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 September 30, 2016

 

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, or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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 ☐

 

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

 

The number of shares of the registrant's common stock outstanding at October 27, 2016 was 98,539,056.

 

 

 

 

 


 

Table of Contents

HILLTOP HOLDINGS INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2016

 

TABLE OF CONTENTS

 

 

 

 

PART I — FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

 

 

Consolidated Balance Sheets

 

Consolidated Statements of Operations

 

Consolidated Statements of Comprehensive Income

 

Consolidated Statements of Stockholders’ Equity

 

Consolidated Statements of Cash Flows

 

Notes to Consolidated Financial Statements

 

 

 

Item 2. 

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

58 

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

94 

 

 

 

Item 4. 

Controls and Procedures

96 

 

 

 

 

 

 

PART II — OTHER INFORMATION 

 

 

 

Item 1. 

Legal Proceedings

97 

 

 

 

Item 1A. 

Risk Factors

97 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

97 

 

 

 

Item 6. 

Exhibits

98 

2


 

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2016

    

2015

 

Assets

 

 

 

 

 

 

 

Cash and due from banks

 

$

528,519

 

$

652,036

 

Federal funds sold

 

 

40,419

 

 

17,409

 

Securities purchased under agreements to resell

 

 

138,284

 

 

105,660

 

Assets segregated for regulatory purposes

 

 

173,840

 

 

158,613

 

Securities:

 

 

 

 

 

 

 

Trading, at fair value

 

 

402,104

 

 

214,146

 

Available for sale, at fair value (amortized cost of $551,827 and $670,003, respectively)

 

 

563,720

 

 

673,706

 

Held to maturity, at amortized cost (fair value of $369,746 and $331,468, respectively)

 

 

365,934

 

 

332,022

 

 

 

 

1,331,758

 

 

1,219,874

 

 

 

 

 

 

 

 

 

Loans held for sale

 

 

1,673,069

 

 

1,533,678

 

Non-covered loans, net of unearned income

 

 

5,674,655

 

 

5,220,040

 

Allowance for non-covered loan losses

 

 

(52,625)

 

 

(45,415)

 

Non-covered loans, net

 

 

5,622,030

 

 

5,174,625

 

 

 

 

 

 

 

 

 

Covered loans, net of allowance of $729 and $1,532, respectively

 

 

292,031

 

 

378,762

 

Broker-dealer and clearing organization receivables

 

 

1,340,617

 

 

1,362,499

 

Premises and equipment, net

 

 

190,645

 

 

200,618

 

FDIC indemnification asset

 

 

73,351

 

 

91,648

 

Covered other real estate owned

 

 

61,988

 

 

99,090

 

Other assets

 

 

657,805

 

 

565,813

 

Goodwill

 

 

251,808

 

 

251,808

 

Other intangible assets, net

 

 

47,112

 

 

54,868

 

Total assets

 

$

12,423,276

 

$

11,867,001

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing

 

$

2,232,813

 

$

2,235,436

 

Interest-bearing

 

 

4,797,772

 

 

4,717,247

 

Total deposits

 

 

7,030,585

 

 

6,952,683

 

 

 

 

 

 

 

 

 

Broker-dealer and clearing organization payables

 

 

1,251,839

 

 

1,338,305

 

Short-term borrowings

 

 

1,265,022

 

 

947,373

 

Securities sold, not yet purchased, at fair value

 

 

164,633

 

 

130,044

 

Notes payable

 

 

313,313

 

 

238,716

 

Junior subordinated debentures

 

 

67,012

 

 

67,012

 

Other liabilities

 

 

481,504

 

 

454,743

 

Total liabilities

 

 

10,573,908

 

 

10,128,876

 

Commitments and contingencies (see Notes 12 and 13)

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

Hilltop stockholders' equity:

 

 

 

 

 

 

 

Common stock, $0.01 par value, 125,000,000 shares authorized; 98,540,676 and 98,896,184 shares issued and outstanding, respectively

 

 

985

 

 

989

 

Additional paid-in capital

 

 

1,570,025

 

 

1,577,270

 

Accumulated other comprehensive income

 

 

8,039

 

 

2,629

 

Retained earnings

 

 

266,048

 

 

155,475

 

Deferred compensation employee stock trust, net

 

 

900

 

 

1,034

 

Employee stock trust (15,496 and 22,196 shares, at cost, respectively)

 

 

(309)

 

 

(443)

 

Total Hilltop stockholders' equity

 

 

1,845,688

 

 

1,736,954

 

Noncontrolling interests

 

 

3,680

 

 

1,171

 

Total stockholders' equity

 

 

1,849,368

 

 

1,738,125

 

Total liabilities and stockholders' equity

 

$

12,423,276

 

$

11,867,001

 

 

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 September 30,

 

Nine Months Ended September 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

97,590

 

$

111,315

 

$

287,591

 

$

295,670

 

Securities borrowed

 

 

9,037

 

 

10,116

 

 

22,952

 

 

29,809

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

5,935

 

 

6,262

 

 

19,136

 

 

19,538

 

Tax-exempt

 

 

1,518

 

 

1,683

 

 

4,692

 

 

4,981

 

Other

 

 

1,183

 

 

1,169

 

 

3,248

 

 

3,878

 

Total interest income

 

 

115,263

 

 

130,545

 

 

337,619

 

 

353,876

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

3,996

 

 

3,719

 

 

11,872

 

 

11,934

 

Securities loaned

 

 

6,954

 

 

7,110

 

 

17,857

 

 

21,505

 

Short-term borrowings

 

 

1,497

 

 

1,189

 

 

3,974

 

 

3,356

 

Notes payable

 

 

2,793

 

 

2,524

 

 

7,993

 

 

5,482

 

Junior subordinated debentures

 

 

673

 

 

605

 

 

1,973

 

 

1,785

 

Other

 

 

180

 

 

187

 

 

543

 

 

544

 

Total interest expense

 

 

16,093

 

 

15,334

 

 

44,212

 

 

44,606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

99,170

 

 

115,211

 

 

293,407

 

 

309,270

 

Provision for loan losses

 

 

3,990

 

 

5,593

 

 

36,273

 

 

8,438

 

Net interest income after provision for loan losses

 

 

95,180

 

 

109,618

 

 

257,134

 

 

300,832

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gains on securities

 

 

 —

 

 

 —

 

 

 —

 

 

4,403

 

Net gains from sale of loans and other mortgage production income

 

 

175,412

 

 

137,303

 

 

469,721

 

 

405,023

 

Mortgage loan origination fees

 

 

26,807

 

 

22,647

 

 

71,417

 

 

58,194

 

Net insurance premiums earned

 

 

38,747

 

 

41,196

 

 

117,201

 

 

121,081

 

Securities commissions and fees

 

 

39,722

 

 

39,070

 

 

118,481

 

 

123,201

 

Investment and securities advisory fees and commissions

 

 

31,129

 

 

27,667

 

 

84,302

 

 

82,254

 

Bargain purchase gain

 

 

 —

 

 

 —

 

 

 —

 

 

81,289

 

Other

 

 

42,641

 

 

28,586

 

 

116,716

 

 

75,270

 

Total noninterest income

 

 

354,458

 

 

296,469

 

 

977,838

 

 

950,715

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

Employees' compensation and benefits

 

 

225,194

 

 

200,620

 

 

625,353

 

 

583,415

 

Loss and loss adjustment expenses

 

 

16,055

 

 

17,335

 

 

75,225

 

 

77,436

 

Policy acquisition and other underwriting expenses

 

 

11,064

 

 

11,784

 

 

33,632

 

 

35,198

 

Occupancy and equipment, net

 

 

27,460

 

 

29,341

 

 

82,264

 

 

89,368

 

Other

 

 

84,360

 

 

74,422

 

 

240,213

 

 

215,878

 

Total noninterest expense

 

 

364,133

 

 

333,502

 

 

1,056,687

 

 

1,001,295

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

85,505

 

 

72,585

 

 

178,285

 

 

250,252

 

Income tax expense

 

 

33,017

 

 

25,338

 

 

65,879

 

 

58,895

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

52,488

 

 

47,247

 

 

112,406

 

 

191,357

 

Less: Net income attributable to noncontrolling interest

 

 

556

 

 

353

 

 

1,833

 

 

1,111

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income attributable to Hilltop

 

 

51,932

 

 

46,894

 

 

110,573

 

 

190,246

 

Dividends on preferred stock

 

 

 —

 

 

 —

 

 

 —

 

 

1,854

 

Income applicable to Hilltop common stockholders

 

$

51,932

 

$

46,894

 

$

110,573

 

$

188,392

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.53

 

$

0.47

 

$

1.12

 

$

1.89

 

Diluted

 

$

0.53

 

$

0.47

 

$

1.12

 

$

1.88

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average share information:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

98,490

 

 

98,676

 

 

98,367

 

 

99,297

 

Diluted

 

 

98,625

 

 

99,556

 

 

98,573

 

 

100,191

 

 

See accompanying notes.

 

 

4


 

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

   

2016

    

2015

   

2016

    

2015

 

Net income

 

$

52,488

 

$

47,247

 

$

112,406

 

$

191,357

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gains (losses) on securities available for sale, net of tax of $(420), $3,222, $3,004 and $3,847, respectively

 

 

(743)

 

 

5,697

 

 

5,410

 

 

6,755

 

Reclassification adjustment for gains included in net income, net of tax of $(1,589)

 

 

 —

 

 

 —

 

 

 —

 

 

(2,814)

 

Comprehensive income

 

 

51,745

 

 

52,944

 

 

117,816

 

 

195,298

 

Less: comprehensive income attributable to noncontrolling interest

 

 

556

 

 

353

 

 

1,833

 

 

1,111

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income applicable to Hilltop

 

$

51,189

 

$

52,591

 

$

115,983

 

$

194,187

 

 

See accompanying notes.

 

 

5


 

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

    

 

 

    

 

    

 

 

    

 

 

    

Accumulated

    

Retained

    

Deferred

    

    

    

 

 

    

Total

    

 

 

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Other

 

Earnings

 

Compensation

 

Employee

 

Hilltop

 

 

 

 

Total

 

 

 

Preferred Stock

 

Common Stock

 

Paid-in

 

Comprehensive

 

(Accumulated

 

Employee Stock

 

Stock Trust

 

Stockholders’

 

Noncontrolling

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Income

 

Deficit)

 

Trust, Net

 

Shares

 

Amount

 

Equity

 

Interest

 

Equity

 

Balance, December 31, 2014

 

114

 

$

114,068

 

90,182

 

$

902

 

$

1,390,788

 

$

651

 

$

(45,957)

 

$

 —

 

 —

 

$

 —

 

$

1,460,452

 

$

787

 

$

1,461,239

 

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

190,246

 

 

 —

 

 —

 

 

 —

 

 

190,246

 

 

1,111

 

 

191,357

 

Other comprehensive income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

3,941

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

3,941

 

 

 —

 

 

3,941

 

Issuance of common stock

 

 —

 

 

 —

 

10,113

 

 

101

 

 

199,932

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

200,033

 

 

 —

 

 

200,033

 

Stock-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

6,278

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

6,278

 

 

 —

 

 

6,278

 

Common stock issued to board members

 

 —

 

 

 —

 

8

 

 

 —

 

 

173

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

173

 

 

 —

 

 

173

 

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

 

 —

 

 

 —

 

(19)

 

 

 —

 

 

(75)

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(75)

 

 

 —

 

 

(75)

 

Dividends on preferred stock

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,854)

 

 

 —

 

 —

 

 

 —

 

 

(1,854)

 

 

 —

 

 

(1,854)

 

Redemption of preferred stock

 

(114)

 

 

(114,068)

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(114,068)

 

 

 —

 

 

(114,068)

 

Repurchase of common stock

 

 —

 

 

 —

 

(1,391)

 

 

(14)

 

 

(22,327)

 

 

 —

 

 

(7,687)

 

 

 —

 

 —

 

 

 —

 

 

(30,028)

 

 

 —

 

 

(30,028)

 

Deferred compensation plan

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,182

 

30

 

 

(590)

 

 

592

 

 

 —

 

 

592

 

Net cash distributed to noncontrolling interest

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(760)

 

 

(760)

 

Balance, September 30, 2015

 

 —

 

$

 —

 

98,893

 

$

989

 

$

1,574,769

 

$

4,592

 

$

134,748

 

$

1,182

 

30

 

$

(590)

 

$

1,715,690

 

$

1,138

 

$

1,716,828

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2015

 

 —

 

$

 —

 

98,896

 

$

989

 

$

1,577,270

 

$

2,629

 

$

155,475

 

$

1,034

 

22

 

$

(443)

 

$

1,736,954

 

$

1,171

 

$

1,738,125

 

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

110,573

 

 

 —

 

 —

 

 

 —

 

 

110,573

 

 

1,833

 

 

112,406

 

Other comprehensive income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

5,410

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

5,410

 

 

 —

 

 

5,410

 

Issuance of common stock

 

 —

 

 

 —

 

538

 

 

5

 

 

4,134

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

4,139

 

 

 —

 

 

4,139

 

Stock-based compensation expense

 

 —

 

 

 —

 

 —

 

 

 —

 

 

7,274

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

7,274

 

 

 —

 

 

7,274

 

Common stock issued to board members

 

 —

 

 

 —

 

17

 

 

 —

 

 

325

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

325

 

 

 —

 

 

325

 

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

 

 —

 

 

 —

 

(94)

 

 

(1)

 

 

(2,710)

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(2,711)

 

 

 —

 

 

(2,711)

 

Retirement of common stock

 

 —

 

 

 —

 

(816)

 

 

(8)

 

 

(16,268)

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(16,276)

 

 

 —

 

 

(16,276)

 

Deferred compensation plan

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(134)

 

(7)

 

 

134

 

 

 —

 

 

 —

 

 

 —

 

Net cash distributed from noncontrolling interest

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

676

 

 

676

 

Balance, September 30, 2016

 

 —

 

$

 —

 

98,541

 

$

985

 

$

1,570,025

 

$

8,039

 

$

266,048

 

$

900

 

15

 

$

(309)

 

$

1,845,688

 

$

3,680

 

$

1,849,368

 

 

See accompanying notes.

 

 

6


 

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

    

2016

    

2015

 

Operating Activities

 

 

 

 

 

 

 

Net income

 

$

112,406

 

$

191,357

 

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

 

 

 

 

 

 

 

Provision for loan losses

 

 

36,273

 

 

8,438

 

Depreciation, amortization and accretion, net

 

 

(37,616)

 

 

(67,557)

 

Net realized gains on securities

 

 

 —

 

 

(4,403)

 

Bargain purchase gain

 

 

 —

 

 

(81,289)

 

Deferred income taxes

 

 

4,878

 

 

11,459

 

Other, net

 

 

11,661

 

 

(91)

 

Net change in securities purchased under agreements to resell

 

 

(32,624)

 

 

(39,148)

 

Net change in assets segregated for regulatory purposes

 

 

(15,227)

 

 

29,372

 

Net change in trading securities

 

 

(187,958)

 

 

39,367

 

Net change in broker-dealer and clearing organization receivables

 

 

149,674

 

 

(680,699)

 

Net change in FDIC Indemnification Asset

 

 

18,486

 

 

38,561

 

Net change in other assets

 

 

(50,760)

 

 

(90,417)

 

Net change in broker-dealer and clearing organization payables

 

 

(117,398)

 

 

708,838

 

Net change in other liabilities

 

 

32,977

 

 

3,138

 

Proceeds from sale of mortgage servicing rights asset

 

 

7,586

 

 

 —

 

Net gains from sales of loans

 

 

(469,721)

 

 

(405,023)

 

Loans originated for sale

 

 

(11,995,553)

 

 

(10,628,783)

 

Proceeds from loans sold

 

 

12,292,342

 

 

10,965,234

 

Net cash used in operating activities

 

 

(240,574)

 

 

(1,646)

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

Proceeds from maturities and principal reductions of securities held to maturity

 

 

141,485

 

 

51,838

 

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

 

 

367,307

 

 

599,737

 

Purchases of securities held to maturity

 

 

(175,781)

 

 

(167,284)

 

Purchases of securities available for sale

 

 

(250,896)

 

 

(22,769)

 

Net change in loans

 

 

(465,542)

 

 

16,205

 

Purchases of premises and equipment and other assets

 

 

(31,119)

 

 

(23,410)

 

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

 

 

58,490

 

 

94,680

 

Proceeds from redemption of bank owned life insurance

 

 

 —

 

 

822

 

Net cash paid for Federal Home Loan Bank and Federal Reserve Bank stock

 

 

(6,807)

 

 

(9,292)

 

Net cash from acquisition

 

 

 —

 

 

41,097

 

Net cash provided by (used in) investing activities

 

 

(362,863)

 

 

581,624

 

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

Net change in deposits

 

 

108,834

 

 

(788,907)

 

Net change in short-term borrowings

 

 

317,649

 

 

(16,446)

 

Proceeds from notes payable

 

 

208,794

 

 

150,078

 

Payments on notes payable

 

 

(134,052)

 

 

(37,787)

 

Redemption of preferred stock

 

 

 —

 

 

(114,068)

 

Proceeds from issuance of common stock

 

 

4,139

 

 

 —

 

Payments to repurchase common stock

 

 

 —

 

 

(30,028)

 

Dividends paid on preferred stock

 

 

 —

 

 

(3,280)

 

Net cash distributed from (to) noncontrolling interest

 

 

676

 

 

(760)

 

Taxes paid on employee stock awards netting activity

 

 

(2,406)

 

 

(75)

 

Other, net

 

 

(704)

 

 

(227)

 

Net cash provided by (used in) financing activities

 

 

502,930

 

 

(841,500)

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

(100,507)

 

 

(261,522)

 

Cash and cash equivalents, beginning of period

 

 

669,445

 

 

813,075

 

Cash and cash equivalents, end of period

 

$

568,938

 

$

551,553

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

 

Cash paid for interest

 

$

42,399

 

$

41,368

 

Cash paid for income taxes, net of refunds

 

$

53,899

 

$

112,282

 

Supplemental Schedule of Non-Cash Activities

 

 

 

 

 

 

 

Conversion of loans to other real estate owned

 

$

14,894

 

$

45,996

 

Common stock issued in acquisition

 

$

 —

 

$

200,626

 

Additions to mortgage servicing rights

 

$

20,309

 

$

23,121

 

 

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 provides its products and services through three primary subsidiaries, PlainsCapital Corporation (“PlainsCapital”), Hilltop Securities Holdings LLC (“Securities Holdings”) and National Lloyds Corporation (“NLC”). PlainsCapital is a financial holding company, headquartered in Dallas, Texas, 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, 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. 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.

 

On January 1, 2015, Hilltop completed its acquisition of SWS Group, Inc. (“SWS”) in a stock and cash transaction (the "SWS Merger"), whereby SWS’s broker-dealer subsidiaries, Southwest Securities, Inc. and SWS Financial Services, Inc., became subsidiaries of Securities Holdings, and SWS’s banking subsidiary, Southwest Securities, FSB (“SWS FSB”), was merged into the Bank. On October 5, 2015, Southwest Securities, Inc. and SWS Financial Services, Inc. were renamed “Hilltop Securities Inc.” (“Hilltop Securities”) and “Hilltop Securities Independent Network Inc.” (“HTS Independent Network”), respectively.

 

On October 22, 2015, the Financial Industry Regulatory Authority (“FINRA”) granted approval to combine First Southwest Company, LLC (“FSC”) and Hilltop Securities, subject to customary conditions. FSC, Hilltop Securities and HTS Independent Network operated as separate broker-dealers, under coordinated leadership from the date of the SWS Merger until January 22, 2016, when FSC was merged into Hilltop Securities to form a combined firm operating under the “Hilltop Securities” name. We use the term “Hilltop Broker-Dealers” to refer to FSC, Hilltop Securities and HTS Independent Network prior to January 22, 2016 and Hilltop Securities and HTS Independent Network after such date.

 

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, 2015 (“2015 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

8


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

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 PlainsCapital. PlainsCapital 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.

 

PlainsCapital 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 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, HTS Independent Network and First Southwest Holdings, LLC (“First Southwest”). Hilltop Securities is a broker-dealer registered with 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 First Southwest, is a registered investment advisor under the Investment Advisors Act of 1940. As discussed above, prior to January 22, 2016, Securities Holdings’ subsidiaries also included FSC, First Southwest’s principal subsidiary and formerly a broker-dealer registered with the SEC and FINRA and a member of the NYSE.

 

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. Acquisition

 

On January 1, 2015, Hilltop completed its acquisition of SWS in a stock and cash transaction, whereby each outstanding share of SWS common stock was converted into the right to receive 0.2496 shares of Hilltop common stock and $1.94 in cash, equating to $6.92 per share based on Hilltop’s closing price on December 31, 2014 and resulting in an aggregate purchase price of $349.1 million, consisting of 10.1 million shares of common stock, $78.2 million in cash and $70.3 million associated with Hilltop’s existing investment in SWS common stock. The operations of SWS are included in the Company’s operating results beginning January 1, 2015. Such operating results include a bargain purchase gain of $81.3 million and are not necessarily indicative of future operating results. SWS’s results of operations prior to the acquisition date are not included in the Company’s consolidated operating results.

 

9


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

The SWS Merger was accounted for using the acquisition method of accounting, and accordingly, purchased assets, including identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair values. The components of the consideration paid are shown in the following table (in thousands).

 

 

 

 

 

Fair value of consideration paid:

 

 

Common stock issued

 

$

200,626

Cash

 

 

78,217

Fair value of Hilltop’s existing investment in SWS

 

 

70,282

Total consideration paid

 

$

349,125

 

The resulting fair values of the identifiable assets acquired, and liabilities assumed, in the SWS Merger at January 1, 2015 are summarized in the following table (in thousands).

 

 

 

 

 

Cash and due from banks

    

$

119,314

Federal funds sold and securities purchased under agreements to resell

 

 

44,741

Assets segregated for regulatory purposes

 

 

181,610

Securities

 

 

707,476

Non-covered loans, net

 

 

863,819

Broker-dealer and clearing organization receivables

 

 

1,221,793

Other assets

 

 

159,906

Total identifiable assets acquired

 

 

3,298,659

 

 

 

 

Deposits

 

 

(1,287,509)

Broker-dealer and clearing organization payables

 

 

(1,109,978)

Short-term borrowings

 

 

(164,240)

Securities sold, not yet purchased, at fair value

 

 

(140,409)

Notes payable

 

 

(76,643)

Other liabilities

 

 

(89,466)

Total liabilities assumed

 

 

(2,868,245)

Bargain purchase gain

 

 

(81,289)

 

 

 

349,125

Less Hilltop existing investment in SWS

 

 

(70,282)

Net identifiable assets acquired

 

$

278,843

 

The bargain purchase gain represents the excess of the estimated fair value of the underlying net tangible assets and intangible assets over the merger consideration. The SWS Merger was a tax-free reorganization under Section 368(a) of the Internal Revenue Code; therefore, no income taxes were recorded in connection with the bargain purchase gain. The Company used significant estimates and assumptions to value certain identifiable assets acquired and liabilities assumed. The bargain purchase gain was primarily driven by the Company’s ability to realize acquired deferred tax assets through its consolidated core earnings and the decline in the price of the Company’s common stock between the date the fixed conversion ratio was agreed upon and the closing date.

 

Included within the fair value of other assets in the table above are identifiable intangible assets recorded in connection with the SWS Merger. The allocation to intangible assets is as follows (dollars in thousands).

 

 

 

 

 

 

 

 

 

Estimated Useful

 

Gross Intangible

 

 

Life (Years)

 

Assets

Customer relationships

   

14

   

$

7,300

Core deposits

 

4

 

 

160

 

 

 

 

$

7,460

 

In connection with the SWS Merger, Hilltop acquired loans both with and without evidence of credit quality deterioration since origination. The acquired loans were initially recorded at fair value with no carryover of any

10


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

allowance for loan losses. Acquired loans were segregated between those considered to be purchased credit impaired (“PCI”) loans and those without credit impairment at acquisition.

 

The following table presents details on acquired loans at the acquisition date (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Loans, excluding

    

PCI

    

Total

 

 

 

PCI Loans

 

Loans

 

Loans

 

Commercial and industrial

 

$

178,603

 

$

9,850

 

$

188,453

 

Real estate

 

 

324,477

 

 

62,218

 

 

386,695

 

Construction and land development

 

 

14,708

 

 

1,391

 

 

16,099

 

Consumer

 

 

3,216

 

 

 —

 

 

3,216

 

Broker-dealer (1)

 

 

269,356

 

 

 —

 

 

269,356

 

Total

 

$

790,360

 

$

73,459

 

$

863,819

 


(1)    Represents acquired margin loans to customers and correspondents associated with acquired broker-dealer segment operations.

 

The following table presents information about the PCI loans at acquisition (in thousands).

 

 

 

 

 

 

Contractually required principal and interest payments

    

$

120,078

 

Nonaccretable difference

 

 

32,040

 

Cash flows expected to be collected

 

 

88,038

 

Accretable difference

 

 

14,579

 

Fair value of loans acquired with a deterioration of credit quality

 

$

73,459

 

 

The following table presents information about the acquired loans without credit impairment at acquisition (in thousands).

 

 

 

 

 

 

Contractually required principal and interest payments

    

$

901,672

 

Contractual cash flows not expected to be collected

 

 

39,721

 

Fair value at acquisition

 

 

790,360

 

 

 

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

11


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

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 September 30, 2016 and December 31, 2015, the aggregate fair value of PrimeLending’s mortgage loans held for sale accounted for under the Fair Value Option was $1.63 billion and $1.46 billion, respectively, and the unpaid principal balance of those loans was $1.56 billion and $1.41 billion, respectively. The interest component of fair value is reported as interest income on loans in the accompanying consolidated statements of operations.

 

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

 

The following tables present information regarding financial assets and liabilities measured at fair value on a recurring basis (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Level 1

    

Level 2

    

Level 3

    

Total

 

September 30, 2016

 

Inputs

 

Inputs

 

Inputs

 

Fair Value

 

Trading securities

 

$

7,387

 

$

394,717

 

$

 —

 

$

402,104

 

Available for sale securities

 

 

19,480

 

 

544,240

 

 

 —

 

 

563,720

 

Loans held for sale

 

 

 —

 

 

1,585,942

 

 

42,577

 

 

1,628,519

 

Derivative assets

 

 

 —

 

 

85,451

 

 

 —

 

 

85,451

 

MSR asset

 

 

 —

 

 

 —

 

 

43,751

 

 

43,751

 

Securities sold, not yet purchased

 

 

87,693

 

 

76,940

 

 

 —

 

 

164,633

 

Derivative liabilities

 

 

 —

 

 

39,001

 

 

 —

 

 

39,001

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Level 1

    

Level 2

    

Level 3

    

 

Total

 

December 31, 2015

 

Inputs

 

Inputs

 

Inputs

 

 

Fair Value

 

Trading securities

 

$

21,807

 

$

192,338

 

$

1

 

$

214,146

 

Available for sale securities

 

 

17,409

 

 

656,297

 

 

 —

 

 

673,706

 

Loans held for sale

 

 

 —

 

 

1,434,955

 

 

25,880

 

 

1,460,835

 

Derivative assets

 

 

 —

 

 

35,676

 

 

 —

 

 

35,676

 

MSR asset

 

 

 —

 

 

 —

 

 

52,285

 

 

52,285

 

Securities sold, not yet purchased

 

 

27,648

 

 

102,396

 

 

 —

 

 

130,044

 

Derivative liabilities

 

 

 —

 

 

5,426

 

 

 —

 

 

5,426

 

 

12


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Gains or Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Realized or Unrealized)

 

 

 

 

 

    

Balance at

    

 

 

    

 

 

    

 

 

 

Included in Other

    

 

 

 

 

 

Beginning of

 

Purchases/

 

Sales/

 

Included in

 

Comprehensive

 

Balance at

 

 

 

Period

 

Additions

 

Reductions

 

Net Income

 

Income (Loss)

 

End of Period

 

Three months ended  September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities

 

$

1

 

$

 —

 

$

 —

 

$

(1)

 

$

 —

 

$

 —

 

Loans held for sale

 

 

45,645

 

 

8,066

 

 

(8,686)

 

 

(2,448)

 

 

 —

 

 

42,577

 

MSR asset

 

 

33,491

 

 

10,416

 

 

 —

 

 

(156)

 

 

 —

 

 

43,751

 

Total

 

$

79,137

 

$

18,482

 

$

(8,686)

 

$

(2,605)

 

$

 —

 

$

86,328

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trading securities

 

$

1

 

$

 —

 

$

 —

 

$

(1)

 

$

 —

 

$

 —

 

Loans held for sale

 

 

25,880

 

 

51,105

 

 

(23,817)

 

 

(10,591)

 

 

 —

 

 

42,577

 

MSR asset

 

 

52,285

 

 

20,309

 

 

(7,586)

 

 

(21,257)

 

 

 —

 

 

43,751

 

Total

 

$

78,166

 

$

71,414

 

$

(31,403)

 

$

(31,849)

 

$

 —

 

$

86,328

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

 

$

16

 

$

 —

 

$

 —

 

$

(15)

 

$

 —

 

$

1

 

Loans held for sale

 

 

19,123

 

 

11,466

 

 

(2,769)

 

 

(1,116)

 

 

 —

 

 

26,704

 

MSR asset

 

 

44,985

 

 

11,025

 

 

 —

 

 

(8,483)

 

 

 —

 

 

47,527

 

Total

 

$

64,124

 

$

22,491

 

$

(2,769)

 

$

(9,614)

 

$

 —

 

$

74,232

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended September 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

 

$

 —

 

$

7,301

 

$

(3,397)

 

$

(3,903)

 

$

 —

 

$

1

 

Loans held for sale

 

 

9,017

 

 

40,075

 

 

(12,493)

 

 

(9,895)

 

 

 —

 

 

26,704

 

MSR asset

 

 

36,155

 

 

23,121

 

 

 —

 

 

(11,749)

 

 

 —

 

 

47,527

 

Total

 

$

45,172

 

$

70,497

 

$

(15,890)

 

$

(25,547)

 

$

 —

 

$

74,232

 

 

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 September 30, 2016.

 

For Level 3 financial instruments measured at fair value on a recurring basis at September 30, 2016, the significant unobservable inputs used in the fair value measurements were as follows.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Range

Financial instrument

    

Valuation Technique

    

Unobservable Input

    

(Weighted-Average)

Loans held for sale

 

Discounted cash flow / Market comparable

 

Projected price

 

89

-

96

%

(

96

%)

 

 

 

 

 

 

 

 

 

 

 

 

 

MSR asset

 

Discounted cash flow

 

Constant prepayment rate

 

 

 

18.12

%

 

 

 

 

 

 

Discount rate

 

 

 

10.93

%

 

 

 

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

 

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

13


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

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 September 30, 2016

 

Three Months Ended September 30, 2015

 

 

   

 

   

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

 

$

73

 

$

 —

 

$

73

 

$

18,531

 

$

 —

 

$

18,531

 

MSR asset

 

 

(156)

 

 

 —

 

 

(156)

 

 

(8,483)

 

 

 —

 

 

(8,483)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2016

 

Nine Months Ended September 30, 2015

 

 

   

 

   

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

 

$

16,003

 

$

 —

 

$

16,003

 

$

2,773

 

$

 —

 

$

2,773

 

MSR asset

 

 

(21,257)

 

 

 —

 

 

(21,257)

 

 

(11,749)

 

 

 —

 

 

(11,749)

 

 

The Company also determines the fair value of certain assets and liabilities on a non-recurring basis. In particular, the fair value of all of the assets acquired and liabilities assumed in the SWS Merger was determined at the acquisition date. 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. 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 PlainsCapital (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 SWS Merger, respectively (collectively, the “Bank Transactions”). Substantially all PCI loans acquired in the FNB Transaction are covered by FDIC loss-share agreements. The fair value of PCI loans was determined using Level 3 inputs, including estimates of expected cash flows that incorporated significant unobservable inputs regarding default rates, loss severity rates assuming default, prepayment speeds on acquired loans accounted for in pools (“Pooled Loans”), and estimated collateral values.

 

At September 30, 2016, estimates for these significant unobservable inputs were as follows.

 

 

 

 

 

 

 

 

 

 

 

PCI Loans

 

 

 

PlainsCapital

 

FNB

 

SWS

 

 

    

Merger

    

Transaction

    

Merger

 

Weighted average default rate

 

54

%  

53

%  

50

%

Weighted average loss severity rate

 

56

%  

32

%  

29

%

Weighted average prepayment speed

 

0

%  

7

%  

0

%

 

At September 30, 2016, the resulting weighted average expected loss on PCI loans associated with the PlainsCapital Merger, FNB Transaction and SWS Merger was 30%, 17% and 15%, 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

14


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

independent market price or appraised value, and current market conditions. At September 30, 2016, 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 September 30, 2016 and December 31, 2015, the estimated fair value of covered OREO was $62.0 million and $99.1 million, respectively, and the underlying fair value measurements utilized Level 2 and Level 3 inputs. The fair value of non-covered OREO at September 30, 2016 and December 31, 2015 was $3.1 million and $0.4 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 September 30,

 

Nine Months Ended September 30,

September 30, 2016

    

Inputs

   

Inputs

   

Inputs

   

Fair Value

   

2016

   

2015

   

2016

    

2015

Non-covered impaired loans

 

$

 —

 

$

 —

 

$

64,842

 

$

64,842

 

$

1,149

 

$

453

 

$

1,284

 

$

224

Covered impaired loans

 

 

 —

 

 

 —

 

 

58,600

 

 

58,600

 

 

725

 

 

(937)

 

 

815

 

 

2,712

Non-covered other real estate owned

 

 

 —

 

 

2,229

 

 

 —

 

 

2,229

 

 

(427)

 

 

 —

 

 

(439)

 

 

(28)

Covered other real estate owned

 

 

 —

 

 

28,854

 

 

 —

 

 

28,854

 

 

(2,552)

 

 

(5,370)

 

 

(14,284)

 

 

(9,428)

 

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. The methods for determining estimated fair value for financial assets and liabilities is described in detail in Note 3 to the consolidated financial statements included in the Company’s 2015 Form 10-K.

 

The following tables present the carrying values and estimated fair values of financial instruments not measured at fair value on either a recurring or non-recurring basis (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Fair Value

 

 

    

Carrying

    

Level 1

    

Level 2

    

Level 3

    

 

 

 

September 30, 2016

 

Amount

 

Inputs

 

Inputs

 

Inputs

 

Total

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

568,938

 

$

568,938

 

$

 —

 

$

 —

 

$

568,938

 

Securities purchased under agreements to resell

 

 

138,284

 

 

 —

 

 

138,284

 

 

 —

 

 

138,284

 

Assets segregated for regulatory purposes

 

 

173,840

 

 

173,840

 

 

 —

 

 

 —

 

 

173,840

 

Held to maturity securities

 

 

365,934

 

 

 —

 

 

369,746

 

 

 —

 

 

369,746

 

Loans held for sale

 

 

44,550

 

 

 —

 

 

44,550

 

 

 —

 

 

44,550

 

Non-covered loans, net

 

 

5,622,030

 

 

 —

 

 

475,176

 

 

5,320,330

 

 

5,795,506

 

Covered loans, net

 

 

292,031

 

 

 —

 

 

 —

 

 

409,056

 

 

409,056

 

Broker-dealer and clearing organization receivables

 

 

1,340,617

 

 

 —

 

 

1,340,617

 

 

 —

 

 

1,340,617

 

FDIC indemnification asset

 

 

73,351

 

 

 —

 

 

 —

 

 

70,130

 

 

70,130

 

Other assets

 

 

60,383

 

 

 —

 

 

56,176

 

 

4,207

 

 

60,383

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

7,030,585

 

 

 —

 

 

7,029,654

 

 

 —

 

 

7,029,654

 

Broker-dealer and clearing organization payables

 

 

1,251,839

 

 

 —

 

 

1,251,839

 

 

 —

 

 

1,251,839

 

Short-term borrowings

 

 

1,265,022

 

 

 —

 

 

1,265,022

 

 

 —

 

 

1,265,022

 

Debt

 

 

380,325

 

 

 —

 

 

374,112

 

 

 —

 

 

374,112

 

Other liabilities

 

 

5,515

 

 

 —

 

 

5,515

 

 

 —

 

 

5,515

 

 

 

15


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Fair Value

 

 

    

Carrying

    

Level 1

    

Level 2

    

Level 3

    

 

 

 

December 31, 2015

 

Amount

 

Inputs

 

Inputs

 

Inputs

 

Total

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

669,445

 

$

669,445

 

$

 —

 

$

 —

 

$

669,445

 

Securities purchased under agreements to resell

 

 

105,660

 

 

 —

 

 

105,660

 

 

 —

 

 

105,660

 

Assets segregated for regulatory purposes

 

 

158,613

 

 

158,613

 

 

 —

 

 

 —

 

 

158,613

 

Held to maturity securities

 

 

332,022

 

 

 —

 

 

331,468

 

 

 —

 

 

331,468

 

Loans held for sale

 

 

72,843

 

 

 —

 

 

72,843

 

 

 —

 

 

72,843

 

Non-covered loans, net

 

 

5,174,625

 

 

 —

 

 

602,968

 

 

4,600,406

 

 

5,203,374

 

Covered loans, net

 

 

378,762

 

 

 —

 

 

 —

 

 

527,201

 

 

527,201

 

Broker-dealer and clearing organization receivables

 

 

1,362,499

 

 

 —

 

 

1,362,499

 

 

 —

 

 

1,362,499

 

FDIC indemnification asset

 

 

91,648

 

 

 —

 

 

 —

 

 

91,648

 

 

91,648

 

Other assets

 

 

68,786

 

 

 —

 

 

53,214

 

 

15,572

 

 

68,786

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

6,952,683

 

 

 —

 

 

6,955,919

 

 

 —

 

 

6,955,919

 

Broker-dealer and clearing organization payables

 

 

1,338,305

 

 

 —

 

 

1,338,305

 

 

 —

 

 

1,338,305

 

Short-term borrowings

 

 

947,373

 

 

 —

 

 

947,373

 

 

 —

 

 

947,373

 

Debt

 

 

305,728

 

 

 —

 

 

299,257

 

 

 —

 

 

299,257

 

Other liabilities

 

 

3,699

 

 

 —

 

 

3,699

 

 

 —

 

 

3,699

 

 

 

 

 

 

 

4. Securities

 

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

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

    

2016

    

2015

 

 

U.S. Treasury securities

 

$

6,105

 

$

20,481

 

 

U.S. government agencies:

 

 

 

 

 

 

 

 

Bonds

 

 

37,125

 

 

36,244

 

 

Residential mortgage-backed securities

 

 

98,681

 

 

12,505

 

 

Commercial mortgage-backed securities

 

 

15,817

 

 

19,280

 

 

Collateralized mortgage obligations

 

 

8,984

 

 

264

 

 

Other

 

 

120

 

 

 —

 

 

Corporate debt securities

 

 

71,987

 

 

34,735

 

 

States and political subdivisions

 

 

87,659

 

 

58,588

 

 

Unit investment trusts

 

 

66,649

 

 

18,400

 

 

Private-label securitized product

 

 

7,234

 

 

12,324

 

 

Other

 

 

1,743

 

 

1,325

 

 

Totals

 

$

402,104

 

$

214,146

 

 

 

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 obligation 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 $164.6 million and $130.0 million at September 30, 2016 and December 31, 2015, respectively.

 

16


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

September 30, 2016

 

Cost

 

Gains

 

Losses

 

Fair Value

 

U.S. Treasury securities

 

$

33,294

 

$

459

 

$

(2)

 

$

33,751

 

U.S. government agencies:

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds

 

 

106,765

 

 

1,629

 

 

 —

 

 

108,394

 

Residential mortgage-backed securities

 

 

94,777

 

 

1,216

 

 

(49)

 

 

95,944

 

Commercial mortgage-backed securities

 

 

8,824

 

 

356

 

 

 —

 

 

9,180

 

Collateralized mortgage obligations

 

 

113,618

 

 

202

 

 

(739)

 

 

113,081

 

Corporate debt securities

 

 

84,201

 

 

5,370

 

 

 —

 

 

89,571

 

States and political subdivisions

 

 

91,148

 

 

2,658

 

 

(7)

 

 

93,799

 

Commercial mortgage-backed securities

 

 

499

 

 

21

 

 

 —

 

 

520

 

Equity securities

 

 

18,701

 

 

1,131

 

 

(352)

 

 

19,480

 

Totals

 

$

551,827

 

$

13,042

 

$

(1,149)

 

$

563,720

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for Sale

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

December 31, 2015

 

Cost

 

Gains

 

Losses

 

Fair Value

 

U.S. Treasury securities

 

$

44,430

 

$

206

 

$

(33)

 

$

44,603

 

U.S. government agencies:

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds

 

 

297,448

 

 

1,135

 

 

(1,947)

 

 

296,636

 

Residential mortgage-backed securities

 

 

34,864

 

 

1,008

 

 

(19)

 

 

35,853

 

Commercial mortgage-backed securities

 

 

9,174

 

 

35

 

 

(2)

 

 

9,207

 

Collateralized mortgage obligations

 

 

54,297

 

 

48

 

 

(1,644)

 

 

52,701

 

Corporate debt securities

 

 

94,877

 

 

3,399

 

 

(326)

 

 

97,950

 

States and political subdivisions

 

 

116,246

 

 

2,581

 

 

(102)

 

 

118,725

 

Commercial mortgage-backed securities

 

 

498

 

 

33

 

 

 —

 

 

531

 

Equity securities

 

 

18,169

 

 

574

 

 

(1,243)

 

 

17,500

 

Totals

 

$

670,003

 

$

9,019

 

$

(5,316)

 

$

673,706

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

September 30, 2016

    

Cost

    

Gains

    

Losses

    

Fair Value

 

U.S. Treasury securities

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

U.S. government agencies:

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds

 

 

46,211

 

 

40

 

 

(58)

 

 

46,193

 

Residential mortgage-backed securities

 

 

21,016

 

 

729

 

 

 —

 

 

21,745

 

Commercial mortgage-backed securities

 

 

24,850

 

 

1,033

 

 

(6)

 

 

25,877

 

Collateralized mortgage obligations

 

 

235,336

 

 

1,951

 

 

(113)

 

 

237,174

 

States and political subdivisions

 

 

38,521

 

 

342

 

 

(106)

 

 

38,757

 

Totals

 

$

365,934

 

$

4,095

 

$

(283)

 

$

369,746

 

 

 

17


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to Maturity

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

 

 

 

December 31, 2015

    

Cost

    

Gains

    

Losses

    

Fair Value

 

U.S. Treasury securities

 

$

25,146

 

$

 —

 

$

(30)

 

$

25,116

 

U.S. government agencies:

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds

 

 

69,379

 

 

145

 

 

(372)

 

 

69,152

 

Residential mortgage-backed securities

 

 

23,735

 

 

311

 

 

 —

 

 

24,046

 

Commercial mortgage-backed securities

 

 

18,658

 

 

27

 

 

(92)

 

 

18,593

 

Collateralized mortgage obligations

 

 

167,541

 

 

302

 

 

(970)

 

 

166,873

 

States and political subdivisions

 

 

27,563

 

 

168

 

 

(43)

 

 

27,688

 

Totals

 

$

332,022

 

$

953

 

$

(1,507)

 

$

331,468

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

December 31, 2015

 

 

    

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

 

3

 

$

3,000

 

$

2

 

8

 

$

33,791

 

$

33

 

Unrealized loss for twelve months or longer

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 

3

 

 

3,000

 

 

2

 

8

 

 

33,791

 

 

33

 

U.S. government agencies:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

 —

 

 

 —

 

 

 —

 

7

 

 

148,327

 

 

896

 

Unrealized loss for twelve months or longer

 

 —

 

 

 —

 

 

 —

 

3

 

 

44,321

 

 

1,051

 

 

 

 —

 

 

 —

 

 

 —

 

10

 

 

192,648

 

 

1,947

 

Residential mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

2

 

 

12,425

 

 

48

 

3

 

 

3,407

 

 

5

 

Unrealized loss for twelve months or longer

 

1

 

 

359

 

 

1

 

1

 

 

982

 

 

14

 

 

 

3

 

 

12,784

 

 

49

 

4

 

 

4,389

 

 

19

 

Commercial mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

 —

 

 

 —

 

 

 —

 

1

 

 

1,611

 

 

2

 

Unrealized loss for twelve months or longer

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

1

 

 

1,611

 

 

2

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

6

 

 

49,458

 

 

426

 

2

 

 

1,590

 

 

4

 

Unrealized loss for twelve months or longer

 

8

 

 

20,444

 

 

313

 

8

 

 

42,399

 

 

1,640

 

 

 

14

 

 

69,902

 

 

739

 

10

 

 

43,989

 

 

1,644

 

Corporate debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

 —

 

 

 —

 

 

 —

 

16

 

 

16,635

 

 

277

 

Unrealized loss for twelve months or longer

 

 —

 

 

 —

 

 

 —

 

1

 

 

1,949

 

 

49

 

 

 

 —

 

 

 —

 

 

 —

 

17

 

 

18,584

 

 

326

 

States and political subdivisions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

11

 

 

5,984

 

 

4

 

2

 

 

3,018

 

 

9

 

Unrealized loss for twelve months or longer

 

1

 

 

459

 

 

3

 

35

 

 

24,423

 

 

93

 

 

 

12

 

 

6,443

 

 

7

 

37

 

 

27,441

 

 

102

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

 —

 

 

 —

 

 

 —

 

2

 

 

8,949

 

 

909

 

Unrealized loss for twelve months or longer

 

2

 

 

11,100

 

 

352

 

1

 

 

1,927

 

 

334

 

 

 

2

 

 

11,100

 

 

352

 

3

 

 

10,876

 

 

1,243

 

Total available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

22

 

 

70,867

 

 

480

 

41

 

 

217,328

 

 

2,135

 

Unrealized loss for twelve months or longer

 

12

 

 

32,362

 

 

669

 

49

 

 

116,001

 

 

3,181

 

 

 

34

 

$

103,229

 

$

1,149

 

90

 

$

333,329

 

$

5,316

 

 

18


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

December 31, 2015

 

 

    

Number of

    

 

 

    

Unrealized

    

Number of

    

 

 

    

Unrealized

 

 

 

Securities

 

Fair Value

 

Losses

 

Securities

 

Fair Value

 

Losses

 

Held to maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. treasury securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

 —

 

$

 —

 

$

 —

 

1

 

$

25,115

 

$

30

 

Unrealized loss for twelve months or longer

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 

 —

 

 

 —

 

 

 —

 

1

 

 

25,115

 

 

30

 

U.S. government agencies:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bonds:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

1

 

 

14,942

 

 

58

 

6

 

 

46,607

 

 

372

 

Unrealized loss for twelve months or longer

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 

1

 

 

14,942

 

 

58

 

6

 

 

46,607

 

 

372

 

Commercial mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

 —

 

 

 —

 

 

 —

 

7

 

 

16,098

 

 

92

 

Unrealized loss for twelve months or longer

 

1

 

 

1,407

 

 

6

 

 —

 

 

 —

 

 

 —

 

 

 

1

 

 

1,407

 

 

6

 

7

 

 

16,098

 

 

92

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

3

 

 

38,093

 

 

113

 

10

 

 

127,393

 

 

970

 

Unrealized loss for twelve months or longer

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 

3

 

 

38,093

 

 

113

 

10

 

 

127,393

 

 

970

 

States and political subdivisions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

30

 

 

14,080

 

 

106

 

18

 

 

7,900

 

 

35

 

Unrealized loss for twelve months or longer

 

 —

 

 

 —

 

 

 —

 

1

 

 

2,664

 

 

8

 

 

 

30

 

 

14,080

 

 

106

 

19

 

 

10,564

 

 

43

 

Total held to maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized loss for less than twelve months

 

34

 

 

67,115

 

 

277

 

42

 

 

223,113

 

 

1,499

 

Unrealized loss for twelve months or longer

 

1

 

 

1,407

 

 

6

 

1

 

 

2,664

 

 

8

 

 

 

35

 

$

68,522

 

$

283

 

43

 

$

225,777

 

$

1,507

 

 

During the three and nine months ended September 30, 2016 and 2015, 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 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, nor does the Company believe that is it likely that the Company will be required, to sell these securities before the recovery of the cost basis.

 

Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties. The amortized cost and fair value of securities, excluding trading and available for sale equity securities, at September 30, 2016 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

 

$

138,235

 

$

138,673

 

$

1,847

 

$

1,853

 

Due after one year through five years

 

 

78,708

 

 

81,902

 

 

5,652

 

 

5,709

 

Due after five years through ten years

 

 

59,728

 

 

64,507

 

 

32,232

 

 

32,294

 

Due after ten years

 

 

38,737

 

 

40,433

 

 

45,001

 

 

45,094

 

 

 

 

315,408

 

 

325,515

 

 

84,732

 

 

84,950

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

 

94,777

 

 

95,944

 

 

21,016

 

 

21,745

 

Collateralized mortgage obligations

 

 

113,618

 

 

113,081

 

 

235,336

 

 

237,174

 

Commercial mortgage-backed securities

 

 

9,323

 

 

9,700

 

 

24,850

 

 

25,877

 

 

 

$

533,126

 

$

544,240

 

$

365,934

 

$

369,746

 

 

19


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

The Company realized net gains of $39.7 million and $4.8 million from its trading securities portfolio during the three months ended September 30, 2016 and 2015, respectively, and net gains from its trading securities portfolio of $80.5 million and $7.6 million during the nine months ended September 30, 2016 and 2015, respectively, which are recorded as a component of other noninterest income within the consolidated statements of operations.

 

Securities with a carrying amount of $613.8 million and $789.9 million (with a fair value of $622.0 million and $790.2 million, respectively) at September 30, 2016 and December 31, 2015, 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 September 30, 2016 and December 31, 2015.

 

Mortgage-backed securities and collateralized mortgage obligations consist principally 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 September 30, 2016 and December 31, 2015, NLC had investments on deposit in custody for various state insurance departments with carrying values of $7.9 million and $9.2 million, respectively.

 

5. Non-Covered Loans and Allowance for Non-Covered Loan Losses

 

Non-covered loans refer to loans not covered by the FDIC loss-share agreements. Covered loans are discussed in Note 6 to the consolidated financial statements. Non-covered loans summarized by portfolio segment are as follows (in thousands).

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2016

    

2015

 

Commercial and industrial

 

$

1,707,893

 

$

1,552,805

 

Real estate

 

 

2,652,779

 

 

2,313,239

 

Construction and land development

 

 

795,665

 

 

705,356

 

Consumer

 

 

43,142

 

 

45,672

 

Broker-dealer (1)

 

 

475,176

 

 

602,968

 

 

 

 

5,674,655

 

 

5,220,040

 

Allowance for non-covered loan losses

 

 

(52,625)

 

 

(45,415)

 

Total non-covered loans, net of allowance

 

$

5,622,030

 

$

5,174,625

 


(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 the non-covered PCI loans (in thousands).

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2016

    

2015

 

Carrying amount

 

$

55,902

 

$

72,054

 

Outstanding balance

 

 

73,372

 

 

92,682

 

 

20


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

Balance, beginning of period

 

$

15,229

 

$

22,168

 

$

17,744

 

$

12,814

 

Additions

 

 

 —

 

 

 —

 

 

 —

 

 

14,579

 

Reclassifications from (to) nonaccretable difference, net(1)

 

 

708

 

 

6,234

 

 

4,655

 

 

11,173

 

Disposals of loans

 

 

 —

 

 

 —

 

 

 —

 

 

(2,778)

 

Accretion

 

 

(1,884)

 

 

(9,206)

 

 

(8,346)

 

 

(16,592)

 

Balance, end of period

 

$

14,053

 

$

19,196

 

$

14,053

 

$

19,196

 


(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 nonaccrual and expected cash flows are no longer predictable and the accretable yield is eliminated.

 

The remaining nonaccretable difference for non-covered PCI loans was $22.0 million and $28.5 million at September 30, 2016 and December 31, 2015, respectively.

 

Impaired loans exhibit a clear indication that the borrower’s cash flow may not be sufficient to meet principal and interest payments, which generally occurs when a loan is 90 days past due unless the asset is both well secured and in the process of collection. Non-covered impaired loans include non-accrual loans, troubled debt restructurings (“TDRs”), PCI loans and partially charged-off loans.

 

The amounts shown in the following tables include loans accounted for on an individual basis, as well as acquired Pooled Loans. For Pooled Loans, the recorded investment with allowance and the related allowance consider impairment measured at the pool level. Non-covered impaired loans, segregated between those considered to be PCI loans and those without credit impairment at acquisition, are summarized by class in the following tables (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Unpaid

    

Recorded

    

Recorded

    

Total

    

 

 

 

 

 

Contractual

 

Investment with

 

Investment with

 

Recorded

 

Related

 

September 30, 2016

 

Principal Balance

 

No Allowance

 

Allowance

 

Investment

 

Allowance

 

PCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

$

24,766

 

$

1,433

 

$

8,570

 

$

10,003

 

$

578

 

Unsecured

 

 

2,500

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

41,028

 

 

13,125

 

 

18,153

 

 

31,278

 

 

1,722

 

Secured by residential properties

 

 

13,834

 

 

8,414

 

 

2,233

 

 

10,647

 

 

143

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 

6,264

 

 

2,790

 

 

848

 

 

3,638

 

 

76

 

Consumer

 

 

1,401

 

 

286

 

 

50

 

 

336

 

 

46

 

Broker-dealer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

89,793

 

 

26,048

 

 

29,854

 

 

55,902

 

 

2,565

 

Non-PCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

 

50,852

 

 

7,728

 

 

7,972

 

 

15,700

 

 

1,850

 

Unsecured

 

 

167

 

 

29

 

 

 —

 

 

29

 

 

 —

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

2,029

 

 

1,861

 

 

 —

 

 

1,861

 

 

 —

 

Secured by residential properties

 

 

1,520

 

 

1,145

 

 

 —

 

 

1,145

 

 

 —

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 

704

 

 

 —

 

 

703

 

 

703

 

 

167

 

Consumer

 

 

53

 

 

50

 

 

 —

 

 

50

 

 

 —

 

Broker-dealer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

55,325

 

 

10,813

 

 

8,675

 

 

19,488

 

 

2,017

 

 

 

$

145,118

 

$

36,861

 

$

38,529

 

$

75,390

 

$

4,582

 

 

 

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, 2015

 

Principal Balance

 

No Allowance

 

Allowance

 

Investment

 

Allowance

 

PCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

$

32,597

 

$

5,520

 

$

7,830

 

$

13,350

 

$

1,341

 

Unsecured

 

 

2,572

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

57,607

 

 

15,914

 

 

25,214

 

 

41,128

 

 

2,756

 

Secured by residential properties

 

 

15,278

 

 

8,957

 

 

2,690

 

 

11,647

 

 

175

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

395

 

 

 —

 

 

221

 

 

221

 

 

8

 

Commercial construction loans and land development

 

 

7,929

 

 

3,283

 

 

1,646

 

 

4,929

 

 

174

 

Consumer

 

 

4,162

 

 

734

 

 

45

 

 

779

 

 

32

 

Broker-dealer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

120,540

 

 

34,408

 

 

37,646

 

 

72,054

 

 

4,486

 

Non-PCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

 

21,222

 

 

6,736

 

 

6,017

 

 

12,753

 

 

1,380

 

Unsecured

 

 

224

 

 

47

 

 

 —

 

 

47

 

 

 —

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

436

 

 

390

 

 

 —

 

 

390

 

 

 —

 

Secured by residential properties

 

 

1,229

 

 

918

 

 

 —

 

 

918

 

 

 —

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 

131

 

 

114

 

 

 —

 

 

114

 

 

 —

 

Consumer

 

 

 —

 

 

1

 

 

 —

 

 

1

 

 

 —

 

Broker-dealer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

 

23,242

 

 

8,206

 

 

6,017

 

 

14,223

 

 

1,380

 

 

 

$

143,782

 

$

42,614

 

$

43,663

 

$

86,277

 

$

5,866

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

Commercial and industrial:

    

 

    

    

 

    

    

 

    

    

 

    

 

Secured

 

$

25,338

 

$

33,137

 

$

25,903

 

$

29,296

 

Unsecured

 

 

38

 

 

73

 

 

38

 

 

118

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

34,491

 

 

55,050

 

 

37,329

 

 

35,625

 

Secured by residential properties

 

 

11,746

 

 

14,853

 

 

12,179

 

 

8,505

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

289

 

 

111

 

 

113

 

Commercial construction loans and land development

 

 

4,161

 

 

5,455

 

 

4,692

 

 

7,581

 

Consumer

 

 

412

 

 

1,061

 

 

583

 

 

1,548

 

Broker-dealer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

$

76,186

 

$

109,918

 

$

80,835

 

$

82,786

 

 

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).

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2016

 

2015

 

Commercial and industrial:

    

 

    

    

 

    

 

Secured

 

$

19,622

 

$

17,717

 

Unsecured

 

 

29

 

 

47

 

Real estate:

 

 

 

 

 

 

 

Secured by commercial properties

 

 

1,861

 

 

4,597

 

Secured by residential properties

 

 

1,226

 

 

999

 

Construction and land development:

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 

703

 

 

114

 

Consumer

 

 

50

 

 

7

 

Broker-dealer

 

 

 —

 

 

 —

 

 

 

$

23,491

 

$

23,481

 

 

At September 30, 2016 and December 31, 2015, non-covered non-accrual loans included non-covered PCI loans of $4.0 million and $9.3 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, $1.7 million and $1.6 million of real estate loans secured by residential properties and classified as held for sale were in non-accrual status at September 30, 2016 and December 31, 2015, respectively.

 

Interest income, including recoveries and cash payments, recorded on non-covered impaired loans was $0.1 million and $4.9 million during the three months ended September 30, 2016 and 2015, respectively, and $0.3 million and $7.4 million during the nine months ended September 30, 2016 and 2015, 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)

The outstanding balance of TDRs granted during the nine months ended September 30, 2016 and 2015 and the three months ended September 30, 2015 are shown in the following tables (in thousands). There were no TDRs granted during the three months ended September 30, 2016. At September 30, 2016 and December 31, 2015, the Bank had nominal unadvanced commitments to borrowers whose loans have been restructured in TDRs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded Investment in Loans Modified by

 

 

    

 

 

    

Interest Rate

    

Payment Term

    

Total

 

Nine months ended September 30, 2016

 

A/B Note

 

Adjustment

 

Extension

 

Modification

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

$

 —

 

$

 —

 

$

944

 

$

944

 

Unsecured

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Secured by residential properties

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Broker-dealer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

$

 —

 

$

 —

 

$

944

 

$

944

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded Investment in Loans Modified by

 

 

    

 

 

    

Interest Rate

    

Payment Term

    

Total

 

Three months ended  September 30, 2015

 

A/B Note

 

Adjustment

 

Extension

 

Modification

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

$

 —

 

$

 —

 

$

88

 

$

88

 

Unsecured

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

 —

 

 

 —

 

 

1,083

 

 

1,083

 

Secured by residential properties

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Broker-dealer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

$

 —

 

$

 —

 

$

1,171

 

$

1,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded Investment in Loans Modified by

 

 

    

 

 

    

Interest Rate

    

Payment Term

    

Total

 

Nine months ended September 30, 2015

 

A/B Note

 

Adjustment

 

Extension

 

Modification

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

$

 —

 

$

 —

 

$

88

 

$

88

 

Unsecured

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

 —

 

 

 —

 

 

1,083

 

 

1,083

 

Secured by residential properties

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Consumer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Broker-dealer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

$

 —

 

$

 —

 

$

1,171

 

$

1,171

 

24


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

The following tables present information regarding TDRs granted during the twelve months preceding September 30, 2016 and 2015, respectively, for which a payment was at least 30 days past due (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

Number of

 

Recorded

 

Twelve Months Preceding September 30, 2016

    

Loans

    

Investment

 

Commercial and industrial:

 

 

 

 

 

Secured

 

1

 

$

944

 

Unsecured

 

 —

 

 

 —

 

Real estate:

 

 

 

 

 

 

Secured by commercial properties

 

 —

 

 

 —

 

Secured by residential properties

 

 —

 

 

 —

 

Construction and land development:

 

 

 

 

 

 

Residential construction loans

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 —

 

 

 —

 

Consumer

 

 —

 

 

 —

 

Broker-dealer

 

 —

 

 

 —

 

 

 

1

 

$

944

 

 

 

 

 

 

 

 

 

 

 

Number of

 

Recorded

 

Twelve Months Preceding September 30, 2015

    

Loans

    

Investment

 

Commercial and industrial:

 

 

 

 

 

Secured

 

 —

 

$

 —

 

Unsecured

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

Secured by commercial properties

 

1

 

 

1,083

 

Secured by residential properties

 

 —

 

 

 —

 

Construction and land development:

 

 

 

 

 

 

Residential construction loans

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 —

 

 

 —

 

Consumer

 

 —

 

 

 —

 

Broker-dealer

 

 —

 

 

 —

 

 

 

1

 

$

1,083

 

 

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

 

September 30, 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

 

$

10,806

 

$

6,062

 

$

7,605

 

$

24,473

 

$

1,574,790

 

$

10,003

 

$

1,609,266

 

$

739

 

Unsecured

 

 

42

 

 

46

 

 

2

 

 

90

 

 

98,537

 

 

 —

 

 

98,627

 

 

2

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

13,901

 

 

2,496

 

 

 —

 

 

16,397

 

 

1,798,800

 

 

31,278

 

 

1,846,475

 

 

 —

 

Secured by residential properties

 

 

484

 

 

484

 

 

336

 

 

1,304

 

 

794,353

 

 

10,647

 

 

806,304

 

 

 —

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

417

 

 

 —

 

 

 —

 

 

417

 

 

114,340

 

 

 —

 

 

114,757

 

 

 —

 

Commercial construction loans and land development

 

 

1,973

 

 

 —

 

 

 —

 

 

1,973

 

 

675,297

 

 

3,638

 

 

680,908

 

 

 —

 

Consumer

 

 

805

 

 

23

 

 

10

 

 

838

 

 

41,968

 

 

336

 

 

43,142

 

 

 —

 

Broker-dealer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

475,176

 

 

 —

 

 

475,176

 

 

 —

 

 

 

$

28,428

 

$

9,111

 

$

7,953

 

$

45,492

 

$

5,573,261

 

$

55,902

 

$

5,674,655

 

$

741

 

 

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, 2015

 

30-59 Days

 

60-89 Days

 

90 Days or More

 

Past Due Loans

 

Loans

 

Loans

 

Loans

 

90 Days or More

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

$

14,869

 

$

3,960

 

$

8,414

 

$

27,243

 

$

1,406,537

 

$

13,350

 

$

1,447,130

 

$

12

 

Unsecured

 

 

18

 

 

1

 

 

 —

 

 

19

 

 

105,656

 

 

 —

 

 

105,675

 

 

 —

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

1,008

 

 

964

 

 

293

 

 

2,265

 

 

1,528,084

 

 

41,128

 

 

1,571,477

 

 

 —

 

Secured by residential properties

 

 

726

 

 

35

 

 

336

 

 

1,097

 

 

729,018

 

 

11,647

 

 

741,762

 

 

 —

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

343

 

 

 —

 

 

 —

 

 

343

 

 

103,819

 

 

221

 

 

104,383

 

 

 —

 

Commercial construction loans and land development

 

 

733

 

 

1,845

 

 

114

 

 

2,692

 

 

593,352

 

 

4,929

 

 

600,973

 

 

 —

 

Consumer

 

 

359

 

 

17

 

 

 —

 

 

376

 

 

44,517

 

 

779

 

 

45,672

 

 

 —

 

Broker-dealer

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

602,968

 

 

 —

 

 

602,968

 

 

 —

 

 

 

$

18,056

 

$

6,822

 

$

9,157

 

$

34,035

 

$

5,113,951

 

$

72,054

 

$

5,220,040

 

$

12

 

 

In addition to the non-covered loans shown in the table above, $41.1 million and $50.8 million of loans included in loans held for sale (with an unpaid principal balance of $41.6 million and $51.1 million, respectively) were 90 days past due and accruing interest at September 30, 2016 and December 31, 2015, 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).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

    

Pass

    

Special Mention

    

Substandard

    

PCI

    

Total

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

$

1,518,064

 

$

9,996

 

$

71,203

 

$

10,003

 

$

1,609,266

 

Unsecured

 

 

95,887

 

 

1,500

 

 

1,240

 

 

 —

 

 

98,627

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

1,793,952

 

 

1,819

 

 

19,426

 

 

31,278

 

 

1,846,475

 

Secured by residential properties

 

 

791,535

 

 

 —

 

 

4,122

 

 

10,647

 

 

806,304

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

114,757

 

 

 —

 

 

 —

 

 

 —

 

 

114,757

 

Commercial construction loans and land development

 

 

676,094

 

 

 —

 

 

1,176

 

 

3,638

 

 

680,908

 

Consumer

 

 

42,498

 

 

25

 

 

283

 

 

336

 

 

43,142

 

Broker-dealer

 

 

475,176

 

 

 —

 

 

 —

 

 

 —

 

 

475,176

 

 

 

$

5,507,963

 

$

13,340

 

$

97,450

 

$

55,902

 

$

5,674,655

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

    

Pass

    

Special Mention

    

Substandard

    

PCI

    

Total

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

$

1,372,671

 

$

 —

 

$

61,109

 

$

13,350

 

$

1,447,130

 

Unsecured

 

 

105,569

 

 

 —

 

 

106

 

 

 —

 

 

105,675

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

1,517,049

 

 

1,536

 

 

11,764

 

 

41,128

 

 

1,571,477

 

Secured by residential properties

 

 

724,701

 

 

 —

 

 

5,414

 

 

11,647

 

 

741,762

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

104,162

 

 

 —

 

 

 —

 

 

221

 

 

104,383

 

Commercial construction loans and land development

 

 

594,614

 

 

 —

 

 

1,430

 

 

4,929

 

 

600,973

 

Consumer

 

 

44,736

 

 

35

 

 

122

 

 

779

 

 

45,672

 

Broker-dealer

 

 

602,968

 

 

 —

 

 

 —

 

 

 —

 

 

602,968

 

 

 

$

5,066,470

 

$

1,571

 

$

79,945

 

$

72,054

 

$

5,220,040

 

 

Allowance for Loan Losses

 

The allowance for both originated and acquired loans is subject to regulatory examinations and determinations as to appropriateness, 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 2015 Form 10-K.

 

During the three months ended June 30, 2016, the Bank discovered irregularities in connection with a single 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.

 

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 September 30, 2016

 

Industrial

 

Real Estate

 

Land Development

 

Consumer

 

Broker-Dealer

 

Total

 

Balance, beginning of period

 

$

20,720

 

$

23,302

 

$

6,288

 

$

325

 

$

378

 

$

51,013

 

Provision charged to (recapture from) operations

 

 

3,973

 

 

(116)

 

 

823

 

 

228

 

 

(189)

 

 

4,719

 

Loans charged off

 

 

(3,550)

 

 

(1)

 

 

 —

 

 

(67)

 

 

 —

 

 

(3,618)

 

Recoveries on charged off loans

 

 

295

 

 

196

 

 

 —

 

 

20

 

 

 —

 

 

511

 

Balance, end of period

 

$

21,438

 

$

23,381

 

$

7,111

 

$

506

 

$

189

 

$

52,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

    

 

 

    

Construction and

    

 

 

    

 

 

    

 

 

 

Nine Months Ended September 30, 2016

 

Industrial

 

Real Estate

 

Land Development

 

Consumer

 

Broker-Dealer

 

Total

 

Balance, beginning of period

 

$

19,845

 

$

18,983

 

$

6,064

 

$

314

 

$

209

 

$

45,415

 

Provision charged to (recapture from) operations

 

 

30,494

 

 

5,333

 

 

1,047

 

 

243

 

 

(19)

 

 

37,098

 

Loans charged off

 

 

(30,333)

 

 

(1,299)

 

 

 —

 

 

(155)

 

 

(1)

 

 

(31,788)

 

Recoveries on charged off loans

 

 

1,432

 

 

364

 

 

 —

 

 

104

 

 

 —

 

 

1,900

 

Balance, end of period

 

$

21,438

 

$

23,381

 

$

7,111

 

$

506

 

$

189

 

$

52,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

    

 

 

    

Construction and

    

 

 

    

 

 

    

 

 

 

Three Months Ended September 30, 2015

 

Industrial

 

Real Estate

 

Land Development

 

Consumer

 

Broker-Dealer

 

Total

 

Balance, beginning of period

 

$

18,508

 

$

14,565

 

$

6,845

 

$

221

 

$

345

 

$

40,484

 

Provision charged to (recapture from) operations

 

 

1,659

 

 

1,812

 

 

847

 

 

(15)

 

 

(23)

 

 

4,280

 

Loans charged off

 

 

(2,685)

 

 

(212)

 

 

 —

 

 

(29)

 

 

 —

 

 

(2,926)

 

Recoveries on charged off loans

 

 

927

 

 

195

 

 

 —

 

 

29

 

 

 —

 

 

1,151

 

Balance, end of period

 

$

18,409

 

$

16,360

 

$

7,692

 

$

206

 

$

322

 

$

42,989

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

    

 

 

    

Construction and

    

 

 

    

 

 

    

 

 

 

Nine Months Ended September 30, 2015

 

Industrial

 

Real Estate

 

Land Development

 

Consumer

 

Broker-Dealer

 

Total

 

Balance, beginning of period

 

$

18,833

 

$

11,131

 

$

6,450

 

$

461

 

$

166

 

$

37,041

 

Provision charged to (recapture from) operations

 

 

1,032

 

 

5,481

 

 

1,242

 

 

(129)

 

 

33

 

 

7,659

 

Loans charged off

 

 

(4,305)

 

 

(581)

 

 

 —

 

 

(208)

 

 

 —

 

 

(5,094)

 

Recoveries on charged off loans

 

 

2,849

 

 

329

 

 

 —

 

 

82

 

 

123

 

 

3,383

 

Balance, end of period

 

$

18,409

 

$

16,360

 

$

7,692

 

$

206

 

$

322

 

$

42,989

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

    

 

 

    

Construction and

    

 

 

    

 

 

    

 

 

 

September 30, 2016

 

Industrial

 

Real Estate

 

Land Development

 

Consumer

 

Broker-Dealer

 

Total

 

Loans individually evaluated for impairment

 

$

14,701

 

$

1,515

 

$

703

 

$

 —

 

$

 —

 

$

16,919

 

Loans collectively evaluated for impairment

 

 

1,683,189

 

 

2,609,339

 

 

791,324

 

 

42,806

 

 

475,176

 

 

5,601,834

 

PCI Loans

 

 

10,003

 

 

41,925

 

 

3,638

 

 

336

 

 

 —

 

 

55,902

 

 

 

$

1,707,893

 

$

2,652,779

 

$

795,665

 

$

43,142

 

$

475,176

 

$

5,674,655

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

    

 

 

    

Construction and

    

 

 

    

 

 

    

 

 

 

December 31, 2015

 

Industrial

 

Real Estate

 

Land Development

 

Consumer

 

Broker-Dealer

 

Total

 

Loans individually evaluated for impairment

 

$

11,354

 

$

97

 

$

 —

 

$

 —

 

$

 —

 

$

11,451

 

Loans collectively evaluated for impairment

 

 

1,528,101

 

 

2,260,367

 

 

700,206

 

 

44,893

 

 

602,968

 

 

5,136,535

 

PCI Loans

 

 

13,350

 

 

52,775

 

 

5,150

 

 

779

 

 

 —

 

 

72,054

 

 

 

$

1,552,805

 

$

2,313,239

 

$

705,356

 

$

45,672

 

$

602,968

 

$

5,220,040

 

 

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

   

 

 

   

 

 

   

 

 

 

September 30, 2016

 

Industrial

 

Real Estate

 

Land Development

 

Consumer

 

Broker-Dealer

 

Total

 

Loans individually evaluated for impairment

 

$

1,850

 

$

 —

 

$

167

 

$

 —

 

$

 —

 

$

2,017

 

Loans collectively evaluated for impairment

 

 

19,010

 

 

21,516

 

 

6,868

 

 

460

 

 

189

 

 

48,043

 

PCI Loans

 

 

578

 

 

1,865

 

 

76

 

 

46

 

 

 —

 

 

2,565

 

 

 

$

21,438

 

$

23,381

 

$

7,111

 

$

506

 

$

189

 

$

52,625

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

    

 

 

    

Construction and

    

 

 

    

 

 

    

 

 

 

December 31, 2015

 

Industrial

 

Real Estate

 

Land Development

 

Consumer

 

Broker-Dealer

 

Total

 

Loans individually evaluated for impairment

 

$

1,380

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

1,380

 

Loans collectively evaluated for impairment

 

 

17,124

 

 

16,052

 

 

5,882

 

 

282

 

 

209

 

 

39,549

 

PCI Loans

 

 

1,341

 

 

2,931

 

 

182

 

 

32

 

 

 —

 

 

4,486

 

 

 

$

19,845

 

$

18,983

 

$

6,064

 

$

314

 

$

209

 

$

45,415

 

 

 

 

 

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 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. 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 September 30, 2016, the Bank recorded a related “true-up” payment accrual of $10.8 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).

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2016

    

2015

 

Commercial and industrial

    

$

5,426

 

$

8,801

 

Real estate

 

 

273,340

 

 

341,048

 

Construction and land development

 

 

13,994

 

 

30,445

 

 

 

 

292,760

 

 

380,294

 

Allowance for covered loans

 

 

(729)

 

 

(1,532)

 

Total covered loans, net of allowance

 

$

292,031

 

$

378,762

 

 

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

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2016

    

2015

 

Carrying amount

    

$

160,312

 

$

221,974

 

Outstanding balance

 

 

309,966

 

 

408,221

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2016

 

2015

 

2016

 

2015

Balance, beginning of period

    

$

157,604

 

$

185,981

 

$

176,719

 

$

193,493

Reclassifications from (to) nonaccretable difference, net(1)

 

 

6,954

 

 

35,338

 

 

25,397

 

 

61,339

Transfer of loans to covered OREO(2)

 

 

(250)

 

 

(153)

 

 

(421)

 

 

1,346

Accretion

 

 

(17,460)

 

 

(32,301)

 

 

(54,847)

 

 

(67,313)

Balance, end of period

 

$

146,848

 

$

188,865

 

$

146,848

 

$

188,865

(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 nonaccrual 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 $117.5 million and $172.2 million at September 30, 2016 and December 31, 2015, respectively. During the three and nine months ended September 30, 2016 and 2015, 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

 

September 30, 2016

 

Principal Balance

 

No Allowance

 

Allowance

 

Investment

 

Allowance

 

PCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

$

8,779

 

$

1,364

 

$

1,386

 

$

2,750

 

$

123

 

Unsecured

 

 

6,201

 

 

361

 

 

879

 

 

1,240

 

 

78

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

155,301

 

 

41,936

 

 

25,329

 

 

67,265

 

 

319

 

Secured by residential properties

 

 

151,759

 

 

77,036

 

 

2,445

 

 

79,481

 

 

165

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

355

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 

23,965

 

 

9,576

 

 

 —

 

 

9,576

 

 

 —

 

 

 

 

346,360

 

 

130,273

 

 

30,039

 

 

160,312

 

 

685

 

Non-PCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

 

52

 

 

52

 

 

 —

 

 

52

 

 

 —

 

Unsecured

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

399

 

 

318

 

 

 —

 

 

318

 

 

 —

 

Secured by residential properties

 

 

4,746

 

 

3,717

 

 

 —

 

 

3,717

 

 

 —

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

206

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 

57

 

 

51

 

 

 —

 

 

51

 

 

 —

 

 

 

 

5,460

 

 

4,138

 

 

 —

 

 

4,138

 

 

 —

 

 

 

$

351,820

 

$

134,411

 

$

30,039

 

$

164,450

 

$

685

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Unpaid

    

Recorded

    

Recorded

    

Total

    

 

 

 

 

 

Contractual

 

Investment with

 

Investment with

 

Recorded

 

Related

 

December 31, 2015

 

Principal Balance

 

No Allowance

 

Allowance

 

Investment

 

Allowance

 

PCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

$

15,454

 

$

3,312

 

$

2,415

 

$

5,727

 

$

495

 

Unsecured

 

 

9,377

 

 

618

 

 

1,162

 

 

1,780

 

 

246

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

211,145

 

 

67,540

 

 

29,388

 

 

96,928

 

 

245

 

Secured by residential properties

 

 

182,698

 

 

93,438

 

 

3,180

 

 

96,618

 

 

514

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

1,225

 

 

121

 

 

 —

 

 

121

 

 

 —

 

Commercial construction loans and land development

 

 

55,947

 

 

20,800

 

 

 —

 

 

20,800

 

 

 —

 

 

 

 

475,846

 

 

185,829

 

 

36,145

 

 

221,974

 

 

1,500

 

Non-PCI

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

 

78

 

 

68

 

 

 —

 

 

68

 

 

 —

 

Unsecured

 

 

 —

 

 

1

 

 

 —

 

 

1

 

 

 —

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

512

 

 

443

 

 

 —

 

 

443

 

 

 —

 

Secured by residential properties

 

 

3,745

 

 

3,031

 

 

 —

 

 

3,031

 

 

 —

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

799

 

 

540

 

 

 —

 

 

540

 

 

 —

 

Commercial construction loans and land development

 

 

123

 

 

110

 

 

 —

 

 

110

 

 

 —

 

 

 

 

5,257

 

 

4,193

 

 

 —

 

 

4,193

 

 

 —

 

 

 

$

481,103

 

$

190,022

 

$

36,145

 

$

226,167

 

$

1,500

 

 

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 September 30,

 

Nine Months Ended September 30,

 

 

2016

 

2015

 

2016

 

2015

Commercial and industrial:

    

 

 

    

 

 

    

 

 

    

 

 

Secured

 

$

3,286

 

$

8,258

 

$

4,299

 

$

10,481

Unsecured

 

 

1,331

 

 

3,118

 

 

1,511

 

 

4,770

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

76,693

 

 

132,133

 

 

82,477

 

 

170,627

Secured by residential properties

 

 

84,129

 

 

111,224

 

 

91,424

 

 

124,720

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

904

 

 

331

 

 

1,133

Commercial construction loans and land development

 

 

10,568

 

 

29,370

 

 

15,269

 

 

34,762

 

 

$

176,007

 

$

285,007

 

$

195,311

 

$

346,493

 

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

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2016

    

2015

 

Commercial and industrial:

    

 

    

    

 

    

 

Secured

 

$

52

 

$

68

 

Unsecured

 

 

 —

 

 

 —

 

Real estate:

 

 

 

 

 

 

 

Secured by commercial properties

 

 

318

 

 

442

 

Secured by residential properties

 

 

3,211

 

 

2,516

 

Construction and land development:

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

541

 

Commercial construction loans and land development

 

 

50

 

 

5,411

 

 

 

$

3,631

 

$

8,978

 

 

At September 30, 2016, there were no covered PCI loans included within non-accrual loans for which discount accretion has been suspended. At December 31, 2015, covered non-accrual loans included covered PCI loans of $5.3 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 during the three and nine months ended September 30, 2016 was nominal. Interest income recorded on covered impaired loans during the three and nine months ended September 30, 2015 was $14.3 million. Except as noted above, covered PCI loans are considered to be performing due to the application of the accretion method.

 

32


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

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. There were no TDRs granted during the three and nine months ended September 30, 2016. The outstanding balance of TDRs granted during the three and nine months ended September 30, 2015 is shown in the following tables (in thousands). Pooled Loans are not in the scope of the disclosure requirements for TDRs. At September 30, 2016 and December 31, 2015, the Bank had nominal unadvanced commitments to borrowers whose loans have been restructured in TDRs.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded Investment in Loans Modified by

 

 

    

 

 

    

Interest Rate

    

Payment Term

    

Total

 

Three Months Ended September 30, 2015

 

A/B Note

 

Adjustment

 

Extension

 

Modification

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Unsecured

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Secured by residential properties

 

 

 —

 

 

55

 

 

 —

 

 

55

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

$

 —

 

$

55

 

$

 —

 

$

55

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recorded Investment in Loans Modified by

 

 

    

 

 

    

Interest Rate

    

Payment Term

    

Total

 

Nine Months Ended September 30, 2015

 

A/B Note

 

Adjustment

 

Extension

 

Modification

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Unsecured

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Secured by residential properties

 

 

119

 

 

191

 

 

254

 

 

564

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 

$

119

 

$

191

 

$

254

 

$

564

 

 

The following tables present information regarding TDRs granted during the twelve months preceding September 30, 2016 and 2015, respectively, for which a payment was at least 30 days past due (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

Number of

 

Recorded

 

Twelve Months Preceding September 30, 2016

    

Loans

    

Investment

 

Commercial and industrial:

 

 

 

 

 

Secured

 

 —

 

$

 —

 

Unsecured

 

 —

 

 

 —

 

Real estate:

 

 

 

 

 

 

Secured by commercial properties

 

 —

 

 

 —

 

Secured by residential properties

 

2

 

 

197

 

Construction and land development:

 

 

 

 

 

 

Residential construction loans

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 —

 

 

 —

 

 

 

2

 

$

197

 

 

33


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

 

 

 

 

 

 

 

 

Number of

 

Recorded

 

Twelve Months Preceding September 30, 2015

    

Loans

    

Investment

 

Commercial and industrial:

 

 

 

 

 

Secured

 

 —

 

$

 —

 

Unsecured

 

 —

 

 

 —

 

Real estate:

 

 

 

 

 

 

Secured by commercial properties

 

1

 

 

 —

 

Secured by residential properties

 

1

 

 

254

 

Construction and land development:

 

 

 

 

 

 

Residential construction loans

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 —

 

 

 —

 

 

 

2

 

$

254

 

 

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

 

September 30, 2016

 

3059 Days

 

6089 Days

 

90 Days or More

 

Past Due Loans

 

Loans

 

Loans

 

Loans

 

90 Days or More

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

$

8

 

$

 —

 

$

224

 

$

232

 

$

1,204

 

$

2,750

 

$

4,186

 

$

171

 

Unsecured

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,240

 

 

1,240

 

 

 —

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

77

 

 

38

 

 

 —

 

 

115

 

 

23,372

 

 

67,265

 

 

90,752

 

 

 —

 

Secured by residential properties

 

 

2,195

 

 

473

 

 

1,872

 

 

4,540

 

 

98,567

 

 

79,481

 

 

182,588

 

 

132

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 

13

 

 

 —

 

 

39

 

 

52

 

 

4,366

 

 

9,576

 

 

13,994

 

 

 —

 

 

 

$

2,293

 

$

511

 

$

2,135

 

$

4,939

 

$

127,509

 

$

160,312

 

$

292,760

 

$

303

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Accruing Loans

 

 

 

Loans Past Due

 

Loans Past Due

 

Loans Past Due

 

Total

 

Current

 

PCI

 

Total

 

(NonPCI) Past Due

 

December 31, 2015

 

3059 Days

 

6089 Days

 

90 Days or More

 

Past Due Loans

 

Loans

 

Loans

 

Loans

 

90 Days or More

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

$

51

 

$

 —

 

$

68

 

$

119

 

$

1,175

 

$

5,727

 

$

7,021

 

$

 —

 

Unsecured

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,780

 

 

1,780

 

 

 —

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

 —

 

 

 —

 

 

100

 

 

100

 

 

28,957

 

 

96,928

 

 

125,985

 

 

 —

 

Secured by residential properties

 

 

3,399

 

 

418

 

 

1,104

 

 

4,921

 

 

113,524

 

 

96,618

 

 

215,063

 

 

 —

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

 —

 

 

540

 

 

540

 

 

264

 

 

121

 

 

925

 

 

 —

 

Commercial construction loans and land development

 

 

47

 

 

1

 

 

95

 

 

143

 

 

8,577

 

 

20,800

 

 

29,520

 

 

 —

 

 

 

$

3,497

 

$

419

 

$

1,907

 

$

5,823

 

$

152,497

 

$

221,974

 

$

380,294

 

$

 —

 

 

34


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

The Bank assigns a risk grade to each of its covered loans in a manner consistent with the existing loan review program and risk grading matrix used for non-covered loans, as described in Note 5 to the consolidated financial statements. The following tables present the internal risk grades of covered loans in the portfolio by class (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

    

Pass

    

Special Mention

    

Substandard

    

PCI

    

Total

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

$

797

 

$

 —

 

$

639

 

$

2,750

 

$

4,186

 

Unsecured

 

 

 —

 

 

 —

 

 

 —

 

 

1,240

 

 

1,240

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

19,586

 

 

 —

 

 

3,901

 

 

67,265

 

 

90,752

 

Secured by residential properties

 

 

95,323

 

 

469

 

 

7,315

 

 

79,481

 

 

182,588

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Commercial construction loans and land development

 

 

2,848

 

 

 —

 

 

1,570

 

 

9,576

 

 

13,994

 

 

 

$

118,554

 

$

469

 

$

13,425

 

$

160,312

 

$

292,760

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

    

Pass

    

Special Mention

    

Substandard

    

PCI

    

Total

 

Commercial and industrial:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured

 

$

758

 

$

 —

 

$

536

 

$

5,727

 

$

7,021

 

Unsecured

 

 

 —

 

 

 —

 

 

 —

 

 

1,780

 

 

1,780

 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Secured by commercial properties

 

 

24,070

 

 

 —

 

 

4,987

 

 

96,928

 

 

125,985

 

Secured by residential properties

 

 

111,128

 

 

491

 

 

6,826

 

 

96,618

 

 

215,063

 

Construction and land development:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential construction loans

 

 

264

 

 

 —

 

 

540

 

 

121

 

 

925

 

Commercial construction loans and land development

 

 

6,847

 

 

 —

 

 

1,873

 

 

20,800

 

 

29,520

 

 

 

$

143,067

 

$

491

 

$

14,762

 

$

221,974

 

$

380,294

 

 

The Bank’s impairment methodology for the covered loans is consistent with that of non-covered loans, and is discussed in detail in Notes 5 and 6 to the consolidated financial statements included in the Company’s 2015 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  September 30, 2016

 

Industrial

 

Real Estate

 

Land Development

 

Total

 

Balance, beginning of period

 

$

55

 

$

1,400

 

$

 —

 

$

1,455

 

Provision charged to (recapture from) operations

 

 

162

 

 

(888)

 

 

(3)

 

 

(729)

 

Loans charged off

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Recoveries on charged off loans

 

 

 —

 

 

 —

 

 

3

 

 

3

 

Balance, end of period

 

$

217

 

$

512

 

$

 —

 

$

729

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

   

 

 

   

Construction and

   

 

 

 

Nine months ended September 30, 2016

 

Industrial

 

Real Estate

 

Land Development

 

Total

 

Balance, beginning of period

 

$

758

 

$

774

 

$

 —

 

$

1,532

 

Recapture from operations

 

 

(535)

 

 

(237)

 

 

(53)

 

 

(825)

 

Loans charged off

 

 

(6)

 

 

(42)

 

 

(51)

 

 

(99)

 

Recoveries on charged off loans

 

 

 —

 

 

17

 

 

104

 

 

121

 

Balance, end of period

 

$

217

 

$

512

 

$

 —

 

$

729

 

 

35


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

    

 

 

    

Construction and

    

 

 

 

Three months ended  September 30, 2015

 

Industrial

 

Real Estate

 

Land Development

 

Total

 

Balance, beginning of period

 

$

130

 

$

469

 

$

335

 

$

934

 

Provision charged to (recapture from) operations

 

 

(100)

 

 

851

 

 

562

 

 

1,313

 

Loans charged off

 

 

38

 

 

(403)

 

 

 —

 

 

(365)

 

Recoveries on charged off loans

 

 

(14)

 

 

2

 

 

 —

 

 

(12)

 

Balance, end of period

 

$

54

 

$

919

 

$

897

 

$

1,870

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

    

 

 

    

Construction and

    

 

 

 

Nine months ended September 30, 2015

 

Industrial

 

Real Estate

 

Land Development

 

Total

 

Balance, beginning of period

 

$

1,193

 

$

3,334

 

$

84

 

$

4,611

 

Provision charged to (recapture from) operations

 

 

(230)

 

 

186

 

 

823

 

 

779

 

Loans charged off

 

 

(915)

 

 

(2,702)

 

 

(10)

 

 

(3,627)

 

Recoveries on charged off loans

 

 

6

 

 

101

 

 

 —

 

 

107

 

Balance, end of period

 

$

54

 

$

919

 

$

897

 

$

1,870

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

    

 

 

    

Construction and

    

 

 

 

September 30, 2016

 

Industrial

 

Real Estate

 

Land Development

 

Total

 

Loans individually evaluated for impairment

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Loans collectively evaluated for impairment

 

 

1,436

 

 

126,594

 

 

4,418

 

 

132,448

 

PCI Loans

 

 

3,990

 

 

146,746

 

 

9,576

 

 

160,312

 

 

 

$

5,426

 

$

273,340

 

$

13,994

 

$

292,760

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

    

 

 

    

Construction and

    

 

 

 

December 31, 2015

 

Industrial

 

Real Estate

 

Land Development

 

Total

 

Loans individually evaluated for impairment

 

$

 —

 

$

 —

 

$

540

 

$

540

 

Loans collectively evaluated for impairment

 

 

1,294

 

 

147,502

 

 

8,984

 

 

157,780

 

PCI Loans

 

 

7,507

 

 

193,546

 

 

20,921

 

 

221,974

 

 

 

$

8,801

 

$

341,048

 

$

30,445

 

$

380,294

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

    

 

 

    

Construction and

    

 

 

 

September 30, 2016

 

Industrial

 

Real Estate

 

Land Development

 

Total

 

Loans individually evaluated for impairment

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Loans collectively evaluated for impairment

 

 

16

 

 

28

 

 

 —

 

 

44

 

PCI Loans

 

 

201

 

 

484

 

 

 —

 

 

685

 

 

 

$

217

 

$

512

 

$

 —

 

$

729

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Commercial and

    

 

 

    

Construction and

    

 

 

 

December 31, 2015

 

Industrial

 

Real Estate

 

Land Development

 

Total

 

Loans individually evaluated for impairment

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

Loans collectively evaluated for impairment

 

 

17

 

 

15

 

 

 —

 

 

32

 

PCI Loans

 

 

741

 

 

759

 

 

 —

 

 

1,500

 

 

 

$

758

 

$

774

 

$

 —

 

$

1,532

 

 

36


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Covered Other Real Estate Owned

 

A summary of the activity in covered OREO is as follows (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

    

2016

 

2015

 

2016

 

2015

 

Balance, beginning of period

 

$

67,634

 

$

125,510

 

$

99,090

 

$

136,945

 

Additions to covered OREO

 

 

2,422

 

 

3,516

 

 

11,703

 

 

39,579

 

Dispositions of covered OREO

 

 

(5,516)

 

 

(17,632)

 

 

(34,521)

 

 

(61,072)

 

Valuation adjustments in the period

 

 

(2,552)

 

 

(5,370)

 

 

(14,284)

 

 

(9,428)

 

Balance, end of period

 

$

61,988

 

$

106,024

 

$

61,988

 

$

106,024

 

 

During the three and nine months ended September 30, 2016 and 2015, 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. The process of determining fair value is subjective in nature and requires the use of significant estimates and assumptions. Although the Bank makes market-based assumptions when valuing acquired assets, new information may come to light that causes estimates to increase or decrease. When the Bank determines, based on subsequent information, that its estimates require adjustment, the Bank records the adjustment. The accounting for such adjustments requires that the decreases to fair value be recorded at the time such new information is received, while increases to fair value are recorded when the asset is subsequently sold.

 

FDIC Indemnification Asset

 

A summary of the activity in the FDIC Indemnification Asset is as follows (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

Balance, beginning of period

 

$

74,460

 

$

102,381

 

$

91,648

 

$

130,437

 

FDIC Indemnification Asset accretion (amortization)

 

 

33

 

 

201

 

 

189

 

 

1,027

 

Transfers to due from FDIC and other

 

 

(1,142)

 

 

(9,680)

 

 

(18,486)

 

 

(38,562)

 

Balance, end of period

 

$

73,351

 

$

92,902

 

$

73,351

 

$

92,902

 

 

As of September 30, 2016, the Bank had billed and collected $118.8 million from the FDIC, which represented reimbursable covered losses and expenses through June 30, 2016.

 

37


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

7. Mortgage Servicing Rights

 

The following tables present the changes in fair value of the Company’s MSR asset, as included in other assets within the consolidated balance sheets, and other information related to the serviced portfolio (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2016

 

2015

 

2016

 

2015

 

Balance, beginning of period

$

33,491

 

$

44,985

 

$

52,285

 

$

36,155

 

Additions

 

10,416

 

 

11,025

 

 

20,309

 

 

23,121

 

Sales

 

 —

 

 

 —

 

 

(7,586)

 

 

 —

 

Changes in fair value:

 

 

 

 

 

 

 

 

 

 

 

 

Due to changes in model inputs or assumptions (1)

 

1,413

 

 

(7,030)

 

 

(16,923)

 

 

(6,302)

 

Due to customer payoffs

 

(1,569)

 

 

(1,453)

 

 

(4,334)

 

 

(5,447)

 

Balance, end of period

$

43,751

 

$

47,527

 

$

43,751

 

$

47,527

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

 

 

 

 

 

2016

 

2015

 

 

 

 

 

 

 

Mortgage loans serviced for others

$

5,491,039

 

$

5,051,884

 

 

 

 

 

 

 

MSR asset as a percentage of serviced mortgage loans

 

0.80

%  

 

1.03

%  

 

 

 

 

 

 


(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.

 

 

 

 

 

 

 

 

 

 

    

September 30,

 

 

December 31,

 

 

 

 

2016

 

    

2015

 

 

Weighted average constant prepayment rate

 

18.12

%  

 

11.51

%

 

Weighted average discount rate

 

10.93

%  

 

10.92

%

 

Weighted average life (in years)

 

4.5

 

 

6.5

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2016

    

2015

 

Constant prepayment rate:

 

 

 

 

 

 

 

Impact of 10% adverse change

 

$

(2,522)

 

$

(2,177)

 

Impact of 20% adverse change

 

 

(4,808)

 

 

(4,195)

 

Discount rate:

 

 

 

 

 

 

 

Impact of 10% adverse change

 

 

(1,402)

 

 

(2,073)

 

Impact of 20% adverse change

 

 

(2,714)

 

 

(3,989)

 

 

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 $5.7 million and $5.2 million during the three months ended September 30, 2016 and 2015, respectively, and $17.3 million and $13.7 million during the nine months ended September 30, 2016 and 2015, respectively, were included in other noninterest income within the consolidated statements of operations.

 

38


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

8. Deposits

 

Deposits are summarized as follows (in thousands).

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2016

    

2015

 

Noninterest-bearing demand

 

$

2,232,813

 

$

2,235,436

 

Interest-bearing:

 

 

 

 

 

 

 

NOW accounts

 

 

1,131,183

 

 

1,077,576

 

Money market

 

 

1,588,141

 

 

1,500,780

 

Brokered - money market

 

 

122,123

 

 

133,380

 

Demand

 

 

403,856

 

 

380,214

 

Savings

 

 

277,385

 

 

273,390

 

Time

 

 

1,183,161

 

 

1,325,342

 

Brokered - time

 

 

91,923

 

 

26,565

 

 

 

$

7,030,585

 

$

6,952,683

 

 

 

9. Short-term Borrowings

 

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

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2016

    

2015

 

Federal funds purchased

 

$

77,700

 

$

58,925

 

Securities sold under agreements to repurchase

 

 

275,322

 

 

217,748

 

Federal Home Loan Bank

 

 

700,000

 

 

600,000

 

Short-term bank loans

 

 

212,000

 

 

70,700

 

 

 

$

1,265,022

 

$

947,373

 

 

Federal funds purchased and securities sold under agreements to repurchase generally mature daily, on demand, or on some other short-term basis. The Bank and the Hilltop Broker-Dealers execute transactions to sell securities under agreements to repurchase with both customers and broker-dealers. Securities involved in these transactions are held by the Bank, the Hilltop Broker-Dealers or a third-party dealer.

 

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

 

 

 

 

 

 

 

 

 

 

    

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

Average balance during the period

 

$

351,430

 

$

313,765

 

Average interest rate during the period

 

 

0.55

%  

 

0.31

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

    

2016

    

 

2015

 

 

Average interest rate at end of period

 

 

0.46

%  

 

 

0.26

%

 

Securities underlying the agreements at end of period:

 

 

 

 

 

 

 

 

 

Carrying value

 

$

201,660

 

 

$

250,981

 

 

Estimated fair value

 

$

202,214

 

 

$

250,045

 

 

 

39


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Federal Home Loan Bank (“FHLB”) short-term borrowings mature over terms not exceeding 365 days and are collateralized by FHLB Dallas stock, nonspecified real estate loans and certain specific commercial real estate loans. Other information regarding FHLB short-term borrowings is shown in the following tables (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

    

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

Average balance during the period

 

$

303,011

 

$

314,780

 

Average interest rate during the period

 

 

0.45

%  

 

0.24

%

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2016

    

2015

 

Average interest rate at end of period

 

0.48

%  

0.35

%

 

The Hilltop Broker-Dealers use short-term bank loans periodically to finance securities owned, margin loans to customers and correspondents, and underwriting activities. Interest on the borrowings varies with the federal funds rate. The weighted average interest rate on the borrowings at September 30, 2016 and December 31, 2015 was 1.29% and 1.26%, respectively.

 

10. Notes Payable

 

Notes payable consisted of the following (in thousands).

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

    

2016

    

2015

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 note payable due March 2035

 

 

20,000

 

 

20,000

Federal Home Loan Bank notes, maturities ranging from March 2017 to June 2030

 

 

103,232

 

 

36,042

Insurance company line of credit due December 31, 2016

 

 

2,500

 

 

7,000

Ventures line of credit due May 2017

 

 

11,805

 

 

 —

Senior Notes due April 2025, net

 

 

148,276

 

 

148,174

 

 

$

313,313

 

$

238,716

 

 

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 38.6% and 34.9% during the three months ended September 30, 2016 and 2015, respectively, and 37.0% and 23.5% during the nine months ended September 30, 2016 and 2015, respectively. The effective tax rate during the three months ended September 30, 2016 was slightly higher than the statutory rate primarily due to higher than expected non-deductible transaction costs associated with the SWS Merger, offset by the recognition of excess tax benefits on share-based payment awards as a result of the Company’s adoption of the provisions of Accounting Standards Update (“ASU”) 2016-09 as of January 1, 2016 as discussed in Note 24 to the consolidated financial statements. The lower effective tax rate during the nine months ended September 30, 2015 was primarily due to no income taxes being recorded during 2015 in connection with the bargain purchase gain of $81.3 million associated with the SWS Merger because the acquisition was a tax-free reorganization under Section 368(a) of the Internal Revenue Code. In addition, the Company recorded an income tax benefit during 2015 of $2.1 million as a result of the SWS Merger to reverse the deferred tax liability for the difference between book and tax basis on Hilltop’s investment in SWS common stock.

 

40


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

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. When it is practicable, the Company estimates loss contingencies for possible litigation and claims, whether or not there is an accrued probable loss. When the Company is able to estimate such possible losses, and when it estimates that it is reasonably possible it could incur losses, in excess of amounts accrued, the Company is required to make a disclosure of the aggregate estimation. As available information changes, however, the matters for which the Company is able to estimate, as well as the estimates themselves will be adjusted, accordingly.

 

Assessments of litigation and claims exposures are difficult due to many factors that involve inherent unpredictability. Those factors include the following: the varying stages of the proceedings, particularly in the early stages; unspecified, unsupported, or uncertain damages; damages other than compensatory, such as punitive damages; a matter presenting meaningful legal uncertainties, including novel issues of law; multiple defendants and jurisdictions; whether discovery has begun or is complete; whether meaningful settlement discussions have commenced; and whether the claim involves a class action and if so, how the class is defined. As a result of some of these factors, the Company may be unable to estimate reasonably possible losses with respect to some or all of the pending and threatened litigation and claims asserted against the Company.

 

Following completion of Hilltop’s acquisition of SWS, several purported holders of shares of SWS common stock filed petitions in the Court of Chancery of the State of Delaware 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. The consolidated matter represents a total of approximately 5.2 million shares of SWS common stock. The Company continues to vigorously defend this matter.

 

On or about November 2, 2012, FSC was named in a lawsuit pending in the state of Rhode Island Superior Court styled Rhode Island Economic Development Corporation v. Wells Fargo Securities, LLC, et al. The lawsuit relates to FSC’s role as financial advisor to the State of Rhode Island, specifically in connection with the Rhode Island Economic Development Corporation’s issuance of $75 million in bonds to finance a loan to 38 Studios, LLC. 38 Studios, LLC ultimately failed to repay the loan and the Rhode Island Economic Development Corporation is seeking recovery to repay the bonds it issued to make such loan. FSC intends to defend itself vigorously in this action.

 

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

41


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

origination practices for loans insured by the Federal Housing Administration (the “FHA”). On August 20, 2014, PrimeLending received a Civil Investigative Demand from the United States Department of Justice (the “DOJ”) related to this Inquiry. According to the Civil Investigative Demand, the DOJ is conducting an investigation to determine whether PrimeLending has violated the False Claims Act in connection with originating and underwriting single-family residential mortgage loans insured by the FHA. No claims or demands have been asserted against PrimeLending. PrimeLending cannot predict the ultimate outcome of this investigation, and cannot make a reasonable estimate of potential liability, if any, at this time. PrimeLending continues to cooperate with the investigation.

 

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 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 of 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.

 

Other Contingencies

 

The mortgage origination segment may be responsible 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 the investor or reimburses the investor’s losses. The mortgage origination segment has established an indemnification liability reserve for such probable losses.

 

Generally, the mortgage origination segment first becomes aware that an investor believes a loss has been incurred on a sold loan when it receives a written request from the investor to repurchase the loan or reimburse the investor’s losses. Upon completing its review of the investor’s request, the mortgage origination segment establishes a specific claims reserve for the loan if it concludes its obligation to the investor is both probable and reasonably estimable.

 

An additional reserve has been established for probable investor 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 investor requests, actual investor claim settlements and the severity of estimated losses resulting from future claims, and the mortgage origination segment’s history of successfully curing defects identified in investor 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 investor claims to date, and therefore, are not a primary factor considered in the calculation of this reserve.

 

At September 30, 2016 and December 31, 2015, the mortgage origination segment’s indemnification liability reserve totaled $19.2 million and $16.6 million, respectively. The provision for indemnification losses was $1.3 million and $1.1 million during the three months ended September 30, 2016 and 2015, respectively, and $3.5 million and $3.1 million during the nine months ended September 30, 2016 and 2015, respectively.

 

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

The following tables provide for a rollforward of claims activity for loans put-back to the mortgage origination segment based upon an alleged breach of a representation or warranty with respect to a loan sold and related indemnification liability reserve activity (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Representation and Warranty Specific Claims

 

 

 

Activity - Origination Loan Balance

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

    

2016

    

2015

 

2016

    

2015

 

Balance, beginning of period

 

$

53,876

 

$

72,564

 

$

57,298

 

$

53,906

 

Claims made

 

 

3,339

 

 

9,787

 

 

12,893

 

 

61,768

 

Claims resolved with no payment

 

 

(4,545)

 

 

(12,178)

 

 

(15,162)

 

 

(34,877)

 

Repurchases

 

 

(789)

 

 

(4,333)

 

 

(2,660)

 

 

(12,647)

 

Indemnification payments

 

 

(2,115)

 

 

(11,921)

 

 

(2,603)

 

 

(14,231)

 

Balance, end of period

 

$

49,766

 

$

53,919

 

$

49,766

 

$

53,919

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indemnification Liability Reserve Activity

 

 

    

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2016

    

2015

    

2016

    

2015

 

Balance, beginning of period

 

$

18,216

 

$

17,279

 

$

16,640

 

$

17,619

 

Additions for new sales

 

 

1,348

 

 

1,092

 

 

3,471

 

 

3,086

 

Repurchases

 

 

(78)

 

 

(408)

 

 

(260)

 

 

(1,206)

 

Early payment defaults

 

 

(72)

 

 

(5)

 

 

(205)

 

 

(44)

 

Indemnification payments

 

 

(250)

 

 

(1,831)

 

 

(482)

 

 

(2,872)

 

Change in estimate

 

 

 —

 

 

(18)

 

 

 —

 

 

(474)

 

Balance, end of period

 

$

19,164

 

$

16,109

 

$

19,164

 

$

16,109

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

 

 

 

 

 

    

2016

 

2015

  

 

 

 

 

 

 

Reserve for Indemnification Liability:

 

 

 

 

 

 

 

 

 

 

 

 

 

Specific claims

 

$

3,461

 

$

5,210

 

 

 

 

 

 

 

Incurred but not reported claims

 

 

15,703

 

 

11,430

 

 

 

 

 

 

 

Total

 

$

19,164

 

$

16,640

 

 

 

 

 

 

 

 

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.

 

In connection with the FNB Transaction, the Bank entered into two loss-share agreements with the FDIC that collectively cover $1.2 billion of loans and OREO acquired in the FNB Transaction. Pursuant to the loss-share agreements, the FDIC has agreed to reimburse the Bank the following amounts with respect to the covered assets: (i) 80% of net losses on the first $240.4 million of net losses incurred; (ii) 0% of net losses in excess of $240.4 million up to and including $365.7 million of net losses incurred; and (iii) 80% of net losses in excess of $365.7 million of net losses incurred. Net losses are defined as book value losses plus certain defined expenses incurred in the resolution of assets, less subsequent recoveries. Under the loss-share agreement for commercial assets, the amount of subsequent recoveries that are reimbursable to the FDIC for a particular asset is limited to book value losses and expenses actually billed plus any book value charge-offs incurred prior to the Bank Closing Date. There is no limit on the amount of subsequent recoveries reimbursable to the FDIC under the loss-share agreement for single family residential assets. The loss-share agreements for commercial and single family residential assets are in effect for 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 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. As of September 30, 2016, the Bank estimated that the sum of

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

covered losses and reimbursable expenses subject to the loss-share agreements will exceed $240.4 million, but will not exceed $365.7 million. Unless actual plus projected covered losses and reimbursable expenses exceed $365.7 million, the Bank will not record additional amounts to the FDIC Indemnification Asset. As of September 30, 2016, the Bank had billed $148.5 million of covered net losses to the FDIC, of which 80%, or $118.8 million, were reimbursable under the loss-share agreements. As of September 30, 2016, the Bank had received aggregate reimbursements of $118.8 million from the FDIC, which represented reimbursable covered losses and expenses through June 30, 2016.

 

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 $1.9 billion at September 30, 2016 and outstanding financial and performance standby letters of credit of $37.4 million at September 30, 2016.

 

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 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. Upon the approval by stockholders and effectiveness of the 2012 Plan in September 2012, no additional awards were permissible under the 2003 Equity Incentive Plan (the “2003 Plan”). In the aggregate, 4,000,000 shares of common stock may be delivered pursuant to awards granted under the 2012 Plan. At September 30, 2016, 1,968,956 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 and the 2003 Plan was $2.6 million and $2.0 million during the three months ended September 30, 2016 and 2015, respectively, and $7.6 million and $6.5 million during the nine months ended September 30, 2016 and 2015, respectively.

 

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

During the nine months ended September 30, 2016 and 2015, Hilltop granted 16,506 and 8,219 shares of common stock, respectively, to certain non-employee members of the Company’s Board of Directors for services rendered to the Company pursuant to the 2012 Plan.

 

Restricted Stock Awards and RSUs

 

The following table summarizes information about nonvested Restricted Stock Award and RSU activity for the nine months ended September 30, 2016 (shares in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted Stock Awards

 

RSUs

 

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

 

Average

 

 

 

Average

 

 

 

 

 

Grant Date

 

 

 

Grant Date

 

    

 

Outstanding

    

Fair Value

    

Outstanding

    

Fair Value

Balance, December 31, 2015

 

453

 

$

13.50

 

875

 

$

21.22

 

Granted

 

 -

 

$

 -

 

598

 

$

17.78

 

Vested/Released

 

(441)

 

$

13.34

 

(7)

 

$

22.22

 

Forfeited

 

(2)

 

$

19.72

 

(10)

 

$

20.80

Balance, September 30, 2016

 

10

 

$

19.07

 

1,456

 

$

19.83

 

Vested/Released Restricted Stock Awards and RSUs include an aggregate of 124,125 shares withheld to satisfy employee statutory tax obligations during the nine months ended September 30, 2016. Pursuant to certain RSU award agreements, an aggregate of 8,247 vested RSUs at September 30, 2016 require deferral of the settlement in shares and statutory tax obligations to a future date.

 

At September 30, 2016, unrecognized compensation expense related to outstanding Restricted Stock Awards of $46 thousand is expected to be recognized over a weighted average period of 0.35 years.

 

During the nine months ended September 30, 2016, the Compensation Committee of the Board of Directors of the Company awarded certain executives and key employees an aggregate of 597,569 RSUs pursuant to the 2012 Plan. At September 30, 2016, 477,719 of these outstanding RSUs are subject to time-based vesting conditions and generally cliff vest on the third anniversary of the grant date, and 118,523 of these outstanding RSUs will cliff vest based upon the achievement of certain performance goals over a three-year period.

 

At September 30, 2016, in the aggregate, 1,171,675 of the outstanding RSUs are subject to time-based vesting conditions and generally cliff vest on the third anniversary of the grant date, and 284,398 outstanding RSUs cliff vest based upon the achievement of certain performance goals over a three-year period. At September 30, 2016, unrecognized compensation expense related to outstanding RSUs of $15.5 million is expected to be recognized over a weighted average period of 1.67 years.

 

Stock Options

 

Stock options granted on November 2, 2011 to two senior executives pursuant to the 2003 Plan to purchase an aggregate of 600,000 shares of the Company’s common stock (the “Stock Option Awards”) at an exercise price of $7.70 per share were fully vested and exercisable at November 2, 2015. As of September 30, 2016, all Stock Option Awards have been exercised. 

 

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

15. Regulatory Matters

 

Banking and Hilltop

 

The Bank and Hilltop are subject to various regulatory capital requirements administered by the 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 the Bank 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).

 

The following table shows the Bank’s and Hilltop’s consolidated actual capital amounts and ratios compared to the regulatory minimum capital requirements and the Bank’s regulatory minimum capital requirements needed to qualify as a “well-capitalized” institution in accordance with Basel III as measured at September 30, 2016 and December 31, 2015, respectively (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To Be Well Capitalized

 

 

 

 

 

 

 

 

Minimum Capital

 

Minimum Capital

 

 

 

Actual

 

Requirements

 

Requirements

 

 

   

Amount

   

Ratio

    

Amount

   

Ratio

    

Amount

   

Ratio

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital (to average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank

 

$

1,110,183

 

12.65

%  

$

351,031

 

4.0

%  

$

438,788

 

5.0

%

Hilltop

 

 

1,618,996

 

13.41

%  

 

483,020

 

4.0

%  

 

N/A

 

N/A

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank

 

 

1,110,183

 

15.15

%  

 

329,764

 

4.5

%  

 

476,325

 

6.5

%

Hilltop

 

 

1,569,295

 

17.80

%  

 

396,679

 

4.5

%  

 

N/A

 

N/A

 

Tier 1 capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank

 

 

1,110,183

 

15.15

%  

 

439,685

 

6.0

%  

 

586,247

 

8.0

%

Hilltop

 

 

1,618,996

 

18.37

%  

 

528,906

 

6.0

%  

 

N/A

 

N/A

 

Total capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank

 

 

1,165,202

 

15.90

%  

 

586,247

 

8.0

%  

 

732,808

 

10.0

%

Hilltop

 

 

1,658,905

 

18.82

%  

 

705,208

 

8.0

%  

 

N/A

 

N/A

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 capital (to average assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank

 

$

1,064,212

 

13.22

%  

$

322,104

 

4.0

%  

$

402,630

 

5.0

%

Hilltop

 

 

1,520,514

 

12.65

%  

 

480,928

 

4.0

%  

 

N/A

 

N/A

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank

 

 

1,063,041

 

16.23

%  

 

294,716

 

4.5

%  

 

425,701

 

6.5

%

Hilltop

 

 

1,469,642

 

17.87

%  

 

370,156

 

4.5

%  

 

N/A

 

N/A

 

Tier 1 capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank

 

 

1,064,212

 

16.25

%  

 

392,954

 

6.0

%  

 

523,939

 

8.0

%

Hilltop

 

 

1,520,514

 

18.48

%  

 

493,541

 

6.0

%  

 

N/A

 

N/A

 

Total capital (to risk-weighted assets):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank

 

 

1,112,654

 

16.99

%  

 

523,939

 

8.0

%  

 

654,924

 

10.0

%

Hilltop

 

 

1,553,867

 

18.89

%  

 

658,055

 

8.0

%  

 

N/A

 

N/A

 

 

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

To be considered “adequately capitalized” (as defined) under regulatory requirements, the Bank must maintain minimum Tier 1 capital to total average assets of 4%, common equity Tier 1 capital to risk-weighted assets of 4.5%, Tier 1 capital to risk-weighted assets ratios of 6%, and a total capital to risk-weighted assets ratio of 8%. Based on the actual capital amounts and ratios shown in the previous table, the Bank’s ratios place it in the “well capitalized” (as defined) capital category under regulatory requirements.

 

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 above, Hilltop and the Bank exceed each of the capital conservation buffer requirements in effect as of September 30, 2016, as well as the fully phased-in requirements through 2019.

 

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 September 30, 2016, the net capital position of each of the Hilltop Broker-Dealers was as follows (in thousands). 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

HTS

 

 

 

Hilltop

 

Independent

 

 

    

Securities

    

Network

 

Net capital

 

$

140,881

 

$

1,338

 

Less required net capital

 

 

10,146

 

 

250

 

Excess net capital

 

$

130,735

 

$

1,088

 

 

 

 

 

 

 

 

 

Net capital as a percentage of aggregate debit items

 

 

27.8

%

 

 

 

Net capital in excess of 5% aggregate debit items

 

$

115,517

 

 

 

 

 

Under certain conditions, Hilltop Securities may be required to segregate cash and securities in a special reserve account for the benefit of customers under Rule 15c3-3 promulgated under the Exchange Act. Assets segregated under the provisions of the Exchange Act are not available for general corporate purposes. At September 30, 2016, Hilltop Securities held cash of $173.8 million 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 September 30, 2016. The fair values of any segregated assets included in special reserve accounts were determined using Level 1 inputs.

 

Mortgage Origination

 

As a mortgage originator, PrimeLending is subject to minimum net worth requirements established by the U.S. Department of Housing and Urban Development (“HUD”) and the GNMA. On an annual basis, PrimeLending submits audited financial statements to HUD and GNMA documenting PrimeLending’s compliance with its minimum net worth requirements. In addition, PrimeLending monitors compliance on an ongoing basis and, as of September 30, 2016, PrimeLending’s net worth exceeded the amounts required by both HUD and GNMA.

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

 

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).

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2016

    

2015

 

Capital and surplus:

 

 

 

 

 

 

 

National Lloyds Insurance Company

 

$

122,311

 

$

121,750

 

American Summit Insurance Company

 

 

29,096

 

 

30,592

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

    

2016

    

2015

    

2016

    

2015

Statutory net income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

National Lloyds Insurance Company

 

$

8,146

 

$

7,901

 

$

4,507

 

$

3,826

American Summit Insurance Company

 

 

(357)

 

 

76

 

 

729

 

 

643

 

Regulations of the Texas Department of Insurance require insurance companies to maintain minimum levels of statutory surplus to ensure their ability to meet their obligations to policyholders. At September 30, 2016, 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 September 30, 2016, the Company's insurance subsidiaries' RBC ratio exceeded the level at which regulatory action would be required.

 

16. Stockholders’ Equity

 

Stock Repurchase Program

 

During the second quarter of 2016, the Company’s Board of Directors approved a stock repurchase program under which it authorized the Company to repurchase, in the aggregate, up to $50.0 million of its outstanding common stock. Under the stock repurchase program authorized, 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. As of September 30, 2016, the Company had not repurchased any shares of its outstanding common stock under this stock repurchase program. 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. The purchases will be funded from available cash balances. The Company’s accounting treatment and policy regarding stock repurchases is discussed in detail in Note 22 to the consolidated financial statements included in the Company’s 2015 Form 10-K.

 

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

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 $1.2 million during the three months ended September 30, 2016, compared with a decrease of $15.5 million during the same period in 2015, and increased $13.0 million during the nine months ended September 30, 2016, compared with an increase of $17.8 million during the same period in 2015. 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’ derivative instruments are recorded in other assets or other liabilities, as appropriate, and the fair values of the Hilltop Broker-Dealers’ derivatives decreased $8.5 million during the three months ended September 30, 2016, compared with an increase of $12.7 million during the three months ended September 30, 2015, and increased $1.0 million and $30.5 million during the nine months ended September 30, 2016 and 2015, respectively. The changes in fair value were recorded as a component of other noninterest income.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

December 31, 2015

 

    

Notional

    

Estimated

    

Notional

    

Estimated

 

 

Amount

 

Fair Value

 

Amount

 

Fair Value

Derivative instruments:

 

 

 

 

 

 

 

 

 

 

 

 

IRLCs

 

$

1,592,523

 

$

44,177

 

$

944,942

 

$

23,762

Commitments to purchase MBSs

 

 

4,708,594

 

 

19,864

 

 

3,151,862

 

 

8,350

Commitments to sell MBSs

 

 

7,123,315

 

 

(16,696)

 

 

5,038,565

 

 

(2,352)

Interest rate swaps and swaptions

 

 

34,287

 

 

(895)

 

 

409,982

 

 

490

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

 

 

379,000

 

 

 —

 

 

 —

 

 

 —


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

 

PrimeLending had cash collateral advances totaling $12.2 million and $0.8 million to offset net liability derivative positions on its commitments to sell MBSs at September 30, 2016 and December 31, 2015, respectively. In addition, PrimeLending advanced cash collateral totaling $3.2 million on its U.S. Treasury bond futures and options at September 30, 2016 and $6.4 million in initial margin on its interest rate swaps and swaptions at December 31, 2015. These amounts are included in other assets within the consolidated balance sheets.

49


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

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

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities borrowed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

$

1,266,145

 

$

 —

 

$

1,266,145

 

$

(1,266,145)

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reverse repurchase agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

 

138,284

 

 

 —

 

 

138,284

 

 

(137,333)

 

 

 —

 

 

951

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward MBS derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

 

19,929

 

 

 —

 

 

19,929

 

 

(19,929)

 

 

 —

 

 

 —

 

 

$

1,424,358

 

$

 —

 

$

1,424,358

 

$

(1,423,407)

 

$

 —

 

$

951

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities borrowed:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

$

1,307,741

 

$

 —

 

$

1,307,741

 

$

(1,307,741)

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps and swaptions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

 

1,526

 

 

(393)

 

 

1,133

 

 

 —

 

 

 —

 

 

1,133

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reverse repurchase agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

 

105,660

 

 

 —

 

 

105,660

 

 

(105,412)

 

 

 —

 

 

248

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward MBS derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

 

1,377

 

 

 —

 

 

1,377

 

 

(1,377)

 

 

 —

 

 

 —

 

 

$

1,416,304

 

$

(393)

 

$

1,415,911

 

$

(1,414,530)

 

$

 —

 

$

1,381

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts Not Offset in

 

 

 

 

 

 

 

 

 

 

 

Net Amounts

 

the Balance Sheet 

 

 

 

 

    

Gross Amounts

    

Gross Amounts

    

of Liabilities

    

    

 

    

Cash

    

    

 

 

 

of Recognized

 

Offset in the

 

Presented in the

 

Financial

 

Collateral

 

Net

 

 

Liabilities

 

Balance Sheet

 

Balance Sheet

 

Instruments

 

Pledged

 

Amount

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities loaned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

$

1,150,826

 

$

 —

 

$

1,150,826

 

$

(1,150,826)

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps and swaptions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

 

895

 

 

 —

 

 

895

 

 

(3,000)

 

 

 —

 

 

(2,105)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

 

139,162

 

 

 —

 

 

139,162

 

 

(139,162)

 

 

 —

 

 

 —

Customer counterparties

 

 

136,160

 

 

 —

 

 

136,160

 

 

(136,160)

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward MBS derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

 

16,982

 

 

(221)

 

 

16,761

 

 

(9,243)

 

 

 —

 

 

7,518

 

 

$

1,444,025

 

$

(221)

 

$

1,443,804

 

$

(1,438,391)

 

$

 —

 

$

5,413

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities loaned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

$

1,235,466

 

 

 —

 

 

1,235,466

 

 

(1,235,466)

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps and swaptions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

 

643

 

 

 —

 

 

643

 

 

(2,519)

 

 

 —

 

 

(1,876)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Repurchase agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

 

69,748

 

 

 —

 

 

69,748

 

 

(69,748)

 

 

 —

 

 

 —

Customer counterparties

 

 

148,000

 

 

 —

 

 

148,000

 

 

(148,000)

 

 

 —

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward MBS derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional counterparties

 

 

4,385

 

 

(1,769)

 

 

2,616

 

 

(1,420)

 

 

 —

 

 

1,196

 

 

$

1,458,242

 

$

(1,769)

 

$

1,456,473

 

$

(1,457,153)

 

$

 —

 

$

(680)

50


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

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 includes 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.

 

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 September 30, 2016 and December 31, 2015.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining Contractual Maturities

 

 

Overnight and

 

 

 

 

 

Greater Than

 

 

 

September 30, 2016

 

Continuous

 

Up to 30 Days

 

30-90 Days

 

90 Days

 

Total

Repurchase agreement transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and agency securities

 

$

186,593

 

$

88,729

 

$

 —

 

$

 —

 

$

275,322

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities lending transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

 

 

14,097

 

 

 —

 

 

 —

 

 

 —

 

 

14,097

Equity securities

 

 

1,136,729

 

 

 —

 

 

 —

 

 

 —

 

 

1,136,729

 Total

 

$

1,337,419

 

$

88,729

 

$

 —

 

$

 —

 

$

1,426,148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

$

1,426,148

Amount related to agreements not included in offsetting disclosure above

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining Contractual Maturities

 

 

Overnight and

 

 

 

 

 

Greater Than

 

 

 

December 31, 2015

 

Continuous

 

Up to 30 Days

 

30-90 Days

 

90 Days

 

Total

Repurchase agreement transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and agency securities

 

$

201,090

 

$

16,658

 

$

 —

 

$

 —

 

$

217,748

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities lending transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury and agency securities

 

 

12,646

 

 

 —

 

 

 —

 

 

 —

 

 

12,646

Corporate securities

 

 

5,993

 

 

 —

 

 

 —

 

 

 —

 

 

5,993

Equity securities

 

 

1,216,827

 

 

 —

 

 

 —

 

 

 —

 

 

1,216,827

 Total

 

$

1,436,556

 

$

16,658

 

$

 —

 

$

 —

 

$

1,453,214

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

$

1,453,214

Amount related to agreements not included in offsetting disclosure above

 

 

 

 

 

 

 

 

 

 

 

 

 

$

 —

 

 

 

51


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

19. Broker-Dealer and Clearing Organization Receivables and Payables

 

Broker-dealer and clearing organization receivables and payables consisted of the following (in thousands). 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2016

    

2015

 

Receivables:

 

 

 

 

 

 

 

Securities borrowed

 

$

1,266,145

 

$

1,307,741

 

Securities failed to deliver

 

 

66,419

 

 

25,087

 

Clearing organizations

 

 

 —

 

 

16,701

 

Trades in process of settlement

 

 

 —

 

 

5,707

 

Other

 

 

8,053

 

 

7,263

 

 

 

$

1,340,617

 

$

1,362,499

 

Payables:

 

 

 

 

 

 

 

Securities loaned

 

$

1,150,826

 

$

1,235,466

 

Correspondents

 

 

38,989

 

 

69,046

 

Securities failed to receive

 

 

39,702

 

 

28,352

 

Trades in process of settlement

 

 

20,159

 

 

1,311

 

Clearing organizations and other

 

 

2,163

 

 

4,130

 

 

 

$

1,251,839

 

$

1,338,305

 

 

 

20. Reserve for Losses and Loss Adjustment Expenses

 

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

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

    

2016

    

2015

 

Balance, beginning of period

 

$

44,357

 

$

29,716

 

Less reinsurance recoverables

 

 

(13,502)

 

 

(4,315)

 

Net balance, beginning of period

 

 

30,855

 

 

25,401

 

 

 

 

 

 

 

 

 

Incurred related to:

 

 

 

 

 

 

 

Current year

 

 

74,782

 

 

71,652

 

Prior years

 

 

443

 

 

5,784

 

Total incurred

 

 

75,225

 

 

77,436

 

 

 

 

 

 

 

 

 

Payments related to:

 

 

 

 

 

 

 

Current year

 

 

(62,111)

 

 

(58,523)

 

Prior years

 

 

(15,421)

 

 

(15,678)

 

Total payments

 

 

(77,532)

 

 

(74,201)

 

 

 

 

 

 

 

 

 

Net balance, end of period

 

 

28,548

 

 

28,636

 

Plus reinsurance recoverables

 

 

15,479

 

 

14,264

 

Balance, end of period

 

$

44,027

 

$

42,900

 

 

The prior period adverse development of $5.8 million during the nine months ended September 30, 2015 was primarily related to litigation emerging from a series of hail storms within the 2012 through 2014 accident years.

 

52


 

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

21. Reinsurance Activity

 

NLC limits the maximum net loss that can arise from large risks or risks in concentrated areas of exposure by reinsuring (ceding) certain levels of risk. Substantial amounts of business are ceded, and these reinsurance contracts do not relieve NLC from its obligations to policyholders. Such reinsurance includes quota share, excess of loss, catastrophe, and other forms of reinsurance on essentially all property and casualty lines of insurance. Net insurance premiums earned, losses and LAE and policy acquisition and other underwriting expenses are reported net of the amounts related to reinsurance ceded to other companies. Amounts recoverable from reinsurers related to the portions of the liability for losses and LAE and unearned insurance premiums ceded to them are reported as assets. Failure of reinsurers to honor their obligations could result in losses to NLC; consequently, allowances are established for amounts deemed uncollectible as NLC evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. At September 30, 2016, reinsurance receivables had a carrying value of $22.2 million, which is included in other assets within the consolidated balance sheet. There was no allowance for uncollectible accounts at September 30, 2016, based on NLC’s quality requirements.

 

The effects of reinsurance on premiums written and earned are summarized as follows (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

2016

 

2015

 

 

    

Written

    

Earned

    

Written

    

Earned

    

Written

    

Earned

    

Written

    

Earned

 

Premiums from direct business

 

$

38,200

 

$

39,839

 

$

41,319

 

$

42,608

 

$

119,955

 

$

120,902

 

$

130,632

 

$

127,218

 

Reinsurance assumed

 

 

2,927

 

 

2,798

 

 

2,786

 

 

2,627

 

 

8,752

 

 

8,180

 

 

8,243

 

 

7,617

 

Reinsurance ceded

 

 

(4,038)

 

 

(3,890)

 

 

(4,316)

 

 

(4,039)

 

 

(11,783)

 

 

(11,881)

 

 

(13,758)

 

 

(13,754)

 

Net premiums

 

$

37,089

 

$

38,747

 

$

39,789

 

$

41,196

 

$

116,924

 

$

117,201

 

$

125,117

 

$

121,081

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

Loss and LAE incurred

 

$

19,953

 

$

20,785

 

$

98,903

 

$

98,382

 

Reinsurance recoverables

 

 

(3,898)

 

 

(3,450)

 

 

(23,678)

 

 

(20,946)

 

Net loss and LAE incurred

 

$

16,055

 

$

17,335

 

$

75,225

 

$

77,436

 

 

Catastrophic coverage

 

At September 30, 2016, 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 September 30, 2016, total retention for any one catastrophe that affects both NLIC and ASIC was limited to $8 million in the aggregate.

 

Effective January 1, 2016, NLC did not renew its multi-line excess of loss coverage that previously limited each risk with respect to property and liability. 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, down from 9% participation in this coverage during 2015.

 

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

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 the Hilltop Broker-Dealers, while 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.

 

Balance sheet amounts not discussed previously and the elimination of intercompany transactions are included in “All Other and Eliminations.” The following tables present certain information about reportable business segment revenues, operating results, goodwill and assets (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

 

    

Mortgage

    

 

    

    

 

    

All Other and

    

Hilltop

 

Three Months Ended September 30, 2016

 

Banking

 

Broker-Dealer

 

Origination

 

Insurance

 

Corporate

 

Eliminations

 

Consolidated

 

Net interest income (expense)

 

$

90,549

 

$

7,823

 

$

(3,076)

 

$

716

 

$

(1,854)

 

$

5,012

 

$

99,170

 

Provision for loan losses

 

 

4,179

 

 

(189)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,990

 

Noninterest income

 

 

12,711

 

 

103,511

 

 

202,560

 

 

41,170

 

 

 —

 

 

(5,494)

 

 

354,458

 

Noninterest expense

 

 

61,536

 

 

94,094

 

 

168,303

 

 

30,415

 

 

10,041

 

 

(256)

 

 

364,133

 

Income (loss) before income taxes

 

$

37,545

 

$

17,429

 

$

31,181

 

$

11,471

 

$

(11,895)

 

$

(226)

 

$

85,505

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

 

    

Mortgage

    

 

    

    

 

    

All Other and

    

Hilltop

 

Nine Months Ended September 30, 2016

 

Banking

 

Broker-Dealer

 

Origination

 

Insurance

 

Corporate

 

Eliminations

 

Consolidated

 

Net interest income (expense)

 

$

268,682

 

$

22,314

 

$

(7,941)

 

$

2,213

 

$

(5,413)

 

$

13,552

 

$

293,407

 

Provision for loan losses

 

 

36,292

 

 

(19)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

36,273

 

Noninterest income

 

 

39,012

 

 

287,293

 

 

541,779

 

 

124,366

 

 

2

 

 

(14,614)

 

 

977,838

 

Noninterest expense

 

 

181,016

 

 

270,135

 

 

465,463

 

 

118,506

 

 

22,373

 

 

(806)

 

 

1,056,687

 

Income (loss) before income taxes

 

$

90,386

 

$

39,491

 

$

68,375

 

$

8,073

 

$

(27,784)

 

$

(256)

 

$

178,285

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

    

 

    

 

    

Mortgage

    

 

    

    

 

    

All Other and

    

Hilltop

 

Three Months Ended September 30, 2015

 

Banking

 

Broker-Dealer

 

Origination

 

Insurance

 

Corporate

 

Eliminations

 

Consolidated

 

Net interest income (expense)

 

$

105,758

 

$

8,301

 

$

(2,538)

 

$

838

 

$

(1,799)

 

$

4,651

 

$

115,211

 

Provision for loan losses

 

 

5,615

 

 

(22)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

5,593

 

Noninterest income

 

 

13,935

 

 

83,817

 

 

159,794

 

 

43,534

 

 

 —

 

 

(4,611)

 

 

296,469

 

Noninterest expense

 

 

60,518

 

 

90,683

 

 

145,113

 

 

32,366

 

 

6,028

 

 

(1,206)

 

 

333,502

 

Income (loss) before income taxes

 

$

53,560

 

$

1,457

 

$

12,143

 

$

12,006

 

$

(7,827)

 

$

1,246

 

$

72,585

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

Mortgage

    

 

    

    

 

    

All Other and

    

Hilltop

 

Nine Months Ended September 30, 2015

 

Banking

 

Broker-Dealer

 

Origination

 

Insurance

 

Corporate

 

Eliminations

 

Consolidated

 

Net interest income (expense)

 

$

280,081

 

$

24,320

 

$

(7,829)

 

$

2,294

 

$

(3,289)

 

$

13,693

 

$

309,270

 

Provision for loan losses

 

 

8,405

 

 

33

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

8,438

 

Noninterest income

 

 

48,293

 

 

243,593

 

 

463,314

 

 

128,216

 

 

81,289

 

 

(13,990)

 

 

950,715

 

Noninterest expense

 

 

179,378

 

 

271,826

 

 

412,234

 

 

121,893

 

 

17,546

 

 

(1,582)

 

 

1,001,295

 

Income (loss) before income taxes

 

$

140,591

 

$

(3,946)

 

$

43,251

 

$

8,617

 

$

60,454

 

$

1,285

 

$

250,252

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

207,741

 

$

7,008

 

$

13,071

 

$

23,988

 

$

 —

 

$

 —

 

$

251,808

 

Total assets

 

$

9,152,866

 

$

2,832,221

 

$

1,917,079

 

$

355,132

 

$

2,010,329

 

$

(3,844,351)

 

$

12,423,276

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

$

207,741

 

$

7,008

 

$

13,071

 

$

23,988

 

$

 —

 

$

 —

 

$

251,808

 

Total assets

 

$

8,707,433

 

$

2,673,455

 

$

1,737,843

 

$

349,259

 

$

1,905,547

 

$

(3,506,536)

 

$

11,867,001

 

 

 

 

 

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

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 nine months ended September 30, 2016 and 2015, stock options and RSUs are the only potentially dilutive non-participating instruments issued by Hilltop. Next, the Company determines and includes in the diluted earnings per common share calculation the more dilutive effect of the participating securities using the treasury stock method or the two-class method. Undistributed losses are not allocated to the nonvested share-based payment awards (the participating securities) under the two-class method as the holders are not contractually obligated to share in the losses of the Company.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income applicable to Hilltop common stockholders

 

$

51,932

 

$

46,894

 

$

110,573

 

$

188,392

 

Less: income applicable to participating shares

 

 

(5)

 

 

(216)

 

 

(11)

 

 

(861)

 

Net earnings available to Hilltop common stockholders

 

$

51,927

 

$

46,678

 

$

110,562

 

$

187,531

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

 

98,490

 

 

98,676

 

 

98,367

 

 

99,297

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.53

 

$

0.47

 

$

1.12

 

$

1.89

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income applicable to Hilltop common stockholders

 

$

51,932

 

$

46,894

 

$

110,573

 

$

188,392

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding - basic

 

 

98,490

 

 

98,676

 

 

98,367

 

 

99,297

 

Effect of potentially dilutive securities

 

 

135

 

 

880

 

 

206

 

 

894

 

Weighted average shares outstanding - diluted

 

 

98,625

 

 

99,556

 

 

98,573

 

 

100,191

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share

 

$

0.53

 

$

0.47

 

$

1.12

 

$

1.88

 

 

 

 

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Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

24. Recently Issued Accounting Standards

 

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 is currently evaluating the provisions of the amendment and the impact on its future 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. Early adoption is permitted no earlier than the first quarter of 2019. The Company is currently evaluating the provisions of the amendment and the impact on its future consolidated financial statements.

 

In March 2016, FASB issued ASU 2016-09 as part of its simplification initiative and affects all entities that issue share-based payment awards to their employees. The amendments in this update cover such areas as the recognition of excess tax benefits and deficiencies, the classification of those excess tax benefits on the statement of cash flows, an accounting policy election for forfeitures, the amount an employer can withhold to cover income taxes and still qualify for equity classification and the classification of those taxes paid on the statement of cash flows. The amendments are effective for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2016 using either prospective, retrospective or modified retrospective transition method, depending on the area covered in this update. As permitted within the amendment, the Company elected to early adopt and prospectively apply the provisions of this amendment as of January 1, 2016.

 

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 is currently evaluating the provisions of the amendment and the impact on its future consolidated financial statements.

 

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 pronouncement 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 fiscal 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 amendment outlines 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 amendment also requires 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 amendment is 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 retrospective transition method. The Company is currently evaluating the provisions of the amendment, including

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

subsequently issued amendments that clarify the principles outlined in the original amendment, and the impact on its future consolidated financial statements.

 

In May 2015, the FASB issued ASU 2015-09 requiring enhanced disclosures for insurers relating to short-duration insurance contract claims and the unpaid claims liability rollforward for long and short-duration contracts. The amendment is effective for annual periods beginning after December 15, 2015 and interim reporting periods thereafter. The Company adopted the amendment as of January 1, 2016 and will include the enhanced disclosures beginning with its Annual Report on Form 10-K for the year ended December 31, 2016.

 

25. Subsequent Event

 

On October 27, 2016, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.06 per common share, payable on November 30, 2016, to all common stockholders of record as of the close of business on November 15, 2016.

 

 

 

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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 “PlainsCapital” 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 PlainsCapital), references to “FNB” refer to First National Bank, references to “SWS” refer to the former SWS Group, Inc., references to “First Southwest” refer to First Southwest Holdings, LLC (a wholly owned subsidiary of Securities Holdings) and its subsidiaries as a whole, references to “FSC” refer to First Southwest Company, LLC (a former wholly owned subsidiary of First Southwest), 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 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, stock repurchases, dividend payments, expectations concerning mortgage loan origination volume, expected losses on covered loans and related reimbursements from the Federal Deposit Insurance Corporation (“FDIC”), expected levels of refinancing as a percentage of total loan origination volume, projected losses on mortgage loans originated, anticipated changes in our revenues or earnings, the effects of government regulation applicable to our operations, the appropriateness of our allowance for loan losses and provision for loan losses, 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:

 

our ability to estimate loan losses;

changes in the default rate of our loans;

changes in general economic, market and business conditions in areas or markets where we compete, including changes in the price of crude oil;

risks associated with concentration in real estate related loans;

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Table of Contents

·

risks associated with merger and acquisition integration, including our ability to promptly and effectively integrate our businesses with those acquired in the SWS Merger and achieve the anticipated synergies and cost savings in connection therewith, as well as the diversion of management time on acquisition- and integration-related issues;

·

severe catastrophic events in Texas and other areas of the southern United States;

changes in the interest rate environment;

·

cost and availability of capital;

effectiveness of our data security controls in the face of cyber attacks;

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;

approval of new, or changes in, accounting policies and practices;

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;

our ability to obtain reimbursements for losses on acquired loans under loss-share agreements with the FDIC to the extent the FDIC determines that we did not adequately manage the covered loan portfolio;

failure of our insurance segment reinsurers to pay obligations under reinsurance contracts; and

·

our ability to use excess cash in an effective manner, including the execution of successful acquisitions.

 

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, 2015 (“2015 Form 10-K”), which was filed with the Securities and Exchange Commission (the “SEC”) on February 24, 2016, 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.

 

PlainsCapital.  PlainsCapital 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 nine months ended September 30, 2016, our net income to common stockholders was $51.9 million, or $0.53 per diluted share, and $110.6 million, or $1.12 per diluted share, respectively.

 

We reported $85.5 million and $178.3 million of consolidated income before income taxes during the three and nine months ended September 30, 2016, respectively, including the following contributions from our four reportable operating segments.

 

·

The banking segment contributed $37.5 million and $90.4 million of income before income taxes during the three and nine months ended September 30, 2016, respectively;

·

The broker-dealer segment contributed $17.4 million and $39.5 million of income before income taxes during the three and nine months ended September 30, 2016, respectively;

·

The mortgage origination segment contributed $31.2 million and $68.4 million of income before income taxes during the three and nine months ended September 30, 2016, respectively; and

·

The insurance segment contributed $11.5 million and $8.1 million of income before income taxes during the three and nine months ended September 30, 2016, respectively.

 

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 during the second quarter of 2016, representing the entire outstanding principal balance of the loan. The banking segment’s financial results for the nine months ended September 30, 2016 reflect this charge-off. The Bank continues to investigate the loan relationship and is pursuing legal remedies to recover losses arising from this isolated incident, including litigation against the borrower and guarantors. Given the preliminary nature of the investigation and related legal proceedings, the Bank cannot currently estimate the amount of any future recoveries or additional expenses related to this charged-off loan.

 

At September 30, 2016, on a consolidated basis, we had total assets of $12.4 billion, total deposits of $7.0 billion, total loans, including loans held for sale, of $7.6 billion and stockholders’ equity of $1.8 billion.

 

On January 1, 2015, we completed our acquisition of SWS in a stock and cash transaction (the “SWS Merger”), whereby SWS’s broker-dealer subsidiaries, Southwest Securities, Inc. and SWS Financial Services, Inc., became subsidiaries of Securities Holdings, and SWS’s banking subsidiary, Southwest Securities, FSB (“SWS FSB”), was merged into the Bank, an indirect wholly owned subsidiary of Hilltop. On October 5, 2015, Southwest Securities, Inc. and SWS Financial Services, Inc. were renamed “Hilltop Securities Inc.” and “Hilltop Securities Independent Network Inc.”, respectively. The operations acquired in the SWS Merger were included in our operating results beginning January 1, 2015 and such operations included a bargain purchase gain of $81.3 million.

 

On October 22, 2015, the Financial Industry Regulatory Authority (“FINRA”) granted approval to combine FSC and Hilltop Securities, subject to customary conditions. Following this approval, we integrated the back-office systems of FSC and Hilltop Securities and, on January 22, 2016, merged FSC and Hilltop Securities into a combined firm operating under the “Hilltop Securities” name. We use the term “Hilltop Broker-Dealers” to refer to FSC, Hilltop Securities and HTS Independent Network prior to such date and Hilltop Securities and HTS Independent Network after such date.

 

Segment Information

 

We have three primary business units, PlainsCapital (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.

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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 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 Hilltop Securities and HTS Independent Network. From the date of the SWS Merger until January 22, 2016, when we merged FSC into Hilltop Securities to form a combined firm operating under the “Hilltop Securities” name, our broker-dealer segment was operated through FSC, Hilltop Securities and HTS Independent Network as separate broker-dealers under coordinated leadership. The broker-dealer segment generates a majority of its revenues from fees and commissions earned from investment advisory and securities brokerage services. Hilltop Securities is a broker-dealer registered with the SEC and 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 advisor under the Investment Advisors 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. 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 in Texas and other areas of the southern United States.

 

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 September 30, 2016

 

Banking

 

Broker-Dealer

 

Origination

 

Insurance

 

Corporate

 

Eliminations

 

Consolidated

 

Net interest income (expense)

 

$

90,549

 

$

7,823

 

$

(3,076)

 

$

716

 

$

(1,854)

 

$

5,012

 

$

99,170

 

Provision for loan losses

 

 

4,179

 

 

(189)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,990

 

Noninterest income

 

 

12,711

 

 

103,511

 

 

202,560

 

 

41,170

 

 

 —

 

 

(5,494)

 

 

354,458

 

Noninterest expense

 

 

61,536

 

 

94,094

 

 

168,303

 

 

30,415

 

 

10,041

 

 

(256)

 

 

364,133

 

Income (loss) before income taxes

 

$

37,545

 

$

17,429

 

$

31,181

 

$

11,471

 

$

(11,895)

 

$

(226)

 

$

85,505

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

    

Mortgage

    

 

    

 

 

    

All Other and

    

Hilltop

 

Nine Months Ended September 30, 2016

 

Banking

 

Broker-Dealer

 

Origination

 

Insurance

 

Corporate

 

Eliminations

 

Consolidated

 

Net interest income (expense)

 

$

268,682

 

$

22,314

 

$

(7,941)

 

$

2,213

 

$

(5,413)

 

$

13,552

 

$

293,407

 

Provision for loan losses

 

 

36,292

 

 

(19)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

36,273

 

Noninterest income

 

 

39,012

 

 

287,293

 

 

541,779

 

 

124,366

 

 

2

 

 

(14,614)

 

 

977,838

 

Noninterest expense

 

 

181,016

 

 

270,135

 

 

465,463

 

 

118,506

 

 

22,373

 

 

(806)

 

 

1,056,687

 

Income (loss) before income taxes

 

$

90,386

 

$

39,491

 

$

68,375

 

$

8,073

 

$

(27,784)

 

$

(256)

 

$

178,285

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

 

    

Mortgage

    

 

    

 

 

    

All Other and

    

Hilltop

 

Three Months Ended September 30, 2015

 

Banking

 

Broker-Dealer

 

Origination

 

Insurance

 

Corporate

 

Eliminations

 

Consolidated

 

Net interest income (expense)

 

$

105,758

 

$

8,301

 

$

(2,538)

 

$

838

 

$

(1,799)

 

$

4,651

 

$

115,211

 

Provision for loan losses

 

 

5,615

 

 

(22)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

5,593

 

Noninterest income

 

 

13,935

 

 

83,817

 

 

159,794

 

 

43,534

 

 

 —

 

 

(4,611)

 

 

296,469

 

Noninterest expense

 

 

60,518

 

 

90,683

 

 

145,113

 

 

32,366

 

 

6,028

 

 

(1,206)

 

 

333,502

 

Income (loss) before income taxes

 

$

53,560

 

$

1,457

 

$

12,143

 

$

12,006

 

$

(7,827)

 

$

1,246

 

$

72,585

 

 

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Mortgage

    

 

    

 

 

    

All Other and

    

Hilltop

 

Nine Months Ended September 30, 2015

 

Banking

 

Broker-Dealer

 

Origination

 

Insurance

 

Corporate

 

Eliminations

 

Consolidated

 

Net interest income (expense)

 

$

280,081

 

$

24,320

 

$

(7,829)

 

$

2,294

 

$

(3,289)

 

$

13,693

 

$

309,270

 

Provision for loan losses

 

 

8,405

 

 

33

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

8,438

 

Noninterest income

 

 

48,293

 

 

243,593

 

 

463,314

 

 

128,216

 

 

81,289

 

 

(13,990)

 

 

950,715

 

Noninterest expense

 

 

179,378

 

 

271,826

 

 

412,234

 

 

121,893

 

 

17,546

 

 

(1,582)

 

 

1,001,295

 

Income (loss) before income taxes

 

$

140,591

 

$

(3,946)

 

$

43,251

 

$

8,617

 

$

60,454

 

$

1,285

 

$

250,252

 

 

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 $293.4 million in net interest income during the nine months ended September 30, 2016, compared with net interest income of $309.3 million during the same period in 2015. Changes in net interest income included decreases within our banking and broker-dealer segments, as well as interest expense incurred on our $150.0 million aggregate principal amount of 5% senior notes due 2025 (“Senior Notes”) that were not issued until the second quarter of 2015.

 

The other component of our revenue is noninterest income, which is primarily comprised of the following:

 

(i)

Income from broker-dealer operations.  Through the Hilltop Broker-Dealers, we provide investment banking and other related financial services. We generated $202.8 million and $205.5 million in securities brokerage commissions and fees and investment advisory fees and commissions, and $81.0 million and $37.7 million in gains from derivative and trading portfolio activities (included within other noninterest income) during the nine months ended September 30, 2016 and 2015, respectively.

 

(ii)

Income from mortgage operations.  Through PrimeLending, we generate noninterest income by originating and selling mortgage loans. During the nine months ended September 30, 2016 and 2015, we generated $541.1 million and $463.2 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 $117.2 million and $121.1 million in net insurance premiums earned during the nine months ended September 30, 2016 and 2015, respectively.

 

In the aggregate, we generated $977.8 million and $950.7 million in noninterest income during the nine months ended September 30, 2016 and 2015, respectively. Excluding the bargain purchase gain of $81.3 million related to the SWS Merger, our noninterest income during the nine months ended September 30, 2015 was $869.4 million. We are presenting this financial measure because certain investors may use it to evaluate our business and financial results. This year-over-year increase in noninterest income, other than bargain purchase gain, is predominantly attributable to increases in noninterest income in our mortgage origination and broker-dealer segments.

 

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.

 

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Consolidated Operating Results

 

Net income applicable to common stockholders during the three months ended September 30, 2016 was $51.9 million, or $0.53 per diluted share, compared with net income applicable to common stockholders of $46.9 million, or $0.47 per diluted share, during the three months ended September 30, 2015. Net income applicable to common stockholders during the nine months ended September 30, 2016 was $110.6 million, or $1.12 per diluted share, compared with net income applicable to common stockholders of $188.4 million, or $1.88 per diluted share, during the nine months ended September 30, 2015. The consolidated operating results during the nine months ended September 30, 2016 included the previously mentioned $24.5 million charge-off of a single large loan by the Bank during the second quarter of 2016. The consolidated operating results during the nine months ended September 30, 2015 included the recognition of a bargain purchase gain related to the SWS Merger of $81.3 million, or $0.81 per diluted share. Included in the bargain purchase gain is a reversal of a $33.4 million valuation allowance against SWS deferred tax assets. This amount is based on our expected ability to realize these acquired deferred tax assets through our consolidated core earnings, the implementation of certain tax planning strategies and reversal of timing differences. SWS’s net operating loss carryforwards are subject to an annual limitation on their usage because of the ownership change effected in connection with the SWS Merger. In addition, the bargain purchase gain reflects our acquisition date fair value allocation to identifiable intangible assets of $7.5 million.

 

Our consolidated operating results during the nine months ended September 30, 2016 also include transaction costs related to the SWS Merger, 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. During the nine months ended September 30, 2016, we incurred $6.7 million in pre-tax transaction costs related to the SWS Merger, while pre-tax integration-related costs associated with employee, professional fee and contractual expenses during this same period were $2.9 million, $2.8 million, and $0.1 million, respectively. During the nine months ended September 30, 2015, we incurred $4.3 million in pre-tax transaction costs related to the SWS Merger, while pre-tax integration-related costs associated with employee, professional fee and contractual expenses during this same period were $7.3 million, $3.3 million and $2.4 million, respectively. On October 22, 2015, FINRA granted approval to combine FSC and Hilltop Securities, subject to customary conditions. Since this approval, we have integrated the back-office systems of FSC and Hilltop Securities and, 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. As a result, we began realizing cost savings in 2016, although these cost savings have been partially offset by additional integration costs that we incurred during the first nine months of 2016.

 

Certain items included in net income for 2016 and 2015 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 September 30, 2016 included net accretion of $1.9 million, $12.2 million and $1.1 million on earning assets and liabilities acquired in the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, offset by amortization of identifiable intangibles of $2.0 million, $0.2 million and $0.2 million, respectively. During the three months ended September 30, 2015, income before taxes included net accretion of $1.4 million, $25.7 million and $8.2 million on earning assets and liabilities acquired in the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, offset by amortization of identifiable intangibles of $2.2 million, $0.2 million and $0.3 million, respectively. Income before taxes during the nine months ended September 30, 2016 included net accretion of $7.8 million, $36.2 million and $3.5 million on earning assets and liabilities acquired in the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, offset by amortization of identifiable intangibles of $6.0 million, $0.6 million and $0.7 million, respectively. During the nine months ended September 30, 2015, income before taxes included net accretion of $11.4 million, $47.3 million and $15.6 million on earning assets and liabilities acquired in the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, offset by amortization of identifiable intangibles of $6.5 million, $0.7 million and $0.8 million, respectively.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

    

2016

    

2015

    

2016

    

2015

    

Performance Ratios:

 

 

 

 

 

 

 

 

 

Return on average stockholder's equity

 

11.41

%  

10.97

%  

8.32

%  

14.95

%  

Return on average assets

 

1.69

%  

1.49

%  

1.24

%  

2.04

%  

Net interest margin (1) (3)

 

3.65

%  

4.18

%  

3.71

%  

3.81

%  

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

 

3.67

%  

4.20

%  

3.74

%  

3.84

%  


(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 50 basis points and 99 basis points during the three months ended September 30, 2016 and 2015, respectively, and 59 basis points and 83 basis points during the nine months ended September 30, 2016 and 2015, respectively.

 

We present net interest margin in the previous table, and net interest margin and net interest income in the following discussion and tables, 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 September 30, 2016, the consolidated taxable equivalent net interest margin of 3.67% was 64 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of $2.7 million, $12.2 million and $1.1 million associated with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of $0.8 million. The consolidated taxable equivalent net interest margin during the three months ended September 30, 2015 of 4.20% was 137 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of $2.2 million, $25.7 million and $8.1 million associated with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of $0.7 million.

 

During the nine months ended September 30, 2016, the consolidated taxable equivalent net interest margin of 3.74% was 70 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of $10.5 million, $36.2 million and $3.2 million million associated with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of $2.5 million. The consolidated taxable equivalent net interest margin during the nine months ended September 30, 2015 of 3.84% was 106 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of $14.3 million, $47.3 million and $15.0 million associated with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of $2.6 million.

 

The FNB Transaction-related accretion of discount on loans of $36.2 million and $47.3 million during the nine months ended September 30, 2016 and 2015, respectively, included accretion of approximately $11 million and $28 million, respectively, due to better-than-expected resolution of covered purchased credit impaired (“PCI”) loans during the respective periods. The better-than-expected performance of the covered PCI loan portfolio since 2014 has led to higher yields calculated as a result of the Bank’s quarterly cash flow recast process. The recast process performed during the nine months ended September 30, 2016 and 2015 resulted in the reclassification of $25.4 million and $61.3 million, respectively, from nonaccretable difference to accretable yield.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

2016

 

2015

 

 

    

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)

 

$

7,315,433

 

$

97,590

 

5.26

%  

$

6,636,328

 

$

111,315

 

6.64

%  

Investment securities - taxable

 

 

999,394

 

 

5,915

 

2.36

%  

 

1,110,813

 

 

6,243

 

2.24

%  

Investment securities - non-taxable (2)

 

 

296,013

 

 

2,052

 

2.77

%  

 

253,170

 

 

2,439

 

3.85

%  

Federal funds sold and securities purchased under agreements to resell

 

 

185,533

 

 

52

 

0.11

%  

 

122,826

 

 

20

 

0.07

%  

Interest-bearing deposits in other financial institutions

 

 

478,560

 

 

567

 

0.47

%  

 

442,689

 

 

237

 

0.21

%  

Other

 

 

1,542,155

 

 

9,622

 

2.44

%  

 

2,381,905

 

 

11,047

 

1.82

%  

Interest-earning assets, gross

 

 

10,817,088

 

 

115,798

 

4.22

%  

 

10,947,731

 

 

131,301

 

4.74

%  

Allowance for loan losses

 

 

(53,470)

 

 

 

 

 

 

 

(43,446)

 

 

 

 

 

 

Interest-earning assets, net

 

 

10,763,618

 

 

 

 

 

 

 

10,904,285

 

 

 

 

 

 

Noninterest-earning assets

 

 

1,588,921

 

 

 

 

 

 

 

1,706,720

 

 

 

 

 

 

Total assets

 

$

12,352,539

 

 

 

 

 

 

$

12,611,005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

$

4,851,952

 

$

3,996

 

0.33

%  

$

4,709,244

 

$

3,719

 

0.31

%  

Notes payable and other borrowings

 

 

2,729,466

 

 

12,097

 

1.76

%  

 

3,385,804

 

 

11,615

 

1.36

%  

Total interest-bearing liabilities

 

 

7,581,418

 

 

16,093

 

0.84

%  

 

8,095,048

 

 

15,334

 

0.75

%  

Noninterest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

2,251,744

 

 

 

 

 

 

 

2,177,319

 

 

 

 

 

 

Other liabilities

 

 

705,985

 

 

 

 

 

 

 

641,456

 

 

 

 

 

 

Total liabilities

 

 

10,539,147

 

 

 

 

 

 

 

10,913,823

 

 

 

 

 

 

Stockholders’ equity

 

 

1,810,266

 

 

 

 

 

 

 

1,696,396

 

 

 

 

 

 

Noncontrolling interest

 

 

3,126

 

 

 

 

 

 

 

786

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

12,352,539

 

 

 

 

 

 

$

12,611,005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (2)

 

 

 

 

$

99,705

 

 

 

 

 

 

$

115,967

 

 

 

Net interest spread (2)

 

 

 

 

 

 

 

3.38

%  

 

 

 

 

 

 

3.99

%  

Net interest margin (2)

 

 

 

 

 

 

 

3.67

%  

 

 

 

 

 

 

4.20

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

 

    

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)

 

$

7,007,669

 

$

287,591

 

5.41

%  

$

6,519,422

 

$

295,670

 

6.01

%  

Investment securities - taxable

 

 

1,041,245

 

 

19,075

 

2.44

%  

 

1,120,185

 

 

19,484

 

2.32

%  

Investment securities - non-taxable (2)

 

 

283,033

 

 

6,532

 

3.08

%  

 

250,580

 

 

7,258

 

3.86

%  

Federal funds sold and securities purchased under agreements to resell

 

 

152,010

 

 

115

 

0.10

%  

 

95,557

 

 

52

 

0.07

%  

Interest-bearing deposits in other financial institutions

 

 

431,056

 

 

1,524

 

0.47

%  

 

630,205

 

 

1,139

 

0.24

%  

Other

 

 

1,637,319

 

 

24,623

 

1.98

%  

 

2,220,400

 

 

32,550

 

1.94

%  

Interest-earning assets, gross

 

 

10,552,332

 

 

339,460

 

4.25

%  

 

10,836,349

 

 

356,153

 

4.36

%  

Allowance for loan losses

 

 

(51,198)

 

 

 

 

 

 

 

(42,226)

 

 

 

 

 

 

Interest-earning assets, net

 

 

10,501,134

 

 

 

 

 

 

 

10,794,123

 

 

 

 

 

 

Noninterest-earning assets

 

 

1,593,065

 

 

 

 

 

 

 

1,750,987

 

 

 

 

 

 

Total assets

 

$

12,094,199

 

 

 

 

 

 

$

12,545,110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

$

4,819,336

 

$

11,872

 

0.33

%  

$

4,853,600

 

$

11,934

 

0.33

%  

Notes payable and other borrowings

 

 

2,632,456

 

 

32,340

 

1.63

%  

 

3,171,511

 

 

32,672

 

1.37

%  

Total interest-bearing liabilities

 

 

7,451,792

 

 

44,212

 

0.79

%  

 

8,025,111

 

 

44,606

 

0.74

%  

Noninterest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

2,203,011

 

 

 

 

 

 

 

2,166,607

 

 

 

 

 

 

Other liabilities

 

 

663,043

 

 

 

 

 

 

 

651,725

 

 

 

 

 

 

Total liabilities

 

 

10,317,846

 

 

 

 

 

 

 

10,843,443

 

 

 

 

 

 

Stockholders’ equity

 

 

1,774,196

 

 

 

 

 

 

 

1,701,032

 

 

 

 

 

 

Noncontrolling interest

 

 

2,157

 

 

 

 

 

 

 

635

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$

12,094,199

 

 

 

 

 

 

$

12,545,110

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (2)

 

 

 

 

$

295,248

 

 

 

 

 

 

$

311,547

 

 

 

Net interest spread (2)

 

 

 

 

 

 

 

3.46

%  

 

 

 

 

 

 

3.62

%  

Net interest margin (2)

 

 

 

 

 

 

 

3.74

%  

 

 

 

 

 

 

3.84

%  


(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 $0.8 million for the three months ended September 30, 2016 and 2015, respectively, and $1.8 million and $2.3 million for the nine months ended September 30, 2016 and 2015, respectively.

 

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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 decreased $16.0 million and $15.9 million, respectively, during the three and nine months ended September 30, 2016, compared with the same periods in 2015. Changes in net interest income were primarily related to lower yields on the loan portfolio within our banking segment and decreases in average stock borrow/loan program balances in our broker-dealer segment. The change in net interest income for the nine months ended September 30, 2016 also included an increase in interest expense at corporate on our outstanding Senior Notes, the offering of which was completed during the second quarter of 2015.

 

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 $4.0 million and $5.6 million during the three months ended September 30, 2016 and 2015, respectively. During the three months ended September 30, 2016, the provision for loan losses was comprised of charges relating to newly originated loans and acquired loans without credit impairment at acquisition of $6.4 million, partially offset by the recapture of charges on PCI loans of $2.4 million, compared to charges relating to newly originated loans and acquired loans without credit impairment at acquisition of $5.1 million, and PCI loans of $0.5 million during the three months ended September 30, 2015. During the nine months ended September 30, 2016 and 2015, the consolidated provision for loan losses, substantially all of which related to the banking segment, was $36.3 million and $8.4 million, respectively. The provision for loan losses during the nine months ended September 30, 2016 was comprised of charges relating to newly originated loans and acquired loans without credit impairment at acquisition of $37.5 million, partially offset by the recapture of charges on PCI loans of $1.2 million, compared to charges relating to newly originated loans and acquired loans without credit impairment at acquisition of $9.3 million, partially offset by the recapture of charges on PCI loans of $0.9 million during the nine months ended September 30, 2015. In addition, as previously mentioned, the consolidated provision for loan losses during the nine months ended September 30, 2016 included a $24.5 million charge-off of a single large loan by the Bank during the second quarter of 2016.

 

Consolidated noninterest income increased $58.0 million and $27.1 million, respectively, during the three and nine months ended September 30, 2016, compared with the same periods in 2015. Consolidated noninterest income during the nine months ended September 30, 2015 included the recognition of a bargain purchase gain related to the SWS Merger of $81.3 million. The year-over-year increases in noninterest income, other than bargain purchase gain, during the three and nine months ended September 30, 2016, compared with the same periods in 2015, of $58.0 million and $108.4 million, respectively, were primarily driven by increases in noninterest income within our mortgage origination segment of $42.3 million and $77.9 million, respectively, and increases in income earned on derivative and trading portfolio activities within our broker-dealer segment of $14.0 million and $43.3 million, respectively, partially offset by decreases in noninterest income in our banking and insurance segments.

 

Consolidated noninterest expense during the three and nine months ended September 30, 2016 increased $30.6 million and $55.4 million, respectively, compared with the same periods in 2015. The year-over-year increase in noninterest expense during the three months ended September 30, 2016, compared with the same period in 2015, primarily included an increase in noninterest expense within our mortgage origination segment, as well as increases within our broker-dealer segment and corporate. The year-over-year increase in noninterest expense during the nine months ended September 30, 2016, compared with the same period in 2015, primarily included an increase in noninterest expense within our mortgage origination segment, as well as an increase within corporate, partially offset by decreases within our broker-dealer and insurance segments. During the nine months ended September 30, 2016, we incurred pre-tax transaction and integration costs related to the SWS Merger of $12.5 million, compared with $17.3 million during the same period in 2015. Changes between the three and nine months ended September 30, 2016 and the comparable periods in 2015 within the major components of consolidated noninterest expense included increases of $24.6 million and $41.9 million, respectively, in employees’ compensation and benefits, and $9.9 million and $24.3 million, respectively, in other expenses primarily attributable to increases in our mortgage origination and banking segments and corporate,

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partially offset by decreases of $1.9 million and $7.1 million, respectively, in occupancy and equipment, net, primarily related to our broker-dealer segment.

 

Consolidated income tax expense during the three months ended September 30, 2016 and 2015 was $33.0 million and $25.3 million, respectively, reflecting effective tax rates of 38.6% and 34.9%, respectively. During the nine months ended September 30, 2016 and 2015, consolidated income tax expense was $65.9 million and $58.9 million, respectively, reflecting effective tax rates of 37.0% and 23.5%, respectively. Our effective tax rate during the three and nine months ended September 30, 2016 was slightly higher than the statutory rate primarily due to higher than expected non-deductible transaction costs associated with the SWS Merger, offset by the recognition of excess tax benefits on share-based payment awards as a result of our adoption of the provisions of Accounting Standards Update 2016-09 as of January 1, 2016 as discussed in Note 24 to the consolidated financial statements. The lower effective tax rate during the nine months ended September 30, 2015 was primarily due to no income taxes being recorded during 2015 in connection with the bargain purchase gain of $81.3 million associated with the SWS Merger because the acquisition was a tax-free reorganization under Section 368(a) of the Internal Revenue Code. In addition, during the quarter ended March 31, 2015, we recorded an income tax benefit of $2.1 million as a result of the SWS Merger to reverse the deferred tax liability for the difference between book and tax basis on Hilltop’s investment in SWS common stock. Therefore, the effective income tax rate during each of the nine months ended September 30, 2016 and 2015 is not necessarily indicative of anticipated future effective tax rates.

 

Segment Results

 

Banking Segment

 

Income before income taxes in our banking segment during the three months ended September 30, 2016 and 2015 was $37.5 million and $53.6 million, respectively, while income before income taxes in our banking segment during the nine months ended September 30, 2016 and 2015 was $90.4 million and $140.6 million, respectively. The decline in income before income taxes during the three months ended September 30, 2016, compared with the same period in 2015, was primarily due to a decrease in net interest income associated with the decline in accretion of discount on loans. The decrease in income before income taxes during the nine months ended September 30, 2016, compared with the same period in 2015, was primarily due to the increase in the provision for loan losses associated with the previously mentioned $24.5 million charge-off of a single large loan by the Bank during the second quarter of 2016, a decrease in net interest income associated with the decline in accretion of discount on loans, and a decrease in noninterest income associated with the prior year recognition of gains on securities acquired in the SWS Merger and subsequently sold. In addition, during the third quarter of 2016, the Bank conducted a core system conversion to enhance its operating platform and increase capacity to support future growth and new products and services.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

    

2016

    

2015

    

2016

    

2015

 

Performance Ratios:

 

 

 

 

 

 

 

 

 

Efficiency ratio (1)

 

59.59

%  

50.56

%  

58.83

%  

54.63

%

Return on average assets

 

1.09

%  

1.64

%  

0.91

%  

1.45

%

Net interest margin (2)

 

4.50

%  

5.77

%  

4.69

%  

5.10

%

Net interest margin (taxable equivalent) (3)

 

4.53

%  

5.79

%  

4.71

%  

5.13

%


(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.

 

The banking segment presents net interest margin in the previous table, and net interest margin and net interest income in the following discussion and tables, 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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During the three months ended September 30, 2016, the banking segment’s taxable equivalent net interest margin of 4.53% was 90 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of $2.7 million, $12.2 million and $1.1 million associated with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of $0.8 million. The banking segment’s taxable equivalent net interest margin during the three months ended September 30, 2015 of 5.79% was 210 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of $2.2 million, $25.7 million and $8.1 million associated with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of $0.7 million.

 

During the nine months ended September 30, 2016, the banking segment’s taxable equivalent net interest margin of 4.71% was 99 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of $10.5 million, $36.2 million and $3.2 million million associated with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of $2.5 million. The banking segment’s taxable equivalent net interest margin during the nine months ended September 30, 2015 of 5.13% was 159 basis points greater due to the impact of purchase accounting and primarily related to accretion of discount on loans of $14.3 million, $47.3 million and $15.0 million associated with the PlainsCapital Merger, FNB Transaction and SWS Merger, respectively, and PlainsCapital Merger-related amortization of premium on acquired securities of $2.6 million.

 

The FNB Transaction-related accretion of discount on loans of $36.2 million and $47.3 million during the nine months ended September 30, 2016 and 2015, respectively, included accretion of approximately $11 million and $28 million, respectively, due to better-than-expected resolution of covered PCI loans during the respective periods. The better-than-expected performance of the covered PCI loan portfolio since 2014 has led to higher yields calculated as a result of the Bank’s quarterly cash flow recast process. The recast process performed during the nine months ended September 30, 2016 and 2015 resulted in the reclassification of $25.4 million and $61.3 million, respectively, from nonaccretable difference to accretable yield.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

2016

 

2015

 

 

    

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)

 

$

5,363,523

 

$

78,749

 

5.78

%  

$

4,800,658

 

$

94,990

 

7.82

%

Subsidiary warehouse lines of credit

 

 

1,363,413

 

 

13,235

 

3.80

%  

 

1,128,373

 

 

10,162

 

3.52

%

Investment securities - taxable

 

 

680,587

 

 

3,121

 

1.83

%  

 

802,098

 

 

4,162

 

2.08

%

Investment securities - non-taxable (2)

 

 

137,009

 

 

1,245

 

3.63

%  

 

140,150

 

 

1,293

 

3.69

%

Federal funds sold and securities purchased under agreements to resell

 

 

38,246

 

 

52

 

0.54

%  

 

26,254

 

 

20

 

0.31

%

Interest-bearing deposits in other financial institutions

 

 

389,713

 

 

516

 

0.53

%  

 

345,746

 

 

210

 

0.24

%

Other

 

 

57,839

 

 

527

 

3.65

%  

 

57,220

 

 

446

 

3.12

%

Interest-earning assets, gross

 

 

8,030,330

 

 

97,445

 

4.77

%  

 

7,300,499

 

 

111,283

 

6.02

%

Allowance for loan losses

 

 

(53,279)

 

 

 

 

 

 

 

(43,019)

 

 

 

 

 

 

Interest-earning assets, net

 

 

7,977,051

 

 

 

 

 

 

 

7,257,480

 

 

 

 

 

 

Noninterest-earning assets

 

 

1,031,002

 

 

 

 

 

 

 

1,111,559

 

 

 

 

 

 

Total assets

 

$

9,008,053

 

 

 

 

 

 

$

8,369,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

$

4,558,000

 

$

5,075

 

0.44

%  

$

4,330,690

 

$

4,116

 

0.38

%

Notes payable and other borrowings

 

 

775,175

 

 

1,024

 

0.52

%  

 

613,884

 

 

613

 

0.39

%

Total interest-bearing liabilities (3)

 

 

5,333,175

 

 

6,099

 

0.45

%  

 

4,944,574

 

 

4,729

 

0.38

%

Noninterest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

2,280,750

 

 

 

 

 

 

 

2,145,372

 

 

 

 

 

 

Other liabilities

 

 

70,971

 

 

 

 

 

 

 

31,875

 

 

 

 

 

 

Total liabilities

 

 

7,684,896

 

 

 

 

 

 

 

7,121,821

 

 

 

 

 

 

Stockholders’ equity

 

 

1,323,157

 

 

 

 

 

 

 

1,247,218

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

9,008,053

 

 

 

 

 

 

$

8,369,039

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (2)

 

 

 

 

$

91,346

 

 

 

 

 

 

$

106,554

 

 

 

Net interest spread (2)

 

 

 

 

 

 

 

4.33

%  

 

 

 

 

 

 

5.64

%

Net interest margin (2)

 

 

 

 

 

 

 

4.53

%  

 

 

 

 

 

 

5.79

%

 

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

2016

 

2015

 

 

    

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)

 

$

5,242,000

 

$

236,436

 

5.93

%  

$

4,762,223

 

$

249,617

 

6.94

%

Subsidiary warehouse lines of credit

 

 

1,169,400

 

 

34,226

 

3.85

%  

 

1,050,123

 

 

28,113

 

3.53

%

Investment securities - taxable

 

 

717,097

 

 

10,788

 

2.01

%  

 

802,639

 

 

12,943

 

2.15

%

Investment securities - non-taxable (2)

 

 

138,377

 

 

3,798

 

3.66

%  

 

141,470

 

 

3,996

 

3.77

%

Federal funds sold and securities purchased under agreements to resell

 

 

28,266

 

 

115

 

0.54

%  

 

24,142

 

 

52

 

0.29

%

Interest-bearing deposits in other financial institutions

 

 

341,372

 

 

1,371

 

0.54

%  

 

526,162

 

 

1,054

 

0.27

%

Other

 

 

53,631

 

 

1,525

 

3.79

%  

 

50,210

 

 

1,295

 

3.44

%

Interest-earning assets, gross

 

 

7,690,143

 

 

288,259

 

4.94

%  

 

7,356,969

 

 

297,070

 

5.35

%

Allowance for loan losses

 

 

(50,982)

 

 

 

 

 

 

 

(41,867)

 

 

 

 

 

 

Interest-earning assets, net

 

 

7,639,161

 

 

 

 

 

 

 

7,315,102

 

 

 

 

 

 

Noninterest-earning assets

 

 

1,046,027

 

 

 

 

 

 

 

1,140,995

 

 

 

 

 

 

Total assets

 

$

8,685,188

 

 

 

 

 

 

$

8,456,097

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

 

$

4,515,661

 

$

14,764

 

0.44

%  

$

4,456,485

 

$

12,994

 

0.39

%

Notes payable and other borrowings

 

 

600,720

 

 

2,423

 

0.53

%  

 

618,270

 

 

1,548

 

0.33

%

Total interest-bearing liabilities (3)

 

 

5,116,381

 

 

17,187

 

0.45

%  

 

5,074,755

 

 

14,542

 

0.38

%

Noninterest-bearing liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

2,220,755

 

 

 

 

 

 

 

2,123,655

 

 

 

 

 

 

Other liabilities

 

 

55,315

 

 

 

 

 

 

 

52,190

 

 

 

 

 

 

Total liabilities

 

 

7,392,451

 

 

 

 

 

 

 

7,250,600

 

 

 

 

 

 

Stockholders’ equity

 

 

1,292,737

 

 

 

 

 

 

 

1,205,497

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

8,685,188

 

 

 

 

 

 

$

8,456,097

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (2)

 

 

 

 

$

271,072

 

 

 

 

 

 

$

282,528

 

 

 

Net interest spread (2)

 

 

 

 

 

 

 

4.49

%  

 

 

 

 

 

 

4.97

%

Net interest margin (2)

 

 

 

 

 

 

 

4.71

%  

 

 

 

 

 

 

5.13

%

 


(1)

Average balance includes non-accrual loans.

(2)

Presented on a taxable basis with annualized taxable equivalent adjustments based on a 35% federal income tax rate. The adjustment to interest income was $0.4 million for both the three months ended September 30, 2016 and 2015, and $1.3 million and $1.4 million for the nine months ended September 30, 2016 and 2015, respectively.

(3)

Excludes the allocation of interest expense on PlainsCapital debt of $0.4 million for both the three months ended September 30, 2016 and 2015, and $1.1 million for both the nine months ended September 30, 2016 and 2015.

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.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2016 vs. 2015

 

2016 vs. 2015

 

 

 

Change Due To (1)

 

 

 

 

Change Due To (1)

 

 

 

 

 

    

Volume

    

Yield/Rate

    

Change

    

Volume

    

Yield/Rate

    

Change

 

Interest income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, gross

 

$

11,060

 

$

(27,301)

 

$

(16,241)

 

$

24,937

 

$

(38,118)

 

$

(13,181)

 

Subsidiary warehouse lines of credit

 

 

2,082

 

 

991

 

 

3,073

 

 

3,152

 

 

2,961

 

 

6,113

 

Investment securities - taxable

 

 

(634)

 

 

(407)

 

 

(1,041)

 

 

(1,377)

 

 

(778)

 

 

(2,155)

 

Investment securities - non-taxable (2)

 

 

(29)

 

 

(19)

 

 

(48)

 

 

(87)

 

 

(111)

 

 

(198)

 

Federal funds sold and securities purchased under agreements to resell

 

 

9

 

 

23

 

 

32

 

 

9

 

 

54

 

 

63

 

Interest-bearing deposits in other financial institutions

 

 

27

 

 

279

 

 

306

 

 

(370)

 

 

687

 

 

317

 

Other

 

 

5

 

 

76

 

 

81

 

 

88

 

 

142

 

 

230

 

Total interest income (2)

 

 

12,520

 

 

(26,358)

 

 

(13,838)

 

 

26,352

 

 

(35,163)

 

 

(8,811)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

215

 

$

744

 

$

959

 

$

173

 

$

1,597

 

$

1,770

 

Notes payable and other borrowings

 

 

159

 

 

252

 

 

411

 

 

(44)

 

 

919

 

 

875

 

Total interest expense

 

 

374

 

 

996

 

 

1,370

 

 

129

 

 

2,516

 

 

2,645

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (2)

 

$

12,146

 

$

(27,354)

 

$

(15,208)

 

$

26,223

 

$

(37,679)

 

$

(11,456)

 


(1)

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

(2)

Annualized taxable equivalent.

 

Taxable equivalent net interest income decreased $15.2 million and $11.5 million during the three and nine months ended September 30, 2016, respectively, compared with the same periods in 2015. Changes in the yields earned on interest-earning assets decreased taxable equivalent net interest income by $26.4 million and $35.2 million during the three and nine months ended September 30, 2016, respectively, compared to the same periods in 2015, primarily due to the net effects of lower yields on the loan portfolio as a result of the decline in accretion of discount on loans, partially offset by the favorable change in yields on warehouse lines of credit extended to other subsidiaries. Accretion of discount on loans is expected to decrease in future periods as loans acquired in the Bank Transactions are repaid, refinanced or renewed. 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 $12.5 million and $26.4 million during the three and nine months ended September 30, 2016, respectively, compared with the same periods in 2015. Changes in rates paid on interest-bearing liabilities decreased taxable equivalent net interest income by $1.0 million and $2.5 million during the three and nine months ended September 30, 2016, respectively, compared with the same periods in 2015.

 

The banking segment’s noninterest income was $12.7 million and $13.9 million during the three months ended September 30, 2016 and 2015, respectively, and $39.0 million and $48.3 million during the nine months ended September 30, 2016 and 2015, respectively. The decrease in noninterest income during the three months ended September 30, 2016, compared to the same period in 2015, was primarily due to year-over-year decreases in exchange fee income due to the impact of the Durbin Act and OREO income. The year-over-year decrease during the nine months ended September 30, 2016 was primarily due to $4.4 million of realized gains on securities acquired in the SWS Merger and subsequently sold during the three months ended March 31, 2015, that did not recur during the same period in 2016, as well as decreases in subsidiary management fees and items during the third quarter of 2016 previously discussed.

 

The banking segment’s noninterest expenses were $61.5 million and $60.5 million during the three months ended September 30, 2016 and 2015, respectively, and $181.0 million and $179.4 million during the nine months ended September 30, 2016 and 2015, respectively. Noninterest expenses were primarily comprised of employees’ compensation and benefits, and occupancy expenses. The change in noninterest expenses during the three months ended September 30, 2016, compared to the same period in 2015, included an increase in compensation and benefits costs, partially offset by a year-over-year decrease in the “true-up” payment accrual associated with covered assets of $2.4 million. The change in

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noninterest expenses during the nine months ended September 30, 2016, compared to the same period in 2015, primarily included a net increase in repossession and foreclosure expenses of $7.5 million and a year-over-year increase in the “true-up” payment accrual associated with covered assets of $1.6 million, offset by a reduction of $3.0 million in pre-tax integration-related costs directly attributable to the integration of the former SWS FSB related to employee expenses, as well as decreases in compensation and benefits costs, and occupancy expenses associated with closed branches and related costs.

 

Broker-Dealer Segment

 

Income before income taxes in our broker-dealer segment during the three and nine months ended September 30, 2016 was $17.4 million and $39.5 million, respectively, compared with income before income taxes during the three months ended September 30, 2015 of $1.5 million and a loss before income taxes of $3.9 million during the nine months ended September 30, 2015. The changes in income (loss) before income taxes during the three and nine months ended September 30, 2016, compared with the same periods in 2015, were primarily the result of increases in trading gains associated with the structured finance business, offset by increases in compensation and benefits expenses related to the integration and merger of FSC and Hilltop Securities, as well as increased incentive compensation for producers.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Variance

 

Nine Months Ended September 30,

 

Variance

 

    

2016

    

2015

    

2016 vs 2015

    

2016

    

2015

    

2016 vs 2015

Net interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Securities lending

 

$

2,083

 

$

3,006

 

$

(923)

 

$

5,095

 

$

8,304

 

$

(3,209)

   Other

 

 

5,740

 

 

5,295

 

 

445

 

 

17,219

 

 

16,016

 

 

1,203

       Total net interest income

 

 

7,823

 

 

8,301

 

 

(478)

 

 

22,314

 

 

24,320

 

 

(2,006)

Noninterest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Securities commissions and fees by business line (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       Capital markets

 

 

13,854

 

 

13,030

 

 

824

 

 

42,435

 

 

43,130

 

 

(695)

       Retail

 

 

19,095

 

 

20,225

 

 

(1,130)

 

 

55,314

 

 

60,623

 

 

(5,309)

       Clearing

 

 

6,999

 

 

4,791

 

 

2,208

 

 

20,752

 

 

15,279

 

 

5,473

       Other

 

 

825

 

 

1,405

 

 

(580)

 

 

2,832

 

 

5,120

 

 

(2,288)

 

 

 

40,773

 

 

39,451

 

 

1,322

 

 

121,333

 

 

124,152

 

 

(2,819)

   Investment banking and advisory fees by business line:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       Public finance

 

 

24,599

 

 

21,507

 

 

3,092

 

 

64,727

 

 

64,339

 

 

388

       Capital markets

 

 

1,366

 

 

716

 

 

650

 

 

4,684

 

 

1,544

 

 

3,140

       Retail

 

 

3,637

 

 

3,731

 

 

(94)

 

 

10,864

 

 

11,701

 

 

(837)

       Structured finance

 

 

1,292

 

 

1,627

 

 

(335)

 

 

3,763

 

 

4,428

 

 

(665)

       Clearing

 

 

234

 

 

12

 

 

222

 

 

265

 

 

36

 

 

229

       Other

 

 

1

 

 

74

 

 

(73)

 

 

(1)

 

 

206

 

 

(207)

 

 

 

31,129

 

 

27,667

 

 

3,462

 

 

84,302

 

 

82,254

 

 

2,048

   Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       Structured finance

 

 

24,998

 

 

11,477

 

 

13,521

 

 

61,502

 

 

26,618

 

 

34,884

       Capital markets

 

 

6,260

 

 

5,782

 

 

478

 

 

19,516

 

 

11,143

 

 

8,373

       Other

 

 

351

 

 

(560)

 

 

911

 

 

640

 

 

(574)

 

 

1,214

 

 

 

31,609

 

 

16,699

 

 

14,910

 

 

81,658

 

 

37,187

 

 

44,471

       Total noninterest income

 

 

103,511

 

 

83,817

 

 

19,694

 

 

287,293

 

 

243,593

 

 

43,700

Noninterest expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Compensation and benefits expenses

 

 

68,051

 

 

64,099

 

 

3,952

 

 

189,843

 

 

192,761

 

 

(2,918)

   Other

 

 

25,854

 

 

26,562

 

 

(708)

 

 

80,273

 

 

79,098

 

 

1,175

       Total noninterest expense

 

 

93,905

 

 

90,661

 

 

3,244

 

 

270,116

 

 

271,859

 

 

(1,743)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

$

17,429

 

$

1,457

 

$

15,972

 

$

39,491

 

$

(3,946)

 

$

43,437

(1)

Securities commissions and fees includes income of $1.1 million and $0.4 million during the three months ended September 30, 2016 and 2015, respectively, and $2.9 million and $1.0 million during the nine months ended September 30, 2016 and 2015, respectively, that is eliminated in consolidation.

 

The broker-dealer segment had net interest income of $7.8 million and $8.3 million during the three months ended September 30, 2016 and 2015, respectively, and net interest income of $22.3 million and $24.3 million during the nine months ended September 30, 2016 and 2015, 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 year-over-year decreases between the three and nine months ended September 30, 2016 and the comparable periods in 2015 were primarily due to decreases of 25% and 21%, respectively, in the broker-dealer segment’s average stock borrow/loan program balances.

 

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Noninterest income was $103.5 million and $83.8 million during the three months ended September 30, 2016 and 2015, respectively, and $287.3 million and $243.6 million during the nine months ended September 30, 2016 and 2015, respectively. The increase in noninterest income of $19.7 million during the three months ended September 30, 2016, compared with the same period in 2015, was primarily due to a $14.0 million increase in income earned from trading gains associated with the structured finance business and a $3.5 million increase in investment banking and advisory fees was primarily due to an increase in the aggregate dollar amount of public finance issuances. The increase in noninterest income of $43.7 million during the nine months ended September 30, 2016, compared with the same period in 2015, was primarily due to a $43.3 million increase in the income earned from trading gains associated with the structured finance and capital markets businesses and a $2.0 million increase in investment banking and advisory fees primarily due to an increase in the aggregate dollar amount of public finance issuances, offset by a decrease of $2.8 million in securities commissions and fees primarily due to a decrease in the commissions earned on municipal bond transactions.

 

Noninterest expenses, including provision for loan losses, were $93.9 million and $90.7 million during the three months ended September 30, 2016 and 2015, respectively, and $270.1 million and $271.9 million during the nine months ended September 30, 2016 and 2015, respectively. The increase in noninterest expenses, including provision for loan losses, of $3.2 million during the three months ended September 30, 2016, compared to the same period in 2015, was primarily due to an increase in compensation and benefits expenses primarily as a result of an increase in incentive pay given the improvement in year-over-year operating performance, partially offset by a decrease in salaries and benefits expenses, which was in part a product of the integration and merger of FSC and Hilltop Securities. The decrease in noninterest expenses, including provision for loan losses, of $1.7 million during the nine months ended September 30, 2016, compared to the same period in 2015, was primarily due to a decrease of $2.9 million in compensation and benefits expenses, primarily as a result of a decrease in salaries and benefits, which was in part a product of the integration and merger of FSC and Hilltop Securities, partially offset by an increase in incentive pay as discussed above. This decrease in compensation and benefits expenses was partially offset by an increase in legal expenses associated with ongoing litigation matters. During the three months ended September 30, 2016, the broker-dealer segment incurred pre-tax integration-related costs resulting from employee expenses and professional fees directly attributable to the integration of SWS of $0.8 million and $0.2 million, respectively, compared with employee expenses, professional fees and contractual expenses of $0.4 million, $1.7 million and $0.1 million, respectively, during the three months ended September 30, 2015. During the nine months ended September 30, 2016, the broker-dealer segment incurred pre-tax integration-related costs resulting from employee expenses, professional fees and contractual expenses directly attributable to the integration of SWS of $2.9 million, $2.8 million and $0.1 million, respectively, compared with pre-tax transaction costs of $0.8 million, and employee expenses, professional fees and contractual expenses of $5.5 million, $2.5 million and $1.6 million, respectively, during the nine months ended September 30, 2015.

 

On October 22, 2015, FINRA granted approval to combine FSC and Hilltop Securities, subject to customary conditions. Since this approval, we have integrated the back-office systems of FSC and Hilltop Securities and, effective as of January 22, 2016, we merged FSC and Hilltop Securities into a combined firm operating under the “Hilltop Securities” name. As a result, we began realizing cost savings in 2016, although these cost savings have been partially offset by integration costs that we incurred during the first nine months of 2016.

 

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Selected information concerning the broker-dealer segment follows (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

2016

    

 

2015

    

2016

    

 

2015

 

Compensation as a % of net revenue

 

61.1%

 

 

69.6%

 

 

61.3%

 

 

71.9%

 

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

 

 

 

 

 

 

$

950,501

 

$

804,688

 

Other FDIC insured program balances (end of period)

 

 

 

 

 

 

$

1,420,496

 

$

1,457,188

 

Customer margin balances (end of period)

 

 

 

 

 

 

$

337,751

 

$

424,234

 

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

 

 

 

 

 

 

$

403,883

 

$

516,722

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Public finance:

 

 

 

 

 

 

 

 

 

 

 

 

Number of issues

 

445

 

 

363

 

 

1,353

 

 

1,233

 

Aggregate amount of offerings

$

22,663,624

 

$

13,822,260

 

$

65,650,303

 

$

57,698,144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital markets:

 

 

 

 

 

 

 

 

 

 

 

 

Total volumes

$

18,196,667

 

$

19,391,338

 

$

61,149,636

 

$

55,674,648

 

Net inventory (end of period)

 

 

 

 

 

 

$

221,263

 

$

98,635

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail:

 

 

 

 

 

 

 

 

 

 

 

 

Retail employee representatives (end of period)

 

 

 

 

 

 

 

119

 

 

119

 

Independent registered representatives (end of period) 

 

 

 

 

 

 

 

231

 

 

245

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Structured finance:

 

 

 

 

 

 

 

 

 

 

 

 

Lock production/TBA volume

$

1,663,926

 

$

1,175,951

 

$

4,536,631

 

$

2,881,454

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clearing:

 

 

 

 

 

 

 

 

 

 

 

 

Total tickets

$

348,877

 

$

664,051

 

$

1,308,929

 

$

1,728,023

 

Correspondents (end of period)

 

 

 

 

 

 

 

179

 

 

204

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities lending:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

$

1,266,145

 

$

2,036,392

 

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

 

 

 

 

 

 

$

1,150,826

 

$

1,929,588

 

 

 

 

Mortgage Origination Segment

 

Income before income taxes in our mortgage origination segment during the three months ended September 30, 2016 and 2015 was $31.2 million and $12.1 million, respectively, and $68.4 million and $43.3 million during the nine months ended September 30, 2016 and 2015, respectively. The increases in income before income taxes during the three and nine months ended September 30, 2016, compared to the same periods in 2015, were primarily due to increases in noninterest income, partially offset by increases in segment operating costs and compensation that varies with the volume of mortgage loan originations (“variable compensation”). Net interest expense of $3.1 million and $2.5 million during the three months ended September 30, 2016 and 2015, respectively, and net interest expense of $7.9 million and $7.8 million during the nine months ended September 30, 2016 and 2015, respectively, resulted from 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 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. Changes in mortgage interest rates have historically had a lesser impact on home purchases volume than on refinancing volume. On October 3, 2015, lender compliance changes associated with TILA-RESPA Integrated Disclosures (“TRID”) became effective and significantly modified required disclosure documents and settlement procedures associated with home mortgage loans. PrimeLending has not experienced significant delays in loan closings due to the implementation of TRID. While PrimeLending believes the majority of infrastructure changes have been made to address additional fulfillment processes resulting from TRID, it continues to evaluate TRID requirements to determine if further fulfillment process changes are needed, which could result in additional costs. 

 

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The mortgage origination segment originates all of its mortgage loans through a retail channel. 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 September 30,

 

 

Nine Months Ended September 30,

 

 

    

    

 

    

% of

    

    

 

    

% of

 

    

    

 

    

% of

    

    

 

    

% of

    

 

 

2016

 

Total

 

2015

 

Total

 

 

2016

 

Total

 

2015

 

Total

 

Mortgage Loan Originations - units

 

 

19,330

 

 

 

 

16,672

 

 

 

 

 

50,441

 

 

 

 

46,045

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Loan Originations - volume

 

$

4,492,553

 

 

 

$

3,639,198

 

 

 

 

$

11,572,132

 

 

 

$

10,286,484

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Loan Originations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conventional

 

$

3,003,506

 

66.86

%  

$

2,244,391

 

61.67

%  

 

$

7,431,755

 

64.22

%  

$

6,514,178

 

63.33

%  

Government

 

 

1,010,682

 

22.50

%  

 

987,446

 

27.13

%  

 

 

2,731,967

 

23.61

%  

 

2,654,708

 

25.81

%  

Jumbo

 

 

308,800

 

6.87

%  

 

218,500

 

6.00

%  

 

 

924,194

 

7.99

%  

 

691,366

 

6.72

%  

Other

 

 

169,565

 

3.77

%  

 

188,861

 

5.20

%  

 

 

484,216

 

4.18

%  

 

426,232

 

4.14

%  

 

 

$

4,492,553

 

100.00

%  

$

3,639,198

 

100.00

%  

 

$

11,572,132

 

100.00

%  

$

10,286,484

 

100.00

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home purchases

 

$

3,191,851

 

71.05

%  

$

2,945,626

 

80.94

%  

 

$

8,504,061

 

73.49

%  

$

7,547,464

 

73.37

%  

Refinancings

 

 

1,300,702

 

28.95

%  

 

693,572

 

19.06

%  

 

 

3,068,071

 

26.51

%  

 

2,739,020

 

26.63

%  

 

 

$

4,492,553

 

100.00

%  

$

3,639,198

 

100.00

%  

 

$

11,572,132

 

100.00

%  

$

10,286,484

 

100.00

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Texas

 

$

984,974

 

21.91

%  

$

818,767

 

22.50

%  

 

$

2,516,881

 

21.75

%  

$

2,235,394

 

21.73

%  

California

 

 

658,074

 

14.65

%  

 

474,545

 

13.04

%  

 

 

1,654,059

 

14.30

%  

 

1,526,958

 

14.84

%  

Florida

 

 

219,544

 

4.89

%  

 

190,301

 

5.23

%  

 

 

584,541

 

5.05

%  

 

494,371

 

4.81

%  

Ohio

 

 

192,950

 

4.29

%  

 

166,891

 

4.59

%  

 

 

493,733

 

4.27

%  

 

434,166

 

4.22

%  

Arizona

 

 

160,766

 

3.58

%  

 

108,409

 

2.98

%  

 

 

407,736

 

3.52

%  

 

322,921

 

3.14

%  

Washington

 

 

155,257

 

3.46

%  

 

133,173

 

3.66

%  

 

 

401,879

 

3.47

%  

 

350,619

 

3.41

%  

North Carolina

 

 

142,315

 

3.17

%  

 

127,365

 

3.50

%  

 

 

392,637

 

3.39

%  

 

373,196

 

3.63

%  

Maryland

 

 

155,246

 

3.46

%  

 

121,966

 

3.35

%  

 

 

384,273

 

3.32

%  

 

346,077

 

3.36

%  

Missouri

 

 

130,325

 

2.90

%  

 

106,097

 

2.92

%  

 

 

341,770

 

2.95

%  

 

305,418

 

2.97

%  

South Carolina

 

 

118,550

 

2.64

%  

 

104,065

 

2.86

%  

 

 

327,050

 

2.83

%  

 

298,083

 

2.90

%  

All other states

 

 

1,574,552

 

35.05

%  

 

1,287,619

 

35.37

%  

 

 

4,067,573

 

35.15

%  

 

3,599,281

 

34.99

%  

 

 

$

4,492,553

 

100.00

%  

$

3,639,198

 

100.00

%  

 

$

11,572,132

 

100.00

%  

$

10,286,484

 

100.00

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Loan Sales - volume

 

$

4,349,794

 

 

 

$

3,699,047

 

 

 

 

$

11,431,589

 

 

 

$

10,240,166

 

 

 

 

Refinancing volume increased to $1.3 billion during the three months ended September 30, 2016 from $693.6 million from the three months ended September 30, 2015 (representing 29.0% and 19.1%, respectively, of total loan origination volume), while refinancing volume increased to $3.1 billion during the nine months ended September 30, 2016 from $2.7 billion during the nine months ended September 30, 2015 (representing 26.5% and 26.6%, respectively, of total loan origination volume). Home purchases volume increased 8.4% to $3.2 billion during the three months ended September 30, 2016 from $2.9 billion during the three months ended September 30, 2015, while home purchases volume increased 12.7% to $8.5 billion during the nine months ended September 30, 2016 from $7.5 billion during the nine months ended September 30, 2015.

 

The mortgage origination segment’s total loan origination volume during the three and nine months ended September 30, 2016 increased 23.4% and 12.5%, respectively, compared to the same periods in 2015, while income before income taxes during the three and nine months ended September 30, 2016 increased 156.8% and 58.1%, respectively, compared to the same periods in 2015. The increase in income before taxes during the three months ended September 30, 2016 was primarily due to noninterest income increasing by 26.8%, while noninterest expense increased at a lower rate of 16.0%, and the increase in income before taxes during the nine months ended September 30, 2016 was primarily due to noninterest income increasing by 16.9%, while noninterest expense increased at a slightly lower rate of 12.9%.  

 

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Noninterest income was $202.6 million and $159.8 million during the three months ended September 30, 2016 and 2015, respectively, and $541.8 million and $463.3 million during the nine months ended September 30, 2016 and 2015, respectively, and was comprised of the following (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Variance

 

Nine Months Ended September 30,

 

Variance

 

 

2016

   

2015

 

2016 vs 2015

 

2016

  

2015

 

2016 vs 2015

 

Net gains from sale of loans

$

167,238

 

$

139,703

 

$

27,535

 

$

432,488

 

$

382,416

 

$

50,072

 

Mortgage loan origination fees

 

26,807

 

 

22,647

 

 

4,160

 

 

71,417

 

 

58,194

 

 

13,223

 

Other mortgage production income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in net fair value and related derivative activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate lock commitments and loans held for sale

 

5,147

 

 

(4,845)

 

 

9,992

 

 

26,641

 

 

14,828

 

 

11,813

 

Mortgage servicing rights asset

 

(2,308)

 

 

(2,946)

 

 

638

 

 

(6,111)

 

 

(5,820)

 

 

(291)

 

Servicing fees

 

5,676

 

 

5,235

 

 

441

 

 

17,344

 

 

13,696

 

 

3,648

 

 

$

202,560

 

$

159,794

 

$

42,766

 

$

541,779

 

$

463,314

 

$

78,465

 

 

Net gains from sale of loans increased 19.7% and 13.1%, and mortgage loan origination fees increased 18.4% and 22.7% during the three and nine months ended September 30, 2016, respectively, compared with the same periods in 2015. The increase in net gains from sale of loans during both the three and nine months ended September 30, 2016 were primarily a result of increases in total loan sales volumes of 17.6% and 11.6% during the three and nine months ended September 30, 2016, respectively, as well as slight increases in average loan sales margin, compared with the same periods in 2015. The increase in mortgage loan origination fees during the three months ended September 30, 2016, was primarily a result of an increase in total loan origination volumes, the impact of which was partially offset by a slight decrease in average mortgage loan origination fees during the three months ended September 30, 2016, compared with the same period in 2015. The increase in mortgage loan origination fees during the nine months ended September 30, 2016, was a result of an increase in total loan origination volumes and average loan origination fees during the nine months ended September 30, 2016, compared with the same period in 2015.

 

During the three and nine months ended September 30, 2016, noninterest income included $5.1 million and $26.6 million, respectively, of increases in 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. These increases were primarily a result of increases in the volume of IRLCs and mortgage loans held during these periods. A slight increase in the average value of individual IRLCs and mortgage loans during both the three and nine months ended September 30, 2016, also contributed to the increases during these periods.

 

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 and nine months ended September 30, 2016, the mortgage origination segment retained servicing on approximately 22% and 19% of loans sold, respectively, compared to 25% and 20% during the same periods in 2015. 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 mortgage servicing rights (“MSR”) asset was valued at $44.9 million on $5.6 billion of serviced loan volume at September 30, 2016, compared with a value of $53.5 million on $5.2 billion of serviced loan volume at December 31, 2015. 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 $2.3 million and $6.1 million during the three and nine months ended September 30, 2016, respectively, compared to net losses of $2.9 million and $5.8 million during the three and nine months ended September 30, 2015, respectively. In addition, net servicing income was $2.3 million and $7.2 million during three and nine months ended September 30, 2016, respectively, compared with $2.3 million and $6.3 million during the same periods in 2015, respectively. In May 2016, the mortgage origination segment sold MSR assets of $7.6 million, which represented $917.4 million of its serviced loan volume at the time.

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Noninterest expenses were $168.3 million and $145.1 million during the three months ended September 30, 2016 and 2015, respectively, and $465.5 million and $412.2 million during the nine months ended September 30, 2016 and 2015, respectively, and were comprised of the following (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Variance

 

Nine Months Ended September 30,

 

Variance

 

 

2016

    

2015

   

2016 vs 2015

   

2016

    

2015

   

2016 vs 2015

 

Variable compensation

$

75,271

 

$

64,582

 

$

10,689

 

$

201,564

 

$

179,884

 

$

21,680

 

Segment operating costs

 

79,308

 

 

69,290

 

 

10,018

 

 

226,522

 

 

195,222

 

 

31,300

 

Lender paid closing costs

 

10,302

 

 

8,324

 

 

1,978

 

 

27,216

 

 

29,764

 

 

(2,548)

 

Servicing expense

 

3,422

 

 

2,917

 

 

505

 

 

10,161

 

 

7,364

 

 

2,797

 

 

$

168,303

 

$

145,113

 

$

23,190

 

$

465,463

 

$

412,234

 

$

53,229

 

 

Employees’ compensation and benefits accounted for the majority of the noninterest expenses incurred during all periods presented. Variable compensation increased $10.7 million and $21.7 million during the three and nine months ended September 30, 2016, respectively, compared with the same periods in 2015, and comprised 62.8% and 64.2% of the total employees’ compensation and benefits expenses during the three months ended September 30, 2016 and 2015, respectively, and 61.7% and 64.0% of total employees’ compensation and benefits expenses during the nine months ended September 30, 2016 and 2015, 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 increased 23.4% and 12.5% for the three and nine months ended September 30, 2016, respectively, compared to the same periods in 2015, the mortgage origination segment’s operating costs increased 14.5% and 16.0%, respectively. The largest increases in segment operating costs during the three and nine months ended September 30, 2016, compared to the same periods in 2015, were increases in salaries and benefits totaling $8.6 million and $23.9 million, respectively. These increases were primarily the result of increases in headcount related to loan processing, loan fulfillment and technology functions. The increases in loan processing and fulfillment headcount levels were initiated during 2015 primarily to address growth in loan origination volume that began in 2014 and to address the implementation of TRID. Additional increases in segment operating costs during the nine months ended September 30, 2016, compared to the same period in 2015, were primarily associated with increases in mortgage branch locations, business development activities and technology initiatives. 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, a customer may opt to have PrimeLending pay certain costs associated with the origination of their mortgage loan (“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, 2007, and September 30, 2016, the mortgage origination segment sold mortgage loans totaling $85.0 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 2007, it does not anticipate experiencing significant losses in the future on loans originated prior to 2007 as a result of investor claims under these provisions of its sales contracts.

 

When an investor 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 cannot be satisfied in that manner, the mortgage origination segment negotiates with the investor to reach a settlement of the claim. Settlements typically result in either the repurchase of a loan or reimbursement to the investor for losses incurred on the loan.

 

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Following is a summary of the mortgage origination segment’s claims resolution activity relating to loans sold between January 1, 2007 and September 30, 2016 (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Original Loan Balance

 

Loss Recognized

 

 

 

 

 

 

% of

 

 

 

 

% of

 

 

 

 

 

 

Loans

 

 

 

 

Loans

 

 

    

Amount

    

Sold

    

Amount

    

Sold

 

Claims resolved with no payment

 

$

209,259

 

0.25%

 

$

 —

 

0.00%

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

243,349

 

0.29%

 

 

23,719

 

0.03%

 

 

 

$

452,608

 

0.54%

 

$

23,719

 

0.03%

 


(1)

Losses incurred include refunded purchased servicing rights.

 

At September 30, 2016 and December 31, 2015, the mortgage origination segment’s indemnification liability reserve totaled $19.2 million and $16.6 million, respectively. The related provision for indemnification losses was $1.3 million and $1.1 million during the three months ended September 30, 2016 and 2015, respectively, and $3.5 million and $3.1 million during the nine months ended September 30, 2016 and 2015, respectively.

 

Insurance Segment

 

Income before income taxes in our insurance segment was $11.5 million and $12.0 million during the three months ended September 30, 2016 and 2015, respectively, and $8.1 million and $8.6 million during the nine months ended September 30, 2016 and 2015.

 

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 customers renew their policies under the new rates, typically 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. Rate actions have historically reduced 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 75.0% and 75.4% during the three months ended September 30, 2016 and 2015, respectively, and 97.8% and 97.6% during the nine months ended September 30, 2016 and 2015, respectively. The relatively consistent combined ratio during the three months ended September 30, 2016, compared with the same period in 2015, included a slight decrease in the loss and LAE ratio driven by the benefit of the current reinsurance structure that has limited the insurance segment’s retention of claims losses associated with sub-catastrophic weather-related events experienced through September 30, 2016. Additionally, premiums earned decreasing at a slightly lower rate than loss and LAE expense also contributed to the decline in the loss and LAE ratio during the three months ended September 30, 2016, compared to the same period in 2015. The combined ratio is a measure of overall insurance underwriting profitability, and represents the sum of loss and LAE and underwriting expenses divided by net insurance premiums earned.

 

Noninterest income of $41.2 million and $43.5 million during the three months ended September 30, 2016 and 2015, respectively, included net insurance premiums earned of $38.7 million and $41.2 million, respectively, while noninterest income of $124.4 million and $128.2 million during the nine months ended September 30, 2016 and 2015, respectively,

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included net insurance premiums earned of $117.2 million and $121.1 million, respectively. The year-over-year decreases in net insurance premiums earned were primarily due to the effect of the decreases in net premiums written.

 

Direct insurance premiums written by major product line are presented in the table below (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Variance

 

Nine Months Ended September 30,

 

Variance

 

 

    

2016

    

2015

    

2016 vs 2015

    

2016

    

2015

    

2016 vs 2015

 

Direct Insurance Premiums Written:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homeowners

 

$

16,727

 

$

18,728

 

$

(2,001)

 

$

50,964

 

$

57,341

 

$

(6,377)

 

Fire

 

 

11,744

 

 

12,865

 

 

(1,121)

 

 

36,679

 

 

40,776

 

 

(4,097)

 

Mobile Home

 

 

8,796

 

 

8,708

 

 

88

 

 

29,576

 

 

29,484

 

 

92

 

Commercial

 

 

856

 

 

933

 

 

(77)

 

 

2,568

 

 

2,833

 

 

(265)

 

Other

 

 

77

 

 

85

 

 

(8)

 

 

168

 

 

198

 

 

(30)

 

 

 

$

38,200

 

$

41,319

 

$

(3,119)

 

$

119,955

 

$

130,632

 

$

(10,677)

 

 

 

The total direct insurance premiums written for our three largest insurance product lines decreased by $3.0 million and $10.4 million during the three and nine months ended September 30, 2016, respectively, compared with the same periods in 2015, due to the continued effects of efforts to reduce concentrations both geographically and within specific product lines, agent management initiatives and competitive pressure.

 

Net insurance premiums earned by major product line are presented in the table below (in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Variance

 

Nine Months Ended September 30,

 

Variance

 

 

    

2016

    

2015

    

2016 vs 2015

    

2016

    

2015

    

2016 vs 2015

 

Net Insurance Premiums Earned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Homeowners

 

$

16,940

 

$

18,613

 

$

(1,673)

 

$

49,792

 

$

53,149

 

$

(3,357)

 

Fire

 

 

11,909

 

 

12,830

 

 

(921)

 

 

35,838

 

 

37,795

 

 

(1,957)

 

Mobile Home

 

 

8,955

 

 

8,745

 

 

210

 

 

28,897

 

 

27,328

 

 

1,569

 

Commercial

 

 

866

 

 

927

 

 

(61)

 

 

2,509

 

 

2,626

 

 

(117)

 

Other

 

 

77

 

 

81

 

 

(4)

 

 

165

 

 

183

 

 

(18)

 

 

 

$

38,747

 

$

41,196

 

$

(2,449)

 

$

117,201

 

$

121,081

 

$

(3,880)

 

 

Net insurance premiums earned during the three and nine months ended September 30, 2016 decreased compared to the same periods in 2015, primarily due to decreases in net premiums written. The decreases in net insurance premiums earned, when compared with the patterns exhibited in prior quarters and years, reflects the effects of the insurance segment’s previously discussed efforts to manage and diversify its business concentrations and products to minimize the effects of future weather-related events, slightly offset by the benefit of the current reinsurance structure.

 

Noninterest expenses of $30.4 million and $32.4 million during the three months ended September 30, 2016 and 2015, respectively, and $118.5 million and $121.9 million during the nine months ended September 30, 2016 and 2015, respectively, include both loss and LAE expenses and policy acquisition and other underwriting expenses, as well as other noninterest expenses. Loss and LAE are recognized based on formula and case basis estimates for losses reported with respect to direct business, estimates of unreported losses based on past experience and deduction of amounts for reinsurance placed with reinsurers. Loss and LAE during the three months ended September 30, 2016 was $16.1 million, compared with $17.3 million during the same period in 2015, resulting in loss and LAE ratios of 41.4% and 42.1%, respectively. Loss and LAE during the nine months ended September 30, 2016 was $75.2 million, compared with $77.4 million during the same period in 2015, resulting in loss and LAE ratios of 64.2% and 64.0%, respectively. The decrease in the loss and LAE ratio during the three months ended June 30, 2016, compared to the same period in 2015, was primarily a result of the benefit of the current reinsurance structure that has limited the insurance segment’s retention of claims losses associated with sub-catastrophic weather-related events experienced through September 30, 2016. The slightly lower claims loss experience during the nine months ended September 30, 2016, compared to the same period in 2015, was positively impacted primarily by an increase in reinsurance recoverables of $2.7 million. Additionally, net insurance premiums earned decreasing at a comparable rate to loss and LAE expenses also contributed to the stablization in the loss and LAE ratio during the nine months ended September 30, 2016, compared to the same period in 2015.

 

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 September 30,

 

Variance

 

Nine Months Ended September 30,

 

Variance

 

 

    

2016

    

2015

    

2016 vs 2015

    

2016

    

2015

    

2016 vs 2015

 

Amortization of deferred policy acquisition costs

 

$

9,337

 

$

9,869

 

$

(532)

 

$

29,217

 

$

31,034

 

$

(1,817)

 

Other underwriting expenses

 

 

4,606

 

 

4,689

 

 

(83)

 

 

12,780

 

 

12,098

 

 

682

 

Total

 

 

13,943

 

 

14,558

 

 

(615)

 

 

41,997

 

 

43,132

 

 

(1,135)

 

Agency expenses

 

 

(908)

 

 

(835)

 

 

(73)

 

 

(2,672)

 

 

(2,395)

 

 

(277)

 

Total less agency expenses

 

$

13,035

 

$

13,723

 

$

(688)

 

$

39,325

 

$

40,737

 

$

(1,412)

 

Net insurance premiums earned

 

$

38,747

 

$

41,196

 

$

(2,449)

 

$

117,201

 

$

121,081

 

$

(3,880)

 

Expense ratio

 

 

33.6

%  

 

33.3

%  

 

0.3

%  

 

33.6

%  

 

33.6

%  

 

 —

%  

 

 

 

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 during each of the three months ended September 30, 2016 and 2015, and $0.3 million during each of the nine months ended September 30, 2016 and 2015, respectively. Investment and interest income during the nine months ended September 30, 2016 included $0.2 million of intercompany interest earned on note receivables held with Securities Holdings and First Southwest that were paid off in January 2016 and March 2016, respectively.

 

Interest expense was $1.9 million during each of the three months ended September 30, 2016 and 2015, and $5.7 million and $3.6 million during the nine months ended September 30, 2016 and 2015, respectively. During the three months ended June 30, 2015, Hilltop completed its issuance of Senior Notes and used the net proceeds of the offering to redeem all of its outstanding Series B Preferred Stock at an aggregate liquidation value of $114.1 million, plus accrued but unpaid dividends of $0.4 million. Consequently, recurring quarterly interest expense of $1.9 million will be incurred.

 

Noninterest income of $81.3 million during the nine months ended September 30, 2015 represents the recognition of a bargain purchase gain related to the SWS Merger. Included in the bargain purchase gain was a reversal of a $33.4 million valuation allowance against SWS deferred tax assets. This amount is based on our expected ability to realize these acquired deferred tax assets through our consolidated core earnings, the implementation of certain tax planning strategies and reversal of timing differences. SWS’s net operating loss carryforwards are subject to an annual Section 382 limitation on their usage because of the ownership change.

 

Noninterest expenses of $10.0 million and $6.0 million during the three months ended September 30, 2016 and 2015, respectively, and $22.4 million and $17.5 million during the nine months ended September 30, 2016 and 2015, respectively, were primarily comprised of employees’ compensation and benefits and professional fees, including corporate governance, legal and transaction costs. During the three months ended September 30, 2016, compared with the same period in 2015, noninterest expenses primarily included increases in transaction-related costs directly attributable to the SWS Merger of $3.8 million and professional fees of $0.3 million. During the nine months ended September 30, 2016, compared with the same period in 2015, noninterest expenses primarily included increases of $2.8 million in transaction-related costs directly attributable to the SWS Merger, employees’ compensation and benefits costs of $0.6 million associated with increases in headcount and incentive compensation costs, professional fees of $0.9 million, and occupancy and equipment expenses of $0.5 million. Specifically, during the nine months ended September 30, 2016, Hilltop incurred pre-tax transaction costs related to the SWS Merger of $6.7 million, compared with $3.5 million in pre-tax transaction costs and $0.4 million in pre-tax integration costs associated with professional fees during the nine months ended September 30, 2015.

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Financial Condition

 

The following discussion contains a more detailed analysis of our financial condition at September 30, 2016 as compared with December 31, 2015.

 

Securities Portfolio

 

At September 30, 2016, 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).

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2016

    

2015

 

Trading securities, at fair value

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

6,105

 

$

20,481

 

U.S. government agencies:

 

 

 

 

 

 

 

Bonds

 

 

37,125

 

 

36,244

 

Residential mortgage-backed securities

 

 

98,681

 

 

12,505

 

Commercial mortgage-backed securities

 

 

15,817

 

 

19,280

 

Collateralized mortgage obligations

 

 

8,984

 

 

264

 

Other

 

 

120

 

 

 —

 

Corporate debt securities

 

 

71,987

 

 

34,735

 

States and political subdivisions

 

 

87,659

 

 

58,588

 

Unit investment trusts

 

 

66,649

 

 

18,400

 

Private-label securitized product

 

 

7,234

 

 

12,324

 

Other

 

 

1,743

 

 

1,325

 

 

 

 

402,104

 

 

214,146

 

Securities available for sale, at fair value

 

 

 

 

 

 

 

U.S. Treasury securities

 

 

33,751

 

 

44,603

 

U.S. government agencies:

 

 

 

 

 

 

 

Bonds

 

 

108,394

 

 

296,636

 

Residential mortgage-backed securities

 

 

95,944

 

 

35,853

 

Commercial mortgage-backed securities

 

 

9,180

 

 

9,207

 

Collateralized mortgage obligations

 

 

113,081

 

 

52,701

 

Corporate debt securities

 

 

89,571

 

 

97,950

 

States and political subdivisions

 

 

93,799

 

 

118,725

 

Commercial mortgage-backed securities

 

 

520

 

 

531

 

Equity securities

 

 

19,480

 

 

17,500

 

 

 

 

563,720

 

 

673,706

 

Securities held to maturity, at amortized cost

 

 

 

 

 

 

 

U.S. Treasury securities

 

 

 —

 

 

25,146

 

U.S. government agencies:

 

 

 

 

 

 

 

Bonds

 

 

46,211

 

 

69,379

 

Residential mortgage-backed securities

 

 

21,016

 

 

23,735

 

Commercial mortgage-backed securities

 

 

24,850

 

 

18,658

 

Collateralized mortgage obligations

 

 

235,336

 

 

167,541

 

States and political subdivisions

 

 

38,521

 

 

27,563

 

 

 

 

365,934

 

 

332,022

 

Total securities portfolio

 

$

1,331,758

 

$

1,219,874

 

 

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We had net unrealized gains of $11.9 million and $3.7 million at September 30, 2016 and December 31, 2015, respectively, related to the available for sale investment portfolio, and a net unrealized gain associated with the securities held to maturity portfolio of $3.8 million at September 30, 2016, compared with a net unrealized loss of $0.6 million at December 31, 2015.

 

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 September 30, 2016, the banking segment’s securities portfolio of $812.1 million was comprised of trading securities of $16.2 million, available for sale securities of $430.0 million and held to maturity securities of $365.9 million.

 

Broker-Dealer Segment

 

Our broker-dealer segment holds securities to support sales, underwriting and other customer activities. 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 $385.9 million at September 30, 2016 as trading. 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 obligation 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 $164.6 million at September 30, 2016.

 

Insurance Segment

 

Our 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. Our insurance segment invests the premiums it receives from policyholders until they are needed to pay policyholder claims or other expenses. At September 30, 2016, the insurance segment’s securities portfolio was comprised of $133.7 million in available for sale securities and $4.8 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 table 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

 

September 30, 2016

 

PCI Loans

 

Loans

 

Loans

 

Commercial and industrial

 

$

1,697,890

 

$

10,003

 

$

1,707,893

 

Real estate

 

 

2,610,854

 

 

41,925

 

 

2,652,779

 

Construction and land development

 

 

792,027

 

 

3,638

 

 

795,665

 

Consumer

 

 

42,806

 

 

336

 

 

43,142

 

Broker-dealer

 

 

475,176

 

 

 —

 

 

475,176

 

Non-covered loans, gross

 

 

5,618,753

 

 

55,902

 

 

5,674,655

 

Allowance for loan losses

 

 

(50,060)

 

 

(2,565)

 

 

(52,625)

 

Non-covered loans, net of allowance

 

$

5,568,693

 

$

53,337

 

$

5,622,030

 

 

 

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Loans, excluding

    

PCI

    

Total

 

December 31, 2015

 

PCI Loans

 

Loans

 

Loans

 

Commercial and industrial

 

$

1,539,455

 

$

13,350

 

$

1,552,805

 

Real estate

 

 

2,260,464

 

 

52,775

 

 

2,313,239

 

Construction and land development

 

 

700,206

 

 

5,150

 

 

705,356

 

Consumer

 

 

44,893

 

 

779

 

 

45,672

 

Broker-dealer

 

 

602,968

 

 

 —

 

 

602,968

 

Non-covered loans, gross

 

 

5,147,986

 

 

72,054

 

 

5,220,040

 

Allowance for loan losses

 

 

(40,929)

 

 

(4,486)

 

 

(45,415)

 

Non-covered loans, net of allowance

 

$

5,107,057

 

$

67,568

 

$

5,174,625

 

 

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 $6.6 billion and $5.9 billion at September 30, 2016 and December 31, 2015, respectively. The banking segment’s non-covered loan portfolio includes a warehouse line of credit extended to PrimeLending, of which $1.5 billion and $1.4 billion was drawn at September 30, 2016 and December 31, 2015, respectively. This warehouse line of credit was temporarily increased to a commitment of $1.9 billion from $1.5 billion until November 30, 2016. 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 September 30, 2016, 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 32.5%, 14.2% and 14.0%, respectively, of the banking segment’s total non-covered loans at September 30, 2016. The banking segment’s non-covered loan concentrations were within regulatory guidelines at September 30, 2016.

 

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 $475.0 million and $602.8 million at September 30, 2016 and December 31, 2015, respectively. This decrease was primarily attributable to decreases of $76.2 million in borrowings in margin accounts and $37.8 million in receivables from correspondents.

 

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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).

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31, 

 

 

    

2016

    

2015

 

Loans held for sale:

 

 

 

 

 

 

 

Unpaid principal balance

 

$

1,562,126

 

$

1,410,445

 

Fair value adjustment

 

 

66,393

 

 

50,390

 

 

 

$

1,628,519

 

$

1,460,835

 

IRLCs:

 

 

 

 

 

 

 

Unpaid principal balance

 

$

1,592,523

 

$

944,942

 

Fair value adjustment

 

 

44,177

 

 

23,762

 

 

 

$

1,636,700

 

$

968,704

 

 

The mortgage origination segment uses forward commitments to mitigate interest rate risk associated with its loans held for sale and IRLCs. The notional amounts of these forward commitments at September 30, 2016 and December 31, 2015 were $2.5 billion and $2.0 billion, respectively, while the related estimated fair values were ($7.5) million and ($1.2) 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 5 years and 10 years, respectively, and the loss recovery provisions to the FDIC are in effect for 8 years and 10 years, respectively, from the Bank Closing Date. In accordance with the loss-share agreements, the Bank may be required to make a “true-up” payment to the FDIC approximately ten years following the Bank Closing Date if our actual net realized losses over the life of the loss-share agreements are less than the FDIC’s initial estimate of losses on covered assets. The “true-up” payment is calculated using a defined formula set forth in the Purchase and Assumption Agreement by and among the FDIC (as receiver of FNB), the Bank and the FDIC (the “P&A Agreement”). As of September 30, 2016, the Bank estimated that the sum of covered losses and reimbursable expenses subject to the loss-share agreements will exceed $240.4 million, but will not exceed $365.7 million. Unless actual plus projected covered losses and reimbursable expenses exceed $365.7 million, the Bank will not record additional amounts to the FDIC Indemnification Asset. As of September 30, 2016, the Bank had billed $148.5 million of covered net losses to the FDIC, of which 80%, or $118.8 million, were reimbursable under the loss-share agreements. As of September 30, 2016, the Bank had received aggregate reimbursements of $118.8 million from the FDIC, which represented reimbursable covered losses and expenses through June 30, 2016. 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 $10.8 million at September 30, 2016 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. If the Bank continues to experience favorable resolutions within its covered assets portfolio and covered losses are lower than currently estimated, the Bank may be required to increase its “true-up” payment accrual

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and recognize negative accretion (amortization) on the FDIC Indemnification Asset. These changes will be partially offset by increased discount accretion on the covered loan portfolio.

 

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

 

September 30, 2016

 

PCI Loans

 

Loans

 

Loans

 

Commercial and industrial

 

$

1,436

 

$

3,990

 

$

5,426

 

Real estate

 

 

126,594

 

 

146,746

 

 

273,340

 

Construction and land development

 

 

4,418

 

 

9,576

 

 

13,994

 

Covered loans, gross

 

 

132,448

 

 

160,312

 

 

292,760

 

Allowance for loan losses

 

 

(44)

 

 

(685)

 

 

(729)

 

Covered loans, net of allowance

 

$

132,404

 

$

159,627

 

$

292,031

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Loans, excluding

    

PCI

    

Total

 

December 31, 2015

 

PCI Loans

 

Loans

 

Loans

 

Commercial and industrial

 

$

1,294

 

$

7,507

 

$

8,801

 

Real estate

 

 

147,502

 

 

193,546

 

 

341,048

 

Construction and land development

 

 

9,524

 

 

20,921

 

 

30,445

 

Covered loans, gross

 

 

158,320

 

 

221,974

 

 

380,294

 

Allowance for loan losses

 

 

(32)

 

 

(1,500)

 

 

(1,532)

 

Covered loans, net of allowance

 

$

158,288

 

$

220,474

 

$

378,762

 

 

At September 30, 2016, 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 62.4% and 31.0%, respectively, of the banking segment’s total covered loans at September 30, 2016. The banking segment’s covered loan concentrations were within regulatory guidelines at September 30, 2016.

 

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 at the end of each quarter, or more frequently as deemed necessary, to 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

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acquired loans into various loan pools based on a minimum of two layers of common risk characteristics for the purpose of determining their respective fair values as of their acquisition dates, and for applying the subsequent recognition and measurement provisions for income accretion and impairment testing. The common risk characteristics used for the pooling of the FNB and SWS PCI loans are risk grade and loan collateral type. The loans acquired in the Bank Transactions were initially recorded at fair value with no carryover of any allowance for loan losses.

 

Provisions for loan losses are charged to operations to record the total allowance for loan losses at a level deemed appropriate by the banking segment’s management based on such factors as the volume and type of lending it conducted, the amount of non-performing loans and related collateral security, the present level of the allowance for loan losses, the results of recent regulatory examinations, generally accepted accounting principles, general economic conditions and other factors related to the ability to collect loans in its portfolio. The provision for loan losses, primarily in the banking segment, was $4.0 million and $5.6 million during the three months ended September 30, 2016 and 2015, respectively, and $36.3 million and $8.4 million during the nine months ended September 30, 2016 and 2015, respectively. The significant increase in the provision for loan losses during the nine months ended September 30, 2016, compared with the same period in 2015, was primarily the result of the previously mentioned $24.5 million charge-off of a single large loan by the Bank during the second quarter of 2016.

 

The allowance for loan losses is subject to regulatory examination and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and the size of the allowance. While we believe we have an appropriate allowance for our existing non-covered and covered portfolios at September 30, 2016, 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 September 30,

 

Nine Months Ended September 30,

 

Non-Covered Portfolio

    

2016

    

2015

    

2016

    

2015

 

Balance, beginning of period

 

$

51,013

 

$

40,484

 

$

45,415

 

$

37,041

 

Provisions charged to operations

 

 

4,719

 

 

4,280

 

 

37,098

 

 

7,659

 

Recoveries of non-covered loans previously charged off:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

295

 

 

927

 

 

1,432

 

 

2,849

 

Real estate

 

 

196

 

 

195

 

 

364

 

 

329

 

Construction and land development

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Consumer

 

 

20

 

 

29

 

 

104

 

 

82

 

Broker-dealer

 

 

 —

 

 

 —

 

 

 —

 

 

123

 

Total recoveries

 

 

511

 

 

1,151

 

 

1,900

 

 

3,383

 

Non-covered loans charged off:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

3,550

 

 

2,685

 

 

30,333

 

 

4,305

 

Real estate

 

 

1

 

 

212

 

 

1,299

 

 

581

 

Construction and land development

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Consumer

 

 

67

 

 

29

 

 

155

 

 

208

 

Broker-dealer

 

 

 —

 

 

 —

 

 

1

 

 

 —

 

Total charge-offs

 

 

3,618

 

 

2,926

 

 

31,788

 

 

5,094

 

Net charge-offs

 

 

(3,107)

 

 

(1,775)

 

 

(29,888)

 

 

(1,711)

 

Balance, end of period

 

$

52,625

 

$

42,989

 

$

52,625

 

$

42,989

 

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

 

 

 

 

 

 

 

 

0.93

%  

 

0.87

%

 

 

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

Covered Portfolio

    

2016

    

2015

    

2016

    

2015

 

Balance, beginning of period

 

$

1,455

 

$

934

 

$

1,532

 

$

4,611

 

Provisions charged to (recapture from) operations

 

 

(729)

 

 

1,313

 

 

(825)

 

 

779

 

Recoveries of covered loans previously charged off:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 —

 

 

(14)

 

 

 —

 

 

6

 

Real estate

 

 

 —

 

 

2

 

 

17

 

 

101

 

Construction and land development

 

 

3

 

 

 —

 

 

104

 

 

 —

 

Total recoveries

 

 

3

 

 

(12)

 

 

121

 

 

107

 

Covered loans charged off:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 —

 

 

(38)

 

 

6

 

 

915

 

Real estate

 

 

 —

 

 

403

 

 

42

 

 

2,702

 

Construction and land development

 

 

 —

 

 

 —

 

 

51

 

 

10

 

Total charge-offs

 

 

 —

 

 

365

 

 

99

 

 

3,627

 

Net recoveries (charge-offs)

 

 

3

 

 

(377)

 

 

22

 

 

(3,520)

 

Balance, end of period

 

$

729

 

$

1,870

 

$

729

 

$

1,870

 

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

 

 

 

 

 

 

 

 

0.25

%  

 

0.40

%

 

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 table below (dollars in thousands).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

December 31, 2015

 

 

    

    

 

    

% of

    

    

 

    

% of

 

 

 

 

 

 

Gross

 

 

 

 

Gross

 

 

 

 

 

 

NonCovered

 

 

 

 

NonCovered

 

Non-Covered Portfolio

 

Reserve

 

Loans

 

Reserve

 

Loans

 

Commercial and industrial

 

$

21,438

 

30.10

%  

$

19,845

 

29.75

%

Real estate (including construction and land development)

 

 

30,492

 

60.77

%  

 

25,047

 

57.83

%

Consumer

 

 

506

 

0.76

%  

 

314

 

0.87

%

Broker-dealer

 

 

189

 

8.37

%  

 

209

 

11.55

%

Total

 

$

52,625

 

100.00

%  

$

45,415

 

100.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

December 31, 2015

 

 

    

    

 

    

% of

    

    

 

    

% of

 

 

 

 

 

 

Gross

 

 

 

 

Gross

 

 

 

 

 

 

Covered

 

 

 

 

Covered

 

Covered Portfolio

 

Reserve

 

loans

 

Reserve

 

Loans

 

Commercial and industrial

 

$

217

 

1.85

%  

$

758

 

2.31

%

Real estate (including construction and land development)

 

 

512

 

98.15

%  

 

774

 

97.69

%

Total

 

$

729

 

100.00

%  

$

1,532

 

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 nine credit relationships totaling $13.3 million of potential problem loans at September 30, 2016, compared with two credit relationships totaling $1.6 million of non-covered potential problem loans at December 31, 2015. Within our covered loan portfolio, we had one credit relationship totaling $0.5 million of potential problem loans at September 30, 2016, compared with one credit relationship totaling $0.5 million of potential problem loans at December 31, 2015.

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Non-Performing Assets

 

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

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

    

2016

    

2015

 

 

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

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

19,651

 

$

17,764

 

 

Real estate

 

 

4,817

 

 

7,160

 

 

Construction and land development

 

 

703

 

 

114

 

 

Consumer

 

 

50

 

 

7

 

 

Broker-dealer

 

 

 —

 

 

 —

 

 

 

 

$

25,221

 

$

25,045

 

 

 

 

 

 

 

 

 

 

 

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

 

 

0.34

%  

 

0.37

%

 

 

 

 

 

 

 

 

 

 

Non-covered other real estate owned

 

$

3,063

 

$

394

 

 

 

 

 

 

 

 

 

 

 

Other repossessed assets

 

$

1,654

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

Non-covered non-performing assets

 

$

29,938

 

$

25,439

 

 

 

 

 

 

 

 

 

 

 

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

 

 

0.24

%  

 

0.21

%

 

 

 

 

 

 

 

 

 

 

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

 

$

41,824

 

$

50,776

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings included in accruing non-covered loans

 

$

1,216

 

$

1,418

 

 

 

At September 30, 2016, total non-covered non-performing assets increased $4.5 million to $29.9 million, compared with $25.4 million at December 31, 2015. Non-covered non-performing loans totaled $25.2 million at September 30, 2016 and $25.0 million at December 31, 2015. At September 30, 2016, non-covered non-accrual loans included 19

commercial and industrial relationships with loans of $19.7 million secured by accounts receivable, life insurance, oil and gas, livestock and equipment. Non-covered non-accrual loans at September 30, 2016 also included $4.8 million characterized as real estate loans, including three commercial real estate loan relationships of $1.9 million and loans secured by residential real estate of $2.9 million, $1.7 million of which were classified as loans held for sale, as well as construction and land development loans of $0.7 million. At December 31, 2015, non-covered non-accrual loans included 20 commercial and industrial relationships with loans of $17.4 million secured by accounts receivable, inventory, life insurance, livestock, and oil and gas, and a total of $0.3 million in lease financing receivables. Non-covered non-accrual loans at December 31, 2015 also included $7.2 million characterized as real estate loans, including four commercial real estate loan relationships of $4.6 million and loans secured by residential real estate of $2.6 million, $1.6 million of which were classified as loans held for sale, as well as construction and land development loans of $0.1 million.

 

Non-covered OREO increased $2.7 million to $3.1 million at September 30, 2016, compared with $0.4 million at December 31, 2015. Changes in non-covered OREO included the addition of six properties totaling $2.8 million. At September 30, 2016, non-covered OREO included commercial properties of $2.4 million and other real estate properties of $0.7 million, while at December 31, 2015, non-covered OREO included commercial properties of $0.4 million.

 

Non-covered non-PCI loans past due 90 days or more and still accruing were $41.8 million and $50.8 million at September 30, 2016 and December 31, 2015, respectively, substantially all of which were loans held for sale and guaranteed by U.S. Government agencies, including loans that are subject to repurchase, or have been repurchased, by PrimeLending.

 

At September 30, 2016, troubled debt restructurings (“TDRs”) on non-covered loans totaled $7.1 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 $5.9 million reported in non-accrual loans. At December 31, 2015, TDRs on non-covered loans totaled $9.3 million, of which $1.4 million relate to non-covered loans that are considered to be performing and non-covered non-performing loans of $7.9 million reported in non-accrual loans.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

    

2016

    

2015

 

 

Covered loans accounted for on a non-accrual basis:

 

 

 

 

 

 

 

 

Commercial and industrial

 

$

52

 

$

68

 

 

Real estate

 

 

3,529

 

 

2,958

 

 

Construction and land development

 

 

50

 

 

5,952

 

 

 

 

$

3,631

 

$

8,978

 

 

 

 

 

 

 

 

 

 

 

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

 

 

1.24

%  

 

2.36

%

 

 

 

 

 

 

 

 

 

 

Covered other real estate owned:

 

 

 

 

 

 

 

 

Real estate - residential

 

$

8,791

 

$

17,718

 

 

Real estate - commercial

 

 

15,749

 

 

33,425

 

 

Construction and land development - residential

 

 

8,838

 

 

9,190

 

 

Construction and land development - commercial

 

 

28,610

 

 

38,757

 

 

 

 

$

61,988

 

$

99,090

 

 

 

 

 

 

 

 

 

 

 

Other repossessed assets

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

Covered non-performing assets

 

$

65,619

 

$

108,068

 

 

 

 

 

 

 

 

 

 

 

Covered non-performing assets as a percentage of total assets

 

 

0.53

%  

 

0.91

%

 

 

 

 

 

 

 

 

 

 

Covered loans past due 90 days or more and still accruing

 

$

303

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

Troubled debt restructurings included in accruing covered loans

 

$

506

 

$

515

 

 

 

At September 30, 2016, covered non-performing assets decreased by $42.4 million to $65.6 million, compared with $108.1 million at December 31, 2015, due to decreases in covered non-accrual loans of $5.3 million and covered other real estate owned of $37.1 million. Covered non-performing loans totaled $3.6 million at September 30, 2016 and $9.0 million at December 31, 2015. At September 30, 2016, covered non-performing loans included two commercial and industrial relationships with loans of $0.1 million, one commercial real estate loan relationship of $0.3 million and 29 residential real estate loan relationships of $3.2 million. At December 31, 2015, covered non-performing loans included four commercial and industrial relationships with loans of $0.1 million secured by accounts receivable and inventory, two commercial real estate loan relationships of $0.4 million, 25 residential real estate loan relationships of $2.5 million, as well as construction and land development loans of $6.0 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 $37.1 million to $62.0 million at September 30, 2016, compared with $99.1 million at December 31, 2015. The decrease was primarily due to the disposal of 165 properties totaling $34.5 million and fair value valuation decreases of $14.3 million, partially offset by the addition of 100 properties totaling $11.7 million.

 

Covered non-PCI loans past due 90 days or more and still accruing totaled $0.3 million at September 30, 2016 and included one residential real estate loan and two commercial and industrial loans. There were no covered non-PCI loans past due 90 days or more and still accruing at December 31, 2015.

 

At September 30, 2016, TDRs on covered loans totaled $1.4 million, of which $0.5 million relate to covered loans that are considered to be performing and covered non-performing loans of $0.9 million included in non-accrual loans. At December 31, 2015, TDRs on covered loans totaled $1.5 million, of which $0.5 million relate to covered loans that are considered to be performing and covered non-performing loans of $1.0 million included in non-accrual loans.

 

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Insurance Losses and Loss Adjustment Expenses

 

At September 30, 2016 and December 31, 2015, our gross reserve for unpaid losses and LAE was $44.0 million and $44.4 million, respectively, including estimated recoveries from reinsurance of $15.5 million and $13.5 million, respectively. The increase in the gross reserve for unpaid losses and LAE was primarily due to increased reserves attributable to significant losses experienced from severe weather events. 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 $7.0 billion during the nine months ended September 30, 2016, and was relatively consistent with average deposits of $7.0 billion during each of the nine months ended September 30, 2015 and the year ended December 31, 2015. 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).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

Year Ended December 31,

 

 

 

2016

 

2015

 

2015

 

 

    

Average

    

Average

    

Average

    

Average

    

Average

    

Average

 

 

 

Balance

 

Rate Paid

 

Balance

 

Rate Paid

 

Balance

 

Rate Paid

 

Noninterest-bearing demand deposits

 

$

2,203,011

 

0.00

%  

$

2,166,607

 

0.00

%  

$

2,187,336

 

0.00

%

Interest-bearing demand deposits

 

 

3,139,554

 

0.15

%  

 

3,015,738

 

0.14

%  

 

3,011,647

 

0.13

%

Savings deposits

 

 

308,592

 

0.16

%  

 

306,419

 

0.15

%  

 

297,857

 

0.15

%

Time deposits

 

 

1,371,190

 

0.79

%  

 

1,531,443

 

0.74

%  

 

1,494,573

 

0.74

%

 

 

$

7,022,347

 

0.23

%  

$

7,020,207

 

0.23

%  

$

6,991,413

 

0.22

%

 

 

 

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Table of Contents

Borrowings

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

December 31, 2015

 

 

 

    

    

 

    

Average

    

    

 

    

Average

 

 

 

 

Balance

 

Rate Paid

 

Balance

 

Rate Paid

 

 

Short-term borrowings

 

$

1,265,022

 

0.66

%  

$

947,373

 

0.56

%

 

Notes payable

 

 

313,313

 

4.00

%  

 

238,716

 

3.93

%

 

Junior subordinated debentures

 

 

67,012

 

3.93

%  

 

67,012

 

3.58

%

 

 

 

$

1,645,347

 

1.63

%  

$

1,253,101

 

1.38

%

 

 

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 $317.6 million increase in short-term borrowings at September 30, 2016 compared with December 31, 2015 included an increase of $210.7 million in short-term bank loans and securities sold under agreements to repurchase used by the Hilltop Broker-Dealers to finance their activities, as well as an increase in borrowings of $106.9 million in our banking segment primarily associated with an an increase in borrowings under the mortgage origination segment’s warehouse line of credit with the Bank. Notes payable at September 30, 2016 of $313.3 million was comprised of $148.3 million related to Senior Notes, net of loan origination fees, insurance segment term notes of $50.0 million, FHLB borrowings with an original maturity greater than one year held by the former SWS FSB within the banking segment of $103.2 million and mortgage origination segment borrowings of $11.8 million. 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 September 30, 2016, Hilltop had $68.4 million in freely available cash and cash equivalents, an increase of $12.9 million from $55.5 million at December 31, 2015. This increase in available cash was primarily due to the net effects of Hilltop’s receipt of a $50.0 million dividend from PlainsCapital, a $20.0 million contribution of capital to Hilltop Securities, and payment of transaction-related costs associated with the SWS Merger 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. The current short-term liquidity needs of Hilltop include operating expenses, interest on debt obligations, dividend payments to stockholders and potential stock repurchases.

 

Dividend Declaration

 

On October 27, 2016, our Board of Directors declared a quarterly cash dividend of $0.06 per common share, payable on November 30, 2016 to all common stockholders of record as of the close of business on November 15, 2016. 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.

 

Senior Notes due 2025

 

Our Senior Notes bear interest at a fixed rate of 5% per year, payable semi-annually in arrears in cash on April 15 and October 15 of each year, commencing on October 15, 2015. The Senior Notes will mature on April 15, 2025, unless we redeem the Senior Notes, in whole at any time or in part from time to time, on or after January 15, 2025 (three months prior to the maturity date of the Senior Notes) at our election at a redemption price equal to 100% of the principal amount of the Senior Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date.

 

The Senior Notes bear interest at a rate of 5% per year, payable semi-annually in arrears in cash on April 15 and October 15 of each year, commencing on October 15, 2015. The Senior Notes will mature on April 15, 2025, unless we redeem the Senior Notes, in whole at any time or in part from time to time, on or after January 15, 2025 (three months prior to the maturity date of the Senior Notes) at our election at a redemption price equal to 100% of the principal amount of the Senior Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date. At September 30,

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2016, $150.0 million of our Senior Notes was outstanding. During the three months ended September 30, 2016, we accrued interest expense of $1.9 million on the Senior Notes.

 

Stock Repurchase Program

 

During the second quarter of 2016, our Board of Directors approved a stock repurchase program under which it authorized us 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. As of September 30, 2016, the Company had not repurchased any shares of its outstanding common stock under this stock repurchase program. The extent to which we repurchase our shares and the timing of such repurchases depends upon market conditions and other corporate considerations, as determined by Hilltop’s management team. The purchases will be funded from available cash balances. Any retired shares will be returned to our pool of authorized but unissued shares of common stock. 

 

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. 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 $10.8 million at September 30, 2016 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 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 September 30, 2016, under guidance issued by the Board of Governors of the Federal Reserve System.

 

At September 30, 2016, Hilltop exceeded all regulatory capital requirements in accordance with Basel III with a total capital to risk weighted assets ratio of 18.82%, Tier 1 capital to risk weighted assets ratio of 18.37%, common equity Tier 1 capital to risk weighted assets ratio of 17.80% and a Tier 1 capital to average assets, or leverage, ratio of 13.41%.

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The Bank’s consolidated actual capital amounts and ratios at September 30, 2016 resulted in it being considered “well-capitalized” under regulatory requirements in accordance with Basel III, and included a total capital to risk weighted assets ratio of 15.90%, Tier 1 capital to risk weighted assets ratio of 15.15%, common equity Tier 1 capital to risk weighted assets ratio of 15.15% and a Tier 1 capital to average assets, or leverage, ratio of 12.65%.

 

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 noted above, Hilltop and the Bank exceed each of the capital conservation buffer requirements in effect as of September 30, 2016, as well as the fully phased-in requirements through 2019.

 

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 2015 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 $7.0 billion at September 30, 2016, a slight increase of $77.9 million from $7.0 billion at December 31, 2015. 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 September 30, 2016, money market deposits, including brokered deposits, were $1.7 billion; time deposits, including brokered deposits, were $1.3 billion; and noninterest bearing demand deposits were $2.2 billion. Money market deposits, including brokered deposits, increased by $76.1 million from $1.6 million and time deposits, including brokered deposits, decreased $76.8 million from $1.4 billion at December 31, 2015.

 

The Bank’s 15 largest depositors, excluding Hilltop and Hilltop Securities, accounted for 9.00% of the Bank’s total deposits, and the Bank’s five largest depositors, excluding Hilltop and Hilltop Securities, accounted for 4.62% of the Bank’s total deposits at September 30, 2016. The loss of one or more of our largest Bank customers, or a significant decline in our deposit balances due to ordinary course fluctuations related to these customers’ businesses, could adversely affect our liquidity and might require us to raise deposit rates to attract new deposits, purchase federal funds or borrow funds on a short-term basis to replace such deposits.

 

Broker-Dealer Segment

 

The Hilltop Broker-Dealers relies on its 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 September 30, 2016, Hilltop Securities had credit arrangements with five unaffiliated banks of up to $700.0 million. These credit arrangements are used to finance securities owned, securities

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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 September 30, 2016, Hilltop Securities had borrowed $212.0 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 of up to $1.9 billion maintained with the Bank. At September 30, 2016, PrimeLending had outstanding borrowings of $1.5 billion against the warehouse line of credit. This warehouse line of credit was temporarily increased from a commitment of $1.5 billion until November 30, 2016. 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 September 30, 2016.

 

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 each of the Bank and Wells Fargo Bank, N.A. (“Wells Fargo”) of up to $20.0 million. At September 30, 2016, Ventures had $10.9 million and $11.8 million in borrowings under its Bank warehouse line of credit and its Wells Fargo line of credit, respectively. Mutual has an available warehouse line of credit with the Bank of up to $10.0 million, of which no borrowings were outstanding at September 30, 2016.

 

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 $222.2 million, or 90.2%, equity investments of $19.4 million and other investments of $4.8 million comprised NLC’s $246.4 million in total cash and investments at September 30, 2016. 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.

 

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

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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 $1.9 billion at September 30, 2016 and outstanding financial and performance standby letters of credit of $37.4 million at September 30, 2016.

 

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, 2015, 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 2015 Form 10-K.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Our assessment of market risk as of September 30, 2016 indicates there are no material changes in the quantitative and qualitative disclosures from those previously reported in our 2015 Form 10-K, except as discussed below.

 

The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. Market risk represents the risk of loss that may result from changes in value of a financial instrument as a result of changes in interest rates, market prices and the credit perception of an issuer. The disclosure is not meant to be a precise indicator of expected future losses, but rather an indicator of reasonably possible losses, and therefore our actual results may differ from any of the following projections. This forward-looking information provides an indicator of how we view and manage our ongoing market risk exposures.

 

Banking Segment

 

The banking segment is engaged primarily in the business of investing funds obtained from deposits and borrowings in interest-earning loans and investments, and our primary component of market risk is sensitivity to changes in interest rates. Consequently, our earnings depend to a significant extent on our net interest income, which is the difference between interest income on loans and investments and our interest expense on deposits and borrowings. To the extent that our interest-bearing liabilities do not reprice or mature at the same time as our interest-bearing assets, we are subject to interest rate risk and corresponding fluctuations in net interest income.

 

There are several common sources of interest rate risk that must be effectively managed if there is to be minimal impact on our earnings and capital. Repricing risk arises largely from timing differences in the pricing of assets and liabilities. 

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Reinvestment risk refers to the reinvestment of cash flows from interest payments and maturing assets at lower or higher rates. Basis risk exists when different yield curves or pricing indices do not change at precisely the same time or in the same magnitude such that assets and liabilities with the same maturity are not all affected equally. Yield curve risk refers to unequal movements in interest rates across a full range of maturities.

 

We have employed asset/liability management policies that attempt to manage our interest-earning assets and interest-bearing liabilities, thereby attempting to control the volatility of net interest income, without having to incur unacceptable levels of risk. We employ procedures which include interest rate shock analysis, repricing gap analysis and balance sheet decomposition techniques to help mitigate interest rate risk in the ordinary course of business. In addition, the asset/liability management policies permit the use of various derivative instruments to manage interest rate risk or hedge specified assets and liabilities.

 

An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market interest rates. The management of interest rate risk is performed by analyzing the maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time (“GAP”) and by analyzing the effects of interest rate changes on net interest income over specific periods of time by projecting the performance of the mix of assets and liabilities in varied interest rate environments. Interest rate sensitivity reflects the potential effect on net interest income resulting from a movement in interest rates. A company is considered to be asset sensitive, or have a positive GAP, when the amount of its interest-earning assets maturing or repricing within a given period exceeds the amount of its interest-bearing liabilities also maturing or repricing within that time period. Conversely, a company is considered to be liability sensitive, or have a negative GAP, when the amount of its interest-bearing liabilities maturing or repricing within a given period exceeds the amount of its interest-earning assets also maturing or repricing within that time period. During a period of rising interest rates, a negative GAP would tend to affect net interest income adversely, while a positive GAP would tend to result in an increase in net interest income. During a period of falling interest rates, a negative GAP would tend to result in an increase in net interest income, while a positive GAP would tend to affect net interest income adversely. However, it is our intent to remain relatively balanced so that changes in rates do not have a significant impact on earnings.

 

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).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

    

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

 

$

4,528,313

 

$

649,554

 

$

873,379

 

$

294,919

 

$

603,900

 

$

6,950,065

 

Securities

 

 

107,682

 

 

192,316

 

 

172,411

 

 

70,068

 

 

339,067

 

 

881,544

 

Federal funds sold and securities purchased under agreements to resell

 

 

40,419

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

40,419

 

Other interest sensitive assets

 

 

254,432

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

254,432

 

Total interest sensitive assets

 

 

4,930,846

 

 

841,870

 

 

1,045,790

 

 

364,987

 

 

942,967

 

 

8,126,460

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest sensitive liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing checking

 

$

2,920,664

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

2,920,664

 

Savings

 

 

277,385

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

277,385

 

Time deposits

 

 

343,752

 

 

566,391

 

 

308,306

 

 

39,844

 

 

16,791

 

 

1,275,084

 

Notes payable and other borrowings

 

 

815,097

 

 

102,742

 

 

95,449

 

 

3,978

 

 

7,485

 

 

1,024,751

 

Total interest sensitive liabilities

 

 

4,356,898

 

 

669,133

 

 

403,755

 

 

43,822

 

 

24,276

 

 

5,497,884

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest sensitivity gap

 

$

573,948

 

$

172,737

 

$

642,035

 

$

321,165

 

$

918,691

 

$

2,628,576

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative interest sensitivity gap

 

$

573,948

 

$

746,685

 

$

1,388,720

 

$

1,709,885

 

$

2,628,576

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of cumulative gap to total interest sensitive assets

 

 

7.06

%  

 

9.19

%  

 

17.09

%  

 

21.04

%  

 

32.35

%  

 

 

 

 

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

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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 September 30, 2016 (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

 

$

41,492

 

13.86

%  

$

217,938

 

14.86

%

+200

 

$

21,092

 

7.05

%  

$

154,454

 

10.53

%

+100

 

$

2,229

 

0.74

%  

$

76,083

 

5.19

%

-50

 

$

2,282

 

0.76

%  

$

(63,321)

 

(4.32)

%

 

The projected changes in net interest income and economic value of equity to changes in interest rates at September 30, 2016 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 significant 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.

 

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.

 

Except as set forth below, there have been no material changes to the risk factors disclosed under “Item 1A. Risk Factors” of our 2015 Form 10-K. For additional information concerning our risk factors, please refer to “Item 1A. Risk Factors” of our 2015 Form 10-K.

 

There can be no assurance that we will continue to declare cash dividends or repurchase stock.

 

On October 27, 2016, we announced that our Board of Directors authorized a dividend program under which we intend to pay quarterly dividends on our common stock, subject to quarterly declarations by our Board of Directors. During the second quarter of 2016, our Board of Directors approved a stock repurchase program under which it authorized us to repurchase, in the aggregate, up to $50.0 million of our outstanding common stock. Any future declarations, amount and timing of any dividends and/or the amount and timing of such stock repurchases are subject to capital availability and the discretion of our Board of Directors, which must evaluate, among other things, whether cash dividends and/or stock repurchases are in the best interest of our stockholders and are in compliance with all applicable laws and any agreements containing provisions that limit our ability to declare and pay cash dividends and/or repurchase stock. Our ability to pay dividends and/or repurchase stock will depend upon, among other factors, our cash balances and potential future capital requirements for strategic transactions, including acquisitions, equity and debt service requirements senior to our common stock, earnings, financial condition, the general economic and regulatory climate and other factors beyond our control that our Board of Directors may deem relevant. In addition, the amount we spend and the number of shares we are able to repurchase under our stock repurchase program may further be affected by a number of other factors, including the stock price and blackout periods in which we are restricted from repurchasing shares. Our dividend payments and/or stock repurchases may change from time to time, and we cannot provide assurance that we will continue to declare dividends and/or repurchase stock in any particular amounts or at all. A reduction in or elimination of our dividend payments, our dividend program and/or stock repurchases could have a negative effect on our stock price.

 

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

 

On July 19, 2016, we issued an aggregate of 5,163 shares of common stock under the Hilltop Holdings Inc. 2012 Equity Incentive Plan to certain non-employee directors as compensation for their service on our Board of Directors during the second quarter of 2016. The shares were issued pursuant to the exemption from registration under Section 4(a)(2) of the Securities Act.

 

The following table details our repurchases of shares of common stock during the three months ended September 30, 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

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 (2)

 

July 1 - July 31, 2016

 

542

(1)

$

19.95

 

 —

 

$

50,000,000

 

August 1 - August 31, 2016

 

1,051

(1)

 

19.95

 

 —

 

 

50,000,000

 

September 1 - September 30, 2016

 

 —

 

 

 —

 

 —

 

 

50,000,000

 

Total

 

1,593

 

$

19.95

 

 —

 

 

 

 


(1)

Represents shares of common stock repurchased by the Company to satisfy tax withholding obligations on restricted stock issued under the Hilltop Holdings Inc. 2012 Equity Incentive Plan.

(2)

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. 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. As of September 30, 2016, we had not repurchased any shares of our outstanding common stock under this stock repurchase program.

 

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Table of Contents

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: October 27, 2016

By:

/s/ William B. Furr

 

 

William B. Furr

 

 

Chief Financial Officer

(Principal Financial Officer and duly authorized officer)

 

 

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Table of Contents

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).

 

 

 

10.1

 

Employment Agreement, dated as of September 1, 2016, by and between William Furr and Hilltop Holdings Inc. (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K/A (Amendment No. 1) filed on September 7, 2016 (File No. 001-31987) and incorporated herein by reference).

 

 

 

10.2

 

First Amendment to Retention Agreement and Assignment and Assumption Agreement by and among Hilltop Holdings Inc., PlainsCapital Corporation and Alan B. White, dated as of September 12, 2016 (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on September 13, 2016 (File No. 001-31987) and incorporated herein by reference).

 

 

 

10.3

 

First Amendment to Employment Agreement by and between Hilltop Holdings Inc. and James R. Huffines, dated as of September 12, 2016 (filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on September 13, 2016 (File No. 001-31987) and incorporated herein by reference).

 

 

 

10.4

 

First Amendment to Employment Agreement by and between Hilltop Holdings Inc. and John A. Martin, dated as of September 12, 2016 (filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on September 13, 2016 (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.

99