

429

 

$

27.11

 

Vested/Released

 

 -

 

$

 -

 

(315)

 

$

23.63

 

Forfeited

 

 -

 

$

 -

 

(50)

 

$

23.56

Balance, June 30, 2017

 

 4

 

$

19.95

 

1,520

 

$

20.97

 

Vested/Released Restricted Stock Awards and RSUs include an aggregate of 76,986 shares withheld to satisfy employee statutory tax obligations during the six months ended June 30, 2017. Pursuant to certain RSU award agreements, an aggregate of 1,000 vested RSUs at June 30, 2017 require deferral of the settlement in shares and statutory tax obligations to a future date.

 

At June 30, 2017, unrecognized compensation expense related to outstanding Restricted Stock Awards of $9 thousand is expected to be recognized over a weighted average period of 0.14 years.

 

During the six months ended June 30, 2017, the Compensation Committee of the Board of Directors of the Company awarded certain executives and key employees an aggregate of 411,922 RSUs pursuant to the 2012 Plan. At June 30, 2017, 321,326 of these outstanding RSUs are subject to time-based vesting conditions and generally cliff vest on the third anniversary of the grant date, and 89,439 of these outstanding RSUs will cliff vest based upon the achievement of certain performance goals over a three-year period.

 

At June 30, 2017, in the aggregate, 1,215,974 of the outstanding RSUs are subject to time-based vesting conditions and generally cliff vest on the third anniversary of the grant date, and 303,800 outstanding RSUs cliff vest based upon the achievement of certain performance goals over a three-year period. At June 30, 2017, unrecognized compensation expense related to outstanding RSUs of $19.3 million is expected to be recognized over a weighted average period of 1.65 years.  

43


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

15. Regulatory Matters

 

Banking and Hilltop

 

PlainsCapital 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. 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 implemented 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 is 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 June 30, 2017, as well as the fully phased-in requirements through 2019.

 

The following table shows PlainsCapital’s and Hilltop’s actual capital amounts and ratios in accordance with Basel III compared to the regulatory minimum capital requirements including conservation buffer 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 June 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital (to average assets):

 

 

 

 

 

 

 

 

 

 

 

 

PlainsCapital

 

$

1,118,299

 

12.11

%  

4.0

%  

4.0

%  

5.0

%

Hilltop

 

 

1,666,286

 

13.07

%  

4.0

%  

4.0

%  

N/A

 

Common equity Tier 1 capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

PlainsCapital

 

 

1,118,299

 

13.95

%  

5.75

%  

7.0

%  

6.5

%

Hilltop

 

 

1,616,937

 

17.53

%  

5.75

%  

7.0

%  

N/A

 

Tier 1 capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

PlainsCapital

 

 

1,118,299

 

13.95

%  

7.25

%  

8.5

%  

8.0

%

Hilltop

 

 

1,666,286

 

18.07

%  

7.25

%  

8.5

%  

N/A

 

Total capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

PlainsCapital

 

 

1,180,356

 

14.72

%  

9.25

%  

10.5

%  

10.0

%

Hilltop

 

 

1,713,164

 

18.57

%  

9.25

%  

10.5

%  

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

44


 

Table of Contents

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

 

 

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 1/15 of aggregate indebtedness.

 

At June 30, 2017, the net capital position of each of the Hilltop Broker-Dealers was as follows (in thousands). 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HTS

 

 

 

Hilltop

 

Independent

 

 

    

Securities

    

Network

 

Net capital

 

$

168,071

 

$

3,302

 

Less: required net capital

 

 

10,287

 

 

250

 

Excess net capital

 

$

157,784

 

$

3,052

 

 

 

 

 

 

 

 

 

Net capital as a percentage of aggregate debit items

 

 

32.7

%

 

 

 

Net capital in excess of 5% aggregate debit items

 

$

142,354

 

 

 

 

 

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 June 30, 2017 and December 31, 2016, Hilltop Securities held cash of $167.6 million and $181.0 million, respectively, segregated in special reserve bank accounts for the benefit of customers. Hilltop Securities was not required to segregate cash and securities in special reserve accounts for the benefit of proprietary accounts of introducing broker-dealers at June 30, 2017 and December 31, 2016. The fair values of any segregated assets included in special reserve accounts were determined using Level 1 inputs.

 

45


 

Table of Contents

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 minimum net worth and liquidity requirements. As of June 30, 2017, PrimeLending and its subsidiaries’ net worth and liquidity exceeded the amounts required by both HUD and GNMA, as applicable.

 

Insurance

 

The statutory financial statements of the Company's insurance subsidiaries, which are domiciled in the State 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).

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2017

    

2016

 

Capital and surplus:

 

 

 

 

 

 

 

National Lloyds Insurance Company

 

$

91,179

 

$

131,328

 

American Summit Insurance Company

 

 

23,139

 

 

30,462

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

    

2017

    

2016

    

2017

    

2016

    

Statutory net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

National Lloyds Insurance Company

 

$

(7,152)

 

$

(7,196)

 

$

(6,516)

 

$

(3,639)

 

American Summit Insurance Company

 

 

(309)

 

 

234

 

 

523

 

 

1,086

 

 

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 June 30, 2017, the Company's insurance subsidiaries had statutory surplus in excess of 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. At June 30, 2017, the Company's insurance subsidiaries' RBC ratio exceeded the level at which regulatory action would be required.

 

16. Stockholders’ Equity

 

Dividend Declaration

 

On July 27, 2017, the Company announced that its board of directors declared a quarterly cash dividend of $0.06 per common share, payable on August 31, 2017, to all common stockholders of record as of the close of business on August 15, 2017.

 

Stock Repurchase Program

 

The Company’s board of directors reauthorized the stock repurchase program originally approved during the second quarter of 2016 through January 2018, under which the Company may repurchase, in the aggregate, up to $50.0 million

46


 

Table of Contents

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 extent to 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. During the six months ended June 30, 2017, the Company paid $16.0 million to repurchase an aggregate of 605,431 shares of common stock at an average price of $26.42 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 accounting treatment and policy regarding stock repurchases is discussed in detail in Note 1 to the consolidated financial statements included in the Company’s 2016 Form 10-K.

 

17. 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 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”). 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.

 

Non-Hedging Derivative Instruments and the Fair Value Option

 

As discussed in Note 3 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, 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 increased $8.8 million during the three months ended June 30, 2017, compared with a decrease of $0.7 million during the three months ended June 30, 2016, while the fair values of PrimeLending’s derivatives increased $9.5 million and $11.8 million during the six months ended June 30, 2017 and 2016, respectively. 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 3 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 increased $9.9 million and $2.6 million during the three months ended June 30, 2017 and 2016, respectively, while the fair values of the Bank’s derivatives increased $15 thousand during the three months ended June 30, 2017, compared with a decrease of $0.1 million during the three months ended June 30, 2016. The fair values of the Hilltop Broker-Dealers’ derivatives increased $16.2 million and $9.5 million during the six months ended June 30, 2017 and 2016, respectively, while the fair values of the Bank’s derivatives increased $0.1 million during the six months ended June 30, 2017, compared with a decrease of $0.6 million during the six months ended June 30, 2016. The changes in fair value were recorded as a component of other noninterest income.

 

47


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Derivative positions are presented in the following table (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

December 31, 2016

 

    

Notional

    

Estimated

    

Notional

    

Estimated

 

 

Amount

 

Fair Value

 

Amount

 

Fair Value

Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

IRLCs

 

$

1,506,302

 

$

33,945

 

$

944,550

 

$

23,269

Customer-based written options

 

 

7,355

 

 

45

 

 

 —

 

 

 —

Customer-based purchased options

 

 

7,355

 

 

(45)

 

 

 —

 

 

 —

Commitments to purchase MBSs

 

 

3,907,444

 

 

5,400

 

 

3,616,922

 

 

(1,155)

Commitments to sell MBSs

 

 

6,580,127

 

 

12,881

 

 

5,609,250

 

 

(532)

Interest rate swaps and swaptions

 

 

32,032

 

 

(144)

 

 

32,452

 

 

(283)

U.S. Treasury bond futures and options (1)

 

 

187,000

 

 

 —

 

 

297,000

 

 

 —


(1)    Changes in the fair value of these contracts are settled daily with PrimeLending’s counterparty.

 

PrimeLending had cash collateral advances totaling $3.7 million to offset net liability derivative positions on its commitments to sell MBSs at June 30, 2017, compared to a payable of $19.1 million on its net liability derivative position on its commitments to sell MBSs at December 31, 2016. In addition, PrimeLending advanced cash collateral totaling $3.2 million on its U.S. Treasury bond futures and options at both June 30, 2017 and December 31, 2016. These amounts are included in other assets within the consolidated balance sheets.

 

18. 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

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities borrowed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

$

1,459,990

 

$

 —

 

$

1,459,990

 

$

(1,409,709)

 

$

 —

 

$

50,281

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate options:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer counterparties

 

 

45

 

 

 —

 

 

45

 

 

 —

 

 

 —

 

 

45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reverse repurchase agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

 

125,188

 

 

 —

 

 

125,188

 

 

(124,426)

 

 

 —

 

 

762

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward MBS derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

 

19,232

 

 

(280)

 

 

18,952

 

 

(11,638)

 

 

 —

 

 

7,314

 

 

$

1,604,455

 

$

(280)

 

$

1,604,175

 

$

(1,545,773)

 

$

 —

 

$

58,402

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities borrowed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

$

1,436,069

 

$

 —

 

$

1,436,069

 

$

(1,385,664)

 

$

 —

 

$

50,405

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reverse repurchase agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

 

89,430

 

 

 —

 

 

89,430

 

 

(89,369)

 

 

 —

 

 

61

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward MBS derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

 

21,366

 

 

(3,893)

 

 

17,473

 

 

(9,012)

 

 

 —

 

 

8,461

 

 

$

1,546,865

 

$

(3,893)

 

$

1,542,972

 

$

(1,484,045)

 

$

 —

 

$

58,927

 

48


 

Table of Contents

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

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities loaned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

$

1,312,985

 

$

 —

 

$

1,312,985

 

$

(1,265,212)

 

$

 —

 

$

47,773

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate options:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

 

45

 

 

 —

 

 

45

 

 

 —

 

 

 —

 

 

45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps and swaptions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

 

162

 

 

(18)

 

 

144

 

 

(1,186)

 

 

 —

 

 

(1,042)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

 

266,700

 

 

 —

 

 

266,700

 

 

(266,700)

 

 

 —

 

 

 —

Customer counterparties

 

 

149,894

 

 

 —

 

 

149,894

 

 

(149,894)

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward MBS derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

 

671

 

 

 —

 

 

671

 

 

(671)

 

 

 —

 

 

 —

 

 

$

1,730,457

 

$

(18)

 

$

1,730,439

 

$

(1,683,663)

 

$

 —

 

$

46,776

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 within one to thirty days from the transaction 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


 

Table of Contents

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 no repurchase-to-maturity transactions outstanding at both June 30, 2017 and December 31, 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining Contractual Maturities

 

 

Overnight and

 

 

 

 

 

Greater Than

 

 

 

June 30, 2017

 

Continuous

 

Up to 30 Days

 

30-90 Days

 

90 Days

 

Total

Repurchase agreement transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and agency securities

 

$

199,803

 

$

 —

 

$

 —

 

$

 —

 

$

199,803

Asset-backed securities

 

 

 —

 

 

216,791

 

 

 —

 

 

 —

 

 

216,791

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities lending transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

 

 

8,586

 

 

 —

 

 

 —

 

 

 —

 

 

8,586

Equity securities

 

 

1,304,399

 

 

 —

 

 

 —

 

 

 —

 

 

1,304,399

 Total

 

$

1,512,788

 

$

216,791

 

$

 —

 

$

 —

 

$

1,729,579

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above

 

 

 

 

$

1,729,579

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

Repurchase agreement transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and agency securities

 

$

195,164

 

$

 —

 

$

 —

 

$

 —

 

$

195,164

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities lending transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

 

 

14,816

 

 

 —

 

 

 —

 

 

 —

 

 

14,816

Equity securities

 

 

1,268,860

 

 

 —

 

 

 —

 

 

 —

 

 

1,268,860

 Total

 

$

1,478,840

 

$

 —

 

$

 —

 

$

 —

 

$

1,478,840

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above

 

 

 

 

$

1,478,840

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). 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

    

2017

    

2016

Receivables:

 

 

 

 

 

 

Securities borrowed

 

$

1,459,990

 

$

1,436,069

Securities failed to deliver

 

 

45,933

 

 

33,834

Trades in process of settlement

 

 

32,379

 

 

10,223

Other

 

 

14,223

 

 

17,615

 

 

$

1,552,525

 

$

1,497,741

Payables:

 

 

 

 

 

 

Securities loaned

 

$

1,312,985

 

$

1,283,676

Correspondents

 

 

28,082

 

 

31,040

Securities failed to receive

 

 

50,920

 

 

31,724

Other

 

 

3,327

 

 

688

 

 

$

1,395,314

 

$

1,347,128

 

 

50


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

20. Reserve for Losses and Loss Adjustment Expenses

 

A summary of NLC’s reserve for unpaid losses and LAE, as included in other liabilities within the consolidated balance sheets, is as follows (in thousands).

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2017

    

2016

 

Reserve for unpaid losses and allocated LAE balance, net

 

$

33,608

 

$

25,203

 

Reinsurance recoverables on unpaid losses

 

 

3,249

 

 

9,434

 

Unallocated LAE

 

 

1,309

 

 

1,189

 

Reserve for unpaid losses and LAE balance, gross

 

$

38,166

 

$

35,826

 

 

A summary of claims loss reserve development activity is presented in the following table (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

 

 

 

 

 

Total of

 

 

 

 

 

 

 

 

 

 

 

IBNR Reserves

 

 

 

 

 

 

 

 

 

 

Plus Expected

 

Cumulative

Accident

 

Six Months Ended June 30, 2017

 

Development on

 

Number of

Year

 

Paid

    

Incurred

    

Reported Claims

    

Reported Claims

2012

 

$

112,723

 

$

114,554

 

$

33

 

 

16,675

2013

 

 

110,318

 

 

111,074

 

 

53

 

 

15,736

2014

 

 

82,620

 

 

84,175

 

 

237

 

 

13,172

2015

 

 

84,162

 

 

88,082

 

 

1,842

 

 

14,968

2016

 

 

79,433

 

 

86,448

 

 

4,718

 

 

21,405

2017

 

 

31,551

 

 

49,997

 

 

7,283

 

 

10,546

Total

 

 

500,807

 

$

534,330

 

 

 

 

 

 

 

 

 

85

 

All outstanding reserves prior to 2012, net of reinsurance

 

 

$

33,608

 

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 June 30, 2017, reinsurance receivables had a carrying value of $3.5 million, which is included in other assets within the consolidated balance sheet. There was no allowance for uncollectible accounts at June 30, 2017, based on NLC’s quality requirements.

 

51


 

Table of Contents

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 June 30,

 

Six Months Ended June 30,

 

 

 

2017

 

2016

 

2017

 

2016

 

 

    

Written

    

Earned

    

Written

    

Earned

    

Written

    

Earned

    

Written

    

Earned

 

Premiums from direct business

 

$

37,792

 

$

36,753

 

$

42,675

 

$

40,177

 

$

73,588

 

$

73,952

 

$

81,754

 

$

81,063

 

Reinsurance assumed

 

 

3,358

 

 

2,910

 

 

3,146

 

 

2,714

 

 

6,227

 

 

5,728

 

 

5,825

 

 

5,382

 

Reinsurance ceded

 

 

(2,974)

 

 

(3,643)

 

 

(4,246)

 

 

(4,170)

 

 

(6,187)

 

 

(7,520)

 

 

(7,745)

 

 

(7,991)

 

Net premiums

 

$

38,176

 

$

36,020

 

$

41,575

 

$

38,721

 

$

73,628

 

$

72,160

 

$

79,834

 

$

78,454

 

 

The effects of reinsurance on incurred losses are as follows (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

Loss and LAE incurred

 

$

33,352

 

$

55,461

 

$

55,654

 

$

78,950

 

Reinsurance recoverables

 

 

(168)

 

 

(18,250)

 

 

(770)

 

 

(19,780)

 

Net loss and LAE incurred

 

$

33,184

 

$

37,211

 

$

54,884

 

$

59,170

 

 

Catastrophic coverage

 

At June 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 four layers of protection: $17 million in excess of $8 million retention and/or loss; $25 million in excess of $25 million loss; $25 million in excess of $50 million loss and $50 million in excess of $75 million loss. NLIC and ASIC retain no participation in any of the layers, beyond the first $8 million and $1.5 million, respectively. At June 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.

 

22. Segment and Related Information

 

The Company currently has four 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 function 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, the broker-dealer segment includes the operations of Securities Holdings, the mortgage origination segment is composed of PrimeLending, and the insurance segment is composed of NLC.

 

Corporate includes certain activities not allocated to specific business segments. These activities include holding company financing and investing activities, 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.

 

52


 

Table of Contents

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 June 30, 2017

 

Banking

 

Broker-Dealer

 

Origination

 

Insurance

 

Corporate

 

Eliminations

 

Consolidated

 

Net interest income (expense)

 

$

102,191

 

$

10,349

 

$

996

 

$

602

 

$

(2,288)

 

$

4,126

 

$

115,976

 

Provision for loan losses

 

 

5,405

 

 

448

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

5,853

 

Noninterest income

 

 

25,499

 

 

92,810

 

 

179,637

 

 

38,413

 

 

12,608

 

 

(4,275)

 

 

344,692

 

Noninterest expense

 

 

62,511

 

 

86,901

 

 

161,369

 

 

49,416

 

 

6,298

 

 

(244)

 

 

366,251

 

Income (loss) before income taxes

 

$

59,774

 

$

15,810

 

$

19,264

 

$

(10,401)

 

$

4,022

 

$

95

 

$

88,564

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

 

    

Mortgage

    

 

    

    

 

    

All Other and

    

Hilltop

 

Six Months Ended June 30, 2017

 

Banking

 

Broker-Dealer

 

Origination

 

Insurance

 

Corporate

 

Eliminations

 

Consolidated

 

Net interest income (expense)

 

$

184,274

 

$

18,837

 

$

(885)

 

$

1,119

 

$

(4,823)

 

$

9,554

 

$

208,076

 

Provision for loan losses

 

 

7,241

 

 

316

 

 

 —

 

 

 —

 

 

 —

 

 

 1

 

 

7,558

 

Noninterest income

 

 

37,910

 

 

175,362

 

 

323,275

 

 

76,723

 

 

12,609

 

 

(9,748)

 

 

616,131

 

Noninterest expense

 

 

123,325

 

 

168,558

 

 

293,207

 

 

86,429

 

 

15,685

 

 

(461)

 

 

686,743

 

Income (loss) before income taxes

 

$

91,618

 

$

25,325

 

$

29,183

 

$

(8,587)

 

$

(7,899)

 

$

266

 

$

129,906

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

 

    

Mortgage

    

 

    

    

 

    

All Other and

    

Hilltop

 

Three Months Ended June 30, 2016

 

Banking

 

Broker-Dealer

 

Origination

 

Insurance

 

Corporate

 

Eliminations

 

Consolidated

 

Net interest income (expense)

 

$

92,029

 

$

7,440

 

$

(2,299)

 

$

758

 

$

(1,846)

 

$

4,315

 

$

100,397

 

Provision for loan losses

 

 

28,613

 

 

263

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

28,876

 

Noninterest income

 

 

13,346

 

 

102,900

 

 

192,881

 

 

41,392

 

 

 1

 

 

(4,515)

 

 

346,005

 

Noninterest expense

 

 

55,132

 

 

91,780

 

 

162,488

 

 

51,717

 

 

6,483

 

 

(235)

 

 

367,365

 

Income (loss) before income taxes

 

$

21,630

 

$

18,297

 

$

28,094

 

$

(9,567)

 

$

(8,328)

 

$

35

 

$

50,161

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Mortgage

    

 

    

    

 

    

All Other and

    

Hilltop

 

Six Months Ended June 30, 2016

 

Banking

 

Broker-Dealer

 

Origination

 

Insurance

 

Corporate

 

Eliminations

 

Consolidated

 

Net interest income (expense)

 

$

178,133

 

$

14,491

 

$

(4,865)

 

$

1,497

 

$

(3,559)

 

$

8,540

 

$

194,237

 

Provision for loan losses

 

 

32,113

 

 

170

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

32,283

 

Noninterest income

 

 

26,301

 

 

183,782

 

 

339,219

 

 

83,196

 

 

 2

 

 

(9,120)

 

 

623,380

 

Noninterest expense

 

 

119,480

 

 

176,041

 

 

297,160

 

 

88,091

 

 

12,332

 

 

(550)

 

 

692,554

 

Income (loss) before income taxes

 

$

52,841

 

$

22,062

 

$

37,194

 

$

(3,398)

 

$

(15,889)

 

$

(30)

 

$

92,780

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Mortgage

    

 

    

    

 

    

All Other and

    

Hilltop

 

 

 

Banking

 

Broker-Dealer

 

Origination

 

Insurance

 

Corporate

 

Eliminations

 

Consolidated

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

207,741

 

$

7,008

 

$

13,071

 

$

23,988

 

$

 —

 

$

 —

 

$

251,808

 

Total assets

 

$

9,828,918

 

$

3,073,342

 

$

2,240,743

 

$

305,099

 

$

2,049,498

 

$

(4,209,027)

 

$

13,288,573

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

23. 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 are the only instruments issued by Hilltop which qualify 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. 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.

 

Diluted earnings per common share is computed in a similar manner, except that first the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares, excluding the participating securities, were issued using the treasury stock method. During the three and six months ended June 30, 2017, RSUs were the only potentially dilutive non-participating instruments issued by Hilltop, while during the three and six months ended June 30, 2016, stock options and RSUs were potentially dilutive non-

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

participating instruments. 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.

 

The following table presents the computation of basic and diluted earnings per common share (in thousands, except per share data).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

   

2017

   

2016

   

2017

    

2016

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income attributable to Hilltop

 

$

62,476

 

$

31,074

 

$

88,910

 

$

58,641

 

Less: income applicable to participating shares

 

 

(2)

 

 

(5)

 

 

(3)

 

 

(9)

 

Net earnings available to Hilltop common stockholders

 

$

62,474

 

$

31,069

 

$

88,907

 

$

58,632

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

 

98,154

 

 

98,457

 

 

98,295

 

 

98,305

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.64

 

$

0.32

 

$

0.90

 

$

0.60

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income attributable to Hilltop

 

$

62,476

 

$

31,074

 

$

88,910

 

$

58,641

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

 

98,154

 

 

98,457

 

 

98,295

 

 

98,305

 

Effect of potentially dilutive securities

 

 

260

 

 

129

 

 

281

 

 

314

 

Weighted average shares outstanding - diluted

 

 

98,414

 

 

98,586

 

 

98,576

 

 

98,619

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.63

 

$

0.32

 

$

0.90

 

$

0.60

 

 

 

 

 

 

 

 

 

 

 

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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

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incurred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

But Not

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reserves Plus

 

Cumulative

 

 

Six Months Ended June 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

 

$

114,554

 

$

33

 

16,675

2013

 

 

 

 

 

 

107,793

 

 

108,951

 

 

111,006

 

 

111,011

 

 

111,074

 

 

53

 

15,736

2014

 

 

 

 

 

 

 

 

 

83,784

 

 

85,037

 

 

84,221

 

 

84,175

 

 

237

 

13,172

2015

 

 

 

 

 

 

 

 

 

 

 

 

89,646

 

 

88,477

 

 

88,082

 

 

1,842

 

14,968

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

84,771

 

 

86,448

 

 

4,718

 

21,405

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49,997

 

 

7,283

 

10,546

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

534,330

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative Paid Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance

 

 

 

 

 

 

 

Six Months Ended June 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

 

$

112,723

 

 

 

 

 

2013

 

 

 

 

 

 

94,238

 

 

104,938

 

 

108,099

 

 

109,662

 

 

110,318

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

 

70,831

 

 

79,713

 

 

81,684

 

 

82,620

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

71,820

 

 

82,940

 

 

84,162

 

 

 

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

71,543

 

 

79,433

 

 

 

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31,551

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

500,807

 

 

 

 

 

All outstanding reserves prior to 2012, net of reinsurance

 

 

85

 

 

 

 

 

Reserve for unpaid losses and allocated loss adjustment expenses, net of reinsurance

 

$

33,608

 

 

 

 

 

 

 

 

 

 

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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.), references to “HTS Independent Network” refer to Hilltop Securities Independent Network Inc. (a wholly owned subsidiary of Securities Holdings that was formerly known as SWS Financial Services, Inc.), 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 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, capital levels, mortgage servicing rights (“MSR”) assets, stock repurchases, dividend payments, expectations concerning mortgage loan origination volume 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, the effects of government regulation applicable to our operations, the appropriateness of our allowance for loan losses and provision for loan losses, anticipated investment yields, our expectations regarding accretion of discount on loans in future periods, the collectability of loans 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;

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·

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;

·

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, 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, 2016 (“2016 Form 10-K”), which was filed with the Securities and Exchange Commission (the “SEC”) on February 16, 2017, 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.

 

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, 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 headquartered in Dallas, Texas that provides, through its subsidiaries, traditional banking and wealth, investment management and treasury management services primarily in Texas and residential mortgage loans throughout the United States.

 

Securities Holdings.  Securities Holdings is a holding company headquartered in Dallas, Texas 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 headquartered in Waco, Texas that provides, through its subsidiaries, fire and homeowners insurance to low value dwellings and manufactured homes primarily in Texas and other areas of the southern United States.

 

During the three and six months ended June 30, 2017, our net income to common stockholders was $62.5 million, or $0.63 per diluted share, and $88.9 million, or $0.90 per diluted share, respectively.  We declared total common dividends of $0.06 and $0.12 per share during the three and six months ended June 30, 2017, respectively, which resulted in dividend payout ratios of 9.43% and 13.27%, respectively. Dividend payout ratio is defined as cash dividends declared per common share divided by basic earnings per common share. We also paid an aggregate of $16.0 million to repurchase our common stock during the six months ended June 30, 2017. 

 

We reported $88.6 million and $129.9 million of consolidated income before income taxes during the three and six months ended June 30, 2017,  respectively, including the following contributions from our four reportable business segments.

 

·

The banking segment contributed $59.8 million and $91.6 million of income before income taxes during the three and six months ended June 30, 2017, respectively;

·

The broker-dealer segment contributed $15.8 million and $25.3 million of income before income taxes during the three and six months ended June 30, 2017, respectively;

·

The mortgage origination segment contributed $19.3 million and $29.2 million of income before income taxes during the three and six months ended June 30, 2017, respectively; and

·

The insurance segment incurred losses before income taxes of $10.4 million and $8.6 million during the three and six months ended June 30, 2017, respectively.

 

During the three months ended June 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 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 three and six months ended June 30, 2016 reflect this charge-off. During the three months ended June 30, 2017, the Bank recorded an insurance receivable and related 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 June 30, 2017, on a consolidated basis, we had total assets of $13.3 billion, total deposits of $7.6 billion, total loans, including loans held for sale, of $8.3 billion and stockholders’ equity of $1.9 billion.

 

Segment Information

 

We have three primary business units, PCC (banking and mortgage origination), Securities Holdings (broker-dealer) and NLC (insurance). Under accounting principles generally accepted in the United States (“GAAP”), our business units are comprised of four reportable business segments organized primarily by the core products offered to the segments’ respective customers: banking, broker-dealer, mortgage origination and insurance. 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, 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 insurance segments.

 

The banking segment includes the operations of the Bank, which primarily provides business and consumer banking services from offices located throughout Texas and generates revenue from its portfolio of earning assets. The Bank’s

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results of operations are primarily dependent on net interest income, while also deriving revenue from other sources, including service charges on customer deposit accounts and trust fees.

 

The broker-dealer segment includes the operations of Securities Holdings. 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 Securities and Exchange Commission (the “SEC”) 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, and First Southwest Asset Management, LLC, a wholly-owned subsidiary of Hilltop Securities, is a registered investment adviser 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 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, 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.

 

The elimination of intercompany transactions are included in “All Other and Eliminations.” Additional information concerning our reportable segments is presented in Note 22, Segment and Related Information, in the notes to our consolidated financial statements. The following tables present certain information about the operating results of our reportable segments (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

    

Mortgage

    

 

    

 

 

    

All Other and

    

Hilltop

 

Three Months Ended June 30, 2017

 

Banking

 

Broker-Dealer

 

Origination

 

Insurance

 

Corporate

 

Eliminations

 

Consolidated

 

Net interest income (expense)

 

$

102,191

 

$

10,349

 

$

996

 

$

602

 

$

(2,288)

 

$

4,126

 

$

115,976

 

Provision for loan losses

 

 

5,405

 

 

448

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

5,853

 

Noninterest income

 

 

25,499

 

 

92,810

 

 

179,637

 

 

38,413

 

 

12,608

 

 

(4,275)

 

 

344,692

 

Noninterest expense

 

 

62,511

 

 

86,901

 

 

161,369

 

 

49,416

 

 

6,298

 

 

(244)

 

 

366,251

 

Income (loss) before income taxes

 

$

59,774

 

$

15,810

 

$

19,264

 

$

(10,401)

 

$

4,022

 

$

95

 

$

88,564

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

    

Mortgage

    

 

    

 

 

    

All Other and

    

Hilltop

 

Six Months Ended June 30, 2017

 

Banking

 

Broker-Dealer

 

Origination

 

Insurance

 

Corporate

 

Eliminations

 

Consolidated

 

Net interest income (expense)

 

$

184,274

 

$

18,837

 

$

(885)

 

$

1,119

 

$

(4,823)

 

$

9,554

 

$

208,076

 

Provision for loan losses

 

 

7,241

 

 

316

 

 

 —

 

 

 —

 

 

 —

 

 

 1

 

 

7,558

 

Noninterest income

 

 

37,910

 

 

175,362

 

 

323,275

 

 

76,723

 

 

12,609

 

 

(9,748)

 

 

616,131

 

Noninterest expense

 

 

123,325

 

 

168,558

 

 

293,207

 

 

86,429

 

 

15,685

 

 

(461)

 

 

686,743

 

Income (loss) before income taxes

 

$

91,618

 

$

25,325

 

$

29,183

 

$

(8,587)

 

$

(7,899)

 

$

266

 

$

129,906

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

    

Mortgage

    

 

    

 

 

    

All Other and

    

Hilltop

 

Three Months Ended June 30, 2016

 

Banking

 

Broker-Dealer

 

Origination

 

Insurance

 

Corporate

 

Eliminations

 

Consolidated

 

Net interest income (expense)

 

$

92,029

 

$

7,440

 

$

(2,299)

 

$

758

 

$

(1,846)

 

$

4,315

 

$

100,397

 

Provision for loan losses

 

 

28,613

 

 

263

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

28,876

 

Noninterest income

 

 

13,346

 

 

102,900

 

 

192,881

 

 

41,392

 

 

 1

 

 

(4,515)

 

 

346,005

 

Noninterest expense

 

 

55,132

 

 

91,780

 

 

162,488

 

 

51,717

 

 

6,483

 

 

(235)

 

 

367,365

 

Income (loss) before income taxes

 

$

21,630

 

$

18,297

 

$

28,094

 

$

(9,567)

 

$

(8,328)

 

$

35

 

$

50,161

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

    

Mortgage

    

 

    

 

 

    

All Other and

    

Hilltop

 

Six Months Ended June 30, 2016

 

Banking

 

Broker-Dealer

 

Origination

 

Insurance

 

Corporate

 

Eliminations

 

Consolidated

 

Net interest income (expense)

 

$

178,133

 

$

14,491

 

$

(4,865)

 

$

1,497

 

$

(3,559)

 

$

8,540

 

$

194,237

 

Provision for loan losses

 

 

32,113

 

 

170

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

32,283

 

Noninterest income

 

 

26,301

 

 

183,782

 

 

339,219

 

 

83,196

 

 

 2

 

 

(9,120)

 

 

623,380

 

Noninterest expense

 

 

119,480

 

 

176,041

 

 

297,160

 

 

88,091

 

 

12,332

 

 

(550)

 

 

692,554

 

Income (loss) before income taxes

 

$

52,841

 

$

22,062

 

$

37,194

 

$

(3,398)

 

$

(15,889)

 

$

(30)

 

$

92,780

 

 

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Table of Contents

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. 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 $208.1 million and $194.2 million in net interest income during the six months ended June 30, 2017 and 2016, respectively. Changes in net interest income primarily included 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. We generated $124.6 million and $131.9 million in securities commissions and fees and investment and securities advisory fees and commissions, and $46.2 million and $49.7 million in gains from derivative and trading portfolio activities (included within other noninterest income) during the six months ended June 30, 2017 and 2016, respectively.

 

(ii)

Income from mortgage operations.  Through PrimeLending, we generate noninterest income by originating and selling mortgage loans. During the six months ended June 30, 2017 and 2016, we generated $323.4 million and $338.9 million, respectively, in net gains from the sale of loans, other mortgage production income (including income associated with retained mortgage servicing rights), and mortgage loan origination fees.

 

(iii)

Income from insurance operations.  Through NLC, we provide fire and limited homeowners insurance for low value dwellings and manufactured homes. We generated $72.2 million and $78.5 million in net insurance premiums earned during the six months ended June 30, 2017 and 2016, respectively.

 

In the aggregate, we generated $616.1 million and $623.4 million in noninterest income during the six months ended June 30, 2017 and 2016, respectively. This year-over-year decrease in noninterest income was predominantly attributable to decreases in noninterest income in our mortgage origination,  broker-dealer and insurance segments, partially offset by increases in noninterest income in our banking segment due to the previously mentioned increases in other noninterest income related to the insurance receivable 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.

 

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 income applicable to common stockholders during the three months ended June 30, 2017 was $62.5 million, or $0.63 per diluted share, compared with net income applicable to common stockholders of $31.1 million, or $0.32 per diluted share, during the three months ended June 30, 2016.  Net income applicable to common stockholders during the six months ended June 30, 2017 was $88.9 million, or $0.90 per diluted share, compared with net income applicable to common stockholders of $58.6 million, or $0.60 per diluted share, during the six months ended June 30, 2016.  The consolidated operating results during the three and six months ended June 30, 2017 included the previously mentioned insurance receivable and related increase to other noninterest income of $15.0 million from coverage provided by an insurance policy for forgery related to a single, large loan charged off by the Bank 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.  The consolidated operating results during the three and six months ended June 30, 2016 included the previously mentioned $24.5 million charge-off of the single, large loan by the Bank. 

 

Our consolidated operating results during the six months ended June 30, 2017 also included transaction costs related to the acquisition of SWS (the “SWS Merger”), while our consolidated operating results during the six months ended June 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.

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Table of Contents

During the six months ended June 30, 2017, we incurred $1.5 million in pre-tax transaction costs related to the SWS Merger. During the six months ended June 30, 2016, we incurred transaction costs and integration-related costs related to the SWS Merger totaling $7.1 million resulting from $2.3 million in pre-tax transaction costs and pre-tax integration-related costs associated with employee, professional fee and contractual expenses of $2.1 million, $2.6 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 substantially 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 2017 and 2016 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-assisted transaction (the “FNB Transaction”) whereby the Bank acquired certain assets and assumed certain liabilities of FNB, and the SWS Merger (collectively, the “Bank Transactions”). Income before taxes during the three months ended June 30, 2017 included net accretion of $0.9 million, $20.7 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, $0.2 million and $0.2 million, respectively. During the three months ended June 30, 2016, income before taxes included net accretion of  $2.7 million, $12.6 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 $0.3 million, respectively. Income before taxes during the six months ended June 30, 2017 included net accretion of $1.9 million, $30.4 million and $1.8 million on earning assets and liabilities acquired in the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, offset by amortization of identifiable intangibles of $3.2 million, $0.3 million and $0.4 million, respectively. During the six months ended June 30, 2016, income before taxes included net accretion of $6.0 million, $24.0 million and $2.3 million on earning assets and liabilities acquired in the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, offset by amortization of identifiable intangibles of $4.0 million, $0.4 million and $0.5 million, respectively.

 

In addition, the Bank recorded a “true-up” accrual related to the loss-share agreements with the FDIC and amortization of the FDIC Indemnification Asset, both related to the FNB Transaction, of $5.3 million and $9.9 million during the three and six months ended June 30, 2017,  respectively, compared to $1.9 million and $3.9 million during the same periods in 2016.

 

We consider the ratios shown in the table below to be key indicators of our performance.

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

Performance Ratios:

 

 

 

 

 

 

 

 

 

Return on average stockholder's equity

 

13.24

%  

7.07

%  

9.53

%  

6.72

%

Return on average assets

 

1.94

%  

1.05

%  

1.43

%  

1.01

%

Net interest margin (1) (3) (4)

 

4.04

%  

3.77

%  

3.80

%  

3.74

%

Net interest margin (taxable equivalent) (2) (3) (4)

 

4.05

%  

3.80

%  

3.81

%  

3.76

%


(1)

Net interest margin is defined as net interest income divided by average interest-earning assets.

(2)

Net interest margin (taxable equivalent), a non-GAAP measure, is defined as taxable equivalent net interest income divided by average interest-earning assets. Annualized taxable equivalent adjustments are based on a 35% federal income tax rate. See footnote 2 to the following tables for the taxable equivalent adjustments to interest income.

(3)

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 53 basis points and 65 basis points during the three months ended June 30, 2017 and 2016, respectively, and 51 basis points and 62 basis points during the six months ended June 30, 2017 and 2016, respectively.

(4)

Net interest margin and taxable equivalent net interest margin were 82 basis points and 72 basis points greater due to the impact of purchase accounting during the three months ended June 30, 2017 and 2016, respectively, and 67 basis points and 73 basis points greater due to the impact of purchase accounting during the six months ended June 30, 2017 and 2016, respectively.

 

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. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest margins for all earning assets, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments.

 

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Table of Contents

During the three months ended June 30, 2017, the consolidated taxable equivalent net interest margin of 4.05% was 82 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of $1.7 million, $20.7 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 $0.7 million. The consolidated taxable equivalent net interest margin during the three months ended June 30, 2016 of 3.80% was 72 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of $3.7 million, $12.6 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 $1.0 million.

 

During the six months ended June 30, 2017, the consolidated taxable equivalent net interest margin of 3.81% was 67 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of $3.2 million, $30.4 million and $1.7 million associated with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of $1.2 million. During the six months ended June 30, 2016, the consolidated taxable equivalent net interest margin of 3.76% was 73 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of $7.8 million, $24.0 million and $2.2 million associated with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of $1.7 million.

 

The FNB Transaction-related accretion of discount on loans of $30.4 million and $24.0 million during the six months ended June 30, 2017 and 2016, respectively, included accretion of approximately $2 million and $6 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 six months ended June 30, 2017 and 2016 resulted in the reclassification of $23.0 million and $18.4 million, respectively, from nonaccretable difference to accretable yield.

 

The tables below provide additional details regarding our consolidated net interest income (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 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)

 

$

7,794,300

 

$

113,794

 

5.81

%  

$

7,038,518

 

$

98,468

 

5.56

%

Investment securities - taxable

 

 

1,399,402

 

 

9,516

 

2.72

%  

 

1,080,097

 

 

6,813

 

2.53

%

Investment securities - non-taxable (2)

 

 

232,340

 

 

1,903

 

3.28

%  

 

291,288

 

 

2,166

 

2.98

%

Federal funds sold and securities purchased under agreements to resell

 

 

147,179

 

 

27

 

0.07

%  

 

144,820

 

 

36

 

0.10

%

Interest-bearing deposits in other financial institutions

 

 

381,100

 

 

885

 

0.93

%  

 

388,520

 

 

484

 

0.50

%

Securities borrowed

 

 

1,512,222

 

 

9,597

 

2.51

%  

 

1,702,286

 

 

6,327

 

1.49

%  

Other

 

 

81,230

 

 

1,113

 

5.49

%  

 

58,081

 

 

537

 

3.72

%

Interest-earning assets, gross (2)

 

 

11,547,773

 

 

136,835

 

4.72

%  

 

10,703,610

 

 

114,831

 

4.27

%

Allowance for loan losses

 

 

(57,976)

 

 

 

 

 

 

 

(51,247)

 

 

 

 

 

 

Interest-earning assets, net

 

 

11,489,797

 

 

 

 

 

 

 

10,652,363

 

 

 

 

 

 

Noninterest-earning assets

 

 

1,529,020

 

 

 

 

 

 

 

1,523,095

 

 

 

 

 

 

Total assets

 

$

13,018,817

 

 

 

 

 

 

$

12,175,458

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

$

5,140,116

 

$

5,464

 

0.43

%  

$

4,821,695

 

$

4,037

 

0.34

%

Securities loaned

 

 

1,388,897

 

 

7,481

 

2.16

%  

 

1,626,021

 

 

4,916

 

1.22

%  

Notes payable and other borrowings

 

 

1,708,241

 

 

7,386

 

1.72

%  

 

1,096,007

 

 

4,852

 

1.78

%

Total interest-bearing liabilities

 

 

8,237,254

 

 

20,331

 

0.99

%  

 

7,543,723

 

 

13,805

 

0.73

%

Noninterest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

2,273,533

 

 

 

 

 

 

 

2,203,065

 

 

 

 

 

 

Other liabilities

 

 

612,712

 

 

 

 

 

 

 

657,435

 

 

 

 

 

 

Total liabilities

 

 

11,123,499

 

 

 

 

 

 

 

10,404,223

 

 

 

 

 

 

Stockholders’ equity

 

 

1,893,052

 

 

 

 

 

 

 

1,768,717

 

 

 

 

 

 

Noncontrolling interest

 

 

2,266

 

 

 

 

 

 

 

2,518

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

13,018,817

 

 

 

 

 

 

$

12,175,458

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (2)

 

 

 

 

$

116,504

 

 

 

 

 

 

$

101,026

 

 

 

Net interest spread (2)

 

 

 

 

 

 

 

3.73

%  

 

 

 

 

 

 

3.53

%

Net interest margin (2)

 

 

 

 

 

 

 

4.05

%  

 

 

 

 

 

 

3.80

%

 

 

62


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 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)

 

$

7,446,546

 

$

203,784

 

5.46

%  

$

6,886,108

 

$

190,001

 

5.49

%

Investment securities - taxable

 

 

1,244,567

 

 

16,520

 

2.67

%  

 

1,062,401

 

 

13,161

 

2.48

%

Investment securities - non-taxable (2)

 

 

225,904

 

 

3,654

 

3.24

%  

 

276,472

 

 

4,490

 

3.25

%

Federal funds sold and securities purchased under agreements to resell

 

 

132,502

 

 

50

 

0.08

%  

 

135,064

 

 

63

 

0.09

%

Interest-bearing deposits in other financial institutions

 

 

439,500

 

 

1,787

 

0.82

%  

 

408,301

 

 

958

 

0.47

%

Securities borrowed

 

 

1,499,720

 

 

17,650

 

2.34

%  

 

1,623,515

 

 

13,916

 

1.72

%  

Other

 

 

86,236

 

 

2,137

 

4.97

%  

 

61,910

 

 

1,085

 

3.53

%

Interest-earning assets, gross (2)

 

 

11,074,975

 

 

245,582

 

4.43

%  

 

10,453,771

 

 

223,674

 

4.26

%

Allowance for loan losses

 

 

(56,809)

 

 

 

 

 

 

 

(50,049)

 

 

 

 

 

 

Interest-earning assets, net

 

 

11,018,166

 

 

 

 

 

 

 

10,403,722

 

 

 

 

 

 

Noninterest-earning assets

 

 

1,550,438

 

 

 

 

 

 

 

1,559,888

 

 

 

 

 

 

Total assets

 

$

12,568,604

 

 

 

 

 

 

$

11,963,610

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

$

5,039,067

 

$

10,154

 

0.41

%  

$

4,802,849

 

$

7,876

 

0.33

%

Securities loaned

 

 

1,375,403

 

 

13,821

 

2.03

%  

 

1,533,684

 

 

10,903

 

1.43

%

Notes payable and other borrowings

 

 

1,380,699

 

 

12,496

 

1.81

%  

 

1,049,734

 

 

9,340

 

1.79

%

Total interest-bearing liabilities

 

 

7,795,169

 

 

36,471

 

0.94

%  

 

7,386,267

 

 

28,119

 

0.76

%

Noninterest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

2,254,268

 

 

 

 

 

 

 

2,178,378

 

 

 

 

 

 

Other liabilities

 

 

634,661

 

 

 

 

 

 

 

641,335

 

 

 

 

 

 

Total liabilities

 

 

10,684,098

 

 

 

 

 

 

 

10,205,980

 

 

 

 

 

 

Stockholders’ equity

 

 

1,881,809

 

 

 

 

 

 

 

1,755,963

 

 

 

 

 

 

Noncontrolling interest

 

 

2,697

 

 

 

 

 

 

 

1,667

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

12,568,604

 

 

 

 

 

 

$

11,963,610

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (2)

 

 

 

 

$

209,111

 

 

 

 

 

 

$

195,555

 

 

 

Net interest spread (2)

 

 

 

 

 

 

 

3.49

%  

 

 

 

 

 

 

3.49

%

Net interest margin (2)

 

 

 

 

 

 

 

3.81

%  

 

 

 

 

 

 

3.76

%

 


(1)

Average balance includes non-accrual loans.

(2)

Presented on a taxable equivalent basis with annualized taxable equivalent adjustments based on a 35% federal income tax rate. The adjustment to interest income was $0.5 million  and $0.6 million for the three months ended June 30, 2017 and 2016, respectively, and $1.0 million and $1.3 million for the six months ended June 30, 2017 and 2016, respectively.

 

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 by the banking segment, are eliminated from the consolidated financial statements.

 

On a consolidated basis, net interest income increased $15.6 million and $13.8 million during the three and six months ended June 30, 2017, respectively, compared with the same periods in 2016. Changes in net interest income were primarily related to increases in the net interest earned on mortgage-backed securities and improved stock loan spreads in our broker-dealer segment and net volume and yield changes on the loan portfolio within our banking segment as a result of the increase in year-over-year accretion of discount on loans. 

 

The provision for loan losses is determined by management as the amount to be added to the allowance for loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management’s best estimate, is necessary to absorb probable losses within the existing loan portfolio. The consolidated provision for loan losses, substantially all of which related to the banking segment, was $5.9 million and $28.9 million during the three months ended June 30, 2017 and 2016, respectively. During the three months ended June 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 $4.4 million and PCI loans of $1.5 million, compared to charges relating to newly originated loans and acquired loans without credit impairment at acquisition of $30.7 million, partially offset by the recapture of charges on PCI loans of $1.8 million during the three months ended June 30, 2016.  During the six months ended June 30, 2017 and 2016, the consolidated provision for loan losses, substantially all of which related to the banking segment, was $7.6 million and $32.3 million, respectively. The provision for loan losses during the six months ended June 30, 2017 was comprised of

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charges relating to newly originated loans and acquired loans without credit impairment at acquisition of $6.1 million and PCI loans of $1.5 million, compared to charges relating to newly originated loans and acquired loans without credit impairment at acquisition of $33.2 million, partially offset by the recapture of charges on PCI loans of $0.9 million during the six months ended June 30, 2016. In addition, as previously mentioned, the consolidated provision for loan losses during the three and six months ended June 30, 2016 included a $24.5 million charge-off of a single large loan by the Bank.

 

Consolidated noninterest income increased $1.3 million and $7.2 million during the three and six months ended June 30, 2017,  respectively, compared with the same periods in 2016. Consolidated noninterest income during the three and six months ended June 30, 2017 included the previously mentioned insurance receivable and related increase to other noninterest income of $15.0 million 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-year changes in noninterest income, other than the previously mentioned non-recurring items, during the three and six months ended June 30, 2017,  compared with the same periods in 2016,  were primarily driven by decreases in noninterest income within each of our operating segments. 

 

Consolidated noninterest expense decreased $1.1 million and $5.8 million during the three and six months ended June 30, 2017,  respectively, compared with the same periods in 2016. The year-over-year decrease in noninterest expense during the three and six months ended June 30, 2017,  compared with the same periods in 2016, primarily included decreases in noninterest expense within our broker-dealer, mortgage origination and insurance segments, partially offset by an increase within our banking segment primarily associated with covered assets.  During the six months ended June 30, 2017, we incurred pre-tax transaction and integration costs related to the SWS Merger of $1.5 million, compared with $7.1 million during the same period in 2016.

 

Consolidated income tax expense during the three months ended June 30, 2017 and 2016 was $25.8 million and $18.4 million, respectively, reflecting effective tax rates of 29.1% and 36.8%, respectively. During the six months ended June 30, 2017 and 2016, consolidated income tax expense was $40.8 million and $32.9 million, respectively, reflecting effective tax rates of 31.4% and 35.4%,  respectively. The effective tax rates during the three and six months ended June 30, 2017 were lower than the statutory rate primarily due to a nontaxable increase to other noninterest income recorded in the resolution of the SWS matter as previously discussed, as the SWS Merger was a tax-free reorganization under Section 368(a) of the Internal Revenue Code.  The lower effective tax rates during the three and six months ended June 30, 2016  were primarily due to the recognition of excess tax benefits on share-based payment awards.

 

Segment Results

 

Banking Segment

 

Income before income taxes in our banking segment during the three months ended June 30, 2017 and 2016 was $59.8 million and $21.6 million, respectively,  while income before income taxes in our banking segment during the six months ended June 30, 2017 and 2016 was $91.6 million and $52.8 million, respectively. The increases in income before income taxes during the three and six months ended June 30, 2017,  compared with the same periods in 2016, were primarily due to the previously mentioned insurance receivable and related increase to other noninterest income of $15.0 million during the 2017 periods and the $24.5 million charge-off within the provision for loan losses during the 2016 periods. Income before income taxes during the three and six months ended June 30, 2017, compared with the same periods in 2016,  also increased due to an increase in net interest income associated with net volume and yield changes as a result of both the increase in year-over-year accretion of discount on loans and the compression of interest rate margins. 

 

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We consider the ratios shown in the table below to be key indicators of the performance of our banking segment.

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

Performance Ratios:

 

 

 

 

 

 

 

 

 

Efficiency ratio (1)

 

48.96

%  

52.32

%  

55.51

%  

58.44

%

Return on average assets

 

1.63

%  

0.66

%  

1.30

%  

0.82

%

Net interest margin (2) (4)

 

4.80

%  

4.85

%  

4.53

%  

4.78

%

Net interest margin (taxable equivalent) (3) (4)

 

4.81

%  

4.87

%  

4.53

%  

4.81

%


(1)

Efficiency ratio is defined as noninterest expenses divided by the sum of total noninterest income and net interest income for the period.

(2)

Net interest margin is defined as net interest income divided by average interest-earning assets.

(3)

Net interest margin (taxable equivalent), a non-GAAP measure, is defined as taxable equivalent net interest income divided by average interest-earning assets. Annualized taxable equivalent adjustments are based on a 35% federal income tax rate. See footnote 2 to the following tables for the taxable equivalent adjustments to interest income.

(4)

Net interest margin and taxable equivalent net interest margin were 112 basis points and 104 basis points greater due to the impact of purchase accounting during the three months ended June 30, 2017 and 2016, respectively, and 91 basis points and 104 basis points greater due to the impact of purchase accounting during the six months ended June 30, 2017 and 2016, respectively.

 

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. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest margins for all earning assets, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments.

 

During the three months ended June 30, 2017, the banking segment’s taxable equivalent net interest margin of 4.81% was 112 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of $1.7 million, $20.7 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 $0.7 million. The banking segment’s taxable equivalent net interest margin during the three months ended June 30, 2016 of 4.87% was 104 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of $3.7 million, $12.6 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 $0.9 million.

 

During the six months ended June 30, 2017, the banking segment’s taxable equivalent net interest margin of 4.53% was 91 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of $3.2 million, $30.4 million and $1.7 million associated with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of $1.2 million. The banking segment’s taxable equivalent net interest margin during the six months ended June 30, 2016 of 4.81% was 104 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of $7.8 million, $24.0 million and $2.2 million associated with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of $1.7 million.

 

The FNB Transaction-related accretion of discount on loans of $30.4 million and $24.0 million during the six months ended June 30, 2017 and 2016, respectively, included accretion of approximately $2 million and $6 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 calculated as a result of the Bank’s quarterly cash flow recast process. The recast process performed during the six months ended June 30, 2017 and 2016 resulted in the reclassification of $23.0 million and $18.4 million, respectively, from nonaccretable difference to accretable yield.

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The tables below provide additional details regarding our banking segment’s net interest income (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 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)

 

$

5,640,067

 

$

90,471

 

6.37

%  

$

5,264,002

 

$

81,306

 

6.13

%

Subsidiary warehouse lines of credit

 

 

1,545,376

 

 

14,655

 

3.75

%  

 

1,150,015

 

 

11,282

 

3.88

%

Investment securities - taxable

 

 

883,414

 

 

4,162

 

1.88

%  

 

733,539

 

 

3,735

 

2.04

%

Investment securities - non-taxable (2)

 

 

124,495

 

 

1,179

 

3.79

%  

 

135,749

 

 

1,267

 

3.73

%

Federal funds sold and securities purchased under agreements to resell

 

 

10,794

 

 

27

 

1.00

%  

 

27,114

 

 

36

 

0.54

%

Interest-bearing deposits in other financial institutions

 

 

284,862

 

 

773

 

1.09

%  

 

302,485

 

 

426

 

0.57

%

Other

 

 

66,127

 

 

624

 

3.78

%  

 

49,455

 

 

487

 

3.94

%

Interest-earning assets, gross (2)

 

 

8,555,135

 

 

111,891

 

5.20

%  

 

7,662,359

 

 

98,539

 

5.11

%

Allowance for loan losses

 

 

(57,738)

 

 

 

 

 

 

 

(51,004)

 

 

 

 

 

 

Interest-earning assets, net

 

 

8,497,397

 

 

 

 

 

 

 

7,611,355

 

 

 

 

 

 

Noninterest-earning assets

 

 

943,310

 

 

 

 

 

 

 

1,040,375

 

 

 

 

 

 

Total assets

 

$

9,440,707

 

 

 

 

 

 

$

8,651,730

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

$

4,867,042

 

$

7,220

 

0.59

%  

$

4,558,852

 

$

4,982

 

0.44

%

Notes payable and other borrowings

 

 

914,994

 

 

2,073

 

0.90

%  

 

515,004

 

 

727

 

0.56

%

Total interest-bearing liabilities (3)

 

 

5,782,036

 

 

9,293

 

0.64

%  

 

5,073,856

 

 

5,709

 

0.44

%

Noninterest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

2,239,680

 

 

 

 

 

 

 

2,225,626

 

 

 

 

 

 

Other liabilities

 

 

54,498

 

 

 

 

 

 

 

59,844

 

 

 

 

 

 

Total liabilities

 

 

8,076,214

 

 

 

 

 

 

 

7,359,326

 

 

 

 

 

 

Stockholders’ equity

 

 

1,364,493

 

 

 

 

 

 

 

1,292,404

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

9,440,707

 

 

 

 

 

 

$

8,651,730

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (2)

 

 

 

 

$

102,598

 

 

 

 

 

 

$

92,830

 

 

 

Net interest spread (2)

 

 

 

 

 

 

 

4.55

%  

 

 

 

 

 

 

4.66

%

Net interest margin (2)

 

 

 

 

 

 

 

4.81

%  

 

 

 

 

 

 

4.87

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 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)

 

$

5,559,920

 

$

164,248

 

5.89

%  

$

5,180,571

 

$

157,687

 

6.04

Subsidiary warehouse lines of credit

 

 

1,301,375

 

 

24,631

 

3.76

%  

 

1,071,328

 

 

20,991

 

3.88

Investment securities - taxable

 

 

822,734

 

 

7,707

 

1.87

%  

 

735,553

 

 

7,667

 

2.08

Investment securities - non-taxable (2)

 

 

125,036

 

 

2,370

 

3.79

%  

 

139,068

 

 

2,568

 

3.69

Federal funds sold and securities purchased under agreements to resell

 

 

11,486

 

 

50

 

0.88

%  

 

23,221

 

 

63

 

0.54

Interest-bearing deposits in other financial institutions

 

 

339,955

 

 

1,610

 

0.95

%  

 

316,936

 

 

855

 

0.54

Other

 

 

71,112

 

 

1,159

 

3.26

%  

 

51,504

 

 

998

 

3.87

Interest-earning assets, gross (2)

 

 

8,231,618

 

 

201,775

 

4.89

%  

 

7,518,181

 

 

190,829

 

5.04

Allowance for loan losses

 

 

(56,642)

 

 

 

 

 

 

 

(49,821)

 

 

 

 

 

 

Interest-earning assets, net

 

 

8,174,976

 

 

 

 

 

 

 

7,468,360

 

 

 

 

 

 

Noninterest-earning assets

 

 

965,116

 

 

 

 

 

 

 

1,053,622

 

 

 

 

 

 

Total assets

 

$

9,140,092

 

 

 

 

 

 

$

8,521,982

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

$

4,765,219

 

$

13,657

 

0.58

%  

$

4,494,259

 

$

9,689

 

0.43

Notes payable and other borrowings

 

 

735,228

 

 

3,024

 

0.82

%  

 

512,534

 

 

1,400

 

0.54

Total interest-bearing liabilities (3)

 

 

5,500,447

 

 

16,681

 

0.61

%  

 

5,006,793

 

 

11,089

 

0.44

Noninterest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

2,227,775

 

 

 

 

 

 

 

2,190,428

 

 

 

 

 

 

Other liabilities

 

 

55,112

 

 

 

 

 

 

 

47,401

 

 

 

 

 

 

Total liabilities

 

 

7,783,334

 

 

 

 

 

 

 

7,244,622

 

 

 

 

 

 

Stockholders’ equity

 

 

1,356,758

 

 

 

 

 

 

 

1,277,360

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

9,140,092

 

 

 

 

 

 

$

8,521,982

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (2)

 

 

 

 

$

185,094

 

 

 

 

 

 

$

179,740

 

 

 

Net interest spread (2)

 

 

 

 

 

 

 

4.28

%  

 

 

 

 

 

 

4.59

Net interest margin (2)

 

 

 

 

 

 

 

4.53

%  

 

 

 

 

 

 

4.81

 


(1)

Average balance includes non-accrual loans.

(2)

Presented on a taxable equivalent basis with annualized taxable equivalent adjustments based on a 35% federal income tax rate. The adjustment to interest income was $0.4 million and $0.5 million for the three months ended June 30, 2017 and 2016, respectively, and $0.8 million and $0.9 million for the six months ended June 30, 2017 and 2016, respectively.

(3)

Only considers debt of PlainsCapital without the allocation of interest expense on PCC debt of $0.3 million and $0.7 million for the three and six months ended June 30, 2016,  respectively. Interest expense on PCC debt was not allocated to PlainsCapital beginning January 1, 2017.

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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, which are eliminated from the consolidated financial statements.

 

The following table summarizes the changes in the banking segment’s net interest income for the periods indicated below, including the component changes in the volume of average interest-earning assets and interest-bearing liabilities and changes in the rates earned or paid on those items (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2017 vs. 2016

 

2017 vs. 2016

 

 

 

Change Due To (1)

 

 

 

 

Change Due To (1)

 

 

 

 

 

    

Volume

    

Yield/Rate

    

Change

    

Volume

    

Yield/Rate

    

Change

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, gross

 

$

5,750

 

$

3,415

 

$

9,165

 

$

11,367

 

$

(4,806)

 

$

6,561

 

Subsidiary warehouse lines of credit

 

 

3,826

 

 

(453)

 

 

3,373

 

 

4,421

 

 

(781)

 

 

3,640

 

Investment securities - taxable

 

 

761

 

 

(334)

 

 

427

 

 

901

 

 

(861)

 

 

40

 

Investment securities - non-taxable (2)

 

 

(105)

 

 

17

 

 

(88)

 

 

(257)

 

 

59

 

 

(198)

 

Federal funds sold and securities purchased under agreements to resell

 

 

(22)

 

 

13

 

 

(9)

 

 

(32)

 

 

19

 

 

(13)

 

Interest-bearing deposits in other financial institutions

 

 

(25)

 

 

372

 

 

347

 

 

62

 

 

693

 

 

755

 

Other

 

 

164

 

 

(27)

 

 

137

 

 

377

 

 

(216)

 

 

161

 

Total interest income (2)

 

 

10,349

 

 

3,003

 

 

13,352

 

 

16,839

 

 

(5,893)

 

 

10,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

338

 

$

1,900

 

$

2,238

 

$

583

 

$

3,385

 

$

3,968

 

Notes payable and other borrowings

 

 

560

 

 

786

 

 

1,346

 

 

600

 

 

1,024

 

 

1,624

 

Total interest expense

 

 

898

 

 

2,686

 

 

3,584

 

 

1,183

 

 

4,409

 

 

5,592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (2)

 

$

9,451

 

$

317

 

$

9,768

 

$

15,656

 

$

(10,302)

 

$

5,354

 


(1)

Changes attributable to both volume and yield/rate are included in yield/rate column.

(2)

Annualized taxable equivalent.

 

Taxable equivalent net interest income increased $9.8 million and $5.4 million during the three and six months ended June 30, 2017, respectively, compared with the same periods in 2016. Changes in the yields earned on interest-earning assets increased taxable equivalent net interest income by $3.0 million during the three months ended June 30, 2017, compared with the same period in 2016, primarily due to an increase in accretion of discount on loans of $5.8 million, partially offset by a decrease in yield on a portion of the loan portfolio. Changes in yields earned on interest-earning assets decreased  taxable equivalent net interest income by $5.9 million during the six months ended June 30, 2017,  compared with the same period in 2016,  primarily due to lower yields on a portion of the loan portfolio, partially offset by an increase in accretion of discount on loans of $1.3 million.  These year-over-year increases in accretion of discount on loans were due to better-than-expected resolution of covered PCI loans. However, accretion of discount on loans is expected to decrease in future periods as loans acquired in the Bank Transactions are repaid, refinanced or renewed. We experienced interest rate margin compression during the three and six months ended June 30, 2017, which was driven by the rising interest rate environment and the rate floors in effect for a portion of the Bank’s loan portfolio, thereby causing yields on our interest-earning assets to rise more slowly than increases in market interest rates. Absent a decline in interest rates, we believe this interest rate compression will continue until the rise in market interest rates is sufficient to allow our loan portfolio to reprice above applicable rate floors. Increases in the volume of interest-earning assets, primarily on the loan portfolio and additional amounts drawn on the subsidiary warehouse lines of credit, increased taxable equivalent net interest income by $10.3 million and $16.8 million during the three and six months ended June 30, 2017,  respectively, compared with the same periods in 2016. Changes in rates paid on interest-bearing liabilities decreased taxable equivalent net interest income by $2.7 million and $4.4 million during the three and six months ended June 30, 2017,  respectively, compared with the same periods in 2016, due to increases in market interest rates.

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The banking segment’s noninterest income was $25.5 million and $13.3 million during the three months ended June 30, 2017 and 2016, respectively, and $37.9 million and $26.3 million during the six months ended June 30, 2017 and 2016, respectively. The increase in noninterest income during the three months ended June 30, 2017, compared to the same period in 2016, primarily included the previously mentioned insurance receivable and related increase in other noninterest income of $15.0 million from coverage provided by an insurance policy for forgery related to a single, large loan previously charged off by the Bank.  The changes in noninterest income, other than the previously mentioned insurance receivable, for the three and six months ended June 30, 2017 compared to the same periods in 2016, were primarily driven by year-over-year decreases in exchange fee income due to the impact of the Durbin amendment, which became applicable to the Bank on July 1, 2016, and intercompany financing charges.

 

The banking segment’s noninterest expenses were $62.5 million and $55.1 million during the three months ended June 30, 2017 and 2016, respectively, and $123.3 million and $119.5 million during the six months ended June 30, 2017 and 2016, respectively. Noninterest expenses were primarily comprised of employees’ compensation and benefits, and occupancy expenses. The change in noninterest expenses during the three months ended June 30, 2017, compared to the same period in 2016, included increases in net expenses associated with covered assets of $3.4 million, repossession and foreclosure expenses of $2.8 million,  as well as legal expenses associated with its efforts to recover losses arising from the $24.5 million loan that was charged off during the second quarter of 2016, partially offset by decreases in expenses associated with organizational changes.  The change in noninterest expenses during the six months ended June 30, 2017, compared to the same period in 2016, included increases in employees’ compensation and benefits of $3.3 million primarily due to increased headcount and related benefit costs, net expenses associated with covered assets of $6.0 million, repossession and foreclosure expenses of $3.0 million, as well as legal expenses associated with the Bank’s previously mentioned efforts, partially offset by a year-over-year decrease of $7.9 million associated with a downward valuation adjustment on a significant covered OREO property recorded during the first quarter of 2016, as well as decreases in occupancy expenses associated with closed branches and expenses associated with organizational changes.

 

Broker-Dealer Segment

 

Income before income taxes in our broker-dealer segment was $15.8 million and $25.3 million during the three and six months ended June 30, 2017, respectively, and $18.3 million and $22.1 million during the three and six months ended June 30, 2016, respectively.  The changes in income before income taxes during the three and six months ended June 30, 2017, compared with the same periods in 2016, were primarily the result of decreases in pre-tax integration-related costs of $0.8 million and $4.8 million, respectively, increases in the federal funds rate during the first and second quarters of 2017, which led to increases of $2.5 million and $5.1 million, respectively, in fees earned on money market and FDIC insured bank deposits, and decreases of $4.5 million and $6.3 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.

 

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. 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.

 

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The following table provides additional details regarding our broker-dealer operating results (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Variance

 

Six Months Ended June 30,

 

Variance

 

    

2017

    

2016

   

2017 vs 2016

    

2017

    

2016

   

2017 vs 2016

Net interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Securities lending

 

$

2,116

 

$

1,410

 

$

706

 

$

3,829

 

$

3,012

 

$

817

   Other

 

 

8,233

 

 

6,030

 

 

2,203

 

 

15,008

 

 

11,479

 

 

3,529

       Total net interest income

 

 

10,349

 

 

7,440

 

 

2,909

 

 

18,837

 

 

14,491

 

 

4,346

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Securities commissions and fees by business line (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       Capital markets

 

 

10,259

 

 

14,731

 

 

(4,472)

 

 

21,658

 

 

28,581

 

 

(6,923)

       Retail

 

 

19,730

 

 

18,468

 

 

1,262

 

 

39,317

 

 

36,219

 

 

3,098

       Clearing

 

 

8,595

 

 

7,238

 

 

1,357

 

 

17,110

 

 

13,753

 

 

3,357

       Other

 

 

1,015

 

 

919

 

 

96

 

 

2,337

 

 

2,003

 

 

334

 

 

 

39,599

 

 

41,356

 

 

(1,757)

 

 

80,422

 

 

80,556

 

 

(134)

   Investment banking and advisory fees by business line:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       Public finance

 

 

19,816

 

 

22,573

 

 

(2,757)

 

 

36,688

 

 

40,128

 

 

(3,440)

       Capital markets

 

 

207

 

 

1,948

 

 

(1,741)

 

 

507

 

 

3,318

 

 

(2,811)

       Retail

 

 

4,102

 

 

3,641

 

 

461

 

 

7,847

 

 

7,227

 

 

620

       Structured finance

 

 

1,119

 

 

1,167

 

 

(48)

 

 

2,142

 

 

2,471

 

 

(329)

       Clearing

 

 

291

 

 

24

 

 

267

 

 

552

 

 

31

 

 

521

       Other

 

 

 2

 

 

 1

 

 

 1

 

 

 3

 

 

(2)

 

 

 5

 

 

 

25,537

 

 

29,354

 

 

(3,817)

 

 

47,739

 

 

53,173

 

 

(5,434)

   Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       Structured finance

 

 

20,701

 

 

23,575

 

 

(2,874)

 

 

34,466

 

 

36,504

 

 

(2,038)

       Capital markets

 

 

6,625

 

 

8,413

 

 

(1,788)

 

 

11,697

 

 

13,255

 

 

(1,558)

       Other

 

 

348

 

 

202

 

 

146

 

 

1,038

 

 

294

 

 

744

 

 

 

27,674

 

 

32,190

 

 

(4,516)

 

 

47,201

 

 

50,053

 

 

(2,852)

       Total noninterest income

 

 

92,810

 

 

102,900

 

 

(10,090)

 

 

175,362

 

 

183,782

 

 

(8,420)

Noninterest expense (2):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Compensation and benefits expenses

 

 

62,840

 

 

63,976

 

 

(1,136)

 

 

120,080

 

 

121,792

 

 

(1,712)

   Other

 

 

24,509

 

 

28,067

 

 

(3,558)

 

 

48,794

 

 

54,419

 

 

(5,625)

       Total noninterest expense

 

 

87,349

 

 

92,043

 

 

(4,694)

 

 

168,874

 

 

176,211

 

 

(7,337)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

$

15,810

 

$

18,297

 

$

(2,487)

 

$

25,325

 

$

22,062

 

$

3,263


(1)

Securities commissions and fees includes income of $1.8 million and $0.9 million during the three months ended June 30, 2017 and 2016, respectively, and $3.6 million and $1.8 million during the six months ended June 30, 2017 and 2016, respectively, that is eliminated in consolidation.

(2)

Noninterest expense includes provision for loan losses associated with the broker-dealer segment within other noninterest expenses.

 

The broker-dealer segment had net interest income of $10.3 million and $7.4 million during the three months ended June 30, 2017 and 2016, respectively, and $18.8 million and $14.5 million during the six months ended June 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 increases between the three and six months ended June 30, 2017 and comparable periods in 2016 were primarily due to increases in the net interest earned on mortgage-backed securities and improved stock loan spreads.

 

Noninterest income was $92.8 million and $102.9 million during the three months ended June 30, 2017 and 2016, respectively, and $175.4 million and $183.8 million during the six months ended June 30, 2017 and 2016, respectively. The changes in noninterest income between the three and six months ended June 30, 2017 and comparable periods in 2016 were primarily due to decreases of $1.8 million and $0.1 million, respectively, in securities commissions and fees, decreases of $3.8 million and $5.4 million, respectively, in investment banking and advisory fees, and decreases of $4.5 million and $2.8 million, respectively in other noninterest income. 

 

Securities commissions and fees decreased $1.8 million and $0.1 million during the three and six months ended June 30, 2017, respectively, compared with the same periods in 2016. The decreases were primarily attributable to a reduction in securities commissions and fees earned in the capital markets business on the sale of municipal and mortgaged back security products. The respective year-over-year decreases in securities commissions and fees were partially offset by fees earned on insurance product sales, money markets and FDIC insured bank deposits by the clearing and retail businesses, resulting from the 27- and 24- basis point increases in the federal funds rate during the first and second quarters, respectively.

 

Investment banking and advisory fees decreased $3.8 million and $5.4 million during the three and six months ended June 30, 2017, respectively, compared with the same periods in 2016, primarily due to reductions in the number and the aggregate dollar amount of municipal bond transactions and the municipal finance and underwriting fees associated with those and other taxable transactions.

 

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Other noninterest income decreases during the three and six months ended June 30, 2017, respectively, compared with the same periods in 2016, were primarily due to decreases of $4.7 million and $3.6 million, respectively, in income earned from trading gains associated with the structured finance and capital markets businesses, partially offset by increases of $0.1 million and $0.8 million, respectively, in the value of broker-dealer segment investments held at corporate, including investments held in the broker-dealer segment’s deferred compensation plan.

 

Noninterest expenses were $87.3 million and $92.0 million during the three months ended June 30, 2017 and 2016, respectively, and $168.9 million and $176.2 million during the six months ended June 30, 2017 and 2016, respectively. The decrease in noninterest expenses of $4.7 million during the three months ended June 30, 2017, compared to the same period in 2016, was primarily due to a decrease in legal expenses associated with settled litigation and decreases of $1.1 million in compensation and benefits expenses and $1.0 million in professional services, which were both in part a product of the integration and merger of FSC and Hilltop Securities. The decrease in noninterest expenses of $7.3 million during the six months ended June 30, 2017, compared to the same period in 2016, was primarily due to a decrease in pre-tax integration-related costs of $4.8 million, a decrease in legal expenses associated with settled litigation and a decrease of $1.7 million in compensation and benefits expenses, 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 based on each business lines’ performance. During the three months ended June 30, 2016, the broker-dealer segment incurred pre-tax integration-related costs totaling $0.8 million resulting from employee expenses and professional fees of $0.4 million and $0.4 million, respectively. During the six months ended June 30, 2016, the broker-dealer segment incurred pre-tax integration-related costs totaling $4.8 million resulting from employee expenses, professional fees and contractual expenses of $2.1 million, $2.6 million, and $0.1 million, respectively.

 

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 substantially 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 follows (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

2017

    

 

2016

    

2017

    

 

2016

Compensation as a % of net revenue

 

60.9%

 

 

58.0%

 

 

61.8%

 

 

61.4%

FDIC insured program balances at PlainsCapital Bank (end of period)

 

 

 

 

 

 

$

1,301,043

 

$

850,126

Other FDIC insured program balances (end of period)

 

 

 

 

 

 

$

1,099,965

 

$

1,408,144

Customer margin balances (end of period)

 

 

 

 

 

 

$

338,514

 

$

364,607

Customer funds on deposit, including short credits (end of period)

 

 

 

 

 

 

$

394,335

 

$

356,071

 

 

 

 

 

 

 

 

 

 

 

 

Public finance:

 

 

 

 

 

 

 

 

 

 

 

Number of issues

 

460

 

 

527

 

 

792

 

 

911

Aggregate amount of offerings

$

19,299,334

 

$

20,932,716

 

$

39,837,764

 

$

42,986,679

 

 

 

 

 

 

 

 

 

 

 

 

Capital markets:

 

 

 

 

 

 

 

 

 

 

 

Total volumes

$

20,573,899

 

$

23,782,437

 

$

34,441,862

 

$

42,952,969

Net inventory (end of period)

 

 

 

 

 

 

$

311,395

 

$

110,676

 

 

 

 

 

 

 

 

 

 

 

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

Retail employee representatives (end of period)

 

 

 

 

 

 

 

123

 

 

117

Independent registered representatives (end of period) 

 

 

 

 

 

 

 

224

 

 

232

 

 

 

 

 

 

 

 

 

 

 

 

Structured finance:

 

 

 

 

 

 

 

 

 

 

 

Lock production/TBA volume

$

1,790,385

 

$

1,808,637

 

$

3,460,487

 

$

2,872,705

 

 

 

 

 

 

 

 

 

 

 

 

Clearing:

 

 

 

 

 

 

 

 

 

 

 

Total tickets (1)

 

315,646

 

 

424,896

 

 

664,785

 

 

960,052

Correspondents (end of period)

 

 

 

 

 

 

 

170

 

 

178

 

 

 

 

 

 

 

 

 

 

 

 

Securities lending:

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets - stock borrowed (end of period)

 

 

 

 

 

 

$

1,459,990

 

$

2,105,818

Interest-bearing liabilities - stock loaned (end of period)

 

 

 

 

 

 

$

1,312,985

 

$

2,009,065

 

 

 

 


(1)

Effective May 2016, a single correspondent began compressing multiple executions when delivering trades for processing, resulting in a decrease in year-over-year ticket count for the Broker-Dealer’s clearing business line. This modification did not significantly impact the correspondent’s clearing revenues.

 

 

 

 

 

 

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Mortgage Origination Segment

 

Income before income taxes in our mortgage origination segment was $19.3 million and $28.1 million during the three months ended June 30, 2017 and 2016, respectively, and $29.2 million and $37.2 million during the six months ended June 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 $1.0 million and net interest expense of $2.3 million during the three months ended June 30, 2017 and 2016, respectively, and net interest expense of $0.9 million and $4.9 million during the six months ended June 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. 

 

The mortgage lending business is subject to variables that can impact loan origination volume, including seasonal 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, 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, PrimeLending’s 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, PrimeLending’s refinancing volume and its refinancing volume as a percentage of total loan origination volume decreased in the first half of 2017 compared to the first half of 2016, and we anticipate that this year-over-year trend will continue for the remainder of 2017. We do not anticipate that these recent increases in mortgage interest rates will significantly impact Prime Lending’s home purchases volume during the remainder of 2017, as changes in mortgage interest rates have historically had a lesser impact on home purchases volume than on refinancing volume. 

 

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The mortgage origination segment primarily originates its mortgage loans through a retail channel, with limited lending through its joint venture channel. For the six months ended June 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).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

    

    

 

    

% of

    

    

 

    

% of

 

    

    

 

    

% of

    

    

 

    

% of

 

 

 

2017

 

Total

 

2016

 

Total

 

 

2017

 

Total

 

2016

 

Total

 

Mortgage Loan Originations - units

 

 

17,594

 

 

 

 

18,167

 

 

 

 

 

29,986

 

 

 

 

31,111

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Loan Originations - volume

 

$

4,058,084

 

 

 

$

4,150,464

 

 

 

 

$

6,882,415

 

 

 

$

7,079,579

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Loan Originations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conventional

 

$

2,442,701

 

60.19

%  

$

2,592,546

 

62.46

%  

 

$

4,165,784

 

60.53

%  

$

4,428,250

 

62.55

%

Government

 

 

1,001,799

 

24.69

%  

 

1,034,720

 

24.93

%  

 

 

1,676,450

 

24.36

%  

 

1,721,285

 

24.31

%

Jumbo

 

 

378,454

 

9.33

%  

 

348,872

 

8.41

%  

 

 

654,088

 

9.50

%  

 

615,394

 

8.69

%

Other

 

 

235,130

 

5.79

%  

 

174,326

 

4.20

%  

 

 

386,093

 

5.61

%  

 

314,650

 

4.45

%

 

 

$

4,058,084

 

100.00

%  

$

4,150,464

 

100.00

%  

 

$

6,882,415

 

100.00

%  

$

7,079,579

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home purchases

 

$

3,502,128

 

86.30

%  

$

3,261,386

 

78.58

%  

 

$

5,771,266

 

83.86

%  

$

5,312,210

 

75.04

%

Refinancings

 

 

555,956

 

13.70

%  

 

889,078

 

21.42

%  

 

 

1,111,149

 

16.14

%  

 

1,767,369

 

24.96

%

 

 

$

4,058,084

 

100.00

%  

$

4,150,464

 

100.00

%  

 

$

6,882,415

 

100.00

%  

$

7,079,579

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Texas

 

$

889,017

 

21.91

%  

$

869,415

 

20.95

%  

 

$

1,511,576

 

21.96

%  

$

1,531,907

 

21.64

%

California

 

 

482,466

 

11.89

%  

 

549,771

 

13.25

%  

 

 

843,550

 

12.26

%  

 

995,985

 

14.07

%

Florida

 

 

239,769

 

5.91

%  

 

213,776

 

5.15

%  

 

 

414,947

 

6.03

%  

 

364,997

 

5.16

%

Ohio

 

 

196,187

 

4.83

%  

 

186,464

 

4.49

%  

 

 

311,212

 

4.52

%  

 

300,783

 

4.25

%

Arizona

 

 

156,183

 

3.85

%  

 

147,768

 

3.56

%  

 

 

272,682

 

3.96

%  

 

246,970

 

3.49

%

South Carolina

 

 

126,815

 

3.12

%  

 

126,691

 

3.05

%  

 

 

226,829

 

3.30

%  

 

208,500

 

2.95

%

North Carolina

 

 

137,481

 

3.39

%  

 

153,613

 

3.70

%  

 

 

225,275

 

3.27

%  

 

250,322

 

3.54

%

Missouri

 

 

141,237

 

3.48

%  

 

125,317

 

3.02

%  

 

 

217,544

 

3.16

%  

 

211,445

 

2.99

%

Maryland

 

 

126,549

 

3.12

%  

 

140,796

 

3.39

%  

 

 

209,569

 

3.04

%  

 

229,027

 

3.24

%

Washington

 

 

119,411

 

2.94

%  

 

142,919

 

3.44

%  

 

 

204,808

 

2.98

%  

 

246,622

 

3.48

%

All other states

 

 

1,442,969

 

35.56

%  

 

1,493,934

 

36.00

%  

 

 

2,444,423

 

35.52

%  

 

2,493,021

 

35.19

%

 

 

$

4,058,084

 

100.00

%  

$

4,150,464

 

100.00

%  

 

$

6,882,415

 

100.00

%  

$

7,079,579

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Loan Sales - volume

 

$

3,385,260

 

 

 

$

3,964,190

 

 

 

 

$

6,660,427

 

 

 

$

7,081,795

 

 

 

 

Refinancing volume decreased to $556.0 million during the three months ended June 30, 2017 from $889.1 million during the three months ended June 30, 2016 (representing 13.7% and 21.4%, respectively, of total loan origination volume), while refinancing volume decreased to $1.1 billion during the six months ended June 30, 2017 from $1.8 billion during the six months ended June 30, 2016 (representing  16.1% and 25.0%, respectively, of total loan origination volume). Home purchases volume increased 7.4% to $3.5 billion during the three months ended June 30, 2017 from $3.3 billion during the three months ended June 30, 2016, while home purchases volume increased 8.6% to $5.8 billion during the six months ended June 30, 2017 from $5.3 billion during the six months ended June 30, 2016.

 

The mortgage origination segment’s total loan origination volume during the three and six months ended June 30, 2017 decreased 2.2% and 2.8%, respectively, compared to the same periods in 2016, while income before income taxes during the three and six months ended June 30, 2017 decreased 31.4% and 21.5%, respectively, compared to the same periods in 2016. The decrease in income before taxes during the three months ended June 30, 2017 was primarily due to a decrease in net gains from sale of loans in addition to an increase in segment operating costs. These changes were partially offset by an increase in the change in net fair value of interest rate lock commitments and loans held for sale, a decrease in compensation that varies with the volume of mortgage loan originations (“variable compensation”) and a decrease in net interest expense. The decrease in income before taxes during the six months ended June 30, 2017 was primarily due to a decrease in net gains from sale of loans, in addition to an increase in segment operating costs. These changes were partially offset by a decrease in variable compensation, a decrease in net interest expense, a decrease in lender paid closing costs, and an increase in the change in net fair value and related derivative activity of the MSR asset. 

 

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Noninterest income was $179.6 million and $192.9 million during the three months ended June 30, 2017 and 2016, respectively, and $323.3 million and $339.2 million during the six months ended June 30, 2017 and 2016, respectively, and was comprised of the following (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Variance

 

Six Months Ended June 30,

 

Variance

 

 

2017

    

2016

    

2017 vs 2016

    

2017

    

2016

    

2017 vs 2016

 

Net gains from sale of loans

$

122,484

 

$

150,014

 

$

(27,530)

 

$

242,123

 

$

265,248

 

$

(23,125)

 

Mortgage loan origination fees

 

25,976

 

 

25,797

 

 

179

 

 

45,532

 

 

44,610

 

 

922

 

Other mortgage production income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net fair value and related derivative activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments and loans held for sale

 

27,979

 

 

12,637

 

 

15,342

 

 

24,529

 

 

21,495

 

 

3,034

 

Mortgage servicing rights asset

 

(1,785)

 

 

(1,315)

 

 

(470)

 

 

(428)

 

 

(3,802)

 

 

3,374

 

Servicing fees

 

4,983

 

 

5,748

 

 

(765)

 

 

11,519

 

 

11,668

 

 

(149)

 

 

$

179,637

 

$

192,881

 

$

(13,244)

 

$

323,275

 

$

339,219

 

$

(15,944)

 

 

Net gains from sale of loans decreased 18.4% and 8.7% during the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016. Mortgage loan origination fees increased 0.7% and 2.1% during the three and six months ended June 30, 2017, respectively, compared with the same periods in 2016. The decreases in net gains from sale of loans during the three and six months ended June 30, 2017 were primarily a result of decrease in total loan sales volume of 14.6% and 6.0% during the three and six months ended June 30, 2017, respectively, compared with the same periods in 2016, in addition to a slight decrease in average loan sales margin during the same periods. Increases in mortgage loan origination fees resulting from increases in average mortgage loan origination fees during the three and six months ended June 30, 2017, compared with the same periods in 2016, were almost entirely offset by decreases in total loan origination volume during the same periods.

 

Noninterest income included increases of $28.0 million and $24.5 million during the three and six months ended June 30, 2017, respectively, compared with increases of $12.6 million and $21.5 million during the same periods in 2016, in the net fair value of the mortgage origination segment’s interest rate lock commitments (“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 increases during the three and six months ended June 30, 2017 were primarily the result of increases in the average volume and value of individual IRLCs and mortgage loans. The increases during the three and six months ended June 30, 2016 were primarily a result of increases in the volume of IRLCs and mortgage loans held during this period, partially offset by decreases in the average value of individual IRLCs and mortgage loans.

 

The mortgage origination segment sells substantially all mortgage loans it originates to various investors in the secondary market, the majority servicing released. During the three months ended June 30, 2017, the mortgage origination segment retained servicing on approximately 5% of loans sold, compared to 25% during the same period in 2016. During the six months ended June 30, 2017, the mortgage origination segment retained servicing on approximately 4% of loans sold, compared to 16% during the same period in 2016. 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. The related MSR asset was valued at $44.8 million on $4.0 billion of serviced loan volume at June 30, 2017, compared with a value of $63.3 million on $5.6 billion of serviced loan volume at December 31, 2016. 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 $1.8 million and $0.4 million during the three and six months ended June 30, 2017, respectively, compared to net losses of $1.3 million and $3.8 million during the three and six months ended June 30, 2016, respectively. Additionally, net servicing income was $1.6 million and $4.8 million during the three and six months ended June 30, 2017, respectively, compared with $2.5 million and $4.9 million, respectively, during the same periods in 2016.  In March 2017 and May 2016, the mortgage

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origination segment sold MSR assets of $17.5 million and $7.6 million,  respectively, which represented $1.7 billion and $917.4 million, respectively, of its serviced loan volume at the time.

 

Noninterest expenses were $161.4 million and $162.5 million during the three months ended June 30, 2017 and 2016, respectively, and $293.2 million and $297.2 million during the six months ended June 30, 2017 and 2016, respectively, and were comprised of the following (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Variance

 

Six Months Ended June 30,

 

Variance

 

 

2017

    

2016

    

2017 vs 2016

    

2017

    

2016

    

2017 vs 2016

 

Variable compensation

$

71,877

 

$

74,604

 

$

(2,727)

 

$

118,783

 

$

126,293

 

$

(7,510)

 

Segment operating costs

 

78,624

 

 

75,222

 

 

3,402

 

 

155,247

 

 

147,213

 

 

8,034

 

Lender paid closing costs

 

7,521

 

 

9,416

 

 

(1,895)

 

 

12,500

 

 

16,915

 

 

(4,415)

 

Servicing expense

 

3,347

 

 

3,246

 

 

101

 

 

6,677

 

 

6,739

 

 

(62)

 

 

$

161,369

 

$

162,488

 

$

(1,119)

 

$

293,207

 

$

297,160

 

$

(3,953)

 

 

Employees’ compensation and benefits accounted for the majority of noninterest expenses incurred during all periods presented. Variable compensation decreased $2.7 million and $7.5 million during the three and six months ended June 30, 2017, respectively, compared with the same periods in 2016, and comprised 62.2% and 64.0% of total employees’ compensation and benefits expenses during the three months ended June 30, 2017 and 2016, respectively, and 57.7% and 61.0% of total employees’ compensation and benefits expenses during the six months ended June 30, 2017 and 2016, respectively.  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 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.

 

While total loan origination volume decreased 2.2% and 2.8% for the three and six months ended June 30, 2017,  respectively, compared to the same periods in 2016, the mortgage origination segment’s operating costs increased 4.5% and 5.5%, respectively. The changes in segment operating costs during the three months ended June 30, 2017, compared to the same period in 2016, were primarily due to net increases in the indemnification liability reserve related to loans sold in prior years and occupancy expenses primarily due to an increase in retail branches. The change in segment operating expenses during the six months ended June 30, 2017, compared to the same period in 2016, was primarily due to an increase in non-variable salaries, as well as increases in the indemnification liability reserve and occupancy expense previously discussed.  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 second 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, 2008 and June 30, 2017, the mortgage origination segment sold mortgage loans totaling $93.7 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, it does not anticipate experiencing significant losses in the future on loans originated prior to 2008 as a result of investor claims under these provisions of its sales contracts.

 

When an agency, investor, or other party claim for indemnification of a loan sold is made, the mortgage origination segment evaluates the claim and determines if the claim can be satisfied through additional documentation or other deliverables. If the claim is valid and cannot be satisfied in that manner, the mortgage origination segment negotiates

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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, 2008 and June 30, 2017 (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Original Loan Balance

 

Loss Recognized

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

 

 

Loans

 

 

 

 

Loans

 

 

    

Amount

    

Sold

    

Amount

    

Sold

 

Claims resolved with no payment

 

$

199,906

 

0.21%

 

$

 —

 

0.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

Claims resolved as a result of a loan repurchase or payment to an investor for losses incurred (1)

 

 

232,747

 

0.25%

 

 

15,908

 

0.02%

 

 

 

$

432,653

 

0.46%

 

$

15,908

 

0.02%

 


(1)

Losses incurred include refunded purchased servicing rights.

 

At June 30, 2017 and December 31, 2016, the mortgage origination segment’s indemnification liability reserve totaled $22.4 million and $18.2 million, respectively. The related provision for indemnification losses was $1.1 million and $1.2 million during the three months ended June 30, 2017 and 2016, respectively, and $2.0 million and $2.1 million during the six months ended June 30, 2017 and 2016, respectively.

 

Insurance Segment

 

Losses before income taxes in our insurance segment were $10.4 million and $9.6 million during the three months ended June 30, 2017 and 2016,  respectively, and $8.6 million and $3.4 million during the six months ended June 30, 2017 and 2016, respectively. The year-over-year increase in losses before income taxes during the six months ended June 30, 2017, compared with the same period in 2016, was driven primarily by the decline in net insurance premiums earned.

 

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 insurance segment’s operations resulted in combined ratios of  131.8% and 130.0% during the three months ended June 30, 2017 and 2016, respectively, and  115.1% and 108.9% during the six months ended June 30, 2017 and 2016,  respectively. The increase in the combined ratio during the three months ended June 30, 2017, compared with the same period in 2016, included an increase in the underwriting expense ratio driven by the reduction in premiums earned, partially offset by a decrease in the loss and LAE ratio.  The increase in the combined ratio during the six months ended June 30, 2017, compared with the same period in 2016, included an increase in the underwriting expense ratio as previously discussed, as well as a slight increase in the loss and LAE ratio that was primarily driven by premiums earned decreasing at a higher rate than loss and LAE expense. The combined ratio is a measure of overall insurance

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underwriting profitability, and represents the sum of loss and LAE and underwriting expenses divided by net insurance premiums earned.

 

Noninterest income of $38.4 million and $41.4 million during the three months ended June 30, 2017 and 2016, respectively, included net insurance premiums earned of $36.0 million and $38.7 million, respectively,  while noninterest income of $76.7 million and $83.2 million during the six months ended June 30, 2017 and 2016, respectively, included net insurance premiums earned of $72.2 million and $78.5 million, respectively. The year-over-year decrease in net insurance premiums earned was primarily 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).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Variance

 

Six Months Ended June 30,

 

Variance

 

 

    

2017

    

2016

    

2017 vs 2016

    

2017

    

2016

    

2017 vs 2016

 

Direct Insurance Premiums Written:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homeowners

 

$

15,259

 

$

18,240

 

$

(2,981)

 

$

29,158

 

$

34,234

 

$

(5,076)

 

Fire

 

 

11,686

 

 

13,030

 

 

(1,344)

 

 

22,636

 

 

24,936

 

 

(2,300)

 

Mobile Home

 

 

10,018

 

 

10,486

 

 

(468)

 

 

20,164

 

 

20,781

 

 

(617)

 

Commercial

 

 

781

 

 

868

 

 

(87)

 

 

1,553

 

 

1,712

 

 

(159)

 

Other

 

 

48

 

 

51

 

 

(3)

 

 

77

 

 

91

 

 

(14)

 

 

 

$

37,792

 

$

42,675

 

$

(4,883)

 

$

73,588

 

$

81,754

 

$

(8,166)

 

 

 

The total direct insurance premiums written for our three largest insurance product lines decreased by $4.8 million and $8.0  million during the three and six months ended June 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).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Variance

 

Six Months Ended June 30,

 

Variance

 

 

    

2017

    

2016

    

2017 vs 2016

    

2017

    

2016

    

2017 vs 2016

 

Net Insurance Premiums Earned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homeowners

 

$

14,559

 

$

16,590

 

$

(2,031)

 

$

28,592

 

$

32,853

 

$

(4,261)

 

Fire

 

 

11,142

 

 

11,824

 

 

(682)

 

 

22,197

 

 

23,929

 

 

(1,732)

 

Mobile Home

 

 

9,529

 

 

9,475

 

 

54

 

 

19,773

 

 

19,942

 

 

(169)

 

Commercial

 

 

743

 

 

785

 

 

(42)

 

 

1,522

 

 

1,643

 

 

(121)

 

Other

 

 

47

 

 

47

 

 

 —

 

 

76

 

 

87

 

 

(11)

 

 

 

$

36,020

 

$

38,721

 

$

(2,701)

 

$

72,160

 

$

78,454

 

$

(6,294)

 

 

Net insurance premiums earned during the three and six months ended June 30, 2017 decreased compared to the same periods in 2016, primarily due to the decrease in net premiums written noted above. 

 

Noninterest expenses of $49.4 million and $51.7 million during the three months ended June 30, 2017 and 2016, respectively, and $86.4 million and $88.1 million during the six months ended June 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 June 30, 2017 was $33.2 million, compared with $37.2 million during the same period in 2016, resulting in loss and LAE ratios of  92.1% and 96.1%, respectively. Loss and LAE during the six months ended June 30, 2017 was $54.9 million, compared with $59.2 million during the same period in 2016, resulting in loss and LAE ratios of 76.1% and 75.4%,  respectively. The decrease in the loss and LAE ratio during the three months ended June 30, 2017, compared to the same period in 2016,  was primarily driven by premiums earned decreasing by 7.0%, compared to a 10.8% decline in loss and LAE expense. The increase in the loss and LAE ratio during the six months ended June 30, 2017, compared to the same period in 2016, was primarily driven by premiums earned decreasing by 8.0%, compared to a 7.2% decline in loss and LAE expense. 

 

Policy acquisition and other underwriting expenses encompass all expenses incurred relative to NLC operations, and include elements of multiple categories of expense otherwise reported as noninterest expense in the consolidated statements of operations.

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The following table details the calculation of the underwriting expense ratio for the periods presented (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Variance

 

 

Six Months Ended June 30,

Variance

 

 

    

2017

    

2016

    

2017 vs 2016

    

    

2017

    

2016

    

2017 vs 2016

 

Amortization of deferred policy acquisition costs

 

$

9,531

 

$

9,687

 

$

(156)

 

 

$

18,627

 

$

19,880

 

$

(1,253)

 

Other underwriting expenses

 

 

5,792

 

 

4,394

 

 

1,398

 

 

 

11,468

 

 

8,174

 

 

3,294

 

Total

 

 

15,323

 

 

14,081

 

 

1,242

 

 

 

30,095

 

 

28,054

 

 

2,041

 

Agency expenses

 

 

(1,039)

 

 

(970)

 

 

(69)

 

 

 

(1,925)

 

 

(1,764)

 

 

(161)

 

Total less agency expenses

 

$

14,284

 

$

13,111

 

$

1,173

 

 

$

28,170

 

$

26,290

 

$

1,880

 

Net insurance premiums earned

 

$

36,020

 

$

38,721

 

$

(2,701)

 

 

$

72,160

 

$

78,454

 

$

(6,294)

 

Expense ratio

 

 

39.7

%  

 

33.9

%  

 

5.8

%  

 

 

39.0

%  

 

33.5

%  

 

5.5

%  

 

 

 

Corporate

 

Corporate includes certain activities not allocated to specific business segments. These activities include holding company financing and investing activities, 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.

 

As a holding company, Hilltop’s primary investment objectives are to preserve capital 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 June 30, 2017 and 2016, respectively, and $0.2 million and $0.3 million during the six months ended June 30, 2017 and 2016, respectively.  Investment and interest income during the six months ended June 30, 2016 included $0.2 million of intercompany interest earned on note receivables held with Securities Holdings that were paid off in January 2016 and March 2016, respectively.

 

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 $2.4 million and $1.9 million during the three months ended June 30, 2017 and 2016, respectively, and $5.0 million and $3.8 million during the six months ended June 30, 2017 and 2016, respectively, and was primarily associated with 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 during the three and six months ended June 30, 2017 of $0.8 million and $1.5 million, 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 six months ended June 30, 2016, interest expense on the Debentures of $0.7 million and $1.3 million was reported within our operating segments.

 

Noninterest income of $12.6 million during both the three and six months ended June 30, 2017 was primarily comprised of the previously mentioned pre-tax net increase to other noninterest income of $11.6 million related to the resolution of the appraisal proceedings from the SWS Merger. Noninterest income during the three and six months ended June 30, 2016 was nominal.

 

Noninterest expenses of $6.3 million and $6.5 million during the three months ended June 30, 2017 and 2016, respectively, and $15.7 million and $12.3 million during the six months ended June 30, 2017 and 2016, respectively were primarily comprised of employees’ compensation and benefits and professional fees, including corporate governance, legal and transaction costs. During the six months ended June 30, 2017, compared with the same period in 2016,  the change in noninterest expenses primarily included increases associated with the organizational changes noted above related to employees’ compensation and benefits costs of $1.6 million, professional fees of $2.3 million, and occupancy and equipment expenses of $1.6 million, partially offset by a decrease of $0.8 million in transaction-related costs directly attributable to the SWS Merger. Specifically, during the six months ended June 30, 2017, Hilltop incurred pre-tax transaction costs related to the SWS Merger of $1.5 million, compared with $2.3 million during the six months ended June 30, 2016.   

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Financial Condition

 

The following discussion contains a more detailed analysis of our financial condition at June 30, 2017 as compared with December 31, 2016.

 

Securities Portfolio

 

At June 30, 2017, 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, mortgage-backed, corporate debt, and equity securities. We may categorize investments as trading, available for sale and held to maturity.

 

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 that may be 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 and are carried at estimated fair value, with unrealized gains and losses recorded in accumulated other comprehensive income (loss). Securities are classified as held to maturity based on the intent and ability of our management, at the time of purchase, to hold such securities to maturity. These securities are carried at amortized cost.

 

The table below summarizes our securities portfolio (in thousands).

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2017

    

2016

 

Trading securities, at fair value

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

1,874

 

$

5,940

 

U.S. government agencies:

 

 

 

 

 

 

 

Bonds

 

 

32,944

 

 

36,303

 

Residential mortgage-backed securities

 

 

233,443

 

 

2,539

 

Commercial mortgage-backed securities

 

 

9,739

 

 

15,171

 

Collateralized mortgage obligations

 

 

1,668

 

 

5,607

 

Corporate debt securities

 

 

75,240

 

 

60,699

 

States and political subdivisions

 

 

98,619

 

 

89,946

 

Unit investment trusts

 

 

8,920

 

 

41,409

 

Private-label securitized product

 

 

4,843

 

 

4,292

 

Other

 

 

4,195

 

 

3,628

 

 

 

 

471,485

 

 

265,534

 

Securities available for sale, at fair value

 

 

 

 

 

 

 

U.S. Treasury securities

 

 

31,871

 

 

31,801

 

U.S. government agencies:

 

 

 

 

 

 

 

Bonds

 

 

91,812

 

 

122,652

 

Residential mortgage-backed securities

 

 

240,446

 

 

133,138

 

Commercial mortgage-backed securities

 

 

12,199

 

 

8,715

 

Collateralized mortgage obligations

 

 

210,115

 

 

114,702

 

Corporate debt securities

 

 

78,074

 

 

79,129

 

States and political subdivisions

 

 

77,679

 

 

87,515

 

Commercial mortgage-backed securities

 

 

507

 

 

515

 

Equity securities

 

 

20,503

 

 

19,840

 

 

 

 

763,206

 

 

598,007

 

Securities held to maturity, at amortized cost

 

 

 

 

 

 

 

U.S. government agencies:

 

 

 

 

 

 

 

Bonds

 

 

40,514

 

 

40,513

 

Residential mortgage-backed securities

 

 

18,009

 

 

19,606

 

Commercial mortgage-backed securities

 

 

57,867

 

 

31,767

 

Collateralized mortgage obligations

 

 

194,664

 

 

217,954

 

States and political subdivisions

 

 

48,793

 

 

41,991

 

 

 

 

359,847

 

 

351,831

 

Total securities portfolio

 

$

1,594,538

 

$

1,215,372

 

 

 

We had a  net unrealized gain of $2.0 million at June 30, 2017, compared with a net unrealized loss of $0.2 million at December 31, 2016, related to the available for sale investment portfolio, and net unrealized losses associated with the

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securities held to maturity portfolio of $4.0 million and $6.7 million at June 30, 2017 and December 31, 2016, respectively.

 

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 securities portfolio serves as a source of liquidity. Historically, the Bank’s policy has been to invest primarily in securities of the U.S. government and its agencies, obligations of municipalities in the State of Texas and other high grade fixed income securities to minimize credit risk. At June 30, 2017, the banking segment’s securities portfolio of $997.3 million was comprised of trading securities of $10.2 million, available for sale securities of $627.3 million and held to maturity securities of $359.8 million.

 

Broker-Dealer Segment

 

The broker-dealer segment holds securities to support sales, underwriting and other customer activities. The interest rate risk inherent in holding these securities is managed by setting and monitoring limits on the size and duration of positions and on the length of time the securities can be held. The Hilltop Broker-Dealers are required to carry their securities at fair value and record changes in the fair value of the portfolio in operations. Accordingly, the securities portfolio of the Hilltop Broker-Dealers included trading securities of $461.3 million at June 30, 2017. 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, had a value of $149.9 million at June 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.

 

Insurance Segment

 

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 June 30, 2017, the insurance segment’s securities portfolio was comprised of $135.9 million in available for sale securities and $5.5 million of other investments included in other assets within the consolidated balance sheet.

 

Non-Covered 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Loans, excluding

    

PCI

    

Total

 

June 30, 2017

 

PCI Loans

 

Loans

 

Loans

 

Commercial and industrial

 

$

1,743,185

 

$

7,120

 

$

1,750,305

 

Real estate

 

 

2,934,521

 

 

34,678

 

 

2,969,199

 

Construction and land development

 

 

860,749

 

 

2,333

 

 

863,082

 

Consumer

 

 

42,552

 

 

214

 

 

42,766

 

Broker-dealer

 

 

492,859

 

 

 —

 

 

492,859

 

Non-covered loans, gross

 

 

6,073,866

 

 

44,345

 

 

6,118,211

 

Allowance for loan losses

 

 

(56,218)

 

 

(2,990)

 

 

(59,208)

 

Non-covered loans, net of allowance

 

$

6,017,648

 

$

41,355

 

$

6,059,003

 

 

 

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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 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.

 

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 June 30, 2017 and December 31, 2016, respectively. The banking segment’s non-covered loan portfolio includes a warehouse line of credit extended to PrimeLending, of which $1.8 billion and $1.6 billion was drawn at June 30, 2017 and December 31, 2016, 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 line of credit are eliminated from net loans on our consolidated balance sheets. The banking segment does not generally participate in syndicated loan transactions and has no foreign loans in its portfolio.

 

At June 30, 2017, 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 35.8%, 12.7% and 14.1%, respectively, of the banking segment’s total non-covered loans at June 30, 2017. The banking segment’s non-covered loan concentrations were within regulatory guidelines at June 30, 2017.

 

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, net of the allowance for non-covered loan losses, were $492.4 million and $501.9 million at June 30, 2017 and December 31, 2016,  respectively. This decrease was primarily attributable to a  decrease of $16.3 million in receivables from correspondents, partially offset by an increase of $5.7 million in borrowings in margin accounts.

 

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Mortgage Origination Segment

 

The loan portfolio of the mortgage origination segment consists of loans held for sale, primarily single-family residential mortgages funded through PrimeLending, and IRLCs with customers pursuant to which we agree to originate a mortgage loan on a future date at an agreed-upon interest rate. The components of the mortgage origination segment’s loans held for sale and IRLCs are as follows (in thousands).

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31, 

 

 

    

2017

    

2016

 

Loans held for sale:

 

 

 

 

 

 

 

Unpaid principal balance

 

$

1,854,581

 

$

1,706,383

 

Fair value adjustment

 

 

73,208

 

 

42,115

 

 

 

$

1,927,789

 

$

1,748,498

 

IRLCs:

 

 

 

 

 

 

 

Unpaid principal balance

 

$

1,506,302

 

$

944,550

 

Fair value adjustment

 

 

33,945

 

 

23,269

 

 

 

$

1,540,247

 

$

967,819

 

 

The mortgage origination segment uses forward commitments to mitigate interest rate risk associated with its loans held for sale and IRLCs. The notional amounts of these forward commitments at June 30, 2017 and December 31, 2016 were $2.6 billion and $2.1 billion, respectively, while the related estimated fair values were $7.3 million and $8.5 million, respectively.

 

Covered Loan Portfolio

 

Banking Segment

 

Loans acquired in the FNB Transaction that are subject to loss-share agreements with the FDIC are referred to as “covered loans” and reported separately in our consolidated balance sheets. Under the terms of the loss-share agreements, the FDIC has agreed to reimburse the Bank the following amounts with respect 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 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 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 June 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 June 30, 2017, the Bank had billed $179.6 million of covered net losses to the FDIC, of which 80%, or $143.7 million, were reimbursable under the loss-share agreements. As of June 30, 2017, the Bank had received aggregate reimbursements of $143.7 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 $15.9 million at June 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.

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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 any 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.

 

Covered loans held for investment are detailed in the table below and classified by portfolio segment (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Loans, excluding

    

PCI

    

Total

 

June 30, 2017

 

PCI Loans

 

Loans

 

Loans

 

Commercial and industrial

 

$

1,068

 

$

581

 

$

1,649

 

Real estate

 

 

103,285

 

 

96,560

 

 

199,845

 

Construction and land development

 

 

3,288

 

 

2,454

 

 

5,742

 

Covered loans, gross

 

 

107,641

 

 

99,595

 

 

207,236

 

Allowance for loan losses

 

 

(38)

 

 

(1,321)

 

 

(1,359)

 

Covered loans, net of allowance

 

$

107,603

 

$

98,274

 

$

205,877

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

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 June 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 74.7% and 21.7%, respectively, of the banking segment’s total covered loans at June 30, 2017. The banking segment’s covered loan concentrations were within regulatory guidelines at June 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 probable losses inherent in our existing non-covered and covered loan portfolios. Management has responsibility for determining the level of the allowance for loan losses, subject to review by the Loan Review Committee of the Bank’s board of directors.

 

It is management’s responsibility to, at the end of each quarter, or more frequently as deemed necessary, analyze the level of the allowance for loan losses to ensure that it is appropriate for the estimated credit losses in the portfolio. Estimated credit losses are the probable current amount of loans that we will be unable to collect given facts and circumstances as of the evaluation date. When management determines that a loan, or portion thereof, is uncollectible, the loan, or portion thereof, is charged-off against the allowance for loan losses, or for acquired loans accounted for in pools, charged against the pool discount. Recoveries on charge-offs of loans acquired in the Bank Transactions that occurred prior to their acquisition represent contractual cash flows not expected to be collected 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 acquired 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

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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 $5.9 million and $28.9 million during the three months ended June 30, 2017 and 2016, respectively, and $7.6 million and $32.3 million during the six months ended June 30, 2017 and 2016, respectively.  The significant decreases in the provision for losses during the three and six months ended June 30, 2017, compared with the same periods in 2016, was primarily the result of the previously mentioned $24.5 million charge-off of a single large loan during 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 June 30, 2017, additional provisions for losses on existing loans may be necessary in the future.

 

The following tables present the activity in our allowance for loan losses within our non-covered and covered loan portfolios for the periods presented (in thousands). Substantially all of the activity shown below occurred within the banking segment.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

Non-Covered Portfolio

    

2017

    

2016

    

2017

    

2016

    

Balance, beginning of period

 

$

55,157

 

$

48,450

 

$

54,186

 

$

45,415

 

Provisions charged to operations

 

 

4,893

 

 

28,693

 

 

6,102

 

 

32,378

 

Recoveries of non-covered loans previously charged off:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

620

 

 

481

 

 

1,060

 

 

1,138

 

Real estate

 

 

61

 

 

112

 

 

97

 

 

169

 

Construction and land development

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Consumer

 

 

22

 

 

44

 

 

40

 

 

84

 

Broker-dealer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total recoveries

 

 

703

 

 

637

 

 

1,197

 

 

1,391

 

Non-covered loans charged off:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

1,200

 

 

25,433

 

 

1,805

 

 

26,783

 

Real estate

 

 

218

 

 

1,298

 

 

300

 

 

1,298

 

Construction and land development

 

 

 —

 

 

 —

 

 

11

 

 

 —

 

Consumer

 

 

127

 

 

37

 

 

161

 

 

89

 

Broker-dealer

 

 

 —

 

 

(1)

 

 

 —

 

 

 1

 

Total charge-offs

 

 

1,545

 

 

26,767

 

 

2,277

 

 

28,171

 

Net charge-offs

 

 

(842)

 

 

(26,130)

 

 

(1,080)

 

 

(26,780)

 

Balance, end of period

 

$

59,208

 

$

51,013

 

$

59,208

 

$

51,013

 

Non-covered allowance for loan losses as a percentage of gross non-covered loans

 

 

 

 

 

 

 

 

0.97

%  

 

0.93

%  

 

 

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Three Months Ended June 30,

 

Six Months Ended June 30,

 

Covered Portfolio

    

2017

    

2016

    

2017

    

2016

 

Balance, beginning of period

 

$

753

 

$

1,217

 

$

413

 

$

1,532

 

Provisions charged to (recapture from) operations

 

 

960

 

 

183

 

 

1,456

 

 

(95)

 

Recoveries of covered loans previously charged off:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 3

 

 

 —

 

 

 6

 

 

 —

 

Real estate

 

 

 1

 

 

10

 

 

 5

 

 

17

 

Construction and land development

 

 

 4

 

 

101

 

 

 6

 

 

101

 

Total recoveries

 

 

 8

 

 

111

 

 

17

 

 

118

 

Covered loans charged off:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 —

 

 

 —

 

 

 6

 

 

 6

 

Real estate

 

 

362

 

 

26

 

 

521

 

 

42

 

Construction and land development

 

 

 —

 

 

30

 

 

 —

 

 

52

 

Total charge-offs

 

 

362

 

 

56

 

 

527

 

 

100

 

Net recoveries (charge-offs)

 

 

(354)

 

 

55

 

 

(510)

 

 

18

 

Balance, end of period

 

$

1,359

 

$

1,455

 

$

1,359

 

$

1,455

 

Covered allowance for loan losses as a percentage of gross covered loans

 

 

 

 

 

 

 

 

0.66

%  

 

0.45

%  

 

The distribution of the allowance for loan 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 portfolios are presented in the tables below (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

December 31, 2016

 

 

    

    

 

    

% of

    

    

 

    

% of

    

 

 

 

 

 

Gross

 

 

 

 

Gross

 

 

 

 

 

 

Non-

 

 

 

 

Non-

 

 

 

 

 

 

Covered

 

 

 

 

Covered

 

Non-Covered Portfolio

 

Reserve

 

Loans

 

Reserve

 

Loans

 

Commercial and industrial

 

$

21,834

 

28.61

%  

$

21,369

 

29.03

%

Real estate (including construction and land development)

 

 

36,379

 

62.64

%  

 

32,238

 

61.67

%

Consumer

 

 

524

 

0.70

%  

 

424

 

0.71

%

Broker-dealer

 

 

471

 

8.05

%  

 

155

 

8.59

%

Total

 

$

59,208

 

100.00

%  

$

54,186

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

December 31, 2016

 

 

    

   

 

    

% of

 

   

 

    

% of

 

 

 

 

 

 

Gross

 

 

 

 

Gross

 

 

 

 

 

 

Covered

 

 

 

 

Covered

 

Covered Portfolio

 

Reserve

 

loans

 

Reserve

 

Loans

 

Commercial and industrial

 

$

47

 

0.80

%

$

35

 

1.05

%

Real estate (including construction and land development)

 

 

1,312

 

99.20

%

 

378

 

98.95

%

Total

 

$

1,359

 

100.00

%

$

413

 

100.00

%

 

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 PCI loans because PCI loans exhibited evidence of credit deterioration at acquisition that made it probable that all contractually required principal payments would not be collected. Within our non-covered loan portfolio, we had eight credit relationships totaling $16.6 million of potential problem loans at June 30, 2017, compared with four credit relationships totaling $3.8 million of non-covered potential problem loans at December 31, 2016. Within our covered loan portfolio, we had one credit relationship totaling $0.4 million of potential problem loans at June 30, 2017, compared with one credit relationship totaling $0.5 million of potential problem loans at December 31, 2016.

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Non-Performing Assets

 

The following table presents components of our non-covered non-performing assets (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2017

    

2016

 

Non-covered loans accounted for on a non-accrual basis:

 

    

 

 

    

 

 

Commercial and industrial

 

$

13,818

 

$

9,515

 

Real estate

 

 

14,877

 

 

13,932

 

Construction and land development

 

 

632

 

 

755

 

Consumer

 

 

208

 

 

244

 

Broker-dealer

 

 

 —

 

 

 —

 

 

 

$

29,535

 

$

24,446

 

 

 

 

 

 

 

 

 

Non-covered non-performing loans as a percentage of total non-covered loans

 

 

0.36

%  

 

0.32

%

 

 

 

 

 

 

 

 

Non-covered other real estate owned

 

$

4,591

 

$

4,507

 

 

 

 

 

 

 

 

 

Other repossessed assets

 

$

723

 

$

1,117

 

 

 

 

 

 

 

 

 

Non-covered non-performing assets

 

$

34,849

 

$

30,070

 

 

 

 

 

 

 

 

 

Non-covered non-performing assets as a percentage of total assets

 

 

0.26

%  

 

0.24

%

 

 

 

 

 

 

 

 

Non-covered loans past due 90 days or more and still accruing

 

$

48,757

 

$

47,486

 

 

 

 

 

 

 

 

 

Troubled debt restructurings included in accruing non-covered loans

 

$

1,170

 

$

1,196

 

 

At June 30, 2017, total non-covered non-performing assets increased $4.7 million to $34.8 million, compared with $30.1 million at December 31, 2016. Non-covered non-performing loans totaled $29.5 million at June 30, 2017 and $24.4 million at December 31, 2016. At June 30, 2017, non-covered non-accrual loans included 21 commercial and industrial relationships with loans of $13.8 million secured by accounts receivable, life insurance, oil and gas, livestock and equipment. Non-covered non-accrual loans at June 30, 2017 also included $14.9 million characterized as real estate loans, including six commercial real estate loan relationships of $11.6 million and $3.3 million in loans secured by residential real estate,  $1.2 million of which were classified as loans held for sale, as well as construction and land development loans of $0.6 million. At December 31, 2016, non-covered non-accrual loans included 19 commercial and industrial relationships with loans of $9.5 million secured by accounts receivable, life insurance, oil and gas, livestock, and equipment. Non-covered non-accrual loans at December 31, 2016 also included $13.9 million characterized as real estate loans, including five commercial real estate loan relationships totaling  $11.0 million and $2.9 million in loans secured by residential real estate, $1.7 million of which were classified as loans held for sale, as well as construction and land development loans of $0.8 million.

 

Non-covered OREO increased  $0.1 million to $4.6 million at June 30, 2017, compared with $4.5 million at December 31, 2016. Changes in non-covered OREO included the addition of three properties totaling $0.4 million and the disposal of three properties of $0.2 million. At June 30, 2017, non-covered OREO included commercial properties of $4.1 million and other real estate properties of $0.5 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 $48.8 million and $47.5 million at June 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 June 30, 2017, troubled debt restructurings (“TDRs”) on non-covered loans totaled $8.7 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 $7.5 million reported in non-accrual loans. At December 31, 2016, TDRs on non-covered loans 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.

 

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The following table presents components of our covered non-performing assets (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2017

    

2016

 

Covered loans accounted for on a non-accrual basis:

 

 

 

 

 

 

 

Commercial and industrial

 

$

96

 

$

52

 

Real estate

 

 

2,904

 

 

3,765

 

Construction and land development

 

 

14

 

 

19

 

 

 

$

3,014

 

$

3,836

 

 

 

 

 

 

 

 

 

Covered non-performing loans as a percentage of total covered loans

 

 

1.45

%  

 

1.50

%

 

 

 

 

 

 

 

 

Covered other real estate owned:

 

 

 

 

 

 

 

Real estate - residential

 

$

5,029

 

$

7,396

 

Real estate - commercial

 

 

7,664

 

 

9,558

 

Construction and land development - residential

 

 

5,103

 

 

7,926

 

Construction and land development - commercial

 

 

24,508

 

 

26,762

 

 

 

$

42,304

 

$

51,642

 

 

 

 

 

 

 

 

 

Other repossessed assets

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

Covered non-performing assets

 

$

45,318

 

$

55,478

 

 

 

 

 

 

 

 

 

Covered non-performing assets as a percentage of total assets

 

 

0.34

%  

 

0.44

%

 

 

 

 

 

 

 

 

Covered loans past due 90 days or more and still accruing

 

$

38

 

$

173

 

 

 

 

 

 

 

 

 

Troubled debt restructurings included in accruing covered loans

 

$

496

 

$

503

 

 

At June 30, 2017, covered non-performing assets decreased by $10.2 million to $45.3 million, compared with $55.5 million at December 31, 2016, due to decreases in covered non-accrual loans of $0.8 million and covered other real estate owned of $9.3 million. Covered non-performing loans totaled $3.0 million at June 30, 2017 and $3.8 million at December 31, 2016. At June 30, 2017, covered non-performing loans included two commercial and industrial relationship of $0.1 million and one residential real estate loan relationship of $2.9 million. At December 31, 2016, covered non-performing loans included one commercial and industrial relationship of $0.1 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 $9.3 million to $42.3 million at June 30, 2017, compared with $51.6 million at December 31, 2016. The decrease was primarily due to the disposal of 94 properties totaling $12.3 million and fair value valuation decreases of $2.1 million, partially offset by the addition of 39 properties totaling $5.1 million.

 

Covered non-PCI loans past due 90 days or more and still accruing totaled  $38 thousand at June 30, 2017 and included one residential real estate loan. At December 31, 2016, covered non-PCI loans past due 90 days or more and still accruing totaled $0.2 million and included one residential real estate loan and one commercial and industrial loan.

 

At June 30, 2017,  TDRs on covered loans totaled $1.3 million, of which $0.5 million relate to covered loans that are considered to be performing and covered non-performing loans of $0.8 million included in non-accrual loans. At December 31, 2016, TDRs on covered loans totaled $1.4 million, of which $0.5 million related to covered loans that are considered to be performing and covered non-performing loans of $0.9 million included in non-accrual loans.

 

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Insurance Losses and Loss Adjustment Expenses

 

At June 30, 2017 and December 31, 2016, our gross reserve for unpaid losses and LAE was $38.2 million and $35.8 million, respectively, including estimated recoveries from reinsurance of $3.2 million and $9.4 million, respectively. 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 $7.3 billion during the six months ended June 30, 2017, and were higher than the average deposits of $7.0 billion during the six months ended June 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).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30,

 

Year Ended December 31,

 

 

 

2017

 

2016

 

2016

 

 

    

Average

    

Average

    

Average

    

Average

    

Average

    

Average

 

 

 

Balance

 

Rate Paid

 

Balance

 

Rate Paid

 

Balance

 

Rate Paid

 

Noninterest-bearing demand deposits

 

$

2,254,268

 

0.00

%  

$

2,178,378

 

0.00

%  

$

2,241,561

 

0.00

%

Interest-bearing demand deposits

 

 

3,578,808

 

0.25

%  

 

3,100,110

 

0.15

%  

 

3,185,006

 

0.14

%

Savings deposits

 

 

250,009

 

0.11

%  

 

316,492

 

0.16

%  

 

301,877

 

0.15

%

Time deposits

 

 

1,210,250

 

0.94

%  

 

1,386,248

 

0.78

%  

 

1,337,491

 

0.81

%

 

 

$

7,293,335

 

0.28

%  

$

6,981,228

 

0.23

%  

$

7,065,935

 

0.22

%

 

 

 

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Borrowings

 

Our borrowings are shown in the table below (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

December 31, 2016

 

 

 

    

    

 

    

Average

    

    

 

    

Average

 

 

 

 

Balance

 

Rate Paid

 

Balance

 

Rate Paid

 

 

Short-term borrowings

 

$

1,515,069

 

1.02

%  

$

1,417,289

 

0.65

%

 

Notes payable

 

 

300,283

 

3.64

%  

 

317,912

 

3.89

%

 

Junior subordinated debentures

 

 

67,012

 

4.38

%  

 

67,012

 

3.99

%

 

 

 

$

1,882,364

 

1.79

%  

$

1,802,213

 

1.57

%

 

 

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. The $97.8 million increase in short-term borrowings at June 30, 2017 compared with December 31, 2016 included an increase of $292.7 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 $194.9 million in our banking segment primarily associated with the increased utilization of available internal funds. Notes payable at June 30, 2017 of $300.3 million was comprised of $148.4 million related to Senior Notes, net of loan origination fees, FHLB borrowings with an original maturity greater than one year within the banking segment of $99.8 million, insurance segment term notes of $27.5 million, and mortgage origination segment borrowings of $21.6 million. The decrease in notes payable at June 30, 2017 compared to December 31, 2016 included the payoff by NLC of its $20.0 million insurance company note payable due March 2035. The average rate paid associated with notes payable includes the effect of amortization of the premiums on FHLB borrowings booked as a part of the SWS Merger.    

 

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 preserve capital and have cash resources available to make acquisitions. At June 30, 2017,  Hilltop had  $116.7 million in cash and cash equivalents, an increase of $12.8 million from $103.9 million at December 31, 2016. This increase in cash and cash equivalents was primarily due to the net effects of Hilltop’s receipt of $75.6 million in dividends from its subsidiaries, partially offset by Hilltop’s payment of $55.0 million related to the resolution of the SWS appraisal proceeding,  $16.0 million associated with our stock repurchase program, $11.6 million in cash dividends declared, and other general corporate expenses. 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.

 

Dividend Declaration

 

On July 27, 2017, our Board of Directors declared a quarterly cash dividend of $0.06 per common share, payable on August 31, 2017 to all common stockholders of record as of the close of business on August 15, 2017.  

 

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 Payable

 

On June 14, 2017,  NLC paid off the $20.0 million insurance company note payable due March 2035.    

 

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. 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 June 30, 2017,  $150.0 million of our Senior Notes was outstanding. During the three months ended June 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 $50.0 million of our outstanding common stock. Under 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 to 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 six months ended June 30, 2017, the Company paid $16.0 million to repurchase an aggregate of 605,431 shares of common stock at an average price of $26.42 per share. 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 $15.9 million at June 30, 2017 based on the current estimate of aggregate realized losses on covered assets over the life of the loss-share agreements.

 

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 implemented 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 is 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 and PlainsCapital exceed each of the capital conservation buffer requirements in effect as of June 30, 2017, as well as the fully phased-in requirements through 2019.

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In addition, under the final rules, bank holding companies with less than $15 billion in assets as of December 31, 2009 are allowed to continue to include junior subordinated debentures in Tier 1 capital, subject to certain restrictions. However, if an institution grows 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 June 30, 2017, under guidance issued by the Board of Governors of the Federal Reserve System.

 

At June 30, 2017,  Hilltop had a total capital to risk weighted assets ratio of 18.57%, Tier 1 capital to risk weighted assets ratio of 18.07%, common equity Tier 1 capital to risk weighted assets ratio of 17.53% and a Tier 1 capital to average assets, or leverage, ratio of 13.07%.  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.

 

At June 30, 2017, PlainsCapital had a total capital to risk weighted assets ratio of 14.72%, Tier 1 capital to risk weighted assets ratio of 13.95%, common equity Tier 1 capital to risk weighted assets ratio of 13.95% and a Tier 1 capital to average assets, or leverage, ratio of 12.11%.  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.

 

We discuss regulatory capital requirements in more detail in Note 15 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 2016 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 had deposits of $7.6 billion at June 30, 2017, an increase of $510.8 million from $7.1 billion at December 31, 2016. 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. At June 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 $530.6 million from $1.8 billion and time deposits, including brokered deposits, increased $175.8 million from $1.2 billion at December 31, 2016.

 

The Bank’s 15 largest depositors, excluding Hilltop and Hilltop Securities, accounted for 9.25% of the Bank’s total deposits, and the Bank’s five largest depositors, excluding Hilltop and Hilltop Securities, accounted for 4.75% of the Bank’s total deposits at June 30, 2017. The loss of one or more of our largest Bank customers, or a significant decline in our deposit balances due to ordinary course fluctuations related to these customers’ businesses, could adversely affect our liquidity and might require us to raise deposit rates to attract new deposits, purchase federal funds or borrow funds on a short-term basis to replace such deposits.

 

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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 financings and other payables to finance their assets and operations, subject to their respective compliance with broker-dealer net capital and customer protection rules. At June 30, 2017,  Hilltop Securities had credit arrangements with five unaffiliated banks 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 facility with an unaffiliated bank of up to $50.0 million. At June 30, 2017,  Hilltop Securities had borrowed $201.0 million under its credit arrangements and had no borrowings under its credit facility.

 

Mortgage Origination Segment

 

PrimeLending funds the mortgage loans it originates through a warehouse line of credit maintained with the Bank. At June 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. PrimeLending sells substantially all mortgage loans it originates to various investors in the secondary market, the majority with servicing released. As these mortgage loans are sold in the secondary market, PrimeLending pays down its warehouse line of credit with the Bank. In addition, PrimeLending has an available line of credit with JPMorgan Chase Bank, NA (“JPMorgan Chase”) of up to $1.0 million, of which no borrowings were outstanding at June 30, 2017.

 

PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC (“Ventures Management”). Ventures Management is the managing member and owns 51% of the membership interest in both PrimeLending Ventures, LLC (“Ventures”) and Mutual of Omaha Mortgage, LLC (“Mutual”). Ventures has available lines of credit with the Bank, Wells Fargo Bank, N.A. (“Wells Fargo”), and Texas Capital Bank (“TCB”) of up to $20.0 million, $20.0 million, and $30.0 million, respectively. At June 30, 2017, Ventures had $18.1 million and $1.0 million in borrowings under its TCB and Bank lines of credit, respectively. Mutual has available lines of credit with the Bank,  Comerica Bank (“Comerica”), and TCB of up to $10.0 million,  $20.0 million, and $30.0 million, respectively. At June 30, 2017, Mutual had $3.5 million in borrowings under its Comerica line of credit. 

 

Insurance Segment

 

Our insurance operating subsidiary’s primary investment objectives are 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. Bonds, cash and short-term investments of $183.0 million, or 87.6%, equity investments of $20.5 million and other investments of $5.5 million comprised NLC’s $209.0 million in total cash and investments at June 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.

 

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.

 

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 billion at June 30, 2017 and outstanding financial and performance standby letters of credit of $33.9 million at June 30, 2017.

 

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. The significant accounting policies which we believe to be the most critical in preparing our consolidated financial statements relate to allowance for loan 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, there have been no changes in critical accounting policies as further described under “Critical Accounting Policies and Estimates” and Note 1 to the Consolidated Financial Statements in our 2016 Form 10-K.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Our assessment of market risk as of June 30, 2017 indicates there are no material changes in the quantitative and qualitative disclosures from those previously reported in our 2016 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 company is considered to be asset sensitive, or have a positive GAP, when the amount of its interest-earning assets maturing or repricing within a given period exceeds the amount of its interest-bearing liabilities also maturing or repricing within that time period. Conversely, a company is considered to be liability sensitive, or have a negative GAP, when the amount of its interest-bearing liabilities maturing or repricing within a given period exceeds the amount of its interest-earning assets also maturing or repricing within that time period. During a period of rising interest rates, a negative GAP would tend to affect net interest income adversely, while a positive GAP would tend to result in an increase in net interest income. During a period of falling interest rates, a negative GAP would tend to result in an increase in net interest income, while a positive GAP would tend to affect net interest income adversely. However, it is our intent to remain relatively balanced so that changes in rates do not have a significant impact on earnings.

 

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As illustrated in the table below, the banking segment is asset sensitive overall. Loans that adjust daily or monthly to the Wall Street Journal Prime rate comprise a large percentage of interest sensitive assets and are the primary cause of the banking segment’s asset sensitivity. To help neutralize interest rate sensitivity, the banking segment has kept the terms of most of its borrowings under one year as shown in the following table (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

   

3 Months or

    

> 3 Months to

    

> 1 Year to

    

> 3 Years to

    

 

 

    

 

 

 

 

 

Less

 

1 Year

 

3 Years

 

5 Years

 

> 5 Years

 

Total

 

Interest sensitive assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans

 

$

4,770,619

 

$

1,015,543

 

$

1,377,250

 

$

317,225

 

$

182,051

 

$

7,662,688

 

Securities

 

 

131,950

 

 

138,696

 

 

250,809

 

 

92,379

 

 

384,626

 

 

998,460

 

Federal funds sold and securities purchased under agreements to resell

 

 

388

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

388

 

Other interest sensitive assets

 

 

228,774

 

 

 —

 

 

 —

 

 

 —

 

 

29,131

 

 

257,905

 

Total interest sensitive assets

 

 

5,131,731

 

 

1,154,239

 

 

1,628,059

 

 

409,604

 

 

595,808

 

 

8,919,441

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest sensitive liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing checking

 

$

3,439,954

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

3,439,954

 

Savings

 

 

226,108

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

226,108

 

Time deposits

 

 

325,071

 

 

633,981

 

 

343,908

 

 

58,719

 

 

9,354

 

 

1,371,033

 

Notes payable and other borrowings

 

 

1,053,894

 

 

93,740

 

 

1,060

 

 

606

 

 

5,034

 

 

1,154,334

 

Total interest sensitive liabilities

 

 

5,045,027

 

 

727,721

 

 

344,968

 

 

59,325

 

 

14,388

 

 

6,191,429

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest sensitivity gap

 

$

86,704

 

$

426,518

 

$

1,283,091

 

$

350,279

 

$

581,420

 

$

2,728,012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative interest sensitivity gap

 

$

86,704

 

$

513,222

 

$

1,796,313

 

$

2,146,592

 

$

2,728,012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of cumulative gap to total interest sensitive assets

 

 

0.97

%  

 

5.75

%  

 

20.14

%  

 

24.07

%  

 

30.59

%  

 

 

 

 

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-sheet derivatives.

 

The table below shows the estimated impact of increases of 1%, 2% and 3% and a decrease of 0.5% in interest rates on net interest income and on economic value of equity for the banking segment at June 30, 2017 (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in

 

Changes in

 

Changes in

 

Interest Rates

 

Net Interest Income

 

Economic Value of Equity

 

(basis points)

    

Amount

    

Percent

    

Amount

    

Percent

 

+300

 

$

57,374

 

17.46

%  

$

246,456

 

13.52

%

+200

 

$

37,201

 

11.32

%  

$

170,111

 

9.33

%

+100

 

$

16,462

 

5.01

%  

$

83,093

 

4.56

%

-50

 

$

(1,778)

 

(0.54)

%  

$

(44,159)

 

(2.42)

%

 

The projected changes in net interest income and economic value of equity to changes in interest rates at June 30, 2017 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.

 

The historically low level of interest rates, combined with the existence of rate floors that are in effect for a portion of the loan portfolio, are projected to cause yields on our earning assets to rise more slowly than increases in market interest rates. As a result, in a rising interest rate environment, our interest rate margins are projected to compress until the rise in market interest rates is sufficient to allow our loan portfolio to reprice above applicable rate floors.

 

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Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the supervision and participation of our Co-Principal Executive Officers 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-Principal Executive Officers and Principal Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to the Company’s management, including our Co-Principal Executive Officers and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There were no 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.

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PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

For a description of material pending legal proceedings, see the discussion set forth under the heading “Legal Matters” in Note 12 to our Consolidated Financial Statements, which is incorporated by reference herein.

 

Item 1A. Risk Factors.

 

There have been no material changes to the risk factors disclosed under “Item 1A. Risk Factors” of our 2016 Form 10-K. For additional information concerning our risk factors, please refer to “Item 1A. Risk Factors” of our 2016 Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

On  April 20, 2017, we issued an aggregate of 4,000 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 first 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 June 30, 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

April 1 - April 30, 2017

 

 —

 

$

 —

 

 —

 

$

42,794,958

 

May 1 - May 31, 2017

 

343,823

 

 

25.58

 

343,823

 

 

33,990,469

 

June 1 - June 30, 2017

 

 —

 

 

 —

 

 —

 

 

33,990,469

 

Total

 

343,823

 

$

25.58

 

343,823

 

 

 

 


(1)

On June 13, 2016, we announced a stock repurchase program which authorized us to repurchase, in the aggregate, up to $50.0 million of our outstanding common stock. On January 26, 2017, we announced that our board of directors reauthorized this stock repurchase program through January 2018. As of June 30, 2017, we had repurchased an aggregate of $16.0  million of our outstanding common stock under this stock repurchase program.

 

In addition, the resolution of the SWS appraisal proceedings 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.

 

Item 6. Exhibits.

 

A list of exhibits filed herewith is contained in the Exhibit Index that immediately precedes such exhibits and is incorporated by reference herein.

 

 

 

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.

 

 

 

Date: July 27, 2017

By:

/s/ William B. Furr

 

 

William B. Furr

 

 

Chief Financial Officer

(Principal Financial Officer and duly authorized officer)

 

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EXHIBIT INDEX

 

 

 

 

Exhibit
Number

   

Description of Exhibit

 

 

 

2.1

 

Agreement and Plan of Merger by and among SWS Group, Inc., Hilltop Holdings Inc. and Peruna LLC, dated as of March 31, 2014 (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on April 1, 2014 (File No. 001-31987) and incorporated herein by reference).

 

 

 

2.2

 

Purchase and Assumption Agreement—Whole Bank, All Deposits, dated as of September 13, 2013, by and among the Federal Deposit Insurance Corporation, receiver of First National Bank, Edinburg, Texas, PlainsCapital Bank and the Federal Deposit Insurance Corporation (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on September 19, 2013 (File No. 001-31987) and incorporated herein by reference).

 

 

 

31.1*

 

Certification of Co-Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

 

 

 

31.2*

 

Certification of Co-Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

 

 

 

31.3*

 

Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

 

 

 

32.1*

 

Certification of Co-Principal Executive Officers and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS*

 

XBRL Instance Document

 

 

 

101.SCH*

 

XBRL Taxonomy Extension Schema

 

 

 

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase

 

 

 

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase

 

 

 

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase

 

 

 

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase


*Filed herewith.

97