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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2020
For the transition period from to
Commission file number: 1-31987
Hilltop Holdings Inc.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
6565 Hillcrest Avenue
Dallas, TX
(Address of principal executive offices)
84-1477939
(I.R.S. Employer
Identification No.)
75205
(Zip Code)
Securities registered pursuant to Section 12(b) of the Act:
(214) 855-2177
(Registrant’s telephone number, including area code)
Title of each class
Common Stock, par value $0.01 per share
Trading symbol
HTH
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
þ Yes ◻ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ◻ Yes þ No
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.
þ Yes ◻ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
þ Yes ◻ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
Non-accelerated filer
þ
◻
Accelerated filer
Smaller reporting company
Emerging growth company
◻
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
☐ Yes þ No
Aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common stock was last sold on
the New York Stock Exchange on June 30, 2020, was approximately $1.18 billion. For the purposes of this computation, all officers, directors and 10% stockholders are
considered affiliates. The number of shares of the registrant’s common stock outstanding at February 16, 2021 was 82,188,513.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant’s definitive Proxy Statement pertaining to the 2021 Annual Meeting of Stockholders, filed or to be filed not later than 120 days after the end of the fiscal year
pursuant to Regulation 14A, is incorporated herein by reference into Part III.
Table of Contents
TABLE OF CONTENTS
MARKET AND INDUSTRY DATA AND FORECASTS
FORWARD-LOOKING STATEMENTS
PART I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Item 12.
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Principal Accounting Fees and Services
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
PART IV
Item 15.
Item 16.
Exhibits, Financial Statement Schedules
Form 10-K Summary
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MARKET AND INDUSTRY DATA AND FORECASTS
Market and industry data and other statistical information and forecasts used throughout this Annual Report on Form 10-K (this
“Annual Report”) are based on independent industry publications, government publications and reports by market research firms
or other published independent sources. We have not sought or obtained the approval or endorsement of the use of this third party
information. Some data also is based on our good faith estimates, which are derived from our review of internal surveys, as well as
independent sources. Forecasts are particularly likely to be inaccurate, especially over long periods of time.
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Unless the context otherwise indicates, all references in this Annual Report to the “Company,” “we,” “us,” “our” or “ours” or
similar words are to Hilltop Holdings Inc. and its direct and indirect wholly owned subsidiaries, references to “Hilltop” refer
solely to Hilltop Holdings Inc., references to “PCC” refer to PlainsCapital Corporation (a wholly owned subsidiary of Hilltop),
references to “Securities Holdings” refer to Hilltop Securities Holdings LLC (a wholly owned subsidiary of Hilltop), references to
“Hilltop Securities” refer to Hilltop Securities Inc. (a wholly owned subsidiary of Securities Holdings), references to “Momentum
Independent Network” refer to Momentum Independent Network Inc., formerly Hilltop Securities Independent Network Inc., (a
wholly owned subsidiary of Securities Holdings), Hilltop Securities and Momentum Independent Network are collectively referred
to as the “Hilltop Broker-Dealers,” references to the “Bank” refer to PlainsCapital Bank (a wholly owned subsidiary of PCC),
references to “FNB” refer to First National Bank, references to “SWS” refer to the former SWS Group, Inc., references to
“PrimeLending” refer to PrimeLending, a PlainsCapital Company (a wholly owned subsidiary of the Bank) and its subsidiaries as
a whole, references to “NLC” refer to National Lloyds Corporation (formerly a wholly owned subsidiary of Hilltop) and its wholly
owned subsidiaries.
FORWARD-LOOKING STATEMENTS
This Annual 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 Annual
Report that address results or developments that we expect or anticipate will or may occur in the future, and statements that are
preceded by, followed by or include, words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “goal,”
“intends,” “may,” “might,” “plan,” “probable,” “projects,” “seeks,” “should,” “target,” “view” or “would” or the negative of these
words and phrases or similar words or phrases, including such things as our business strategy, our financial condition, our revenue,
our liquidity and sources of funding, market trends, operations and business, taxes, the impact of natural disasters or public health
emergencies, such as the current global outbreak of a novel strain of coronavirus (“COVID-19”), information technology
expenses, capital levels, mortgage servicing rights (“MSR”) assets, use of proceeds from offerings, stock repurchases, dividend
payments, expectations concerning mortgage loan origination volume, servicer advances and interest rate compression, expected
levels of refinancing as a percentage of total loan origination volume, projected losses on mortgage loans originated, total
expenses, the effects of government regulation applicable to our operations, the appropriateness of, and changes in, our allowance
for credit losses and provision for (reversal of) credit losses, including as a result of the “current expected credit losses” (CECL)
model, expected future benchmarks rates, anticipated investment yields, our expectations regarding accretion of discount on loans
in future periods, the collectability of loans, cybersecurity incidents and the outcome of litigation are forward-looking statements.
These forward-looking statements are based on our beliefs, assumptions and expectations of our future performance taking into
account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties
and can change as a result of many possible events or factors, not all of which are known to us. If an event occurs, our business,
business plan, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-
looking statements. Certain factors that could cause actual results to differ include, among others:
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the COVID-19 pandemic and the response of governmental authorities to the pandemic, which have caused and are
causing significant harm to the global economy and our business;
the credit risks of lending activities, including our ability to estimate credit losses and increases to the allowance for
credit losses as a result of the implementation of CECL, as well as the effects of changes in the level of, and trends in,
loan delinquencies and write-offs;
effectiveness of our data security controls in the face of cyber attacks;
changes in general economic, market and business conditions in areas or markets where we compete, including changes
in the price of crude oil;
risks associated with our concentration in real estate related loans;
changes in the interest rate environment and transitions away from the London Interbank Offered Rate (“LIBOR”);
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the effects of our indebtedness on our ability to manage our business successfully, including the restrictions imposed by
the indenture governing our indebtedness;
changes in state and federal laws, regulations or policies affecting one or more of our business segments, including
changes in regulatory fees, deposit insurance premiums, capital requirements and the Dodd-Frank Wall Street Reform
and Consumer Protection Act (the “Dodd-Frank Act”);
cost and availability of capital;
changes in key management;
competition in our banking, broker-dealer, and mortgage origination segments from other banks and financial institutions
as well as investment banking and financial advisory firms, mortgage bankers, asset-based non-bank lenders and
government agencies;
legal and regulatory proceedings;
risks associated with merger and acquisition integration; and
our ability to use excess capital in an effective manner.
For a more detailed discussion of these and other factors that may affect our business and that could cause the actual results to
differ materially from those anticipated in these forward-looking statements, see Item 1A, “Risk Factors,” and Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” herein. 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 Annual Report
except to the extent required by federal securities laws.
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Item 1. Business.
General
PART I
Hilltop Holdings Inc. is a diversified, Texas-based financial holding company registered under the Bank Holding Company Act of
1956, as amended (the “Bank Holding Company Act”). Our primary line of business is to provide business and consumer banking
services from offices located throughout Texas through the Bank. We also provide an array of financial products and services
through our broker-dealer and mortgage origination segments. We endeavor to build and maintain a strong financial services
company through organic growth as well as acquisitions, which we may make using available capital, excess liquidity and, if
necessary or appropriate, additional equity or debt financing sources. The following includes additional details regarding the
financial products and services provided by each of our two primary business units.
PCC. PCC is a financial holding company that provides, through its subsidiaries, traditional banking and wealth, investment
and treasury management services primarily in Texas and residential mortgage loans throughout the United States.
Securities Holdings. Securities Holdings is a holding company that provides, through its subsidiaries, investment banking and
other related financial services, including municipal advisory, sales, trading and underwriting of taxable and tax-exempt fixed
income securities, clearing, securities lending, structured finance and retail brokerage services throughout the United States.
At December 31, 2020, on a consolidated basis, we had total assets of $16.9 billion, total deposits of $11.2 billion, total loans,
including loans held for sale, of $10.3 billion and stockholders’ equity of $2.4 billion.
Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “HTH.”
Our principal office is located at 6565 Hillcrest Avenue, Dallas, Texas 75205, and our telephone number at that location is
(214) 855-2177. Our internet address is www.hilltop-holdings.com. Our Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of
the Exchange Act are available on our website at http://ir.hilltop-holdings.com/ under the tab “Investor Relations - SEC Filings” as
soon as reasonably practicable after we electronically file such reports with, or furnish them to, the Securities and Exchange
Commission (the “SEC”). The references to our website in this Annual Report are inactive textual references only. The
information on our website is not incorporated by reference into this Annual Report.
Business Segments
Under accounting principles generally accepted in the United States (“GAAP”), our business units are comprised of three
reportable business segments organized primarily by the core products offered to the segments’ respective customers: banking,
broker-dealer, and mortgage origination. These segments reflect the manner in which operations are managed and the criteria used
by our chief operating decision maker, our President and Chief Executive Officer, to evaluate segment performance, develop
strategy and allocate resources.
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The following graphic reflects our current business segment.
On June 30, 2020, we completed the sale of all of the outstanding capital stock of NLC, which comprised the operations of the
former insurance segment. As a result, insurance segment results and its assets and liabilities have been presented as discontinued
operations in our consolidated financial statements, and we no longer have an insurance segment. Following the sale of NLC, our
business units are comprised of three reportable business segments organized primarily by the core products offered to the
segments’ respective customers: banking, broker-dealer and mortgage origination.
Corporate includes certain activities not allocated to specific business segments. These activities include holding company
financing and investing activities, merchant banking investment opportunities, and management and administrative services to
support the overall operations of the Company. Hilltop’s merchant banking investment activities include the identification of
attractive opportunities for capital deployment in companies engaged in non-financial activities through its merchant bank
subsidiary, Hilltop Opportunity Partners LLC.
For more financial information about each of our business segments, see Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” herein. See also Note 30 in the notes to our consolidated financial statements
included under Item 8, “Financial Statements and Supplementary Data.”
Banking
The banking segment includes the operations of the Bank, which, at December 31, 2020, had $13.3 billion in assets and total
deposits of $11.4 billion. The primary sources of our deposits are residents and businesses located in Texas. At December 31,
2020, the Bank employed approximately 1,100 people.
The table below sets forth a distribution of the banking segment’s loans, classified by portfolio segment. The banking segment’s
loan portfolio includes $3.3 billion in warehouse lines of credit extended to PrimeLending, of which $2.5 billion was drawn at
December 31, 2020. Amounts advanced against the warehouse line of credit are included in the table below, but are eliminated
from net loans on our consolidated balance sheets.
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial (1)
Mortgage warehouse lending
Construction and land development
1-4 family residential
Consumer
PrimeLending warehouse lines of credit
Total loans held for investment
Total Loans
Held for Investment
% of Total
Loans Held
for Investment
$
$
1,788,311
1,345,592
1,834,968
792,806
828,852
629,938
35,667
7,256,134
2,525,422
9,781,556
18.3 %
13.7 %
18.8 %
8.1 %
8.5 %
6.4 %
0.4 %
74.2 %
25.8 %
100.0 %
(1)
Included loans totaling $486.7 million at December 31, 2020 funded through the Paycheck Protection Program.
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Our lending policies seek to establish an asset portfolio that will provide a return on stockholders’ equity sufficient to maintain
capital to assets ratios that meet or exceed established regulations. In support of that goal, we have designed our underwriting
standards to determine:
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that our borrowers possess sound ethics and competently manage their affairs;
that we know the source of the funds the borrower will use to repay the loan;
that the purpose of the loan makes economic sense; and
that we identify relevant risks of the loan and determine that the risks are acceptable.
In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) and the
Paycheck Protection Program and Health Care Enhancement Act were passed in March and April 2020, which are intended to
provide emergency relief to several groups and individuals impacted by the COVID-19 pandemic. In March 2020, the Bank
implemented several actions to better support our impacted banking clients and allow for loan modifications such as principal
and/or interest payment deferrals, participation in the Paycheck Protection Program (“PPP”) as a Small Business Administration
(“SBA”) preferred lender and personal banking assistance including waived fees, increased daily spending limits and suspension
of residential foreclosure activities. The COVID-19 payment deferment programs allow for a deferral of principal and/or interest
payments with such deferred principal payments due and payable on the maturity date of the existing loan.
We implement our underwriting standards according to the facts and circumstances of each particular loan request, as discussed
below.
Business Banking. Our business banking customers primarily consist of agribusiness, energy, healthcare, institutions of higher
education, real estate (including construction and land development) and wholesale/retail trade companies. We provide these
customers with extensive banking services, such as online banking, business check cards and other add-on services as determined
on a customer-by-customer basis. Our treasury management services, which are designed to reduce the time, burden and expense
of collecting, transferring, disbursing and reporting cash, are also available to our business customers. We offer our business
banking customers term loans, lines of credit, equipment loans and leases, letters of credit, agricultural loans, commercial real
estate loans and other loan products, including PPP loans.
Commercial and industrial loans are primarily made within Texas and are underwritten on the basis of the borrower’s ability to
service the debt from cash flow from an operating business. In general, commercial and industrial loans involve more credit risk
than residential and commercial real estate loans and, therefore, usually yield a higher return. The increased risk in commercial and
industrial loans results primarily from the type of collateral securing these loans, which typically includes accounts receivable,
equipment and inventory. Additionally, increased risk arises from the expectation that commercial and industrial loans generally
will be serviced principally from operating cash flow of the business, and such cash flows are dependent upon successful business
operations. Historical trends have shown these types of loans to have higher delinquencies than mortgage loans. As a result of the
additional risk and complexity associated with commercial and industrial loans, such loans require more thorough underwriting
and servicing than loans to individuals. To manage these risks, our policy is to attempt to secure commercial and industrial loans
with both the assets of the borrowing business and other additional collateral and guarantees that may be available. In addition,
depending on the size of the credit, we actively monitor the financial condition of the borrower by analyzing the borrower’s
financial statements and assessing certain financial measures, including cash flow, collateral value and other appropriate credit
factors. We also have processes in place to analyze and evaluate on a regular basis our exposure to industries, products, market
changes and economic trends.
The Bank offers term financing on commercial real estate that includes retail, office, multi-family, industrial and warehouse
properties. Commercial mortgage lending can involve high principal loan amounts, and the repayment of these loans is dependent,
in large part, on a borrower’s ongoing business operations or on income generated from the properties that are leased to third
parties. Accordingly, we apply the measures described above for commercial and industrial loans to our commercial real estate
lending, with increased emphasis on analysis of collateral values. As a general practice, the Bank requires its commercial mortgage
loans to (i) be secured with first lien positions on the underlying property, (ii) maintain adequate equity margins, (iii) be serviced
by businesses operated by an established management team and (iv) be guaranteed by the principals of the borrower. The Bank
seeks lending opportunities where cash flow from the collateral provides adequate debt service coverage and/or the guarantor’s net
worth is comprised of assets other than the project being financed.
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The Bank’s mortgage warehouse lending activities consist of asset-based lending in which the Bank provides short-term, revolving
lines of credit to independent mortgage bankers (“IMBs”). IMBs are generally small businesses, with mortgage loan origination
and servicing as their sole or primary business. IMBs use the funds from their lines of credit to provide home loans to prospective
and existing homeowners. When the IMBs subsequently sell the loans to institutional investors in the secondary market—typically
within 30 days of closing the transaction—the proceeds from the sale are used to pay down and therefore replenish their lines of
credit.
The Bank also offers construction financing for (i) commercial, retail, office, industrial, warehouse and multi-family
developments, (ii) residential developments and (iii) single family residential properties. Construction loans involve additional
risks because loan funds are advanced upon the security of a project under construction, and the project is of uncertain value prior
to its completion. If the Bank is forced to foreclose on a project prior to completion, it may not be able to recover the entire unpaid
portion of the loan. Additionally, the Bank may be required to fund additional amounts to complete a project and may have to hold
the property for an indeterminate period of time. Because of uncertainties inherent in estimating construction costs, the market
value of the completed project and the effects of governmental regulation on real property, it can be difficult to accurately evaluate
the total funds required to complete a project and the related loan-to-value ratio. As a result of these uncertainties, construction
lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate
project rather than the ability of a borrower or guarantor to repay the loan. The Bank generally requires that the subject property of
a construction loan for commercial real estate be pre-leased because cash flows from the completed project provide the most
reliable source of repayment for the loan. Loans to finance these projects are generally secured by first liens on the underlying real
property. The Bank conducts periodic completion inspections, either directly or through an agent, prior to approval of periodic
draws on these loans.
In addition to the real estate lending activities described above, a portion of the Bank’s real estate portfolio consists of one-to-four
family residential mortgage loans typically collateralized by owner occupied properties. These residential mortgage loans are
generally secured by a first lien on the underlying property and have maturities up to 30 years. These loans are shown in the loans
held for investment table above as “1-4 family residential.”
Personal Banking. The Bank offers a broad range of personal banking products and services for individuals. Similar to its business
banking operations, the Bank also provides its personal banking customers with a variety of add-on features such as check cards,
safe deposit boxes, online banking, bill pay, overdraft privilege services and access to automated teller machine (ATM) facilities
throughout the United States. The Bank offers a variety of deposit accounts to its personal banking customers including savings,
checking, interest-bearing checking, money market and certificates of deposit.
The Bank loans to individuals for personal, family and household purposes, including lines of credit, home improvement loans,
home equity loans, and loans for purchasing and carrying securities.
Private Banking and Investment Management. The Bank’s private banking team personally assists high net worth individuals and
their families with their banking needs, including depository, credit, asset management, and trust and estate services. The Bank
offers trust and asset management services in order to assist these customers in managing, and ultimately transferring, their wealth.
The Bank’s services provide personal trust, investment management and employee benefit plan administration services, including
estate planning, management and administration, investment portfolio management, employee benefit accounts and individual
retirement accounts.
Broker-Dealer
The “Hilltop Broker-Dealers” include the operations of Hilltop Securities, a clearing broker-dealer subsidiary registered with the
SEC and the Financial Industry Regulatory Authority (“FINRA”) and a member of the NYSE, Momentum Independent Network,
an introducing broker-dealer subsidiary that is also registered with the SEC and FINRA, and Hilltop Securities Asset Management,
LLC. Hilltop Securities and Momentum Independent Network are both registered with the Commodity Futures Trading
Commission (“CFTC”) as non-guaranteed introducing brokers and as members of the National Futures Association (“NFA”).
Additionally, Hilltop Securities Asset Management, LLC, Hilltop Securities and Momentum Independent Network are investment
advisers registered under the Investment Advisers Act of 1940. At December 31, 2020, Hilltop Securities had consolidated assets
of $3.2 billion and net capital of $291.2 million, which was
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$284.2 million in excess of its minimum net capital requirement of $7.0 million. At December 31, 2020, the Hilltop Broker-
Dealers employed approximately 750 people and maintained 51 locations in 19 states.
Our broker-dealer segment has four primary lines of business: (i) public finance services, (ii) structured finance, (iii) fixed income
services, and (iv) wealth management, which includes retail, clearing services and securities lending. These lines of business and
the respective services provided reflect the current manner in which the broker-dealer segment’s operations are managed.
Public Finance Services. The public finance services line of business assists public entities nationwide, including cities, counties,
school districts, utility districts, tax increment zones, special districts, state agencies and other governmental entities, in
originating, syndicating and distributing securities of municipalities and political subdivisions. In addition, the public finance
services line of business provides specialized advisory and investment banking services for airports, convention centers, healthcare
institutions, institutions of higher education, housing, industrial development agencies, toll road authorities, and public power and
utility providers.
Additionally, through its arbitrage rebate, treasury management and government investment pools management departments, the
public finance services line of business provides state and local governments with advice and guidance with respect to arbitrage
rebate compliance, portfolio management and local government investment pool administration.
Structured Finance. The structured finance line of business provides advisory services and centralized product expertise for
derivatives and commodities. In addition, this business line participates in programs in which it issues forward purchase
commitments of mortgage-backed securities to certain non-profit housing clients and sells U.S. Agency to-be-announced (“TBA”)
mortgage-backed securities.
Fixed Income Services. The fixed income services line of business specializes in sales, trading and underwriting of U.S.
government and government agency bonds, corporate bonds, municipal bonds, mortgage-backed, asset-backed and commercial
mortgage-backed securities and structured products to support sales and other client activities. In addition, the fixed income
services line of business provides asset and liability management advisory services to community banks.
Wealth Management. The wealth management line of business is comprised of our retail, clearing services and securities lending
groups.
Retail. The retail group acts as a securities broker for retail investors in the purchase and sale of securities, options, commodities
and futures contracts that are traded on various exchanges or in the over-the-counter market through our employee-registered
representatives or independent contractor arrangements. We extend margin credit on a secured basis to our retail customers in
order to facilitate securities transactions. Through Southwest Insurance Agency, Inc. and Southwest Financial Insurance Agency,
Inc., we hold insurance licenses to facilitate the sale of insurance and annuity products by Hilltop Securities and Momentum
Independent Network advisors to retail clients. We retain no underwriting risk related to these insurance and annuity products. In
addition, through our investment management team, the retail group provides a number of advisory programs that offer advisors a
wide array of products and services for their advisory businesses. In most cases, we charge commissions to our clients in
accordance with an established commission schedule, subject to certain discounts based upon the client’s level of business, the
trade size and other relevant factors. The Momentum Independent Network advisors may also contract directly with third party
carriers to sell specified insurance products to their customers. The commissions received from these third party carriers are paid
directly to the advisor. Hilltop Securities is also a fully disclosed client of two of the largest futures commission merchants in the
United States. At December 31, 2020, we employed 117 registered representatives in 18 retail brokerage offices and had contracts
with 189 independent retail representatives for the administration of their securities business.
Clearing Services. The clearing services group offers fully disclosed clearing services to FINRA- and SEC-registered member
firms for trade execution and clearance as well as back office services such as record keeping, trade reporting, accounting, general
back-office support, securities and margin lending, reorganization assistance and custody of securities. At December 31, 2020, we
provided services to 129 financial organizations, including correspondent firms, correspondent broker-dealers, registered
investment advisers, discount and full-service brokerage firms, and institutional firms.
Securities Lending. The securities lending group performs activities that include borrowing and lending securities for other broker-
dealers, lending institutions, and internal clearing and retail operations. These activities involve borrowing
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securities to cover short sales and to complete transactions in which clients have failed to deliver securities by the required
settlement date, and lending securities to other broker-dealers for similar purposes.
Mortgage Origination
Our mortgage origination segment operates through a wholly owned subsidiary of the Bank, PrimeLending, which is a residential
mortgage banker licensed to originate and close loans in all 50 states and the District of Columbia. PrimeLending primarily
originates its mortgage loans through a retail channel, with limited lending through its affiliated business arrangements (“ABAs”).
During 2020, funded loan volume through ABAs was approximately 7% of the mortgage origination segment’s total loan volume.
At December 31, 2020, our mortgage origination segment operated from over 290 locations in 45 states, originating 18.6%, 10.9%
and 6.1%, respectively, of its mortgage loans (by dollar volume) from its Texas, California and Florida locations. 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 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 interest rates have historically had a lesser impact on home
purchases volume than on refinancing volume.
PrimeLending handles loan processing, underwriting and closings in-house. Mortgage loans originated by PrimeLending are
funded through warehouse lines of credit maintained with the Bank. PrimeLending sells substantially all mortgage loans it
originates to various investors in the secondary market, historically with the majority servicing released. During 2020, 2019, and
2018, the mortgage origination segment originated approximately $193 million, $149 million, and $97 million, respectively, in
loans on behalf of the banking segment, representing up to 1% of PrimeLending’s total loan origination volume during each year.
We expect loan volume originated on behalf of the banking segment to increase during 2021 based on approved authority for up to
5% of the mortgage origination segment’s total loan volume. PrimeLending’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. PrimeLending may, from time to time, manage its related mortgage servicing rights (“MSR”) assets through
different strategies, including varying the percentage of mortgage loans sold servicing released and opportunistically selling MSR
assets. As mortgage loans are sold in the secondary market, PrimeLending pays down its warehouse lines of credit with the Bank.
Loans sold are subject to certain standard indemnification provisions with investors, including the repurchase of loans sold and the
repayment of sales proceeds to investors under certain conditions.
Our mortgage lending underwriting strategy, driven in large measure by secondary market investor standards, seeks primarily to
originate conforming loans. Our underwriting practices include:
●
●
●
●
granting loans on a sound and collectible basis;
obtaining a balance between maximum yield and minimum risk;
ensuring that primary and secondary sources of repayment are adequate in relation to the amount of the loan; and
ensuring that each loan is properly documented and, if appropriate, adequately insured.
PrimeLending also acts as a primary servicer for loans originated prior to sale, loans sold to the banking segment and loans sold
with servicing retained.
PrimeLending had a staff of approximately 2,700 people, including approximately 1,225 mortgage loan officers, as of December
31, 2020 that produced $23.0 billion in closed mortgage loan volume during 2020, 58.4% of which related to home purchases
volume. PrimeLending offers a variety of loan products catering to the specific needs of borrowers seeking purchase or refinancing
options, including 30-year and 15-year fixed rate conventional mortgages, adjustable rate mortgages, jumbo loans, and Federal
Housing Administration (“FHA”), Veterans Affairs (“VA”), and United States Department of Agriculture (“USDA”)
loans. Mortgage loans originated by PrimeLending are secured by a first lien on the underlying property. PrimeLending does not
currently originate subprime loans (which it defines to be conventional and government loans that (i) are ineligible for sale to the
Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) or Government
National Mortgage Association (“GNMA”), or (ii) do not comply with approved investor-specific underwriting guidelines).
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Geographic Dispersion of our Businesses
The Bank provides traditional banking and wealth, investment and treasury management services. The Bank has a presence in the
large metropolitan markets in Texas and conducts substantially all of its banking operations in Texas.
Our broker-dealer services are provided through Hilltop Securities and Momentum Independent Network, which conduct business
nationwide, with 45% of the broker-dealer segment’s net revenues during 2020 generated through locations in Texas, California
and Oklahoma.
PrimeLending provides residential mortgage origination products and services from over 290 locations in 45 states. During 2020,
an aggregate of 61% of PrimeLending’s origination volume was concentrated in ten states, with 36% concentrated in Texas,
California and Florida, collectively. Other than these ten states, none of the states in which PrimeLending operated during 2020
represented more than 3% of PrimeLending’s origination volume.
Employees and Human Capital Resources
At December 31, 2020 we employed approximately 4,900 full-time employees and less than 50 part-time employees. Our
employees are not represented by any collective bargaining group. Management believes that we have good relations with our
employees.
We encourage and support the growth and development of our employees and, wherever possible, seek to fill positions by
promotion and transfer from within the organization. Continual learning and career development are advanced through annual
performance and development conversations with employees, internally developed training programs, customized corporate
training engagements and seminars, conferences, and other training events employees are encouraged to attend in connection with
their job duties.
Our human capital objectives include attracting, training, motivating, rewarding and retaining our employees. The safety, health
and wellness of our employees is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining
employee safety while continuing successful operations. Through teamwork and the adaptability of our management and staff, we
were able to transition during the peak of the pandemic, over a short period of time, to a rotational work schedule allowing
employees to effectively work from remote locations and ensure a safely-distanced working environment for employees
performing customer-facing activities, at branches and operations centers. All employees are asked not to come to work when they
experience signs or symptoms of a possible COVID-19 illness and have been provided paid time off to cover compensation during
such absences. On an ongoing basis, we further promote the health and wellness of our employees by strongly encouraging work-
life balance, offering flexible work schedules, and keeping the employee portion of health care premiums to a minimum.
Employee retention helps us operate efficiently and achieve one of our business objectives, which is being a high-level service
provider. We believe our commitment to our core values (integrity, collaboration, adaptability, respect and excellence) as well as
actively prioritizing concern for our employees’ well-being, supporting our employees’ career goals, offering competitive wages
and providing valuable fringe benefits aids in the retention of our top-performing employees. At December 31, 2020,
approximately 25% of our current staff had been with us for ten years or more.
Competition
We face significant competition in the business segments in which we operate and the geographic markets we serve. Many of our
competitors have substantially greater financial resources, lending limits and branch networks than we do, and offer a broader
range of products and services.
Our banking segment primarily competes with national, regional and community banks within the various markets where the Bank
operates. The Bank also faces competition from many other types of financial institutions, including savings and loan associations,
credit unions, finance companies, pension trusts, mutual funds, insurance companies, brokerage and investment banking firms,
asset-based non-bank lenders, government agencies and certain other non-financial institutions. The ability to attract and retain
skilled lending professionals is critical to our banking business. Competition for deposits and in providing lending products and
services to consumers and businesses in our market area is intense and pricing is important. Other factors encountered in
competing for deposits are convenient office locations, interest rates and fee structures of products offered. Direct competition for
deposits also comes from other commercial bank and thrift
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institutions, money market mutual funds and corporate and government securities that may offer more attractive rates than insured
depository institutions are willing to pay. Competition for loans is based on factors such as interest rates, loan origination fees and
the range of services offered by the provider. We seek to distinguish ourselves from our competitors through our commitment to
personalized customer service and responsiveness to customer needs while providing a range of competitive loan and deposit
products and other services.
Within our broker-dealer segment, we face significant competition based on a number of factors, including price, perceived
expertise, quality of advice, reputation, range of services and products, technology, innovation and local presence. Competition for
recruiting and retaining securities traders, investment bankers, and other financial advisors is intense. Our broker-dealer business
competes directly with numerous other financial advisory and investment banking firms, broker-dealers and banks, including large
national and major regional firms and smaller niche companies, some of whom are not broker-dealers and, therefore, are not
subject to the broker-dealer regulatory framework. Further, our broker-dealer segment competes with discount brokerage firms that
do not offer equivalent services but offer discounted prices and certain free services. We seek to distinguish ourselves from our
competitors through our commitment to personalized customer service and responsiveness to customer needs while providing a
range of investment banking, advisory and other related financial brokerage services.
Our competitors in the mortgage origination business include large financial institutions as well as independent mortgage banking
companies, commercial banks, savings banks and savings and loan associations. Our mortgage origination segment competes on a
number of factors including customer service, quality and range of products and services offered, price, reputation, interest rates,
closing process and duration, and loan origination fees. The ability to attract and retain skilled mortgage origination professionals
is critical to our mortgage origination business. We seek to distinguish ourselves from our competitors through our commitment to
personalized customer service and responsiveness to customer needs while providing a range of competitive mortgage loan
products and services.
Overall, competition among providers of financial products and services continues to increase as technological advances have
lowered the barriers to entry for financial technology companies, with consumers having the opportunity to select from a growing
variety of traditional and nontraditional alternatives, including online checking, savings and brokerage accounts, online lending,
online insurance underwriters, crowdfunding, digital wallets, and money transfer services. The ability of non-banking financial
institutions to provide services previously limited to commercial banks has intensified competition. Because non-banking financial
institutions are not subject to many of the same regulatory restrictions as banks and bank holding companies, they can often
operate with greater flexibility and lower cost structures.
Government Supervision and Regulation
General
We are subject to extensive regulation under federal and state laws. The regulatory framework is intended primarily for the
protection of customers and clients, and not for the protection of our stockholders or creditors. In many cases, the applicable
regulatory authorities have broad enforcement power over bank holding companies, banks and their subsidiaries, including the
power to impose substantial fines and other penalties for violations of laws and regulations. The following discussion describes the
material elements of the regulatory framework that applies to us and our subsidiaries. References in this Annual Report to
applicable statutes and regulations are brief summaries thereof, do not purport to be complete, and are qualified in their entirety by
reference to such statutes and regulations.
The Dodd-Frank Act, which significantly altered the regulation of financial institutions and the financial services industry,
established the Consumer Financial Protection Bureau (“CFPB”) and requires the CFPB and other federal agencies to implement
many provisions of the Dodd-Frank Act. Several aspects of the Dodd-Frank Act have affected our business, including, without
limitation, capital requirements, mortgage regulation, restrictions on proprietary trading in securities, restrictions on investments in
hedge funds and private equity funds (the “Volcker Rule”), executive compensation restrictions, potential federal oversight of the
insurance industry and disclosure and reporting requirements.
Recent Regulatory Developments. New regulations and statutes are regularly proposed and/or adopted that contain wide-ranging
proposals for altering the structures, regulations and competitive relationships of financial institutions operating and doing business
in the United States. Changes in leadership at various federal banking agencies, including the Federal Reserve, can also change the
policy direction of these agencies. Certain of these recent proposals and changes are described below.
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The CARES Act, which became law on March 27, 2020, provided over $2 trillion to combat COVID-19 and stimulate the
economy. The law had several provisions relevant to financial institutions, including the following:
●
●
Institutions are allowed to not characterize loan modifications related to the COVID-19 pandemic as a troubled debt
restructuring and are allowed to suspend the corresponding impairment determinations for accounting purposes.
The Community Bank Leverage Ratio was temporarily reduced to eight percent (8%). This provision terminated on
December 31, 2020.
● A borrower of a federally backed mortgage loan (VA, FHA, USDA, FHLMC and FNMA) experiencing financial
hardship due, directly or indirectly, to the COVID-19 pandemic may request forbearance from paying such mortgage by
submitting a request to the borrower’s servicer affirming such borrower’s financial hardship during the COVID-19
emergency. Such a forbearance will be granted for up to 180 days, which can be extended for an additional 180-day
period upon the request of the borrower. During that time, no fees, penalties or interest beyond the amounts scheduled or
calculated as if the borrower made all contractual payments on time and in full under the mortgage contract will accrue
on the borrower’s account.
● A borrower of a multi-family federally backed mortgage loan that is current as of February 1, 2020, may submit a request
for forbearance to the borrower’s servicer affirming that the borrower is experiencing financial hardship during the
COVID-19 emergency. A forbearance will be granted for up to 30 days, which can be extended for up to two additional
30-day periods upon the request of the borrower. During that time of the forbearance, the multi-family borrower cannot
evict or initiate the eviction of a tenant or charge any late fees, penalties or other charges to a tenant for late payment of
rent. Additionally, a multi-family borrower that receives a forbearance may not require a tenant to vacate a dwelling unit
before a date that is 30 days after the date on which the borrower provides the tenant notice to vacate and may not issue a
notice to vacate until after the expiration of the forbearance.
The CARES Act provided approximately $350 billion to fund loans to eligible small businesses through the SBA’s 7(a) loan
guaranty program. These loans were 100% federally guaranteed (principal and interest) through December 31, 2020. An eligible
business could apply for a PPP loan up to 2.5 times its average monthly “payroll costs” limited to a loan amount of $10.0 million.
The proceeds of the loan could be used for payroll (excluding individual employee compensation over $100,000 per year),
mortgage, interest, rent, insurance, utilities and other qualifying expenses. PPP loans have: (a) an interest rate of 1.0%; (b) a two-
year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement. The
SBA guaranteed 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan,
including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and
compensation levels of the business are maintained and 75% of the loan proceeds are used for payroll expenses, with the
remaining 25% of the loan proceeds used for other qualifying expenses.
The Paycheck Protection Program Flexibility Act (the “PPFA”) enacted on June 5, 2020 modified the PPP. The PPFA increased
the amount of time that borrowers have to use PPP loan proceeds and apply for loan forgiveness and made other changes to make
the PPP more favorable to borrowers.
The Coronavirus Response and Relief Supplemental Appropriations Act of 2021 (“Appropriations PPP Amendments”) is a
pandemic relief portion of the much larger Consolidated Appropriations Act of 2021, which was signed by the President on
December 27, 2020. The Appropriations PPP Amendments, among other things, reauthorize and modify the PPP by appropriating
more than $284 billion to the PPP so businesses can apply for forgivable loans for the first time; permit businesses that had
previously received a PPP loan to apply for a second PPP loan subject to generally more restrictive eligibility criteria and reducing
the maximum amount of proceeds available; enable debtors-in-possession or trustees of bankruptcy estates to apply for a PPP loan;
appropriate funds for a $600 stimulus check for most Americans with an adjusted gross income lower than $75,000; extend federal
unemployment benefits until March 31, 2021; extend the eviction moratorium for tenants with annual incomes of less than $99,000
until January 31, 2021; as well as other appropriations to address the pandemic. See “Risk Factors —As a participating lender in
the PPP, the Company and the Bank are subject to additional risks of litigation from the Bank’s clients, or other parties regarding
our originating, processing, or servicing of loans under the PPP, and risks that the SBA may not fund some or all PPP loan
guaranties.”
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The Anti-Money Laundering Act of 2020 (the “AML Act”) was enacted as part of the National Defense Authorization Act for
Fiscal Year 2021 when the U.S. House of Representatives and the U.S. Senate voted by more than a two-thirds majority to
override a Presidential veto effective on January 1, 2021. The AML Act is the most significant revision to the anti-money
laundering laws since the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism of 2001, as amended (the “USA PATRIOT Act”). The AML Act clarifies and streamlines the Currency and Foreign
Transactions Reporting Act of 1970, as amended, (the “Bank Secrecy Act”) and anti-money laundering (“AML”) obligations in the
following ways: requires U.S. entities and entities doing business in the United States to report into a national registry maintained
by the Financial Crimes Enforcement Network (“FinCEN”) certain beneficial ownership information, subject to exceptions;
modernizes the statutory definition of “financial institution” to include (i) entities that provide services involving “value that
substitutes for currency,” which includes stored value and virtual currencies and (ii) any person engaged in the trade of antiquities,
including an advisor, consultant or any other person who deals in the sale of antiquities; enhances penalties for Bank Secrecy Act
and AML violations, including claw back of bonuses; increases AML whistleblower awards and expands whistleblower
protections; requires the Secretary of the Treasury to establish and update every four years National AML Priorities, which are
incorporated into the Bank Secrecy Act compliance programs at financial institutions subject to the Bank Secrecy Act; permits
collaborative arrangements between financial institutions to participate in common activity or pool resources related to AML or
Bank Secrecy Act compliance; provides for an annual review of Bank Secrecy Act regulations by the Secretary of the Treasury
that is reported to Congress; and requires the Secretary of the Treasury to review the dollar thresholds and reporting requirements
relating to currency transaction reports and suspicious activity; among other amendments to the Bank Secrecy Act.
On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief and Consumer Protection Act
(“EGRRCPA”), which included amendments to the Dodd-Frank Act and other statutes that provide the federal banking agencies
with the ability to tailor various provisions of the banking laws and eased the regulatory burden imposed by the Dodd-Frank Act
with respect to company-run stress testing, resolutions plans, the Volcker Rule, high volatility commercial real estate exposures,
and real estate appraisals.
In July 2017, the Financial Conduct Authority (“FCA”) announced that it intends to cease compelling banks to submit rates for the
calculation of the London Interbank Offered Rate (“LIBOR”) after 2021. The Alternative Reference Rates Committee (“ARRC”)
has proposed that the Secured Overnight Financing Rate (“SOFR”) is the rate that represents best practice as the alternative to
LIBOR for use in derivatives and other financial contracts that are currently indexed to LIBOR. Additionally, the accounting
standards setter, Financial Accounting Standards Board (“FASB”) recently issued optional guidance that would help ease the
potential effects of reference rate reform on financial reporting. The guidance would offer optional expedients and exceptions for
applying GAAP to contracts, hedging relationships, or other transactions affected by reference rate reform. Additionally, the FASB
issued specific accounting guidance which permits the use of the Overnight Index Swap rate based on the SOFR to be designated
as a benchmark interest rate for hedge accounting purposes. ARRC has proposed a paced market transition plan to SOFR from
LIBOR, and organizations are currently working on industry-wide and company-specific transition plans as it relates to derivatives
and cash markets exposed to LIBOR.
We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business
may be affected by any new regulation or statute.
Corporate
Hilltop is a legal entity separate and distinct from PCC and its other subsidiaries. On November 30, 2012, concurrent with the
consummation of the acquisition of PlainsCapital Corporation (the “PlainsCapital Merger”), Hilltop became a financial holding
company registered under the Bank Holding Company Act, as amended by the Gramm-Leach-Bliley Act (“Gramm-Leach-Bliley
Act”). Accordingly, it is subject to supervision, regulation and examination by the Federal Reserve Board. The Dodd-Frank Act,
Gramm-Leach-Bliley Act, the Bank Holding Company Act and other federal laws subject financial and bank holding companies to
particular restrictions on the types of activities in which they may engage and to a range of supervisory requirements and activities,
including regulatory enforcement actions for violations of laws and regulations.
Changes of Control. Federal and state laws impose additional notice, approval and ongoing regulatory requirements on any
investor that seeks to acquire direct or indirect “control” of a regulated holding company, such as Hilltop. These laws
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include the Bank Holding Company Act and the Change in Bank Control Act. Among other things, these laws require regulatory
filings by an investor that seeks to acquire direct or indirect “control” of a regulated holding company. The determination whether
an investor “controls” a regulated holding company is based on all of the facts and circumstances surrounding the investment. As a
general matter, an investor is deemed to control a depository institution or other company if the investor owns or controls 25% or
more of any class of voting stock, and in certain other circumstances, an investor may be presumed to control a depository
institution or other company if the investor owns or controls less than 25% or more of any class of voting stock. Furthermore, these
laws may discourage potential acquisition proposals and may delay, deter or prevent change of control transactions, including
those that some or all of our stockholders might consider to be desirable.
Regulatory Restrictions on Dividends; Source of Strength. It is the policy of the Federal Reserve Board that bank holding
companies should pay cash dividends on common stock only out of income available over the past year and only if prospective
earnings retention is consistent with the organization’s expected future needs and financial condition. The policy provides that
bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to
serve as a source of strength to its banking subsidiaries. The Dodd-Frank Act requires the regulatory agencies to issue regulations
requiring that all bank and savings and loan holding companies serve as a source of financial and managerial strength to their
subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress; however, no such
proposed regulations have yet been published.
Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to each of its
banking subsidiaries and commit resources to their support. Such support may be required at times when, absent this Federal
Reserve Board policy, a holding company may not be inclined to provide it. As discussed herein, a bank holding company, in
certain circumstances and subject to certain limitations, could be required to guarantee the capital plan of an undercapitalized
banking subsidiary.
Scope of Permissible Activities. Under the Bank Holding Company Act, Hilltop and PCC generally may not acquire a direct or
indirect interest in, or control of more than 5% of, the voting shares of any company that is not a bank or bank holding company.
Additionally, the Bank Holding Company Act may prohibit Hilltop from engaging in activities other than those of banking,
managing or controlling banks or furnishing services to, or performing services for, its subsidiaries, except that it may engage in,
directly or indirectly, certain activities that the Federal Reserve Board has determined to be closely related to banking or managing
and controlling banks as to be a proper incident thereto. In approving acquisitions or the addition of activities, the Federal Reserve
Board considers, among other things, whether the acquisition or the additional activities can reasonably be expected to produce
benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh such possible
adverse effects as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking
practices.
Notwithstanding the foregoing, the Gramm-Leach-Bliley Act, effective March 11, 2000, eliminated the barriers to affiliations
among banks, securities firms, insurance companies and other financial service providers and permits bank holding companies to
become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other
activities that are financial in nature. The Gramm-Leach-Bliley Act defines “financial in nature” to include: securities
underwriting; dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and
agency; merchant banking activities; and activities that the Federal Reserve Board has determined to be closely related to banking.
Prior to enactment of the Dodd-Frank Act, regulatory approval was not required for a financial holding company to acquire a
company, other than a bank or savings association, engaged in activities that were financial in nature or incidental to activities that
were financial in nature, as determined by the Federal Reserve Board.
Under the Gramm-Leach-Bliley Act, a bank holding company may become a financial holding company by filing a declaration
with the Federal Reserve Board if each of its subsidiary banks is “well capitalized” under the Federal Deposit Insurance
Corporation Improvement Act prompt corrective action provisions, is “well managed,” and has at least a “satisfactory” rating
under the Community Reinvestment Act of 1977 (the “CRA”). The Dodd-Frank Act underscores the criteria for becoming a
financial holding company by amending the Bank Holding Company Act to require that bank holding companies be “well
capitalized” and “well managed” in order to become financial holding companies. Hilltop became a financial holding company on
December 1, 2012.
Safe and Sound Banking Practices. Bank holding companies are not permitted to engage in unsafe and unsound banking practices.
The Federal Reserve Board’s Regulation Y, for example, generally requires a holding company to give the
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Federal Reserve Board prior notice of any redemption or repurchase of its equity securities, if the consideration to be paid, together
with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of the company’s
consolidated net worth. In addition, bank holding companies are required to consult with the Federal Reserve Board prior to
making any redemption or repurchase, even within the foregoing parameters. The Federal Reserve Board may oppose the
transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation.
Depending upon the circumstances, the Federal Reserve Board could take the position that paying a dividend would constitute an
unsafe or unsound banking practice.
The Federal Reserve Board has broad authority to prohibit activities of bank holding companies and their nonbanking subsidiaries
that represent unsafe and unsound banking practices or that constitute violations of laws or regulations, and can assess civil money
penalties for certain activities conducted on a knowing or reckless basis, if those activities caused a substantial loss to a depository
institution. The penalties can be as high as $2.01 million for each day the activity continues. In addition, the Dodd-Frank Act
authorizes the Federal Reserve Board to require reports from and examine bank holding companies and their subsidiaries, and to
regulate functionally regulated subsidiaries of bank holding companies.
Anti-tying Restrictions. Subject to various exceptions, bank holding companies and their affiliates are generally prohibited from
tying the provision of certain services, such as extensions of credit, to certain other services offered by a bank holding company or
its affiliates.
Capital Adequacy Requirements and BASEL III. Hilltop and PlainsCapital, which includes the Bank and PrimeLending, are subject
to capital adequacy requirements under the comprehensive capital framework for U.S. banking organizations known as “Basel III”.
Basel III, which reformed the existing frameworks under which U.S. banking organizations historically operated, became effective
January 1, 2015 and was fully phased in as of January 1, 2019. Basel III was developed by the Basel Committee on Banking
Supervision and adopted by the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency (the “OCC”).
The federal banking agencies’ risk-based capital and leverage ratios are minimum supervisory ratios generally applicable to
banking organizations that meet certain specified criteria, assuming that they have the highest regulatory rating. Banking
organizations not meeting these criteria are expected to operate with capital positions well above the minimum ratios. The federal
bank regulatory agencies may set capital requirements for a particular banking organization that are higher than the minimum
ratios when circumstances warrant. Federal Reserve Board guidelines also provide that banking organizations experiencing
internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets.
Final rules published by the Federal Reserve, the FDIC, and the OCC implemented the Basel III regulatory capital reforms and
changes required by the Dodd-Frank Act. Among other things, Basel III increased minimum capital requirements, introduced a
new minimum leverage ratio and implemented a capital conservation buffer. The regulatory agencies carefully considered the
potential impacts on all banking organizations, including community and regional banking organizations such as Hilltop and
PlainsCapital, and sought to minimize the potential burden of these changes where consistent with applicable law and the
agencies’ goals of establishing a robust and comprehensive capital framework. Under the guidelines in effect beginning January 1,
2015, a risk weight factor of 0% to 1250% is assigned to each category of assets based generally on the perceived credit risk of the
asset class. The risk weights are then multiplied by the corresponding asset balances to determine a “risk-weighted” asset base.
Under Basel III, total capital consists of two tiers of capital, Tier 1 and Tier 2. Tier 1 capital consists of common equity Tier 1
capital and additional Tier 1 capital. Below is a list of certain significant components that comprise the tiers of capital for Hilltop
and PlainsCapital under Basel III.
Common equity Tier 1 capital:
●
●
●
includes common stockholders’ equity (such as qualifying common stock and any related surplus, undivided profits,
disclosed capital reserves that represent a segregation of undivided profits and foreign currency translation adjustments,
excluding changes in other comprehensive income (loss) and treasury stock);
includes certain minority interests in the equity capital accounts of consolidated subsidiaries; and
excludes goodwill and various intangible assets.
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Additional Tier 1 capital:
●
●
●
●
includes certain qualifying minority interests not included in common equity Tier 1 capital;
includes certain preferred stock and related surplus;
includes certain subordinated debt; and
excludes 50% of the insurance underwriting deduction.
Tier 2 capital:
●
●
●
includes allowance for credit losses, up to a maximum of 1.25% of risk-weighted assets;
includes minority interests not included in Tier 1 capital; and
excludes 50% of the insurance underwriting deduction.
The following table summarizes the Basel III requirements fully phased-in as of the period beginning January 1, 2019.
Item
Minimum common equity Tier 1 capital ratio
Common equity Tier 1 capital conservation buffer
Minimum common equity Tier 1 capital ratio plus capital conservation buffer
Minimum Tier 1 capital ratio
Minimum Tier 1 capital ratio plus capital conservation buffer
Minimum total capital ratio
Minimum total capital ratio plus capital conservation buffer
Requirement
4.5 %
2.5 %
7.0 %
6.0 %
8.5 %
8.0 %
10.5 %
In order to avoid limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary
bonus payments to executive officers, Basel III also implemented a capital conservation buffer, which requires a banking
organization to hold a buffer above its minimum risk-based capital requirements. This buffer helps to ensure that banking
organizations conserve capital when it is most needed, allowing them to better weather periods of economic stress. The buffer is
measured relative to risk-weighted assets.
The rules also prohibit a banking organization from making distributions or discretionary bonus payments during any quarter if its
eligible retained income is negative in that quarter and its capital conservation buffer ratio was less than 2.5% at the beginning of
the quarter. A banking organization with a buffer greater than 2.5% would not be subject to limits on capital distributions or
discretionary bonus payments; however, a banking organization with a buffer of less than 2.5% would be subject to increasingly
stringent limitations as the buffer approaches zero. The eligible retained income of a banking organization is defined as its net
income for the four calendar quarters preceding the current calendar quarter, based on the organization’s quarterly regulatory
reports, net of any distributions and associated tax effects not already reflected in net income. When the rules were fully phased-in
in 2019, the minimum capital requirements plus the capital conservation buffer should have exceeded the prompt corrective action
well-capitalized thresholds.
Hilltop and PlainsCapital began transitioning to the Basel III final rules on January 1, 2015. The capital conservation buffer and
certain deductions from common equity Tier 1 capital were fully phased in as of January 1, 2019. During 2020, our eligible
retained income was positive and our capital conservation buffer was greater than 2.5%, and therefore, we were not subject to
limits on capital distributions or discretionary bonus payments. We anticipate similar results during 2021.
At December 31, 2020, Hilltop had a total capital to risk-weighted assets ratio of 22.34%, Tier 1 capital to risk-weighted assets
ratio of 19.57% and a common equity Tier 1 capital to risk-weighted assets ratio of 18.97%. Hilltop’s actual capital amounts and
ratios in accordance with Basel III exceeded the regulatory capital requirements including conservation buffer in effect at the end
of the period.
At December 31, 2020, PlainsCapital had a total capital to risk-weighted assets ratio of 15.27%, Tier 1 capital to risk-weighted
assets ratio of 14.40% and a common equity Tier 1 capital to risk-weighted assets ratio of 14.40%. Accordingly, PlainsCapital’s
actual capital amounts and ratios in accordance with Basel III resulted in it being considered “well-capitalized” and exceeded the
regulatory capital requirements including conservation buffer in effect at the end of the period.
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Phase-in of Current Expected Credit Losses Accounting Standard. In June 2016, the Financial Accounting Standards Board issued
an update to the accounting standards for credit losses that included the Current Expected Credit Losses (“CECL”) methodology,
which replaces the existing incurred loss methodology for certain financial assets. CECL became effective January 1, 2020. In
December 2018, the federal bank regulatory agencies approved a final rule modifying their regulatory capital rules and providing
an option to phase-in, over a period of three years, the day-one regulatory capital effects resulting from the implementation of
CECL. The final rule also revises the agencies’ other rules to reflect the update to the accounting standards. We originally elected
to not exercise the option for phase-in. In March 2020, in connection with the economic uncertainties associated with the effects of
COVID-19, the agencies’ issued an additional transition option that permitted banking institutions to mitigate the estimated
cumulative regulatory capital effects from CECL over a five-year transitionary period. We elected to exercise this option for
phase-in.
Volcker Rule. Provisions of the Volcker Rule and the final rules implementing the Volcker Rule restrict certain activities provided
by the Company, including proprietary trading and sponsoring or investing in “covered funds,” which include many venture
capital, private equity and hedge funds. For purposes of the Volcker Rule, purchases or sales of financial instruments such as
securities, derivatives, contracts of sale of commodities for future delivery or options on the foregoing for the purpose of short-
term gain are deemed to be proprietary trading (with financial instruments held for less than 60 days presumed to be for
proprietary trading unless an alternative purpose can be demonstrated), unless certain exemptions apply. Exempted activities
include, among others, the following: (i) underwriting; (ii) market making; (iii) risk mitigating hedging; (iv) trading in certain
government securities; (v) employee compensation plans and (vi) transactions entered into on behalf of and for the account of
clients as agent, broker, custodian, or in a trustee or fiduciary capacity. On July 22, 2019, the federal banking agencies, among
other agencies, published a final rule implementing provisions of EGRRCPA that exclude community banks with $10.0 billion or
less in total consolidated assets and total trading assets and liabilities of 5% or less of total consolidated assets from the restrictions
of the Volcker Rule. At this time, the Bank does not qualify for this regulatory exclusion.
On November 14, 2019, the federal banking agencies, among other agencies, published a separate final rule to provide greater
clarity and certainty about the activities prohibited by the Volcker Rule and to improve supervision and implementation of the
Volcker Rule based on the agencies’ experience implementing these provisions since 2013. Compliance with the final rule began
January 1, 2021, however, banking entities may voluntarily comply with the final rule in whole or in part prior to the compliance
date, subject to the agencies’ completion of necessary technological changes.
In July 2020, the federal banking agencies published a final rule to streamline and improve the covered funds provisions of the
Volcker Rule by making the following changes: permitting the activities of qualifying foreign excluded funds; revising the
exclusions from the definition of “covered fund” for foreign public funds, loan securitizations, public welfare investments and
small business investment companies; creating new exclusions from the definition of “covered fund” for credit funds, qualifying
venture capital funds, family wealth management vehicles, and customer facilitation vehicles; permitting certain transactions that
could otherwise be prohibited under affiliate transaction restrictions unique to the Volcker Rule; modifying the definition of
“ownership interest”; and providing that certain investments made in parallel with a covered fund, as well as certain restricted
profit interests held by an employee or director, need not be included in a banking entity’s calculation of its ownership interest in
the covered fund.
While management continues to assess compliance with the Volcker Rule, we have reviewed our processes and procedures in
regard to proprietary trading and covered funds activities and we believe we are currently complying with the provisions of the
Volcker Rule. However, it remains uncertain how the scope of applicable restrictions and exceptions will be interpreted and
administered by the relevant regulators. Absent further regulatory guidance, we are required to make certain assumptions as to the
degree to which our activities, processes and procedures in these areas comply with the requirements of the Volcker Rule. If these
assumptions are not accurate or if our implementation of compliance processes and procedures is not consistent with regulatory
expectations, we may be required to make certain changes to our business activities, processes or procedures, which could further
increase our compliance and regulatory risks and costs.
Acquisitions by Bank Holding Companies. The Bank Holding Company Act requires every bank holding company to obtain the
prior approval of the Federal Reserve Board before it may acquire all or substantially all of the assets of any bank, or ownership or
control of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5% of
the voting shares of such bank. In approving bank acquisitions by bank holding companies, the Federal Reserve Board is required
to consider, among other things, the financial and managerial resources and future
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prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served, and
various competitive factors. In addition, the Dodd-Frank Act requires the Federal Reserve Board to consider “the risk to the
stability of the U.S. banking or financial system” when evaluating acquisitions of banks and nonbanks under the Bank Holding
Company Act. With respect to interstate acquisitions, the Dodd-Frank Act amends the Bank Holding Company Act by raising the
standard by which interstate bank acquisitions are permitted from a standard that the acquiring bank holding company be
“adequately capitalized” and “adequately managed” to the higher standard of being “well capitalized” and “well managed”.
Control Acquisitions. The Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of a bank
holding company unless the Federal Reserve Board has been notified and has not objected to the transaction. As a general matter,
an investor is deemed to control a depository institution or other company if the investor owns or controls 25% or more of any
class of voting stock, and in certain other circumstances, an investor may be presumed to control a depository institution or other
company if the investor owns or controls less than 25% or more of any class of voting stock.
Banking
The Bank is subject to various requirements and restrictions under the laws of the United States, and to regulation, supervision and
regular examination by the Texas Department of Banking. The Bank, as a state member bank, is also subject to regulation and
examination by the Federal Reserve Board. The Bank became subject to the regulations issued by the CFPB on July 21, 2011,
although the Federal Reserve Board continued to examine the Bank for compliance with federal consumer protection laws. If the
Bank’s total assets are over $10.0 billion (as measured on four consecutive quarterly call reports of the Bank and any institutions it
acquires), the Bank will become subject to the CFPB’s supervisory and enforcement authority with respect to federal consumer
financial laws beginning in the following quarter. As of December 31, 2020, the Bank’s total assets were $13.3 billion. Along with
continued Federal Reserve consumer supervisory and enforcement, the Bank became subject to CFPB supervisory and
enforcement authority, starting in the second quarter of 2020.
The Bank is also an insured depository institution and, therefore, subject to regulation by the FDIC, although the Federal Reserve
Board is the Bank’s primary federal regulator. The Federal Reserve Board, the Texas Department of Banking, the CFPB and the
FDIC have the power to enforce compliance with applicable banking statutes and regulations. Such requirements and restrictions
include requirements to maintain reserves against deposits, restrictions on the nature and amount of loans that may be made and
the interest that may be charged thereon and restrictions relating to investments and other activities of the Bank. In July 2010, the
FDIC voted to revise its agreement with the primary federal regulators to enhance the FDIC’s existing backup authorities over
insured depository institutions that the FDIC does not directly supervise. As a result, the Bank may be subject to increased
supervision by the FDIC.
Restrictions on Transactions with Affiliates. Transactions between the Bank and its nonbanking affiliates, including Hilltop and
PCC, are subject to Section 23A of the Federal Reserve Act. In general, Section 23A imposes limits on the amount of such
transactions, and also requires certain levels of collateral for loans to affiliated parties. It also limits the amount of advances to
third parties that are collateralized by the securities or obligations of Hilltop or its subsidiaries. Among other changes, the Dodd-
Frank Act expands the definition of “covered transactions” and clarifies the amount of time that the collateral requirements must
be satisfied for covered transactions, and amends the definition of “affiliate” in Section 23A to include “any investment fund with
respect to which a member bank or an affiliate thereof is an investment adviser.”
Affiliate transactions are also subject to Section 23B of the Federal Reserve Act, which generally requires that certain transactions
between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the Bank, as those prevailing at
the time for comparable transactions with or involving other nonaffiliated persons. The Federal Reserve has also issued Regulation
W, which codifies prior regulations under Sections 23A and 23B of the Federal Reserve Act and interpretive guidance with respect
to affiliate transactions.
Loans to Insiders. The restrictions on loans to directors, executive officers, principal stockholders and their related interests
(collectively referred to herein as “insiders”) contained in the Federal Reserve Act and Regulation O apply to all insured
institutions and their subsidiaries and holding companies. These restrictions include conditions that must be met before insider
loans can be made, limits on loans to an individual insider and an aggregate limitation on all loans to insiders and their related
interests. These loans cannot exceed the institution’s total unimpaired capital and surplus, and
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the Federal Reserve Board may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions for
knowingly accepting loans in violation of applicable restrictions. The Dodd-Frank Act amends the statutes placing limitations on
loans to insiders by including credit exposures to the person arising from a derivatives transaction, repurchase agreement, reverse
repurchase agreement, securities lending transaction, or securities borrowing transaction between the member bank and the person
within the definition of an extension of credit.
Restrictions on Distribution of Subsidiary Bank Dividends and Assets. Dividends paid by the Bank have provided a substantial part
of PCC’s operating funds and for the foreseeable future it is anticipated that dividends paid by the Bank to PCC will continue to be
PCC’s and Hilltop’s principal source of operating funds. Capital adequacy requirements serve to limit the amount of dividends that
may be paid by the Bank. Pursuant to the Texas Finance Code, a Texas banking association may not pay a dividend that would
reduce its outstanding capital and surplus unless it obtains the prior approval of the Texas Banking Commissioner. Additionally,
the FDIC and the Federal Reserve Board have the authority to prohibit Texas state banks from paying a dividend when they
determine the dividend would be an unsafe or unsound banking practice. As a member of the Federal Reserve System, the Bank
must also comply with the dividend restrictions with which a national bank would be required to comply. Those provisions are
generally similar to those imposed by the state of Texas. Among other things, the federal restrictions require that if losses have at
any time been sustained by a bank equal to or exceeding its undivided profits then on hand, no dividend may be paid.
In the event of a liquidation or other resolution of an insured depository institution, the claims of depositors and other general or
subordinated creditors are entitled to a priority of payment over the claims of holders of any obligation of the institution to its
stockholders, including any depository institution holding company (such as PCC and Hilltop) or any stockholder or creditor
thereof.
Branching. The establishment of a bank branch must be approved by the Texas Department of Banking and the Federal Reserve
Board, which consider a number of factors, including financial history, capital adequacy, earnings prospects, character of
management, needs of the community and consistency with corporate powers. The regulators will also consider the applicant’s
CRA record. Under the Dodd-Frank Act, de novo interstate branching by banks is permitted if, under the laws of the state where
the branch is to be located, a state bank chartered in that state would be permitted to establish a branch.
Prompt Corrective Action. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) establishes a system
of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal
banking regulators have established five capital categories (“well capitalized,” “adequately capitalized,” “undercapitalized,”
“significantly undercapitalized” and “critically undercapitalized”) in which all institutions are placed. Federal banking regulators
are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to
institutions in the three undercapitalized categories. The severity of the action depends upon the capital category in which the
institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an
institution that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level
for each category.
An institution that is categorized as “undercapitalized”, “significantly undercapitalized” or “critically undercapitalized” is required
to submit an acceptable capital restoration plan to its appropriate federal banking agency. A bank holding company must guarantee
that a subsidiary depository institution meets its capital restoration plan, subject to various limitations. The controlling holding
company’s obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary’s assets at
the time it became undercapitalized or the amount required to meet regulatory capital requirements. An undercapitalized institution
is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in
any new line of business, except under an accepted capital restoration plan or with FDIC approval. The regulations also establish
procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital. PlainsCapital
was classified as “well capitalized” at December 31, 2020.
Pursuant to FDICIA, an “undercapitalized” bank is prohibited from increasing its assets, engaging in a new line of business,
acquiring any interest in any company or insured depository institution, or opening or acquiring a new branch office, except under
certain circumstances, including the acceptance by the federal banking regulators of a capital restoration plan for the Bank.
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FDIC Insurance Assessments. The FDIC has adopted a risk-based assessment system for insured depository institutions that takes
into account the risks attributable to different categories and concentrations of assets and liabilities. The system assigns an
institution to one of three capital categories: (1) “well capitalized;” (2) “adequately capitalized;” or (3) “undercapitalized.” These
three categories are substantially similar to the prompt corrective action categories described above, with the “undercapitalized”
category including institutions that are undercapitalized, significantly undercapitalized and critically undercapitalized for prompt
corrective action purposes. The FDIC also assigns an institution to one of three supervisory subgroups based on a supervisory
evaluation that the institution’s primary federal regulator provides to the FDIC and information that the FDIC determines to be
relevant to the institution’s financial condition and the risk posed to the deposit insurance funds. The FDIC may terminate its
insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound
condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
The FDIC is required to maintain a designated reserve ratio of the deposit insurance fund (“DIF”) to insured deposits in the United
States. The Dodd-Frank Act required the FDIC to assess insured depository institutions to achieve a DIF ratio of at least 1.35% by
September 30, 2020. On November 28, 2018, the FDIC announced that the DIF reserve ratio exceeded the statutorily required
minimum reserve ratio of 1.35%, ahead of the September 30, 2020 deadline. FDIC regulations provide for two changes to deposit
insurance assessments upon reaching the minimum ratio: (1) surcharges on insured depository institutions with total consolidated
assets of $10.0 billion or more (large banks) will cease; and (2) small banks will receive assessment credits for the portion of their
assessments that contributed to the growth in the reserve ratio from between 1.15% and 1.35%, to be applied when the reserve
ratio is at or above 1.38%. Pursuant to its authority in the Dodd-Frank Act, the FDIC on December 20, 2010, published a final
rule establishing a higher long-term target DIF ratio of greater than 2%. Deposit insurance assessment rates are subject to change
by the FDIC and will be impacted by the overall economy and the stability of the banking industry as a whole. The FDIC will
notify the Bank concerning any assessment credits and the assessment rate that we will be charged for the assessment period. As a
result of the new regulations, we expect to incur lower annual deposit insurance assessments, which could have a positive impact
on our financial condition and results of operations. Accruals for DIF assessments were $1.8 million during 2020.
The Dodd-Frank Act permanently increased the standard maximum deposit insurance amount to $250,000. The FDIC insurance
coverage limit applies per depositor, per insured depository institution for each account ownership category.
Community Reinvestment Act. The CRA requires, in connection with examinations of financial institutions, that federal banking
regulators (in the Bank’s case, the Federal Reserve Board) evaluate the record of each financial institution in meeting the credit
needs of its local community, including low and moderate-income neighborhoods. These facts are also considered in evaluating
mergers, acquisitions and applications to open a branch or facility. Failure to adequately meet these criteria could impose
additional requirements and limitations on the Bank. Additionally, the Bank must publicly disclose the terms of various CRA-
related agreements.
The Bank received a “satisfactory” CRA rating in connection with its most recent CRA performance evaluation. A CRA rating of
less than “satisfactory” adversely affects a bank’s ability to establish new branches and impairs a bank’s ability to commence new
activities that are “financial in nature” or acquire companies engaged in these activities. See “Risk Factors — We are subject to
extensive supervision and regulation that could restrict our activities and impose financial requirements or limitations on the
conduct of our business and limit our ability to generate income.”
Privacy. Under the Gramm-Leach-Bliley Act, financial institutions are required to disclose their policies for collecting and
protecting confidential information. Customers generally may prevent financial institutions from sharing nonpublic personal
financial information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactions
requested by the consumer or when the financial institution is jointly sponsoring a product or service with a nonaffiliated third
party. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for
use in telemarketing, direct mail marketing or other marketing to consumers. The Bank and all of its subsidiaries have established
policies and procedures to comply with the privacy provisions of the Gramm-Leach-Bliley Act.
Federal Laws Applicable to Credit Transactions. The loan operations of the Bank are also subject to federal laws and
implementing regulations applicable to credit transactions, such as the Truth-In-Lending Act, the Home Mortgage Disclosure Act
of 1975, the Equal Credit Opportunity Act, the Fair Credit Reporting Act of 1978, the Fair Debt Collection Practices Act, the
Service Members Civil Relief Act, the Dodd-Frank Act and rules and regulations of the various federal
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agencies charged with the responsibility of implementing these federal laws. Interest and other charges collected or contracted for
by the Bank are subject to state usury laws and federal laws concerning interest rates.
Federal Laws Applicable to Deposit Operations. The deposit operations of the Bank are subject to the Right to Financial Privacy
Act, the Truth in Savings Act and the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board and the
CFPB to implement that act. The Dodd-Frank Act amends the Electronic Funds Transfer Act to, among other things, give the
Federal Reserve Board the authority to establish rules regarding interchange fees charged for electronic debit transactions by
payment card issuers having assets over $10 billion and to enforce a new statutory requirement that such fees be reasonable and
proportional to the actual cost of a transaction to the issuer.
Capital Requirements. The Federal Reserve Board and the Texas Department of Banking monitor the capital adequacy of
PlainsCapital by using a combination of risk-based guidelines and leverage ratios. The agencies consider PlainsCapital’s capital
levels when taking action on various types of applications and when conducting supervisory activities related to the safety and
soundness of individual banks and the banking system.
On January 1, 2019, PlainsCapital fully transitioned to the final rules that substantially amended the regulatory risk-based capital
rules to implement the Basel III regulatory capital reforms. For additional discussion of Basel III, see the section entitled
“Government Supervision and Regulation — Corporate — Capital Adequacy Requirements and Basel III” earlier in this Item 1. At
December 31, 2020, PlainsCapital’s ratio of total risk-based capital to risk-weighted assets was 15.27%, PlainsCapital’s ratio of
Tier 1 capital to risk-weighted assets was 14.40%, PlainsCapital’s common equity Tier 1 capital to risk-weighted assets ratio was
14.40%, and PlainsCapital’s ratio of Tier 1 capital to average total assets was 10.44%.
On December 13, 2019, the Federal Reserve, the FDIC and the OCC published a final rule modifying the treatment of high
volatility commercial real estate (“HVCRE”) exposures as required by EGRRCPA. The final rule clarifies certain defined terms in
the HVCRE exposure definition in a manner generally consistent with the call report instructions as well as the treatment of credit
facilities that finance one- to four-family residential properties and the development of land. The final rule became effective on
April 1, 2020.
The FDIC Improvement Act. FDICIA made a number of reforms addressing the safety and soundness of the deposit insurance
system, supervision of domestic and foreign depository institutions, and improvement of accounting standards. This statute also
limited deposit insurance coverage, implemented changes in consumer protection laws and provided for least-cost resolution and
prompt regulatory action with regard to troubled institutions.
FDICIA requires every bank with total assets in excess of $500 million to have an annual independent audit made of the Bank’s
financial statements by a certified public accountant to verify that the financial statements of the Bank are presented in accordance
with GAAP and comply with such other disclosure requirements as prescribed by the FDIC.
Brokered Deposits. Under FDICIA, banks may be restricted in their ability to accept brokered deposits, depending on their capital
classification. “Well capitalized” banks are permitted to accept brokered deposits, but banks that are not “well capitalized” are not
permitted to accept such deposits. The FDIC may, on a case-by-case basis, permit banks that are “adequately capitalized” to accept
brokered deposits if the FDIC determines that acceptance of such deposits would not constitute an unsafe or unsound banking
practice with respect to such bank. Pursuant to a provision in EGRRCPA, the FDIC published a final rule on February 4, 2019
excepting a capped amount of reciprocal deposits from being considered as brokered deposits for certain insured depository
institutions. On December 15, 2020, the FDIC also approved a final rule modernizing the FDIC’s overall brokered deposit
regulations, reflecting technological changes and innovations across the banking industry. The final rule clarifies when a person
meets the deposit broker definition in a way that provides clear rules by which banks and third parties can evaluate whether
particular activities cause deposits to be considered brokered. The final rule also identifies a number of bright line categories called
“designated exceptions” for business arrangements that automatically satisfy the primary purpose exception, establishes a
transparent application process for entities that seek a “primary purpose exception” and modernizes the definition and calculation
of the “National Rate Cap”. At December 31, 2020, PlainsCapital was “well capitalized” and therefore not subject to any
limitations with respect to its brokered deposits.
Check Clearing for the 21st Century Act. The Check Clearing for the 21st Century Act gives “substitute checks,” such as a digital
image of a check and copies made from that image, the same legal standing as the original paper check.
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Federal Home Loan Bank System. The Federal Home Loan Bank (“FHLB”) system, of which the Bank is a member, consists of
regional FHLBs governed and regulated by the Federal Housing Finance Board. The FHLBs serve as reserve or credit facilities for
member institutions within their assigned regions. The reserves are funded primarily from proceeds derived from the sale of
consolidated obligations of the FHLB system. The FHLBs make loans (i.e., advances) to members in accordance with policies and
procedures established by the FHLB and the boards of directors of each regional FHLB.
As a system member, according to currently existing policies and procedures, the Bank is entitled to borrow from the FHLB of its
respective region and is required to own a certain amount of capital stock in the FHLB. The Bank is in compliance with the stock
ownership rules with respect to such advances, commitments and letters of credit and home mortgage loans and similar
obligations. All loans, advances and other extensions of credit made by the FHLB to the Bank are secured by a portion of the
respective mortgage loan portfolio, certain other investments and the capital stock of the FHLB held by the Bank.
Fixing America’s Surface Transportation Act (FAST Act). The FAST Act, signed by President Obama on December 4, 2015,
provides for funding highways and infrastructure in the United States. Part of the funding for this law comes from a reduction of
the dividends paid by the Federal Reserve to its stockholders with total consolidated assets of more than $10 billion, effective
January 1, 2016. On that date, the annual dividend on paid-in capital stock for stockholders with total consolidated assets of more
than $10 billion shall be the lesser of: (i) the rate equal to the high yield of the 10-year Treasury note auctioned at the last auction
held prior to the payment of such dividend and (ii) 6 percent. The Federal Reserve Board published a final rule implementing these
requirements on November 23, 2016. On December 12, 2019, the Federal Reserve published its annual adjustment to the
consolidated asset threshold, increasing it to $10.715 billion in assets through December 31, 2020. As of December 31, 2020, the
Bank’s total assets were $13.3 billion.
Anti-terrorism and Money Laundering Legislation. The Bank is subject to the USA PATRIOT Act, the Bank Secrecy Act and
rules and regulations of the Office of Foreign Assets Control. These statutes and related rules and regulations impose requirements
and limitations on specific financial transactions and account relationships intended to guard against money laundering and
terrorism financing. The Bank has established a customer identification program pursuant to Section 326 of the USA PATRIOT
Act and the Bank Secrecy Act, including obtaining beneficial ownership information on new legal entity customers and otherwise
has implemented policies and procedures intended to comply with the foregoing rules until such time as FinCEN publishes
regulations implementing the Corporate Transparency Act, which is part of the AML Act. As discussed above under “Recent
Regulatory Developments,” the AML Act imposes the reporting requirements of beneficial ownership of certain business entities
on those entities and not on covered financial institutions, among other amendments to the Bank Secrecy Act.
Incentive Compensation Guidance. On June 21, 2010, the Federal Reserve Board, the Office of the Comptroller of the Currency,
the Office of Thrift Supervision and the FDIC jointly issued comprehensive final guidance on incentive compensation policies (the
“Incentive Compensation Guidance”) intended to ensure that the incentive compensation policies of banking organizations do not
undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The Incentive Compensation
Guidance sets expectations for banking organizations concerning their incentive compensation arrangements and related risk-
management, control and governance processes. The Incentive Compensation Guidance, which covers all employees that have the
ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon three primary
principles: (i) balanced risk-taking incentives, (ii) compatibility with effective controls and risk management, and (iii) strong
corporate governance. Any deficiencies in compensation practices that are identified may be incorporated into the organization’s
supervisory ratings, which can affect its ability to make acquisitions or perform other actions. In addition, under the Incentive
Compensation Guidance, a banking organization’s federal regulator may initiate enforcement action if the organization’s incentive
compensation arrangements pose a risk to the safety and soundness of the organization.
Broker-Dealer
The Hilltop Broker-Dealers are broker-dealers registered with the SEC, FINRA, all 50 U.S. states and the District of Columbia.
Hilltop Securities is also registered in Puerto Rico and the U.S. Virgin Islands. Much of the regulation of broker-dealers, however,
has been delegated to self-regulatory organizations, principally FINRA, the Municipal Securities Rulemaking Board and national
securities exchanges. These self-regulatory organizations adopt rules (which are subject to approval by the SEC) for governing its
members and the industry. Broker-dealers are also subject to federal securities laws and SEC rules, as well as the laws and rules of
the states in which a broker-dealer conducts business. The Hilltop Broker-Dealers are members of, and are primarily subject to
regulation, supervision and regular examination by FINRA.
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The regulations to which broker-dealers are subject cover all aspects of the securities business, including, but not limited to, sales
and trade practices, net capital requirements, record keeping and reporting procedures, relationships and conflicts with customers,
the handling of cash and margin accounts, experience and training requirements for certain employees, the conduct of investment
banking and research activities and the conduct of registered persons, directors, officers and employees. Broker-dealers are also
subject to the privacy and anti-money laundering laws and regulations discussed herein. Additional legislation, changes in
rules promulgated by the SEC, securities exchanges, self-regulatory organizations or states or changes in the interpretation or
enforcement of existing laws and rules often directly affect the method of operation and profitability of broker-dealers. The SEC,
securities exchanges, self-regulatory organizations and states may conduct administrative and enforcement proceedings that can
result in censure, fine, profit disgorgement, monetary penalties, suspension, revocation of registration or expulsion of broker-
dealers, their registered persons, officers or employees. The principal purpose of regulation and discipline of broker-dealers is the
protection of customers and the securities markets rather than protection of creditors and stockholders of broker-dealers.
Limitation on Businesses. The businesses that the Hilltop Broker-Dealers may conduct are limited by its agreements with, and its
oversight by, FINRA, other regulatory authorities and federal and state law. Participation in new business lines, including trading
of new products or participation on new exchanges or in new countries often requires governmental and/or exchange approvals,
which may take significant time and resources. In addition, the Hilltop Broker-Dealers are operating subsidiaries of Hilltop, which
means their activities are further limited by those that are permissible for financial holding companies and subsidiaries of financial
holding companies, and as a result, the Hilltop Broker-Dealers and Hilltop may be prevented from entering new businesses that
may be profitable in a timely manner, if at all.
Net Capital Requirements. The SEC, FINRA and various other regulatory authorities have stringent rules and regulations with
respect to the maintenance of specific levels of net capital by regulated entities. Rule 15c3-1 of the Exchange Act (the “Net Capital
Rule”) requires that a broker-dealer maintain minimum net capital. Generally, a broker-dealer’s net capital is net worth plus
qualified subordinated debt less deductions for non-allowable (or non-liquid) assets and other adjustments and operational charges.
At December 31, 2020, the Hilltop Broker-Dealers were in compliance with applicable net capital requirements.
The SEC, CFTC, FINRA and other regulatory organizations impose rules that require notification when net capital falls below
certain predefined thresholds. These rules also dictate the ratio of debt-to-equity in the regulatory capital composition of a broker-
dealer, and constrain the ability of a broker-dealer to expand its business under certain circumstances. If a broker-dealer fails to
maintain the required net capital, it may be subject to censure, fine, monetary penalties and other regulatory sanctions, including
suspension, revocation of registration or expulsion by the SEC or applicable regulatory authorities, and suspension, revocation or
expulsion by these regulators could ultimately lead to the broker-dealer’s liquidation. Additionally, the Net Capital Rule and
certain FINRA rules impose requirements that may have the effect of prohibiting a broker-dealer from distributing or withdrawing
capital and requiring prior notice to, and approval from, the SEC and FINRA for certain capital withdrawals.
Compliance with the net capital requirements may limit our operations, requiring the intensive use of capital. Such rules require
that a certain percentage of our assets be maintained in relatively liquid form and therefore act to restrict our ability to withdraw
capital from our broker-dealer entities, which in turn may limit our ability to pay dividends, repay debt or redeem or purchase
shares of our outstanding common stock. Any change in such rules or the imposition of new rules affecting the scope, coverage,
calculation or amount of capital requirements, or a significant operating loss or any unusually large charge against capital, could
adversely affect our ability to pay dividends, repay debt, meet our debt covenant requirements or to expand or maintain our
operations. In addition, such rules may require us to make substantial capital contributions into one or more of the Hilltop Broker-
Dealers in order for such subsidiaries to comply with such rules, either in the form of cash or subordinated loans made in
accordance with the requirements of all applicable net capital rules.
Customer Protection Rule. The Hilltop Broker-Dealers that hold customers’ funds and securities are subject to the SEC’s customer
protection rule (Rule 15c3-3 under the Exchange Act), which generally provides that such broker-dealers maintain physical
possession or control of all fully-paid securities and excess margin securities carried for the account of customers and maintain
certain reserves of cash or qualified securities.
Securities Investor Protection Corporation (“SIPC”). The Hilltop Broker-Dealers are subject to the Securities Investor Protection
Act and belong to SIPC, whose primary function is to provide financial protection for the customers of failing
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brokerage firms. SIPC provides protection for customers up to $500,000, of which a maximum of $250,000 may be in cash.
Anti-Money Laundering. The Hilltop Broker-Dealers must also comply with the USA PATRIOT Act and other rules and
regulations discussed herein, including FINRA requirements, designed to fight international money laundering and to block
terrorist access to the U.S. financial system. We are required to have systems and procedures to ensure compliance with such laws
and regulations.
CFTC Oversight. Hilltop Securities and Momentum Independent Network are registered as introducing brokers with the CFTC and
NFA. The CFTC also has net capital regulations (CFTC Rule 1.17) that must be satisfied. Our futures business is also regulated by
the NFA, a registered futures association. Violation of the rules of the CFTC, the NFA or the commodity exchanges could result in
remedial actions including fines, registration restrictions or terminations, trading prohibitions or revocations of commodity
exchange memberships.
Investment Advisory Activity. Hilltop Securities Asset Management, LLC, Hilltop Securities and Momentum Independent Network
are registered with, and subject to oversight and inspection by, the SEC as investment advisers under the Investment Advisers Act
of 1940, as amended. The investment advisory business of our subsidiaries is subject to significant federal regulation, including
with respect to wrap fee programs, the management of client accounts, the safeguarding of client assets, client fees and disclosures,
transactions among affiliates and recordkeeping and reporting procedures. Legislation and changes in regulations promulgated by
the SEC or changes in the interpretation or enforcement of existing laws and regulations often directly affect the method of
operation and profitability of investment advisers. The SEC may conduct administrative and enforcement proceedings that can
result in censure, fine, suspension, revocation of registration or expulsion of the investment advisory business of our subsidiaries,
our officers or employees.
Volcker Rule. Provisions of the Volcker Rule and the final rules implementing the Volcker Rule also restrict certain activities
provided by the Hilltop Broker-Dealers, including proprietary trading and sponsoring or investing in “covered funds.”
Regulation Best Interest (“Regulation BI”) and Form CRS Relationship Summary (“Form CRS”). Beginning June 2020, the “best
interest” standard requires a broker-dealer to make recommendations of securities transactions to a retail customer without putting
its financial interests ahead of the interests of a retail customer. The SEC Form CRS requires registered investment advisors
(“RIAs”) and broker-dealers to deliver to retail investors a succinct, plain English summary about the relationship and services
provided by the firm and the required standard of conduct associated with the relationship and services. Regulation BI heightens
the standard of care for broker-dealers when making investment recommendations and imposes disclosure and policy and
procedural obligations that could impact the compensation our wealth management line of business and its representatives receive
for selling certain types of products, particularly those that offer different compensation across different share classes (such as
mutual funds and variable annuities). In addition, Regulation BI prohibits a broker-dealer and its associated persons from using the
term “adviser” or “advisor” if the broker-dealer is not an RIA or the associated person is not a supervised person of an RIA.
Changing Regulatory Environment. The regulatory environment in which the Hilltop Broker-Dealers operate is subject to frequent
change. Our business, financial condition and operating results may be adversely affected as a result of new or revised legislation
or regulations imposed by the U.S. Congress, the SEC, FINRA or other U.S. and state governmental and regulatory authorities.
The business, financial condition and operating results of the Hilltop Broker-Dealers also may be adversely affected by changes in
the interpretation and enforcement of existing laws and rules by these governmental and regulatory authorities. In the current era of
heightened regulation of financial institutions, the Hilltop Broker-Dealers can expect to incur increasing compliance costs, along
with the industry as a whole.
Mortgage Origination
PrimeLending and the Bank are subject to the rules and regulations of the CFPB, FHA, VA, FNMA, FHLMC and GNMA with
respect to originating, processing, selling and servicing mortgage loans and the issuance and sale of mortgage-backed securities.
Those rules and regulations, among other things, prohibit discrimination and establish underwriting guidelines which include
provisions for inspections and appraisals, require credit reports on prospective borrowers and fix maximum loan amounts, and,
with respect to VA loans, fix maximum interest rates. Mortgage origination activities are subject to, among others, the Equal
Credit Opportunity Act, Fair Housing Act, Federal Truth-in-Lending Act, Secure and Fair Enforcement of Mortgage Licensing
Act, Home Mortgage Disclosure Act, Fair Credit Reporting Act and the Real Estate Settlement Procedures Act and the regulations
promulgated thereunder which, among other things, prohibit
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discrimination and require the disclosure of certain basic information to borrowers concerning credit terms and settlement costs.
PrimeLending and the Bank are also subject to regulation by the Texas Department of Banking with respect to, among other
things, the establishment of maximum origination fees on certain types of mortgage loan products. PrimeLending and the Bank are
also subject to the provisions of the Dodd-Frank Act. Among other things, the Dodd-Frank Act established the CFPB and provides
mortgage reform provisions regarding a customer’s ability to repay, restrictions on variable-rate lending, loan officers’
compensation, risk retention, and new disclosure requirements. The Dodd-Frank Act also clarifies that applicable state laws,
rules and regulations related to the origination, processing, selling and servicing of mortgage loans continue to apply to
PrimeLending.
The final rules concerning mortgage origination and servicing address the following topics:
Ability to Repay. This final rule requires that for residential mortgages, creditors must make a reasonable and good faith
determination based on verified and documented information that the consumer has a reasonable ability to repay the loan
according to its terms. The final rule also establishes a presumption of compliance with the ability to repay determination for a
certain category of mortgages called “qualified mortgages” meeting a series of detailed requirements. The final rule also provides a
rebuttable presumption for higher-priced mortgage loans. On December 29, 2020, the CFPB published a final rule creating a new
category of “qualified mortgage,” called a seasoned qualified mortgage, for first lien, fixed rate covered loans that meet certain
performance requirements, are held in portfolio by the originating creditor or first purchaser for a 36-month period, comply with
general restrictions on product features and points and fees, and meet certain underwriting requirements.
High-Cost Mortgage. This final rule strengthens consumer protections for high-cost mortgages (generally bans balloon payments
and prepayment penalties, subject to exceptions and bans or limits certain fees and practices) and requires consumers to receive
information about homeownership counseling prior to taking out a high-cost mortgage.
Appraisals for High-Risk Mortgages. The final rule permits a creditor to extend a higher-priced (subprime) mortgage loan
(“HPML”) only if the following conditions are met (subject to exceptions): (i) the creditor obtains a written appraisal; (ii) the
appraisal is performed by a certified or licensed appraiser; and (iii) the appraiser conducts a physical property visit of the interior
of the property. The rule also requires that during the application process, the applicant receives a notice regarding the appraisal
process and their right to receive a free copy of the appraisal.
Copies of Appraisals. This final rule requires a creditor to provide a free copy of appraisal or valuation reports prepared in
connection with any closed-end loan secured by a first lien on a dwelling. The final rule requires notice to applicants of the right to
receive copies of any appraisal or valuation reports and creditors must send copies of the reports whether or not the loan
transaction is consummated. Creditors must provide the copies of the appraisal or evaluation reports for free, however, the
creditors may charge reasonable fees for the cost of the appraisal or valuation unless applicable law provides otherwise.
Escrow Requirements. This final rule requires a minimum duration of five years for an escrow account on certain higher-priced
mortgage loans, subject to certain exemptions for loans made by certain creditors that operate predominantly in rural or
underserved areas, as long as certain other criteria are met.
Servicing. Two final rules, the Truth in Lending Act and the Real Estate Settlement Procedures Act, protect consumers from
detrimental actions by mortgage servicers and to provide consumers with better tools and information when dealing with mortgage
servicers. The final rules include a number of exemptions and other adjustments for small servicers, defined as servicers that
service 5,000 or fewer mortgage loans and service only mortgage loans that they or an affiliate originated or own.
Mortgage Loan Originator Compensation. This final rule revises and clarifies existing regulations and commentary on loan
originator compensation. The rule also prohibits, among other things: (i) certain arbitration agreements; (ii) financing certain credit
insurance in connection with a mortgage loan; (iii) compensation based on a term of a transaction or a proxy for a term of a
transaction; and (iv) dual compensation from a consumer and another person in connection with the transaction. The final rule also
imposes a duty on individual loan officers, mortgage brokers and creditors to be “qualified” and, when applicable, registered or
licensed to the extent required under applicable State and Federal law.
Risk Retention. This final rule requires that at least one sponsor of each securitization retains at least 5% of the credit risk of the
assets collateralizing asset-backed securities. Sponsors are prohibited from hedging or transferring this credit risk,
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and the rule applies in both public and private transactions. Securitizations backed by “qualified residential mortgages” or
“servicing assets” are exempt from the rule, and the definition of “qualified residential mortgages” is subject to review of the joint
regulators every five years.
CARES Act. As part of the response to the COVID-19 pandemic, Congress passed the CARES Act, which among other things,
established the ability of a borrower of a federally backed mortgage loan (VA, FHA, USDA, FHLMC and FNMA) experiencing
financial hardship due, directly or indirectly, to the COVID-19 pandemic to request forbearance from paying their mortgage by
submitting a request to the borrower’s servicer affirming such borrower’s financial hardship during the COVID-19 emergency.
Such a forbearance will be granted for up to 180 days, which can be extended for an additional 180-day period upon the request of
the borrower. During that time, no fees, penalties or interest beyond the amounts scheduled or calculated as if the borrower made
all contractual payments on time and in full under the mortgage contract will accrue on the borrower’s account.
Any additional regulatory requirements affecting our mortgage origination operations will result in increased compliance costs and
may impact revenue.
Item 1A. Risk Factors.
The following discussion sets forth what management currently believes could be the material regulatory, market and economic,
liquidity, legal and business and operational risks and uncertainties that could impact our business, results of operations and
financial condition. Other risks and uncertainties, including those not currently known to us, could also negatively impact our
business, results of operations and financial condition. Thus, the following should not be considered a complete discussion of all of
the risks and uncertainties we may face, and the order of their respective significance may change. Below is a summary of our risk
factors with a more detailed discussion following.
●
The outbreak of COVID-19 has adversely affected, and will likely continue to adversely affect, our business, financial
condition, liquidity and results of operations.
● Our allowances for credit losses for loans and debt securities may prove inadequate or we may be negatively affected by
credit risk exposures. Also, future additions to our allowance for credit losses will reduce our future earnings.
● As a participating lender in the PPP, the Company and the Bank are subject to additional risks of litigation from the Bank’s
clients, or other parties regarding our originating, processing, or servicing of loans under the PPP, and risks that the SBA may
not fund some or all PPP loan guaranties.
● Our business is subject to interest rate risk, and fluctuations in interest rates may adversely affect our earnings, capital levels
and overall results.
● Our operational systems and networks have been, and will continue to be, subject to an increasing risk of continually
evolving cybersecurity or other technological risks, which could result in a loss of customer business, financial liability,
regulatory penalties, damage to our reputation or the disclosure of confidential information.
●
The financial services industry is characterized by rapid technological change, and if we fail to keep pace, our business may
suffer.
● We are heavily reliant on technology, and a failure to effectively implement new technological solutions or enhancements to
existing systems or platforms could adversely affect our business operations and the financial results of our operations.
● Our geographic concentration may magnify the adverse effects and consequences of any regional or local economic
downturn.
● An adverse change in real estate market values may result in losses in our banking segment and otherwise adversely affect
our profitability.
● Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, may
adversely affect interest income or expense.
● Our mortgage origination is subject to fluctuations based upon seasonal and other factors and, as a result, our results of
operations for any given quarter may not be indicative of the results that may be achieved for the full fiscal year.
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● Our risk management processes may not fully identify and mitigate exposure to the various risks that we face, including
interest rate, credit, liquidity and market risk.
● Our hedging strategies may not be successful in mitigating our exposure to interest rate risk.
● Our bank lending, margin lending, stock lending, securities trading and execution and mortgage purchase businesses are all
subject to credit risk.
● We depend on our computer and communications systems and an interruption in service would negatively affect our
business.
● We are heavily dependent on dividends from our subsidiaries.
● Our indebtedness may affect our ability to operate our business, and may have a material adverse effect on our financial
condition and results of operations. We may incur additional indebtedness, including secured indebtedness.
● We may not be able to generate sufficient cash to service all of our indebtedness, including the Senior Notes, and may be
forced to take other actions to satisfy our obligations under our indebtedness that may not be successful.
● A reduction in our credit rating could adversely affect us or the holders of our securities.
●
The indenture governing the Senior Notes contains, and any instruments governing future indebtedness would likely contain,
restrictions that limit our flexibility in operating our business.
● We are subject to extensive supervision and regulation that could restrict our activities and impose financial requirements or
limitations on the conduct of our business and limit our ability to generate income.
● We may be subject to more stringent capital requirements in the future.
● Our broker-dealer business is subject to various risks associated with the securities industry.
● Market fluctuations could adversely impact our broker-dealer business.
● Our investment advisory business may be affected if our investment products perform poorly.
● Our existing correspondents may choose to perform their own clearing services or move their clearing business to one of our
competitors or exit the business.
●
Several of our broker-dealer segment’s product lines rely on favorable tax treatment and changes in federal tax law could
impact the attractiveness of these products to our customers.
● Our mortgage origination segment is subject to investment risk on loans that it originates.
●
The CFPB has issued “ability-to-repay” and “qualified mortgage” rules that may have a negative impact on our loan
origination process and foreclosure proceedings, which could adversely affect our business, operating results, and financial
condition.
● Changes in interest rates may change the value of our mortgage servicing rights portfolio, which may increase the volatility
of our earnings.
●
If we fail to develop, implement and maintain an effective system of internal control over financial reporting, the accuracy
and timing of our financial reporting in future periods may be adversely affected.
● We ultimately may write-off goodwill and other intangible assets resulting from business combinations.
●
The accuracy of our financial statements and related disclosures could be affected if we are exposed to actual conditions
different from the judgments, assumptions or estimates used in our critical accounting policies.
● We are dependent on our management team, and the loss of our senior executive officers or other key employees could
impair our relationship with customers and adversely affect our business and financial results.
● We are subject to losses due to fraudulent and negligent acts.
● Negative publicity regarding us, or financial institutions in general, could damage our reputation and adversely impact our
business and results of operations.
● We are subject to legal claims and litigation, including potential securities law liabilities, any of which could have a material
adverse effect on our business.
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Risks Related to our Business
The outbreak of COVID-19 has adversely affected, and will likely continue to adversely affect, our business, financial
condition, liquidity and results of operations.
The worldwide COVID-19 pandemic has negatively affected the global economy and our business, and we believe that it is likely
to continue to do so. Since the beginning of January 2020, the outbreak has caused significant volatility and disruption in the
financial markets both globally and in the United States. If COVID-19, or another highly infectious or contagious disease,
continues to spread or the response to contain it is unsuccessful, we could experience material adverse effects on our business,
financial condition, liquidity, and results of operations. The extent of such effects depends on future developments that are highly
uncertain and cannot be predicted, including the geographic spread of the virus, the overall severity of the disease, the duration of
the outbreak, the measures that have to be taken, or future measures, by various governmental authorities in response to the
outbreak (such as quarantines, shelter-in-place orders and travel restrictions) and the possible further impacts on the global
economy.
We are generally exposed to the credit risk that third parties that owe us money, securities or other assets will fail to meet their
obligations to us due to numerous causes, and this risk may be exacerbated by the macroeconomic effects of COVID-19. We lend
to businesses and individuals, including through offering commercial and industrial loans, commercial and residential mortgage
loans and other loans generally collateralized by assets. We also incur credit risk through our investments. Our credit risk and
credit losses may increase to the extent our loans or investments are to borrowers or issuers who as a group may be uniquely or
disproportionately affected by declining economic or market conditions as a result of COVID-19, such as those operating in the
travel, lodging, retail, entertainment and energy industries. During 2020, the significant build in the allowance for credit losses at
the Bank was primarily due to the market disruption and related economic uncertainties caused by COVID-19. We may incur
further unexpected losses, and the deterioration of an individually large exposure due to COVID-19 could lead to additional credit
loss provisions and/or charges-offs, or credit impairment of our investments, and subsequently have a material impact on our net
income, regulatory capital and liquidity.
The continuation of the adverse economic conditions caused by the pandemic can be expected to have a significant adverse effect
on our businesses and results of operations, including:
●
●
●
further increases in the allowance for credit losses and possible recognition of credit losses, especially if businesses
remain closed or substantially limited in their operating capacity, the unemployment rate remains high, consumer and
business confidence remains declined, consumer trends continue to change and clients and customers draw on their lines
of credit or seek additional loans to help finance their businesses;
possible constraints on liquidity and capital, whether due to increases in risk-weighted assets related to supporting client
activities or to regulatory actions; and
the possibility that significant portions of our workforce are unable to work effectively, including because of illness,
quarantines, sheltering-in-place arrangements, government actions or other restrictions related to the pandemic.
We also could experience a material reduction in trading volume and lower securities prices in times of market volatility, which
would result in lower brokerage revenues, including losses on firm inventory. The fair values of certain of our investments could
also be negatively impacted, resulting in unrealized or realized losses on such investments.
Moreover, certain actions taken by U.S. or other governmental authorities, including the Federal Reserve, that are intended to
ameliorate the macroeconomic effects of COVID-19 may cause additional harm to our business. Decreases in short-term interest
rates, such as those announced by the Federal Reserve late in our 2019 fiscal year and during the first fiscal quarter of 2020, have
had, and we expect that they will continue to have, a negative impact on our results of operations, as we have certain assets and
liabilities that are sensitive to changes in interest rates.
The extent to which the COVID-19 pandemic negatively affects our businesses, results of operations and financial condition, as
well as our regulatory capital and liquidity ratios, will depend on future developments that are highly uncertain and cannot be
predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties
in response to the pandemic. To the extent the COVID-19 pandemic adversely affects our business, results of operations and
financial condition, it may also have the effect of heightening many of the other risks described herein.
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Our allowances for credit losses for loans and debt securities may prove inadequate or we may be negatively affected by credit
risk exposures. Also, future additions to our allowance for credit losses will reduce our future earnings.
As a lender, we are exposed to the risk that we could sustain losses because our borrowers may not repay their loans in accordance
with the terms of their loans. We maintain allowances for credit losses for loans and debt securities to provide for defaults and
nonperformance, which represent an estimate of expected losses over the remaining contractual lives of the loan and debt security
portfolios. This estimate is the result of our continuing evaluation of specific credit risks and loss experience, current loan and debt
security portfolio quality, present economic, political and regulatory conditions, industry concentrations, reasonable and
supportable forecasts for future conditions and other factors that may indicate losses. The determination of the appropriate levels
of the allowances for loan and debt security credit losses inherently involves a high degree of subjectivity and judgment and
requires us to make estimates of current credit risks and future trends, all of which may undergo material changes. Generally, our
nonperforming loans and other real estate owned (“OREO”) reflect operating difficulties of individual borrowers and weaknesses
in the economies of the markets we serve.
Under the acquisition method of accounting requirements, we were required to estimate the fair value of the loan portfolios
acquired in each of the PlainsCapital Merger, the Federal Deposit Insurance Corporation (“FDIC”) -assisted transaction (the “FNB
Transaction”) whereby the Bank acquired certain assets and assumed certain liabilities of FNB, the acquisition of SWS Group, Inc.
in a stock and cash transaction (the “SWS Merger”) and the acquisition of The Bank of River Oaks (“BORO”) in an all-cash
transaction (“BORO Acquisition”, and collectively with the PlainsCapital Merger, FNB Transaction and the SWS Merger, the
“Bank Transactions”) as of the applicable acquisition date and write down the recorded value of each such acquired portfolio to the
applicable estimate. For most loans, this process was accomplished by computing the net present value of estimated cash flows to
be received from borrowers of such loans. The allowance for credit losses that had been maintained by PCC, FNB, SWS or BORO,
as applicable, prior to their respective transactions, was eliminated in this accounting process.
The estimates of fair value as of the consummation of each of the Bank Transactions were based on economic conditions at such
time and on Bank management’s projections concerning both future economic conditions and the ability of the borrowers to
continue to repay their loans. If management’s assumptions and projections prove to be incorrect, however, the estimate of fair
value may be higher than the actual fair value and we may suffer losses in excess of those estimated. Further, the allowance for
credit losses established for new loans may prove to be inadequate to cover actual losses, especially if economic conditions
worsen.
While Bank management will endeavor to estimate the allowance to cover anticipated losses over the lives of our loan and debt
security portfolios, no underwriting and credit monitoring policies and procedures that we could adopt to address credit risk could
provide complete assurance that we will not incur unexpected losses. These losses could have a material adverse effect on our
business, financial condition, results of operations and cash flows. In addition, federal regulators periodically evaluate the
adequacy of our allowance for credit losses and may require us to increase our provision for credit losses or recognize further loan
charge-offs based on judgments different from those of Bank management. Any such increase in our provision for (reversal of)
credit losses or additional loan charge-offs could have a material adverse effect on our results of operations and financial
condition.
As a participating lender in the PPP, the Company and the Bank are subject to additional risks of litigation from the Bank’s
clients, or other parties regarding our originating, processing, or servicing of loans under the PPP, and risks that the SBA may
not fund some or all PPP loan guaranties.
On March 27, 2020, President Trump signed the CARES Act, which included a $349 billion loan program administered through
the SBA referred to as the PPP. The Appropriations PPP Amendments, signed by the President on December 27, 2020, among
other things, reauthorize and modify the PPP by appropriating more than $284 billion to the PPP.
Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other
approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is
participating as a lender in the PPP. The PPP opened on April 3, 2020; however, because of the short timeframe between the
passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the
operation of the PPP which exposes the Company to risks relating to noncompliance with the PPP. For instance, several larger
banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the
PPP. The Company and the Bank may be exposed to the risk of litigation, from
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both clients and non-clients that solicited the Bank for PPP loans, regarding our process and procedures used to process
applications for the PPP. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation could have
a material adverse impact on our business, financial condition and results of operations.
In addition, the Bank may be exposed to credit risk on PPP loans if a determination is made by the SBA that there is a deficiency
in the manner in which loans were originated, funded, or serviced by the Bank, such as an issue with the eligibility of a borrower
to receive a PPP loan or the calculation of the maximum PPP loans to which a borrower is entitled, which may or may not be
related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP. If a deficiency is identified, the SBA
may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek
recovery of any loss related to the deficiency from the Company.
In addition, the Company’s participation in the PPP as a lender may adversely affect the Company’s revenue and results of
operations depending on the timing and amount of forgiveness, if any, to which borrowers are entitled.
Our business is subject to interest rate risk, and fluctuations in interest rates may adversely affect our earnings, capital levels
and overall results.
The majority of our assets are monetary in nature and, as a result, we are subject to significant risk from changes in interest rates.
Between December 2016 and December 2018, the Federal Open Market Committee of the Federal Reserve Board raised its target
range for short-term interest rates by 200 basis points, and between August 2019 and March 2020, it decreased interest rates by
200 basis points. Changes in interest rates may impact our net interest income in our banking segment as well as the valuation of
our assets and liabilities in each of our segments. Earnings in our banking segment are significantly dependent on our net interest
income, which is the difference between interest income on interest-earning assets, such as loans and securities, and interest
expense on interest-bearing liabilities, such as deposits and borrowings. We expect to periodically experience “gaps” in the interest
rate sensitivities of our banking segment’s assets and liabilities, meaning that either our interest-bearing liabilities will be more
sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates
should move contrary to our position, this “gap” may work against us, and our results of operations and financial condition may be
adversely affected. Asymmetrical changes in interest rates, such as if short-term rates increase or decrease at a faster rate than
long-term rates, can affect the slope of the yield curve. A flatter or inverted yield curve, which occurred at various times
throughout 2019, as measured by the difference between 10-year U.S. Treasury bond yields and 3-month yields, could adversely
impact the net interest income of our banking segment as the spread between interest-earning assets and interest-bearing liabilities
becomes compressed. As a result, a flattening or an inversion of the yield curve is likely to have a negative impact on our net
interest income and our net interest margin over time.
An increase in the absolute level of interest rates may also, among other things, adversely affect the demand for loans and our
ability to originate loans. In particular, if mortgage interest rates increase, the demand for residential mortgage loans and the
refinancing of residential mortgage loans will likely decrease, which will have an adverse effect on our income generated from
mortgage origination activities. Conversely, a decrease in the absolute level of interest rates, among other things, may lead to
prepayments in our loan and mortgage-backed securities portfolios as well as increased competition for deposits. Accordingly,
changes in the general level of market interest rates may adversely affect our net yield on interest-earning assets, loan origination
volume and our overall results.
Our broker-dealer segment holds securities, principally fixed-income bonds, to support sales, underwriting and other customer
activities. If interest rates increase, the value of debt securities held in the broker-dealer segment’s inventory would decrease.
Rapid or significant changes in interest rates could adversely affect the segment’s bond sales, trading and underwriting activities.
Further, the profitability of our margin and stock lending businesses depends to a great extent on the difference between interest
income earned on loans and investments of customer cash balances and the interest expense paid on customer cash balances and
borrowings.
In addition, we hold 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. Such securities are classified as available for sale
and are carried at estimated fair value, which may fluctuate with changes in market interest rates. The effects of an increase in
market interest rates may result in a decrease in the value of our available for sale investment portfolio.
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Market interest rates are affected by many factors outside of our control, including inflation, recession, unemployment, money
supply, international disorder and instability in domestic and foreign financial markets. We may not be able to accurately predict
the likelihood, nature and magnitude of such changes or how and to what extent such changes may affect our business. We also
may not be able to adequately prepare for, or compensate for, the consequences of such changes. Any failure to predict and prepare
for changes in interest rates, or adjust for the consequences of these changes, may adversely affect our earnings and capital levels
and overall results of operations and financial condition.
Our business and results of operations may be adversely affected by unpredictable economic, market and business conditions.
Our business and results of operations are affected by general economic, market and business conditions. The credit quality of our
loan portfolio necessarily reflects, among other things, the general economic conditions in the areas in which we conduct our
business. Our continued financial success depends to a degree on factors beyond our control, including:
●
●
●
●
national and local economic conditions, such as the level and volatility of short-term and long-term interest rates,
inflation, home prices, unemployment and under-employment levels, energy prices, bankruptcies, household income and
consumer spending;
the availability and cost of capital and credit;
incidence of customer fraud; and
federal, state and local laws affecting these matters.
The deterioration of any of these conditions, as we have experienced with past economic downturns, could adversely affect our
consumer and commercial businesses and securities portfolios, our level of loan charge-offs and provision for credit losses, the
carrying value of our deferred tax assets, the investment portfolio of our insurance segment, our capital levels and liquidity, our
securities underwriting business and our results of operations.
Several factors could pose risks to the financial services industry, including trade wars, restrictions and tariffs; slowing growth in
emerging economies; geopolitical matters, including international political unrest, disturbances and conflicts; acts of war and
terrorism; pandemics; changes in interest rates; regulatory uncertainty; continued infrastructure deterioration and low oil prices. In
addition, the current environment of heightened scrutiny of financial institutions has resulted in increased public awareness of and
sensitivity to banking fees and practices. Each of these factors may adversely affect our fees and costs.
Over the last several years, there have been several instances where there has been uncertainty regarding the ability of Congress
and the President collectively to reach agreement on federal budgetary and spending matters. A period of failure to reach
agreement on these matters, particularly if accompanied by an actual or threatened government shutdown, may have an adverse
impact on the U.S. economy. Additionally, a prolonged government shutdown may inhibit our ability to evaluate borrower
creditworthiness and originate and sell certain government-backed loans.
Our operational systems and networks have been, and will continue to be, subject to an increasing risk of continually evolving
cybersecurity or other technological risks, which could result in a loss of customer business, financial liability, regulatory
penalties, damage to our reputation or the disclosure of confidential information.
We rely heavily on communications and information systems to conduct our business and maintain the security of confidential
information and complex transactions, which subjects us to an increasing risk of cyber incidents from these activities due to a
combination of new technologies and the increasing use of the Internet to conduct financial transactions, as well as a potential
failure, interruption or breach in the security of these systems, including those that could result from attacks or planned changes,
upgrades and maintenance of these systems. Such cyber incidents could result in failures or disruptions in our customer
relationship management, securities trading, general ledger, deposits, computer systems, electronic underwriting servicing or loan
origination systems; or unauthorized disclosure of confidential and non-public information maintained within our systems. We also
utilize relationships with third parties to aid in a significant portion of our information systems, communications, data management
and transaction processing. These third parties with which we do business may also be sources of cybersecurity or other
technological risks, including operational errors, system interruptions or breaches, unauthorized disclosure of confidential
information and misuse of intellectual property. If our third-party service providers encounter any of these issues, we could be
exposed to disruption of service, reputation damages, and litigation risk, any of which could have a material adverse effect on our
business.
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The recent occurrence of cybersecurity incidents across a range of industries has resulted in increased legislative and regulatory
scrutiny over cybersecurity and calls for additional data privacy laws and regulations at both the state and federal levels. For
example, in 2018, the State of California adopted the California Consumer Privacy Act of 2018, which imposes requirements on
companies operating in California and provides consumers with a private right of action if covered companies suffer a data breach
related to their failure to implement reasonable security measures. These laws and regulations could result in increased operating
expenses or increase our exposure to the risk of litigation.
Although we devote significant resources to maintain and regularly upgrade our systems and networks to safeguard critical
business applications, there is no guarantee that these measures or any other measures can provide absolute security. Our computer
systems, software and networks may be adversely affected by cyber incidents such as unauthorized access; loss or destruction of
data (including confidential client information); account takeovers; unavailability of service; computer viruses or other malicious
code; cyber attacks; and other events. In addition, our protective measures may not promptly detect intrusions, and we may
experience losses or incur costs or other damage related to intrusions that go undetected or go undetected for significant periods of
time, at levels that adversely affect our financial results or reputation. Further, because the methods used to cause cyber attacks
change frequently, or in some cases cannot be recognized until launched, we may be unable to implement preventative measures or
proactively address these methods until they are discovered. Cyber threats may derive from human error, fraud or malice on the
part of employees or third parties, or may result from accidental technological failure. For example, during the second quarter of
2018, we became the victim of a “spear phishing” attack on one of our employees in which we suffered a $4.0 million wire fraud
loss and sensitive customer information was stolen. As a result of this attack, we incurred costs to provide identity protections
services, including credit monitoring, to customers who may have been impacted and other legal and professional services, and
may also incur expenses in the future including legal and professional expenses and claims for damages. Additional challenges are
posed by external extremist parties, including foreign state actors, in some circumstances, as a means to promote political ends. If
one or more of these events occurs, it could result in the disclosure of confidential client or customer information, damage to our
reputation with our clients, customers and the market, customer dissatisfaction, additional costs such as repairing systems or
adding new personnel or protection technologies, regulatory penalties, fines, remediation costs, exposure to litigation and other
financial losses to both us and our clients and customers. Such events could also cause interruptions or malfunctions in our
operations. We maintain cyber risk insurance, but this insurance may not be sufficient to cover all of our losses from any future
breaches of our systems.
We continue to evaluate our cybersecurity program and will consider incorporating new practices as necessary to meet the
expectations of regulatory agencies in light of such cybersecurity guidance and regulatory actions and settlements for
cybersecurity-related failures and violations by other industry participants. Such procedures include management-level
engagement and corporate governance, risk management and assessment, technical controls, incident response planning,
vulnerability testing, vendor management, intrusion detection monitoring, patch management and staff training. Even if we
implement these procedures, however, we cannot assure you that we will be fully protected from a cybersecurity incident, the
occurrence of which could adversely affect our reputation and financial condition.
The financial services industry is characterized by rapid technological change, and if we fail to keep pace, our business may
suffer.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new
technology-driven products and services. Many of our competitors have substantially greater resources to invest in technological
improvements. We may not be able to effectively or timely implement new technology-driven products and services or be
successful in marketing these products and services to our customers and clients. Failure to successfully keep pace with
technological change affecting the financial services industry and avoid interruptions, errors and delays could have a material
adverse impact on our business, financial condition, results of operations or cash flows.
We are heavily reliant on technology, and a failure to effectively implement new technological solutions or enhancements to
existing systems or platforms could adversely affect our business operations and the financial results of our operations.
Like most financial services companies, we significantly depend on technology to deliver our products and services and to
otherwise conduct business. To remain technologically competitive and operationally efficient, we have either begun the
significant investment in or have plans to invest in new technological solutions, substantial core system upgrades and other
technology enhancements within each of our operating segments and corporate. Many of these solutions and enhancements have a
significant duration, include phased implementation schedules, are tied to critical systems, and
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require substantial internal and external resources for design and implementation. Such external resources may be relied upon to
provide expertise and support to help implement, maintain and/or service certain of our core technology solutions.
Although we take steps to mitigate the risks and uncertainties associated with these solutions and initiatives, we may encounter
significant adverse developments in the completion and implementation of these initiatives. These may include significant time
delays, cost overruns, loss of key personnel, technological problems, processing failures, distraction of management and other
adverse developments. Further, our ability to maintain an adequate control environment may be impacted.
The ultimate effect of any adverse development could damage our reputation, result in a loss of customer business, subject us to
additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could materially affect
us, including our control environment, operating efficiency, and results of operations.
Our geographic concentration may magnify the adverse effects and consequences of any regional or local economic downturn.
We conduct our banking operations primarily in Texas. At December 31, 2020, substantially all of the real estate loans in our loan
portfolio were secured by properties located in our four largest markets within Texas, with 40%, 23%, 15% and 5% secured by
properties located in the Dallas/Fort Worth, Austin/San Antonio, Houston/Coastal Bend and Rio Grande Valley/South Texas
markets, respectively. Substantially all of these loans are made to borrowers who live and conduct business in Texas. Accordingly,
economic conditions in Texas have a significant impact on the ability of the Bank’s customers to repay loans, the value of the
collateral securing loans, our ability to sell the collateral upon any foreclosure, and the stability of the Bank’s deposit funding
sources. Further, low crude oil prices may have a more profound effect on the economy of energy-dominant states such as Texas.
The Bank has loans extended to businesses that depend on the energy industry including those within the exploration and
production, oilfield services, pipeline construction, distribution and transportation sectors. If crude oil prices remain depressed for
an extended period or decrease further, the Bank could experience weaker energy loan demand and increased losses within its
energy and Texas-related loan portfolios. Moreover, natural disasters, such as Hurricane Harvey in 2017, may also have an adverse
impact on local economic conditions.
In addition, mortgage origination fee income is dependent to a significant degree on economic conditions in Texas and California.
During 2020, 18.6% and 10.9% of our mortgage loans originated (by dollar volume) were collateralized by properties located in
Texas and California, respectively. Also, in our broker-dealer segment, 69% of public finance services net revenues were from
entities located in Texas, and 89% of retail brokerage service revenues were generated through locations in Texas, California and
Oklahoma. Any regional or local economic downturn that affects Texas or, to a lesser extent, California or Oklahoma, whether
caused by recession, inflation, unemployment, changing oil prices, natural disasters or other factors, may affect us and our
profitability more significantly and more adversely than our competitors that are less geographically concentrated, and could have
a material adverse effect on our results of operations and financial condition.
An adverse change in real estate market values may result in losses in our banking segment and otherwise adversely affect our
profitability.
At December 31, 2020, 38% of the loan portfolio of our banking segment was comprised of loans with commercial or residential
real estate as the primary component of collateral. The real estate collateral in each case provides a source of repayment in the
event of default by the borrower and may deteriorate in value during the time the credit is extended. A decline in commercial or
residential real estate values generally, and in Texas specifically, could impair the value of the collateral underlying a significant
portion of the Bank’s loan portfolio and our ability to sell the collateral upon any foreclosure. In the event of a default with respect
to any of these loans, the amounts we receive upon sale of the collateral may be insufficient to recover the outstanding principal
and interest on the loan. As a result, our results of operations and financial condition may be materially adversely affected by a
decrease in real estate market values.
Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative reference rate, may adversely
affect interest income or expense.
Certain loans we originate bear interest at a floating rate based on LIBOR. We also pay interest on certain notes and are
counterparty to derivative agreements that are based on LIBOR.
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As previously discussed, in July 2017, the FCA announced that it intends to cease compelling banks to submit rates for the
calculation of LIBOR after 2021. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to
LIBOR and it is impossible to predict the effect of any such alternatives on the value of LIBOR-based securities and variable rate
loans, debentures, or other securities or financial arrangements, given LIBOR’s role in determining market interest rates globally.
The ARRC has proposed that SOFR is the rate that represents best practice as the alternative to LIBOR for use in derivatives and
other financial contracts that are currently indexed to LIBOR. ARRC has proposed a paced market transition plan to SOFR from
LIBOR, and organizations are currently working on industry-wide and company-specific transition plans as it relates to derivatives
and cash markets exposed to LIBOR.
It is unclear whether, or in what form, LIBOR will continue to exist after 2021. Any transition to an alternative benchmark will
require careful consideration and implementation so as not to disrupt the stability of financial markets. If LIBOR ceases to exist,
we may need to take a variety of actions, including negotiating certain of our agreements based on an alternative benchmark that
may be established, if any. There is no guarantee that a transition from LIBOR to an alternative benchmark will not result in
financial market disruptions, significant changes in benchmark rates or adverse changes in the value of certain of our loans, and
our income and expense. In addition, as a result of these actions, we may incur significant expenses in effecting the transition,
including, but not limited to, changes to our agreements and our agreements with customers that do not contemplate LIBOR being
unavailable, systems and processes, and may be subject to disputes or litigation with customers over the appropriateness or
comparability to LIBOR of the substitute indices, which could have a material adverse effect on our financial condition or results
of operations.
Our mortgage origination business is subject to fluctuations based upon seasonal and other factors and, as a result, our results
of operations for any given quarter may not be indicative of the results that may be achieved for the full fiscal year.
Our mortgage origination business is subject to several variables that can impact loan origination volume, including seasonal and
interest rate fluctuations. We typically experience increased loan origination volume from purchases of homes during the second
and third calendar quarters, when more people tend to move and buy or sell homes. In addition, an increase in the general level of
interest rates may, among other things, adversely affect the demand for mortgage loans and our ability to originate mortgage loans.
In particular, if mortgage interest rates increase, the demand for residential mortgage loans and the refinancing of residential
mortgage loans will likely decrease, which will have an adverse effect on our mortgage origination activities. Conversely, a
decrease in the general level of interest rates, among other things, may lead to increased competition for mortgage loan origination
business.
As a result of these variables, our results of operations for any single quarter are not necessarily indicative of the results that may
be achieved for a full fiscal year.
Our risk management processes may not fully identify and mitigate exposure to the various risks that we face, including
interest rate, credit, liquidity and market risk.
We continue to refine our risk management techniques, strategies and assessment methods on an ongoing basis. However, our risk
management techniques and strategies (as well as those available to the market generally) may not be fully effective in mitigating
our risk exposure in all economic market environments or against all types of risk. For example, we might fail to identify or
anticipate particular risks, or the systems that we use, and that are used within our business segments generally, may not be capable
of identifying certain risks. Certain of our strategies for managing risk are based upon observed historical market behavior. We
apply statistical and other tools to these observations to quantify our risk exposure. Any failures in our risk management
techniques and strategies to accurately identify and quantify our risk exposure could limit our ability to manage risks. In addition,
any risk management failures could cause our losses to be significantly greater than the historical measures indicate. Further, our
quantified modeling does not take all risks into account. As a result, we also take a qualitative approach in reducing our risk,
although our qualitative approach to managing those risks could also prove insufficient, exposing us to material unanticipated
losses.
Our hedging strategies may not be successful in mitigating our exposure to interest rate risk.
We use derivative financial instruments, primarily consisting of interest rate swaps, to limit our exposure to interest rate risk within
the banking and mortgage origination segments. No hedging strategy can completely protect us, and the derivative financial
instruments we elect may not have the effect of reducing our interest rate risk. Poorly designed strategies, improperly executed and
documented transactions, inaccurate assumptions or the failure of a counterparty to fulfill its obligations could actually increase
our risks and losses. In addition, hedging strategies involve transaction and
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other costs. Our hedging strategies and the derivatives that we use may not adequately offset the risks of interest rate volatility and
could result in or magnify losses, which could have an adverse effect on our financial condition and results of operations.
Our bank lending, margin lending, stock lending, securities trading and execution and mortgage purchase businesses are all
subject to credit risk.
We are exposed to credit risk in all areas of our business. The Bank is exposed to the risk that its loan customers may not repay
their loans in accordance with their terms, the collateral securing the loans may be insufficient, or its credit loss reserve may be
inadequate to fully compensate the Bank for the outstanding balance of the loan plus the costs to dispose of the collateral. Further,
our mortgage warehousing activities subject us to credit risk during the period between funding by the Bank and when the
mortgage company sells the loan to a secondary investor.
Our broker-dealer business is subject to credit risk if securities prices decline rapidly because the value of our collateral could fall
below the amount of the indebtedness it secures. In rapidly appreciating markets, credit risk increases due to short positions. Our
securities lending business as well as our securities trading and execution businesses subject us to credit risk if a counterparty fails
to perform or if collateral securing its obligations is insufficient. In securities transactions, we are subject to credit risk during the
period between the execution of a trade and the settlement by the customer.
Significant failures by our customers, including correspondents, or clients to honor their obligations, or increases in their rates of
default, together with insufficient collateral and reserves, could have a material adverse effect on our business, financial condition,
results of operations or cash flows.
We depend on our computer and communications systems and an interruption in service would negatively affect our business.
Our businesses rely on electronic data processing and communications systems. The effective use of technology allows us to better
serve customers and clients, increases efficiency and reduces costs. Our continued success will depend, in part, upon our ability to
successfully maintain, secure and upgrade the capability of our systems, our ability to address the needs of our clients by using
technology to provide products and services that satisfy their demands and our ability to retain skilled information technology
employees. Significant malfunctions or failures of our computer systems, computer security, software or any other systems in the
trading process (e.g., record retention and data processing functions performed by third parties, and third party software, such as
Internet browsers) could cause delays in customer trading activity. Such delays could cause substantial losses for customers and
could subject us to claims from customers for losses, including litigation claiming fraud or negligence. In addition, if our computer
and communications systems fail to operate properly, regulations would restrict our ability to conduct business. Any such failure
could prevent us from collecting funds relating to customer and client transactions, which would materially impact our cash flows.
Any computer or communications system failure or decrease in computer system performance that causes interruptions in our
operations could have a material adverse effect on our business, financial condition, results of operations or cash flows.
We are heavily dependent on dividends from our subsidiaries.
We are a financial holding company engaged in the business of managing, controlling and operating our subsidiaries. Hilltop
conducts limited material business other than activities incidental to holding stock in the Bank and Securities Holdings. As a result,
we rely substantially on the profitability of, and dividends from, these subsidiaries to pay our operating expenses and to pay
interest on our debt obligations. The Bank and Securities Holdings are subject to significant regulatory restrictions limiting their
ability to declare and pay dividends to us. Accordingly, if the Bank and Securities Holdings are unable to make cash distributions
to us, then we may be unable to satisfy our operating expense obligations or make interest payments on our debt obligations.
Our broker-dealer business is subject to various risks associated with the securities industry.
Our broker-dealer business is subject to uncertainties that are common in the securities industry. These uncertainties include:
●
●
intense competition in the securities industry;
the volatility of domestic and international financial, bond and stock markets;
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●
●
●
extensive governmental regulation;
litigation; and
substantial fluctuations in the volume and price level of securities.
As a result of such uncertainties, the revenues and operating results of our broker-dealer segment may vary significantly from
quarter to quarter and from year to year. Unfavorable financial or economic conditions could reduce the number and size of
transactions in which we provide financial advisory, underwriting and other services. Disruptions in fixed income and equity
markets could lead to a decline in the volume of transactions executed for customers and, therefore, to declines in revenues from
commissions and clearing services. In addition, the Hilltop Broker-Dealers are operating subsidiaries of Hilltop, which means that
their activities are limited to those that are permissible for subsidiaries of a bank holding company.
Market fluctuations could adversely impact our broker-dealer business.
Our broker-dealer segment is subject to risks as a result of fluctuations in the securities markets. Our securities trading, market-
making and underwriting activities involve the purchase and sale of securities as a principal, which subjects our capital to
significant risks. Market conditions could limit our ability to sell securities purchased or to purchase securities sold in such
transactions. If interest rates increase, the value of debt securities we hold in our inventory would decrease. Rapid or significant
market fluctuations could adversely affect our business, financial condition, results of operations and cash flow.
In addition, during periods of market disruption, it may be difficult to value certain assets if comparable sales become less frequent
or market data becomes less observable. Certain classes of assets or loan collateral that were in active markets with significant
observable data may become illiquid due to the current financial environment. In such cases, asset valuations may require more
estimation and subjective judgment.
Our investment advisory business may be affected if our investment products perform poorly.
Poor investment returns and declines in client assets in our investment advisory business, due to either general market conditions
or underperformance (relative to our competitors or to benchmarks) by investment products, may affect our ability to retain
existing assets, prevent clients from transferring their assets out of products or their accounts, or inhibit our ability to attract new
clients or additional assets from existing clients. Any such poor performance could adversely affect our investment advisory
business and the advisory fees that we earn on client assets.
Our existing correspondents may choose to perform their own clearing services or move their clearing business to one of our
competitors or exit the business.
As the operations of our correspondents grow, our correspondents may consider the option of performing clearing functions
themselves, in a process referred to as “self-clearing.” The option to convert to self-clearing operations may become more
attractive as the transaction volume of a broker-dealer grows. The cost of implementing the necessary infrastructure may
eventually be offset by the elimination of per transaction processing fees that would otherwise be paid to a clearing firm.
Additionally, performing their own clearing services allows self-clearing broker-dealers to retain their customers’ margin balances,
free credit balances and securities for use in margin lending activities. Furthermore, our correspondents may decide to use the
clearing services of one of our competitors or exit the business. Any significant loss of correspondents due to self-clearing, moving
their clearing business to a competitor or exiting the business could have a material adverse effect on our business, financial
condition, results of operations or cash flows.
Several of our broker-dealer segment’s product lines rely on favorable tax treatment and changes in federal tax law could
impact the attractiveness of these products to our customers.
We offer a variety of services and products, such as individual retirement accounts and municipal bonds, which rely on favorable
federal income tax treatment to be attractive to our customers. Should favorable tax treatment of these products be eliminated or
reduced, sales of these products could be materially impacted, which could have a material adverse effect on our business,
financial condition, results of operations or cash flows.
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Our mortgage origination segment is subject to investment risk on loans that it originates.
We intend to sell, and not hold for investment, substantially all residential mortgage loans that we originate through PrimeLending.
At times, however, we may originate a loan or execute an interest rate lock commitment (“IRLC”) with a customer pursuant to
which we agree to originate a mortgage loan on a future date at an agreed-upon interest rate without having identified a purchaser
for such loan. An identified purchaser may also decline to purchase a loan for a variety of reasons. In these instances, we will bear
interest rate risk on an IRLC until, and unless, we are able to find a buyer for the loan underlying such IRLC and the risk of
investment on a loan until, and unless, we are able to find a buyer for such loan. In addition, in the event of a breach of any
representation or warranty concerning a loan, an agency, investor or other third party could, among other things, require us to
repurchase the full amount of the loan or seek indemnification for losses from us, even if the loan is not in default. Further, if a
customer defaults on a mortgage payment shortly after the loan is originated, the purchaser of the loan may have a put right,
whereby the purchaser can require us to repurchase the loan at the full amount that it paid. During periods of market downturn, we
may choose to hold mortgage loans when the identified purchasers have declined to purchase such loans because we may not
obtain an acceptable substitute bid price for such loan. The failure of mortgage loans that we hold on our books to perform
adequately could have a material adverse effect on our financial condition, liquidity and results of operations. Moreover, if a
property securing a mortgage loan on which we own the servicing rights is damaged, including from flooding, we may be
responsible for repairs for uninsured damage.
Changes in interest rates may change the value of our mortgage servicing rights portfolio, which may increase the volatility of
our earnings.
As a result of our mortgage servicing business, which we may expand in the future, we have a portfolio of MSR assets. A MSR is
the right to service a mortgage loan – collect principal, interest and escrow amounts – for a fee. We measure and carry all of our
residential MSR assets using the fair value measurement method. Fair value is determined as the present value of estimated future
net servicing income, calculated based on a number of variables, including assumptions about the likelihood of prepayment by
borrowers.
One of the principal risks associated with MSR assets is that in a declining interest rate environment, they will likely lose a
substantial portion of their value as a result of higher than anticipated prepayments. Moreover, if prepayments are greater than
expected, the cash we receive over the life of the mortgage loans would be reduced. The mortgage origination segment uses
derivative financial instruments, including U.S. Treasury bond futures and options, as a means to mitigate market risk associated
with MSR assets. However, no hedging strategy can protect us completely, and hedging strategies may fail because they are
improperly designed, improperly executed and documented or based on inaccurate assumptions and, as a result, could actually
increase our risks and losses. The increasing size of our MSR portfolio may increase our interest rate risk and correspondingly, the
volatility of our earnings, especially if we cannot adequately hedge the interest rate risk relating to our MSR assets.
The CARES Act was enacted as a part of an on-going legislative response to the COVID-19 virus and provides borrowers the
ability to request forbearance of residential mortgage loan payments, placing a significant strain on mortgage servicers as they may
be required to fund missed or deferred payments related to loans in forbearance. A significant increase in nationwide forbearance
requests has resulted in the reduction of third-party mortgage servicers willing to purchase mortgage servicing rights. As a result of
this market dynamic, beginning in the second quarter 2020, the Company has increased the amount of retained servicing on
mortgage loan sales. Starting in the second quarter of 2020, PrimeLending retained servicing on 89% of total mortgage loans sold.
The increased size of our MSR portfolio could result in us carrying significant asset balances. This could result in a reduction in
our liquidity and cause a reduction in our capital ratios. The combination of these impacts along with other impacts, could cause us
to not have sufficient liquidity or capital.
At December 31, 2020, the mortgage origination segment’s MSR asset had a fair value of $144.2 million. All income related to
retained servicing, including changes in the value of the MSR asset, is included in noninterest income. Depending on the interest
rate environment, it is possible that the fair value of our MSR asset may be reduced in the future. If such changes in fair value
significantly reduce the carrying value of our MSR asset, our financial condition and results of operations would be negatively
affected.
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If we fail to develop, implement and maintain an effective system of internal control over financial reporting, the accuracy and
timing of our financial reporting in future periods may be adversely affected.
The Sarbanes-Oxley Act and related rules and regulations require that management report annually on the effectiveness of our
internal control over financial reporting and assess the effectiveness of our disclosure controls and procedures on a quarterly basis.
Effective internal controls are necessary for us to provide timely and reliable financial reports and effectively prevent fraud.
Following the identification during the fourth quarter of 2019 of a control deficiency that constituted a material weakness in our
internal controls and procedures described in our Annual Report on Form 10-K for the year ended December 31, 2019, we initiated
remediation measures to address the design and maintenance of effective controls over certain aspects relating to the determination
of the qualitative factors considered by management in the allowance for loan losses estimation process, specifically control
activities to adequately support the analysis and the impact of such support on the loss measurement. As previously reported, the
remediation plan was implemented during the fourth quarter of 2019 and included an enhanced analysis to support the qualitative
factors considered in the estimation of the allowance for loan losses as of December 31, 2019. Management believes that such
enhanced controls, including new controls implemented as a part of the adoption of CECL on January 1, 2020, have been designed
to address the material weakness and were implemented as of March 31, 2020. We consider the material weakness remediated as
of December 31, 2020, as the remedial controls have operated for a sufficient period of time and we have concluded, through
testing, that these controls are operating effectively. For a more detailed discussion, see Item 9A, “Controls and Procedures”
herein.
If we fail to maintain adequate internal controls, our financial statements may not accurately reflect our financial condition. Any
material misstatements could require a restatement of our consolidated financial statements, cause us to fail to meet our reporting
obligations or cause investors to lose confidence in our reported financial information, leading to a decline in the market value of
our securities.
We ultimately may write-off goodwill and other intangible assets resulting from business combinations.
As a result of purchase accounting in connection with acquisitions, our consolidated balance sheet at December 31, 2020, included
goodwill of $267.4 million and other intangible assets, net of accumulated amortization, of $20.4 million. On an ongoing basis, we
evaluate whether facts and circumstances indicate any impairment of value of intangible assets. As circumstances change, we may
not realize the value of these intangible assets. If we determine that a material impairment has occurred, we will be required to
write-off the impaired portion of intangible assets, which could have a material adverse effect on our results of operations in the
period in which the write-off occurs.
The ultimate impact of the COVID-19 pandemic on our operations and financial performance depends on many factors that are not
within our control. If we are unable to successfully manage our business through the challenges and uncertainty created by the
COVID-19 pandemic, our business and operating results could be materially adversely affected.
If the COVID-19 pandemic results in a prolonged adverse impact on our operating results, our goodwill and other intangible assets
may be at risk of future impairment.
We have goodwill and intangibles balances recorded in connection with acquisition in our banking and broker-dealer segments,
which we periodically review for impairment. These assets are sensitive to any significant changes in related results of operations
of the underlying businesses. Specifically, our banking segment has experienced lower-than-forecasted operating results during the
year ended December 31, 2020, due to conditions discussed in detail within the discussion of banking segment that follows.
However, we cannot predict the effects that any continued adverse conditions from the pandemic may have on the future
impairment of these assets.
Based on the results of our annual quantitative analysis as of October 1, 2020, the fair values of each of our reporting units
indicated no impairment of goodwill. Any downward revisions to current year actual and future forecasted operating performance,
in conjunction with any changes to long-term growth rates or discount rates, may cause the fair value of the respective reporting
unit to decline. If the estimated fair value is less than the carrying value, we would be required to recognize an impairment charge
for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized would not
exceed the total amount of goodwill allocated to that reporting unit.
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The accuracy of our financial statements and related disclosures could be affected if we are exposed to actual conditions
different from the judgments, assumptions or estimates used in our critical accounting policies.
The preparation of financial statements and related disclosure in conformity with GAAP requires us to make judgments,
assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Our
critical accounting policies, which are included in this Annual Report, describe those significant accounting policies and methods
used in the preparation of our consolidated financial statements that we consider “critical” because they require judgments,
assumptions and estimates that materially impact our consolidated financial statements and related disclosures. As a result, if
future events differ significantly from the judgments, assumptions and estimates in our critical accounting policies, such events or
assumptions could have a material impact on our audited consolidated financial statements and related disclosures.
We are dependent on our management team, and the loss of our senior executive officers or other key employees could impair
our relationship with customers and adversely affect our business and financial results.
Our success is dependent, to a large degree, upon the continued service and skills of our existing management team and other key
employees with long-term customer relationships. Our business and growth strategies are built primarily upon our ability to retain
employees with experience and business relationships within their respective segments. The loss of one or more of these key
personnel could have an adverse impact on our business because of their skills, knowledge of the market, years of industry
experience and the difficulty of finding qualified replacement personnel. In addition, we currently do not have non-competition
agreements with certain members of management and other key employees. If any of these personnel were to leave and compete
with us, our business, financial condition, results of operations and growth could suffer.
A decline in the market for municipal advisory services could adversely affect our business and results of operations.
Our broker-dealer segment has historically earned a material portion of its revenues from advisory fees paid to it by its clients, in
large part upon the successful completion of the client’s transaction. New issuances in the municipal market by cities, counties,
school districts, state and other governmental agencies, airports, healthcare institutions, institutions of higher education and other
clients that the public finance services line of business serves can be subject to significant fluctuations based on factors such as
changes in interest rates, property tax bases, budget pressures on certain issuers caused by uncertain economic times and other
factors. A decline in the market for municipal advisory services due to the factors listed above could have an adverse effect on our
business and results of operations.
We are subject to losses due to fraudulent and negligent acts.
Our banking and mortgage origination businesses expose us to fraud risk from our loan and deposit customers and the parties they
do business with, as well as from our employees, contractors and vendors. We rely heavily upon information supplied by third
parties, including the information contained in credit applications, property appraisals, title information, equipment pricing and
valuation, and employment and income documentation, in deciding which loans to originate and the terms of those loans. If any of
the information upon which we rely is misrepresented, either fraudulently or negligently, and the misrepresentation is not detected
prior to funding, the value of the collateral may be significantly lower than expected, the source of repayment may not exist or may
be significantly impaired, or we may fund a loan that we would not have funded or on terms we would not have extended. While
we have underwriting and operational controls in place to help detect and prevent such fraud, no such controls are effective to
detect or prevent all fraud. Whether a misrepresentation is made by the applicant, another third party or one of our own employees,
we may bear the risk of loss associated with the misrepresentation. We have experienced losses resulting from fraud in the past,
including loan, wire transfer, document and check fraud, and identity theft. We maintain fraud insurance, but this insurance may
not be sufficient to cover all of our losses from any fraudulent acts.
Our broker-dealer activities also expose us to fraud risks. When acting as an underwriter, our broker-dealer segment may be liable
jointly and severally under federal, state and foreign securities laws for false and misleading statements concerning the securities,
or the issuer of the securities, that it underwrites. We are sometimes brought into lawsuits in connection with our correspondent
clearing business based on actions of our correspondents. In addition, we may act as a fiduciary in other capacities that could
expose us to liability under such laws or under common law fiduciary principles.
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Negative publicity regarding us, or financial institutions in general, could damage our reputation and adversely impact our
business and results of operations.
Our ability to attract and retain customers and conduct our business could be adversely affected to the extent our reputation is
damaged. Reputational risk, or the risk to our business, earnings and capital from negative public opinion regarding our company,
or financial institutions in general, is inherent in our business. Adverse perceptions concerning our reputation could lead to
difficulties in generating and maintaining accounts as well as in financing them. In particular, such negative perceptions could lead
to decreases in the level of deposits that consumer and commercial customers and potential customers choose to maintain with us.
Negative public opinion could result from actual or alleged conduct in any number of activities or circumstances, including
lending or foreclosure practices; sales practices; corporate governance and potential conflicts of interest; ethical failures or fraud,
including alleged deceptive or unfair lending or pricing practices; regulatory compliance; protection of customer information;
cyber attacks, whether actual, threatened, or perceived; negative news about us or the financial institutions industry generally;
general company performance; or actions taken by government regulators and community organizations in response to such
activities or circumstances. Furthermore, our failure to address, or the perception that we have failed to address, these issues
appropriately could impact our ability to keep and attract customers and/or employees and could expose us to litigation and/or
regulatory action, which could have an adverse effect on our business and results of operations.
We are subject to legal claims and litigation, including potential securities law liabilities, any of which could have a material
adverse effect on our business.
We face significant legal risks in each of the business segments in which we operate, and the volume of legal claims and amount of
damages and penalties claimed in litigation and regulatory proceedings against financial service companies remains high. These
risks often are difficult to assess or quantify, and their existence and magnitude often remain unknown for substantial periods of
time. Substantial legal liability or significant regulatory action against us or any of our subsidiaries could have a material adverse
effect on our results of operations or cause significant reputational harm to us, which could seriously harm our business and
prospects. Further, regulatory inquiries and subpoenas, other requests for information, or testimony in connection with litigation
may require incurrence of significant expenses, including fees for legal representation and fees associated with document
production. These costs may be incurred even if we are not a target of the inquiry or a party to the litigation. Any financial liability
or reputational damage could have a material adverse effect on our business, which, in turn, could have a material adverse effect
on our financial condition and results of operations.
Further, in the normal course of business, our broker-dealer segment has been subject to claims by customers and clients alleging
unauthorized trading, churning, mismanagement, suitability of investments, breach of fiduciary duty or other alleged misconduct
by our employees or brokers. We are sometimes brought into lawsuits based on allegations concerning our correspondents. As
underwriters, we are subject to substantial potential liability for material misstatements and omissions in prospectuses and other
communications with respect to underwritten offerings of securities. Prolonged litigation producing significant legal expenses or a
substantial settlement or adverse judgment could have a material adverse effect on our business, financial condition, results of
operations or cash flows.
Because we may use a substantial portion of our remaining excess capital to make acquisitions or effect a business
combination, we may become subject to risks inherent in pursuing and completing any such acquisitions or business
combination.
We may make acquisitions or effect business combinations with a substantial portion of our remaining excess capital. We may not,
however, be able to identify suitable targets, consummate acquisitions or effect a combination on commercially acceptable terms
or, if consummated, successfully integrate personnel and operations.
The success of any acquisition or business combination will depend upon, among other things, the ability of management and our
employees to integrate personnel, operations, products and technologies effectively, to attract, retain and motivate key personnel
and to retain customers and clients of targets. It is possible that the integration process could result in the loss of key employees,
the disruption of ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect our
ability to maintain relationships with clients, customers, depositors and employees. In addition, the integration of certain
operations will require the dedication of significant management resources, which may temporarily distract management’s
attention from our day-to-day business. Any inability to realize the full extent, or any, of the anticipated cost savings and financial
benefits of any acquisitions we make, as well as any delays encountered in the integration process, could have an adverse effect on
our business and results of operations, which could adversely
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affect our financial condition and cause a decrease in our earnings per share or decrease or delay the expected accretive effect of
the acquisitions and contribute to a decrease in the price of our common stock. In addition, any acquisition or business
combination we undertake may consume available cash resources, result in potentially dilutive issuances of equity securities and
divert management’s attention from other business concerns. Even if we conduct extensive due diligence on a target business that
we acquire or with which we merge, our diligence may not surface all material issues that may adversely affect a particular target
business, and we may be forced to later write-down or write-off assets, restructure our operations or incur impairment or other
charges that could result in our reporting losses. Consequently, we also may need to make further investments to support the
acquired or combined company and may have difficulty identifying and acquiring the appropriate resources.
We may enter, through acquisitions or a business combination, into new lines of business or initiate new service offerings subject
to the restrictions imposed upon us as a regulated financial holding company. Accordingly, there is no basis for you to evaluate the
possible merits or risks of the particular target business with which we may combine or that we may ultimately acquire.
Subject to the restrictions imposed upon us as a regulated financial holding company, we may also use excess capital to make
investments in companies engaged in non-financial activities. These investments could decline in value and are likely to be
substantially less liquid than exchange-listed securities, if we are able to sell them at all. If we are required to sell these
investments quickly, we may receive significantly less value than if we could otherwise have sold them. Losses on these
investments could have an adverse impact on our profitability, results of operations and financial condition.
We may be subject to environmental liabilities in connection with the foreclosure on real estate assets securing the loan
portfolio of our banking segment.
Hazardous or toxic substances or other environmental hazards may be located on the real estate that secures our loans. If we
acquire such properties as a result of foreclosure, or otherwise, we could become subject to various environmental liabilities. For
example, we could be held liable for the cost of cleaning up or otherwise addressing contamination at or from these properties. We
could also be held liable to a governmental entity or third party for property damage, personal injury or other claims relating to any
environmental contamination at or from these properties. In addition, we could be held liable for costs relating to environmental
contamination at or from our current or former properties. We may not detect all environmental hazards associated with these
properties. If we ever became subject to significant environmental liabilities, our business, financial condition, liquidity and results
of operations could be harmed.
Risks Related to Our Indebtedness
Our indebtedness may affect our ability to operate our business, and may have a material adverse effect on our financial
condition and results of operations. We may incur additional indebtedness, including secured indebtedness.
At December 31, 2020, on a consolidated basis, we had total deposits of $11.2 billion and other indebtedness of $1.1 billion,
including $150.0 million in aggregate principal amount of 5% senior notes due 2025 (the “Senior Notes”), $50 million aggregate
principal amount of 5.75% fixed-to-floating rate subordinated notes due 2030 (the “2030 Subordinated Notes”) and $150 million
aggregate principal amount of 6.125% fixed-to-floating rate subordinated notes due 2035 (the “2035 Subordinated Notes”). Our
significant amount of indebtedness could have important consequences, such as:
●
●
●
●
●
limiting our ability to obtain additional financing to fund our working capital needs, acquisitions, capital expenditures or
other debt service requirements or for other purposes;
limiting our ability to use operating cash flow in other areas of our business because we must dedicate a substantial
portion of these funds to service debt;
limiting our ability to compete with other companies who are not as highly leveraged, as we may be less capable of
responding to adverse economic and industry conditions;
restricting us from making strategic acquisitions, developing properties or pursuing business opportunities;
restricting the way in which we conduct our business because of financial and operating covenants in the agreements
governing our and certain of our subsidiaries’ existing and future indebtedness, including, in the case of certain
indebtedness of subsidiaries, certain covenants that restrict the ability of such subsidiaries to pay dividends or make other
distributions to us;
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●
●
●
exposing us to potential events of default (if not cured or waived) under financial and operating covenants contained in
our or our subsidiaries’ debt instruments that could have a material adverse effect on our business, financial condition and
operating results;
increasing our vulnerability to a downturn in general economic conditions or a decrease in pricing of our products; and
limiting our ability to react to changing market conditions in our industry and in our customers’ industries.
In addition to our debt service obligations, our operations require substantial investments on a continuing basis. Our ability to
make scheduled debt payments, to refinance our obligations with respect to our indebtedness and to fund capital and non-capital
expenditures necessary to maintain the condition of our operating assets and properties, as well as to provide capacity for the
growth of our business, depends on our financial and operating performance, which, in turn, is subject to prevailing economic
conditions and financial, business, competitive, legal and other factors.
Subject to the restrictions in the indentures governing the Senior Notes, 2030 Subordinated Notes and 2035 Subordinated Notes
(collectively, the “Senior and Subordinated Notes”), we may incur significant additional indebtedness, including secured
indebtedness. If new debt is added to our current debt levels, the risks described above could increase.
We may not be able to generate sufficient cash to service all of our indebtedness, including the Senior and Subordinated Notes,
and may be forced to take other actions to satisfy our obligations under our indebtedness that may not be successful.
Our ability to satisfy our debt obligations will depend upon, among other things:
●
●
our future financial and operating performance, which will be affected by prevailing economic conditions and financial,
business, regulatory and other factors, many of which are beyond our control; and
our future ability to refinance the Senior and Subordinated Notes, which depends on, among other things, our compliance
with the covenants in the indentures governing the Senior and Subordinated Notes.
We cannot assure you that our business will generate sufficient cash flow from operations, or that we will be able to obtain
financing in an amount sufficient to fund our liquidity needs.
If our cash flows and capital resources are insufficient to service our indebtedness, including the Senior and Subordinated Notes,
we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or restructure or refinance our
indebtedness, including the Senior and Subordinated Notes. These alternative measures may not be successful and may not permit
us to meet our scheduled debt service obligations, including our obligations under the Senior and Subordinated Notes. Our ability
to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time.
Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which
could further restrict our business operations. In addition, the terms of existing or future debt agreements may restrict us from
adopting some of these alternatives. In the absence of such operating results and resources, we could face substantial liquidity
problems and might be required to dispose of material assets or operations, sell equity and/or negotiate with our lenders and other
creditors to restructure the applicable debt in order to meet our debt service and other obligations. We may not be able to
consummate those dispositions for fair market value or at all. The indentures governing the Senior and Subordinated Notes may
restrict, or market or business conditions may limit, our ability to avail ourselves of some or all of these options. Furthermore, any
proceeds that we could realize from any such dispositions may not be adequate to meet our debt service obligations then due.
A reduction in our credit rating could adversely affect us or the holders of our securities.
The credit rating agencies rating our indebtedness regularly evaluate the Company, and credit ratings are based on a number of
factors, including our financial strength and ability to generate earnings, as well as factors not entirely within our control, including
conditions affecting the financial services industry and the economy and changes in rating methodologies. There can be no
assurance that we will maintain our current credit rating. A downgrade of our credit rating could adversely affect our access to
liquidity and capital, and could significantly increase our cost of funds, trigger additional collateral or funding requirements and
decrease the number of investors and counterparties willing to lend to us or purchase our securities. This could affect our growth,
profitability and financial condition, including liquidity.
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The indentures governing the Senior and Subordinated Notes contain, and any instruments governing future indebtedness
would likely contain, restrictions that limit our flexibility in operating our business.
The indentures governing the Senior and Subordinated Notes contain, and any instruments governing future indebtedness would
likely contain, a number of covenants that impose significant operating and financial restrictions on us, including restrictions on
our ability to, among other things:
●
●
dispose of, or issue voting stock of, certain subsidiaries; or
incur or permit to exist any mortgage, pledge, encumbrance or lien or charge on the capital stock of certain subsidiaries.
Any of these restrictions could limit our ability to plan for or react to market conditions and could otherwise restrict corporate
activities. Any failure to comply with these covenants could result in a default under the indentures governing the Senior and
Subordinated Notes. Upon a default, holders of the Senior and Subordinated Notes have the ability ultimately to force us into
bankruptcy or liquidation, subject to the indentures governing the Senior and Subordinated Notes. In addition, a default under the
indentures governing the Senior and Subordinated Notes could trigger a cross default under the agreements governing our existing
and future indebtedness. Our operating results may not be sufficient to service our indebtedness or to fund our other expenditures
and we may not be able to obtain financing to meet these requirements.
Risks Related to our Industry
The soundness of other financial institutions could adversely affect our business.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other
financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty and other
relationships. We have exposure to many different counterparties and we routinely execute transactions with counterparties in the
financial services industry, including brokers and dealers, commercial banks, credit unions, investment banks, mutual and hedge
funds, and other institutional clients. As a result, defaults by, or even negative speculation about, one or more financial services
institutions, or the financial services industry in general, have led to market-wide liquidity problems in the past and could lead to
losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our
counterparty or client. In addition, our credit risk may be exacerbated when we hold collateral that cannot be realized or is
liquidated at prices not sufficient to recover the full amount of the receivable due to us. Any such losses could be material and
could materially and adversely affect our business, financial condition, results of operations or cash flows.
We face strong competition from other financial institutions and financial service companies, which may adversely affect our
operations and financial condition.
Our banking segment primarily competes with national, regional and community banks within various markets where the Bank
operates. The Bank also faces competition from many other types of financial institutions, including savings and loan associations,
savings banks, finance companies and credit unions. A number of these banks and other financial institutions have substantially
greater resources and lending limits, larger branch systems and a wider array of banking services than we do. We also compete
with other providers of financial services, such as money market mutual funds, brokerage and investment banking firms, consumer
finance companies, pension trusts and governmental organizations, each of which may offer more favorable financing than we are
able to provide. In addition, some of our non-bank competitors are not subject to the same extensive regulations that govern us.
The banking business in Texas has remained competitive over the past several years, and we expect the level of competition we
face to further increase. Competition for deposits and in providing lending products and services to consumers and businesses in
our market area is intense and pricing is important. Other factors encountered in competing for savings deposits are convenient
office locations, interest rates and fee structures of products offered. Direct competition for savings deposits also comes from other
commercial bank and thrift institutions, money market mutual funds and corporate and government securities that may offer more
attractive rates than insured depository institutions are willing to pay. Competition for loans is based on factors such as interest
rates, loan origination fees and the range of services offered by the provider. We seek to distinguish ourselves from our
competitors through our commitment to personalized customer service and responsiveness to customer needs while providing a
range of competitive loan and deposit products and other services. Our profitability depends on our
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ability to compete effectively in these markets. This competition may reduce or limit our margins on banking services, reduce our
market share and adversely affect our results of operations and financial condition.
The financial advisory and investment banking industries also are intensely competitive industries and will likely remain
competitive. Our broker-dealer business competes directly with numerous other financial advisory and investment banking firms,
broker-dealers and banks, including large national and major regional firms and smaller niche companies, some of whom are not
broker-dealers and, therefore, not subject to the broker-dealer regulatory framework. In addition to competition from firms
currently in the industry, there has been increasing competition from others offering financial services, including automated
trading and other services based on technological innovations. Our broker-dealer business competes on the basis of a number of
factors, including the quality of advice and service, technology, product selection, innovation, reputation, client relationships and
price. Increased pressure created by any current or future competitors, or by competitors of our broker-dealer business collectively,
could materially and adversely affect our business and results of operations. Increased competition may result in reduced revenue
and loss of market share. Further, as a strategic response to changes in the competitive environment, our broker-dealer business
may from time to time make certain pricing, service or marketing decisions that also could materially and adversely affect our
business and results of operations.
Our mortgage origination business faces vigorous competition from banks and other financial institutions, including large financial
institutions as well as independent mortgage banking companies, commercial banks, savings banks and savings and loan
associations. Our mortgage origination segment competes on a number of factors including customer service, quality and range of
products and services offered, price, reputation, interest rates, closing process and duration, and loan origination fees. The ability
to attract and retain skilled mortgage origination professionals is critical to our mortgage origination business. We seek to
distinguish ourselves from our competitors through our commitment to personalized customer service and responsiveness to
customer needs while providing a range of competitive mortgage loan products and services.
Overall, competition among providers of financial products and services continues to increase as technological advances have
lowered the barriers to entry for financial technology companies, with consumers having the opportunity to select from a growing
variety of traditional and nontraditional alternatives, including online checking, savings and brokerage accounts, online lending,
online insurance underwriters, crowdfunding, digital wallets, and money transfer services. The ability of non-banking financial
institutions to provide services previously limited to commercial banks has intensified competition. Because non-banking financial
institutions are not subject to many of the same regulatory restrictions as banks and bank holding companies, they can often
operate with greater flexibility and lower cost structures. This competition could result in the loss of customer deposits and
brokerage accounts and lower mortgage originations which could have a material adverse effect on our financial condition and
results of operations.
Acquisitions may be delayed, impeded, or prohibited due to regulatory issues.
Acquisitions by financial institutions are subject to approval by a variety of federal and state regulatory agencies. The process for
obtaining these required regulatory approvals has become substantially more difficult in recent years. Regulatory approvals could
be delayed, impeded, restrictively conditioned or denied due to existing or new regulatory issues we have, or may have, with
regulatory agencies, including, without limitation, issues related to Bank Secrecy Act compliance, Community Reinvestment Act
issues, fair lending laws, fair housing laws, consumer protection laws, unfair, deceptive, or abusive acts or practices regulations
and other similar laws and regulations. We may fail to pursue, evaluate or complete strategic and competitively significant
acquisition opportunities as a result of our inability, or perceived or anticipated inability, to obtain regulatory approvals in a timely
manner, under reasonable conditions or at all. Difficulties associated with potential acquisitions that may result from these factors
could have a material adverse effect on our business, financial condition and results of operations.
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Legal and Regulatory Risks
We are subject to extensive supervision and regulation that could restrict our activities and impose financial requirements or
limitations on the conduct of our business and limit our ability to generate income.
We are subject to extensive federal and state regulation and supervision, including that of the Federal Reserve Board, the Texas
Department of Banking, the FDIC, the CFPB, the SEC and FINRA. Banking regulations are primarily intended to protect
depositors’ funds, federal deposit insurance funds and the banking system as a whole, not stockholders or other debt holders
Likewise, regulations promulgated by the SEC and FINRA are primarily intended to protect the securities markets and customers
of broker-dealer businesses rather than stockholders or other debt holders. Further, because the Bank’s total assets were over $10.0
billion (as measured on four consecutive quarterly call reports of the Bank) as of June 30, 2020, along with the continued Federal
Reserve consumer supervisory and enforcement, the Bank became subject to the CFPB’s supervisory and enforcement authority
with respect to federal consumer financial laws, beginning in the second quarter of 2020.
These regulations affect our lending practices, capital structure, capital requirements, investment practices, brokerage and
investment advisory activities, dividends and growth, among other things. Failure to comply with laws, regulations or policies
could result in money damages, civil money penalties or reputational damage, as well as sanctions and supervisory actions by
regulatory agencies that could subject us to significant restrictions on or suspensions of our business and our ability to expand
through acquisitions or branching. Further, our clearing contracts generally include automatic termination provisions that are
triggered in the event we are suspended from any of the national exchanges of which we are a member for failure to comply with
the rules or regulations thereof. While we have implemented policies and procedures designed to prevent any such violations of
rules and regulations, such violations may occur from time to time, which could have a material adverse effect on our financial
condition and results of operations.
The U.S. Congress, state legislatures, and federal and state regulatory agencies frequently revise banking and securities laws,
regulations and policies. For example, several aspects of the Dodd-Frank Act have affected our business, including, without
limitation, increased capital requirements, increased mortgage regulation, restrictions on proprietary trading in securities,
restrictions on investments in hedge funds and private equity funds, executive compensation restrictions, potential federal
oversight of the insurance industry and disclosure and reporting requirements. Although the EGRRCPA is intended to ease the
regulatory burden imposed by the Dodd-Frank Act with respect to company-run stress testing, resolution plans, the Volcker Rule,
high volatility commercial real estate exposures, and real estate appraisals, at this time, it remains difficult to predict the full extent
to which the Dodd-Frank Act the EGRRCPA, the CARES Act, the AML Act or the resulting rules and regulations will affect our
business. Compliance with new laws and regulations has resulted and likely will continue to result in additional costs, which could
be significant and may adversely impact our results of operations, financial condition, and liquidity.
The Bank received a “satisfactory” CRA rating in connection with its most recent CRA performance evaluation. A CRA rating of
less than “satisfactory” adversely affects a bank’s ability to establish new branches and impairs a bank’s ability to commence new
activities that are “financial in nature” or acquire companies engaged in these activities. Other regulatory exam ratings or findings
also may adversely impact our ability to branch, commence new activities or make acquisitions.
We cannot predict whether or in what form any other proposed regulations or statutes will be adopted or the extent to which our
business may be affected by any new regulation or statute. These changes become less predictable, yet more likely to occur,
following the transition of power from one presidential administration to another, especially as in 2021, when it involves a change
in political party. Any such changes could subject our business to additional costs, limit the types of financial services and
products we may offer and increase the ability of non-banks to offer competing financial services and products, among other
things.
We may be subject to more stringent capital requirements in the future.
We are subject to regulatory requirements specifying minimum amounts and types of capital that we must maintain. From time to
time, the regulators change these regulatory capital adequacy guidelines. If we fail to meet these minimum capital guidelines and
other regulatory requirements, we or our subsidiaries may be restricted in the types of activities we may conduct and we may be
prohibited from taking certain capital actions, such as paying dividends and repurchasing or redeeming capital securities.
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In particular, under the Basel III capital framework, we are required to satisfy additional, more stringent, capital adequacy
standards than we had in the past. Further, because we had less than $15 billion in assets as of December 31, 2009, we have been
allowed to include the debentures issued to the PCC Statutory Trusts I, II, III and IV (the “Trusts”), less the common stock of the
Trusts, in Tier 1 capital. However, because Hilltop has grown above $15 billion in assets, if we make an acquisition in the future,
the debentures issued to the Trusts may be phased out of Tier 1 and into Tier 2 capital. Failure to meet minimum capital
requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could
have an adverse material effect on our financial condition and results of operations. The application of more stringent capital
requirements for Hilltop and PlainsCapital could, among other things, adversely affect our results of operations and growth,
require the raising of additional capital, restrict our ability to pay dividends or repurchase shares and result in regulatory actions if
we were to be unable to comply with such requirements.
Periodically, the SEC adopts amendments to Rules 15c3-1 and 15c3-3 under the Exchange Act related to our broker-dealer
segment. The implementation of any new requirements from these amendments may increase our cost of regulatory compliance.
The CFPB has issued “ability-to-repay” and “qualified mortgage” rules that may have a negative impact on our loan
origination process and foreclosure proceedings, which could adversely affect our business, operating results, and financial
condition.
The CFPB’s “qualified mortgage” rule requires mortgage lenders to consider consumers’ ability to repay home loans before
extending them credit. The rule describes certain minimum requirements for lenders making ability-to-repay determinations, but
does not dictate that they follow particular underwriting models. Lenders are presumed to have complied with the ability-to-repay
rule if they issue “qualified mortgages,” which are generally defined as mortgage loans prohibiting or limiting certain risky
features. Loans that do not meet the ability-to-repay standard can be challenged in court by borrowers who default and the absence
of ability-to-repay status can be used against a lender in foreclosure proceedings. Any loans that we make outside of the “qualified
mortgage” criteria, including the newly created “seasoned qualified mortgage” criteria could expose us to an increased risk of
liability and reduce or delay our ability to foreclose on the underlying property. Any increases in compliance and foreclosure costs
caused by the rule could negatively affect our business, operating results and financial condition.
Risks Related to Our Common Stock
We may issue shares of preferred stock or additional shares of common stock to complete an acquisition or effect a
combination or under an employee incentive plan after consummation of an acquisition or business combination, which would
dilute the interests of our stockholders and likely present other risks.
The issuance of shares of preferred stock or additional shares of common stock:
● may significantly dilute the equity interest of our stockholders;
● may subordinate the rights of holders of common stock if preferred stock is issued with rights senior to those afforded our
common stock;
●
could cause a change in control if a substantial number of shares of common stock are issued, which may affect, among
other things, our ability to use our net operating loss carry forwards; and
● may adversely affect prevailing market prices for our common stock.
Our board of directors, in its sole discretion, may designate and issue one or more series of preferred stock from the authorized and
unissued shares of preferred stock. Subject to limitations imposed by law or our articles of incorporation, our board of directors is
empowered to determine the designation and number of shares constituting each series of preferred stock, as well as any
designations, qualifications, privileges, limitations, restrictions or special or relative rights of additional series. The rights of
preferred stockholders may supersede the rights of common stockholders. Preferred stock could be issued with voting and
conversion rights that could adversely affect the voting power of the shares of our common stock. The issuance of preferred stock
could also result in a series of securities outstanding that would have preferences over the common stock with respect to dividends
and in liquidation.
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Our common stock price may experience substantial volatility, which may affect your ability to sell our common stock at an
advantageous price.
Price volatility of our common stock may affect your ability to sell our common stock at an advantageous price. Market price
fluctuations in our common stock may arise due to acquisitions, dispositions or other material public announcements, including
those regarding dividends or changes in management, along with a variety of additional factors, including, without limitation,
other risks identified in “Forward-looking Statements” and these “Risk Factors.” In addition, the stock markets in general,
including the NYSE, have experienced extreme price and trading fluctuations. These fluctuations have resulted in volatility in the
market prices of securities that often have been unrelated or disproportionate to changes in operating performance. These broad
market fluctuations may adversely affect the market price of our common stock.
Existing circumstances may result in several of our directors having interests that may conflict with our interests.
A director who has a conflict of interest with respect to an issue presented to our board will have no inherent legal obligation to
abstain from voting upon that issue. We do not have provisions in our bylaws or charter that require an interested director to
abstain from voting upon an issue, and we do not expect to add provisions in our charter and bylaws to this effect. Although each
director has a duty to act in good faith and in a manner he or she reasonably believes to be in our best interests, there is a risk that,
should interested directors vote upon an issue in which they or one of their affiliates has an interest, their vote may reflect a bias
that could be contrary to our best interests. In addition, even if an interested director abstains from voting, the director’s
participation in the meeting and discussion of an issue in which he or she has, or companies with which he or she is associated
have, an interest could influence the votes of other directors regarding the issue.
Our rights and the rights of our stockholders to take action against our directors and officers are limited.
We are organized under Maryland law, which provides that a director or officer has no liability in that capacity if he or she
performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that
an ordinarily prudent person in a like position would use under similar circumstances. In addition, our charter eliminates our
directors’ and officers’ liability to us and our stockholders for money damages, except for liability resulting from actual receipt of
an improper benefit or profit in money, property or services or active and deliberate dishonesty established by a final judgment and
that is material to the cause of action. Our bylaws require us to indemnify our directors and officers for liability resulting from
actions taken by them in those capacities to the maximum extent permitted by Maryland law. As a result, our stockholders and we
may have more limited rights against our directors and officers than might otherwise exist under common law. In addition, we may
be obligated to fund the defense costs incurred by our directors and officers.
Our charter and bylaws contain provisions that could discourage acquisition bids or merger proposals, which may adversely
affect the market price of our common stock.
Authority to Issue Additional Shares. Under our charter, our board of directors may issue up to an aggregate of ten million shares
of preferred stock without stockholder action. The preferred stock may be issued, in one or more series, with the preferences and
other terms designated by our board of directors that may delay or prevent a change in control of us, even if the change is in the
best interests of stockholders. At December 31, 2020, no shares of preferred stock were outstanding.
Banking Laws. Any change in control of our company is subject to prior regulatory approval under the Bank Holding Company
Act or the Change in Bank Control Act, which may delay, discourage or prevent an attempted acquisition or change in control of
us.
FINRA. Any change in control (as defined under FINRA rules) of any of the Hilltop Broker-Dealers, including through
acquisition, is subject to prior regulatory approval by FINRA which may delay, discourage or prevent an attempted acquisition or
other change in control of such broker-dealers.
Restrictions on Calling Special Meeting, Cumulative Voting and Director Removal. Our bylaws include a provision prohibiting
holders that do not or have not owned, continuously for at least one year as of the record date of such proposed meeting, capital
stock representing at least 15% of the shares entitled to be voted at such proposed meeting, from calling a special meeting of
stockholders. Our charter does not provide for the cumulative voting in the election of directors. In addition, our charter provides
that our directors may only be removed for cause and then only by an
48
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affirmative vote of at least two-thirds of the votes entitled to be cast in the election of directors. Any amendment to our charter
relating to the removal of directors requires the affirmative vote of two-thirds of all of the votes entitled to be cast on the matter.
These provisions of our bylaws and charter may delay, discourage or prevent an attempted acquisition or change in control of us.
There can be no assurance that we will continue to declare cash dividends or repurchase stock.
In October 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 2020, we declared and paid
cash dividends of $0.36 per common share.
In January 2020, the Hilltop board of directors authorized a stock repurchase program through January 2021, pursuant to which the
Company was authorized to repurchase, in the aggregate, up to $75.0 million of its outstanding common stock. As previously
announced on April 30, 2020, in light of the uncertain outlook for 2020 due to the COVID-19 pandemic, Hilltop’s board of
directors suspended its stock repurchase program. During 2020, prior to its suspension, the Company paid $15.2 million to
repurchase an aggregate of 720,901 shares of common stock at a weighted average price of $21.13 per share associated with the
stock repurchase program. These shares were returned to the pool of authorized but unissued shares of common stock.
On September 23, 2020, the Company announced the commencement of a modified “Dutch auction” tender offer to purchase
shares of its common stock for an aggregate cash purchase price of up to $350 million. On November 17, 2020, we completed our
tender offer, repurchasing 8,058,947 shares of outstanding common stock at a price of $24.00 per share for a total of $193.4
million excluding fees and expenses. We funded the tender offer with cash on hand.
Based on Hilltop’s ability to maintain strong capital and liquidity to meet the needs of its customers and communities during this
exceptional period of economic uncertainty, in January 2021, our board of directors authorized a new stock repurchase program
through January 2022, pursuant to which we are authorized to repurchase, in the aggregate, up to $75.0 million of our outstanding
common stock, inclusive of repurchases to offset dilution related to grants of stock-based compensation.
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, the ability of our subsidiaries to pay dividends to Hilltop, capital
adequacy requirements and other regulatory restrictions on us and our subsidiaries, policies of the Federal Reserve Board, 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.
An investment in our common stock is not an insured deposit.
An investment in our common stock is not a bank deposit and is not insured or guaranteed by the FDIC, SIPC or any other
government agency. Accordingly, you should be capable of affording the loss of any investment in our common stock.
Item 1B. Unresolved Staff Comments.
None.
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Table of Contents
Item 2. Properties.
During 2018, we made an investment in land and a mixed-use real estate development in the City of University Park, Texas, which
has served as headquarters for both Hilltop and the Bank since February 2020. In addition to our principal office, our various
business segments conduct business at various locations. We have options to renew leases at most locations that we do not own.
Banking. At December 31, 2020, our banking segment conducted business at 65 locations throughout Texas, including four
support facilities. The Bank leases 37 banking locations, including its principal offices, and owns the remaining 28 banking
locations.
Broker-Dealer. At December 31, 2020, our broker-dealer segment conducted business from 51 locations in 19 states. Each of these
locations is leased by Hilltop Securities.
Mortgage Origination. At December 31, 2020, our mortgage origination segment conducted business from over 290 locations in
45 states. Each of these locations is leased by PrimeLending.
Item 3. Legal Proceedings.
For a description of material pending legal proceedings, see the discussion set forth under the heading “Legal Matters” in Note 21
to our Consolidated Financial Statements, which is incorporated by reference herein.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Securities, Stockholder and Dividend Information
Our common stock is listed on the New York Stock Exchange under the symbol “HTH”. At February 16, 2021, there were
82,188,513 shares of our common stock outstanding with 372 stockholders of record.
In October 2016, we announced that our board of directors authorized a dividend program under which we pay quarterly dividends
on our common stock, subject to quarterly declarations by our board of directors. During 2020, we declared and paid cash
dividends of $0.36 per common share. On January 28, 2021, we announced that our board of directors increased our quarterly
dividend to $0.12 per common share. Although we expect to continue to pay dividends, we may elect not to pay dividends. Any
declarations of dividends, and the amount and timing thereof, will be at the discretion of our board of directors, which must
evaluate, among other things, whether cash dividends 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. Our ability to
pay dividends 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. Our dividend payments may change from time to time, and we cannot provide assurance that we will continue to declare
dividends in any particular amounts or at all. A reduction in or elimination of our dividend payments and/or our dividend program
could have a negative effect on our stock price. See Item 1A, “Risk Factors — Risks Related to our Common Stock — There can
be no assurance that we will continue to declare cash dividends or repurchase stock.”
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information at December 31, 2020 with respect to compensation plans under which shares of our
common stock may be issued. Additional information concerning our stock-based compensation plans is presented in Note 23,
Stock-Based Compensation, in the notes to our consolidated financial statements.
Equity Compensation Plan Information
Plan Category
Equity compensation plans approved by security holders*
Total
Number of securities
Number of securities
Weighted-average
to be issued upon
exercise price of
exercise of
outstanding options,
outstanding options,
warrants and rights warrants and rights
—
— $
—
— $
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in first column)
3,428,547
3,428,547
* Represents shares available for future issuance under the Hilltop Holdings Inc. 2020 Equity Incentive Plan (the “2020 Plan”). Shares may become
available for awards under the 2020 Plan upon the future forfeiture, expiration, cancellation or settlement in cash of awards outstanding under the
Hilltop Holdings Inc. 2012 Equity Incentive Plan.
Issuer Repurchases of Equity Securities
The following table details our repurchases of shares of common stock during the three months ended December 31, 2020.
Period
October 1 - October 31, 2020
November 1 - November 30, 2020
December 1 - December 31, 2020
Total
Total Number of
Shares
Purchased
Average Price
Paid per
Share
—
8,058,947
—
8,058,947
$
$
—
24.00
—
24.00
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Plans or
Programs (1)
— $
8,058,947
—
8,058,947
59,750,234
59,750,234
59,750,234
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(1) On January 30, 2020, we announced that our board of directors authorized a stock repurchase program under which we could repurchase, in the
aggregate, up to $75.0 million of our outstanding common stock through January 2021, which was inclusive of repurchases to offset dilution related
to grants of stock-based compensation. As previously announced on April 30, 2020, in light of the uncertain outlook for 2020 due to the COVID-19
pandemic, Hilltop’s board of directors suspended the stock repurchase program. Additionally, on September 23, 2020, we announced the Company
would purchase shares of our common stock up to $350 million, through a modified “Dutch auction” tender offer. On November 17, 2020, we
completed our tender offer, repurchasing 8,058,947 shares of outstanding common stock at a price of $24.00 per share for a total of $193.4 million
excluding fees and expenses. The number of shares eligible for purchase under the tender offer was indeterminable and therefore is not included in
this column. In January 2021, our board of directors authorized a new stock repurchase program through January 2022, pursuant to which we are
authorized to repurchase, in the aggregate, up to $75.0 million of our outstanding common stock, inclusive of repurchases to offset dilution related to
grants of stock-based compensation. With the adoption of the new stock repurchase plan in January 2021, the stock repurchase plan authorized in
January 2020 expired.
Item 6. Selected Financial Data.
Our historical consolidated balance sheet data at December 31, 2020 and 2019 and our consolidated statement of operations data
for the years ended December 31, 2020, 2019 and 2018 have been derived from our historical consolidated financial statements
included elsewhere in this Annual Report. The following table shows our selected historical financial data for the periods
indicated. You should read our selected historical financial data, together with the notes thereto, in conjunction with the more
detailed information contained in our consolidated financial statements and related notes and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” included in this Annual Report. The insurance segment’s operating
results and assets and liabilities that were sold on June 30, 2020 are presented as discontinued operations for all periods presented
in the following table. The operations acquired in the BORO Acquisition are included in our operating results beginning August 1,
2018 (dollars in thousands, except per share data and weighted average shares outstanding).
2020
2019
2018
2017
2016
Statement of Operations Data:
Total interest income
Total interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Total noninterest income
Total noninterest expense
Income from continuing operations before income taxes
Income tax expense
Income from continuing operations before income taxes
Income (loss) from discontinued operations, net of income taxes
Net Income
Less: Net income attributable to noncontrolling interest
Income applicable to Hilltop common stockholders
Per Share Data:
Earnings per common share from continuing operations- basic
Earnings (losses) per common share from discontinued operations- basic
Net income
Weighted average shares outstanding - basic
Earnings per common share from continuing operations- diluted
Earnings (losses) per common share from discontinued operations- diluted
Net income
Weighted average shares outstanding - diluted
Book value per common share
Tangible book value per common share
Cash dividends declared per common share
Dividend payout ratio (1)
Balance Sheet Data:
Total assets of continuing operations
Cash and due from banks
Securities
Loans held for sale
Loans held for investment, net of unearned income
Allowance for credit losses
Goodwill and other intangible assets, net
Total deposits
Notes payable
Junior subordinated debentures
Total stockholders’ equity
Total assets of discontinued operations
$
$
$
$
$
$
$
$
$
$
610,696
171,717
438,979
7,206
431,773
1,062,817
1,211,889
282,701
63,714
218,987
13,990
232,977
7,686
225,291
2.29
0.15
2.44
92,345
2.29
0.15
2.44
92,394
23.20
19.65
0.32
13.12 %
14,924,019
433,626
1,987,561
2,106,361
7,381,400
(61,136)
294,113
9,032,214
256,269
67,012
2,128,796
248,429
$
$
$
$
$
$
$
$
$
$
574,623
141,324
433,299
5,088
428,211
880,130
1,153,328
155,013
34,227
120,786
4,941
125,727
4,286
121,441
1.23
0.05
1.28
94,969
1.23
0.05
1.28
95,067
20.83
17.31
0.28
21.90 %
13,430,059
598,999
1,871,660
1,393,246
6,930,458
(59,486)
305,452
8,536,156
228,872
67,012
1,973,893
253,513
$
$
$
$
$
$
$
$
$
$
502,329
83,442
418,887
14,271
404,616
1,053,594
1,210,901
247,309
113,189
134,120
(976)
133,144
600
132,544
1.37
(0.01)
1.36
97,137
1.37
(0.01)
1.36
97,353
19.92
16.92
0.24
17.59 %
13,074,147
423,726
1,717,236
1,715,357
6,455,798
(63,686)
284,067
7,978,119
208,809
67,012
1,914,807
291,639
450,502
56,135
394,367
40,620
353,747
1,122,396
1,265,870
210,273
76,004
134,269
13,675
147,944
2,050
145,894
1.34
0.14
1.48
98,404
1.34
0.14
1.48
98,629
18.98
15.97
0.06
4.05 %
12,409,086
546,807
1,093,850
1,795,463
6,099,626
(54,599)
272,515
7,063,811
317,912
67,012
1,874,520
328,976
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
546,495
122,329
424,166
96,491
327,675
1,690,480
1,453,803
564,352
133,071
431,281
38,396
469,677
21,841
447,836
4.59
0.43
5.02
89,280
4.58
0.43
5.01
89,304
28.28
24.77
0.36
7.18 %
16,944,264
1,062,560
2,468,544
2,788,386
7,693,141
(149,044)
287,811
11,242,319
381,987
67,012
2,350,647
—
52
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Performance Ratios (2)(3):
Return on average stockholders’ equity (4)
Return on average assets (4)
Net interest margin (5)
Net interest margin (taxable equivalent) (6)
Asset Quality Ratios (2)(3):
Total nonperforming assets to total loans and other real estate
Allowance for credit losses to nonperforming loans
Allowance for credit losses to total loans
Net charge-offs to average loans outstanding
Capital Ratios (3):
Equity to assets ratio
Tangible common equity to tangible assets
Regulatory Capital Ratios (3):
Hilltop - Leverage ratio
Hilltop - Common equity Tier 1 risk-based capital ratio
Hilltop - Tier 1 risk-based capital ratio
Hilltop - Total risk-based capital ratio
PlainsCapital - Leverage ratio
PlainsCapital - Common equity Tier 1 risk-based capital ratio
PlainsCapital - Tier 1 risk-based capital ratio
PlainsCapital - Total risk-based capital ratio
Other Data:
Banking Segment:
Efficiency ratio (7)
Return on average assets (4)
Net interest margin (5)
Net interest margin (taxable equivalent) (6)
Broker-Dealer Segment:
Net revenue (8)
Compensation as a % of net revenue
Mortgage Origination Segment:
Mortgage loan originations volume - Home purchases
Mortgage loan originations volume - Refinancings
Mortgage loan originations volume - Total
Mortgage loan sales volume - Total
2020
2019
2018
2017
2016
20.03 %
2.88 %
2.85 %
2.85 %
0.96 %
186.46 %
1.94 %
0.28 %
13.72 %
12.22 %
12.64 %
18.97 %
19.57 %
22.34 %
10.44 %
14.40 %
14.40 %
15.27 %
11.18 %
1.66 %
3.48 %
3.48 %
0.73 %
169.28 %
0.83 %
0.08 %
13.86 %
12.00 %
12.71 %
16.70 %
17.13 %
17.55 %
11.61 %
13.45 %
13.45 %
14.13 %
6.33 %
0.93 %
3.55 %
3.56 %
0.89 %
175.22 %
0.86 %
0.14 %
14.25 %
12.13 %
12.53 %
16.58 %
17.04 %
17.47 %
12.47 %
13.90 %
13.90 %
14.63 %
7.00 %
1.03 %
3.61 %
3.63 %
1.33 %
139.58 %
0.99 %
0.08 %
14.31 %
12.42 %
12.94 %
17.71 %
18.24 %
18.78 %
12.32 %
14.47 %
14.47 %
15.29 %
8.13 %
1.21 %
3.68 %
3.71 %
1.39 %
193.05 %
0.90 %
0.57 %
14.68 %
12.65 %
13.51 %
18.30 %
18.87 %
19.34 %
12.35 %
14.64 %
14.64 %
15.38 %
53.78 %
0.63 %
3.31 %
3.31 %
531,267
58.7 %
13,413,545
9,556,649
22,970,194
22,514,170
$
$
54.99 %
1.36 %
4.00 %
4.01 %
455,719
58.7 %
11,718,772
3,860,665
15,579,437
14,591,727
$
$
61.93 %
1.23 %
4.23 %
4.24 %
352,592
62.0 %
11,798,804
1,893,680
13,692,484
13,735,885
$
$
58.24 %
0.85 %
4.31 %
4.33 %
412,156
60.8 %
11,974,571
2,483,342
14,457,913
14,454,260
$
$
58.87 %
0.94 %
4.65 %
4.68 %
416,938
60.6 %
11,276,378
4,183,835
15,460,213
15,155,340
$
$
(1) Dividend payout ratio is defined as cash dividends declared per common share divided by basic earnings per common share.
(2) Noted measures are typically used for measuring the performance of banking and financial institutions.
(3) Ratios and financial data presented on a consolidated basis and includes discontinued operations and those assets and liabilities classified as
discontinued.
(4) Noted measures during 2017 include estimated non-cash, non-recurring charges to Hilltop consolidated and banking segment results of $28.4 million
and $25.7 million, respectively, primarily attributable to the revaluation of deferred tax assets as a result of the enactment of the Tax Cuts and Jobs
Act of 2017 (“the Tax Legislation”). Deferred tax asset amounts recorded in December 2017 following enactment of the Tax Legislation were final
as of September 30, 2018.
(5) Net interest margin is defined as net interest income divided by average interest-earning assets.
(6) Net interest margin (taxable equivalent), a non-GAAP measure, is defined as taxable equivalent net interest income divided by average interest-
earning assets. Taxable equivalent adjustments are based on a 21% federal income tax rate for 2020, 2019 and 2018 periods presented and 35%
federal income tax rate for 2017 and 2016 periods presented. The interest income earned on certain earning assets is completely or partially exempt
from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful
comparisons of net interest margins for all earning assets, we use net interest income on a taxable-equivalent basis in calculating net interest margin
by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. For the
periods presented, the taxable equivalent adjustments to interest income for Hilltop consolidated were $1.2 million, $0.6 million, $0.9 million, $2.2
million and $2.4 million, respectively, and for the banking segment were $0.8 million, $0.6 million, $0.8 million, $1.6 million and $1.5 million,
respectively.
(7) Efficiency ratio is defined as noninterest expenses divided by the sum of total noninterest income and net interest income for the year.
(8) Net revenue is defined as the sum of total broker-dealer net interest income plus total broker-dealer noninterest income.
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GAAP Reconciliation and Management’s Explanation of Non-GAAP Financial Measures
We present certain measures in our selected financial data that are not measures of financial performance recognized by GAAP.
“Tangible book value per common share” is defined as our total stockholders’ equity, excluding preferred stock, reduced by
goodwill and other intangible assets, divided by total common shares outstanding. “Tangible common equity to tangible assets” is
defined as our total stockholders’ equity, excluding preferred stock, reduced by goodwill and other intangible assets divided by
total assets reduced by goodwill and other intangible assets. These measures are important to investors interested in changes from
period to period in tangible common equity per share exclusive of changes in intangible assets. For companies such as ours that
have engaged in business combinations, purchase accounting can result in the recording of significant amounts of goodwill and
other intangible assets related to those transactions.
You should not view this disclosure as a substitute for results determined in accordance with GAAP, and our disclosure is not
necessarily comparable to that of other companies that use non-GAAP measures.
The following table reconciles these non-GAAP financial measures to the most comparable GAAP financial measures, “book
value per common share” and “equity to total assets” (dollars in thousands, except per share data).
Book value per common share
Effect of goodwill and intangible assets per
share
Tangible book value per common share
Hilltop stockholders’ equity
Less: goodwill and intangible assets, net
Tangible common equity
Total assets
Less: goodwill and intangible assets, net
Tangible assets
2020
2019
$
$
28.28
(3.51)
24.77
$ 2,323,939
287,811
$ 2,036,128
$ 16,944,264
287,811
$ 16,656,453
$
$
$
$
$
$
23.20
(3.55)
19.65
2,103,039
321,590
1,781,449
15,172,448
321,590
14,850,858
December 31,
2018
20.83
(3.52)
17.31
1,949,470
329,440
1,620,030
13,683,572
329,440
13,354,132
$
$
$
$
$
$
2017
2016
$
$
$
$
$
$
19.92
(3.00)
16.92
1,912,081
288,240
1,623,841
13,365,786
288,240
13,077,546
$
$
$
$
$
$
18.98
(3.01)
15.97
1,870,509
296,503
1,574,006
12,738,062
296,503
12,441,559
Equity to assets
Tangible common equity to tangible assets
13.72 %
12.22 %
13.86 %
12.00 %
14.25 %
12.13 %
14.31 %
12.42 %
14.68 %
12.65 %
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion is intended to help the reader understand our results of operations and financial condition and is
provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements and the
accompanying notes thereto commencing on page F-1. In addition to historical financial information, the following discussion and
analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our results and the timing of
selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors,
including those discussed under “Item 1A. Risk Factors” and elsewhere in this Annual Report. See “Forward-Looking
Statements.”
Unless the context otherwise indicates, all references in this Management’s Discussion and Analysis of Financial Condition and
Results of Operations, or MD&A, to the “Company,” “we,” “us,” “our” or “ours” or similar words are to Hilltop Holdings Inc.
and its direct and indirect wholly owned subsidiaries, references to “Hilltop” refer solely to Hilltop Holdings Inc., references to
“PCC” refer to PlainsCapital Corporation (a wholly owned subsidiary of Hilltop), references to “Securities Holdings” refer to
Hilltop Securities Holdings LLC (a wholly owned subsidiary of Hilltop), references to “Hilltop Securities” refer to Hilltop
Securities Inc. (a wholly owned subsidiary of Securities Holdings), references to “Momentum Independent Network” refer to
Momentum Independent Network Inc., formerly Hilltop Securities Independent Network Inc. (a wholly owned subsidiary of
Securities Holdings), Hilltop Securities and Momentum Independent Network are collectively referred to as the “Hilltop Broker-
Dealers,” references to the “Bank” refer to PlainsCapital Bank (a wholly owned subsidiary of PCC), references to “FNB” refer
to First National Bank, references to “SWS” refer to the former SWS Group, Inc., references to “PrimeLending” refer to
PrimeLending, a PlainsCapital Company (a wholly owned subsidiary of the Bank) and its subsidiaries as a whole, references to
“NLC” refer to National Lloyds Corporation (formerly a wholly owned subsidiary of Hilltop) and its wholly owned subsidiaries.
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OVERVIEW
We are a financial holding company registered under the Bank Holding Company Act of 1956. Our primary line of business is to
provide business and consumer banking services from offices located throughout Texas through the Bank. We also provide an
array of financial products and services through our broker-dealer and mortgage origination segments. The following includes
additional details regarding the financial products and services provided by each of our primary business units.
PCC. PCC is a financial holding company that provides, through its subsidiaries, traditional banking and wealth, investment
and treasury management services primarily in Texas and residential mortgage loans throughout the United States.
Securities Holdings. Securities Holdings is a holding company that provides, through its subsidiaries, investment banking and
other related financial services, including municipal advisory, sales, trading and underwriting of taxable and tax-exempt fixed
income securities, clearing, securities lending, structured finance and retail brokerage services throughout the United States.
On June 30, 2020, we completed the sale of all of the outstanding capital stock of NLC, which comprised the operations of our
former insurance segment, for cash proceeds of $154.1 million. During 2020, Hilltop recognized an aggregate gain associated with
this transaction of $36.8 million, net of $5.1 million in transaction costs and was subject to post-closing adjustments. The resulting
book gain from this sale transaction was not recognized for tax purposes due to the excess tax basis over book basis being greater
than the recorded book gain. Any tax loss related to this transaction is deemed disallowed pursuant to the rules under the Internal
Revenue Code. We also entered into an agreement at closing to refrain for a specified period from certain activities that compete
with the business of NLC. As a result, NLC’s results and its assets and liabilities have been presented as discontinued operations in
the consolidated financial statements, and we no longer have an insurance segment. Unless otherwise noted, for purposes of this
Management’s Discussion and Analysis of Financial Condition and Results of Operations, “consolidated” refers to our
consolidated financial position and consolidated results of operations, including discontinued operations and assets and liabilities
of the discontinued operations.
During 2020, our income from continuing operations to common stockholders was $409.4 million, or $4.58 per diluted share. We
declared and paid total common dividends of $0.36 per share, or $32.5 million, during 2020, which resulted in a dividend payout
ratio of 7.18%. Dividend payout ratio is defined as cash dividends declared per common share divided by basic earnings per
common share. We also paid an aggregate of $208.7 million to repurchase shares of our common stock during 2020, including
shares purchased in the tender offer completed in November 2020.
We reported $564.4 million of income from continuing operations before income taxes during 2020, including the following
contributions from our reportable business segments.
●
●
●
The banking segment contributed $103.5 million of income before income taxes during 2020;
The broker-dealer segment contributed $115.6 million of income before income taxes during 2020; and
The mortgage origination segment contributed $408.0 million of income before income taxes during 2020.
Our insurance segment, the results of which have been presented within discontinued operations in the consolidated financial
statements, contributed $2.1 million of income before income taxes during 2020.
At December 31, 2020, on a consolidated basis, we had total assets of $16.9 billion, total deposits of $11.2 billion, total loans,
including loans held for sale, of $10.3 billion and stockholders’ equity of $2.4 billion.
On January 28, 2021, our board of directors declared a quarterly cash dividend of $0.12 per common share, payable on February
26, 2021 to all common stockholders of record as of the close of business on February 15, 2021.
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Recent Developments
COVID-19
COVID-19 has spread globally, including to every state in the United States, and has resulted in the WHO declaring COVID-19 to
be a global pandemic. On March 13, 2020, the United States declared a national emergency with respect to COVID-19. The U.S.
federal government issued social distancing guidelines as a measure to reduce the escalation of the spread of COVID-19 in the
United States. A majority of states and certain U.S. territories, including the District of Columbia, issued orders requiring the
closure of non-essential businesses and/or requiring residents to stay at home. The effects of COVID-19 and the governmental and
societal response to the virus have negatively impacted financial markets and overall economic conditions on an unprecedented
scale, resulting in the shuttering of businesses across the country and significant job loss. Many of these businesses reopened but
may be operating at limited capacity levels. We are following guidelines established by the Centers for Disease Control and WHO
and orders issued by the state and local governments where we operate. We have taken a number of precautionary steps to
safeguard our business and our employees from COVID-19, including, but not limited to, banking by appointment, implementing
employee travel restrictions and telecommuting arrangements, while maintaining business continuity so that we can continue to
deliver service to and meet the demands of our clients. On March 23, 2020, most of our employees began working remotely, with
only certain operationally critical employees working on site at our principal business headquarters and business segment
locations. In early September 2020, a majority of our employees began the process of returning to their respective office locations
based on rotational team schedules to better ensure that appropriate social distancing measures are available. However, in
November 2020, given the escalation of COVID-19 cases, most of our employees returned to working remotely, with only certain
operationally critical employees working on site at our principal business headquarters and business segment locations. We are
monitoring and assessing the impact of the COVID-19 pandemic on a daily basis to ensure that we continue to adhere to guidelines
and orders issued by federal, state and local governments.
In March and April 2020, President Trump signed into law two relief bills, the Coronavirus Aid, Relief, and Economic Security
Act (“CARES Act”) and the Paycheck Protection Program and Health Care Enhancement Act (the “PPP/HCE Act”), which are
intended to provide emergency relief to several groups and individuals impacted by the COVID-19 pandemic. Among the
numerous provisions contained in the CARES Act is the creation of a $349 billion Paycheck Protection Program (“PPP”) that
provides federal government loan forgiveness for Small Business Administration (“SBA”) Section 7(a) loans for small businesses,
which may include our customers, to pay up to eight weeks of employee compensation and other basic expenses such as electric
and telephone bills. The PPP/HCE Act included an additional $310 billion for PPP funding. The CARES Act also provides for
relief related to the adoption of certain accounting principles as well as tax provisions that may support the improvement of
working capital levels. We will continue to evaluate the provisions of the CARES Act and the PPP/HCE Act and their impact on
Hilltop and our employees as well as our customers and clients.
In light of the extreme volatility and disruptions in the capital and credit markets in March 2020 resulting from the COVID-19
crisis and its negative impact on the economy, including a significant decline in corporate debt and equity issuances and a
deterioration in the mortgage servicing and commercial paper markets, we took a number of precautionary actions in March to
enhance our financial flexibility by bolstering our cash position to ensure we have adequate cash readily available to meet both
expected and unexpected funding needs without adversely affecting our daily operations. Additionally, as previously announced
on April 30, 2020, in light of the uncertain outlook for 2020 due to the COVID-19 pandemic, Hilltop’s board of directors
suspended its stock repurchase program. Hilltop’s board of directors has the ability to reinstate the stock repurchase program at its
discretion as circumstances warrant.
The Federal Open Market Committee (“FOMC”) reduced the target range for short-term rates by 150 basis points to a range of 0%
to 0.25% during March 2020 to support the economy and potentially reduce the impacts from the COVID-19 pandemic. As a result
of these rate adjustments and the stressed economic outlook, mortgage rates fell to historically low levels. Given our exposure to
the mortgage market, this precipitous decline in rates resulted in significant growth in mortgage originations at both PrimeLending
and Hilltop Securities through its partnerships with certain housing finance authorities. To improve our already strong liquidity
position, we raised brokered and other wholesale funding to support the enhanced mortgage activity. To meet increased liquidity
demands, we raised brokered deposits that totaled $731 million at December 31, 2020, down from $1.4 billion at June 30, 2020.
Further, beginning in March 2020, an additional $200 million of deposits was swept from Hilltop Securities into the Bank,
bringing the total funds swept from Hilltop Securities to approximately $1.5 billion until June 2020 when the total funds swept was
reduced back to $1.3 billion at June 30, 2020. During the third and fourth quarters of 2020, given the continued strong cash and
liquidity levels at the
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Bank, the total funds swept from Hilltop Securities into the Bank was reduced further to approximately $700 million as of
December 31, 2020.
Further, during March 2020, we substantially reduced the trading portfolio inventory limits at Hilltop Securities in an effort to
protect capital, minimize losses and ensure target liquidity levels throughout the crisis. During March 2020, the capital markets
experienced significant friction and in certain portions of the market, liquidity was not prevalent. In particular for us, the market
for municipal securities, collateralized mortgage obligations, mortgage derivatives and Government National Mortgage
Association (“GNMA”) mortgage pools experienced significant liquidity stress at points during the month. The Federal Reserve, in
partnership with the Treasury of the United States, stepped in to provide additional liquidity in each of these critical markets. We
will continue to evaluate market conditions and determine the appropriateness of capital market inventory limits.
Asset Valuation
At each reporting date between annual impairment tests, the Company considers potential indicators of impairment. Given the
current economic uncertainty and volatility surrounding COVID-19, the Company assessed whether the events and circumstances
resulted in it being more likely than not that the fair value of any reporting unit and other intangible assets were less than their
respective carrying value. Impairment indicators considered comprised the condition of the economy and banking industry;
government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the
reporting unit; performance of the Company’s stock and other relevant events. Specifically, our banking segment experienced
lower-than-forecasted operating results during 2020, due to conditions discussed in detail within the discussion of banking
segment results that follows.
Given the potential impacts as a result of COVID-19, actual results may differ materially from our current estimates as the scope
of COVID-19 evolves or if the duration of business disruptions is longer than currently anticipated. The Company further
considered the amount by which fair value exceeded book value in the most recent quantitative analysis and sensitivities
performed. At the conclusion of the annual assessment, the Company determined that as of October 1, 2020 it was more likely than
not that the fair value of goodwill and other intangible assets exceeded their respective carrying values.
While certain valuation assumptions and judgments will change to account for pandemic-related circumstances, we do not
anticipate significant changes in methodology used to determine the fair value of our goodwill, intangible assets and other long-
lived assets. We will continue to monitor developments regarding the COVID-19 pandemic and measures implemented in
response to the pandemic, market capitalization, overall economic conditions and any other triggering events or circumstances that
may indicate an impairment in the future.
In addition, the COVID-19 crisis could cause a further and sustained decline in our stock price or the occurrence of what
management would deem to be a triggering event that could, under certain circumstances, cause us to perform impairment tests on
our goodwill and other intangible assets, and result in an impairment charge being recorded for that period. In the event that we
conclude that all or a portion of our goodwill and other intangible assets are impaired, a non-cash charge for the respective amount
of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.
Loan Portfolio
In response to the COVID-19 pandemic, the CARES Act was passed in March 2020, which among other things, allows the Bank
to suspend the requirements for certain loan modifications to be categorized as a troubled debt restructuring (“TDR”). Starting in
March, the Bank implemented several actions to better support our impacted banking clients and allow for loan modifications such
as principal and/or interest payment deferrals, participation in the PPP as an SBA preferred lender and personal banking assistance
including waived fees, increased daily spending limits and suspension of residential foreclosure activities. The COVID-19
payment deferment programs allow for a deferral of principal and/or interest payments with such deferred principal payments due
and payable on the maturity date of the existing loan. The Bank’s actions originally included approval of approximately $968
million in COVID-19 related loan modifications as of June 30, 2020.
As noted in the table below, during the third and fourth quarters of 2020, the Bank continued to support its impacted banking
clients through the approval of COVID-19 related loan modifications, which resulted in an additional $75 million
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of new COVID-19 related loan modifications since June 30, 2020. The portfolio of active deferrals that have not reached the end
of their deferral period was approximately $240 million as of December 31, 2020, of which approximately $90 million had
received an additional deferral. COVID-19 related loan modifications of approximately $714 million have returned to agreed-upon
contractual terms and had made at least one required principal and/or interest payment since the end of their initial deferral period.
Such loans represent elevated risk, therefore management continues to monitor these loans. The extent to which these measures
will impact the Bank is uncertain, and any progression of loans, whether receiving COVID-19 payment deferrals or not, into non-
performing assets, during future periods is uncertain and will depend on future developments that cannot be predicted.
While all industries could experience adverse impacts due to the COVID-19 pandemic, certain of our loan portfolio industry
sectors and subsectors, including real estate collateralized by office buildings, have an increased level of risk. The following table
provides information on those loans held for investment balances, by portfolio industry sector, including collectively evaluated
allowance for credit losses, that include active COVID-19 payment deferrals (dollars in thousands).
December 31, 2020
Hotel
Restaurants
Transportation & Warehousing
1-4 Family Residential
Retail
Real Estate & Rental & Leasing
All Other
Active
90 Day
Principal
Deferrals
Active
90 Day
Interest and
Principal
Deferrals
$
$
104,978
72,930
8,312
—
—
2,139
9,353
197,712
$
$
27,251
—
—
7,727
6,625
889
—
42,491
$
$
Total
Active Modifications
($)
132,229
72,930
8,312
7,727
6,625
3,028
9,353
240,203
(#)
17
12
12
73
1
2
8
125
Classified
and
Criticized
Loans
$ 104,978
72,930
8,312
5,692
—
889
9,353
$ 202,154
Allowance
for
Credit
Losses
$
$
19,851
14,537
1,276
225
76
457
5,074
41,496
Allowance for
Credit Losses
as a % of
Total
Active
Modifications
Allowance for
Credit Losses
as a % of
Classified
and Criticized
Loans
15.0 %
19.9 %
15.4 %
2.9 %
1.1 %
15.1 %
54.3 %
17.3 %
18.9 %
19.9 %
15.4 %
3.9 %
— %
51.4 %
54.3 %
20.5 %
In addition, the Bank’s loan portfolio includes collateralized loans extended to businesses that depend on the energy industry,
including those within the exploration and production, field services, pipeline construction and transportation sectors. The sharp
decline in crude oil prices coupled with the economic uncertainties associated with COVID-19 have increased pressures on this
portfolio. The following table summarizes energy loan portfolio exposures by sector (dollars in thousands).
December 31, 2020
Exploration / Production
Midstream
Services
Other
Loans Held for Investment Balances
Total
Loans Held
For Investment
9,700
$
12,075
28,511
29,051
79,337
$
Unfunded
Commitments
7,460
2,500
8,460
21,172
39,592
$
$
Total
Commitments
17,160
14,575
36,971
50,223
118,929
$
$
$
$
Classified
and Criticized
Loans
Allowance
For Credit
Losses
— $
4,031
7,175
3,000
14,206
$
2,095
12
1,320
104
3,531
Allowance For Credit Losses as
a Percentage of
Total Loans Held
For Investment
Classified and
Criticized Loans
21.6 %
0.1 %
4.6 %
0.4 %
4.5 %
— %
0.3 %
18.4 %
3.5 %
24.9 %
As noted above, the Bank’s actions during the second quarter of 2020 also included supporting our impacted banking clients
through the PPP effort. These efforts included approval and funding of over 2,800 PPP loans ranging from approximately $1
thousand to $8.4 million, with approximately $487 million remaining outstanding at December 31, 2020. The PPP loans made by
the Bank are guaranteed by the SBA and, if used by the borrower for authorized purposes, may be fully forgiven. On October 2,
2020, the SBA began approving PPP forgiveness applications and remitting forgiveness payments to PPP lenders for PPP
borrowers. Through February 12, 2021, the SBA had approved approximately 1,500 PPP forgiveness applications totaling
approximately $294 million, with PPP loans of approximately $171 million pending SBA review and approval. In addition, given
recent updates from the SBA regarding the second round of the PPP effort, the Bank is accepting new applications from impacted
banking clients. Through February 12, 2021, these efforts have included review of approximately $193 million in second round
PPP loan application submissions, of which approximately $127 million have been approved.
Refer to the discussion in the “Financial Condition – Allowance for Credit Losses on Loans” section that follows for more details
regarding the significant assumptions and estimates involved in estimating credit losses given the economic uncertainties
associated with COVID-19.
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Outlook for 2021
The spread of COVID-19 has had, and is expected to continue to have, adverse effects on our business and operations. The broader
adverse implications of COVID-19 on the operations and overall financial performance of our clients is uncertain due to the
currently unknowable duration and severity of the COVID-19 pandemic. The extent of the impact of COVID-19 on our operational
and financial performance in 2021 is likewise currently uncertain and will depend on certain developments, including, among
others, the ultimate impact of COVID-19 on our customers and clients, potential further disruption and deterioration in the global
economy and the financial services industry, including the mortgage servicing and commercial paper markets, and additional, or
extended, federal, state and local government orders and regulations that might be imposed in response to the pandemic, all of
which are uncertain.
See “Item 1A. Risk Factors” for additional discussion of the potential adverse impact of COVID-19 on our business, results of
operations and financial condition.
Tender Offer
On September 23, 2020, we announced the commencement of a modified “Dutch auction” tender offer to purchase shares of our
common stock for an aggregate cash purchase price of up to $350 million. On November 17, 2020, we completed our tender offer,
repurchasing 8,058,947 shares of outstanding common stock at a price of $24.00 per share for a total of $193.4 million excluding
fees and expenses. We funded the tender offer with cash on hand.
NLC Sale
As previously discussed, on June 30, 2020, we completed the sale of all of the outstanding capital stock of NLC, which comprised
the operations of our insurance segment. Accordingly, NLC’s results and its assets and liabilities have been presented as
discontinued operations in the consolidated financial statements.
Subordinated Notes due 2030 and 2035
On May 7, 2020, we completed a public offering of $50 million aggregate principal amount of 5.75% fixed-to-floating rate
subordinated notes due May 15, 2030 (the “2030 Subordinated Notes”) and $150 million aggregate principal amount of 6.125%
fixed-to-floating rate subordinated notes due May 15, 2035 (the “2035 Subordinated Notes”). We collectively refer to the 2030
Subordinated Notes and the 2035 Subordinated Notes as the “Subordinated Notes”. The price for the Subordinated Notes was
100% of the principal amount of the Subordinated Notes. The net proceeds from the offering, after deducting underwriting
discounts and fees and expenses of $3.4 million, were $196.6 million. We intend to use the net proceeds of the offerings for
general corporate purposes.
The 2030 Subordinated Notes and the 2035 Subordinated Notes will mature on May 15, 2030 and May 15, 2035, respectively. We
may redeem the Subordinated Notes, in whole or in part, from time to time, subject to obtaining Federal Reserve approval,
beginning with the interest payment date of May 15, 2025 for the 2030 Subordinated Notes and beginning with the interest
payment date of May 15, 2030 for the 2035 Subordinated Notes, at a redemption price equal to 100% of the principal amount of
the Subordinated Notes being redeemed plus accrued and unpaid interest to but excluding the date of redemption.
The 2030 Subordinated Notes bear interest at a rate of 5.75% per year, payable semi-annually in arrears commencing on
November 15, 2020. The interest rate for the 2030 Subordinated Notes will reset quarterly beginning May 15, 2025 to an interest
rate, per year, equal to the then-current benchmark rate, which is expected to be three-month term Secured Overnight Financing
Rate (“SOFR”) rate, plus 5.68%, payable quarterly in arrears. The 2035 Subordinated Notes bear interest at a rate of 6.125% per
year, payable semi-annually in arrears commencing on November 15, 2020. The interest rate for the 2035 Subordinated Notes will
reset quarterly beginning May 15, 2030 to an interest rate, per year, equal to the then-current benchmark rate, which is expected to
be three-month term SOFR rate, plus 5.80%, payable quarterly in arrears.
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Factors Affecting Results of Operations
As a financial institution providing products and services through our banking, broker-dealer and mortgage origination segments,
we are directly affected by general economic and market conditions, many of which are beyond our control and unpredictable. A
key factor impacting our results of operations includes changes in the level of interest rates in addition to twists in the shape of the
yield curve with the magnitude and direction of the impact varying across the different lines of business. Other factors impacting
our results of operations include, but are not limited to, fluctuations in volume and price levels of securities, inflation, political
events, investor confidence, investor participation levels, legal, regulatory, and compliance requirements and competition. All of
these factors have the potential to impact our financial position, operating results and liquidity. In addition, the recent economic
and political environment has led to legislative and regulatory initiatives, both enacted and proposed, that could substantially
change the regulation of the financial services industry and may significantly impact us.
Factors Affecting Comparability of Results of Operations
Changes in Management and Efficiency Initiative-Related Charges
In 2019, we successfully completed several leadership transitions through effective succession planning. During 2019, the broker-
dealer segment’s results reflected aggregate pre-tax charges of $2.2 million within employees’ compensation and benefits
noninterest expenses, all of which were recognized in the first quarter of 2019, related to the resignation of Hill A. Feinberg as
President and Chief Executive Officer of Hilltop Securities and the appointment of his successor, M. Bradley Winges. Also,
corporate recognized a pre-tax charge of $5.8 million within employees’ compensation and benefits noninterest expenses in the
first quarter of 2019 related to the retirement of Alan B. White, our former Vice Chairman and Co-Chief Executive Officer. Lastly,
the mortgage origination segment recognized a pre-tax charge of $1.25 million within employees’ compensation and benefits
noninterest expenses in the fourth quarter of 2019 related to the resignation of Todd Salmans as Chief Executive Officer of
PrimeLending and the appointment of his successor, Steve Thompson. These management changes and the related impact on our
results of operations are collectively referred to as the “Leadership Changes.” For additional information regarding the Leadership
Changes, refer to the section captioned “Factors Affecting the Current Year — Changes in Management and Efficiency Initiative-
Related Changes” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our
2019 Form 10-K.
In addition to the costs associated with the Leadership Changes, during 2019, corporate and the broker-dealer segment recognized
$1.0 million and $0.7 million, respectively, in efficiency initiative-related charges resulting in aggregated charges of $1.7 million.
Technology Enhancements and Corporate Initiatives
In furtherance of our goal of building a premier, diversified financial services company, we regularly evaluate strategic
opportunities to invest in our business and technology platforms. Such investments are intended to support long-term technological
competitiveness and improve operational efficiencies throughout our organization. During 2018, we began the significant
investment in new technological solutions, substantial core system upgrades and other technology enhancements. Such significant
investments specifically include single enterprise-wide general ledger and procurement solutions, a mortgage loan origination
system and a core system replacement within our broker-dealer segment (collectively referred to as “Core System
Improvements”). In combination with these technology enhancements, we are continuing our efforts to consolidate common back
office functions. Costs incurred related to these Core System Improvements and the consolidation of common back office
functions represents a significant portion of our noninterest expenses throughout 2020, and we believe this trend will continue into
2021, but we are making such investments with the expectation that they will result in cost savings over the long term. Beginning
in the second quarter of 2019, the mortgage origination segment began the implementation of a new mortgage loan origination
system. The transition from the previous mortgage loan origination system was completed during the fourth quarter of 2020.
During the second quarter of 2020, we implemented the core system replacement within our broker-dealer segment. This was a
highly complex endeavor and the broker-dealer segment continues to work with the technology vendors, clients and internal
stakeholders. Additionally, through the third quarter of 2020, we made significant progress in our transition to a single, enterprise-
wide general ledger solution by replacing legacy ledgers at our banking and mortgage origination segments, as well as corporate.
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LIBOR
In July 2017, the Financial Conduct Authority (“FCA”) announced that it intends to cease compelling banks to submit rates for the
calculation of LIBOR after 2021. Working groups comprised of various regulators and other industry groups have been formed in
the United States and other countries in order to provide guidance on this topic. In particular, the Alternative Reference Rates
Committee (“ARRC”) has proposed that SOFR is the rate that represents best practice as the alternative to LIBOR for use in
derivatives and other financial contracts that are currently indexed to LIBOR. The ARRC has also published recommended fall-
back language for LIBOR-linked financial instruments, among numerous other areas of guidance.
The Financial Accounting Standards Board (“FASB”) issued guidance in March 2020 intended to provide temporary optional
expedients and exceptions to the GAAP guidance on contract modifications and hedge accounting to ease the financial reporting
burdens related to the expected market transition from LIBOR and other interbank offered rates to alternative reference rates.
Additionally, the FASB issued specific accounting guidance that permits the use of the Overnight Index Swap rate based on the
SOFR to be designated as a benchmark interest rate for hedge accounting purposes.
Certain loans we originate bear interest at a floating rate based on LIBOR. We also pay interest on certain borrowings, are
counterparty to derivative agreements that are based on LIBOR and have existing contracts with payment calculations that use
LIBOR as the reference rate. These changes will create various risks surrounding the financial, operational, compliance and legal
aspects associated with changing certain elements of existing contracts.
ARRC has proposed a paced market transition plan to SOFR from LIBOR, and organizations are currently working on industry-
wide and company-specific transition plans as it relates to derivatives and cash markets exposed to LIBOR. However, in
November 2020, Intercontinental Exchange announced that ICE Benchmark Administration Limited (“IBA”) will consult on its
intention to cease the publication of the one-week and two-month settings of United States Dollar (“USD”) LIBOR immediately
after December 31, 2021, and cease publishing remaining USD LIBOR settings on June 30, 2023, providing time for many legacy
LIBOR-referencing contracts to mature.
We have made an assessment of areas across the organization that will be affected by the migration away from LIBOR. We have
assembled individuals from across the organization and established a governance process as part of a coordinated effort to prepare
for the cessation of LIBOR. During the third quarter of 2020, PrimeLending began originating conventional adjustable-rate
mortgage, or ARM, loan products utilizing a SOFR rate with terms consistent with government-sponsored enterprise guidelines. In
addition, the Bank’s management team is currently working with its commercial relationships who have LIBOR-based contracts
maturing after 2021 to amend terms and establish an alternative benchmark rate. We are also continuing work on an enterprise-
wide contract model and software review to better evaluate both the impacts of the LIBOR phase-out and transition requirements.
As a result of this ongoing effort, we may incur significant expenses in effecting the transition, including, but not limited to,
changes to our agreements and our agreements with customers that do not contemplate LIBOR being unavailable, as well as
changes to systems and processes.
Company Background
In January 2007, we acquired NLC, a property and casualty insurance holding company. As a result, our subsequent primary
operations through November 2012 were limited to providing fire and homeowners insurance to low value dwellings and
manufactured homes primarily in Texas and other areas of the southern United States through NLC’s wholly owned insurance
subsidiaries. As previously discussed, on June 30, 2020, we completed the sale of all of the outstanding capital stock of NLC.
On November 30, 2012, we acquired PlainsCapital Corporation pursuant to a plan of merger whereby PlainsCapital Corporation
merged with and into our wholly owned subsidiary (the “PlainsCapital Merger”), which continued as the surviving entity under the
name “PlainsCapital Corporation”. Concurrent with the consummation of the PlainsCapital Merger, Hilltop became a financial
holding company registered under the Bank Holding Company Act of 1956.
On September 13, 2013 (the “Bank Closing Date”), the Bank assumed substantially all of the liabilities, including all of the
deposits, and acquired substantially all of the assets of Edinburg, Texas-based FNB from the FDIC, as receiver, and reopened
former branches of FNB acquired from the FDIC under the “PlainsCapital Bank” name (the “FNB
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Transaction”). Pursuant to the Purchase and Assumption Agreement by and among the FDIC as receiver for FNB, the FDIC and
the Bank (the “P&A Agreement”), the Bank and the FDIC entered into loss-share agreements whereby the FDIC agreed to share in
the losses of certain loans and real estate acquired through foreclosure (“OREO”) that the Bank acquired in the FNB Transaction.
The loss-share agreements with the FDIC were terminated in the fourth quarter of 2018.
On January 1, 2015, we acquired SWS in a stock and cash transaction (the “SWS Merger”), whereby SWS’s broker-dealer
subsidiaries became subsidiaries of Securities Holdings and SWS’s banking subsidiary, Southwest Securities, FSB, was merged
into the Bank. On October 5, 2015, Southwest Securities, Inc. was renamed “Hilltop Securities Inc.”
On August 1, 2018, we acquired privately-held, Houston-based BORO in an all-cash transaction (“BORO Acquisition”). In
connection with the BORO Acquisition, we merged BORO into the Bank, and all customer accounts were converted to the
PlainsCapital Bank platform.
Segment Information
As previously discussed, on June 30, 2020, we completed the sale of all of the outstanding capital stock of NLC, which comprised
the operations of the former insurance segment. As a result, insurance segment results and its assets and liabilities have been
presented as discontinued operations in the consolidated financial statements, and we no longer have an insurance segment.
Additional details are presented in Note 3, Discontinued Operations, in the notes to our consolidated financial statements.
Following the above noted sale of NLC, we have two primary business units within continuing operations, PCC (banking and
mortgage origination) and Securities Holdings (broker-dealer). Under accounting principles generally accepted in the United States
(“GAAP”), our continuing operations business units are comprised of three reportable business segments organized primarily by
the core products offered to the segments’ respective customers: banking, broker-dealer and mortgage origination. Consistent with
our historical segment operating results, we anticipate that future revenues will be driven primarily from the banking segment, with
the remainder being generated by our broker-dealer and mortgage origination segments. Operating results for the mortgage
origination segment have historically been more volatile than operating results for the banking and broker-dealer segments.
The banking segment includes the operations of the Bank. The banking segment primarily provides business and consumer
banking services from offices located throughout Texas and generates revenue from its portfolio of earning assets. The Bank’s
results of operations are primarily dependent on net interest income. The Bank also derives revenue from other sources, including
service charges on customer deposit accounts and trust fees.
The broker-dealer segment includes the operations of Securities Holdings, which operates through its wholly owned subsidiaries
Hilltop Securities, Momentum Independent Network and Hilltop Securities Asset Management, LLC. The broker-dealer segment
generates a majority of its revenues from fees and commissions earned from investment advisory and securities brokerage services.
Hilltop Securities is a broker-dealer registered with the SEC and the Financial Industry Regulatory Authority (“FINRA”) and a
member of the New York Stock Exchange (“NYSE”). Momentum Independent Network is an introducing broker-dealer that is
also registered with the SEC and FINRA. Hilltop Securities, Momentum Independent Network and Hilltop Securities Asset
Management, LLC are registered investment advisers under the Investment Advisers Act of 1940.
The mortgage origination segment includes the operations of PrimeLending, which offers a variety of loan products and generates
revenue predominantly from fees charged on the origination and servicing of loans and from selling these loans in the secondary
market.
Corporate includes certain activities not allocated to specific business segments. These activities include holding company
financing and investing activities, merchant banking investment opportunities, and management and administrative services to
support the overall operations of the Company.
The eliminations of intercompany transactions are included in “All Other and Eliminations.” Additional information concerning
our reportable segments is presented in Note 30, Segment and Related Information, in the notes to our consolidated financial
statements.
62
Table of Contents
The following table presents certain information about the continuing operating results of our reportable segments (in thousands).
This table serves as a basis for the discussion and analysis in the segment operating results sections that follow.
Net interest income (expense):
Banking
Broker-Dealer
Mortgage Origination
Corporate
All Other and Eliminations
Hilltop Continuing Operations
Provision for (reversal of) credit losses:
Banking
Broker-Dealer
Mortgage Origination
Corporate
All Other and Eliminations
Hilltop Continuing Operations
Noninterest income:
Banking
Broker-Dealer
Mortgage Origination
Corporate
All Other and Eliminations
Hilltop Continuing Operations
Noninterest expense:
Banking
Broker-Dealer
Mortgage Origination
Corporate
All Other and Eliminations
Hilltop Continuing Operations
Income (loss) from continuing operations before taxes:
Banking
Broker-Dealer
Mortgage Origination
Corporate
All Other and Eliminations
Hilltop Continuing Operations
NM
Not meaningful
Key Performance Indicators
Year Ended December 31,
2019
2020
2018
Variance 2020 vs 2019
Amount
Percent
Variance 2019 vs 2018
Amount
Percent
$
$
$
$
$
$
$
$
$
$
390,871
39,912
(10,489)
(14,192)
18,064
424,166
96,326
165
—
—
—
96,491
41,376
491,355
1,172,450
3,945
(18,646)
1,690,480
232,447
415,463
753,917
53,040
(1,064)
1,453,803
103,474
115,639
408,044
(63,287)
482
564,352
$
$
$
$
$
$
$
$
$
$
379,258
51,308
(6,273)
(5,541)
20,227
438,979
7,280
(74)
—
—
—
7,206
41,753
404,411
634,992
2,104
(20,443)
1,062,817
231,524
366,031
563,998
50,968
(632)
1,211,889
182,207
89,762
64,721
(54,405)
416
282,701
$
$
$
$
$
$
$
$
$
$
370,732
50,878
1,485
(9,176)
19,380
433,299
5,319
(231)
—
—
—
5,088
43,588
301,714
551,860
4,798
(21,830)
880,130
256,577
320,241
540,474
36,628
(592)
1,153,328
152,424
32,582
12,871
(41,006)
(1,858)
155,013
$
$
$
$
$
$
$
$
$
$
11,613
(11,396)
(4,216)
(8,651)
(2,163)
(14,813)
89,046
239
—
—
—
89,285
(377)
86,944
537,458
1,841
1,797
627,663
923
49,432
189,919
2,072
(432)
241,914
(78,733)
25,877
343,323
(8,882)
66
281,651
3 % $
(22)%
(67)%
(156)%
(11)%
(3)% $
NM
NM
—
—
—
NM
$
$
(1)% $
21 %
85 %
88 %
9 %
59 % $
0 % $
14 %
34 %
4 %
(68)%
20 % $
(43)% $
29 %
530 %
(16)%
16 %
100 % $
8,526
430
(7,758)
3,635
847
5,680
1,961
157
-
-
-
2,118
(1,835)
102,697
83,132
(2,694)
1,387
182,687
(25,053)
45,790
23,524
14,340
(40)
58,561
29,783
57,180
51,850
(13,399)
2,274
127,688
2 %
1 %
(522)%
40 %
4 %
1 %
37 %
68 %
- %
- %
- %
42 %
(4)%
34 %
15 %
(56)%
6 %
21 %
(10)%
14 %
4 %
39 %
(7)%
5 %
20 %
175 %
403 %
(33)%
122 %
82 %
We utilize several key indicators of financial condition and operating performance to evaluate the various aspects of our business.
In addition to traditional financial metrics, such as revenue and growth trends, we monitor several other financial measures and
non-financial operating metrics to help us evaluate growth trends, measure the adequacy of our capital based on regulatory
reporting requirements, measure the effectiveness of our operations and assess operational efficiencies. These indicators change
from time to time as the opportunities and challenges in our businesses change.
Specifically, performance ratios and asset quality ratios are typically used for measuring the performance of banking and financial
institutions. We consider return on average stockholders’ equity, return on average assets and net interest margin to be important
supplemental measures of operating performance that are commonly used by securities analysts, investors and other parties
interested in the banking and financial industry. The net charge-offs to average loans outstanding ratio is also considered a key
measure for our banking segment as it indicates the performance of our loan portfolio.
In addition, we consider regulatory capital ratios to be key measures that are used by us, as well as banking regulators, investors
and analysts, to assess our regulatory capital position and to compare our regulatory capital to that of other financial services
companies. We monitor our capital strength in terms of both leverage ratio and risk-based capital ratios based on capital
requirements administered by the federal banking agencies. The risk-based capital ratios are minimum supervisory ratios generally
applicable to banking organizations, but banking organizations are widely expected to operate with capital positions well above the
minimum ratios. Failure to meet minimum capital requirements can initiate certain mandatory actions by regulators that, if
undertaken, could have a material effect on our financial condition or results of operations.
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Table of Contents
How We Generate Revenue
We generate revenue from net interest income and from noninterest income. Net interest income represents the difference between
the income earned on our assets, including our loans and investment securities, and our cost of funds, including the interest paid on
the deposits and borrowings that are used to support our assets. Net interest income is a significant contributor to our operating
results. Fluctuations in interest rates, as well as the amounts and types of interest-earning assets and interest-bearing liabilities we
hold, affect net interest income. We generated $424.2 million in net interest income during 2020, compared with net interest
income of $439.0 million and $433.3 million during 2019 and 2018, respectively. Changes in net interest income during 2020,
compared with 2019, primarily included increases within our banking segment, partially offset by decreases in our broker-dealer,
mortgage origination and corporate segments.
The other component of our revenue is noninterest income, which is primarily comprised of the following:
(i)
(ii)
Income from broker-dealer operations. Through Securities Holdings, we provide investment banking and other
related financial services that generated $274.0 million, $241.5 million and $241.0 million in securities
brokerage commissions and fees and investment advisory fees and commissions, and $203.1 million, $150.0
million and $47.8 million in gains from derivative and trading portfolio activities (included within other
noninterest income) during 2020, 2019 and 2018, respectively.
Income from mortgage operations. Through PrimeLending, we generate noninterest income by originating and
selling mortgage loans. During 2020, 2019 and 2018, we generated $1.2 billion, $634.9 million and $548.7
million, respectively, in net gains from sale of loans, other mortgage production income (including income
associated with retained mortgage servicing rights), and mortgage loan origination fees.
In the aggregate, we generated $1.7 billion, $1.1 billion and $0.9 billion in noninterest income during 2020, 2019 and 2018,
respectively. The increase in noninterest income during 2020, compared with 2019, was predominantly attributable to increases of
$537.9 million in net gains from sale of loans, other mortgage production income and mortgage loan origination fees within our
mortgage origination segment and $53.0 million in gains from derivative and trading portfolio activities within our broker-dealer
segment.
We also incur noninterest expenses in the operation of our businesses. Our businesses engage in labor intensive activities and,
consequently, employees’ compensation and benefits represent the majority of our noninterest expenses.
Consolidated Operating Results
Income from continuing operations applicable to common stockholders during 2020 was $409.4 million, or $4.58 per diluted
share, compared with $211.3 million, or $2.29 per diluted share, during 2019, and $116.5 million, or $1.23 per diluted share,
during 2018. Hilltop’s financial results from continuing operations during 2020 reflect both a significant increase in mortgage
origination segment net gains from sales of loans and other mortgage production income and a significant build in the allowance
for credit losses associated with the deterioration of the economic outlook attributable to the market disruption and economic
uncertainties caused by COVID-19. Results during 2019 included the costs incurred associated with the significant Leadership
Changes and other efficiency initiative-related charges which, in the aggregate, totaled $11.0 million before income taxes.
Including income from discontinued operations, net of income taxes, income applicable to common stockholders was $447.8
million, or $5.01 per diluted share, during 2020, compared to $225.3 million, or $2.44 per diluted share, during 2019, and $121.4
million, or $1.28 per diluted share, during 2018.
Certain items included in net income during 2020, 2019 and 2018 resulted from purchase accounting associated with the
PlainsCapital Merger, the FNB Transaction, the SWS Merger and the BORO Acquisition (collectively, the “Bank Transactions”).
Income before income taxes during 2020, 2019 and 2018 included net accretion on earning assets and liabilities of $18.9 million,
$28.5 million and $37.6 million, respectively, and amortization of identifiable intangibles of $6.3 million, $7.6 million and $8.0
million, respectively, related to the Bank Transactions.
64
Table of Contents
The information shown in the table below includes certain key performance indicators on a consolidated basis.
Return on average stockholders' equity (1)
Return on average assets (2)
Net interest margin (3) (4)
Leverage ratio (5) (end of period)
Common equity Tier 1 risk-based capital ratio (6) (end of period)
2020
Year Ended December 31,
2019
2018
20.03 %
2.88 %
2.85 %
12.64 %
18.97 %
11.18 %
1.66 %
3.48 %
12.71 %
16.70 %
6.33 %
0.93 %
3.55 %
12.53 %
16.58 %
(1) Return on average stockholders’ equity ratio is defined as consolidated income attributable to Hilltop divided by average total Hilltop stockholders’
equity.
(2) Return on average assets ratio is defined as consolidated net income divided by average assets.
(3) Net interest margin is defined as net interest income divided by average interest-earning assets. We consider net interest margin as a key indicator of
profitability as it represents interest earned on our interest-earning assets compared to interest incurred.
(4) The securities financing operations within our broker-dealer segment had the effect of lowering net interest margin by 25 basis points, 40 basis points
and 42 basis points during 2020, 2019 and 2018, respectively.
(5) The leverage ratio is a regulatory capital ratio and is defined as Tier 1 risk-based capital divided by average consolidated assets.
(6) The common equity Tier 1 risk-based capital ratio is a regulatory capital ratio and is defined as common equity Tier 1 risk-based capital divided by
risk weighted assets. Common equity includes common equity Tier 1 capital (common stockholders’ equity and certain minority interests in the
equity capital accounts of consolidated subsidiaries, but excluding goodwill and various intangible assets) and additional Tier 1 capital (certain
qualifying minority interests not included in common equity Tier 1 capital, certain preferred stock and related surplus, and certain subordinated debt).
We present net interest margin and net interest income below on a taxable-equivalent basis. Net interest margin (taxable
equivalent), a non-GAAP measure, is defined as taxable equivalent net interest income divided by average interest earning assets.
Taxable equivalent adjustments are based on the applicable corporate federal income tax rates of 21% for all periods presented.
The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-
exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net
interest margins for all earning assets, we use net interest income on a taxable-equivalent basis in calculating net interest margin by
increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable
investments.
During 2020, 2019 and 2018, purchase accounting contributed 14, 25 and 34 basis points to our consolidated taxable equivalent
net interest margin of 2.85%, 3.48% and 3.56%, respectively. The purchase accounting activity is primarily related to the accretion
of discount of loans which totaled $18.8 million, $28.7 million and $39.1 million during 2020, 2019 and 2018, respectively,
associated with the Bank Transactions.
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Table of Contents
The table below provides additional details regarding our consolidated net interest income (dollars in thousands).
Average
Outstanding
Balance
2020
Interest
Earned or
Paid
Annualized
Yield or
Rate
Year Ended December 31,
2019
Interest
Earned or
Paid
Annualized
Yield or
Rate
Average
Outstanding
Balance
Average
Outstanding
Balance
2018
Interest
Earned or
Paid
Annualized
Yield or
Rate
Assets
Interest-earning assets
Loans held for sale
Loans held for investment,
gross (1)
Investment securities - taxable
Investment securities - non-
taxable (2)
Federal funds sold and
securities purchased under
agreements to resell
Interest-bearing deposits in
other financial institutions
Securities borrowed
Other
Interest-earning assets, gross (2)
Allowance for credit losses
Interest-earning assets, net
Noninterest-earning assets
Total assets
Liabilities and Stockholders' Equity
Interest-bearing liabilities
Interest-bearing deposits
Securities loaned
Notes payable and other
borrowings
Total interest-bearing liabilities
Noninterest-bearing liabilities
Noninterest-bearing deposits
Other liabilities
Total liabilities
Stockholders’ equity
Noncontrolling interest
Total liabilities and stockholders'
equity
Net interest income (2)
Net interest spread (2)
Net interest margin (2)
$ 2,306,203
$
74,467
3.23 % $
1,501,154 $
64,830
4.32 % $ 1,472,772
$
68,536
4.65 %
7,618,723
1,897,859
358,844
49,936
4.71 %
2.63 %
7,088,208
1,803,622
395,641
61,983
5.58 %
3.44 %
6,601,453
1,680,976
368,189
50,860
5.58 %
3.03 %
231,824
7,918
3.42 %
233,713
6,803
2.91 %
247,651
7,752
3.13 %
90,961
138
0.15 %
63,598
1,236
1.94 %
189,183
2,831
1.50 %
1,257,902
1,435,572
59,412
14,898,456
(122,148)
14,776,308
1,537,269
$ 16,313,577
3,165
51,360
3,687
549,515
0.25 %
3.58 %
6.21 %
3.69 %
371,312
1,550,322
75,298
12,687,227
(57,690)
12,629,537
1,397,420
$ 14,026,957
8,469
69,582
6,869
615,413
2.28 %
4.49 %
9.12 %
4.85 %
459,628
1,542,539
74,684
12,268,886
(62,681)
12,206,205
1,288,718
$ 13,494,923
8,683
66,914
6,535
580,300
1.89 %
4.34 %
8.75 %
4.73 %
$ 7,397,121
1,336,873
$
47,040
42,817
0.64 % $
3.20 %
5,916,491 $
1,423,847
71,509
60,086
1.21 % $ 5,568,473
1,395,947
4.22 %
$
46,002
56,733
1,222,044
9,956,038
33,249
123,106
2.72 %
1.24 %
1,398,559
8,738,897
41,928
173,523
3.00 %
1.99 %
1,477,966
8,442,386
40,369
143,104
0.83 %
4.06 %
2.73 %
1.70 %
3,304,475
791,002
14,051,515
2,235,690
26,372
$ 16,313,577
2,635,924
614,164
11,988,985
2,014,535
23,437
$ 14,026,957
2,504,599
617,227
11,564,212
1,919,940
10,771
$ 13,494,923
$
426,409
$
441,890
$
437,196
2.45 %
2.85 %
2.86 %
3.48 %
3.03 %
3.56 %
(1) Average balance includes non-accrual loans.
(2) Presented on a taxable equivalent basis with taxable equivalent adjustments based on a 21% federal income tax rate for all periods presented. The
adjustment to interest income was $1.2 million, $0.6 million and $0.9 million during 2020, 2019 and 2018, respectively.
The banking segment’s net interest margin exceeds our consolidated net interest margin shown above. Our consolidated net
interest margin includes certain items that are not reflected in the calculation of our net interest margin within our banking segment
and reduce our consolidated net interest margin, such as the borrowing costs of Hilltop and the yields and costs associated with
certain items within interest-earning assets and interest-bearing liabilities in the broker-dealer segment, including items related to
securities financing operations that particularly decrease net interest margin. In addition, yields and costs on certain interest-
earning assets, such as warehouse lines of credit extended to subsidiaries (operating segments) by the banking segment, are
eliminated from the consolidated financial statements. Our
consolidated net interest margin during 2020 was also negatively impacted by certain actions taken by management to strengthen
our available liquidity position. Such actions, including increasing overall cash balances by raising brokered money market and
brokered time deposits and raising capital through the issuance of subordinated debt, were taken out of an abundance of caution as
the pandemic created significant uncertainty in the banking and capital markets.
Net interest income from continuing operations decreased during 2020, compared with 2019, primarily due to decreases in interest
earned on loans held for investment, interest incurred beginning in May 2020 related to the new Subordinated Notes at corporate
and decreases in net interest income from our stock lending business, customer margin loans and other customer activities within
the broker-dealer segment. The increase in net interest income during 2019, compared with 2018, was primarily related to changes
attributable to both volumes and yields within our banking segment, partially
66
Table of Contents
offset by a decrease in accretion of discount on loans within the banking segment and declining net yields on mortgage loans held
for sale within our mortgage origination segment. Refer to the discussion in the “Banking Segment” section that follows for more
details on the changes in net interest income, including the component changes in the volume of average interest-earning assets
and interest-bearing liabilities and changes in the rates earned or paid on those items.
The provision for (reversal of) credit losses is determined by management as the amount to maintain the allowance for credit losses
at the amount of expected credit losses inherent within the loans held for investment portfolio. The amount of expense and the
corresponding level of allowance for credit losses for loans are based on our evaluation of the collectability of the loan portfolio
based on historical loss experience, reasonable and supportable forecasts, and other significant qualitative and quantitative
factors. Substantially all of our consolidated provision for (reversal of) credit losses is related to the banking segment. During
2020, the provision for credit losses was significantly impacted by the banking segment’s build in reserves associated with the
increase in the expected lifetime credit losses under the Current Expected Credit Losses (“CECL”) methodology on both
individually evaluated loans and collectively evaluated loans within the portfolio attributable to the market disruption and related
economic uncertainties caused by COVID-19 during 2020. Refer to the discussion in the “Financial Condition – Allowance for
Credit Losses on Loans” section that follows for more details regarding the significant assumptions and estimates involved in
estimating credit losses. During 2019, the provision for (reversal of) credit losses was impacted by the banking segment’s release
during the first quarter of 2019 of a $2.0 million reserve associated with previously estimated hurricane loss exposures due to
improved customer performance.
Noninterest income from continuing operations increased during 2020, compared with 2019, primarily due to increases in total
mortgage loan sales volume and changes in net fair value and related derivative activity within our mortgage origination segment,
as well as increases in fixed income services, public finance services and structured finance net revenues with our broker-dealer
segment. The increase in noninterest income from continuing operations during 2019, compared with 2018, was primarily due to
increases in noninterest income within our mortgage origination and broker-dealer segments.
Noninterest expense from continuing operations increased during 2020, compared with 2019, primarily due to increases in variable
compensation and segment operating costs associated with the increased mortgage loan originations within our mortgage
origination segment and increases in variable compensation within our broker-dealer segment. Noninterest expense increased
during 2019, compared with 2018, primarily due to increases in noninterest expense within our broker-dealer and mortgage
origination segments as well as corporate, partially offset by a decrease within our banking segment.
Effective income tax rates from continuing operations were 23.6%, 22.5% and 22.1% for 2020, 2019 and 2018, respectively. The
increase in the effective tax rate during 2020 was primarily attributable to the percentage of income at subsidiaries with higher
state effective tax rates, while the effective tax rates for 2019 and 2018 approximated statutory rates and includes the effect of
investments in tax-exempt instruments, offset by nondeductible expenses.
67
Table of Contents
Segment Results from Continuing Operations
Banking Segment
The following table presents certain information about the operating results of our banking segment (in thousands).
Net interest income
Provision for credit losses
Noninterest income
Noninterest expense
Income before income taxes
$
$
Year Ended December 31,
2019
2020
390,871
96,326
41,376
232,447
103,474
$
$
379,258
7,280
41,753
231,524
182,207
$
$
Variance
2018
370,732
5,319
43,588
256,577
152,424
2020 vs 2019
11,613
$
89,046
(377)
923
(78,733) $
2019 vs 2018
8,526
$
1,961
(1,835)
(25,053)
29,783
$
The decline in income before income taxes during 2020, compared with 2019, was primarily due to the significant increase in the
provision for credit losses associated with the adoption of CECL and the market disruption caused by COVID-19 during 2020.
Changes to net interest income related to the component changes in the volume of average interest-earning assets and interest-
bearing liabilities and changes in the rates earned or paid on those items are discussed in more detail below.
The information shown in the table below includes certain key indicators of the performance and asset quality of our banking
segment.
Efficiency ratio (1)
Return on average assets (2)
Net interest margin (3)
Net recoveries (charge-offs) to average loans outstanding (4)
2020
Year Ended December 31,
2019
2018
53.78 %
0.63 %
3.31 %
(0.30)%
54.99 %
1.36 %
4.00 %
(0.08)%
61.93 %
1.23 %
4.23 %
(0.15)%
(1) Efficiency ratio is defined as noninterest expenses divided by the sum of total noninterest income and net interest income for the period. We consider
the efficiency ratio to be a measure of the banking segment’s profitability.
(2) Return of average assets ratio is defined as net income divided by average assets.
(3) Net interest margin is defined as net interest income divided by average interest-earning assets. We consider net interest margin as a key indicator of
profitability, as it represents interest earned on interest-earning assets compared to interest incurred.
(4) The net charge-offs to average loans outstanding ratio is defined as charge-offs during the reported period minus recoveries divided by average loans
outstanding. We use the ratio to measure the credit performance of our loan portfolio.
The banking segment presents net interest margin and net interest income in the following discussion and tables below, on a
taxable equivalent basis. Net interest margin (taxable equivalent), a non-GAAP measure, is defined as taxable equivalent net
interest income divided by average interest-earning assets. Taxable equivalent adjustments are based on the applicable corporate
federal income tax rates of 21% for all periods presented. The interest income earned on certain earning assets is completely or
partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable
investments. To provide more meaningful comparisons of net interest margins for all earning assets, we use net interest income on
a taxable equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make
it fully equivalent to interest income earned on taxable investments.
During 2020, 2019 and 2018, purchase accounting contributed 18, 33 and 48 basis points, respectively, to the banking segment’s
taxable equivalent net interest margin of 3.31%, 4.01% and 4.24%, respectively. These purchase accounting items are primarily
related to accretion of discount of loans associated with the Bank Transactions as discussed in the Consolidated Operating Results
section.
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Table of Contents
The table below provides additional details regarding our banking segment’s net interest income (dollars in thousands).
Average
Outstanding
Balance
2020
Interest
Earned or
Paid
Annualized
Yield or
Rate
Year Ended December 31,
2019
Interest
Earned or
Paid
Average
Outstanding
Balance
Annualized
Yield or
Rate
Average
Outstanding
Balance
2018
Interest
Earned or
Paid
Annualized
Yield or
Rate
Assets
Interest-earning assets
Loans held for
investment, gross (1)
Subsidiary warehouse
lines of credit
Investment securities -
taxable
Investment securities -
non-taxable (2)
Federal funds sold and
securities purchased
under agreements to
resell
Interest-bearing deposits
in other financial
institutions
Other
Interest-earning assets,
gross (2)
Allowance for credit
losses
Interest-earning assets, net
Noninterest-earning assets
Total assets
Liabilities and Stockholders’
Equity
Interest-bearing liabilities
Interest-bearing deposits
Notes payable and other
borrowings
Total interest-bearing
liabilities
Noninterest-bearing
liabilities
Noninterest-bearing
deposits
Other liabilities
Total liabilities
Stockholders’ equity
Total liabilities and
stockholders’ equity
Net interest income (2)
Net interest spread (2)
Net interest margin (2)
$
7,152,783
$ 341,383
4.77 % $
6,564,748
$ 367,903
5.60 % $
6,032,767
$ 342,098
2,073,087
79,488
3.83 %
1,374,051
61,812
4.50 %
1,364,577
58,551
1,377,578
27,651
2.01 %
1,181,198
29,879
2.53 %
965,937
22,451
111,471
3,789
3.40 %
96,186
3,267
3.40 %
110,386
3,707
5.67 %
4.29 %
2.32 %
3.36 %
460
1
0.18 %
447
1
0.17 %
1,049
16
1.54 %
1,038,647
42,977
1,888
377
0.18 %
0.88 %
202,478
55,403
4,525
2,534
2.23 %
4.57 %
241,124
51,906
4,429
2,282
11,797,003
454,577
3.85 %
9,474,511
469,921
4.96 %
8,767,746
433,534
(121,770)
11,675,233
967,690
$ 12,642,923
(57,546)
9,416,965
938,663
$ 10,355,628
(62,306)
8,705,440
906,586
9,612,026
$
$
7,306,143
$
60,297
0.83 % $
5,654,663
$
79,805
1.41 % $
5,237,014
$
55,060
205,448
2,642
1.29 %
481,924
10,233
2.12 %
417,534
7,000
7,511,591
62,939
0.84 %
6,136,587
90,038
1.47 %
5,654,548
62,060
1.84 %
4.40 %
4.94 %
1.05 %
1.68 %
1.10 %
3,412,212
128,795
11,052,598
1,590,325
$ 12,642,923
2,622,229
93,861
8,852,677
1,502,951
$ 10,355,628
2,492,728
48,847
8,196,123
1,415,903
$
9,612,026
$
391,638
$
379,883
$ 371,474
3.01 %
3.31 %
3.49 %
4.01 %
3.85 %
4.24 %
(1) Average balance includes non-accrual loans.
(2) Presented on a taxable equivalent basis with taxable equivalent adjustments based on the applicable corporate federal income tax rates of 21% for all
periods presented. The adjustment to interest income was $0.8 million, $0.6 million and $0.8 million during 2020, 2019 and 2018, respectively.
The banking segment’s net interest margin exceeds our consolidated net interest margin. Our consolidated net interest margin
includes certain items that are not reflected in the calculation of our net interest margin within our banking segment and reduce our
consolidated net interest margin, such as the borrowing costs of Hilltop and the yields and costs associated with certain items
within interest-earning assets and interest-bearing liabilities in the broker-dealer segment, including items related to securities
financing operations that particularly decrease net interest margin. In addition, the banking segment’s interest-earning assets
include warehouse lines of credit extended to other subsidiaries, which are eliminated from the consolidated financial statements.
The banking segment’s net interest margins during 2020 were also negatively impacted by certain actions taken by management to
strengthen the Bank’s available liquidity position. Such actions, including increasing overall cash balances by raising brokered
money market and brokered time deposits and raising capital through the issuance of subordinated debt, were taken out of an
abundance of caution as the pandemic created significant uncertainty in the banking and capital markets.
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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).
2020 vs. 2019
Change Due To (1)
2019 vs. 2018
Change Due To (1)
Year Ended December 31,
Volume Yield/Rate Change
Volume Yield/Rate Change
Interest income
Loans held for investment, gross
Subsidiary warehouse lines of credit
Investment securities - taxable
Investment securities - non-taxable (2)
Federal funds sold and securities purchased
under agreements to resell
Interest-bearing deposits in other financial
institutions
Other
Total interest income (2)
Interest expense
Deposits
Notes payable and other borrowings
Total interest expense
$ 32,930
31,446
4,968
519
$ (59,450) $ (26,520) $ 30,163
407
5,003
(477)
(13,770)
(7,196)
3
17,676
(2,228)
522
$ (4,358) $ 25,805
3,261
7,428
(440)
2,854
2,425
37
—
—
—
(9)
(6)
(15)
18,685
(568)
87,980
(21,322)
(1,589)
(103,324)
(2,637)
(2,157)
(15,344)
(710)
154
34,531
806
98
1,856
96
252
36,387
$ 23,308
(5,871)
17,437
$ (42,816) $ (19,508) $
(1,720)
(44,536)
(7,591)
(27,099)
4,391
1,080
5,471
$ 20,354
2,153
22,507
$ 24,745
3,233
27,978
Net interest income (2)
$ 70,543
$ (58,788) $ 11,755
$ 29,060
$ (20,651) $ 8,409
(1) Changes attributable to both volume and yield/rate are included in yield/rate column.
(2) Taxable equivalent.
Changes in the yields earned on interest-earning assets decreased taxable equivalent net interest income during 2020, compared
with 2019, primarily as a result of lower loan yields due to decreased market rates, the addition of 1% note rate PPP loans, and the
decrease in accretion of discount on loans of $9.9 million. Accretion of discount on loans is expected to continue to decrease in
future periods as loans acquired in the Bank Transactions are repaid, refinanced or renewed. Changes in the volume of interest-
earning assets, primarily due to the significant increase in mortgage warehouse lending volume and new PPP loan originations,
increased taxable equivalent net interest income during 2020, compared with 2019. Changes in rates paid on interest-bearing
liabilities increased taxable equivalent net interest income during 2020, compared with 2019, due to decreases in market interest
rates. Our portfolio includes loans that periodically reprice or mature prior to the end of an amortized term. Some of our variable-
rate loans remain at applicable rate floors, which may delay and/or limit changes in net interest income during a period of changing
rates. If interest rates were to fall further, the impact on our net interest income for certain variable-rate loans would be limited by
these rate floors. In addition, declining interest rates may reduce our cost of funds on deposits. The extent of this impact will
ultimately be driven by the timing, magnitude and frequency of interest rate and yield curve movements, as well as changes in
market conditions and timing of management strategies. If interest rates were to rise, yields on the portion of our loan portfolio that
remain at applicable rate floors would rise more slowly than increases in market interest rates. Any changes in interest rates across
the term structure will continue to impact net interest income and net interest margin. The impact of rate movements will change
with the shape of the yield curve, including any changes in steepness or flatness and inversions at any points on the yield curve.
Changes in the yields earned on interest-earning assets increased taxable equivalent net interest income during 2019, compared
with 2018, primarily as a result of higher yields due to increased market rates, significantly offset by a decrease in accretion of
discount on loans of $10.3 million. Changes in the volume of interest-earning assets, primarily due to an increase in the loan
portfolio as a result of the BORO Acquisition, and seasonal increases in mortgage warehouse lending volume increased taxable
equivalent net interest income during 2019, compared with 2018. Changes in rates paid on interest-bearing liabilities decreased
taxable equivalent net interest income during 2019, compared with 2018, due to increases in market interest rates and increased
competitive pressure for deposits.
In response to the COVID-19 pandemic, the Bank implemented several actions to better support our impacted banking clients.
Such programs include loan modifications such as principal and/or interest payment deferrals, participation in the
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PPP as an SBA preferred lender and personal banking assistance including waived fees, increased daily spending limits and
suspension of residential foreclosure activities. The extent to which these measures will impact the Bank is uncertain. The adverse
economic conditions caused by the COVID-19 pandemic have had and can be expected to continue to have a significant adverse
effect on the banking segment’s business and results of operations, including significantly reduced demand for loan products and
services from customers, deposit balance attrition, possible recognition of credit losses and increases in allowance for credit losses,
especially if businesses remain limited in their operating capacity, unemployment remains elevated and customers draw on their
lines of credit or seek additional loans to help finance their businesses, and possible constraints on liquidity and capital, whether
due to increases in risk-weighted assets related to supporting customer activities or to regulatory actions. In the event future
operating performance is below our projections, there are negative changes to projected provision for credit losses on loans, long-
term loan and deposit growth rates or discount rates increase, the fair value of the banking reporting unit may decline, and we may
be required to record a goodwill impairment charge. Additionally, with regards to its core deposit intangible assets, in the event
that the deposit retention levels and derived cost savings from available core deposits at the Bank relative to an alternative cost of
funds falls to a level that cannot support the remaining carrying value, we may be required to record an impairment charge. The
extent to which the COVID-19 pandemic negatively affects the banking segment’s business, results of operations and financial
condition, as well as its regulatory capital and liquidity ratios, will depend on future developments that are highly uncertain and
cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other
third parties in response to the pandemic, as discussed in more detail in the “Recent Developments” section above.
During 2020, 2019 and 2018, the banking segment retained approximately $193 million, $149 million and $97 million,
respectively, in mortgage loans originated by the mortgage origination segment. These loans are purchased by the banking
segment at par. For origination services provided, the banking segment reimburses the mortgage origination segment for direct
origination costs associated with these mortgage loans, in addition to payment of a correspondent fee. The correspondent fees are
eliminated in consolidation. We expected loans originated by the mortgage origination segment on behalf of and retained by the
banking segment to increase during 2020 based on approved authority for up to 5% of the mortgage origination segment’s total
origination volume. However, in March 2020, the Bank made a decision to sell the previously purchased mortgage loans to the
mortgage origination segment, instead of holding them for investment. In October 2020, the Bank began purchasing and retaining
mortgage loans originated by the mortgage origination segment again. During 2021, we expect loans originated by the mortgage
origination segment on behalf of and retained by the banking segment to increase based on approved authority for up to 5% of the
mortgage origination segment’s total origination volume. The determination of mortgage loan retention levels by the banking
segment will be impacted by, among other things, an ongoing review of the prevailing mortgage rates, balance sheet positioning at
Hilltop and the banking segment’s outlook for commercial loan growth.
The banking segment’s provision for credit losses during 2020 included a significant build in the provision for credit losses on
individually evaluated loans of $20.1 million, while the provision for credit losses on expected losses of collectively evaluated
loans accounted for $76.1 million of the total provision primarily due to the increase in the expected lifetime credit losses under
CECL attributable to the deteriorating economic outlook associated with the impact of the market disruption caused by the
COVID-19 pandemic. The change in provision for credit losses during 2020 was also attributable to other factors including, but
not limited to, loan growth, loan mix and changes in risk rating grades. The change in the allowance during 2020 was also
impacted by net charge-offs of $21.1 million, primarily associated with loans specifically reserved for during the first quarter of
2020. Refer to the discussion in the “Financial Condition – Allowance for Credit Losses on Loans” section that follows for more
details regarding the significant assumptions and estimates involved in estimating credit losses.
The banking segment’s noninterest income was relatively flat during 2020, compared to 2019, primarily due to sales activity in our
available-for-sale investment portfolio as well as changes in our intercompany financing charges. The decrease in noninterest
income during 2019, compared to 2018, was primarily due to sales activity in our available-for sale investment portfolio.
The banking segment’s noninterest expenses were relatively flat during 2020, compared to 2019, primarily due to an increase in
the reserve for unfunded commitments attributable to macroeconomic uncertainties associated with the impact of market
disruption caused by COVID-19 conditions, offset by a reduction in legal, business development and other operating expenses.
The decrease in noninterest expense during 2019, compared to 2018, was primarily due to a reduction in the previously mentioned
BORO Acquisition-related transaction expenses and expenses related to a wire fraud incident, as well as a reduction in net
expenses related to previously covered assets.
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Broker-Dealer Segment
The following table provides additional details regarding our broker-dealer operating results (in thousands).
$
Net interest income:
Wealth management:
Retail
Clearing services
Structured finance (5)
Fixed income services
Other (5)
Total net interest income
Noninterest income:
Securities commissions and fees by business line (1):
Fixed income services (5)
Wealth management:
Retail (5)
Clearing services
Structured finance (5)
Other (5)
Investment and securities advisory fees and commissions by business
line:
Public finance services (5)
Fixed income services (5)
Wealth management:
Retail
Clearing services
Structured finance (5)
Other (5)
Other:
Structured finance (5)
Fixed income services (5)
Other (5)
Total noninterest income
Net revenue (2)
Noninterest expense:
Variable compensation (3)
Non-variable compensation and benefits
Segment operating costs (4)
Total noninterest expense
2020
Year Ended December 31,
2019
2018
2020 vs 2019
2019 vs 2018
Variance
$
8,544
6,916
6,200
12,173
6,079
39,912
49,573
69,718
30,018
1,820
4,765
155,894
95,193
6,395
24,023
1,649
3,725
342
131,327
157,466
45,365
1,303
204,134
491,355
531,267
205,464
106,314
103,850
415,628
$
9,496
11,530
8,460
6,180
15,642
51,308
36,997
71,934
33,787
1,793
4,664
149,175
76,519
2,936
20,820
1,264
2,063
185
103,787
114,190
35,859
1,400
151,449
404,411
455,719
163,840
103,823
98,294
365,957
10,181
13,038
12,122
477
15,060
50,878
40,396
78,672
35,605
1,982
5,568
162,223
63,808
1,542
19,037
1,190
4,354
135
90,066
35,265
12,881
1,279
49,425
301,714
352,592
115,948
102,519
101,543
320,010
$
(952) $
(4,614)
(2,260)
5,993
(9,563)
(11,396)
12,576
(2,216)
(3,769)
27
101
6,719
18,674
3,459
3,203
385
1,662
157
27,540
43,276
9,506
(97)
52,685
86,944
75,548
41,624
2,491
5,556
49,671
(685)
(1,508)
(3,662)
5,703
582
430
(3,399)
(6,738)
(1,818)
(189)
(904)
(13,048)
12,711
1,394
1,783
74
(2,291)
50
13,721
78,925
22,978
121
102,024
102,697
103,127
47,892
1,304
(3,249)
45,947
Income before income taxes
$
115,639
$
89,762
$
32,582
$
25,877
$
57,180
Securities commissions and fees includes income of $13.2 million, $11.4 million, and $11.3 million during 2020, 2019, and 2018, respectively, that is eliminated in consolidation.
(1)
(2) Net revenue is defined as the sum of total net interest income and total noninterest income. We consider net revenue to be a key performance measure in the
evaluation of the broker-dealer segment’s financial position and operating performance as it is the primary revenue performance measure used by investors and
analysts. Net revenue provides for some level of comparability of trends across the financial services industry as it reflects both noninterest income, including
investment and securities advisory fees and commissions, as well as net interest income. Internally, we assess the broker-dealer segment’s performance on a revenue
basis for comparability with our banking segment.
(3) Variable compensation represents performance-based commissions and incentives.
(4)
(5) Noted balances during all prior periods include certain reclassifications to conform to current period presentation.
Segment operating costs include provision for credit losses associated with the broker-dealer segment within other noninterest expenses.
Despite the economic disruptions related to the pandemic, during the second half of 2020, the broker-dealer’s public finance
services business line experienced improved results in line with modest improvements in both Texas and national issuance activity
and market share compared to the same period during the prior year. The structured finance business line experienced robust
results given strong issuance volumes and improved demand for mortgage products following market volatility in the first quarter
of 2020. Structuring activity results also improved as demand for structured agency products rebounded starting in the second
quarter of 2020. Additionally, the fixed income services business line demonstrated improved operating results. During 2020,
transactional revenues in the fixed income business line improved compared with the same period in 2019 as we experienced
relative strength in municipal and taxable products. The wealth management business line’s net revenues were lower during 2020,
compared to 2019, as customer balance revenues were driven lower due to the current low interest rate environment. Additional
information related to the impact of COVID-19 is included within the “Recent Developments” section above.
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The specific components of the overall increase in the broker-dealer segment’s income before income taxes 2020, compared with
2019, was primarily as a result of the following:
●
●
●
●
a $40.6 million increase in net revenue in our fixed income services business line due to strong performances in our
municipal and taxable products, which noted significant increases beginning in March 2020 through December 2020.
Improved client demand combined with active position management and effective hedging tools led to improved
municipal revenue. The broker-dealer segment wound-down the equity capital market business line, resulting in an
offsetting decline of net revenues of $9.1 million during 2020 for a net increase of $31.5 million in net revenue in our
fixed income services business line year over year;
a $44.1 million increase in compensation expense, of which $41.6 million was due to the increase in variable
compensation, resulting from increases in our public finance services, fixed income services and structured finance
business line revenues;
an $8.6 million decrease in net revenue in our wealth management business line during 2020 was primarily due to lower
customer balance based revenues, including FDIC insured investment products’ fees and net interest on other customer
balances as a result of the low interest rate environment. During 2020, the decrease in the wealth management business
line’s net revenues was partially offset by the activity in the first quarter of 2020 from improved transactional revenues
due to the significant re-allocation of customer assets into cash and cash equivalents as clients exited risk markets and
increases in other production and fee income during 2020 compared to 2019; and
a $42.7 million increase in the broker-dealer segment’s structured finance net revenues. During 2020, activity in March
2020 was weaker as demand for structured agency products declined, resulting in a $14.4 million decrease in the business
line’s other noninterest income in the first quarter of 2020 compared to the first quarter of 2019. After March 2020,
structured finance revenues improved in line with increased volumes reflecting robust activity in mortgage originations
combined with improved product demand from the buy-side and other changes in the business line, resulting in a $57.6
million increase in the business line’s other noninterest income for the period from April 1 to December 31, 2020
compared to the same period in 2019. As a result, the structured finance business produced a $43.2 million increase in
noninterest income during 2020 compared to the same period in 2019.
The broker-dealer segment is subject to interest rate risk as a consequence of maintaining inventory positions, trading in interest
rate sensitive financial instruments and maintaining a matched stock loan book. Changes in interest rates are likely to have a
meaningful impact on our overall financial performance. Our broker-dealer segment has historically earned a significant portion of
its revenues from advisory fees upon the successful completion of client transactions, which could be adversely impacted by
interest rate volatility. Rapid or significant changes in interest rates could adversely affect the broker-dealer segment’s bond
trading, sales, underwriting activities and other interest spread-sensitive activities described below. The broker-dealer segment also
receives administrative fees for providing money market and FDIC investment alternatives to clients, which tend to be sensitive to
short term interest rates. In addition, the profitability of the broker-dealer segment depends, to an extent, on the spread between
revenues earned on customer loans and excess customer cash balances, and the interest expense paid on customer cash balances, as
well as the interest revenue earned on trading securities, net of financing costs.
In the broker-dealer segment, interest is earned from securities lending activities, interest charged on customer margin loan
balances and interest earned on investment securities used to support sales, underwriting and other customer activities. The
decrease in net interest income during 2020, compared with 2019, was primarily due to decreases in net interest income from our
stock lending business, customer margin loans and other customer activities. The decrease in net interest income was partially
offset by an increase in net interest earned from the broker-dealer’s taxable securities. The increase in net interest income during
2019, compared with 2018, was primarily due to an increase in net interest earned on trading securities as a result of increases in
market interest rates. The increase in net interest income was partially offset by decreases in net interest income from our
structured finance operations due to a decline in pool inventory from December 31, 2018 to December 31, 2019 and decreases in
average customer margin balances within the segment’s clearing business of 19% during 2019.
Noninterest income increased during 2020 compared to 2019 primarily due to increases in securities commissions and fees,
investment and securities advisory fees and commissions, and other noninterest income. Noninterest income increased during 2019
compared to 2018 primarily due to increases in other noninterest income and investments and securities advisory fees and
commissions, partially offset by decreases in securities commissions and fees.
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Securities commissions and fees increased during 2020 compared to 2019 primarily due to the increases in commissions earned in
our fixed income service line of business of $18.1 million offset by the decreases in commissions earned through the wind-down
of our equity capital markets business line, which resulted in a decrease of $5.5 million. Additionally, the overall increase in
securities commissions and fees was offset by the decreases in commissions and fees earned by our wealth management business
line from declines in our money market and FDIC sweep revenues, primarily in the wealth management business line. Securities
commissions and fees decreased during 2019 compared to 2018, primarily due to decreases in commissions earned in our retail
group and fixed income services business line and fees related to our FDIC insured investment products, as well as commissions
earned on insurance and mutual fund transactions, and fees earned from correspondent transactions.
Investment and securities advisory fees and commissions increased during 2020 compared to 2019, primarily due to increases in
municipal advisory and underwriting transactions. Investment and securities advisory fees and commissions increased during
2019, compared with 2018, primarily due to the increase in the number of issues and the aggregate amount of those issues by our
public finance services business line.
Other noninterest income increased during 2020, compared to 2019. The increase during the period was primarily the result of a
$43.2 million increase in trading gains earned from our structured finance business line’s derivative activities due to strong year-
over-year volumes and robust customer demand despite heightened market volatility in the first quarter of 2020. Additionally,
other noninterest income within our fixed income services business line increased $9.5 million during the year associated with
both our taxable and municipal securities trading portfolio activities, partially offset by a decrease in our securitized mortgage
backed securities portfolio. The increase in other noninterest income during 2019, compared with 2018, was primarily the result of
a $102.3 million increase in trading gains earned from our derivative and trading portfolio activities, most notably in our structured
finance business, which accounted for $79.2 million of the increase, as well as our fixed income services business line, which
accounted for $23.0 million of the increase. The increases in our structured finance business were primarily due to the 77 basis-
point decline in the 10-year treasury bond yield during 2019 compared to a 29 basis-point increase during 2018, and a 22%
increase in the business line’s TBA mortgage-backed securities volume. The $23.0 million increase in our fixed income services
business line was attributable to an improved market environment, improved spreads and a 26% increase in trading volume.
Noninterest expenses increased during 2020 compared to 2019 primarily due to increases in variable compensation, partially offset
by $2.9 million in pre-tax costs associated with the Leadership Changes and efficiency initiative-related charges in 2019 as noted
in the “Factors Affecting Results of Operations” section above. Other noninterest expenses increased during the period primarily
due to deployment of a new back-office system on June 1, 2020. Noninterest expenses increased during 2019, compared with
2018, primarily due to an increase in variable compensation and the pre-tax costs associated with the Leadership Changes and
efficiency initiative-related charges as noted in the “Factors Affecting Results of Operations” section above.
Selected information concerning the broker-dealer segment follows (dollars in thousands).
Total compensation as a % of net revenue (1)
Pre-tax margin (2)
FDIC insured program balances at the Bank (end of period)
Other FDIC insured program balances (end of period)
Customer funds on deposit, including short credits (end of period)
Public finance services:
Number of issues
Aggregate amount of offerings
Structured finance:
Lock production/TBA volume
Fixed income services:
Total volumes
Net inventory (end of period)
Year Ended December 31,
2020
2019
2018
58.7 %
21.8 %
700,006
1,892,974
480,200
1,252
57,107,263
9,075,232
169,559,201
613,413
$
$
$
$
$
$
$
$
$
$
$
$
$
$
58.7 %
19.7 %
1,304,333
666,418
329,743
1,179
54,394,943
5,876,466
83,571,542
643,371
$
$
$
$
$
$
$
62.0 %
9.2 %
1,302,558
905,503
394,005
1,123
53,559,396
4,829,687
66,370,939
659,237
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Wealth management (Retail and Clearing services groups):
Retail employee representatives (end of period)
Independent registered representatives (end of period)
Correspondents (end of period)
Correspondent receivables (end of period)
Customer margin balances (end of period)
Wealth management (Securities lending group):
Interest-earning assets - stock borrowed (end of period)
Interest-bearing liabilities - stock loaned (end of period)
2020
2019
2018
117
189
129
180,173
256,682
1,338,855
1,245,066
$
$
$
$
122
195
145
264,201
310,752
1,634,782
1,555,964
$
$
$
$
120
208
152
243,179
333,054
1,365,547
1,186,073
$
$
$
$
(1)
(2)
Total compensation includes the sum of non-variable compensation and benefits and variable compensation. We consider total compensation as a percentage of net revenue to be a
key performance measure and indicator of segment profitability.
Pre-tax margin is defined as income before income taxes divided by net revenue. We consider pre-tax margin to be a key performance measure given its use as a profitability metric
representing the percentage of net revenue earned that results in a profit.
Mortgage Origination Segment
The following table presents certain information regarding the operating results of our mortgage origination segment (in
thousands).
Net interest income (expense)
Noninterest income
Noninterest expense
Income before income taxes
$
$
Year Ended December 31,
2019
2018
2020 vs 2019
2020
(10,489)
1,172,450
753,917
408,044
$
$
(6,273)
634,992
563,998
64,721
$
$
1,485
551,860
540,474
12,871
$
$
Variance
(4,216) $
537,458
189,919
343,323
2019 vs 2018
(7,758)
83,132
23,524
51,850
$
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 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. Average mortgage interest rates decreased during both 2020 and
2019, which resulted in refinancing volume as a percentage of total origination volume increasing in each period when compared
to 2019 and 2018, respectively. See details regarding refinancing volume in the table below. Changes in mortgage interest rates
have historically had a lesser impact on home purchases volume than on refinancing volume. An increase in mortgage interest
rates during 2021 could impact the percentage mix of refinancing and purchase volumes relative to total loan origination volume
compared to 2020.
In response to the COVID-19 pandemic, during the first quarter of 2020, the FOMC reduced short-term rates by 150 basis points
to a range of 0% to 0.25%. Further, 10-year interest rates also declined significantly during the first quarter 2020, which led to a
steady decrease in mortgage interest rates during the remainder of the year. This decrease in mortgage interest rates was the
primary driver of a significant increase in mortgage loan applications and resulting increases in interest rate lock commitments
(“IRLCs”) and loan sales volume. In addition, an increase in average loans sales margin was recognized as a result of
PrimeLending managing increased loan origination volumes to a level that could be supported by its loan fulfillment operations
and addressing anticipated enhanced credit and liquidity risks triggered by the economic impact of the COVID-19 pandemic. As a
result, income before income taxes increased $343.3 million, or 530.5%, during 2020, compared with 2019.
The CARES Act provides borrowers the ability to request forbearance of residential mortgage loan payments, placing a significant
strain on mortgage servicers as they may be required to fund missed or deferred payments related to loans in forbearance. A
significant increase in nationwide forbearance requests has resulted in the reduction of third-party mortgage servicers willing to
purchase mortgage servicing rights. As a result of this market dynamic, beginning in the second quarter 2020, we increased the
amount of retained servicing on mortgage loan sales. During both the second and third quarters of 2020, PrimeLending retained
servicing on 89% of total mortgage loans sold. As forbearance requests leveled off during the latter part of 2020, the third party
market for mortgage servicing rights improved, increasing demand, which allowed PrimeLending to reduce retained servicing to
57% of total mortgage loans sold during the fourth quarter 2020. PrimeLending utilizes a third-party to manage its servicing
portfolio and we therefore have not experienced additional infrastructure costs to manage the increase in PrimeLending’s servicing
portfolio. PrimeLending’s liquidity has not been, and we do not expect that it will be, significantly impacted by recent forbearance
requests. In addition, GNMA, Federal National Mortgage Association and Federal Home Loan Mortgage Corporation have
imposed certain restrictions
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on loans the agencies will accept under a forbearance agreement, which could result in PrimeLending seeking non-agency
investors or choosing to retain these loans.
As average mortgage interest rates decreased between, 2019 and 2020, refinancing volume as a percentage of total origination
volume increased from 24.8% during 2019 to 41.6% during 2020. As average mortgage interest rates decreased between 2018 and
2019, refinancing volume as a percentage of total origination volume increased from 13.8% during 2018 to 24.8% during 2019.
See details regarding refinancing volume in the table below. A higher refinance percentage could also be driven by a slowing of
purchase volume due to the negative impact on new and existing home sales resulting from the COVID-19 pandemic. While
PrimeLending experienced an increase in purchase volume as a percentage of total loan origination volume between the second
and third quarters of 2020, purchase volume as a percentage of total loan origination volume decreased during the fourth quarter of
2020. We are uncertain whether this trend will continue.
The mortgage origination segment primarily originates its mortgage loans through a retail channel, with limited lending through its
affiliated business relationships (“ABAs”). For 2020, funded loan volume through ABAs was approximately 7% of the mortgage
origination segment’s total loan volume. During the nine months ended September 30, 2020, PrimeLending had a 51%
membership interest in four ABAs. On October 1, 2020, the mortgage origination segment divested its interest in one of its ABAs,
resulting in three ABAs remaining as of December 31, 2020. We expect total production within the ABA channel to decrease
slightly to 6% loan volume of the mortgage origination segment during 2021.
The following table provides further details regarding our mortgage loan originations and sales for the periods indicated below
(dollars in thousands).
Mortgage Loan Originations - units
2020
% of
Total
Amount
84,209
Year Ended December 31,
2019
% of
Total
Amount
61,045
2018
% of
Total
Amount
57,186
Variance
2020 vs 2019
23,164
2019 vs 2018
3,859
Mortgage Loan Originations - volume
$ 22,970,194
$ 15,579,437
$ 13,692,484
$
7,390,757
Mortgage Loan Originations:
Conventional
Government
Jumbo
Other
Home purchases
Refinancings
Texas
California
Florida
Arizona
South Carolina
Ohio
Maryland
Missouri
Washington
North Carolina
All other states
Mortgage Loan Sales - volume:
External third parties
Banking segment
$ 16,519,498
4,473,763
1,219,492
757,441
$ 22,970,194
71.92 % $ 9,503,044
3,860,802
19.48 %
1,309,317
5.31 %
906,274
3.29 %
100.00 % $ 15,579,437
61.00 % $
24.78 %
8.40 %
5.82 %
8,262,800
3,413,300
1,181,353
835,031
100.00 % $ 13,692,484
60.35 %
24.93 %
8.63 %
6.09 %
100.00 %
$ 13,413,545
9,556,649
$ 22,970,194
58.40 % $ 11,718,772
41.60 %
3,860,665
100.00 % $ 15,579,437
75.22 % $ 11,798,804
24.78 %
1,893,680
100.00 % $ 13,692,484
86.17 %
13.83 %
100.00 %
$ 4,280,831
2,497,066
1,403,196
1,045,298
929,710
869,393
811,706
777,389
736,135
719,936
8,899,534
$ 22,970,194
18.64 % $ 2,999,633
1,561,926
10.87 %
1,113,827
6.11 %
681,486
4.55 %
604,546
4.05 %
642,130
3.78 %
485,098
3.53 %
510,025
3.38 %
631,549
3.20 %
3.13 %
485,682
38.76 %
5,863,535
100.00 % $ 15,579,437
19.25 % $
2,594,585
10.03 %
1,511,931
7.15 %
1,026,157
4.37 %
567,202
3.88 %
474,844
4.12 %
588,199
3.11 %
403,086
3.27 %
454,517
4.05 %
520,543
3.12 %
413,686
37.65 %
5,137,734
100.00 % $ 13,692,484
18.95 %
11.04 %
7.49 %
4.14 %
3.47 %
4.30 %
2.94 %
3.32 %
3.80 %
3.02 %
37.53 %
100.00 %
$ 22,321,599
192,571
$ 22,514,170
99.14 % $ 14,442,929
148,798
100.00 % $ 14,591,727
0.86 %
98.98 % $ 13,639,215
96,670
100.00 % $ 13,735,885
1.02 %
99.30 %
0.70 %
100.00 %
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,886,953
1,240,244
447,502
127,964
71,243
1,886,953
(80,032)
1,966,985
1,886,953
405,048
49,995
87,670
114,284
129,702
53,931
82,012
55,508
111,006
71,996
725,801
1,886,953
7,016,454
612,961
(89,825)
(148,833)
7,390,757
1,694,773
5,695,984
7,390,757
1,281,198
935,140
289,369
363,812
325,164
227,263
326,608
267,364
104,586
234,254
3,035,999
7,390,757
7,878,670 $
43,773
7,922,443
$
803,714
52,128
855,842
We consider the mortgage origination segment’s total loan origination volume to be a key performance measure. Loan origination
volume is central to the segment’s ability to generate income by originating and selling mortgage loans, resulting in net gains from
the sale of loans, other mortgage production income and mortgage loan origination fees. Total loan origination volume is a
measure utilized by management, our investors and analysts in assessing market share and growth of the mortgage origination
segment.
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The mortgage origination segment’s total loan origination volume during 2020 increased 47.4% compared with 2019, while
income before income taxes during 2020 increased 530.5%, compared with 2019. The increase in income before income taxes
during 2020 was primarily due to an increase in net gains from sale of loans. These changes were partially offset by an increase in
compensation that varies with the volume of mortgage loan originations (“variable compensation”), an increase in non-variable
compensation, a decrease in change in net fair value of mortgage servicing rights (“MSR”) assets, and an increase in segment
operating costs.
The mortgage origination segment’s total loan origination volume increased 13.8% between 2019 and 2018, while income before
income taxes during 2019 increased 402.8%, compared with 2018. The increase in income before income taxes during 2019 was
primarily due to an increase in the change in net fair value of IRLCs and loans held for sale, an increase in mortgage loan
origination fees and other related income, an increase in net gains from sale of loans and a decrease in segment operating costs.
These changes were partially offset by an increase in variable compensation, a decrease in change in net fair value of MSR assets,
and an increase in net interest expense.
Net interest expense was comprised of interest income earned on loans held for sale, offset by interest incurred on warehouse lines
of credit held with the Bank and related intercompany financing costs. The increase in net interest expense during 2020, compared
with 2019, included the effects of declining net yields on mortgage loans held for sale.
Noninterest income was comprised of the following (in thousands).
Net gains from sale of loans
Mortgage loan origination fees and other related income
Other mortgage production income:
Change in net fair value and related derivative activity:
IRLCs and loans held for sale
Mortgage servicing rights asset
Servicing fees
Total noninterest income
Year Ended December 31,
Variance
2020
2019
2018
2020 vs 2019
2019 vs 2018
$
$
913,474
172,096
$
473,380
130,208
81,560
(30,119)
35,439
1,172,450
$
21,253
(15,166)
25,317
634,992
$
$
450,515
104,463
(20,608)
(5,856)
23,346
551,860
$
$
440,094
41,888
$
60,307
(14,953)
10,122
537,458
$
22,865
25,745
41,861
(9,310)
1,971
83,132
The increases in net gains from sale of loans during 2020, compared with 2019, were primarily a result of an increase in total loan
sales volume, in addition to an increase in average loan sales margin. Since PrimeLending sells substantially all mortgage loans it
originates to various investors in the secondary market, the increases in loan sales volume during 2020 are consistent with
increases in loan origination volume during 2020. The increase in average loans sales margin was primarily driven by
PrimeLending managing increased loan origination volumes to a level that could be supported by its loan fulfillment operations
and addressing anticipated enhanced credit and liquidity risks triggered by the economic impact of the COVID-19 pandemic. The
increases in mortgage loan origination fees during 2020, compared with 2019, were primarily the result of an increase in loan
origination volume, partially offset by a decrease in average mortgage loan origination fees.
We consider the mortgage origination segment’s net gains from sale of loans margin, in basis points, to be a key performance
measure. Net gains from sale of loans margin is defined as net gains from sale of loans divided by loan sales volume. The net gains
from sale of loans is central to the segment’s generation of income. The mortgage origination segment’s net gains from sale of
loans margins, including loans sold to the banking segment, during 2020, 2019 and 2018 were 406 bps, 324 bps and 328 bps,
respectively. During 2020, 2019 and 2018, the mortgage origination segment originated approximately $193 million, $149 million
and $97 million, respectively, in loans on behalf of the banking segment, representing up to 1% of PrimeLending’s total loan
origination volume during each respective year. These loans were sold to the banking segment at par. For origination services
provided, the mortgage origination segment was reimbursed direct origination costs associated with these loans, in addition to
payment of a correspondent fee. The reimbursed origination costs and correspondent fee are included in the mortgage origination
segment operating results, and the correspondent fees are eliminated in consolidation. The impact of loans sold to the banking
segment at par was to reduce this margin 3 bps in 2019, while the impact on 2020 and 2018 was de minimis. Loan volumes to be
originated on behalf of and retained by the banking segment are evaluated each quarter. We anticipate an increase in loans sold to
the banking segment during 2021 as compared to 2020. The mortgage origination segment has been approved to sell up to 5% of
its total loan volume to the banking segment. In March 2020, the mortgage origination segment executed a letter of intent with the
banking segment to purchase mortgage loans previously sold to the banking segment with an unpaid principal balance of
approximately $210 million. Such original sales of approximately $121 million and $91 million are reflected in the previous
mortgage loan details table within the mortgage loan sales volume to the banking segment in 2020 and 2019, respectively. When
these loans were sold at par by the mortgage origination segment, the banking segment’s intent was to hold these loans for
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investment. The mortgage origination segment completed the repurchase of these loans from the banking segment and in turn sold
the loans to investors in the secondary market during the second quarter of 2020. This sale is reflected in the previous mortgage
loan details table within the mortgage loan sales volume to external third parties in 2020.
Noninterest income included changes in the net fair value of the mortgage origination segment’s IRLCs and loans held for sale and
the related activity associated with forward commitments used by the mortgage origination segment to mitigate interest rate risk
associated with its IRLCs and loans held for sale. The increase during 2020 was the result of an increase in the total volume of
individual IRLCs and loans held for sale, as well as an increase in the average value of individual IRLCs and loans held for sale.
The decreases during 2019 and 2018 were the result of decreases in the average value and the total volume of individual IRLCs
and loans held for sale at the end of these periods.
The mortgage origination segment sells substantially all mortgage loans it originates to various investors in the secondary market,
historically with the majority servicing released. In addition, the mortgage origination segment originates loans on behalf of the
Bank. The mortgage origination segment’s determination of whether to retain or release servicing on mortgage loans it sells is
impacted by, among other things, changes in mortgage interest rates, and refinancing and market activity. During 2020, 2019 and
2018, the mortgage origination segment retained servicing on approximately 67%, 6% and 13% of loans sold, respectively. The
increase in rates of retained servicing during 2020 was due to the reduction in third party servicing outlets during the second
quarter of 2020 resulting from the impact of the CARES Act. The CARES Act permits borrowers of federally-backed mortgage
loans to forbear payments, which could negatively impact servicers’ liquidity and their ability to purchase servicing. We expect
that PrimeLending will retain servicing on approximately 50% to 60% of its mortgage loan sales during 2021. The related MSR
asset was valued at $144.2 million on $14.7 billion of serviced loan volume at December 31, 2020, compared with a value of $56.7
million on $5.1 billion of serviced loan volume at December 31, 2019. The mortgage origination segment may, from time to time,
manage its MSR asset through different strategies, including varying the percentage of mortgage loans sold servicing released and
opportunistically selling MSR assets. The mortgage origination segment has also retained servicing on certain loans sold to the
banking segment. Gains and losses associated with such sales to the banking segment and the related MSR asset are eliminated in
consolidation. The mortgage origination segment uses derivative financial instruments, including 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 as noted in the table above. Additionally, net servicing income was $15.0 million, $12.3
million and $10.9 million during 2020, 2019 and 2018, respectively. In October 2020, February 2020, and March 2018, the
mortgage origination segment sold MSR assets of $18.1 million, $18.7 million, and $9.3 million, respectively, which represented
$2.3 billion, $1.5 billion, and $834.3 million, respectively, of its serviced loan volume at the time. There were no sales of MSR
assets during 2019. On February 12, 2021, the mortgage origination segment executed a letter of intent to sell MSR assets of
approximately $53 million, which represented approximately $5 billion of its current serviced loan volume. The MSR sale is
scheduled to close in March 2021.
Noninterest expenses were comprised of the items set forth in the table below (in thousands).
Variable compensation
Non-variable compensation and benefits
Segment operating costs
Lender paid closing costs
Servicing expense
Total noninterest expense
Year Ended December 31,
2019
2018
2020
$
$
405,116
181,597
125,104
21,696
20,404
753,917
$
$
252,956
166,179
112,128
19,698
13,037
563,998
$
$
216,038
173,093
118,630
20,294
12,419
540,474
$
$
Variance
2020 vs 2019 2019 vs 2018
36,918
(6,914)
(6,502)
(596)
618
23,524
152,160
15,418
12,976
1,998
7,367
189,919
$
$
Total employees’ compensation and benefits accounted for the majority of the noninterest expenses incurred during all periods
presented. Specifically, variable compensation comprised 69.0% and 60.4% of the total employees’ compensation and benefits
expenses during 2020 and 2019, respectively. Variable compensation increased $152.2 million during 2020, compared to 2019,
and increased $36.9 million during 2019, compared with 2018. The increases in the percentage concentration of variable
compensation and benefits were primarily due to an increase in loan origination volume. Variable compensation, which is
primarily driven by loan origination volume, tends to fluctuate to a greater degree than loan origination volume because mortgage
loan originator and fulfillment staff incentive compensation plans are structured to pay at increasing rates as higher monthly
volume tiers are achieved. However, certain other incentive compensation plans driven by non-mortgage production criteria may
alter this trend. In addition to an increase in loan origination volume primarily driving the increase in variable compensation and
benefits, an increase in the average
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incentive rate paid and the impact of incentive plans driven by non-mortgage production criteria contributed to the increase in
variable compensation.
While total loan origination volumes increased 47.4% during 2020, compared with 2019, the aggregate non-variable compensation
and benefits of the mortgage origination segment increased by 9.3%. The aforementioned increase during 2020, compared with
2019, was primarily due to an increase in overtime expense incurred due to increased loan volume and an increase in salaries
resulting from increased underwriting and loan fulfillment staff, to support the increase in loan origination volume beginning in the
second quarter of 2020.
While total loan origination volumes increased 13.8% during 2019, compared with 2018, the mortgage origination segment’s
operating costs decreased 5.0%. The decrease in segment operating costs during 2019, compared to 2018, was primarily due to
decreases in non-variable compensation and related benefits, depreciation, professional fees, and business development. These
decreases were partially offset by increases in loan origination costs, as well as software license and maintenance expense. The
decrease in non-variable compensation and benefits during 2019, compared to 2018, was due to reductions in corporate headcount,
loan processing, and loan fulfillment primarily resulting from PrimeLending’s cost reduction plan initiated during the third quarter
of 2018, partially offset by $1.25 million in pre-tax costs associated with the Leadership Changes discussed in the “Factors
Affecting Results of Operations” section.
In exchange for a higher interest rate, customers 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, 2011 and December 31, 2020, the mortgage origination segment sold mortgage loans totaling $137.2 billion.
These loans were sold under sales contracts that generally include provisions that hold the mortgage origination segment
responsible for errors or omissions relating to its representations and warranties that loans sold meet certain requirements,
including representations as to underwriting standards and the validity of certain borrower representations in connection with the
loan. In addition, the sales contracts typically require the refund of purchased servicing rights plus certain investor servicing costs
if a loan experiences an early payment default. While the mortgage origination segment sold loans prior to 2011, it does not
anticipate experiencing significant losses in the future on loans originated prior to 2011 because of investor claims under these
provisions of its sales contracts.
When a claim for indemnification of a loan sold is made by an agency, investor, or other party, the mortgage origination segment
evaluates the claim and determines if the claim can be satisfied through additional documentation or other deliverables. If the
claim is valid and cannot be satisfied in that manner, the mortgage origination segment negotiates with the claimant to reach a
settlement of the claim. Settlements typically result in either the repurchase of a loan or reimbursement to the claimant for losses
incurred on the loan.
Following is a summary of the mortgage origination segment’s claims resolution activity relating to loans sold between January 1,
2011 and December 31, 2020 (dollars in thousands).
Claims resolved with no payment
Claims resolved because of a loan repurchase or
payment to an investor for losses incurred (1)
(1) Losses incurred include refunded purchased servicing rights.
Original Loan Balance
Loss Recognized
% of
Loans
Sold
0.15%
Amount
211,865
241,296
453,161
0.18%
0.33%
$
$
$
$
% of
Loans
Sold
— 0.00%
Amount
9,750
9,750
0.01%
0.01%
For each loan it concludes its obligation to a claimant is both probable and reasonably estimable, the mortgage origination segment
has established a specific claims indemnification liability reserve. An additional indemnification liability reserve has been
established for probable agency, investor or other party losses that may have been incurred, but not yet reported to the mortgage
origination segment based upon a reasonable estimate of such losses. In addition to other factors, the
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mortgage origination segment has considered that GNMA, FNMA and FHLMC have imposed certain restrictions on loans the
agencies will accept under a forbearance agreement resulting from the COVID-19 pandemic, which could increase the magnitude
of indemnification losses on these loans.
At December 31, 2020 and 2019, the mortgage origination segment’s total indemnification liability reserve totaled $21.5 million
and $11.8 million, respectively. The related provision for indemnification losses was $11.2 million, $3.1 million, and $3.2 million
during 2020, 2019 and 2018, respectively.
On October 23, 2018, PrimeLending entered into a Settlement Agreement and an Indemnification Agreement with the DOJ and
HUD, respectively. These agreements provide for payments of $13.5 million, in the aggregate, to the DOJ and HUD. In exchange
for these payments, each of the DOJ and HUD released any civil claims they may have related to certain loans originated by
PrimeLending. The payments were made to the DOJ and HUD during the fourth quarter of 2018, and the indemnification liability
related to this matter was released. The mortgage origination segment’s operating results or financial condition will not be
impacted by this matter in future periods.
Corporate
The following table presents certain financial information regarding the operating results of corporate (in thousands).
Net interest income (expense)
Noninterest income
Noninterest expense
$
Year Ended December 31,
2019
Variance
2018
(9,176)
4,798
36,628
2020 vs 2019
$
(8,651) $
1,841
2,072
2019 vs 2018
3,635
(2,694)
14,340
$
(5,541)
2,104
50,968
2020
(14,192) $
3,945
53,040
Income (loss) from continuing operations before
income taxes
$
(63,287) $
(54,405)
$
(41,006)
$
(8,882) $
(13,399)
Corporate includes certain activities not allocated to specific business segments. These activities include holding company
financing and investing activities, merchant banking investment opportunities and management and administrative services to
support the overall operations of the Company. Hilltop’s merchant banking investment activities include the identification of
attractive opportunities for capital deployment in companies engaged in non-financial activities through its merchant bank
subsidiary, Hilltop Opportunity Partners LLC.
As a holding company, Hilltop’s primary investment objectives are to support capital deployment for organic growth and to
preserve capital to be deployed through acquisitions, dividend payments and potential stock repurchases. Investment and interest
income earned during 2020 was primarily comprised of dividend income from merchant banking investment activities, in addition
to interest income earned on intercompany notes.
Interest expense during 2020, 2019 and 2018 was primarily associated with recurring annual interest expense of $7.7 million
incurred on our $150.0 million aggregate principal amount of 5% senior notes due 2025 (“Senior Notes”). During 2020, we
incurred interest expense of $7.9 million on our $200 million aggregate principal amount of Subordinated Notes, which we issued
in May 2020. Additionally, we incurred interest expense of $2.8 million, $3.9 million and $3.7 million during 2020, 2019 and
2018, respectively, on junior subordinated debentures of $67.0 million issued by PCC (the “Debentures”).
Noninterest income from continuing operations during 2020 and 2019 included activity related to our investment in a new real
estate development in Dallas’ University Park, Hilltop Plaza, which also serves as headquarters for both Hilltop and the Bank, and
net noninterest income associated with activity within our merchant bank subsidiary. Noninterest income during 2018 included a
$5.3 million pre-tax gain on the sale of a merchant bank investment, partially offset by a $2.5 million charge on a legacy merchant
bank equity investment as a result of our periodic fair value assessment, as well as activity related to the Hilltop Plaza investment.
Noninterest expenses from continuing operations were primarily comprised of employees’ compensation and benefits, occupancy
expenses and professional fees, including corporate governance, legal and transaction costs. During 2020, compared with 2019, the
increase in noninterest expenses was primarily due to increased employees’ compensation and benefits costs associated with the
consolidation of certain common back office functions into corporate and improved operating results, and professional fees,
partially offset by a decrease of $6.8 million of aggregate pre-tax costs associated with the Leadership Changes and efficiency
initiative-related charges discussed in the “Factors Affecting Comparability
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of Results of Operations” section. During 2019, compared with 2018, the $14.3 million increase in noninterest expenses was
primarily due to Core System Improvements and the Leadership Changes and efficiency initiative-related charges as previously
discussed.
Results from Discontinued Operations
Insurance Segment
As previously discussed, on June 30, 2020, we completed the sale of NLC. Accordingly, insurance segment results and its assets
and liabilities have been presented as discontinued operations in the consolidated financial statements. Additional details are
presented in Note 3, Discontinued Operations, in the notes to our consolidated financial statements. Income from discontinued
operations before income taxes was $2.1 million, $17.6 million and $5.8 million during 2020, 2019 and 2018, respectively.
Corporate
As a result of the previously noted sale of NLC on June 30, 2020 for cash proceeds of $154.1 million, Hilltop recognized an
aggregate pre-tax gain on sale within discontinued operations of corporate of $36.8 million, net of customary transaction costs of
$5.1 million. The resulting book gain from this sale transaction was not recognized for tax purposes pursuant to the rules under the
Internal Revenue Code. Income from discontinued operations before income taxes was $36.8 million.
Financial Condition
The following discussion contains a more detailed analysis of our financial condition at December 31, 2020 as compared to
December 31, 2019 and December 31, 2018.
Securities Portfolio
At December 31, 2020, investment securities consisted of securities of the U.S. Treasury, U.S. government and its agencies,
obligations of municipalities and other political subdivisions, primarily in the State of Texas, as well as mortgage-backed,
corporate debt, and equity securities. We may categorize investments as trading, available for sale, held to maturity and equity
securities.
Trading securities are bought and held principally for the purpose of selling them in the near term and are carried at fair value,
marked to market through operations and held at the Bank and the Hilltop Broker-Dealers. Securities classified as available for
sale may, from time to time, be bought and sold in response to changes in market interest rates, changes in securities’ prepayment
risk, increases in loan demand, general liquidity needs and to take advantage of market conditions that create more economically
attractive returns. Such securities are carried at estimated fair value, with unrealized gains and losses recorded in accumulated
other comprehensive income (loss). Equity investments are carried at fair value, with all changes in fair value recognized in net
income. Securities are classified as held to maturity based on the intent and ability of our management, at the time of purchase, to
hold such securities to maturity. These securities are carried at amortized cost.
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The table below summarizes our securities portfolio from continuing operations (in thousands).
Trading securities, at fair value
U.S. Treasury securities
U.S. government agencies:
Bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralized mortgage obligations
Corporate debt securities
States and political subdivisions
Unit investment trusts
Private-label securitized product
Other
Securities available for sale, at fair value
U.S. Treasury securities
U.S. government agencies:
Bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralized mortgage obligations
Corporate debt securities
States and political subdivisions
Securities held to maturity, at amortized cost
U.S. Treasury securities
U.S. government agencies:
Bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralized mortgage obligations
States and political subdivisions
Equity securities, at fair value
Total securities portfolio
2020
December 31,
2019
2018
$
40,491
$
— $
7,945
40
336,081
876
69,172
62,481
171,573
—
8,571
4,970
694,255
24,680
331,601
2,145
191,154
36,973
93,117
3,468
2,992
3,446
689,576
1,494
309,455
4,239
206,813
59,293
126,748
19,913
5,680
3,887
745,467
—
—
11,538
82,806
641,611
124,538
565,908
—
47,342
1,462,205
85,575
437,029
12,031
335,616
—
41,242
911,493
85,611
385,074
11,772
276,399
53,302
51,962
875,658
—
—
9,903
—
13,547
152,820
74,932
70,645
311,944
24,020
17,776
161,624
113,894
69,012
386,326
39,018
21,993
87,065
142,474
50,649
351,102
140
166
19,679
$
2,468,544
$
1,987,561
$
1,991,906
We had net unrealized gains of $26.3 million and $11.7 million at December 31, 2020 and 2019, respectively, compared with net
unrealized losses of $10.3 million at December 31, 2018, related to the available for sale investment portfolio. We had net
unrealized gains of $14.7 million and $2.6 million at December 31, 2020 and 2019, respectively, compared with net unrealized
losses associated with the securities held to maturity portfolio of $9.9 million at December 31, 2018. Equity securities included net
unrealized gains of $0.1 million at both December 31, 2020 and 2019, respectively, compared with net unrealized gains of $0.1
million at December 31, 2018.
Banking Segment
The banking segment’s securities portfolio plays a role in the management of our interest rate sensitivity and generates additional
interest income. In addition, the securities portfolio is used to meet collateral requirements for public and trust deposits, securities
sold under agreements to repurchase and other purposes. The available for sale and equity securities portfolios serve as a source of
liquidity. Historically, the Bank’s policy has been to invest primarily in securities of the U.S. government and its agencies,
obligations of municipalities in the State of Texas and other high grade fixed income securities to minimize credit risk. At
December 31, 2020, the banking segment’s securities portfolio of $1.8 billion was comprised of trading securities of $1.1 million,
available for sale securities of $1.5 billion, held to maturity securities of $311.9 million and equity securities of $0.1 million, in
addition to $14.8 million of other investments included in other assets within the consolidated balance sheets.
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Broker-Dealer Segment
The broker-dealer segment holds securities to support sales, underwriting and other customer activities. The interest rate risk
inherent in holding these securities is managed by setting and monitoring limits on the size and duration of positions and on the
length of time the securities can be held. The Hilltop Broker-Dealers are required to carry their securities at 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 $693.2 million at December 31, 2020. In addition, the Hilltop Broker-Dealers enter into transactions that
represent commitments to purchase and deliver securities at prevailing future market prices to facilitate customer transactions and
satisfy such commitments. Accordingly, the Hilltop Broker-Dealers’ ultimate 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 $79.8 million at December 31, 2020.
Corporate
At December 31, 2020, the corporate portfolio included other investments, including those associated with merchant banking, of
$39.0 million in other assets within the consolidated balance sheets.
Allowance for Credit Losses for Available for Sale Securities and Held to Maturity Securities
We have evaluated available for sale debt securities that are in an unrealized loss position and have determined that any declines in
value are unrelated to credit loss and related to changes in market interest rates since purchase. None of the available for sale debt
securities held were past due at December 31, 2020. In addition, as of December 31, 2020, we had evaluated our held to maturity
debt securities, considering the current credit ratings and recognized losses, and determined the potential credit loss to be minimal.
With respect to these securities, we considered the risk of credit loss to be negligible, and therefore, no allowance was recognized
on the debt securities portfolio at December 31, 2020.
The following table sets forth the estimated maturities of our debt securities, excluding trading securities, at December 31, 2020.
Contractual maturities may be different (dollars in thousands, yields are tax-equivalent).
One Year One Year to Five Years to Greater Than
Or Less
Five Years
Ten Years
Ten Years
Total
U.S. government agencies:
Bonds:
Amortized cost
Fair value
Weighted average yield
$
$
3,729
3,795
2.83 %
Residential mortgage-backed securities:
Amortized cost
Fair value
Weighted average yield
Commercial mortgage-backed
securities:
Amortized cost
Fair value
Weighted average yield
Collateralized mortgage obligations:
Amortized cost
Fair value
Weighted average yield
States and political subdivisions:
Amortized cost
Fair value
Weighted average yield
Total securities portfolio:
Amortized cost
Fair value
Weighted average yield
$
$
$
$
—
—
—
—
—
—
—
—
—
1,915
1,923
$
$
$
$
$
$
$
$
$
$
52,684
53,710
1.18 %
10
11
2.25 %
75,959
80,000
2.78 %
3,143
3,228
1.84 %
9,723
10,200
$
$
$
$
$
$
$
$
$
$
$
$
5,232
5,231
0.79 %
53,236
55,020
3.27 %
115,853
121,178
2.05 %
37,601
38,315
1.14 %
20,511
21,473
$
$
$
$
$
$
$
$
$
$
20,391
20,070
$
$
82,036
82,806
1.00 %
1.18 %
585,164
600,835
$ 638,410
$ 655,866
1.86 %
1.98 %
85,937
85,385
$ 277,749
$ 286,563
1.51 %
2.08 %
593,550
601,333
$ 634,294
$ 642,876
1.09 %
1.09 %
83,225
87,169
$ 115,374
$ 120,765
3.50 %
3.44 %
3.45 %
232,433
241,217
$ 1,368,267
$ 1,394,792
$ 1,747,863
$ 1,788,876
2.56 %
3.63 %
5,644
5,718
$ 141,519
$ 147,149
2.74 %
2.22 %
2.28 %
1.58 %
1.73 %
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Loan Portfolio
Consolidated loans held for investment are detailed in the tables below, classified by portfolio segment.
Loan Held for Investment
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Allowance for credit losses
Loans held for investment, net of
allowance
Banking Segment
$
2020
$ 3,133,903
2,627,774
828,852
629,938
35,667
437,007
7,693,141
(149,044)
2019
3,000,523
2,025,720
940,564
791,020
47,046
576,527
7,381,400
(61,136)
$
$
December 31,
2018
2,940,120
1,752,257
932,909
679,263
47,546
578,363
6,930,458
(59,486)
2017
2,617,520
1,682,260
964,320
573,363
40,446
577,889
6,455,798
(63,686)
$
2016
2,415,041
1,844,275
795,811
501,070
41,352
502,077
6,099,626
(54,599)
$ 7,544,097
$
7,320,264
$
6,870,972
$
6,392,112
$
6,045,027
The loan portfolio constitutes the primary earning asset of the banking segment and typically offers the best alternative for
obtaining the maximum interest spread above the banking segment’s cost of funds. The overall economic strength of the banking
segment generally parallels the quality and yield of its loan portfolio.
The banking segment’s total loans held for investment, net of the allowance for credit losses, were $9.6 billion, $8.6 billion and
$7.5 billion at December 31, 2020, 2019 and 2018, respectively. The banking segment’s loan portfolio includes warehouse lines of
credit extended to PrimeLending of $3.3 billion, of which $2.5 billion, $1.8 billion and $1.2 billion was drawn at December 31,
2020, 2019 and 2018, respectively. Amounts advanced against the warehouse lines of credit are eliminated from net loans held for
investment on our consolidated balance sheets. The banking segment does not generally participate in syndicated loan transactions
and has no foreign loans in its portfolio.
The banking segment’s loan portfolio included $486.7 million in PPP loans at December 31, 2020. While these loans have terms
up to 60 months, borrowers can apply for forgiveness of these loans with the SBA. Through February 12, 2021, the SBA had
approved approximately 1,500 PPP forgiveness applications totaling approximately $294 million, with PPP loans of approximately
$171 million pending SBA review and approval. We anticipate a significant amount of these remaining loans pending approval to
be forgiven over the next two quarters. The forgiveness or payoff of these loans would generate an increase in interest income as
we would recognize the remaining unamortized origination fee at the time of payoff.
At December 31, 2020, the banking segment had loan concentrations (loans to borrowers engaged in similar activities) that
exceeded 10% of total loans in its real estate portfolio. The areas of concentration within our real estate portfolio were non-
construction commercial real estate loans and construction and land development loans, which represented 43.2% and 11.4%,
respectively, of the banking segment’s total loans held for investment at December 31, 2020. The banking segment’s loan
concentrations were within regulatory guidelines at December 31, 2020.
The following table provides information regarding the maturities of the banking segment’s real estate and commercial and
industrial gross loans held for investment, net of unearned income (in thousands).
Real estate
Commercial and industrial
Total
Fixed rate loans
Floating rate loans
Total
December 31, 2020
Due Within
One Year
$
900,342
4,033,583
$ 4,933,925
Due From One
To Five Years
$ 2,164,612
976,001
$ 3,140,613
$ 4,647,948
285,977
$ 4,933,925
$ 2,854,709
285,904
$ 3,140,613
Due After
Five Years
1,527,739
143,613
1,671,352
1,601,098
70,254
1,671,352
$
$
$
$
Total
4,592,693
5,153,197
9,745,890
9,103,755
642,135
9,745,890
$
$
$
$
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In the table above, real estate includes commercial real estate, construction and land development and 1-4 family residential loans.
Commercial and industrial includes amounts advanced against the warehouse lines of credit extended to PrimeLending, mortgage
warehouse lending and PPP loans. Floating rate loans that have reached their applicable rate floor or ceiling are classified as fixed
rate loans rather than floating rate loans. As of December 31, 2020, floating rate loans totaling $2.86 billion had reached their
applicable rate floor. The majority of floating rate loans carry an interest rate tied to The Wall Street Journal Prime Rate, as
published in The Wall Street Journal.
Broker-Dealer Segment
The loan portfolio of the broker-dealer segment consists primarily of loans to customers and correspondents. These loans are
collateralized by the securities purchased or by other securities owned by the clients and, because of collateral coverage ratios, are
believed to present minimal collectability exposure. Additionally, these loans are subject to a number of regulatory requirements as
well as the Hilltop Broker-Dealers’ internal policies. The broker-dealer segment’s total loans held for investment, net of the
allowance for credit losses, were $436.8 million, $576.5 million and $578.2 million at December 31, 2020, 2019 and 2018,
respectively. The decrease during 2020, compared to 2019, was primarily attributable to a decrease of $54.1 million, or 17.4%, in
customer margin accounts and a decrease of $84.0 million, or 31.8%, in receivables from correspondents. The decrease during
2019, compared to 2018, was primarily attributable to a decrease of $22.3 million in customer margin accounts, partially offset by
an increase of $20.5 million in receivables from correspondents.
Mortgage Origination Segment
The loan portfolio of the mortgage origination segment consists of loans held for sale, primarily single-family residential
mortgages funded through PrimeLending, and IRLCs with customers pursuant to which we agree to originate a mortgage loan on a
future date at an agreed-upon interest rate. The components of the mortgage origination segment’s loans held for sale and IRLCs
are as follows (in thousands).
Loans held for sale:
Unpaid principal balance
Fair value adjustment
IRLCs:
Unpaid principal balance
Fair value adjustment
2020
2,411,626
109,778
2,521,404
2,470,013
76,048
2,546,061
$
$
$
$
December 31,
2019
$
$
$
$
1,878,231
57,482
1,935,713
914,526
18,222
932,748
2018
1,213,068
44,707
1,257,775
677,267
17,421
694,688
$
$
$
$
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 December 31, 2020, 2019 and 2018 were $4.0 billion, $2.2
billion and $1.4 billion, respectively, while the related estimated fair values were ($28.0) million, ($3.8) million and ($11.6)
million, respectively.
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Allowance for Credit Losses on Loans
For additional information regarding the allowance for credit losses, refer to the section captioned “Critical Accounting Policies
and Estimates” included in this Form 10-K.
Loans Held for Investment
The Bank has lending policies in place with the goal of establishing an asset portfolio that will provide a return on stockholders’
equity sufficient to maintain capital to assets ratios that meet or exceed established regulations. Loans are underwritten with
careful consideration of the borrower’s financial condition, the specific purpose of the loan, the primary sources of repayment and
any collateral pledged to secure the loan.
Underwriting procedures address financial components based on the size and complexity of the credit. The financial components
include, but are not limited to, current and projected cash flows, shock analysis and/or stress testing, and trends in appropriate
balance sheet and statement of operations ratios. The Bank’s loan policy provides specific underwriting guidelines by portfolio
segment, including commercial and industrial, real estate, construction and land development, and consumer loans. The guidelines
for each individual portfolio segment set forth permissible and impermissible loan types. With respect to each loan type, the
guidelines within the Bank’s loan policy provide minimum requirements for the underwriting factors listed above. The Bank’s
underwriting procedures also include an analysis of any collateral and guarantor. Collateral analysis includes a complete
description of the collateral, as well as determined values, monitoring requirements, loan to value ratios, concentration risk,
appraisal requirements and other information relevant to the collateral being pledged. Guarantor analysis includes liquidity and
cash flow evaluation based on the significance with which the guarantors are expected to serve as secondary repayment sources.
The Bank maintains a loan review department that reviews credit risk in response to both external and internal factors that
potentially impact the performance of either individual loans or the overall loan portfolio. The loan review process reviews the
creditworthiness of borrowers and determines compliance with the loan policy. The loan review process complements and
reinforces the risk identification and assessment decisions made by lenders and credit personnel. Results of these reviews are
presented to management and the Bank’s board of directors.
The allowance for credit losses for loans held for investment represents management’s best estimate of all expected credit losses
over the expected contractual life of our existing portfolio. Determining the appropriateness of the allowance is complex and
requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-
existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in
those future periods. Such future changes in the allowance for credit losses are expected to be volatile given dependence upon,
among other things, the portfolio composition and quality, as well as the impact of significant drivers, including prepayment
assumptions and macroeconomic conditions and forecasts.
The COVID-19 pandemic has resulted in a weak labor market and weak overall economic conditions that will affect borrowers
across our lending portfolios and significant judgment is required to estimate the severity and duration of the current economic
downturn, as well as its potential impact on borrower defaults and loss severity. In particular, macroeconomic conditions and
forecasts regarding the duration and severity of the economic downturn are rapidly changing and remain highly uncertain as the
resurgence of COVID-19 cases evolves nationally and in key geographies. It is difficult to predict exactly how borrower behavior
will be impacted by these economic conditions as the effectiveness of government stimulus, customer relief and enhanced
unemployment benefits should help mitigate in the short term, but the extent and duration of government stimulus as well as
performance of payment deferral programs remains uncertain.
One of the most significant judgments involved in estimating our allowance for credit losses relates to the macroeconomic
forecasts used to estimate credit losses over the reasonable and supportable forecast period. To determine the allowance for credit
losses as of December 31, 2020, we utilized a single macroeconomic baseline scenario published by a third party in December
2020.
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The following table summarizes the U.S. Real Gross Domestic Product (“GDP”) growth rates and unemployment rate assumptions
used in our baseline economic forecast to determine our best estimate of expected credit losses.
GDP growth rates:
December 31,
2020
September 30,
2020
June 30,
2020
March 31,
2020
As of
Unemployment rates:
Q1 2020
Q2 2020
Q3 2020
Q4 2020
Q1 2021
Q2 2021
Q3 2021
Q4 2021
Q1 2022
Q2 2022
Q1 2020
Q2 2020
Q3 2020
Q4 2020
Q1 2021
Q2 2021
Q3 2021
Q4 2021
Q1 2022
Q2 2022
4.0%
1.6%
4.5%
4.7%
5.8%
4.8%
4.4%
6.7%
6.9%
7.1%
7.0%
6.8%
6.5%
6.2%
26.6%
2.9%
3.6%
3.1%
4.4%
6.0%
5.5%
8.9%
9.1%
8.9%
8.7%
8.3%
7.8%
7.3%
(33.4)%
19.8%
0.1%
0.2%
1.8%
8.5%
7.3%
14.0%
9.1%
9.5%
9.7%
9.7%
9.2%
8.7%
(2.5)%
(18.3)%
10.9%
2.4%
2.6%
3.3%
5.1%
3.8%
8.7%
6.3%
6.5%
6.7%
6.7%
6.6%
The baseline economic forecast used to determine our best estimate of expected credit losses as of March 31, 2020 assumed a
severe, but short U.S. recession during the first half of 2020 with growth rates down, followed by a strong economic recovery as
businesses re-open, consumer spending increases during the second half of 2020 and positive GDP growth rates. The
unemployment rates were expected to remain elevated into the fourth quarter of 2021, then revert to historical data in the fourth
quarter of 2022. Management’s recovery assumptions included some expected benefit of COVID-19 related fiscal and monetary
stimulus measures and the expected beneficial impacts of the CARES Act and certain regulatory interagency guidance.
As of June 30, 2020, our best estimate of expected credit losses used a baseline economic forecast that continued to assume the
Federal Reserve target range of the federal funds rate at 0% to 0.25% into 2023, but was updated for continued deterioration in the
U.S. economic outlook due to COVID-19 conditions. Compared to assumptions as of March 31, 2020, GDP growth rates declined
significantly in the second quarter of 2020, but reflected higher recovery in the third quarter of 2020. Unemployment rates were
forecasted to be at higher levels than those assumed as of March 31, 2020 into the fourth quarter of 2022. The timing of the release
in early June 2020 of the third party’s baseline forecast utilized did not assume a second wave of COVID-19 cases into the summer
months, so the model results as of June 30, 2020 were qualitatively adjusted to consider recent developments in Texas, uncertainty
in Texas’ economic re-opening plan and such impacts on our most adversely impacted loan portfolios. Qualitative adjustments
considered both significant government relief programs and stimulus, as well as certain model limitations with the current
economic forecast and recent commodity price shocks not observed in historical data.
As of September 30, 2020, our near-term baseline economic forecast improved from June 30, 2020, reflecting better than expected
economic data as states progressed with their re-opening plans. Projected real GDP growth rates were revised for the third quarter
of 2020 as economic data suggested the assumed peak-to-trough decline in real GDP during the second quarter of 2020 was
significant, but not as severe as expected. As such, projected real GDP growth in the third and fourth quarters of 2020 were revised
upward to reflect monthly recovery trends in consumer and government spending observed in July and August. Projected near-
term unemployment rates were adjusted lower to reflect the initial phase of the labor market recovery as states re-opened and
temporarily furloughed workers are recalled to their jobs. Our interest rate expectations continued to assume monetary policy
supported the Federal Reserve target range of the federal funds rate at 0% to 0.25% into late 2023. However, baseline assumptions
around fiscal policy and additional government
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stimulus were revised lower as it was uncertain whether additional stimulus legislation would be passed before early 2021 and how
its delay would affect our most adversely impacted loan portfolios.
As of December 31, 2020, our near-term baseline economic forecast improved from September 30, 2020, reflecting better than
expected economic data and approval of additional government stimulus earlier than expected. As such, projected real GDP
growth in the fourth quarter of 2020 was revised upward. However, we revised our near-term 2021 real GDP forecast to reflect
approximately $900 billion of additional stimulus compared to $1.5 trillion planned as of September 30, 2020. Unemployment rate
forecasts were adjusted lower based on economic data observed in October and November 2020, as well as recent COVID vaccine
approvals showing progress towards the next phase of labor market recovery. Forecasts for commercial real estate prices nationally
were updated lower as of December 31, 2020 to reflect declines through 2022 and recovery to pre-COVID levels in late 2024.
Prior quarter forecasts as of September 30, 2020 assumed declines through 2021 and recovery to pre-COVID levels in mid-2023.
Our interest rate expectations continued to assume monetary policy supported the Federal Reserve target range of the federal funds
rate at 0% to 0.25% into late 2023.
Since December 31, 2019, our baseline economic forecast changed significantly year-over-year in response to weak economic
conditions caused by the COVID pandemic as developments occurred rapidly in February and March 2020. As of December 31,
2019, we assumed the U.S. economy was in the late stages of the economic cycle with unemployment rates near historical lows of
3.6% increasing to 3.8% in Q4 2020 and reverting to historical data in the fourth quarter of 2022. Downside risks to the economy
were concerns over international trade war between the U.S. and its trading partners and potential fallout from a Brexit in 2020.
Interest rate expectations assumed one rate cut in 2020 with the Federal Reserve target range of the federal funds rate at 1.25% to
1.50% before reverting to historical data in 2023. In response to the COVID pandemic, the Federal Reserve twice cut federal funds
rate targets in March 2020 to 0% to 0.25% with interest rate expectations as of December 31, 2020 unchanged until late 2023.
Several U.S. fiscal and monetary policy changes during early 2020 were enacted to counter a severe, but short U.S. recession
during the first half of 2020 and support a strong economic recovery during the second half of 2020 with U.S. budget deficits
increasing to more than $3 trillion during the year. U.S. unemployment rates reached 14.8% in April 2020 before declining to
6.7% as of December 31, 2020, which is 3.1% higher than the unemployment rate as of December 31, 2019. Annualized real GDP
growth rates declined -31.4% in Q2 2020 and increased 33.4% in Q3 2020. The U.S. presidential election later in 2020 resulted in
several changes, as Presidential Candidate Joe Biden won the electoral vote to replace President Donald Trump in 2021 and
majority control of the U.S. Congress moved from Republican to Democratic parties. As economic growth slowed during Q4
2020, additional government stimulus of approximately $900 billion was approved.
As previously discussed, we adopted the new CECL standard and recorded transition adjustment entries that resulted in an
allowance for credit losses for loans held for investment of $73.7 million as of January 1, 2020, an increase of $12.6 million. This
increase reflected credit losses of $18.9 million from the expansion of the loss horizon to life of loan and also takes into account
forecasts of expected future macroeconomic conditions, partially offset by the elimination of the non-credit component within the
historical allowance related to previously categorized PCI loans of $6.3 million. This increase, net of tax, was largely reflected
within the banking segment and included a decrease of $5.7 million to opening retained earnings at January 1, 2020.
During 2020, the significant build in the allowance included provision for credit losses on individually evaluated loans of $20.2
million, while the provision for credit losses on expected losses of collectively evaluated loans accounted for $76.1 million of the
total provision primarily due to the identified changes in the Bank’s loan portfolio composition and credit quality and increase in
the expected lifetime credit losses under CECL attributable to the deteriorating economic outlook associated with the impact of the
market disruption caused by the COVID-19 pandemic. The change in the allowance for credit losses during 2020 was primarily
attributable to the Bank and also reflected other factors including, but not limited to, loan growth, loan mix, and changes in risk
rating grades, macroeconomic factor assumptions and qualitative factors. The change in the allowance during 2020 was also
impacted by net charge-offs of $21.1 million, primarily associated with loans specifically reserved for during the first quarter of
2020.
As discussed under the section entitled “Loan Portfolio” earlier in this Item 7, the Bank’s actions, beginning in the second quarter
of 2020, included supporting our impacted banking clients experiencing an increased level of risk due to the COVID-19 pandemic
through loan modifications. The significant build in the allowance included provision for credit losses associated with this
deteriorating economic outlook and resulted in an allowance for credit losses as a percentage of our total loan portfolio, excluding
margin loans in the broker-dealer segment and banking segment mortgage warehouse lending and PPP lending programs, of
2.48%.
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The respective distribution of the allowance for credit losses as a percentage of our total loan portfolio and total active loan
modifications, excluding margin loans in the broker-dealer segment and banking segment mortgage warehouse lending and PPP
lending programs, are presented in the following table (dollars in thousands).
December 31, 2020
Commercial real estate
Commercial and industrial (1)
Construction and land
development
1-4 family residential
Consumer
Broker-dealer
Mortgage warehouse lending
Paycheck Protection Program
Total
Loans Held
For Investment
3,133,903
1,348,253
$
828,852
629,938
35,667
5,976,613
437,007
792,806
486,715
7,693,141
$
Total
Allowance
for Credit
Losses
109,629
27,298
6,677
3,946
876
148,426
213
405
—
149,044
$
$
Allowance For
Credit Losses
as a % of
Total Loans
Held For
Investment
3.50 %
2.02 %
0.81 %
0.63 %
2.46 %
2.48 %
0.05 %
0.05 %
— %
1.94 %
Active
Loan
Modifications
192,801
14,721
$
$
24,954
7,727
—
240,203
—
—
—
240,203
$
$
Allowance
For Credit
Losses on
Active
Loan
Modifications
Allowance For
Credit Losses
as a % of
Active
Loan
Modifications
34,239
6,370
662
225
—
41,496
—
—
—
41,496
17.76 %
43.27 %
2.65 %
2.91 %
— %
17.28 %
— %
— %
— %
17.28 %
(1)
Commercial and industrial portfolio amounts reflect balances excluding broker-dealer segment margin loans and banking segment mortgage warehouse lending and PPP loans.
Allowance Model Sensitivity
Our allowance model was designed to capture the historical relationship between economic and portfolio changes. As such,
evaluating shifts in individual portfolio attributes or macroeconomic variables in isolation may not be indicative of past or future
performance. It is difficult to estimate how potential changes in any one factor or input might affect the overall allowance for
credit losses because we consider a wide variety of factors and inputs in the allowance for credit losses estimate. Changes in the
factors and inputs considered may not occur at the same rate and may not be consistent across all geographies or product types,
and changes in factors and input may be directionally inconsistent, such that improvement in one factor may offset deterioration in
others.
However, to consider the sensitivity of credit loss estimates to alternative macroeconomic forecasts, we compared the Company’s
allowance for credit loss estimates as of December 31, 2020, excluding loans in the broker-dealer segment margin, the banking
segment mortgage warehouse, and PPP lending programs, with modeled results using both upside (“S1”) and downside (“S3”)
economic scenario forecasts published by Moody’s Analytics.
Compared to our baseline economic forecast, the upside scenario assumes consumer and business confidence increases as
successful developments in vaccines and medical treatments slow the progression of the virus and most businesses affected by
local restrictions reopen earlier than expected. Real GDP growth is expected to grow 5.1% in the first quarter of 2021, 8.0% in the
second quarter of 2021, 7.0% in the third quarter of 2021 and 8.7% in the fourth quarter of 2021. Average unemployment rates
decline to 5.0% by the end of 2021 and 3.8% by the end of 2022. Monetary and fiscal policy assumptions include the Federal
Reserve maintaining a near 0% target for the federal funds rate through mid-2022 and $900 billion of additional stimulus payments
are approved consistent with the baseline economic forecast.
Compared to our baseline economic forecast, the downside scenario assumes consumer and business confidence continues to
decline as infections rise, while consumer concerns regarding vaccines and medical treatments increase in the short-term. As the
number of new cases rise, some nonessential businesses are forced to close again, and most businesses affected by local
restrictions reopen slower than expected. Real GDP growth is expected to decrease 4.9% in the first quarter of 2021, 3.2% in the
second quarter of 2021 and 0.3% in the third quarter of 2021, then is expected to grow 2.3% in the fourth quarter of 2021 and 2.3%
in the first quarter of 2022. Average unemployment rates increase to 9.8% by the fourth quarter of 2021 and improve modestly to
8.6% by the end of 2022. Unemployment is expected to remain elevated, but improve to 6.4% in the fourth quarter of 2023 and
reverts to historical average rates over time. Monetary and fiscal policy assumptions include the Federal Reserve maintaining a
near 0% target for the federal funds rate through early 2025, while disagreements in Congress prevent any additional stimulus from
being enacted at all, resulting in no expanded programs for unemployment insurance benefits or state and local governments.
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The impact of applying all of the assumptions of the upside economic scenario during the reasonable and supportable forecast
period would have resulted in a decrease in the allowance for credit losses of approximately $26 million or a weighted average
expected loss rate of 1.77% as a percentage of our total loan portfolio, excluding margin loans in the broker-dealer segment and
the banking segment mortgage warehouse lending and PPP lending programs.
The impact of applying all of the assumptions of the downside economic scenario during the reasonable and supportable forecast
period would have resulted in an increase in the allowance for credit losses of approximately $94 million or a weighted average
expected loss rate of 3.83% as a percentage of our total loan portfolio, excluding margin loans in the broker-dealer segment and
the banking segment mortgage warehouse lending and PPP lending programs.
This analysis relates only to the modeled credit loss estimates and is not intended to estimate changes in the overall allowance for
credit losses as they do not reflect any potential changes in the adjustment to the quantitative calculation, which would also be
influenced by the judgment management applies to the modeled lifetime loss estimates to reflect the uncertainty and imprecision of
these modeled lifetime loss estimates based on then-current circumstances and conditions. It also did not consider impacts from
recent Bank deferral and customer accommodation efforts or government fiscal and monetary stimulus measures.
Our allowance for credit losses reflects our best estimate of current expected credit losses, which is highly dependent on the path
of the virus and expectations around the development of reliable vaccines and medical treatments. We continue to monitor the
impact of the COVID-19 pandemic and related policy measures on the economy and if pace and vigor of the expected recovery is
worse than expected, further meaningful provisions could be required. Future allowance for credit losses may vary considerably
for these reasons.
Allowance Activity
The following tables present the activity in our allowance for credit losses within our loan portfolio for the periods presented (in
thousands). Substantially all of the activity shown below occurred within the banking segment.
Loans Held for Investment
Balance, beginning of year
Transition adjustment for adoption of CECL accounting
standard
Provision for credit losses
Recoveries of loans previously charged off:
2020
$ 61,136
12,562
96,491
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Total recoveries
Loans charged off:
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Total charge-offs
Net charge-offs
Balance, end of year
Allowance for credit losses as a percentage of gross loans
613
1,834
2
54
392
—
2,895
4,517
18,158
2
748
615
—
24,040
(21,145)
$ 149,044
Year Ended December 31,
2018
$ 63,686
2017
$ 54,599
2019
$ 59,486
2016
$ 46,947
—
5,088
—
14,271
—
40,620
—
7,206
6
2,829
—
61
37
—
2,933
—
4,273
6
146
64
—
4,489
46
1,833
7
201
79
—
2,166
—
1,160
5,924
800
12,741
—
907
498
—
8,489
(5,556)
$ 61,136
143
93
—
13,777
(9,288)
$ 59,486
764
6,253
13
112
208
—
7,350
(5,184)
$ 63,686
172
1,931
—
344
123
—
2,570
1,362
33,776
—
196
203
1
35,538
(32,968)
$ 54,599
held for investment
1.94 %
0.83 %
0.86 %
0.99 %
0.90 %
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The distribution of the allowance for credit losses among loan types and the percentage of the loans for that type to gross loans,
excluding unearned income, within our loan portfolio is presented in the tables below (dollars in thousands).
2020
2019
% of
Gross
Loans
% of
Gross
Loans
Reserve
Reserve
December 31,
2018
% of
Gross
Loans
Reserve
2017
% of
Gross
Loans
Reserve
2016
% of
Reserve
Gross
Loans
Commercial real
estate
$
109,629
40.74 % $ 31,595
40.65 % $ 27,100
42.42 % $ 29,142
42.82 % $ 22,675
42.61 %
Commercial and
industrial
Construction and
land
development
1-4 family
residential
Consumer
Broker-dealer
Total
27,703
34.16 % 17,964
27.44 % 21,980
25.28 % 23,674
26.04 % 21,369
30.19 %
6,677
10.77 %
4,878
12.74 %
6,061
13.46 %
7,844
14.91 %
7,002
12.90 %
3,946
876
213
149,044
8.19 %
0.46 %
5.68 %
6,386
265
48
100.00 % $ 61,136
10.72 %
0.64 %
7.81 %
3,956
267
122
100.00 % $ 59,486
9.80 %
0.69 %
8.35 %
2,362
311
353
100.00 % $ 63,686
6.65 %
0.63 %
8.95 %
2,974
424
155
100.00 % $ 54,599
5.39 %
0.68 %
8.23 %
100.00 %
$
The following table summarizes historical levels of the allowance for credit losses on loans held for investment, distributed by
portfolio segment (in thousands).
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
$
December 31,
2020
109,629
27,703
6,677
3,946
876
213
149,044
$
September 30,
2020
$
$
104,566 $
38,178
6,270
5,052
1,002
146
155,214 $
June 30,
2020
106,551
31,863
8,393
7,399
1,429
748
156,383
March 31,
2020
December 31,
2019
$
$
53,939
38,550
6,360
6,365
1,203
322
106,739
$
$
31,595
17,964
4,878
6,386
265
48
61,136
The increase in the allowance for credit losses for loans held for investment subsequent to December 31, 2019 in the table above
was primarily attributable to the adoption of the new CECL standard as of January 1, 2020 and a deteriorating economic outlook
associated with the impact of the market disruption caused by COVID-19 conditions. As previously noted, CECL requires that we
reflect the expansion of the loss horizon to life of loan and take into account forecasts of expected future macroeconomic
conditions in our determination of the allowance for credit losses.
Unfunded Loan Commitments
In order to estimate the allowance for credit losses on unfunded loan commitments, the Bank uses a process similar to that used in
estimating the allowance for credit losses on the funded portion. The allowance is based on the estimated exposure at default,
multiplied by the lifetime probability of default grade and loss given default grade for that particular loan segment. The Bank
estimates expected losses by calculating a commitment usage factor based on industry usage factors. The commitment usage factor
is applied over the relevant contractual period. Loss factors from the underlying loans to which commitments are related are
applied to the results of the usage calculation to estimate any liability for credit losses related for each loan type. The expected
losses on unfunded commitments align with statistically calculated parameters used to calculate the allowance for credit losses on
the funded portion. Letters of credit are not currently reserved because they are issued primarily as credit enhancements and the
likelihood of funding is low.
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Changes in the allowance for credit losses for loans with off-balance sheet credit exposures are shown below (in thousands).
Balance, beginning of year
Transition adjustment CECL accounting standard
Other noninterest expense
Balance, end of year
2020
Year Ended December 31,
2019
2018
$
$
2,075
3,837
2,476
8,388
$
$
2,366
—
(291)
2,075
$
$
1,932
—
434
2,366
At December 31, 2020, the reserve for unfunded commitments was $8.4 million, compared to $2.1 million and $2.4 million at
December 31, 2019 and 2018, respectively. As previously discussed, we adopted the new CECL standard and recorded a transition
adjustment entry that resulted in an allowance for credit losses of $5.9 million as of January 1, 2020. During 2020, the increase in
the reserve for unfunded commitments was primarily due to economic uncertainties associated with the impact of the market
disruption caused by COVID-19 conditions.
Potential Problem Loans
Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has
concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor’s potential operating or
financial difficulties. Management monitors these loans and reviews their performance on a regular basis. Potential problem loans
contain potential weaknesses that could improve, persist or further deteriorate. If such potential weaknesses persist without
improving, the loan is subject to downgrade, typically to substandard, in three to six months. Potential problem loans are assigned
a grade of special mention within our risk grading matrix. Potential problem loans do not include purchased credit deteriorated
(“PCD”) loans because PCD loans exhibited evidence of more than insignificant credit deterioration at acquisition that made it
probable that all contractually required principal payments would not be collected. Additionally, potential problem loans do not
include loans that have been modified in connection with our COVID-19 payment deferment programs which allow for a deferral
of principal and/or interest payments. Within our loan portfolio, we had seven credit relationships totaling $11.3 million of
potential problem loans at December 31, 2020, compared with five credit relationships totaling $16.8 million of potential problem
loans at December 31, 2019 and seven credit relationships totaling $17.8 million of potential problem loans at December 31, 2018.
Non-Performing Assets
In response to the COVID-19 pandemic, the CARES Act was passed in March 2020, which among other things, allows the Bank
to suspend the requirements for certain loan modifications to be categorized as a TDR. Starting in March, the Bank implemented
several actions to better support our impacted banking clients and allow for loan modifications such as principal and/or interest
payment deferrals, participation in the PPP as an SBA preferred lender and personal banking assistance including waived fees,
increased daily spending limits and suspension of residential foreclosure activities. The COVID-19 payment deferment programs
allow for a deferral of principal and/or interest payments with such deferred principal payments due and payable on the maturity
date of the existing loan.
Specifically, as discussed under the section entitled “Loan Portfolio” earlier in this Item 7, the Bank’s actions during the third and
fourth quarters of 2020 included approval of an additional $75 million of new COVID-19 related loan modifications since June 30,
2020. The portfolio of active deferrals that have not reached the end of their deferral period was approximately $240 million as of
December 31, 2020, of which approximately $90 million had received an additional deferral. COVID-19 related loan
modifications of approximately $714 million have returned to agreed-upon contractual terms and had made at least one required
principal and/or interest payment since the end of their initial deferral period. Such loans represent elevated risk, therefore
management continues to monitor these loans. The extent to which these measures will impact the Bank, and any progression of
loans, whether receiving COVID-19 payment deferrals or not, into non-performing assets, during future periods is uncertain and
will depend on future developments that cannot be predicted.
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The following table presents components of our non-performing assets (dollars in thousands).
2020
2019
2018
2017
2016
December 31,
Loans accounted for on a non-accrual basis:
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Troubled debt restructurings included in accruing loans held for
investment
Non-performing loans
Non-performing loans as a percentage of total loans (1)
Other real estate owned
Other repossessed assets
$
$
$
$
$
11,133
34,049
507
32,263
28
—
77,980
1,954
79,934
0.76 %
21,289
101
Non-performing assets (1)
$ 101,324
$
$
$
$
$
$
7,308
15,262
1,316
12,204
26
—
36,116
$
5,324
14,870
3,278
10,437
41
—
$ 33,950
$ 19,724
20,878
611
4,358
56
—
$ 45,627
$ 13,351
13,932
755
244
—
—
$ 28,282
2,173
38,289
1,339
$ 35,289
1,433
$ 47,060
1,699
$ 29,981
0.40 %
0.41 %
0.58 %
0.39 %
18,202
$ 27,578
$ 40,627
$ 56,149
— $
68
$
323
$
1,117
56,491
$ 62,935
$ 88,010
$ 87,247
Non-performing assets as a percentage of total assets (1)
0.60 %
0.37 %
0.46 %
0.65 %
0.68 %
Loans past due 90 days or more and still accruing
$ 243,630
$ 102,707
$ 83,131
$ 85,396
$ 47,659
(1)
Noted balances and percentages during all prior periods reflect reclassifications to conform to current period presentation.
At December 31, 2020, non-accrual loans included 60 commercial and industrial relationships with loans secured by accounts
receivable, life insurance, oil and gas, livestock and equipment. Non-accrual loans at December 31, 2020 also included $10.9
million of loans secured by residential real estate which were classified as loans held for sale. At December 31, 2019, non-accrual
loans included 23 commercial and industrial relationships with loans secured by accounts receivable, life insurance, oil and gas,
livestock and equipment. Non-accrual loans at December 31, 2019 also included $4.8 million of loans secured by residential real
estate which were classified as loans held for sale. At December 31, 2018, non-accrual loans included 16 commercial and
industrial relationships with loans secured by accounts receivable, life insurance, livestock, oil and gas, and equipment. Non-
accrual loans at December 31, 2018 also included $3.4 million of loans secured by residential real estate which were classified as
loans held for sale.
At December 31, 2020, TDRs were comprised of $2.0 million of loans that were considered to be performing and accruing, and of
$16.0 million of loans considered to be non-performing reported in non-accrual loans. At December 31, 2019, TDRs were
comprised of $2.2 million of loans that were considered to be performing and accruing, and $11.9 million of loans considered to be
non-performing reported in non-accrual loans. At December 31, 2018, TDRs were comprised of $1.3 million related to loans that
were considered to be performing and accruing, and of $5.9 million of loans considered to be non-performing reported in non-
accrual loans. In March 2020, the CARES Act was passed, which, among other things, allows the Bank to suspend the
requirements for certain loan modifications to be categorized as a TDR. Therefore, the Bank is not reporting COVID-19 related
modifications as TDRs.
OREO increased from December 31, 2019 to December 31, 2020, primarily due to additions totaling $13.9 million, partially offset
by disposals of $10.8 million. OREO as of December 31, 2019 decreased from December 31, 2018 primarily due to $14.0 million
of disposals and fair value decreases, partially offset by additions of totaling $4.6 million. OREO as of December 31, 2018
decreased from December 31, 2017 due to $16.7 million of disposals and fair value decreases, partially offset by additions totaling
$6.7 million. At both December 31, 2020 and 2019, OREO was primarily comprised of commercial properties.
Loans past due 90 days or more and still accruing at December 31, 2020, 2019 and 2018 were primarily comprised of loans held
for sale and guaranteed by U.S. government agencies, including GNMA related loans subject to repurchase within our mortgage
origination segment. As of December 31, 2020, $198.8 million of loans subject to repurchase were
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under a forbearance agreement resulting from the COVID-19 pandemic. During May 2020, GNMA announced it will temporarily
exclude any new GNMA lender delinquencies, occurring on or after April 2020, when calculating the delinquency ratios for the
purposes of enforcing compliance with its delinquency rate thresholds. This exclusion is extended automatically to GNMA lenders
that were compliant with GNMA’s delinquency rate thresholds as reflected by their April 2020 investor accounting report. The
mortgage origination segment qualified for this exclusion as of December 31, 2020. As of December 31, 2020, $142.1 million of
loans subject to repurchase under a forbearance agreement had delinquencies on or after April 2020.
Deposits
The banking segment’s major source of funds and liquidity is its deposit base. Deposits provide funding for its investments in
loans and securities. Interest paid for deposits must be managed carefully to control the level of interest expense and overall net
interest margin. The composition of the deposit base (time deposits versus interest-bearing demand deposits and savings), as
discussed in more detail within the section entitled “Liquidity and Capital Resources — Banking Segment” below, is constantly
changing due to the banking segment’s needs and market conditions.
The table below presents the average balance of, and rate paid on, consolidated deposits (dollars in thousands).
2020
Year Ended December 31,
2019
2018
Noninterest-bearing demand deposits
Interest-bearing demand deposits
Savings deposits
Time deposits
Average
Balance
$ 3,304,475
5,284,582
231,996
1,880,543
$ 10,701,596
Average
Rate Paid
Average
Balance
Average
Rate Paid
Average
Balance
Average
Rate Paid
0.00 % $ 2,635,924
0.31 % 4,283,642
0.07 %
186,235
1.11 % 1,446,614
0.35 % $ 8,552,415
0.00 % $ 2,504,599
0.98 % 4,025,259
0.19 %
201,328
2.02 % 1,341,886
0.84 % $ 8,073,072
0.00 %
0.66 %
0.11 %
1.42 %
0.57 %
The maturity of consolidated interest-bearing time deposits of $100,000 or more at December 31, 2020 is set forth in the table
below (in thousands).
Months to maturity:
3 months or less
3 months to 6 months
6 months to 12 months
Over 12 months
$
$
386,037
393,175
536,333
183,599
1,499,144
The banking segment experienced an increase of $384 million in interest-bearing time deposits of $100,000 or more at December
31, 2020, compared to December 31, 2019. The increase during 2020, compared to 2019, was primarily due to an increase in the
use of brokered certificates of deposit to strengthen the Bank’s available liquidity position given the economic uncertainties
associated with the impact of the market disruption caused by COVID-19 conditions. This is compared to an increase of $96
million in interest-bearing time deposits of $100,000 or more at December 31, 2019, compared to December 31, 2018. The
increase during 2019, compared to 2018, was primarily due customers locking in higher rates before the federal funds interest rate
started to decrease during 2019 and a more competitive deposit pricing environment. At December 31, 2020, there were $1.5
billion in interest-bearing time deposits scheduled to mature within one year.
Borrowings
Our borrowings associated with continuing operations are shown in the table below (dollars in thousands).
2020
December 31,
2019
Average
Balance
Rate Paid
Balance
Average
Rate Paid
Balance
2018
Average
Short-term borrowings
Notes payable
Junior subordinated debentures
$
695,798
381,987
67,012
$ 1,144,797
1.46 % $ 1,424,010
256,269
4.54 %
4.13 %
67,012
2.51 % $ 1,747,291
2.41 % $ 1,065,807
201,372
4.70 %
5.75 %
67,012
2.90 % $ 1,334,191
94
Rate Paid
2.15 %
4.72 %
5.47 %
2.63 %
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Short-term borrowings has historically consisted of federal funds purchased, securities sold under agreements to repurchase,
borrowings at the Federal Home Loan Bank (“FHLB”), short-term bank loans and commercial paper. The $728.2 million decrease
in short-term borrowings at December 31, 2020, compared with December 31, 2019, included a decrease in borrowings in our
banking and broker-dealer segments primarily associated with the increased utilization of available internal funds, a decrease in
FHLB borrowings and a decrease in securities sold under agreements to repurchase by the Hilltop Broker-Dealers, partially offset
by an increase in commercial paper used by the Hilltop Broker-Dealers to finance their activities. The $358.2 million increase in
short-term borrowings at December 31, 2019 compared with December 31, 2018 included a net increase of $363.7 million in our
banking segment primarily associated with increases in FHLB notes, partially offset by a net decrease of $5.5 million in short-term
bank loans, securities sold under agreements to repurchase and commercial paper used by the Hilltop Broker-Dealers to finance
their activities.
Notes payable at December 31, 2020 of $382.0 million was comprised of $148.9 million related to Senior Notes, net of loan
origination fees, Subordinated Notes, net of origination fees, of $196.8 million and mortgage origination segment borrowings of
$36.2 million. Notes payable at December 31, 2019 of $283.8 million was comprised of $148.8 million related to Senior Notes, net
of loan origination fees, FHLB borrowings with an original maturity greater than one year within our banking segment of $28.8
million, and mortgage origination segment borrowings of $78.7 million. Notes payable at December 31, 2018 of $228.9 million
was comprised of $148.6 million related to Senior Notes, net of loan origination fees, FHLB borrowings with an original maturity
greater than one year held within our banking segment of $4.4 million, and mortgage origination segment borrowings of $48.4
million.
Liquidity and Capital Resources
Hilltop is a financial holding company whose assets primarily consist of the stock of its subsidiaries and invested assets. Hilltop’s
primary investment objectives, as a holding company, are to support capital deployment for organic growth and to preserve capital
to be deployed through acquisitions, dividend payments and stock repurchases. At December 31, 2020, Hilltop had $374.8 million
in cash and cash equivalents, an increase of $269.2 million from $105.6 million at December 31, 2019. This increase in cash and
cash equivalents was primarily due to the receipt of $196.6 million in net proceeds associated with the Subordinated Notes
offering, cash proceeds of $154.1 million from the completed sale of NLC and $207.2 million of dividends from subsidiaries,
partially offset by $32.5 million in cash dividends declared, $208.7 million of stock repurchases, including through the tender offer
completed in November 2020, and other general corporate expenses. Subject to regulatory restrictions, Hilltop has received, and
may also continue to receive, dividends from its subsidiaries. If necessary or appropriate, we may also finance acquisitions with
the proceeds from equity or debt issuances. We believe that Hilltop’s liquidity is sufficient for the foreseeable future, with current
short-term liquidity needs including operating expenses, interest on debt obligations, dividend payments to stockholders and
potential stock repurchases.
COVID-19
As previously discussed, in light of the extreme volatility and disruptions in the capital and credit markets beginning in March
2020 resulting from the COVID-19 crisis, including a significant decline in corporate debt and equity issuances and a deterioration
in the mortgage servicing and commercial paper markets, we took a number of precautionary actions in March to enhance our
financial flexibility by bolstering our cash position to ensure we have adequate cash readily available to meet both expected and
unexpected funding needs without adversely affecting our daily operations.
The FOMC reduced the target range for short-term rates by 150 basis points to a range of 0% to 0.25% during March 2020 to
support the economy and potentially reduce the impacts from the COVID-19 pandemic. As a result of these rate adjustments and
the stressed economic outlook, mortgage rates fell to historically low levels, which resulted in significant growth in mortgage
originations at both PrimeLending and Hilltop Securities through its partnerships with certain housing finance authorities. To
strengthen the Bank’s available liquidity position, we raised brokered deposits that totaled $1.4 billion at June 30, 2020, as well as
swept an additional $200 million of deposits from Hilltop Securities into the Bank, bringing the total funds swept from Hilltop
Securities to approximately $1.5 billion until June 2020 when the total funds swept was reduced back to $1.3 billion at June 30,
2020. During the third and fourth quarters of 2020, given the continued strong cash and liquidity levels at the Bank, brokered
deposits declined to $731.0 million and $1.0 billion as of December 31, 2020 and September 30, 2020, respectively, and the total
funds swept from Hilltop Securities into the Bank was reduced further to approximately $700 million and $900 million as of
December 31, 2020 and September 30, 2020, respectively.
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Further, during March 2020, we substantially reduced the trading portfolio inventory limits at Hilltop Securities in an effort to
protect capital, minimize losses and ensure target liquidity levels throughout the crisis. During March 2020, the capital markets
experienced significant friction and in certain portions of the market, liquidity was not prevalent. In particular for us, the market
for municipal securities, collateralized mortgage obligations, mortgage derivatives and GNMA mortgage pools experienced
significant liquidity stress at points during the month. The Federal Reserve, in partnership with the Treasury of the United States,
has stepped in to provide additional liquidity in each of these critical markets. We will continue to evaluate market conditions and
determine the appropriateness of capital market inventory limits.
To meet demand for customer loan advances and satisfy our obligations to repay long-term debt maturing over the next 12 months,
we believe we currently have sufficient liquidity from the available on- and off-balance sheet liquidity sources and our ability to
issue debt in the capital markets. We continue to review actions that we may take to further enhance our financial flexibility in the
event that market conditions deteriorate further or for an extended period.
Tender Offer
On September 23, 2020, we announced the commencement of a modified “Dutch auction” tender offer to purchase shares of our
common stock for an aggregate cash purchase price of up to $350 million. On November 17, 2020, we completed our tender offer,
repurchasing 8,058,947 shares of outstanding common stock at a price of $24.00 per share for a total of $193.4 million excluding
fees and expenses. We funded the tender offer with cash on hand.
NLC Sale
On June 30, 2020, we completed the sale of all of the outstanding capital stock of NLC, which comprised the operations of our
former insurance segment, for cash proceeds of $154.1 million. During 2020, Hilltop recognized an aggregate gain associated with
this transaction of $36.8 million, net of customary transaction costs of $5.1 million and was subject to post-closing adjustments.
The resulting book gain from this sale transaction was not recognized for tax purposes due to the excess tax basis over book basis
being greater than the recorded book gain. Any tax loss related to this transaction is deemed disallowed pursuant to the rules under
the Internal Revenue Code. We also agreed to enter into an agreement at closing to refrain for a specified period from certain
activities that compete with the business of NLC. As a result, NLC’s results and its assets and liabilities have been presented as
discontinued operations in the consolidated financial statements, and we no longer have an insurance segment.
Dividend Program and Declaration
In October 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 2020, we declared and paid
cash dividends of $0.36 per common share, or $32.5 million.
On January 28, 2021, our board of directors declared a quarterly cash dividend of $0.12 per common share, payable on February
26, 2021 to all common stockholders of record as of the close of business on February 15, 2021.
Future dividends on our common stock are subject to the determination by the board of directors based on an evaluation of our
earnings and financial condition, liquidity and capital resources, the general economic and regulatory climate, our ability to service
any equity or debt obligations senior to our common stock and other factors.
Stock Repurchases
In January 2021, our board of directors authorized a new stock repurchase program through January 2022 pursuant to which we are
authorized to repurchase, in the aggregate, up to $75.0 million of our outstanding common stock, inclusive of repurchases to offset
dilution related to grants of stock-based compensation. Under the stock repurchase program authorized, we may repurchase shares
in the open market or through privately negotiated transactions as permitted under Rule 10b-18 promulgated under the Exchange
Act. The extent to which we repurchase our shares and the timing of such repurchases depends upon market conditions and other
corporate considerations, as determined by Hilltop’s management team. Repurchased shares will be returned to our pool of
authorized but unissued shares of common stock.
During 2020, we paid $15.2 million to repurchase an aggregate of 720,901 shares of common stock at a weighted average price of
$21.13 per share. The purchases were funded from available cash balances.
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Senior Notes due 2025
On April 9, 2015, we completed an offering of $150.0 million aggregate principal amount of our 5% senior notes due 2025
(“Senior Unregistered Notes”) in a private offering that was exempt from the registration requirements of the Securities Act. The
Senior Unregistered Notes were offered within the United States only to qualified institutional buyers pursuant to Rule 144A under
the Securities Act, and to persons outside of the United States under Regulation S under the Securities Act. The Senior
Unregistered Notes were issued pursuant to an indenture, dated as of April 9, 2015 (the “indenture”), by and between Hilltop and
U.S. Bank National Association, as trustee. The net proceeds from the offering, after deducting estimated fees and expenses and
the initial purchasers’ discounts, were approximately $148 million. We used the net proceeds of the offering to redeem all of our
outstanding Series B Preferred Stock at an aggregate liquidation value of $114.1 million, plus accrued but unpaid dividends of $0.4
million, and Hilltop utilized the remainder for general corporate purposes.
In connection with the issuance of the Senior Unregistered Notes, on April 9, 2015, we entered into a registration rights agreement
with the initial purchasers of the Senior Unregistered Notes. Under the terms of the registration rights agreement, we agreed to
offer to exchange the Senior Unregistered Notes for notes registered under the Securities Act (the “Senior Registered Notes”). The
terms of the Senior Registered Notes are substantially identical to the Senior Unregistered Notes for which they were exchanged
(including principal amount, interest rate, maturity and redemption rights), except that the Senior Registered Notes generally are
not subject to transfer restrictions. On May 22, 2015, and subject to the terms and conditions set forth in the Senior Registered
Notes prospectus, we commenced an offer to exchange the outstanding Senior Unregistered Notes for Senior Registered Notes.
Substantially all of the Senior Unregistered Notes were tendered for exchange, and on June 22, 2015, we fulfilled all of the
requirements of the registration rights agreement for the Senior Unregistered Notes by issuing Senior Registered Notes in
exchange for the tendered Senior Unregistered Notes. We refer to the Senior Registered Notes and the Senior Unregistered Notes
that remain outstanding collectively as the “Senior Notes.”
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 December 31, 2020, $150.0 million of our Senior Notes was
outstanding.
The indenture contains covenants that limit our ability to, among other things and subject to certain significant exceptions:
(i) dispose of or issue voting stock of certain of our bank subsidiaries or subsidiaries that own voting stock of our bank
subsidiaries, (ii) incur or permit to exist any mortgage, pledge, encumbrance or lien or charge on the capital stock of certain of our
bank subsidiaries or subsidiaries that own capital stock of our bank subsidiaries and (iii) sell all or substantially all of our assets or
merge or consolidate with or into other companies. The indenture also provides for certain events of default, which, if any of them
occurs, would permit or require the principal amount, premium, if any, and accrued and unpaid interest on the then outstanding
Senior Notes to be declared immediately due and payable.
Subordinated Notes due 2030 and 2035
On May 7, 2020, we completed a public offering of $50 million aggregate principal amount of 2030 Subordinated Notes and $150
million aggregate principal amount of 2035 Subordinated Notes. The price to the public for the Subordinated Notes was 100% of
the principal amount of the Subordinated Notes. The net proceeds from the offering, after deducting underwriting discounts and
fees and expenses of $3.4 million, were $196.6 million. We intend to use the net proceeds of the offerings for general corporate
purposes.
The 2030 Subordinated Notes and the 2035 Subordinated Notes will mature on May 15, 2030 and May 15, 2035, respectively. We
may redeem the Subordinated Notes, in whole or in part, from time to time, subject to obtaining Federal Reserve approval,
beginning with the interest payment date of May 15, 2025 for the 2030 Subordinated Notes and beginning with the interest
payment date of May 15, 2030 for the 2035 Subordinated Notes at a redemption price equal to 100% of the principal amount of the
Subordinated Notes being redeemed plus accrued and unpaid interest to but excluding the date of redemption.
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The 2030 Subordinated Notes bear interest at a rate of 5.75% per year, payable semi-annually in arrears commencing on
November 15, 2020. The interest rate for the 2030 Subordinated Notes will reset quarterly beginning May 15, 2025 to an interest
rate, per year, equal to the then-current benchmark rate, which is expected to be three-month term SOFR rate, plus 5.68%, payable
quarterly in arrears. The 2035 Subordinated Notes bear interest at a rate of 6.125% per year, payable semi-annually in arrears
commencing on November 15, 2020. The interest rate for the 2035 Subordinated Notes will reset quarterly beginning May 15,
2030 to an interest rate, per year, equal to the then-current benchmark rate, which is expected to be three-month term SOFR rate
plus 5.80%, payable quarterly in arrears. At December 31, 2020, $200 million of our Subordinated Notes was outstanding.
Junior Subordinated Debentures
The Debentures have a stated term of 30 years with maturities ranging from July 2031 to February 2038 with interest payable
quarterly. The rate on the Debentures, which resets quarterly, is three-month LIBOR plus an average spread of 3.22%. The total
average interest rate at December 31, 2020 was 3.45%. The Debentures are callable at PCC’s discretion with a minimum of a 45 to
60-day notice. At December 31, 2020, $67.0 million of PCC’s Debentures were outstanding.
Regulatory Capital
We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum
capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material adverse effect on
our financial condition and results of operations. Under capital adequacy and regulatory requirements, we must meet specific
capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Under the comprehensive capital framework (“Basel III”) for U.S. banking organizations, total capital consists of two tiers of
capital, Tier 1 and Tier 2. Tier 1 capital is further composed of common equity Tier 1 capital and additional Tier 1 capital. Total
capital is the sum of Tier 1 capital and Tier 2 capital. We perform reviews of the classification and calculation of risk-weighted
assets to ensure accuracy and compliance with the Basel III regulatory capital requirements. Our capital amounts and classification
are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
In order to avoid limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary
bonus payments to executive officers, Basel III requires banking organizations to maintain a capital conservation buffer above
minimum risk-based capital requirements measured relative to risk-weighted assets.
Bank holding companies with less than $15 billion in assets as of December 31, 2009 are allowed to include junior subordinated
debentures in Tier 1 capital, subject to certain restrictions. However, because Hilltop has grown above $15 billion in assets, if we
make an acquisition in the future, the debentures issued to the Trusts may 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 December 31, 2020, under guidance issued by the Board of Governors of the Federal Reserve System.
Actual capital amounts and ratios as of December 31, 2020 reflect PlainsCapital’s and Hilltop’s decision to elect the transition
option as issued by the federal banking regulatory agencies in March 2020 that permits banking institutions to mitigate the
estimated cumulative regulatory capital effects from CECL over a five-year transitionary period.
At December 31, 2020, Hilltop had a total capital to risk weighted assets ratio of 22.34%, Tier 1 capital to risk weighted assets
ratio of 19.57%, common equity Tier 1 capital to risk weighted assets ratio of 18.97% and a Tier 1 capital to average assets, or
leverage, ratio of 12.64%. Accordingly, Hilltop’s actual capital amounts and ratios in accordance with Basel III exceeded the
regulatory capital requirements including conservation buffer in effect at the end of the period.
At December 31, 2020, PlainsCapital had a total capital to risk weighted assets ratio of 15.27%, Tier 1 capital to risk weighted
assets ratio of 14.40%, common equity Tier 1 capital to risk weighted assets ratio of 14.40%, and a Tier 1 capital to average assets,
or leverage, ratio of 10.44%. Accordingly, PlainsCapital’s actual capital amounts and ratios in accordance with Basel III resulted
in it being considered “well-capitalized” and exceeded the regulatory capital requirements including conservation buffer in effect
at the end of the period.
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We discuss regulatory capital requirements in more detail in Note 24 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 this Annual Report.
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 corporate treasury group is responsible for continuously monitoring our
liquidity position to ensure that our assets and liabilities are managed in a manner that will meet our short-term and long-term cash
requirements. Our goal is to manage our liquidity position in a manner such that we can meet our customers’ short-term and long-
term deposit withdrawals and anticipated and unanticipated increases in loan demand without penalizing earnings. Funds invested
in short-term marketable instruments, the continuous maturing of other interest-earning assets, cash flows from self-liquidating
investments such as mortgage-backed securities and collateralized mortgage obligations, the possible sale of available for sale
securities, and the ability to securitize certain types of loans provide sources of liquidity from an asset perspective. The liability
base provides sources of liquidity through deposits and the maturity structure of short-term borrowed funds. For short-term
liquidity needs, we utilize federal fund lines of credit with correspondent banks, securities sold under agreements to repurchase,
borrowings from the Federal Reserve and borrowings under lines of credit with other financial institutions. For intermediate
liquidity needs, we utilize advances from the FHLB. To supply liquidity over the longer term, we have access to brokered time
deposits, term loans at the FHLB and borrowings under lines of credit with other financial institutions.
As previously discussed, to meet increased liquidity demands, to ensure we have adequate cash readily available to meet both
expected and unexpected funding needs without adversely affecting our daily operations and to improve the Bank’s already strong
liquidity position, we raised brokered deposits that totaled $731 million at December 31, 2020, down from $1.4 billion at June 30,
2020. Further, beginning in March 2020, an additional $200 million of deposits was swept from Hilltop Securities into the Bank,
bringing the total funds swept from Hilltop Securities to approximately $1.5 billion until June 2020 when the total funds swept was
reduced back to $1.3 billion at June 30, 2020. During the third and fourth quarters of 2020, given the continued strong cash and
liquidity levels at the Bank, the total funds swept from Hilltop Securities into the Bank was reduced further to approximately $900
million as of September 30, 2020, and then approximately $700 million as of December 31, 2020. As a result, the Bank was able to
further fortify its borrowing capacity through access to secured funding sources as summarized in the following table (in millions).
FHLB capacity
Investment portfolio (available)
Fed deposits (excess daily requirements)
December 31,
2020
2019
$
$
4,410
982
875
6,267
$
$
3,207
683
217
4,107
As noted in the table above, the Bank’s available liquidity position and borrowing capacity at December 31, 2020 is at a
heightened level given the uncertain outlook for 2021 due to the COVID-19 pandemic. While the extent to which COVID-19 will
impact the Bank is uncertain, the Bank is targeting available liquidity of between approximately $5 billion and $6 billion during
2021. Available liquidity does not include borrowing capacity available through the discount window at the Federal Reserve.
Within our banking segment, deposit flows are affected by the level of market interest rates, the interest rates and products offered
by competitors, the volatility of equity markets and other factors. While the Bank experienced an increase in non-brokered
customer deposits during 2020, an economic recovery and improved commercial real estate investment outlook may result in an
outflow of deposits at an accelerated pace as customers utilize such available funds for expanded operations and investment
opportunities. The Bank regularly evaluates its deposit products and pricing structures relative to the market to maintain
competitiveness over time.
The Bank’s 15 largest depositors, excluding Hilltop and Hilltop Securities, collectively accounted for 9.58% of the Bank’s total
deposits, and the Bank’s five largest depositors, excluding Hilltop and Hilltop Securities, collectively accounted for 4.40% of the
Bank’s total deposits at December 31, 2020. 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’
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businesses, could adversely affect our liquidity and might require us to raise deposit rates to attract new deposits, purchase federal
funds or borrow funds on a short-term basis to replace such deposits.
Broker-Dealer Segment
The Hilltop Broker-Dealers rely on their equity capital, short-term bank borrowings, interest-bearing and noninterest-bearing client
credit balances, correspondent deposits, securities lending arrangements, repurchase agreement financing, commercial paper
issuances and other payables to finance their assets and operations, subject to their respective compliance with broker-dealer net
capital and customer protection rules. At December 31, 2020, Hilltop Securities had credit arrangements with four unaffiliated
banks, with maximum aggregate commitments of up to $600.0 million. These credit arrangements are used to finance securities
owned, securities held for correspondent accounts, receivables in customer margin accounts and underwriting activities. These
credit arrangements are provided on an “as offered” basis and are not committed lines of credit. In addition, Hilltop Securities has
committed revolving credit facilities with three unaffiliated banks, with aggregate availability of up to $250.0 million. At
December 31, 2020, Hilltop Securities had no borrowings under its credit arrangements or its credit facilities.
During the fourth quarter of 2019, Hilltop Securities initiated two commercial paper programs, in the ordinary course of its
business, of which the net proceeds (after deducting related issuance expenses) from the sale will be used for general corporate
purposes, including working capital and the funding of a portion of its securities inventories. The commercial paper notes (“CP
Notes”) may be issued with maturities of 14 days to 270 days from the date of issuance. The CP Notes are issued under two
separate programs, Series 2019-1 CP Notes and Series 2019-2 CP Notes, in maximum aggregate amounts of $300 million and
$200 million, respectively. The CP Notes are not redeemable prior to maturity or subject to voluntary prepayment and do not bear
interest, but are sold at a discount to par. The discount to maturity will be based on an interest factor and the CP Notes are secured
by a pledge of collateral owned by Hilltop Securities. As of December 31, 2020, the weighted average maturity of the CP Notes
was 146 days at a rate of 1.23%, with a weighted average remaining life of 70 days. At December 31, 2020, the amount
outstanding under these secured arrangements was $277.6 million, which was collateralized by securities held for firm accounts
valued at $296.3 million.
Mortgage Origination Segment
PrimeLending funds the mortgage loans it originates through warehouse lines of credit maintained with the Bank which have an
aggregate commitment of $3.3 billion, of which $2.5 billion was drawn at December 31, 2020. PrimeLending sells substantially all
mortgage loans it originates to various investors in the secondary market, historically with the majority with servicing released. As
these mortgage loans are sold in the secondary market, PrimeLending pays down its warehouse line of credit with the Bank. In
addition, PrimeLending has an available line of credit with an unaffiliated bank of up to $1.0 million, of which no borrowings were
outstanding at December 31, 2020.
PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC (“Ventures Management”) which
holds an ownership interest in and is the managing member of certain ABAs. At December 31, 2020, these ABAs had combined
available lines of credit totaling $170.0 million, $80.0 million of which was with a single unaffiliated bank, and the remaining
$90.0 million of which was with the Bank. At December 31, 2020, Ventures Management had outstanding borrowings of $47.5
million, $11.3 million of which was with the Bank.
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Contractual Obligations
The following table presents information regarding our contractual obligations at December 31, 2020 (in thousands). Payments
related to leases are based on actual payments specified in the underlying contracts, and the table below includes all leases that had
commenced as of December 31, 2020. Payments related to short-term borrowings and long-term debt obligations include the
estimated contractual interest payments under the respective agreements.
More than 1
Payments Due by Period
3 Years or
Short-term borrowings
Long-term debt obligations
Finance lease obligations
Operating lease obligations
Total
1 year
or Less
700,264
59,290
1,212
36,132
796,898
$
$
Year but Less More but Less
than 3 Years
than 5 Years
$
— $
— $
5 Years
or More
— $
43,755
2,521
50,834
97,110
188,443
2,049
26,572
217,064
398,852
1,411
29,636
$ 429,899
$
$
Total
700,264
690,340
7,193
143,174
$ 1,540,971
In addition to the contractual obligations presented above, during 2018, Hilltop and the Bank entered into leases for a majority of
the available corporate office space in Hilltop Plaza to serve as the headquarters for both companies as well as retail space for a
PlainsCapital Bank branch. The two separate 129-month office and retail leases, which commenced in February 2020, have
combined total base rent of approximately $35 million with the first nine months of rent abated.
Impact of Inflation and Changing Prices
Our consolidated financial statements included herein have been prepared in accordance with GAAP, which presently require us to
measure financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due
to inflation or recession are generally not considered. The primary effect of inflation on our operations is reflected in increased
operating costs. In management’s opinion, changes in interest rates affect the financial condition of a financial institution to a far
greater degree than changes in the inflation rate. While interest rates are greatly influenced by changes in the inflation rate, they do
not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many
factors that are beyond our control, including changes in the expected rate of inflation, the influence of general and local economic
conditions and the monetary and fiscal policies of the U.S. government, its agencies and various other governmental regulatory
authorities.
Off-Balance Sheet Arrangements; Commitments; Guarantees
In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our
consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions
include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and
interest rate risk in excess of the amounts recognized in our consolidated balance sheets.
Banking Segment
We enter into contractual loan commitments to extend credit, normally with fixed expiration dates or termination clauses, at
specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon customers
maintaining specific credit standards until the time of loan funding. We minimize our exposure to loss under these commitments
by subjecting them to credit approval and monitoring procedures. We assess the credit risk associated with certain commitments to
extend credit and have recorded a liability related to such credit risk in our consolidated financial statements.
Standby letters of credit are written conditional commitments issued by us to guarantee the performance of a customer to a third
party. 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.
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In the aggregate, the Bank had outstanding unused commitments to extend credit of $1.9 billion at December 31, 2020 and
outstanding financial and performance standby letters of credit of $91.5 million at December 31, 2020.
Broker-Dealer Segment
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. Our significant accounting policies are presented in Note 1 to our consolidated financial statements, which
are included in this Annual Report. We have identified certain significant accounting policies which involve a higher degree of
judgment and complexity in making certain estimates and assumptions that affect amounts reported in our consolidated financial
statements. Actual amounts and values as of the balance sheet dates may be materially different than the amounts and values
reported due to the inherent uncertainty in the estimation process. Also, future amounts and values could differ materially from
those estimates due to changes in values and circumstances after the balance sheet date. The significant accounting policies, as
summarized below, which we believe to be the most critical in preparing our consolidated financial statements relate to allowance
for credit losses, goodwill and identifiable intangible assets, mortgage loan indemnification liability, mortgage servicing rights
asset and acquisition accounting.
Allowance for Credit Losses
The allowance for credit losses for loans represents management’s estimate of all expected credit losses over the expected
contractual life of our existing loan portfolio. Determining the appropriateness of the allowance is complex and requires judgment
by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then existing loan portfolio,
in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods.
We employ a disciplined process and methodology to establish our allowance for credit losses that has two basic components: first,
an asset-specific component involving individual loans that do not share risk characteristics with other loans and the measurement
of expected credit losses for such individual loans; and second, a pooled component for estimated expected credit losses for pools
of loans that share similar risk characteristics.
The credit loss estimation process for both on and off-balance sheet exposures involves procedures to appropriately consider the
unique characteristics of our loan portfolio segments, which are further disaggregated into loan classes, the level at which credit
risk is monitored. When computing allowance levels, credit loss assumptions are estimated using models that analyze loans
according to credit risk ratings, loss history, delinquency status and other credit trends and risk characteristics, including current
conditions and reasonable and supportable forecasts about the future. Significant variables that impact the modeled losses across
our loan portfolios are the U.S. Real Gross Domestic Product, or GDP, growth rates and unemployment rate assumptions. Future
factors and forecasts may result in significant changes in the allowance and provision for (reversal of) credit losses in those future
periods.
Credit quality is assessed and monitored by evaluating various attributes, such as credit risk ratings, historic loss experience, past
due status and other credit trends and risk characteristics, including current conditions and reasonable and supportable forecasts
about the future. The results of these continuous credit quality evaluations help form our underwriting criteria for new loans and
also factor into the process for estimation of the allowance for credit losses. The allowance level is influenced by loan volumes,
loan asset quality, delinquency status, historic loss experience and other conditions influencing loss expectations, such as
reasonable and supportable forecasts of economic conditions. The allowance for credit losses will primarily reflect estimated
losses for pools of loans that share similar risk characteristics, but will also consider individual loans that do not share risk
characteristics with other loans.
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In estimating the component of the allowance for credit losses for loans that share similar risk characteristics with other loans, such
loans are segregated into loan classes. Loans are designated into loan classes based on loans pooled by product types and similar
risk characteristics or areas of risk concentration. In determining the allowance for credit losses, we derive an estimated credit loss
assumption from a model that categorizes loan pools based on loan type and internal risk rating or delinquency bucket.
When a loan moves to a substandard non-accrual risk rating grade, it is removed from the collective evaluation allowance
methodology and is subject to individual evaluation. A problem asset report is prepared for each loan in excess of a predetermined
threshold and the net realizable value of the loan is determined. This value is compared to the appropriate loan basis (depending on
whether the loan is a PCD loan or a non-PCD loan) to determine the required allowance for credit loss reserve amount.
Estimating the timing and amounts of future loss cash flows is subject to significant management judgment as these loss cash
flows rely upon estimates such as default rates, loss severities, collateral valuations, the amounts and timing of principal payments
(including any expected prepayments) or other factors that are reflective of current or future expected conditions. These estimates,
in turn, depend on the duration of current overall economic conditions, industry, borrower, or portfolio specific conditions, the
expected outcome of bankruptcy or insolvency proceedings, as well as, in certain circumstances, other economic factors, including
the level of current and future real estate prices. All of these estimates and assumptions require significant management judgment
and certain assumptions that are highly subjective. Model imprecision also exists in the allowance for credit losses estimation
process due to the inherent time lag of available industry information and differences between expected and actual outcomes.
The provision for (reversal of) credit losses recorded through earnings, and reduced by the charge-off of loan amounts, net of
recoveries, is the amount necessary to maintain the allowance for credit losses at the amount of expected credit losses inherent
within the loans held for investment portfolio. The amount of expense and the corresponding level of allowance for credit losses
for loans are based on our evaluation of the collectability of the loan portfolio based on historical loss experience, reasonable and
supportable forecasts, and other significant qualitative and quantitative factors.
Allowance for Loan Losses
Prior to the adoption of the Current Expected Credit Losses (“CECL”) methodology on January 1, 2020, our allowance for loan
losses was a valuation allowance for probable losses existing in the loan portfolio. Loans were charged to the allowance when the
loss was confirmed or when a determination was made that a probable loss had been incurred on a specific loan. Recoveries were
credited as a reduction to the allowance at the time of recovery. Throughout the respective year, management estimated the
probable level of losses to determine whether the allowance for credit losses was appropriate to absorb losses existing in the
portfolio. Based on these estimates, an amount was charged to or recovered from the provision for loan losses in order to adjust the
allowance to a level determined to be appropriate to absorb losses. Management’s judgment regarding the appropriateness of the
allowance for loan losses involved consideration of current economic conditions and their estimated effects on specific borrowers;
an evaluation of the existing relationships among loans, potential loan losses and the present level of the allowance; results of
examinations of the loan portfolio by regulatory agencies; and management’s internal review of the loan portfolio. In determining
the ability to collect certain loans, management also considered the fair value of any underlying collateral. The amount ultimately
realized may differ from the carrying value of these assets because of economic or other conditions beyond our control.
Goodwill and Identifiable Intangible Assets
Goodwill and other identifiable intangible assets are initially recorded at their estimated fair values at the date of acquisition.
Goodwill and other intangible assets having an indefinite useful life are not amortized for financial statement purposes. In the
event that facts and circumstances indicate that the goodwill or other identifiable intangible assets may be impaired, an interim
impairment test would be required. Intangible assets with finite lives are amortized over their useful lives. We perform required
annual impairment tests of our goodwill and other intangible assets as of October 1st for our reporting units.
The goodwill impairment test requires us to make judgments and assumptions. The test consists of estimating the fair value of each
reporting unit based on valuation techniques, including a discounted cash flow model using revenue and profit forecasts and recent
industry transaction and trading multiples of our peers, and comparing those estimated fair values with the carrying values of the
assets and liabilities of each reporting unit, which includes the allocated goodwill. If
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the estimated fair value is less than the carrying value, we will recognize an impairment charge for the amount by which the
carrying amount exceeds the reporting unit’s fair value; however, any loss recognized will not exceed the total amount of goodwill
allocated to that reporting unit.
This evaluation includes multiple assumptions, including estimated discounted cash flows and other estimates that may change
over time. If future discounted cash flows become less than those projected by us, future impairment charges may become
necessary that could have a materially adverse impact on our results of operations and financial condition in the period in which
the write-off occurs.
Mortgage Loan Indemnification Liability
The mortgage origination segment may be responsible for errors or omissions relating to its representations and warranties that the
mortgage loans sold meet certain requirements, including representations as to underwriting standards and the validity of certain
borrower representations in connection with a mortgage loan. If determined to be at fault, the mortgage origination segment either
repurchases the mortgage loans from the investors or reimburses the investors’ losses (a “make-whole” payment). The mortgage
origination segment has established an indemnification liability for such probable losses based upon, among other things, the level
of current unresolved repurchase requests, the volume of estimated probable future repurchase requests, our ability to cure the
defects identified in the repurchase requests, and the severity of an estimated loss upon repurchase. Although we consider this
reserve to be appropriate, there can be no assurance that the reserve will prove to be appropriate over time to cover ultimate losses
due to conditions outside of our control such as unanticipated adverse changes in the economy and historical loss patterns, discrete
events adversely affecting specific borrowers or industries, or actions taken by institutions or investors. The impact of such matters
will be considered in the reserving process when known.
Mortgage Servicing Rights Asset
The Company measures its residential mortgage servicing rights asset using the fair value method. Under the fair value method,
the retained MSR assets are carried in the balance sheet at fair value and the changes in fair value are reported in earnings within
other noninterest income in the period in which the change occurs. Retained MSR assets are measured at fair value as of the date
of sale of the related mortgage loan. Subsequent fair value measurements are determined using a discounted cash flow model. In
order to determine the fair value of the MSR asset, the present value of expected future cash flows is estimated. Assumptions used
include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income.
The model assumptions and the MSR asset fair value estimates are compared to observable trades of similar portfolios as well as
to MSR asset broker valuations and industry surveys, as available. The expected life of the loan can vary from management’s
estimates due to prepayments by borrowers, especially when rates fall. Prepayments in excess of management’s estimates would
adversely impact the recorded value of the MSR asset. The value of the MSR asset is also dependent upon the discount rate used in
the model, which is based on current market rates and is reviewed by management on an ongoing basis. An increase in the
discount rate would result in a decrease in the value of the MSR asset.
Acquisition Accounting
We account for business combinations using the acquisition method, which requires an allocation of the purchase price of an
acquired entity to the assets acquired and liabilities assumed, including identifiable intangibles, based on their estimated fair values
at the date of acquisition. Management applies various valuation methodologies to these acquired assets and assumed liabilities
which often involve a significant degree of judgment, as liquid markets often do not exist for certain loans, deposits, identifiable
intangible assets and other assets and liabilities acquired or assumed. Our valuation methodologies employ significant estimates
and assumptions to value such items, including, among others, projected cash flows, prepayment and default assumptions, discount
rates, and realizable collateral values. Purchase date valuations, which are permitted to be revised for up to one year after the
acquisition date, determine the amount of goodwill or bargain purchase gain recognized in connection with a business
combination. Changes to provisional amounts identified during this measurement period are recognized in the reporting period in
which the adjustment amounts are determined. Certain assumptions and estimates must be updated regularly in connection with the
ongoing accounting for purchased loans. Valuation assumptions and estimates may also have to be revisited in connection with our
periodic impairment assessments of goodwill, intangible assets and certain other long-lived assets. The use of different
assumptions could
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produce significantly different valuation results, which could have material positive or negative effects on the Company’s results
of operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
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.
At December 31, 2020, total debt obligations on our consolidated balance sheet, excluding short-term borrowings and unamortized
debt issuance costs and premiums, were $433 million, and included $350 million in debt obligations subject to fixed interest rates,
with the remainder of indebtedness subject to variable interest rates. If LIBOR and the prime rate were to increase by one eighth of
one percent (0.125%), the increase in interest expense on the variable rate debt would not have a significant impact on our future
consolidated earnings or cash flows.
Banking Segment
The banking segment is engaged primarily in the business of investing funds obtained from deposits and borrowings in interest-
earning loans and investments, and our primary component of market risk is sensitivity to changes in interest rates. Consequently,
our earnings depend to a significant extent on our net interest income, which is the difference between interest income on loans
and investments and our interest expense on deposits and borrowings. To the extent that our interest-bearing liabilities do not
reprice or mature at the same time as our interest-bearing assets, we are subject to interest rate risk and corresponding fluctuations
in net interest income.
There are several common sources of interest rate risk that must be effectively managed if there is to be minimal impact on our
earnings and capital. Repricing risk arises largely from timing differences in the pricing of assets and liabilities. Reinvestment risk
refers to the reinvestment of cash flows from interest payments and maturing assets at lower or higher rates. Basis risk exists when
different yield curves or pricing indices do not change at precisely the same time or in the same magnitude such that assets and
liabilities with the same maturity are not all affected equally. Yield curve risk refers to unequal movements in interest rates across
a full range of maturities.
We have employed asset/liability management policies that attempt to manage our interest-earning assets and interest-bearing
liabilities, thereby attempting to control the volatility of net interest income, without having to incur unacceptable levels of risk.
We employ procedures which include interest rate shock analysis, repricing gap analysis and balance sheet decomposition
techniques to help mitigate interest rate risk in the ordinary course of business. In addition, the asset/liability management policies
permit the use of various derivative instruments to manage interest rate risk or hedge specified assets and liabilities.
An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate
change in line with general market interest rates. The management of interest rate risk is performed by analyzing the maturity and
repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time (“GAP”) and by
analyzing the effects of interest rate changes on net interest income over specific periods of time by projecting the performance of
the mix of assets and liabilities in varied interest rate environments. Interest rate sensitivity reflects the potential effect on net
interest income resulting from a movement in interest rates. A company is considered to be asset sensitive, or have a positive GAP,
when the amount of its interest-earning assets maturing or repricing within a given period exceeds the amount of its interest-
bearing liabilities also maturing or repricing within that time period. Conversely, a company is considered to be liability sensitive,
or have a negative GAP, when the amount of its interest-bearing liabilities maturing or repricing within a given period exceeds the
amount of its interest-earning assets also maturing or repricing within that time period. During a period of rising interest rates, a
negative GAP would tend to affect net interest income adversely, while a positive GAP would tend to result in an increase in net
interest income. During a period of falling interest rates, a negative GAP would tend to result in an increase in net interest income,
while a positive GAP would tend to affect net interest income adversely. However, it is our intent to remain relatively balanced so
that changes in rates do not have a significant impact on earnings.
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As illustrated in the table below, the banking segment is asset sensitive overall. Loans that adjust daily or monthly to the Wall
Street Journal Prime rate comprise a large percentage of interest sensitive assets and are the primary cause of the banking
segment’s asset sensitivity. To help neutralize interest rate sensitivity, the banking segment has kept the terms of most of its
borrowings under one year as shown in the following table (dollars in thousands).
Interest sensitive assets:
Loans
Securities
Federal funds sold and securities purchased under agreements to resell
Other interest sensitive assets
Total interest sensitive assets
Interest sensitive liabilities:
Interest bearing checking
Savings
Time deposits
Notes payable and other borrowings
Total interest sensitive liabilities
Interest sensitivity gap
Cumulative interest sensitivity gap
3 Months or > 3 Months to > 1 Year to > 3 Years to
Less
1 Year
3 Years
5 Years
> 5 Years
Total
December 31, 2020
$
6,096,909
265,611
$
1,245,460
249,026
$
1,970,402
459,157
$
386
884,180
7,247,086
—
—
—
—
1,494,486
2,429,559
$
376,325
303,999
—
—
680,324
93,474
473,602
—
29,415
596,491
$
9,782,570
1,751,395
386
913,595
12,447,946
$
5,360,583
$
276,327
458,223
180,393
6,275,526
$
$
971,560
971,560
$
$
1,151,845
215
1,152,060
342,426
1,313,986
— $
—
— $
—
187,704
668
188,372
— $
—
32,623
831
33,454
$
$
2,241,187
3,555,173
$
$
646,870
4,202,043
$
$
— $
—
324
3,076
3,400
5,360,583
276,327
1,830,719
185,183
7,652,812
593,091
$
4,795,134
4,795,134
Percentage of cumulative gap to total interest sensitive assets
7.80 %
10.56 %
28.56 %
33.76 %
38.52 %
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 50 to 100 basis points to determine the effect on net interest income changes for the next twelve
months. The banking segment also measures the effects of changes in interest rates on economic value of equity by discounting
projected cash flows of deposits and loans. Economic value changes in the investment portfolio are estimated by discounting
future cash flows and using duration analysis. Investment security prepayments are estimated using current market information.
We believe the simulation analysis presents a more accurate picture than the GAP analysis. Simulation analysis recognizes that
deposit products may not react to changes in interest rates as quickly or with the same magnitude as earning assets contractually
tied to a market rate index. The sensitivity to changes in market rates varies across deposit products. Also, unlike GAP analysis,
simulation analysis takes into account the effect of embedded options in the securities and loan portfolios as well as any off-
balance-sheet derivatives.
The table below shows the estimated impact of a range of changes in interest rates on net interest income and on economic value
of equity for the banking segment at December 31, 2020 (dollars in thousands).
Change in
Interest Rates
(basis points)
+300
+200
+100
-50
Changes in
Net Interest Income
Amount
Percent
Changes in
Economic Value of Equity
Amount
Percent
$
$
$
$
61,317
27,191
3,346
(3,266)
16.39 %
7.27 %
0.89 %
(0.87)%
$
$
$
$
687,498
496,741
271,386
(212,535)
42.44 %
30.66 %
16.75 %
(13.12)%
The projected changes in net interest income and economic value of equity to changes in interest rates at December 31, 2020 were
in compliance with established internal policy guidelines. These projected changes are based on numerous assumptions of growth
and changes in the mix of assets or liabilities.
Our portfolio includes loans that periodically reprice or mature prior to the end of an amortized term. Some of our variable-rate
loans remain at applicable rate floors, which may delay and/or limit changes in interest income during a period of changing rates.
If interest rates were to fall, the impact on our interest income would be limited by these rate floors. In addition, declining interest
rates may negatively affect our cost of funds on deposits. The extent of this impact will ultimately be driven by the timing,
magnitude and frequency of interest rate and yield curve movements, as well as changes in market conditions and timing of
management strategies. If interest rates were to rise, yields on the portion of our portfolio that remain at applicable rate floors
would rise more slowly than increases in market interest rates. Any
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changes in interest rates across the term structure will continue to impact net interest income and net interest margin. The impact of
rate movements will change with the shape of the yield curve, including any changes in steepness or flatness and inversions at any
points on the yield curve.
Broker-Dealer Segment
Our broker-dealer segment is exposed to market risk primarily due to its role as a financial intermediary in customer transactions,
which may include purchases and sales of securities, use of derivatives and securities lending activities, and in our trading
activities, which are used to support sales, underwriting and other customer activities. We are subject to the risk of loss that may
result from the potential change in value of a financial instrument as a result of fluctuations in interest rates, market prices, investor
expectations and changes in credit ratings of the issuer.
Our broker-dealer segment is exposed to interest rate risk as a result of maintaining inventories of interest rate sensitive financial
instruments and other interest-earning assets including customer and correspondent margin loans and receivables and securities
borrowing activities. Our funding sources, which include customer and correspondent cash balances, bank borrowings, repurchase
agreements and securities lending activities, also expose the broker-dealer to interest rate risk. Movement in short-term interest
rates could reduce the positive spread between the broker-dealer segment’s interest income and interest expense.
With respect to securities held, our interest rate risk is managed by setting and monitoring limits on the size and duration of
positions and on the length of time securities can be held. Much of the interest rates on customer and correspondent margin loans
and receivables are indexed and can vary daily. Our funding sources are generally short term with interest rates that can vary daily.
The following table categorizes the broker-dealer segment’s net trading securities which are subject to interest rate and market
price risk (dollars in thousands).
Trading securities, at fair value
Municipal obligations
U.S. government and government agency obligations
Corporate obligations
Total debt securities
Corporate equity securities
Other
Weighted average yield
Municipal obligations
U.S. government and government agency obligations
Corporate obligations
1 Year
or Less
> 1 Year
to 5 Years
December 31, 2020
> 5 Years
to 10 Years
> 10 Years
Total
$
$
26
40,040
(5,179)
34,887
(3,004)
4,970
36,853
$
$
5,703
(8,029)
6,229
3,903
—
—
3,903
$
$
27,131
(24,609)
8,443
10,965
—
—
10,965
$
$
138,713
386,715
36,264
561,692
—
—
561,692
$
$
171,573
394,117
45,757
611,447
(3,004)
4,970
613,413
0.00 %
0.00 %
0.88 %
0.68 %
0.31 %
2.27 %
1.17 %
0.95 %
2.54 %
2.91 %
3.04 %
3.11 %
2.56 %
2.64 %
2.56 %
Derivatives are used to support certain customer programs and hedge our related exposure to interest rate risks.
Our broker-dealer segment is engaged in various brokerage and trading activities that expose us to credit risk arising from potential
non-performance from counterparties, customers or issuers of securities. This risk is managed by setting and monitoring position
limits for each counterparty, conducting periodic credit reviews of counterparties, reviewing concentrations of securities and
conducting business through central clearing organizations.
Collateral underlying margin loans to customers and correspondents and with respect to securities lending activities is marked to
market daily and additional collateral is required as necessary.
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Mortgage Origination Segment
Within our mortgage origination segment, our principal market exposure is to interest rate risk due to the impact on our mortgage-
related assets and commitments, including mortgage loans held for sale, IRLCs and MSR. Changes in interest rates could also
materially and adversely affect our volume of mortgage loan originations.
IRLCs represent an agreement to extend credit to a mortgage loan applicant, whereby the interest rate on the loan is set prior to
funding. Our mortgage loans held for sale, which we hold in inventory while awaiting sale into the secondary market, and our
IRLCs are subject to the effects of changes in mortgage interest rates from the date of the commitment through the sale of the loan
into the secondary market. As a result, we are exposed to interest rate risk and related price risk during the period from the date of
the lock commitment until (i) the lock commitment cancellation or expiration date or (ii) the date of sale into the secondary
mortgage market. Loan commitments generally range from 20 to 60 days, and our average holding period of the mortgage loan
from funding to sale is approximately 30 days. An integral component of our interest rate risk management strategy is our
execution of forward commitments to sell MBSs to minimize the impact on earnings resulting from significant fluctuations in the
fair value of mortgage loans held for sale and IRLCs caused by changes in interest rates.
We have expanded, and may continue to expand, our residential mortgage servicing operations within our mortgage origination
segment. As a result of our mortgage servicing business, we have a portfolio of retained MSR. One of the principal risks associated
with MSR is that in a declining interest rate environment, they will likely lose a substantial portion of their value as a result of
higher than anticipated prepayments. Moreover, if prepayments are greater than expected, the cash we receive over the life of the
mortgage loans would be reduced. The mortgage origination segment uses derivative financial instruments, including U.S.
Treasury bond futures and options, Eurodollar futures and forward MBS commitments, as a means to mitigate market risk
associated with MSR assets. No hedging strategy can protect us completely, and hedging strategies may fail because they are
improperly designed, improperly executed and documented or based on inaccurate assumptions and, as a result, could actually
increase our risks and losses. The increasing size of our MSR portfolio may increase our interest rate risk and, correspondingly, the
volatility of our earnings, especially if we cannot adequately hedge the interest rate risk relating to our MSR.
The goal of our interest rate risk management strategy within our mortgage origination segment is not to eliminate interest rate
risk, but to manage it within appropriate limits. To mitigate the risk of loss, we have established policies and procedures, which
include guidelines on the amount of exposure to interest rate changes we are willing to accept.
Item 8. Financial Statements and Supplementary Data.
Our financial statements required by this item are submitted as a separate section of this Annual Report. See “Financial
Statements,” commencing on page F-1 hereof.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Our management, with the supervision and participation of our Principal Executive Officer and Principal Financial Officer, has
evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-
15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2020, the end of the period covered by this Annual Report.
Based upon that evaluation, our Principal Executive Officer 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 Principal Executive Officer and Principal Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
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Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control
over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as a process designed by, or under the
supervision of, our Principal Executive Officer and Principal Financial Officer and effected by our board of directors, management
and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles and includes those policies and
procedures that:
●
●
●
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and
dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are
being made only in accordance with authorization of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of
any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes
in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this
assessment, management used the criteria set forth in Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission, or COSO. Based on our assessment, management concluded that, as of
December 31, 2020, our internal control over financial reporting is effective.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, audited the effectiveness of our internal control
over financial reporting as of December 31, 2020, and issued an unqualified opinion thereon as stated in their report, which
appears on page F-2.
Remediation of Material Weakness
The Company and its Board of Directors are committed to maintaining a strong internal control environment. Following the
identification of the material weakness described in our Annual Report on Form 10-K for the year ended December 31, 2019,
related to certain aspects of the determination of the qualitative factors considered by management in the allowance for loan losses
estimation process, we initiated remediation measures to address the material weakness. Management believes that it has
completed its updates to the design and implementation of internal controls to remediate the material weakness and enhance the
Company’s internal control environment. As previously reported, the remediation plan was implemented during the fourth quarter
of 2019 and included an enhanced analysis to support the qualitative factors considered in the estimation of the allowance for loan
losses as of December 31, 2019. Management believes that such enhanced controls, including new controls implemented as a part
of the adoption of CECL on January 1, 2020, have been designed to address the material weakness. We completed our remediation
activities by testing the operating effectiveness of the enhanced and newly implemented controls and found them to be effective.
Based on the implementation work and results of testing performed, we have concluded that the previously identified material
weakness has been remediated as of December 31, 2020.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during our fourth fiscal quarter covered by this annual report
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
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Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information called for by this Item is contained in our definitive Proxy Statement for our 2021 Annual Meeting of
Stockholders, and is incorporated herein by reference.
Item 11. Executive Compensation.
The information called for by this Item is contained in our definitive Proxy Statement for our 2021 Annual Meeting of
Stockholders, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information called for by this Item is contained in our definitive Proxy Statement for our 2021 Annual Meeting of
Stockholders, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information called for by this Item is contained in our definitive Proxy Statement for our 2021 Annual Meeting of
Stockholders, and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information called for by this Item is contained in our definitive Proxy Statement for our 2021 Annual Meeting of
Stockholders, and is incorporated herein by reference.
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Item 15. Exhibits, Financial Statement Schedules.
(a)
The following documents are filed herewith as part of this Form 10-K.
PART IV
1. Financial Statements.
Hilltop Holdings Inc.
Report of Independent Registered Public Accounting Firm
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
2. Financial Statement Schedules.
Page
F-2
F-4
F-5
F-6
F-7
F-8
F-9
All financial statement schedules have been omitted because they are not required, not applicable or the information
has been included in our consolidated financial statements.
3. Exhibits. See the Exhibit Index preceding the signature page hereto.
Item 16. Form 10-K Summary.
None.
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Exhibit
Number
2.1#
2.2#
3.1
3.2
3.2.1
4.1
4.2
4.3.1
4.3.2
4.3.3
4.3.4
Description of Exhibit
Stock Purchase Agreement by and among Hilltop Holdings Inc., ARC Insurance Holdings, Inc., Align NL Holdings,
LLC and, for limited purposes set forth therein, Align Financial Holdings, LLC and MGI Holdings, Inc., dated January
30, 2020 (filed as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed February 5, 2020 (File No. 001-
31987) and incorporated herein by reference).
First Amendment to Stock Purchase Agreement by and among Hilltop Holdings Inc., ARC Insurance Holdings, Inc.,
Align NL Holdings, LLC and, for limited purposes set forth therein, Align Financial Holdings, LLC and MGI Holdings,
Inc., dated June 30, 2020 (filed as Exhibit 2.2 to the Registrant’s Current Report on Form 8-K filed July 1, 2020 (File
No. 001-31987) and incorporated therein by reference).
Articles of Amendment and Restatement of Affordable Residential Communities Inc., dated February 16, 2004, as
amended or supplemented by: Articles Supplementary, dated February 16, 2004; Corporate Charter Certificate of
Notice, dated June 6, 2005; Articles of Amendment, dated January 23, 2007; Articles of Amendment, dated July 31,
2007; Corporate Charter Certificate of Notice, dated September 23, 2008; Articles Supplementary, dated December 15,
2010; Articles Supplementary, dated as of November 29, 2012 relating to Subtitle 8 election; Articles Supplementary,
dated November 29, 2012 relating to Non-Cumulative Perpetual Preferred Stock, Series B, of Hilltop Holdings Inc.; and
Articles of Amendment and Restatement, dated March 31, 2014 (filed as Exhibit 3.1 to the Quarterly Report on Form
10-Q for the quarter ended June 30, 2014 (File No. 001-31987) and incorporated herein by reference).
Third Amended and Restated Bylaws of Hilltop Holdings Inc. (filed as Exhibit 3.2 to the Registrant’s Current Report on
Form 8-K filed on January 31, 2018 (File No. 001-31987) and incorporated herein by reference).
First Amendment to Third Amended and Restated Bylaws of Hilltop Holdings Inc., adopted and effective April 25,
2019 (filed as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed May 1, 2019 (File No. 001-31987) and
incorporated herein by reference).
Form of Certificate of Common Stock of Hilltop Holdings Inc. (filed as Exhibit 4.1 to the Registrant’s Annual Report
on Form 10-K for the year ended December 31, 2007 (File No. 001-31987) and incorporated herein by reference).
Corporate Charter Certificate of Notice, dated June 6, 2005 (filed as Exhibit 3.2 to the Registrant’s Registration
Statement on Form S-3 (File No. 333-125854) and incorporated herein by reference).
Amended and Restated Declaration of Trust, dated as of July 31, 2001, by and among U.S. Bank National Association
(successor in interest to State Street Bank and Trust Company of Connecticut, National Association), as Institutional
Trustee, PlainsCapital Corporation, and the Administrators party thereto from time to time (filed as Exhibit 4.2 to the
Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and
incorporated herein by reference).
First Amendment to Amended and Restated Declaration of Trust, dated as of August 7, 2006, by and between
PlainsCapital Corporation and U.S. Bank National Association, as Institutional Trustee (filed as Exhibit 4.3 to the
Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and
incorporated herein by reference).
Indenture, dated as of July 31, 2001, by and between PlainsCapital Corporation and U.S. Bank National Association
(successor in interest to State Street Bank and Trust Company of Connecticut, National Association), as Trustee (filed as
Exhibit 4.4 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File
No. 000-53629) and incorporated herein by reference).
First Supplemental Indenture, dated as of August 7, 2006, by and between PlainsCapital Corporation and U.S. Bank
National Association, as Trustee (filed as Exhibit 4.5 to the Registration Statement on Form 10 filed by PlainsCapital
Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
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4.3.5
4.3.6
4.3.7
4.3.8
4.4.1
4.4.2
4.4.3
4.4.4
4.4.5
4.5.1
4.5.2
4.5.3
Second Supplemental Indenture, dated as of November 30, 2012, by and among U.S. Bank National Association, as
Trustee, PlainsCapital Corporation (f/k/a Meadow Corporation) and PlainsCapital Corporation (filed as Exhibit 4.5.5 to
the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 15, 2013 (File
No. 001-31987) and incorporated herein by reference).
Amended and Restated Floating Rate Junior Subordinated Deferrable Interest Debenture of Plains Capital Corporation,
dated as of August 7, 2006, by PlainsCapital Corporation in favor of U.S. Bank National Association, as Institutional
Trustee for PCC Statutory Trust I (filed as Exhibit 4.6 to the Registration Statement on Form 10 filed by PlainsCapital
Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
Guarantee Agreement, dated as of July 31, 2001, by and between PlainsCapital and U.S. Bank National Association
(successor in interest to State Street Bank and Trust Company of Connecticut, National Association), as Trustee (filed as
Exhibit 4.7 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File
No. 000-53629) and incorporated herein by reference).
First Amendment to Guarantee Agreement, dated as of August 7, 2006, by and between PlainsCapital Corporation and
U.S. Bank National Association, as Guarantee Trustee (filed as Exhibit 4.8 to the Registration Statement on Form 10
filed by PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
Amended and Restated Declaration of Trust, dated as of March 26, 2003, by and among U.S. Bank National
Association, as Institutional Trustee, PlainsCapital Corporation, and the Administrators party thereto from time to time
(filed as Exhibit 4.9 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File
No. 000-53629) and incorporated herein by reference).
Indenture, dated as of March 26, 2003, by and between PlainsCapital Corporation and U.S. Bank National Association,
as Trustee (filed as Exhibit 4.10 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on
April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
First Supplemental Indenture, dated as of November 30, 2012, by and among U.S. Bank National Association, as
Trustee, PlainsCapital Corporation (f/k/a Meadow Corporation) and PlainsCapital Corporation (filed as Exhibit 4.6.3 to
the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 15, 2013 (File
No. 001-31987) and incorporated herein by reference).
Floating Rate Junior Subordinated Deferrable Interest Debenture of Plains Capital Corporation, dated as of March 26,
2003, by PlainsCapital Corporation in favor of U.S. Bank National Association, as Institutional Trustee for PCC
Statutory Trust II (filed as Exhibit 4.11 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on
April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
Guarantee Agreement, dated as of March 26, 2003, by and between PlainsCapital Corporation and U.S. Bank National
Association, as Guarantee Trustee (filed as Exhibit 4.12 to the Registration Statement on Form 10 filed by PlainsCapital
Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
Amended and Restated Declaration of Trust, dated as of September 17, 2003, by and among U.S. Bank National
Association, as Institutional Trustee, PlainsCapital Corporation, and the Administrators party thereto from time to time
(filed as Exhibit 4.13 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009
(File No. 000-53629) and incorporated herein by reference).
Indenture, dated as of September 17, 2003, by and between PlainsCapital Corporation and U.S. Bank National
Association, as Trustee (filed as Exhibit 4.14 to the Registration Statement on Form 10 filed by PlainsCapital
Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
First Supplemental Indenture, dated as of November 30, 2012, by and among U.S. Bank National Association, as
Trustee, PlainsCapital Corporation (f/k/a Meadow Corporation) and PlainsCapital Corporation. (filed as Exhibit 4.7.3 to
the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 15, 2013 (File
No. 001-31987) and incorporated herein by reference).
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4.5.4
4.5.5
4.6.1
4.6.2
4.6.3
4.6.4
4.6.5
4.7
4.8
4.8.1
4.9.1
4.9.2
Floating Rate Junior Subordinated Deferrable Interest Debenture of Plains Capital Corporation, dated as of
September 17, 2003, by PlainsCapital Corporation in favor of U.S. Bank National Association, as Institutional Trustee
for PCC Statutory Trust III (filed as Exhibit 4.15 to the Registration Statement on Form 10 filed by PlainsCapital
Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
Guarantee Agreement, dated as of September 17, 2003, by and between PlainsCapital Corporation and U.S. Bank
National Association, as Guarantee Trustee (filed as Exhibit 4.16 to the Registration Statement on Form 10 filed by
PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
Amended and Restated Trust Agreement, dated as of February 22, 2008, by and among PlainsCapital Corporation,
Wells Fargo Bank, N.A., as Property Trustee, Wells Fargo Delaware Trust Company, as Delaware Trustee, and the
Administrators party thereto from time to time (filed as Exhibit 4.17 to the Registration Statement on Form 10 filed by
PlainsCapital Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
Junior Subordinated Indenture, dated as of February 22, 2008, by and between PlainsCapital Corporation and Wells
Fargo Bank, N.A., as Trustee (filed as Exhibit 4.18 to the Registration Statement on Form 10 filed by PlainsCapital
Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
First Supplemental Indenture, dated as of November 30, 2012, by and between PlainsCapital Corporation (f/k/a
Meadow Corporation) and Wells Fargo Bank, National Association, as Trustee. (filed as Exhibit 4.8.3 to the
Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 15, 2013 (File
No. 001-31987) and incorporated herein by reference).
Plains Capital Corporation Floating Rate Junior Subordinated Note due 2038, dated as of February 22, 2008, by
PlainsCapital Corporation in favor of Wells Fargo Bank, N.A., as Property Trustee of PCC Statutory Trust IV (filed as
Exhibit 4.19 to the Registration Statement on Form 10 filed by PlainsCapital Corporation on April 17, 2009 (File
No. 000-53629) and incorporated herein by reference).
Guarantee Agreement, dated as of February 22, 2008, by and between PlainsCapital Corporation and Wells Fargo
Bank, N.A., as Guarantee Trustee (filed as Exhibit 4.20 to the Registration Statement on Form 10 filed by PlainsCapital
Corporation on April 17, 2009 (File No. 000-53629) and incorporated herein by reference).
Indenture, dated as of April 9, 2015, by and between Hilltop Holdings, Inc. and U.S. Bank National Association, as
Trustee, including form of notes (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on April 9,
2015 (File No. 001-31987) and incorporated herein by reference).
Indenture, dated as of November 22, 2019, by and between Hilltop Securities Inc. and The Bank of New York Mellon,
as indenture trustee (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on November 27, 2019
(File No. 001-31987) and incorporated herein by reference).
Indenture, dated as of December 6, 2019, by and between Hilltop Securities Inc. and The Bank of New York Mellon, as
indenture trustee (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on December 11, 2019 (File
No. 001-31987) and incorporated herein by reference).
Indenture, dated as of May 11, 2020, between Hilltop Holdings Inc., as Issuer, and U.S. Bank National Association, as
Trustee (filed as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed May 13, 2020 (File No. 001-31987)
and incorporated herein by reference).
First Supplemental Indenture, dated as of May 11, 2020, between Hilltop Holdings Inc., as Issuer, and U.S. Bank
National Association, as Trustee (filed as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed May 13,
2020 (File No. 001-31987) and incorporated herein by reference).
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4.9.3
4.9.4
4.9.5
Second Supplemental Indenture, dated as of May 11, 2020, between Hilltop Holdings Inc., as Issuer, and U.S. Bank
National Association, as Trustee (filed as Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed May 13,
2020 (File No. 001-31987) and incorporated herein by reference).
Form of 5.75% Fixed-to-Floating Rate Subordinated Notes due 2030 (filed as Exhibit 4.4 to the Registrant’s Current
Report on Form 8-K filed May 13, 2020 (File No. 001-31987) and incorporated herein by reference).
Form of 6.125% Fixed-to-Floating Rate Subordinated Notes due 2035 (filed as Exhibit 4.5 to the Registrant’s Current
Report on Form 8-K filed May 13, 2020 (File No. 001-31987) and incorporated herein by reference).
4.10*
Description of the Registrant’s Securities.
10.1.1†
10.1.2†
10.1.3†
10.1.4†
10.1.5†
10.1.6†
10.1.7†
10.1.8†
10.1.9†
Hilltop Holdings Inc. 2012 Equity Incentive Plan, effective September 20, 2012 (filed as Exhibit 10.18 to the
Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 15, 2013 (File
No. 001-31987) and incorporated herein by reference).
Form of Restricted Stock Unit Award Agreement (Performance-Based Vesting) for awards beginning in 2018 (filed as
Exhibit 10.1.8 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2017 filed on
February 15, 2018 (File No. 001-31987) and incorporated herein by reference).
Form of Restricted Stock Unit Award Agreement (Time-Based Vesting for Section 16 Officers) for awards beginning
in 2018 (filed as Exhibit 10.1.9 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2017
filed on February 15, 2018 (File No. 001-31987) and incorporated herein by reference).
Form of Restricted Stock Unit Award Agreement (Time-Based Vesting for Non-Section 16 Officers) for awards
beginning in 2018 (filed as Exhibit 10.1.10 to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2017 filed on February 15, 2018 (File No. 001-31987) and incorporated herein by reference).
Form of Restricted Stock Unit Award Agreement (Performance-Based Vesting) for awards beginning in 2019 (filed as
Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on April 25, 2019 (File No. 001-31987) and
incorporated herein by reference).
Form of Restricted Stock Unit Award Agreement (Time-Based Vesting for Section 16 Officers) for awards beginning
in 2019 (filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed on April 25, 2019 (File No. 001-
31987) and incorporated herein by reference).
Form of Restricted Stock Unit Award Agreement (Time-Based Vesting for Non-Section 16 Officers) for awards
beginning in 2019 (filed as Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q filed on April 25, 2019
(File No. 001-31987) and incorporated herein by reference).
Form of Restricted Stock Unit Award Agreement (Performance-Based Vesting) for awards beginning in 2020 (filed as
Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 5, 2020 (File No. 001-31987) and
incorporated herein by reference).
Form of Restricted Stock Unit Award Agreement (Time-Based Vesting for Section 16 Officers) for awards beginning
in 2020 (filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on May 5, 2020 (File No. 001-
31987) and incorporated herein by reference).
10.1.10†
Form of Restricted Stock Unit Award Agreement (Time-Based Vesting for Non-Section 16 Officers) for awards
beginning in 2020 (filed as Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on May 5, 2020 (File
No. 001-31987) and incorporated herein by reference).
10.2.1†
Hilltop Holdings Inc. 2020 Equity Incentive Plan (filed as Exhibit 99.1 to the Registrant’s Registration Statement on
Form S-8 filed July 24, 2020 (File No. 333-240090) and incorporated herein by reference).
115
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10.2.2†
10.2.3†
10.2.4†
10.3†
10.4†
10.5.1†
10.5.2†
10.5.3†
10.6†
10.7.1†
10.7.2†
10.8†
10.9†
10.10†
Form of Restricted Stock Unit Award Agreement (Performance-Based) for awards beginning in 2020 (filed as Exhibit
99.3 to the Registrant’s Registration Statement on Form S-8 filed July 24, 2020 (File No. 333-240090) and
incorporated herein by reference).
Form of Restricted Stock Unit Award Agreement (Time-Based Vesting for Section 16 Officers) for awards beginning
in 2020 (filed as Exhibit 99.4 to the Registrant’s Registration Statement on Form S-8 filed July 24, 2020 (File No. 333-
240090) and incorporated herein by reference).
Form of Restricted Stock Unit Award Agreement (Time-Based Vesting for Non-Section 16 Officers) for awards
beginning in 2020 (filed as Exhibit 99.5 to the Registrant’s Registration Statement on Form S-8 filed July 24, 2020
(File No. 333-240090) and incorporated herein by reference).
Hilltop Holdings Inc. Employee Stock Purchase Plan (filed as Exhibit 99.2 to the Registrant’s Registration Statement
on Form S-8 filed July 24, 2020 (File No. 333-240090) and incorporated herein by reference).
Hilltop Holdings Inc. Annual Incentive Plan, effective September 20, 2012 (filed as Exhibit 10.19 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2012 filed on March 15, 2013 (File No. 001-31987) and
incorporated herein by reference).
Employment Agreement, dated as of December 4, 2014, by and between Todd Salmans and Hilltop Holdings Inc. (filed
as Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014 (File No. 001-
31987) and incorporated herein by reference).
First Amendment to Employment Agreement, dated as of November 8, 2017, by and between Todd Salmans and Hilltop
Holdings Inc. (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 13, 2017 (File
No. 001-31987) and incorporated herein by reference).
Retention Agreement by and between Hilltop Holdings Inc. and Todd Salmans, dated as of October 25, 2019, but
effective January 1, 2020 (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed October 30, 2019
(File No. 001-31987) and incorporated herein by reference).
Compensation arrangement of Jeremy B. Ford (filed as Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K
for the year ended December 31, 2019 filed on February 27, 2020 (File No. 001-31987) and incorporated herein by
reference).
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).
First Amendment to Employment Agreement by and between Hilltop Holdings Inc. and William B. Furr, dated as of
August 30, 2019 (filed as Exhibit 10.7.2 to the Registrant’s Current Report on Form 8-K filed September 6, 2019 (File
No. 001-31987) and incorporated herein by reference).
Employment Agreement, dated as of November 20, 2018, by and between Hilltop Holdings Inc. and Martin B. Winges
(filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on December 12, 2018 (File No. 001-31987) and
incorporated herein by reference).
Retention Agreement, dated as of February 19, 2019, by and between Hill A. Feinberg and Hilltop Holdings Inc. (filed
as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 22, 2019 (File No. 001-31987) and
incorporated herein by reference).
Employment Agreement by and between Hilltop Holdings Inc. and Steve Thompson, dated as of October 25, 2019, but
effective January 1, 2020 (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed October 30, 2019
(File No. 001-31987) and incorporated herein by reference).
116
Table of Contents
10.11†
10.12†
10.13†
10.14†
10.15†
21.1*
23.1*
31.1*
31.2*
32.1*
Limited Liability Company Agreement of HTH Diamond Hillcrest Land LLC, dated as of July 31, 2018 (filed as
Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 6, 2018 (File No. 001-31987) and
incorporated herein by reference).
Ground Lease Agreement by and among HTH Diamond Hillcrest Land LLC, as Ground Lessor, and SPC Park Plaza
Partners LLC, HTH Hillcrest Project LLC and Diamond Hillcrest LLC, as Ground Lessees, dated as of July 31, 2018
(filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on August 6, 2018 (File No. 001-31987) and
incorporated herein by reference).
Hilltop Plaza Co-Owners Agreement, by and among Diamond Hillcrest, LLC, HTH Hillcrest Project LLC and SPC
Park Plaza Partners LLC, dated as of July 31, 2018 (filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-
K filed on August 6, 2018 (File No. 001-31987) and incorporated herein by reference).
Office Lease between SPC Park Plaza Partners, LLC, Diamond Hillcrest, LLC, and HTH Hillcrest Project LLC, as Co-
Owners, and Hilltop Holdings Inc., as Tenant, dated July 31, 2018 (filed as Exhibit 10.4 to the Registrant’s Current
Report on Form 8-K filed on August 6, 2018 (File No. 001-31987) and incorporated herein by reference).
Retail Lease between SPC Park Plaza Partners, LLC, Diamond Hillcrest, LLC, and HTH Hillcrest Project LLC, as Co-
Owners, and PlainsCapital Bank, as Tenant, dated July 31, 2018 (filed as Exhibit 10.5 to the Registrant’s Current
Report on Form 8-K filed on August 6, 2018 (File No. 001-31987) and incorporated herein by reference).
List of subsidiaries of the Registrant.
Consent of PricewaterhouseCoopers LLP.
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended.
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as
amended.
Certification of Principal Executive Officer 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 – the instance document does not appear in the Interactive Data File because its XBRL tags
are embedded within the Inline XBRL document.
101.SCH*
Inline XBRL Taxonomy Extension Schema.
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase.
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase.
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase.
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
* Filed herewith.
† Exhibit is a management contract or compensatory plan or arrangement.
# Schedules and similar attachments have been omitted from this Exhibit pursuant to Item 601(b)(2) of Regulation S-K. A copy
of any omitted schedule or similar attachment will be furnished to the SEC upon request.
117
Table of Contents
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: February 16, 2021
HILLTOP HOLDINGS INC.
By: /s/ William B. Furr
William B. Furr
Chief Financial Officer
(Principal Financial Officer and duly authorized officer)
118
Table of Contents
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature
Capacity in which Signed
/s/ Jeremy B. Ford
Jeremy B. Ford
/s/ William B. Furr
William B. Furr
/s/ Keith E. Bornemann
Keith E. Bornemann
Charlotte Jones Anderson
/s/ Rhodes Bobbitt
Rhodes Bobbitt
/s/ Tracy A. Bolt
Tracy A. Bolt
/s/ J. Taylor Crandall
J. Taylor Crandall
/s/ Charles R. Cummings
Charles R. Cummings
/s/ Hill A. Feinberg
Hill A. Feinberg
/s/ Gerald J. Ford
Gerald J. Ford
/s/ J. Markham Green
J. Markham Green
William T. Hill, Jr.
/s/ Lee Lewis
Lee Lewis
Andrew J. Littlefair
/s/ W. Robert Nichols, III
W. Robert Nichols, III
Thomas C. Nichols
Kenneth D. Russell
A. Haag Sherman
/s/ Jonathan S. Sobel
Jonathan S. Sobel
/s/ Robert Taylor, Jr.
Robert Taylor, Jr.
/s/ Carl B. Webb
Carl B. Webb
President, Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
Executive Vice President, Chief Accounting Officer
(Principal Accounting Officer)
Director
Director
Date
February 16, 2021
February 16, 2021
February 16, 2021
February 16, 2021
Director and Audit Committee Member
February 16, 2021
Director
February 16, 2021
Director and Chairman of Audit Committee
February 16, 2021
Director
Chairman of the Board
February 16, 2021
February 16, 2021
Director and Audit Committee Member
February 16, 2021
Director
Director
Director
Director
Director
Director
Director
Director
Director
Director
119
February 16, 2021
February 16, 2021
February 16, 2021
February 16, 2021
February 16, 2021
Table of Contents
Index to Consolidated Financial Statements
Hilltop Holdings Inc.
Report of Independent Registered Public Accounting Firm
Audited Consolidated 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
F-1
F-2
F-4
F-5
F-6
F-7
F-8
F-9
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Hilltop Holdings Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Hilltop Holdings Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and
2019, and the related consolidated statements of operations, of comprehensive income, of stockholders’ equity and of cash flows for each of the three years in the
period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the
Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of
December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity
with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the
COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for credit losses in 2020.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for
its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting
appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control
over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated
or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and
(ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not
F-2
Table of Contents
alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below,
providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Credit Losses for Loans Held for Investment – Collectively Evaluated
As described in Notes 1 and 8 to the consolidated financial statements, the Company’s allowance for credit losses for loans held for investment was $149 million
as of December 31, 2020. Management’s allowance for credit losses for collectively evaluated loans is an estimate of expected losses over the lifetime of a loan
within the Company’s existing loans held for investment portfolio and is based on historical experience, current conditions and reasonable and supportable
forecasts. The credit loss estimation process considers the characteristics of the Company’s loan portfolio segments, which are further disaggregated into loan
classes, the level at which credit risk is monitored. The allowance for credit losses for collectively evaluated loans is calculated using statistical credit factors,
including probabilities of default (“PD”) and loss given default (“LGD”), to the amortized cost of pools of loan exposures with similar risk characteristics over its
contractual life, adjusted for prepayments, to arrive at an estimate of expected credit losses. As described by management, one of the most significant judgments
involved in estimating the Company’s allowance for credit losses relates to the macroeconomic forecasts used to estimate credit losses over the reasonable and
supportable forecast period. Management utilizes a single macroeconomic baseline scenario published by a third party that reflects the U.S. economic outlook.
This baseline scenario utilizes multiple economic variables in forecasting the economic outlook. Significant variables that impact the modeled losses across the
Company’s loan portfolios are the U.S. Real Gross Domestic Product (GDP) growth rates and unemployment rate assumptions. Management also considers
adjustments for certain conditions in the Company’s allowance for credit losses estimate qualitatively where they have not been measured directly in
management’s collective assessments.
The principal considerations for our determination that performing procedures relating to the allowance for credit losses for collectively evaluated loans held for
investment is a critical audit matter are (i) the significant judgment by management in estimating the allowance for credit losses, which in turn led to a high
degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating audit evidence relating to management’s determination of the impact
of GDP growth rate and unemployment rate forecasts within the macroeconomic baseline scenario, as well as qualitative adjustments to the allowance for credit
losses; and (ii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated
financial statements. These procedures included testing the effectiveness of controls relating to the allowance for credit losses for collectively evaluated loans
held for investment, which included controls over evaluation and selection of the variables used in the macroeconomic baseline scenario as well as qualitative
adjustments. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in testing
management’s process for estimating the allowance for credit losses, which included (i) evaluating the appropriateness of the methodology and models, (ii)
testing the completeness and accuracy of certain data used in the estimate, (iii) evaluating the reasonableness of management’s determination of the impact of
GDP growth rate and unemployment rate forecasts within the macroeconomic baseline scenario and (iv) evaluating the reasonableness of qualitative adjustments
to the allowance for credit losses.
Valuation of Mortgage Servicing Rights
As described in Notes 1 and 12 to the consolidated financial statements, the Company measures its residential mortgage servicing rights asset at fair value, which
totaled $144 million as of December 31, 2020. Management estimates the fair value of residential mortgage servicing rights by valuing the projected net
servicing cash flows, which are then discounted to estimate fair value using a discounted cash flow model. The significant unobservable inputs related to the
valuation of residential mortgage servicing rights are the discount rate and the constant prepayment rate assumptions. As disclosed by management, the model
assumptions and the mortgage servicing rights fair value estimates are compared to observable trades of similar portfolios as well as to broker valuations and
industry surveys, as available.
The principal considerations for our determination that performing procedures relating to the valuation of mortgage servicing rights is a critical audit matter are
(i) the significant judgment by management in estimating the fair value of residential mortgage servicing rights, which in turn led to a high degree of auditor
judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to management’s estimate of the fair value of mortgage
servicing rights and the constant prepayment rate and discount rate assumptions used in the estimate, and (ii) the audit effort involved the use of professionals
with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated
financial statements. These procedures included testing the effectiveness of controls relating to the valuation of mortgage servicing rights, which included
controls over the constant prepayment rate and discount rate assumptions. These procedures also included, among others, the involvement of professionals with
specialized skill and knowledge to assist in testing management’s process for estimating the valuation of mortgage servicing rights, which included (i) evaluating
the appropriateness of the methodology, (ii) testing the completeness and accuracy of certain data used in the estimate, (iii) evaluating the reasonableness of the
constant prepayment rate and discount rate assumptions used in the estimate and (iv) evaluating the reasonableness of the fair value of mortgage servicing rights,
which included comparison to observable trades of similar portfolios and industry surveys.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 16, 2021
We have served as the Company’s auditor since 1998.
F-3
Table of Contents
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31,
2020
2019
Assets
Cash and due from banks
Federal funds sold
Assets segregated for regulatory purposes
Securities purchased under agreements to resell
Securities:
Trading, at fair value
Available for sale, at fair value, net (amortized cost of $1,435,919 and 899,817, respectively)
Held to maturity, at amortized cost, net (fair value of $326,671 and $388,930, respectively)
Equity, at fair value
Loans held for sale
Loans held for investment, net of unearned income
Allowance for credit losses
Loans held for investment, net
Broker-dealer and clearing organization receivables
Premises and equipment, net
Operating lease right-of-use assets
Mortgage servicing rights
Other assets
Goodwill
Other intangible assets, net
Assets of discontinued operations
Total assets
Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
Broker-dealer and clearing organization payables
Short-term borrowings
Securities sold, not yet purchased, at fair value
Notes payable
Operating lease liabilities
Junior subordinated debentures
Other liabilities
Liabilities of discontinued operations
Total liabilities
Commitments and contingencies (see Notes 21 and 22)
Stockholders' equity:
Hilltop stockholders' equity:
Common stock, $0.01 par value, 125,000,000 shares authorized; 82,184,893 and 90,640,944 shares issued
and outstanding at December 31, 2020 and 2019, respectively
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings
Deferred compensation employee stock trust, net
Employee stock trust (6,930 and 7,794 shares, at cost, at December 31, 2020 and 2019, respectively)
Total Hilltop stockholders' equity
Noncontrolling interests
Total stockholders' equity
Total liabilities and stockholders' equity
See accompanying notes.
F-4
$
$
$
$
1,062,560
386
290,357
80,319
694,255
1,462,205
311,944
140
2,468,544
2,788,386
7,693,141
(149,044)
7,544,097
1,404,727
211,595
105,757
143,742
555,983
267,447
20,364
—
16,944,264
3,612,384
7,629,935
11,242,319
1,368,373
695,798
79,789
381,987
125,450
67,012
632,889
—
14,593,617
822
1,317,929
17,763
986,792
771
(138)
2,323,939
26,708
2,350,647
16,944,264
$
$
$
$
433,626
394
157,436
59,031
689,576
911,493
386,326
166
1,987,561
2,106,361
7,381,400
(61,136)
7,320,264
1,780,280
210,375
114,320
55,504
404,754
267,447
26,666
248,429
15,172,448
2,769,556
6,262,658
9,032,214
1,605,518
1,424,010
43,817
256,269
125,619
67,012
348,519
140,674
13,043,652
906
1,445,233
11,419
644,860
776
(155)
2,103,039
25,757
2,128,796
15,172,448
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
2020
Year Ended December 31,
2019
2018
Table of Contents
Interest income:
Loans, including fees
Securities borrowed
Securities:
Taxable
Tax-exempt
Other
Total interest income
Interest expense:
Deposits
Securities loaned
Short-term borrowings
Notes payable
Junior subordinated debentures
Other
Total interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income:
Net gains from sale of loans and other mortgage production income
Mortgage loan origination fees
Securities commissions and fees
Investment and securities advisory fees and commissions
Other
Total noninterest income
Noninterest expense:
Employees' compensation and benefits
Occupancy and equipment, net
Professional services
Other
Total noninterest expense
Income from continuing operations before income taxes
Income tax expense
Income from continuing operations
Income from discontinued operations, net of income taxes
Net income
Less: Net income attributable to noncontrolling interest
Income attributable to Hilltop
Earnings per common share:
Basic:
Earnings from continuing operations
Earnings from discontinued operations
Diluted:
Earnings from continuing operations
Earnings from discontinued operations
Weighted average share information:
Basic
Diluted
See accompanying notes.
F-5
$
$
$
$
$
$
$
$
$
$
$
$
433,311
51,360
48,273
6,698
6,853
546,495
47,040
42,816
11,611
15,897
2,772
2,193
122,329
424,166
96,491
327,675
1,001,059
171,769
142,720
131,327
243,605
1,690,480
1,059,645
99,416
69,984
224,758
1,453,803
564,352
133,071
431,281
38,396
469,677
21,841
447,836
4.59
0.43
5.02
4.58
0.43
5.01
89,280
89,304
$
$
$
$
$
$
460,471
69,582
58,493
6,159
15,991
610,696
71,509
60,086
26,778
8,948
3,851
545
171,717
438,979
7,206
431,773
504,935
130,003
137,742
103,787
186,350
1,062,817
844,602
113,336
60,565
193,386
1,211,889
282,701
63,714
218,987
13,990
232,977
7,686
225,291
2.29
0.15
2.44
2.29
0.15
2.44
92,345
92,394
436,725
66,914
46,665
6,834
17,485
574,623
46,002
56,733
25,816
8,483
3,663
627
141,324
433,299
5,088
428,211
445,116
103,563
150,989
90,066
90,396
880,130
757,214
113,923
69,799
212,392
1,153,328
155,013
34,227
120,786
4,941
125,727
4,286
121,441
1.23
0.05
1.28
1.23
0.05
1.28
94,969
95,067
Table of Contents
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net income
Other comprehensive income:
$
2020
469,677
Year Ended December 31,
2019
232,977
$
$
2018
125,727
Change in fair value of cash flow and fair value hedges, net of tax of
$(820), $111 and $0, respectively
(2,950)
417
—
Net unrealized gains (losses) on securities available for sale, net of tax of
$2,756, $6,276 and $(1,558), respectively
9,111
21,599
(5,632)
Reclassification adjustment for gains (losses) included in net income, net
of tax of $55, $(573) and $0, respectively
Comprehensive income
Less: comprehensive income attributable to noncontrolling interest
183
476,021
21,841
(1,970)
253,023
7,686
—
120,095
4,286
Comprehensive income applicable to Hilltop
$
454,180
$
245,337
$
115,809
See accompanying notes.
F-6
Table of Contents
Balance, December 31, 2017
Net income
Other comprehensive loss
Stock-based compensation
expense
Common stock issued to board
members
Issuance of common stock
related to share-based
awards, net
Repurchases of common stock
Dividends on common stock
($0.28 per share)
Deferred compensation plan
Adoption of accounting
standards
Net cash contributed from
noncontrolling interest
Balance, December 31, 2018
Net income
Other comprehensive income
Stock-based compensation
expense
Common stock issued to board
members
Issuance of common stock
related to share-based
awards, net
Repurchases of common stock
Dividends on common stock
($0.32 per share)
Deferred compensation plan
Adoption of accounting
standards
Net cash contributed to
noncontrolling interest
Balance, December 31, 2019
Net income
Other comprehensive income
Stock-based compensation
expense
Common stock issued to board
members
Issuance of common stock
related to share-based
awards, net
Repurchases of common stock
Dividends on common stock
($0.36 per share)
Deferred compensation plan
Adoption of accounting
standards (Note 2)
Net cash distributed to
noncontrolling interest
Balance, December 31, 2020
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Deferred
Compensation
Employee Stock
Trust, Net
$
$
$
$
848
—
—
—
—
—
—
—
(23)
—
—
825
—
—
—
—
—
—
—
(49)
—
—
776
—
—
—
—
—
—
—
(5)
—
—
771
Shares
12
—
—
—
—
—
—
—
(1)
—
—
11
—
—
—
—
—
—
—
(3)
—
—
8
—
—
—
—
—
—
—
(1)
—
—
7
Employee
Stock Trust
Total
Hilltop
Total
Stockholders’ Noncontrolling Stockholders’
Interest
Amount
$
(247)
$
—
—
Equity
1,912,081
121,441
(5,632)
$
$
2,726
4,286
—
Equity
1,914,807
125,727
(5,632)
$
$
—
8,454
—
654
—
—
—
30
—
(1,847)
(58,990)
(26,698)
7
—
—
—
—
—
—
—
—
8,454
654
(1,847)
(58,990)
(26,698)
7
—
(217)
—
$
—
—
—
1,949,470
225,291
20,046
$
17,411
24,423
7,686
—
$
17,411
1,973,893
232,977
20,046
—
11,243
—
573
—
—
—
62
(1,978)
(73,385)
(29,627)
13
—
1,393
—
—
—
—
—
—
—
11,243
573
(1,978)
(73,385)
(29,627)
13
1,393
(155)
—
$
—
—
—
2,103,039
447,836
6,344
$
(6,352)
25,757
21,841
—
$
(6,352)
2,128,796
469,677
6,344
—
14,089
—
586
—
—
(1,088)
(208,664)
—
17
(32,524)
12
—
(5,691)
—
—
—
—
—
—
—
14,089
586
(1,088)
(208,664)
(32,524)
12
(5,691)
—
$
(138)
—
2,323,939
$
$
(20,890)
26,708
$
(20,890)
2,350,647
Common Stock
Shares
95,982
—
—
$
Amount
960
—
—
—
30
327
(2,729)
—
—
—
—
93,610
—
—
$
—
27
—
—
3
(27)
—
—
—
—
936
—
—
—
—
Additional
Paid-in
Capital
$ 1,526,369
Accumulated
Other
Comprehensive
Income (Loss)
$
(394)
—
—
Retained
Earnings
$ 384,545
— 121,441
—
(5,632)
8,454
654
(1,850)
(43,811)
—
—
—
—
—
—
—
—
—
(15,152)
—
—
(26,698)
—
—
(2,601)
2,601
$ 1,489,816
—
$
—
—
11,243
573
394
(3,390)
4
(34)
(1,982)
(54,417)
—
—
—
—
90,641
—
—
$
—
31
—
—
—
—
906
—
—
—
—
—
—
—
$ 1,445,233
—
$
—
—
14,089
586
293
(8,780)
3
(87)
(1,091)
(140,888)
—
—
—
—
—
—
—
—
—
—
82,185
$
—
822
$ 1,317,929
—
$
(8,627)
—
—
$ 466,737
— 225,291
—
20,046
—
—
—
—
—
—
—
(18,934)
—
—
(29,627)
—
—
1,393
11,419
—
—
$ 644,860
— 447,836
—
6,344
—
—
—
—
—
—
—
(67,689)
—
—
(32,524)
—
—
(5,691)
—
—
$ 986,792
17,763
See accompanying notes.
F-7
Table of Contents
HILLTOP HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for credit losses
Depreciation, amortization and accretion, net
Deferred income taxes
Other, net
Net change in securities purchased under agreements to resell
Net change in trading securities
Net change in broker-dealer and clearing organization receivables
Net change in other assets
Net change in broker-dealer and clearing organization payables
Net change in other liabilities
Net change in securities sold, not yet purchased
Proceeds from sale of mortgage servicing rights asset
Change in valuation of mortgage servicing rights asset
Net gains from sales of loans
Loans originated for sale
Proceeds from loans sold
Net cash provided by (used in) operating activities for continuing operations
Net cash used in operating activities for discontinued operations
Net cash provided by (used in) operating activities
Investing Activities
Proceeds from maturities and principal reductions of securities held to maturity
Proceeds from sales, maturities and principal reductions of securities available for sale
Purchases of securities held to maturity
Purchases of securities available for sale
Net change in loans held for investment
Purchases of premises and equipment and other assets
Proceeds from sales of premises and equipment and other real estate owned
Net cash received from (paid to) Federal Home Loan Bank and Federal Reserve Bank stock
Net cash paid for acquisition
Other, net
Net cash used in investing activities for continuing operations
Net cash provided by investing activities for discontinued operations
Net cash received from disposal of discontinued operations
Net cash used in investing activities
Financing Activities
Net change in deposits
Net change in short-term borrowings
Proceeds from notes payable
Payments on notes payable
Payments to repurchase common stock
Dividends paid on common stock
Net cash distributed to (from) noncontrolling interest
Other, net
Net cash provided by financing activities
Net change in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of year
Cash, cash equivalents and restricted cash, end of year
Reconciliation of Cash, Cash Equivalents and Restricted Cash to Consolidated Balance Sheets
Cash and due from banks
Cash and due from banks, included within assets of discontinued operations
Federal funds sold
Assets segregated for regulatory purposes
Total cash, cash equivalents and restricted cash
Supplemental Disclosures of Cash Flow Information
Cash paid for interest
Cash paid for income taxes, net of refunds
Supplemental Schedule of Non-Cash Activities
Derecognition of construction in progress related to build-to-suit lease obligations
Conversion of loans to other real estate owned
Additions to mortgage servicing rights
See accompanying notes.
F-8
Year Ended December 31,
2019
2018
2020
$
469,677
$
232,977
$
125,727
96,491
21,930
16,583
11,849
(21,288)
(4,679)
515,073
(78,997)
(152,158)
249,313
35,972
35,142
37,926
(1,001,059)
(26,766,999)
26,848,663
313,439
(33,003)
280,436
81,140
433,828
(7,553)
(975,289)
(457,540)
(37,746)
21,512
22,808
—
—
(918,840)
1,941
89,233
(827,666)
2,125,118
(729,110)
1,451,249
(1,325,711)
(208,664)
(32,524)
(20,890)
(1,724)
1,257,744
710,514
642,789
1,353,303
1,062,560
—
386
290,357
1,353,303
124,934
123,553
$
$
$
$
$
7,206
(1,483)
(4,063)
15,445
2,580
55,890
(338,158)
61,688
206,170
78,245
(37,850)
—
24,353
(504,935)
(16,644,259)
16,413,647
(432,547)
(476)
(433,023)
73,924
296,812
(109,622)
(415,763)
(423,890)
(42,287)
14,309
(17,092)
—
904
(622,705)
18,413
—
(604,292)
600,481
358,203
1,055,772
(1,000,960)
(73,385)
(29,627)
(6,352)
(2,494)
901,638
(135,677)
778,466
642,789
433,626
51,333
394
157,436
642,789
168,535
56,901
$
$
$
$
$
— $
$
$
13,865
162,914
— $
$
$
4,669
13,755
5,088
(5,272)
13,009
8,972
124,926
(14,781)
23,618
33,321
(7,054)
(78,708)
(151,154)
9,303
4,337
(445,116)
(14,287,551)
15,037,339
396,004
(6,464)
389,540
43,699
215,368
(39,259)
(306,005)
(110,615)
(67,726)
25,847
3,198
(63,245)
(49)
(298,787)
9,120
—
(289,667)
196,060
(140,617)
664,045
(643,921)
(58,990)
(26,698)
17,411
(2,657)
4,633
104,506
673,960
778,466
598,999
45,074
400
133,993
778,466
143,201
8,378
27,802
6,899
25,028
$
$
$
$
$
$
$
$
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting and Reporting Policies
Nature of Operations
Hilltop Holdings Inc. (“Hilltop” and, collectively with its subsidiaries, the “Company”) is a financial holding company registered
under the Bank Holding Company Act of 1956. The Company’s primary line of business is to provide business and consumer
banking services from offices located throughout Texas through PlainsCapital Bank (the “Bank”). In addition, the Company
provides an array of financial products and services through its broker-dealer and mortgage origination subsidiaries.
On June 30, 2020, Hilltop completed the sale of all of the outstanding capital stock of National Lloyds Corporation (“NLC”),
which comprised the operations of the former insurance segment, for cash proceeds of $154.1 million and was subject to post-
closing adjustments. Accordingly, NLC’s results and its assets and liabilities have been presented as discontinued operations in
the consolidated financial statements. For further details, see Note 3 to the consolidated financial statements.
As a result of the above noted sale of NLC, the Company, headquartered in Dallas, Texas, provides its products and services
through two primary business units within continuing operations, PlainsCapital Corporation (“PCC”) and Hilltop Securities
Holdings LLC (“Securities Holdings”). PCC is a financial holding company, that provides, through its subsidiaries, traditional
banking, wealth and investment management and treasury management services primarily in Texas and residential mortgage
lending throughout the United States. Securities Holdings is a holding company, that provides, through its subsidiaries,
investment banking and other related financial services, including municipal advisory, sales, trading and underwriting of taxable
and tax-exempt fixed income securities, clearing, securities lending, structured finance and retail brokerage services throughout
the United States. Unless otherwise noted, the Company’s notes to the consolidated financial statements present information
limited to continuing operations.
As a result of the spread of the novel coronavirus (“COVID-19”) pandemic, economic uncertainties continue to adversely impact
the global economy and have contributed to significant volatility in banking and other financial activity in the areas in which the
Company operates. The effects of COVID-19 and the governmental and societal response to the virus have negatively impacted
financial markets and overall economic conditions on an unprecedented scale, resulting in the shuttering of businesses across the
country and significant job loss. Many of these businesses reopened but may be operating at limited capacity. The Company’s
business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial
transactions. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of
COVID-19. COVID-19 presents material uncertainty which could have a material adverse effect on the Company’s business,
financial condition, results of operations and cash flows.
Basis of Presentation
The audited 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”).
Other than changes related to the implementation of the current expected credit losses (“CECL”) standard, as further described in
Note 2 to the consolidated financial statements, the Company has applied its critical accounting policies and estimation methods
consistently in all periods presented in these consolidated financial statements. Actual amounts and values as of the balance sheet
dates may be materially different than the amounts and values reported due to the inherent uncertainty in the estimation process.
Also, future amounts and values could differ materially from those estimates due to changes in values and circumstances after the
balance sheet date.
Hilltop owns 100% of the outstanding stock of PCC. PCC owns 100% of the outstanding stock of the Bank and 100% of the
membership interest in Hilltop Opportunity Partners LLC, a merchant bank utilized to facilitate investments in companies
engaged in non-financial activities. The Bank owns 100% of the outstanding stock of PrimeLending, a PlainsCapital Company
(“PrimeLending”).
F-9
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC (“Ventures Management”),
which holds an ownership interest in and is the managing member of certain affiliated business arrangements (“ABAs”).
PCC also owns 100% of the outstanding common securities of PCC Statutory Trusts I, II, III and IV (the “Trusts”), which are not
included in the consolidated financial statements under the requirements of the Variable Interest Entities (“VIE”) Subsections of
the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”), because the primary
beneficiaries of the Trusts are not within the consolidated group.
Hilltop has a 100% membership interest in Securities Holdings, which operates through its wholly-owned subsidiaries, Hilltop
Securities Inc. (“Hilltop Securities”), Momentum Independent Network Inc., formerly Hilltop Securities Independent Network
Inc., (“Momentum Independent Network” and collectively with Hilltop Securities, the “Hilltop Broker-Dealers”) and Hilltop
Securities Asset Management, LLC. Hilltop Securities is a broker-dealer registered with the Securities and Exchange
Commission (“SEC”) and Financial Industry Regulatory Authority (“FINRA”) and a member of the New York Stock Exchange
(“NYSE”), Momentum Independent Network is an introducing broker-dealer that is also registered with the SEC and FINRA.
Hilltop Securities, Momentum Independent Network and Hilltop Securities Asset Management, LLC are registered investment
advisers under the Investment Advisers Act of 1940.
In addition, Hilltop owns 100% of the membership interest in each of HTH Hillcrest Project LLC (“HTH Project LLC”) and
Hilltop Investments I, LLC. Hilltop Investments I, LLC owns 50% of the membership interest in HTH Diamond Hillcrest Land
LLC (“Hillcrest Land LLC”) which is consolidated under the aforementioned VIE Subsections of the ASC. These entities are
related to the Hilltop Plaza investment discussed in detail in Note 20 to the consolidated financial statements and are collectively
referred to as the “Hilltop Plaza Entities.”
The consolidated financial statements include the accounts of the above-named entities. Intercompany transactions and balances
have been eliminated. Noncontrolling interests have been recorded for minority ownership in entities that are not wholly owned
and are presented in compliance with the provisions of Noncontrolling Interest in Subsidiary Subsections of the ASC.
Certain reclassifications have been made to the prior period consolidated financial statements to conform with the current period
presentation, including reclassifications due to the adoption of new accounting pronouncements and reclassifications due to the
presentation of NLC’s results and its assets and liabilities as discontinued operations. 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.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. Estimates regarding the allowance for credit losses, the fair values of financial instruments, the mortgage loan
indemnification liability, and the potential impairment of 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.
Acquisition Accounting
Acquisitions are accounted for under the acquisition method of accounting. Purchased assets, including identifiable intangible
assets, and assumed liabilities are recorded at their respective acquisition date fair values. If the fair value of net assets purchased
exceeds the consideration given, a bargain purchase gain is recognized. If the consideration given exceeds the fair value of the net
assets received, goodwill is recognized.
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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Securities Purchased Under Agreements to Resell
Securities purchased under agreements to resell (reverse repurchase agreements or reverse repos) are treated as collateralized
financings and are carried at the amounts at which the securities will subsequently be resold as specified in the agreements. The
Company is in possession of collateral with a fair value equal to or in excess of the contract amounts.
Securities
Management classifies securities at the time of purchase and reassesses such designation at each balance sheet date. Securities
held for resale to facilitate principal transactions with customers are classified as trading and are carried at fair value, with
changes in fair value reflected in the consolidated statements of operations. The Company reports interest income on trading
securities as interest income on securities and other changes in fair value as other noninterest income.
Debt securities held but not intended to be held to maturity or on a long-term basis are classified as available for sale. Securities
included in this category are those that management intends to use as part of its asset/liability management strategy and that may
be sold in response to changes in interest rates, prepayment risk or other factors related to interest rate and prepayment risk. Debt
securities available for sale are carried at fair value. Unrealized holding gains and losses on debt securities available for sale, net
of taxes, are reported in other comprehensive income (loss) until realized. Premiums and discounts are recognized in interest
income using the effective interest method and reflect any optionality that may be embedded in the security.
Equity securities are carried at fair value, with changes in fair value reflected in the consolidated statements of operations. Equity
securities that do not have readily determinable fair values are initially recorded at cost and subsequently remeasured when there
is (i) an observable transaction involving the same investment, (ii) an observable transaction involving a similar investment from
the same issuer or (iii) an impairment. These remeasurements are reflected in the consolidated statements of operations.
Allowance for Credit Losses on Available for Sale and Held to Maturity Securities
Available for sale debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least
quarterly. For available for sale debt securities, a decline in fair value due to credit loss results in recording an allowance for
credit losses to the extent the fair value is less than the amortized cost basis. Declines in fair value that have not been recorded
through an allowance for credit losses, such as declines due to changes in market interest rates, are recorded through other
comprehensive income, net of applicable taxes.
Allowances for credit losses may result from credit deterioration of the issuer or the collateral underlying the security. In
performing an assessment of whether any decline in fair value is due to a credit loss, all relevant information is considered at the
individual security level. In assessing whether a credit loss exists, the Company compares the present value of cash flows
expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows
expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an allowance for credit losses
is recorded, limited to the amount by which the fair value is less than the amortized cost basis.
Under the new credit loss guidance adopted on January 1, 2020, the previous other-than-temporary-impairment (“OTTI”) model
was replaced. Under the OTTI model, credit losses were recognized as a reduction to the cost basis of the investment with
recovery of an impairment loss recognized prospectively over time as interest income, and reversals of impairment were not
allowed. Effective January 1, 2020, if the Company intends to sell a debt security, or it is more likely than not that the Company
will be required to sell the security before recovery of its amortized cost basis, the debt security is written down to its fair value
and the write down is charged against the allowance for credit losses, with any incremental impairment reported in earnings.
Reversals of the allowance for credit losses are permitted and should not exceed the allowance amount initially recognized.
For debt securities held to maturity, estimated expected credit losses are calculated in a manner like that used for loans held for
investment. That is, the historical lifetime probability of default and severity of loss in the event of default is derived or obtained
from external sources and adjusted for the expected effects of reasonable and supportable forecasts over the expected lives of the
securities on those historical credit losses. With respect to certain classes of debt securities, primarily U.S. Treasuries, the
Company considers the history of credit losses, current conditions and reasonable and
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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
supportable forecasts, which may indicate that the expectation that nonpayment of the amortized cost basis is or continues to be
zero, even if the U.S. government were to technically default. Therefore, for those securities, the Company does not record
expected credit losses.
Loans Held for Sale
Loans held for sale consist primarily of single-family residential mortgages funded through PrimeLending. These loans are
generally on the consolidated balance sheet between 30 and 45 days. Substantially all mortgage loans originated by
PrimeLending are sold to various investors in the secondary market, historically with the majority with servicing released.
Mortgage loans held for sale are carried at fair value in accordance with the provisions of the Fair Value Option Subsections of
the ASC (the “Fair Value Option”). Changes in the fair value of the loans held for sale are recognized in earnings and fees and
costs associated with origination are recognized as incurred. The specific identification method is used to determine realized
gains and losses on sales of loans, which are reported as net gains (losses) in noninterest income. Loans sold are subject to certain
indemnification provisions with investors, including the repurchase of loans sold and repayment of certain sales proceeds to
investors under certain conditions. In addition, certain mortgage loans guaranteed by U.S. Government agencies and sold into
Government National Mortgage Association (“GNMA”) pools may, under certain conditions specified in the government
programs, become subject to repurchase by PrimeLending. When such loans subject to repurchase no longer qualify for sale
accounting, they are reported as loans held for sale in the consolidated balance sheets.
Loans Held for Investment
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the
amount of unpaid principal reduced by unearned income, net unamortized deferred fees and an allowance for credit losses.
Unearned income on installment loans and interest on other loans is recognized using the effective interest method. Net fees
received for providing loan commitments and letters of credit that result in loans are deferred and amortized to interest income
over the life of the related loan, beginning with the initial borrowing. Net fees on commitments and letters of credit that are not
expected to be funded are amortized to noninterest income over the commitment period. Income on direct financing leases is
recognized on a basis that achieves a constant periodic rate of return on the outstanding investment.
The accrual of interest on credit deteriorated loans is discontinued when, in management’s opinion, there is a clear indication that
the borrower’s cash flow may not be sufficient to meet principal and interest payments, which is generally when a loan is 90 days
past due unless the asset is both well secured and in the process of collection. When a loan is placed on non-accrual status, all
previously accrued and unpaid interest is charged against income. Once placed on non-accrual status, interest income is
recognized on a cash basis. Additionally, accretion of purchased discount on non-accrual loans is suspended.
The Company follows applicable regulatory guidance when measuring past due status. The Company uses the actual days
elapsed since the payment due date of the loan to determine delinquency. In response to the ongoing COVID-19 pandemic, the
Company allowed modifications, such as payment deferrals for up to 90 days and temporary forbearance, to credit-worthy
borrowers who are experiencing temporary hardship due to the effects of COVID-19. These modifications generally meet the
criteria of the CARES Act, and therefore, the Company does not account for such loan modifications as TDRs, nor are loans
granted payment deferrals related to COVID-19 reported as past due or placed on non-accrual status (provided the loans were not
past due or on non-accrual status prior to the deferral). The Company elected to accrue and recognize interest income on these
modifications during the payment deferral period.
Management defines loans acquired in a business combination as acquired loans. Acquired loans are recorded at estimated fair
value on their purchase date with no carryover of the related allowance for credit losses. Acquired loans are segregated between
those considered to be credit deteriorated and those without credit deterioration at acquisition. To make this determination,
management considers such factors as past due status, non-accrual status and credit risk ratings. For acquired performing loans, a
lifetime allowance for credit losses is estimated as of the date of acquisition and is recorded through provision for (reversal of)
credit losses. The difference between the purchase price and loan receivable is amortized over the remaining life of the loan.
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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
All formerly designated purchased credit impaired (“PCI”) loans became purchased credit deteriorated (“PCD”) loans effective
January 1, 2020. PCD loans are loans that, as of the date of acquisition, have experienced a more-than-insignificant deterioration
in credit quality since origination. For PCD loans, any non-credit discount or premium related to an acquired pool of PCD loans
is allocated to each individual asset within the pool. On the acquisition date, the initial allowance for credit losses measured on a
pooled basis is allocated to each individual asset within the pool to allocate any non-credit discount or premium. Credit losses are
measured based on unpaid principal balance. A lifetime allowance for credit losses is estimated as of the date of acquisition. The
initial allowance for credit losses is added to the purchase price and is considered to be part of the PCD loan amortized cost basis.
Allowance for Credit Losses for Loans Held for Investment
Credit quality within the loans held for investment portfolio is continuously monitored by management and is reflected within the
allowance for credit losses for loans. The allowance for credit losses, or reserve, is an estimate of expected losses over the
lifetime of a loan within the Company’s existing loans held for investment portfolio. The allowance for credit losses for loans
held for investment is adjusted by a provision for (reversal of) credit losses, which is reported in earnings, and reduced by the
charge-off of loan amounts, net of recoveries.
The credit loss estimation process involves procedures to appropriately consider the unique characteristics of the Company’s loan
portfolio segments, which are further disaggregated into loan classes, the level at which credit risk is monitored. The allowance
for credit losses for loans not evaluated for specific reserves is calculated using statistical credit factors, including probabilities of
default (“PD”) and loss given default (“LGD”), to the amortized cost of pools of loan exposures with similar risk characteristics
over its contractual life, adjusted for prepayments, to arrive at an estimate of expected credit losses. Economic forecasts are
applied over the period management believes it can estimate reasonable and supportable forecasts. Reasonable and supportable
forecast periods and reversion assumptions to historical data are credit model specific. The Company typically forecasts
economic variables over a one to four year horizon. Prepayments are estimated by loan type using historical information and
adjusted for current and future conditions.
Commercial loans that exceed a minimum size scope are underwritten and graded using credit models that leverage national
industry default data to score the loans. At the conclusion of the process of underwriting or re-grading a borrower, each borrower
(for commercial and industrial loans) or property (for commercial real estate loans) is assigned a PD grade threshold. The
valuation methodology of risk rating internal grades is based on the merits of the financial ratios of the borrower or the property.
In addition, an LGD grade is determined by the credit models utilizing collateral information provided. A master rating scale
effectively "pools" the loans by credit scores and assigns a standard one year PD percentage and an LGD percentage equally for
all loans that have a given score. For borrowers or loans that do not meet the minimum balance threshold, an internal scorecard is
utilized to approximate the grades derived from the credit models and is mapped to the master rating scale. The resulting
numerical PD grade is the credit quality indicator for commercial loans. The grades on borrowers or properties that are scored in
the credit models are determined at origination and updated at least annually. The grades on the internal scorecards are updated
annually if they meet a minimum threshold, or if new circumstances (favorable or unfavorable) warrant a re-scoring.
When computing allowance levels, credit loss assumptions are estimated using models that analyze loans according to credit risk
ratings, historic loss experience, past due status and other credit trends and risk characteristics, including current conditions and
reasonable and supportable forecasts about the future. Determining the appropriateness of the allowance is complex and requires
judgment by management about the effect of matters that are inherently uncertain. Future factors and forecasts may result in
significant changes in the allowance and provision (reversal) for credit losses in those future periods. The allowance for credit
losses will primarily reflect estimated losses for pools of loans that share similar risk characteristics, but will also consider
individual loans that do not share risk characteristics with other loans.
Loans that Share Risk Characteristics with Other Loans
In estimating the component of the allowance for credit losses for loans that share similar risk characteristics with other loans,
such loans are segregated into loan classes. Loans are designated into loan classes based on loans pooled by product types and
similar risk characteristics or areas of risk concentration. In determining the allowance for credit losses, the Company derives an
estimated credit loss assumption from a model that categorizes loan pools based on loan type and internal risk rating or past due
category as follows.
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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Commercial and Industrial and Commercial Real Estate Loans. The Company assesses the credit quality of the borrower and
assigns an internal risk rating by loan type for the commercial and industrial and commercial real estate portfolios. Internal risk
ratings are assigned at origination or acquisition, and if necessary, adjusted for changes in credit quality over the life of the
exposure. In assessing the internal PD risk rating of the loan or related unfunded commitments, we separately evaluate owner and
non-owner occupied real estate. The borrower’s financial statements may be used to evaluate amounts and sources of repayments,
debt service coverage, debt capacity, and quality of earnings. Other non-financial metrics are also evaluated including the
geographies and industries within which it operates, its management strength, and its reputation and historical experience. The
internal LGD risk rating also considers assessment of collateral quality and current loan to value, collateral type and loan
seniority, covenant strength and performance, as well as any individual, corporate, or government guarantees.
These factors are based on an evaluation of historical and current information and sometimes involve subjective assessment and
interpretation. Specific considerations for construction are considered in the internal PD and LGD risk ratings including property
type, development phase and complexity, as well as lease-up and stabilization projections. The PD and LGD factors are further
sensitized in the models for future expectations over the loan’s contractual life, adjusted for prepayments.
1-4 Family Residential Loans. The 1-4 family residential loan portfolio is segmented into pools of residential real estate loans
with similar credit risk characteristics. For 1-4 family residential loans, the Company utilizes separate credit models designed for
these types of loans to estimate the PD and LGD grades for the allowance for credit losses calculation. The models calculate
expected losses and prepayments using borrower information at origination, including FICO score, loan type, collateral type, lien
position, geography, origination year, and loan to value. Past due status post-origination is also a key input in the models. Current
and future changes in economic conditions, including unemployment rates, home prices, index rates, and mortgage rates, are also
considered. New originations and loan purchases are scored using the FICO score at origination. FICO score bands are assigned
following prevalent industry standards and are used as the credit quality indicator for these types of loans. Substandard non-
accrual loans are treated as a separate category in the credit scoring grid as the probability of default is 100% and the FICO score
is no longer a relevant predictor.
Consumer Loans. The consumer loan portfolio is segmented into pools of consumer installment loans or revolving lines of credit
with similar credit characteristics. The models calculate expected losses using borrower information at origination, including
FICO score, origination year, geography, and collateral type.
Broker-Dealer Loans. The broker-dealer loan portfolio is evaluated on an individual basis using the collateral maintenance
practical expedient. The collateral maintenance practical expedient allows the broker-dealer to compare the fair value of the
collateral of each loan as of the reporting date to loan value. The underlying collateral of the loans to customers and
correspondents is marked to market daily and any required additional collateral is collected. The allowance represents the amount
of unsecured loan balances at the end of the period.
Qualitative Factors
Estimating the timing and amounts of future loss cash flows is subject to significant management judgment as these loss cash
flows rely upon estimates such as default rates, loss severities, collateral valuations, the amounts and timing of principal
payments (including any expected prepayments) or other factors that are reflective of current or future expected conditions. These
estimates, in turn, depend on the duration of current overall economic conditions, industry, borrower, or portfolio specific
conditions, the expected outcome of bankruptcy or insolvency proceedings, as well as, in certain circumstances, other economic
factors, including the level of current and future real estate prices. All of these estimates and assumptions require significant
management judgment and certain assumptions that are highly subjective. Model imprecision also exists in the allowance for
credit losses estimation process due to the inherent time lag of available industry information and differences between expected
and actual outcomes.
Management considers adjustments for these conditions in its allowance for credit loss estimates qualitatively where they may
not be measured directly in its individual or collective assessments, including but not limited to:
●
an adjustment to historical loss data to measure credit risk even if that risk is remote and does not meet the scope of
assets with zero expected losses;
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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
●
●
●
●
●
●
●
●
●
the environmental factors and the areas in which credit is concentrated, such as the regulatory, environmental, or
technological environment, the geographical area or key industries, or in the national or regional economic and business
conditions where the borrower has exposure;
the nature and volume of the company’s financial assets;
the borrower’s financial condition, credit rating, credit score, asset quality, or business prospects;
the borrower’s ability to make scheduled interest or principal payments;
the remaining payment terms of the financial assets and the remaining time to maturity and the timing and extent of
prepayments on the financial assets;
the volume and severity of past due or adversely classified financial assets;
the value of underlying collateral in which the collateral-dependent practical expedient has not been utilized;
any updates to credit lending policies and procedures, including lending strategies, underwriting standards, collection
and recovery practices, not reflected in the models; and
the quality of the internal credit review system.
Loans that Do Not Share Risk Characteristics with Other Loans
When a loan is assigned a substandard non-accrual risk rating grade, the loan subsequently is evaluated on an individual basis and
no longer evaluated on a collective basis. The net realizable value of the loan is compared to the appropriate loan basis (i.e. PCD
loan versus non-PCD loan) to determine any allowance for credit losses. Loans that are below a predetermined threshold, with the
exception of 1-4 family residential loans, are fully reserved. The Company generally considers non-accrual loans to be collateral-
dependent. The practical expedient to measure credit losses using the fair value of the collateral has been exercised.
For commercial real estate loans, the fair value of collateral is primarily based on appraisals. For owner occupied real estate
loans, underlying properties are occupied by the borrower in its business, and evaluations are based on business operations used
to service the debt. For non-owner occupied real estate loans, underlying properties are income-producing and evaluations are
based on tenant revenues. For income producing construction and land development loans, appraisals reflect the assumption that
properties are completed.
For 1-4 family residential loans that are graded substandard non-accrual, an assessment of value is made using the most recent
appraisal on file. If the appraisal on file is older than two years, the latest property tax assessment is used as a screening value to
determine if a reserve might be required. If the assessed value is less than the appraised value, this value is discounted for selling
costs and is used to measure the reserve required. If the appraisal is less than two years old, the value is discounted for selling
costs and compared to the appropriate basis in the loan.
Consumer loans are charged off when they reach 90 days delinquency as a general rule. There are limited cases where the loan is
not charged off due to special circumstances and is subject to the collateral review process.
Allowance for Loan Losses for Loans Held for Investment
Prior to the adoption of the new CECL standard as described in Note 2 to the consolidated financial statements, the Company’s
allowance for loan losses was a reserve established through a provision for loan losses charged to or recovered from expense,
which represents management’s best estimate of probable losses inherent in the existing portfolio of loans at the balance sheet
date. The allowance for loan losses included allowance allocations calculated in accordance with the regulatory Interagency
Policy Statement on the Allowance for Loan and Lease Losses and the Receivables and Contingencies Topics of the ASC. The
level of the allowance reflected management’s continuing evaluation of industry concentrations, specific credit risks, loan loss
experience, current loan portfolio quality, present economic, political and regulatory conditions, and unidentified losses inherent
in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is
available for any credit that, in management’s judgment, should be charged off. While management utilized its best judgment and
information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond its control, including
the performance of the loan portfolio, the economy and changes in interest rates.
The Bank’s allowance for loan losses consisted of three elements: (i) specific valuation allowances established for probable
losses on individually impaired loans; (ii) general historical valuation allowances calculated based on historical loan loss
experience for homogenous loans with similar collateral; and (iii) valuation allowances to adjust general reserves based on
current economic conditions and other qualitative risk factors, including projected loss emergence period, both internal and
external to the Bank.
Changes in the volume and severity of past due, non-accrual and classified loans, as well as changes in the nature, volume and
terms of loans in the portfolio are key indicators of changes that could indicate a necessary adjustment to the historical loss
factors. Classified loans are defined as loans having a well-defined weakness or weaknesses related to the borrower's financial
capacity or to pledged collateral that may jeopardize the repayment of the debt. They are characterized by the
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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
possibility that the Bank may sustain some loss if the deficiencies giving rise to the substandard classification are not corrected.
The magnitude of the impact of these factors on the qualitative assessment of the allowance for loan loss changes from quarter to
quarter. Periodically, management conducted an analysis to estimate the loss emergence period for each loan portfolio segment
based on historical charge-offs, loan type and loan payment history and considered available industry peer bank data. Model
output by loan category was reviewed to evaluate the reasonableness of the reserve levels in comparison to the estimated loss
emergence period applied to historical loss experience.
In connection with business combinations, the Bank acquired loans both with and without evidence of credit quality deterioration
since origination. PCI loans were accounted for in pools as well as on an individual loan basis. Cash flows expected to be
collected were recast quarterly for each loan or pool. These evaluations required the continued use and updating of key
assumptions and estimates such as default rates, loss severity given default and prepayment speed assumptions (similar to those
used for the initial fair value estimate). Management judgment was applied in developing these assumptions. If expected cash
flows for a loan or pool decreased, an increase in the allowance for loan losses was made through a charge to the provision for
loan losses. If expected cash flows for a loan or pool increased, any previously established allowance for loan losses was reversed
and any remaining difference increased the accretable yield. This increase in accretable yield was taken into income over the
remaining life of the loan.
Loans without evidence of credit impairment at acquisition were subsequently evaluated for any required allowance at each
reporting date. An allowance for loan losses was calculated using a methodology similar to that described above for originated
loans. The allowance as determined for each loan collateral type was compared to the remaining fair value discount for that loan
collateral type. If greater, the excess was recognized as an addition to the allowance through a provision for loan losses. If less
than the discount, no additional allowance was recorded. Charge-offs and losses first reduced any remaining fair value discount
for the loan and once the discount was depleted, losses were applied against the allowance established for that loan.
Off-Balance Sheet Credit Exposures, Including Unfunded Loan Commitments
The Company maintains a separate allowance for credit losses from off-balance sheet credit exposures, including unfunded loan
commitments, which is included in other liabilities within the consolidated balance sheets. The Company estimates expected
losses by calculating a commitment usage factor based on industry usage factors. The commitment usage factor is applied over
the relevant contractual period. Loss factors from the underlying loans to which commitments are related are applied to the
results of the usage calculation to estimate any liability for credit losses related for each loan type.
Broker-Dealer and Clearing Organization Transactions
Amounts recorded in broker-dealer and clearing organization receivables and payables include securities lending activities, as
well as amounts related to securities transactions for either customers of the Hilltop Broker-Dealers or for the accounts of the
Hilltop Broker-Dealers. Securities borrowed and securities loaned transactions are generally reported as collateralized financings.
Securities borrowed transactions require the Hilltop Broker-Dealers to deposit cash, letters of credit, or other collateral with the
lender. With respect to securities loaned, the Hilltop Broker-Dealers receive collateral in the form of cash or other assets in an
amount generally in excess of the market value of securities loaned. The Hilltop Broker-Dealers monitor the market value of
securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as necessary. Interest income and
interest expense associated with collateralized financings is included in the accompanying consolidated statements of operations.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and amortization computed principally on the straight-
line method over the estimated useful lives of the assets, which range between 3 and 25 years. Gains or losses on disposals of
premises and equipment are included in results of operations.
F-16
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Leases
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Company determines if an arrangement is a lease at inception. Operating leases with a term of greater than one year are
included in operating lease right-of-use (“ROU”) assets and operating lease liabilities on the Company’s consolidated balance
sheets. Finance leases are included in premises and equipment and other liabilities on the Company’s consolidated balance sheets.
The Company has lease agreements with lease and nonlease components, which are generally accounted for as a single lease
component. Leases of low-value assets are assessed on a lease-by-lease basis to determine the need for balance sheet
capitalization.
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its
obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized on the lease
commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not
provide an implicit rate, the Company uses the incremental borrowing rate commensurate with the lease term based on the
information available at the lease commencement date in determining the present value of lease payments. No significant
judgments or assumptions were involved in developing the estimated operating lease liabilities as the Company’s operating lease
liabilities largely represent the future rental expenses associated with operating leases, and the incremental borrowing rates are
based on publicly available interest rates. The operating lease ROU asset also includes any lease payments made and excludes
lease incentives. The Company’s lease terms may include options to extend or terminate the lease. These options to extend or
terminate are assessed on a lease-by-lease basis, and the ROU assets and lease liabilities are adjusted when it is reasonably certain
that an option will be exercised. Rental expense for lease payments is recognized on a straight-line basis over the lease term and
is included in occupancy and equipment, net within our consolidated statements of operations.
Other Real Estate Owned
Real estate acquired through foreclosure (“OREO”) is included in other assets within the consolidated balance sheets and is
carried at management’s estimate of fair value, less estimated cost to sell. Any excess of recorded investment over fair value, less
cost to sell, is charged against the allowance for credit losses when property is initially transferred to OREO. Subsequent to the
initial transfer to OREO, downward valuation adjustments are charged against earnings. Valuation adjustments, revenue and
expenses from operations of the properties and resulting gains or losses on sale are included within the consolidated statements of
operations in other noninterest income or expense, as appropriate.
Debt Issuance Costs
The Company capitalizes debt issuance costs associated with financing of debt. These costs are amortized using the effective
interest method over the repayment term of the debt. Unamortized debt issuance costs are presented in the consolidated balance
sheets as a direct reduction from the associated debt liability. Debt issuance costs of $0.3 million, $0.2 million and $0.2 million
during 2020, 2019 and 2018, respectively, were amortized and included in interest expense within the consolidated statements of
operations. In May 2020 and April 2015, debt issuance costs of $3.2 million and $1.9 million, respectively, were capitalized in
connection with Hilltop’s issuance of the Subordinated Notes due 2030 and 2035 (defined hereafter) and the 5% senior notes due
2025 (defined hereafter), respectively.
Goodwill
Goodwill, which represents the excess of cost over the fair value of the net assets acquired, is allocated to reporting units and
tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the carrying
amount should be assessed. The Company performs required annual impairment tests of its goodwill as of October 1st for each of
its reporting units, which is one level below an operating segment. Goodwill is assigned to reporting units at the date the goodwill
is initially recorded. Once goodwill has been assigned to reporting units, it no longer retains its association with a particular
acquisition, and all of the activities within a reporting unit, whether acquired or internally generated, are available to support the
value of the goodwill. The goodwill impairment test requires the Company to make judgments in determining what assumptions
to use in the calculation. The process consists of estimating the fair value of each reporting unit based on valuation techniques,
including a discounted cash flow model using revenue and profit forecasts and recent industry transaction and trading multiples
of peers, and comparing those estimated fair values with the carrying values of the assets and liabilities of the reporting unit,
which includes the allocated goodwill. If the estimated fair value is less than the carrying value, the Company is required to
recognize an
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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, any loss
recognized will not exceed the total amount of goodwill allocated to that reporting unit.
Intangibles and Other Long-Lived Assets
Intangible assets are acquired assets that lack physical substance but can be distinguished from goodwill because of contractual or
other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related
contract, asset or liability. The Company’s intangible assets primarily consist of core deposits, trade names and customer
relationships. Intangible assets with definite useful lives are generally amortized on the straight-line method over their estimated
lives, although certain intangibles, including core deposits, and customer relationships, are amortized on an accelerated basis.
Amortization of intangible assets is recorded in other noninterest expense within the consolidated statements of operations.
Intangible assets with indefinite useful lives are tested for impairment on an annual basis as of October 1st, or more often if
events or circumstances indicate there may be impairment, and not amortized until their lives are determined to be
definite. Intangible assets with definite useful lives, premises and equipment, operating lease ROU assets, and other long-lived
assets are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not
be recoverable from future undiscounted cash flows. Impaired assets are recorded at fair value.
Mortgage Servicing Rights
The Company determines its portfolio segment of residential mortgage servicing assets based on the asset type being serviced
along with the methods used to manage the risk inherent in the servicing assets, which includes the market inputs used to value
the servicing assets. The Company measures its servicing assets at fair value and reports changes in fair value through earnings.
The retained mortgage servicing rights (“MSR”) asset is measured at fair value as of the date of sale of the related mortgage loan.
Subsequent fair value measurements of the MSR asset are determined by valuing the projected net servicing cash flows, which
are then discounted to estimate fair value using a discounted cash flow model. Assumptions used include market discount rates,
anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income.
The model assumptions and the MSR asset fair value estimates are compared to observable trades of similar portfolios as well as
to MSR asset broker valuations and industry surveys, as available. The expected life of the loan can vary from management’s
estimates due to prepayments by borrowers. The value of the MSR asset is also dependent upon the discount rate used in the
model, which is based on current market rates that are reviewed by management on an ongoing basis.
Derivative Financial Instruments
The Company enters into various derivative financial instruments to manage interest rate risk or to hedge specified assets and
liabilities. The Company’s derivative financial instruments also include interest rate lock commitments (“IRLCs”) executed with
its customers that allow those customers to obtain a mortgage loan on a future date at an agreed-upon interest rate. The IRLCs,
forward commitments, interest rate swaps, U.S. Treasury bond futures and options and Eurodollar futures meet the definition of a
derivative under the provisions of the Derivatives and Hedging Topic of the ASC.
Derivatives are recorded at fair value in the consolidated balance sheets. To qualify for hedge accounting, derivatives must be
highly effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception
of the derivative contract. If derivative instruments are designated as hedges of fair values, the change in the fair value of both the
derivative instrument and the hedged item are included in current earnings. Changes in the fair value of derivatives designated as
hedges of cash flows are recorded in other comprehensive income (loss). Actual cash receipts and/or payments and related
accruals on derivatives related to hedges are recorded as adjustments to the line item where the hedged item’s effect on earnings
is recorded.
F-18
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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Revenue from Contracts with Customers
Certain activities primarily within the Company’s broker-dealer and banking segments are subject to the provisions of ASC 606,
Revenue from Contracts with Customers. The Company’s broker-dealer segment has four primary lines of business: (i) public
finance services, (ii) structured finance, (iii) fixed income services and (iv) wealth management, which includes retail, clearing
services and securities lending groups. Revenue from contracts with customers subject to the guidance in ASC 606 from the
broker-dealer segment is included within the securities commissions and fees and investment and securities advisory fees and
commissions line items within the consolidated statements of operations. Commissions and fees revenue is generally recognized
at a point in time upon the delivery of contracted services based on a predefined contractual amount or on the trade date for trade
execution services based on prevailing market prices and internal and regulatory guidelines.
The Company’s banking segment has three primary lines of business: (i) business banking, (ii) personal banking and (iii) wealth
and investment management. Revenue from contracts with customers subject to the guidance in ASC 606 from the banking
segment (certain retail and trust fees) is included within the other noninterest income line item within the consolidated statements
of operations. Retail and trust fees are generally recognized at the time the related transaction occurs or when services are
completed. Fees are based on the dollar amount of the transaction or are otherwise predefined in contracts associated with each
customer account depending on the type of account and services provided.
Loss Contingencies
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when
the likelihood of loss is probable and an amount or range of loss can be reasonably estimated.
Stock-Based Compensation
Stock-based compensation expense for all share-based awards granted is based on the grant date fair value estimated in
accordance with the provisions of the Stock Compensation Topic of the ASC. The Company recognizes these compensation costs
for only those awards expected to vest over the service period of the award.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recorded for the
estimated future tax effects of the temporary difference between the tax basis and book basis of assets and liabilities reported in
the accompanying consolidated balance sheets. The provision for income tax expense or benefit differs from the amounts of
income taxes currently payable because certain items of income and expense included in the consolidated financial statements are
recognized in different time periods by taxing authorities. Interest and penalties incurred related to tax matters are charged to
other interest expense or other noninterest expense, respectively. The revaluation of deferred tax assets as a result of enacted tax
rate changes, such as those found in the Tax Cuts and Jobs Act of 2017 (“Tax Legislation”), is recognized within income tax
expense in continuing operations in the period of enactment.
Benefits from uncertain tax positions are recognized in the consolidated financial statements only when it is more likely than not
that the tax position will be sustained upon examination by the appropriate taxing authority having full knowledge of all relevant
information. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount of
cumulative benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Tax positions that
previously failed to meet the more-likely-than-not recognition threshold are recognized in the reporting period in which that
threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold are
derecognized in the reporting period in which that threshold is no longer met. If the Company were to prevail on all uncertain tax
positions, the effect would be a benefit to the Company’s effective tax rate. Due to uncertainties in any tax audit outcome,
estimates of the ultimate settlement of unrecognized tax positions may change and the actual tax benefits may differ significantly
from the estimate.
Deferred tax assets, including net operating loss and tax credit carry forwards, are reduced by a valuation allowance when, in the
opinion of management, it is more-likely-than-not that any portion of these tax attributes will not be realized. Periodic reviews of
the carrying amount of deferred tax assets are made when it is more likely than not that all or a portion of a deferred tax asset will
not be realized.
F-19
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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Cash, Cash Equivalents and Restricted Cash
For the purpose of presentation in the consolidated statements of cash flows, cash, cash equivalents and restricted cash are
defined as the amounts included in the consolidated balance sheet captions “Cash and due from banks”, “Federal funds sold” and
“Assets segregated for regulatory purposes.” Cash equivalents have original maturities of three months or less.
Repurchases of Common Stock
In accordance with Maryland law, the Company uses the par value method of accounting for its stock repurchases, whereby the
par value of the shares is deducted from common stock. The excess of the cost of shares acquired over the par value is allocated
to additional paid-in capital based on an estimated average sales price per issued share with the excess amounts charged to
retained earnings.
Basic and Diluted Net Income Per 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.
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. The Company calculated basic earnings per common share using
the treasury method instead of the two-class method because there were no instruments which qualified as participating securities
during 2020, 2019 or 2018.
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 2020, 2019 and 2018, restricted stock units
(“RSUs”) were the only potentially dilutive non-participating instruments issued by Hilltop. Next, the Company determines and
includes in the diluted earnings per common share calculation the more dilutive effect of the participating securities using the
treasury stock method or the two-class method. Undistributed losses are not allocated to the nonvested share-based payment
awards (the participating securities) under the two-class method as the holders are not contractually obligated to share in the
losses of the Company.
2. Recently Issued Accounting Standards
Accounting Standards Adopted During 2020
In March 2020, FASB issued ASU 2020-03 which included various clarifications and improvements related to financial
instruments. The following topics are addressed: fair value option disclosures, applicability of portfolio exception to non-
financial items, disclosures for depository and lending institutions, cross-reference to line-of-credit or revolving debt
arrangements, cross-reference to net asset value practical expedient, the contractual term of a net investment in a lease for
measuring expected credit losses, and recording of an allowance for credit losses when control of financial assets sold is regained.
All items had various effective dates, which for the Company ranged from January 1, 2020 to the date of issuance. The adoption
of ASU 2020-03 did not have a material impact on the Company’s consolidated financial statements.
In December 2019, FASB issued ASU 2019-12 which simplifies the accounting for income taxes by removing certain exceptions
to the general principles in the ASC and is intended to improve consistency by clarifying and amending existing guidance. The
amendments are effective for annual periods beginning after December 15, 2020. As permitted within the amendment, the
Company elected to early adopt and prospectively apply the provisions of this amendment as
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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
of January 1, 2020. The removal of the exceptions did not result in a material change in the Company’s current or deferred
income tax provisions and did not have a material impact on the Company’s consolidated financial statements.
In August 2018, FASB issued ASU 2018-15 which aligns the requirements for capitalizing implementation costs incurred in a
hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or
obtain internal-use software (and hosting arrangements that include internal-use software licenses). The accounting for the
service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The
amendment also includes presentation and disclosure provisions regarding capitalized implementation costs. The amendment is
effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. The Company
adopted the provisions of this amendment as of January 1, 2020. The impact of this amendment is limited to presentation and
disclosure changes that did not have an impact on the Company’s consolidated financial statements.
In August 2018, FASB issued ASU 2018-13 which includes various removals, modifications and additions to existing guidance
regarding fair value disclosures. The amendments are effective for annual periods, and interim periods within those annual
periods, beginning after December 15, 2019. The Company adopted the provisions of these amendments as of January 1, 2020.
The impact of these amendments is limited to presentation and disclosure changes that did not have an impact on the Company’s
consolidated financial statements.
In June 2016, FASB issued ASU 2016-13 which sets forth a current expected credit loss model that requires entities to measure
all credit losses expected over the life of an exposure (or pool of exposures) for financial instruments held at the reporting date
based on historical experience, current conditions and reasonable and supportable forecasts. The FASB has issued various
updates, improvements and technical corrections to the standard since the issuance of ASU 2016-13. The new standard, which is
codified in ASC 326, Financial Instruments – Credit Losses, replaces the existing incurred loss model and is applicable to the
measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit
exposures. For available for sale securities, the standard modifies the current OTTI model by requiring entities to record an
allowance for credit losses rather than reducing the carrying amount of securities. Additionally, the new standard eliminated the
former accounting model for PCI loans, but requires an allowance to be recognized for PCD assets. The new standard also
requires enhanced disclosures to help financial statement users better understand significant estimates and judgments used in
estimating credit losses, as well as the credit quality and underwriting standards of an entity’s portfolio. The Company’s
implementation efforts included, among other activities, the development, testing and validation of credit forecasting models and
a new credit scoring system for significant loan portfolio segments, reassessment of risk rating grades and matrix, as well as
development of the policies, systems and controls required to fully implement CECL. The new standard is effective for the
Company for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2019, with
a cumulative-effect adjustment to retained earnings at the date of adoption. On January 1, 2020, the Company adopted the new
CECL standard and recorded entries that resulted in an aggregate allowance for credit losses of $83.6 million within the
consolidated balance sheets. The transition adjustment resulted in a net of tax, decrease of $5.7 million to opening retained
earnings at January 1, 2020. The decrease to retained earnings included an initial estimate of lifetime expected credit losses for
PCD loans and was recognized through a balance sheet gross-up. While not material, the impact of the adoption of CECL also
affected the Company’s regulatory capital, performance and other asset quality ratios. Future changes in the allowance for credit
losses are expected to be volatile given dependence upon, among other things, the portfolio composition and quality, as well as
the impact of significant drivers, including prepayment assumptions and macroeconomic conditions and forecasts.
In March 2020, FASB issued ASU 2020-04, which is intended to provide temporary optional expedients and exceptions to the
GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected
market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference
rates. This guidance is effective beginning on March 12, 2020, and the Company may elect to apply the amendments
prospectively through December 31, 2022. Further, in January 2021, FASB issued ASU 2021-01, which clarifies that all
derivative instruments affected by changes to the interest rates used for discounting, margining or contract price alignment are in
the scope of ASU 2020-04 and therefore qualify for the available temporary optional expedients and exceptions. As such, entities
that employ derivatives that are the designated hedged item in a hedge relationship where perfect effectiveness is assumed can
continue to apply hedge accounting without de-designating the hedging relationship to the extent such derivatives are impacted
by the discounting transition. The Company adopted the provisions of ASU 2020-04, as well as retrospectively applied the
amendments of ASU 2021-01, as of December 31,
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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2020. The adoption of these amendments did not have a material impact on the Company’s consolidated financial statements.
Accounting Standards Issued But Not Yet Adopted
In January 2020, FASB issued ASU 2020-01 to clarify the interaction among ASC 321, ASC 323, and ASC 815 for equity
securities, equity method investments, and certain financial instruments to acquire equity securities. ASU 2020-01 clarifies
whether re-measurement of equity investments is appropriate when observable transactions cause the equity method to be
triggered or discontinued. ASU 2020-01 also provides that certain forward contracts and purchased options to acquire equity
securities will be measured under ASC 321 without an assessment of subsequent accounting upon settlement or exercise. The
amendment is effective in periods beginning after December 15, 2020. The Company adopted the provisions of ASU 2020-01 as
of January 1, 2021. The impact of this guidance is not expected to have a material impact on the Company’s consolidated
financial statements.
T
3. Discontinued Operations
NLC Sale
On June 30, 2020, Hilltop completed the sale of all of the outstanding capital stock of NLC, which comprised the operations of
the former insurance segment, for cash proceeds of $154.1 million. During 2020, Hilltop recognized an aggregate gain associated
with this transaction of $36.8 million, net of customary transaction costs of $5.1 million and was subject to post-closing
adjustments. The resulting book gain from this sale transaction was not recognized for tax purposes due to the excess tax basis
over book basis being greater than the recorded book gain. Any tax loss related to this transaction is deemed disallowed pursuant
to the rules under the Internal Revenue Code.
During the first quarter of 2020, management determined that the pending sale of NLC met the criteria to be presented as
discontinued operations. Therefore, NLC’s results and its assets and liabilities have been presented as discontinued operations in
the consolidated financial statements. All related notes to consolidated financial statements for discontinued operations have been
included in this note. The following table details the carrying amounts of assets and liabilities of NLC reflected in the
consolidated balance sheet under the caption “Assets of discontinued operations” and “Liabilities of discontinued operations”,
respectively, at December 31, 2019.
Assets
Cash and due from banks
Securities:
Available for sale, at fair value
Equity, at fair value
Premises and equipment, net
Operating lease right-of-use assets
Other assets
Goodwill
Other intangible assets, net
Total assets of discontinued operations
Liabilities
Notes payable
Operating lease liabilities
Other liabilities
Total liabilities of discontinued operations
F-22
$
51,333
86,899
19,841
106,740
9,607
2,739
50,533
23,988
3,489
248,429
27,500
2,783
110,391
140,674
$
$
$
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following table presents the results of discontinued operations for NLC for the periods indicated.
Interest income:
Securities:
Taxable
Other
Total interest income
Interest expense:
Notes payable
Noninterest income:
Net insurance premiums earned
Other
Total noninterest income
Noninterest expense:
Employees' compensation and benefits
Occupancy and equipment, net
Professional services
Loss and loss adjustment expenses
Other
Total noninterest expense
Income from discontinued operations before income taxes
Gain on disposal of discontinued operations
Income tax expense
Income from discontinued operations, net of income taxes
Securities
2020
Year Ended December 31,
2019
2018
$
$
$
1,752
71
1,823
775
65,077
3,051
68,128
6,002
464
18,201
38,419
3,987
67,073
2,103
36,811
518
38,396
$
$
3,611
522
4,133
1,806
132,284
10,915
143,199
11,663
991
35,528
68,940
10,796
127,918
17,608
—
3,618
13,990
$
4,310
495
4,805
1,780
136,751
5,909
142,660
11,474
1,284
35,953
79,347
11,863
139,921
5,764
—
823
4,941
The available for sale securities held by NLC at December 31, 2019 reflected in the consolidated balance sheets under the caption
“Assets of discontinued operations” were primarily comprised of U.S. Treasury, residential mortgage-backed and corporate debt
securities with aggregate unrealized gross gains of $2.5 million and measured using Level 2 inputs on a recurring basis. NLC’s
available for sale portfolio had nominal unrealized gross losses at December 31, 2019.
NLC had unrealized net gains of $1.1 million during 2020 from the equity securities held at December 31, 2019, measured using
Level 1 inputs on a recurring basis. NLC recognized net gains of $1.9 million during 2019 due to changes in the fair value of
equity securities still held at the balance sheet date.
Reinsurance Activity
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 included in other assets within the consolidated
balance sheets. Reinsurance assumed from other companies, including assumed premiums written and earned, and losses and
LAE, is accounted for in the same manner as direct insurance written.
F-23
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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The effects of reinsurance on premiums written and earned are included within discontinued operations for all periods presented
and are summarized as follows (in thousands).
Premiums from direct business
Reinsurance assumed
Reinsurance ceded
Net premiums
2020
Year Ended December 31,
2019
2018
Written Earned Written Earned
Written Earned
$ 63,811
6,396
(2,759)
$ 67,448
$ 61,384
6,452
(2,759)
$ 65,077
$ 125,157
13,148
(7,191)
$ 131,114
$ 126,434
13,041
(7,191)
$ 132,284
$ 129,611
12,917
(8,749)
$ 133,779
$ 133,112
12,516
(8,877)
$ 136,751
The effects of reinsurance on incurred losses and LAE are included within discontinued operations for all periods and are as
follows (in thousands).
Losses and LAE incurred
Reinsurance recoverables
Net loss and LAE incurred
$
$
Year Ended December 31,
2019
68,130
810
68,940
2020
38,225
194
38,419
$
$
$
$
2018
76,464
2,883
79,347
Costs of acquiring insurance primarily consist of commissions, premium taxes and underwriting expenses, and are deferred and
amortized over the terms of the policies or reinsurance treaties to which they relate. Proceeds from reinsurance transactions that
represent recovery of acquisition costs reduce applicable unamortized acquisition costs in such a manner that net acquisition costs
are capitalized and charged to expense in proportion to net revenue recognized. A premium deficiency and a corresponding
charge to income is recognized if the sum of the expected loss and LAE, unamortized policy acquisition costs, and maintenance
costs exceed related unearned insurance premiums and anticipated investment income. At December 31, 2019, there was no
premium deficiency.
Policy acquisition expenses, primarily commissions, premium taxes and underwriting expenses related to the successful issuance
of a new or renewal policy incurred by NLC are deferred and charged against income ratably over the terms of the related
policies. A summary of the activity in deferred policy acquisition costs included within discontinued operations for all periods is
as follows (in thousands).
Balance, beginning of year
Acquisition expenses capitalized
Amortization charged to income
Balance, end of year
$
$
Insurance Losses and Loss Adjustment Expenses
$
Year Ended December 31,
2019
16,633
32,245
(33,206)
15,672
2020
15,672
17,642
(16,967)
16,347
$
$
$
2018
16,988
34,328
(34,683)
16,633
At December 31, 2019, our gross reserve for unpaid losses and LAE reflected in the consolidated balance sheet under the caption
“Liabilities of discontinued operations” was $15.3 million, including estimated recoveries from reinsurance of $1.0 million. 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 insurance subsidiary 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 was 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.
The methods that our actuaries utilized to estimate ultimate loss and LAE amounts were the paid and reported loss development
method and the paid and reported Bornhuetter-Ferguson method. Significant periods of time can elapse between the occurrence
of an insured loss, the reporting of the loss to the insurer and the insurer’s payment of that loss. NLC’s liabilities for unpaid losses
represent the best estimate at a given point in time of what it expects to pay claimants,
F-24
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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
based on facts, circumstances and historical trends then known. 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.
4. Acquisition
On August 1, 2018, in an effort to expand its Houston-area banking operations, the Company acquired privately-held The Bank
of River Oaks (“BORO”) in an all-cash transaction (the “BORO Acquisition”). Pursuant to the terms of the definitive agreement,
the Company paid cash in the aggregate amount of $85 million to the shareholders and option holders of BORO. The operations
of BORO are included in the Bank’s operating results beginning August 1, 2018. BORO’s results of operations prior to the
acquisition date are not included in the Company’s consolidated operating results.
The BORO Acquisition 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
resulting fair values of the identifiable assets acquired and liabilities assumed from BORO at August 1, 2018 are summarized in
the following table (in thousands).
Cash and due from banks
Securities
Loans held for investment
Other assets
Total identifiable assets acquired
Deposits
Short-term borrowings
Other liabilities
Total liabilities assumed
Net identifiable assets acquired
Goodwill resulting from the acquisition
Net assets acquired
$
$
21,756
60,477
326,618
25,912
434,763
376,393
10,000
2,996
389,389
45,374
39,627
85,001
The goodwill of $39.6 million resulting from the BORO Acquisition represents the inherent long-term value expected from the
business opportunities created from combining BORO with the Company. The Company used significant estimates and
assumptions to value the identifiable assets acquired and liabilities assumed. The amount of goodwill recorded in connection with
the Company’s acquisition of BORO is not deductible for tax purposes.
Included within the fair value of other assets in the table above are identifiable core deposits intangible assets recorded in
connection with the BORO Acquisition of $10.0 million which is being amortized on an accelerated basis over an estimated
useful life of six years. The fair value of the core deposit intangible assets was estimated using the net cost savings method, a
variation of the income approach. This involved the use of the following significant assumptions: cost of deposits, customer
attrition rate, and discount rate.
During 2018, pre-tax transaction- and integration-related expenses of $8.2 million associated with the BORO Acquisition are
included in noninterest expense within the consolidated statement of operations. Such expenses were for professional services
and other incremental employee costs associated with the integration of BORO’s operations.
F-25
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Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Fair Value Measurements
Fair Value Measurements and Disclosures
The Company determines fair values in compliance with The Fair Value Measurements and Disclosures Topic of the ASC (the
“Fair Value Topic”). The Fair Value Topic defines fair value, establishes a framework for measuring fair value in GAAP and
expands disclosures about fair value measurements. The Fair Value Topic defines fair value as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Fair Value Topic assumes
that transactions upon which fair value measurements are based occur in the principal market for the asset or liability being
measured. Further, fair value measurements made under the Fair Value Topic exclude transaction costs and are not the result of
forced transactions.
The Fair Value Topic includes a fair value hierarchy that classifies fair value measurements based upon the inputs used in valuing
the assets or liabilities that are the subject of fair value measurements. The fair value hierarchy gives the highest priority to
quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs, as indicated below.
●
●
●
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities that the Company can access
at the measurement date.
Level 2 Inputs: Observable inputs other than Level 1 prices. Level 2 inputs include quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs
other than quoted prices that are observable for the asset or liability (such as interest rates, yield curves, prepayment
speeds, default rates, credit risks and loss severities), and inputs that are derived from or corroborated by market data,
among others.
Level 3 Inputs: Unobservable inputs that reflect an entity’s own 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 the retained 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 December 31, 2020 and 2019,
the aggregate fair value of PrimeLending’s mortgage loans held for sale accounted for under the Fair Value Option was $2.52
billion and $1.94 billion, respectively, and the unpaid principal balance of those loans was $2.41 billion and $1.88 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, as further described below. Those inputs include quotes from mortgage loan investors and
derivatives dealers and data from independent pricing services. The fair value of loans held for sale is determined using an exit
price method.
Trading Securities — Trading securities are reported at fair value primarily using either Level 1 or Level 2 inputs in the same
manner as discussed below for available for sale securities.
Available For Sale Securities — Most securities available for sale are reported at fair value using Level 2 inputs. The Company
obtains fair value measurements from independent pricing services. As the Company is responsible for the determination of fair
value, control processes are designed to ensure that the fair values received from independent pricing services are reasonable and
the valuation techniques and assumptions used appear reasonable and consistent with prevailing market conditions. The fair value
measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield
curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the financial
instruments’ terms and conditions, among other things.
F-26
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Equity Securities - For public common and preferred equity stocks, the determination of fair value uses Level 1 inputs based on
observable market transactions.
Loans Held for Sale — Mortgage loans held for sale are reported at fair value, as discussed above, using Level 2 inputs that
consist of commitments on hand from investors or prevailing market prices. These instruments are held for relatively short
periods, typically no more than 30 days. As a result, changes in instrument-specific credit risk are not a significant component of
the change in fair value. 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.
Derivatives — Derivatives, which are included in other assets and liabilities within the Company’s consolidated balance sheets,
are reported at fair value using either Level 2 or Level 3 inputs. The Bank uses dealer quotes to value interest rate swaps, forward
purchase commitments and forward sale commitments executed for both hedging and non-hedging purposes. PrimeLending and
the Hilltop Broker-Dealers use dealer quotes to value forward purchase commitments and forward sale commitments,
respectively, executed for both hedging and non-hedging purposes. PrimeLending also issues IRLCs to its customers and the
Hilltop Broker-Dealers issue forward purchase commitments to its clients that are valued based on the change in the fair value of
the underlying mortgage loan from inception of the IRLC or purchase commitment to the balance sheet date, adjusted for
projected loan closing rates. PrimeLending determines the value of the underlying mortgage loan as discussed in “Loans Held for
Sale”, above. The Hilltop Broker-Dealers determine the value of the underlying mortgage loan from prices of comparable
securities used to value forward sale commitments. Additionally, PrimeLending also uses dealer quotes to value Eurodollar
futures and U.S. Treasury bond futures and options used to hedge interest rate risk, and the Hilltop Broker-Dealers use dealer
quotes to value Eurodollar futures and U.S. Treasury bond futures and options used to hedge changes in the fair value of
securities.
MSR Asset — The MSR asset is reported at fair value using Level 3 inputs. The MSR asset is valued by projecting net servicing
cash flows, which are then discounted to estimate the fair value. The fair value of the MSR asset is impacted by a variety of
factors. Prepayment rates and discount rates, the most significant unobservable inputs, are discussed further in Note 12 to the
consolidated financial statements. The increase in the weighted average discount rate used to value the MSR asset at December
31, 2020, compared to December 31, 2019, addresses the effect of the reduction in third-party servicing outlets beginning in the
second quarter of 2020 resulting from the impact of the Coronavirus Aid Relief, and Economic Security Act (“CARES Act”).
The CARES Act permits borrowers of federally-backed mortgage loans to forbear payments, which could negatively impact
servicers’ liquidity and their ability to purchase servicing.
Securities Sold, Not Yet Purchased — Securities sold, not yet purchased are reported at fair value primarily using either Level
1 or Level 2 inputs in the same manner as discussed above for trading and available for sale securities.
The following tables present information regarding financial assets and liabilities measured at fair value on a recurring basis (in
thousands).
December 31, 2020
Trading securities
Available for sale securities
Equity securities
Loans held for sale
Derivative assets
MSR asset
Securities sold, not yet purchased
Derivative liabilities
$
Level 1
Inputs
$ 45,390
—
140
—
—
—
54,494
—
Level 2
Inputs
648,865
1,462,205
—
2,449,588
126,898
—
25,295
74,598
Level 3
Inputs
Total
Fair Value
$
— $
—
—
71,816
—
143,742
—
—
694,255
1,462,205
140
2,521,404
126,898
143,742
79,789
74,598
F-27
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2019
Trading securities
Available for sale securities
Equity securities
Loans held for sale
Derivative assets
MSR asset
Securities sold, not yet purchased
Derivative liabilities
Level 1
Inputs
$
— $
—
166
—
—
—
29,080
—
Level 2
Inputs
689,576
911,493
—
1,868,518
33,129
—
14,737
17,140
Level 3
Inputs
$
— $
—
—
67,195
—
55,504
—
—
Total
Fair Value
689,576
911,493
166
1,935,713
33,129
55,504
43,817
17,140
The following table includes a rollforward for those financial instruments measured at fair value using Level 3 inputs (in
thousands).
Balance at
Total Gains or Losses
(Realized or Unrealized)
Included in Other
Beginning of
Year
Purchases/
Additions
Sales/
Reductions
Transfers into
Level 3
Included in
Net Income
Comprehensive
Income (Loss)
Balance at
End of Year
$
$
$
$
$
$
67,195
55,504
122,699
$
61,410
162,914
$ 224,324
50,464
66,102
116,566
36,972
54,714
91,686
$
$
$
$
60,475
13,755
74,230
61,573
25,028
86,601
$
$
$
$
$
$
(57,682)
(36,750)
(94,432)
(34,849)
—
(34,849)
(41,801)
(9,303)
(51,104)
$
$
$
$
$
$
10,323
—
10,323
1,136
—
1,136
$
$
$
$
(9,430)
(37,926)
(47,356)
(10,031)
(24,353)
(34,384)
— $
—
— $
(6,280)
(4,337)
(10,617)
$
$
$
$
$
$
— $
—
— $
71,816
143,742
215,558
— $
—
— $
67,195
55,504
122,699
— $
—
— $
50,464
66,102
116,566
Year ended December 31,
2020
Loans held for sale
MSR asset
Total
Year ended December 31,
2019
Loans held for sale
MSR asset
Total
Year ended December 31,
2018
Loans held for sale
MSR asset
Total
All net realized and unrealized gains (losses) in the table above are reflected in the accompanying consolidated financial
statements. The unrealized gains (losses) relate to financial instruments still held at December 31, 2020.
For Level 3 financial instruments measured at fair value on a recurring basis at December 31, 2020 and 2019, the significant
unobservable inputs used in the fair value measurements were as follows.
Range (Weighted-Average)
December 31,
Financial instrument
Loans held for sale
Valuation Technique
Market comparable
Unobservable Inputs
2020
2019
Projected price
91 - 94 %
( 94 %)
92 - 96 %
( 95 %)
MSR asset
Discounted cash flows
Constant prepayment rate
Discount rate
12.15 %
14.60 %
13.16 %
11.14 %
The Company had no transfers between Levels 1 and 2 during the periods presented. Any transfers are based on changes in the
observability and/or significance of the valuation inputs and are assumed to occur at the beginning of the quarterly reporting
period in which they occur.
The following table presents those changes in fair value of instruments recognized in the consolidated statements of operations
that are accounted for under the Fair Value Option (in thousands).
Year Ended December 31, 2020
Year Ended December 31, 2019
Year Ended December 31, 2018
Loans held for sale
MSR asset
Net
Gains (Losses)
52,296
$
(37,926)
$
Other
Noninterest
Income
Total
Changes in
Fair Value Gains (Losses)
12,775
$
(24,353)
52,296
(37,926)
Net
— $
—
F-28
Other
Noninterest
Income
Total
Changes in
Fair Value Gains (Losses)
(8,063)
$
(4,337)
12,775
(24,353)
Net
— $
—
$
$
Other
Noninterest
Income
Total
Changes in
Fair Value
(8,063)
(4,337)
— $
—
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Company determines the fair value of OREO on a non-recurring basis. In particular, the fair value of properties are
determined at their respective acquisition date fair values. In addition, facts and circumstances may dictate a fair value
measurement when there is evidence of impairment. The Company determines fair value primarily using independent appraisals
of OREO properties. The resulting fair value measurements are classified as Level 2 inputs. At December 31, 2020 and 2019, the
estimated fair value of OREO was $21.3 million and $18.2 million, respectively, and the underlying fair value measurements
utilized Level 2 inputs. The amounts are included in other assets within the consolidated balance sheets. During the reported
periods, all fair value measurements for OREO subsequent to initial recognition utilized Level 2 inputs. The Company recorded
total losses of $4.4 million, $1.4 million and $2.8 million during 2020, 2019 and 2018, respectively, which represent a change in
fair value subsequent to initial recognition of the asset.
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 measured at fair value on a recurring or non-recurring basis are discussed above. For other financial
assets and liabilities, the Company utilizes quoted market prices, if available, to estimate the fair value of financial instruments.
Because no quoted market prices exist for a significant portion of the Company’s financial instruments, the fair value of such
instruments has been derived based on management’s assumptions with respect to future economic conditions, the amount and
timing of future cash flows, and estimated discount rates. Different assumptions could significantly affect these estimates.
Accordingly, the estimates provided herein do not necessarily indicate amounts which could be realized in a current transaction.
Further, as it is management’s intent to hold a significant portion of its financial instruments to maturity, it is not probable that
the fair values shown below will be realized in a current transaction.
Because of the wide range of permissible valuation techniques and the numerous estimates which must be made, it may be
difficult to make reasonable comparisons of the Company’s fair value information to that of other financial institutions. The
aggregate estimated fair value amount should in no way be construed as representative of the underlying value of Hilltop and its
subsidiaries. The following methods and assumptions are typically used in estimating the fair value disclosures for financial
instruments:
Cash and Cash Equivalents — For cash and due from banks and federal funds sold, the carrying amount is a reasonable
estimate of fair value.
Assets Segregated for Regulatory Purposes — Assets segregated for regulatory purposes may consist of cash and securities
with carrying amounts that approximate fair value.
Securities Purchased Under Agreements to Resell — Securities purchased under agreements to resell are carried at the
amounts at which the securities will subsequently be resold as specified in the agreements. The carrying amounts approximate
fair value due to their short-term nature.
Held to Maturity Securities — For securities held to maturity, estimated fair value equals quoted market price, if available. If a
quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Loans Held for Sale — Loans held for sale includes mortgage loans held for sale that are guaranteed by U.S. government
agencies that are subject to repurchase, or have been repurchased, by PrimeLending and certain mortgage loans originated by
PrimeLending on behalf of the Bank. Such loans are reported at fair value, as discussed above, using Level 2 inputs that consist
of commitments on hand from investors or prevailing market prices.
Loans Held for Investment — The estimated fair values of loans held for investment are measured using an exit price method.
Broker-Dealer and Clearing Organization Receivables and Payables — The carrying amount approximates their fair value.
Deposits — The estimated fair value of demand deposits, savings accounts and NOW accounts is the amount payable on demand
at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently
F-29
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
offered for deposits of similar remaining maturities. The carrying amount for variable-rate certificates of deposit approximates
their fair values.
Short-Term Borrowings — The carrying amounts of federal funds purchased, borrowings under repurchase agreements, Federal
Home Loan Bank (“FHLB”) and other short-term borrowings approximate their fair values.
Debt — The fair values are estimated using discounted cash flow analysis based on current incremental borrowing rates for
similar types of borrowing arrangements.
Other Assets and Liabilities — Other assets and liabilities primarily consists of cash surrender value of life insurance policies
and accrued interest receivable and payable with carrying amounts that approximate their fair values using Level 2 inputs. The
fair value of certain other receivables and investments is based on Level 3 inputs.
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).
December 31, 2020
Financial assets:
Carrying
Amount
Level 1
Inputs
Estimated Fair Value
Level 3
Inputs
Level 2
Inputs
Cash and cash equivalents
Assets segregated for regulatory purposes
Securities purchased under agreements to resell
Held to maturity securities
Loans held for sale
Loans held for investment, net
Broker-dealer and clearing organization receivables
Other assets
$ 1,062,946
290,357
80,319
311,944
266,982
7,544,097
1,404,727
74,881
$
$ 1,062,946
290,357
—
—
—
—
—
—
— $
—
80,319
326,671
266,982
437,007
1,404,727
73,111
— $
—
—
—
—
7,351,411
—
1,770
Total
1,062,946
290,357
80,319
326,671
266,982
7,788,418
1,404,727
74,881
Financial liabilities:
Deposits
Broker-dealer and clearing organization payables
Short-term borrowings
Debt
Other liabilities
11,242,319
1,368,373
695,798
448,999
6,133
— 11,256,629
1,368,373
—
695,798
—
448,999
—
6,133
—
— 11,256,629
1,368,373
—
695,798
—
448,999
—
6,133
—
December 31, 2019
Financial assets:
Carrying Level 1
Amount
Inputs
Estimated Fair Value
Level 3
Inputs
Level 2
Inputs
Total
Cash and cash equivalents
Assets segregated for regulatory purposes
Securities purchased under agreements to resell
Held to maturity securities
Loans held for sale
Loans held for investment, net
Broker-dealer and clearing organization receivables
Other assets
$
434,020
157,436
59,031
386,326
170,648
7,320,264
1,780,280
71,040
$
— $
$ 434,020
—
157,436
59,031
—
388,930
—
170,648
—
—
576,527
— 1,780,280
69,580
—
— $
—
—
—
—
6,990,706
434,020
157,436
59,031
388,930
170,648
7,567,233
— 1,780,280
71,040
1,460
Financial liabilities:
Deposits
Broker-dealer and clearing organization payables
Short-term borrowings
Debt
Other liabilities
— 9,032,496
— 1,605,518
— 1,424,010
323,281
—
8,340
—
— 9,032,496
— 1,605,518
— 1,424,010
323,281
—
8,340
—
9,032,214
1,605,518
1,424,010
323,281
8,340
F-30
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Company held equity investments other than securities of $63.6 million and $36.6 million at December 31, 2020 and 2019,
respectively, which are included within other assets in the consolidated balance sheets. Of the $63.6 million of such equity
investments held at December 31, 2020, $22.8 million do not have readily determinable fair values and each is measured at cost,
less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a
similar investment of the same issuer.
The following table presents the adjustments to the carrying value of these investments (in thousands).
Balance, beginning of year
Additional investments
Upward adjustments
Impairments and downward adjustments
Dispositions
Balance, end of year
Year Ended December 31,
2020
2019
$
$
19,771 $
500
4,188
(1,615)
—
$
22,844
20,376
—
403
(1,008)
—
19,771
6. Securities
The fair value of trading securities are summarized as follows (in thousands).
U.S. Treasury securities
U.S. government agencies:
Bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralized mortgage obligations
Corporate debt securities
States and political subdivisions
Unit investment trusts
Private-label securitized product
Other
Totals
December 31,
2020
2019
$
40,491 $
—
40
336,081
876
69,172
62,481
171,573
—
8,571
4,970
694,255
$
24,680
331,601
2,145
191,154
36,973
93,117
3,468
2,992
3,446
689,576
$
In addition to the securities shown above, the Hilltop Broker-Dealers enter into transactions that represent commitments to
purchase and deliver securities at prevailing future market prices to facilitate customer transactions and satisfy such
commitments. Accordingly, the Hilltop Broker-Dealers’ ultimate 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 $79.8 million and $43.8 million at December 31, 2020 and 2019, respectively.
The amortized cost and fair value of available for sale and held to maturity securities are summarized as follows (in thousands).
December 31, 2020
U.S. government agencies:
Bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralized mortgage obligations
States and political subdivisions
Totals
Available for Sale
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
$
82,036
624,863
124,929
559,362
44,729
$ 1,435,919
$
$
1,095
17,194
768
6,916
2,613
28,586
$
$
F-31
(325) $
(446)
(1,159)
(370)
82,806
641,611
124,538
565,908
47,342
(2,300) $ 1,462,205
—
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2019
U.S. government agencies:
Bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralized mortgage obligations
States and political subdivisions
Totals
December 31, 2020
U.S. government agencies:
Residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralized mortgage obligations
States and political subdivisions
Totals
December 31, 2019
U.S. government agencies:
Bonds
Residential mortgage-backed securities
Commercial mortgage-backed securities
Collateralized mortgage obligations
States and political subdivisions
Totals
Available for Sale
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
$
$
84,590
430,514
11,488
333,256
39,969
899,817
$
$
1,049
6,662
543
3,175
1,273
12,702
$
$
(64) $
(147)
—
(815)
—
(1,026) $
85,575
437,029
12,031
335,616
41,242
911,493
Held to Maturity
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
$
$
13,547
152,820
74,932
70,645
311,944
$
$
708
9,205
2,036
2,778
14,727
$
$
— $
—
—
—
— $
14,255
162,025
76,968
73,423
326,671
Held to Maturity
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
$
$
24,020
17,776
161,624
113,894
69,012
386,326
$
$
10
295
2,810
226
1,013
4,354
$
$
(35) $
—
(655)
(904)
(156)
(1,750) $
23,995
18,071
163,779
113,216
69,869
388,930
Additionally, the Company had unrealized net gains of $0.1 million at both December 31, 2020 and 2019 from equity securities
with fair values of $0.1 million and $0.2 million at December 31, 2020 and 2019, respectively. The Company recognized nominal
net gains and losses during 2020 and 2019 due to changes in the fair value of equity securities still held at the balance sheet date.
During 2020 and 2019, net gains and losses recognized from equity securities sold were nominal.
F-32
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Information regarding available for sale, held to maturity and equity securities that were in an unrealized loss position is shown in
the following tables (dollars in thousands).
December 31, 2020
December 31, 2019
Number of
Securities
Unrealized Number of
Fair Value
Losses
Securities
Fair Value
Unrealized
Losses
Available for Sale
U.S. government agencies:
Bonds:
Unrealized loss for less than twelve months
Unrealized loss for twelve months or longer
Residential mortgage-backed securities:
Unrealized loss for less than twelve months
Unrealized loss for twelve months or longer
Commercial mortgage-backed securities:
Unrealized loss for less than twelve months
Unrealized loss for twelve months or longer
Collateralized mortgage obligations:
Unrealized loss for less than twelve months
Unrealized loss for twelve months or longer
States and political subdivisions:
Unrealized loss for less than twelve months
Unrealized loss for twelve months or longer
Total available for sale:
Unrealized loss for less than twelve months
Unrealized loss for twelve months or longer
Held to Maturity
U.S. government agencies:
Bonds:
Unrealized loss for less than twelve months
Unrealized loss for twelve months or longer
Commercial mortgage-backed securities:
Unrealized loss for less than twelve months
Unrealized loss for twelve months or longer
Collateralized mortgage obligations:
Unrealized loss for less than twelve months
Unrealized loss for twelve months or longer
States and political subdivisions:
Unrealized loss for less than twelve months
Unrealized loss for twelve months or longer
Total held to maturity:
Unrealized loss for less than twelve months
Unrealized loss for twelve months or longer
$
8
—
8
60,298
$
—
60,298
15
—
15
10
—
10
86,287
—
86,287
105,386
—
105,386
10
5
15
101,990
13,611
115,601
—
—
—
—
—
—
325
—
325
429
—
429
1,176
—
1,176
324
46
370
—
—
—
43
5
48
353,961
13,611
$ 367,572
$
2,254
46
2,300
2
$
—
24,937
$
—
2
37
2
39
1
24,937
36,187
13,683
49,870
9,967
—
—
1
15
13
28
9,967
94,545
46,217
140,762
—
—
487
487
64
—
64
87
58
145
2
—
2
446
369
815
—
—
—
165,636
60,387
$ 226,023
$
599
427
1,026
December 31, 2020
December 31, 2019
Number of
Securities
Unrealized Number of
Fair Value
Losses
Securities
Fair Value
Unrealized
Losses
1
1
55
16
71
4
8
12
38
4
42
52
12
64
$
2
—
2
8
—
8
9,665
$
—
9,665
44,610
—
44,610
23,904
59,560
83,464
15,996
1,099
17,095
35
—
35
656
—
656
287
617
904
124
31
155
94,175
60,659
$ 154,834
$
1,102
648
1,750
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $
—
—
— $
—
—
—
—
—
—
—
—
578
—
578
578
—
578
$
—
—
—
—
—
—
2
—
2
2
—
2
$
F-33
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay
obligations with or without penalties. The amortized cost and fair value of securities, excluding trading and equity securities, at
December 31, 2020 are shown by contractual maturity below (in thousands).
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Residential mortgage-backed securities
Collateralized mortgage obligations
Commercial mortgage-backed securities
Available for Sale
Held to Maturity
Amortized
Cost
Fair Value
Amortized
Cost
$
$
4,999
61,182
17,537
43,047
126,765
$
5,072
62,636
18,179
44,261
130,148
645
1,225
8,205
60,570
70,645
$
Fair Value
646
1,273
8,525
62,979
73,423
624,863
559,362
124,929
$ 1,435,919
641,611
565,908
124,538
$ 1,462,205
13,547
74,932
152,820
311,944
$
14,255
76,968
162,025
326,671
$
During 2020, 2019 and 2018, the Company recognized net gains from its trading portfolio of $122.0 million, $20.5 million and
$6.2 million, respectively. In addition, the Hilltop Broker-Dealers realized net gains from structured product trading activities of
$77.1 million, $132.7 million and $41.9 million during 2020, 2019 and 2018, respectively. During 2020 and 2019, the Company
had other realized gains on securities of $0.2 million and other realized losses on securities of $2.5 million, respectively, while
other net realized gains on securities during 2018 were nominal. All such net gains and losses are recorded as a component of
other noninterest income within the consolidated statements of operations.
Securities with a carrying amount of $712.3 million and $576.0 million (with a fair value of $733.8 million and $583.6 million,
respectively) at December 31, 2020 and 2019, respectively, were pledged by the Bank to secure public and trust deposits, federal
funds purchased and securities sold under agreements to repurchase, and for other purposes as required or permitted by law.
Substantially all of these pledged securities were included in the Company’s available for sale and held to maturity securities
portfolios at December 31, 2020 and 2019.
Mortgage-backed securities and collateralized mortgage obligations consist principally of 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.
7. Loans Held for Investment
The Bank originates loans to customers primarily in Texas. Although the Bank has diversified loan and leasing portfolios and,
generally, holds collateral against amounts advanced to customers, its debtors’ ability to honor their contracts is substantially
dependent upon the general economic conditions of the region and of the industries in which its debtors operate, which consist
primarily of agribusiness, construction, energy, real estate and wholesale/retail trade. The Hilltop Broker-Dealers make loans to
customers and correspondents through transactions originated by both employees and independent retail representatives
throughout the United States. The Hilltop Broker-Dealers control risk by requiring customers to maintain collateral in compliance
with various regulatory and internal guidelines, which may vary based upon market conditions. Securities owned by customers
and held as collateral for loans are not included in the consolidated financial statements.
F-34
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Loans held for investment summarized by portfolio segment are as follows (in thousands).
Commercial real estate
Commercial and industrial (1)
Construction and land development
1-4 family residential
Consumer
Broker-dealer (2)
Allowance for credit losses
Total loans held for investment, net of allowance
December 31,
2020
$ 3,133,903
2,627,774
828,852
629,938
35,667
437,007
7,693,141
(149,044)
$ 7,544,097
$
$
2019
3,000,523
2,025,720
940,564
791,020
47,046
576,527
7,381,400
(61,136)
7,320,264
(1)
(2)
Included loans totaling $486.7 million at December 31, 2020 funded through the Paycheck Protection Program.
Primarily represents margin loans to customers and correspondents associated with broker-dealer segment operations.
The following table provides details associated with non-accrual loans, excluding those classified as held for sale (in thousands).
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Non-accrual Loans
With
Allowance
December 31, 2020
With No
Allowance
Total
December 31,
2019
Interest Income
Recognized (1)
Year Ended
December 31, 2020
$
$
$
1,213
3,473
10,821
102
4,726
28
—
$
445
6,002
23,228
405
16,651
—
—
20,363
$
46,731
$
1,658
9,475
34,049
507
21,377
28
—
67,094
$
$
3,813
3,495
15,262
1,316
7,382
26
—
$
31,294
$
1,364
295
2,362
110
1,568
122
—
5,821
(1)
Interest income recognized on non-accrual loans during 2019 and 2018 was $1.6 million and $1.4 million, respectively.
At December 31, 2020 and 2019, $10.9 million and $4.8 million, respectively, of real estate loans secured by residential
properties and classified as held for sale were in non-accrual status.
Loans accounted for on a non-accrual basis increased from December 31, 2019 to December 31, 2020, by $35.8 million. A
number of loans previously accounted for in accruing pools under ASC 310-30 were reclassified to non-accrual in the CECL
transition. The increase in commercial real estate loans in non-accrual status at December 31, 2020 of $3.8 million was primarily
related to the addition of loans totaling $8.4 million, of which $6.8 million were previously accruing at December 31, 2019,
partially offset by the resolution of loans totaling $4.5 million. Commercial real estate loans in non-accrual status carried a
reserve of $1.1 million at December 31, 2020. The increase in commercial and industrial loans in non-accrual status since
December 31, 2019 was primarily due to a small number of relationships that included loans totaling $18.9 million and a CECL
transition gross-up adjustment of $4.3 million related to a single loan. Commercial and industrial loans in non-accrual status
carried a reserve of $7.9 million at December 31, 2020. The increase in 1-4 family residential loans in non-accrual status at
December 31, 2020, compared to December 31, 2019, was primarily related to the addition of $17.1 million of loans in non-
accrual status, of which $15.0 million were previously accruing at December 31, 2019, partially offset by both the return to
accruing classification and resolution of loans totaling $3.2 million. 1-4 family residential loans in non-accrual status carried a
reserve of $0.7 million at December 31, 2020.
F-35
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Company considers non-accrual loans to be collateral-dependent unless there are underlying mitigating circumstances. The
practical expedient to measure the allowance using the fair value of the collateral has been implemented.
The Bank classifies loan modifications as troubled debt restructurings (“TDRs”) when it concludes that it has both granted a
concession to a debtor and that the debtor is experiencing financial difficulties. Loan modifications are typically structured to
create affordable payments for the debtor and can be achieved in a variety of ways. The Bank modifies loans by reducing interest
rates and/or lengthening loan amortization schedules. The Bank may also reconfigure a single loan into 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.
In March 2020, the CARES Act was passed, which, among other things, allows the Bank to suspend the requirements for certain
loan modifications to be categorized as a TDR, including the related impairment for accounting purposes. On December 27,
2020, the Consolidated Appropriations Act 2021 was signed into law. (Section 541) of this legislation, “Extension of Temporary
Relief From Troubled Debt Restructurings and Insurer Clarification,” extends certain relief provisions from the March CARES
Act that were set to expire at the end of 2020. This new legislation extends the relief to financial institutions to suspend TDR
assessment and reporting requirements under GAAP for loan modifications to the earlier of 60 days after the national emergency
termination date or January 1, 2022. The Bank’s COVID-19 payment deferral programs allow for a deferral of principal and/or
interest payments with such deferred principal payments due and payable on maturity date of the existing loan. The Bank’s
actions included approval of approximately $968 million in COVID-19 related loan modifications as of June 30, 2020. During
the third and fourth quarters of 2020, the Bank continued to support its impacted banking clients through the approval of COVID-
19 related loan modifications, which resulted in an additional $75 million of new COVID-19 related loan modifications since
June 30, 2020. The portfolio of active deferrals that have not reached the end of their deferral period was approximately $240
million as of December 31, 2020, of which approximately $90 million had received an additional deferral. COVID-19 related
loan modifications of approximately $714 million have returned to agreed-upon contractual terms and had made at least one
required principal and/or interest payment since the end of their initial deferral period. Such loans represent elevated risk,
therefore management continues to monitor these loans. The extent to which these measures will impact the Bank is uncertain,
and any progression of loans, whether receiving COVID-19 payment deferrals or not, into non-accrual status during future
periods is uncertain and will depend on future developments that cannot be predicted.
Information regarding TDRs granted during 2020 and 2019 that do not qualify for the CARES Act exemption is shown in the
following table (dollars in thousands). There were no TDRs granted during 2018.
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Year Ended December 31, 2020
Year Ended December 31, 2019
Number of Balance at Balance at
Number of Balance at Balance at
Loans
Extension End of Period
Loans
Extension End of Period
— $
—
9,464
—
438
—
—
— $
—
3
—
5
—
—
8 $ 9,902 $
—
—
4,116
—
438
—
—
4,554
— $
—
9,618
—
—
—
—
— $
—
4
—
—
—
—
4 $ 9,618 $
—
—
8,566
—
—
—
—
8,566
All of the loan modifications included in the table above involved payment term extensions. The Bank did not grant principal
reductions on any restructured loans during 2020, 2019 or 2018.
At December 31, 2020 and 2019, the Bank had nominal unadvanced commitments to borrowers whose loans have been
restructured in TDRs. There were no TDRs granted during the twelve months preceding December 31, 2020, 2019 or 2018 for
which a payment was at least 30 days past due.
F-36
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
An analysis of the aging of the Company’s loan portfolio is shown in the following tables (in thousands).
December 31, 2020
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
December 31, 2019
Commercial real estate:
Non-owner occupied
Owner occupied
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Loans Past Due
30-59 Days
Loans Past Due
60-89 Days
Loans Past Due
90 Days or More
Total
Past Due Loans
Current
Loans
Total
Loans
Accruing Loans
Past Due
90 Days or More
$
$
1,919
195
3,114
19
8,110
172
—
13,529
$
$
— $
522
407
—
3,040
123
—
4,092
$
199
8,328
7,318
—
12,420
26
—
28,291
$
$
2,118
9,045
10,839
19
23,570
321
—
45,912
$ 1,786,193
1,336,547
2,616,935
828,833
606,368
35,346
437,007
$ 7,647,229
$ 1,788,311
1,345,592
2,627,774
828,852
629,938
35,667
437,007
$ 7,693,141
$
$
—
—
6
—
—
—
—
6
Loans Past Due
30-59 Days
Loans Past Due
60-89 Days
Loans Past Due
90 Days or More
Total
Past Due Loans
Current
Loans
Total
Loans
Accruing Loans
Past Due
90 Days or More
$
$
4,062
1,813
5,967
7,580
12,058
455
—
31,935
$
$
— $
880
1,735
1,827
3,442
34
—
7,918
$
2,790
3,265
3,395
—
6,520
—
—
15,970
$
$
6,852
5,958
11,097
9,407
22,020
489
—
55,823
$ 1,702,500
1,285,213
2,014,623
931,157
769,000
46,557
576,527
$ 7,325,577
$ 1,709,352
1,291,171
2,025,720
940,564
791,020
47,046
576,527
$ 7,381,400
$
$
—
—
3
—
—
—
—
3
In addition to the loans shown in the tables above, PrimeLending had $243.6 million and $102.7 million of loans included in
loans held for sale (with an aggregate unpaid principal balance of $245.5 million and $104.0 million, respectively) that were 90
days past due and accruing interest at December 31, 2020 and 2019, respectively. These loans are guaranteed by U.S. government
agencies and include loans that are subject to repurchase, or have been repurchased, by PrimeLending.
In response to the ongoing COVID-19 pandemic, the Company allowed modifications, such as payment deferrals for up to 90
days and temporary forbearance, to credit-worthy borrowers who are experiencing temporary hardship due to the effects of
COVID-19. These short-term modifications generally meet the criterial of the CARES Act and, therefore, they are not reported as
past due or placed on non-accrual status (provided the loans were not past due or on non-accrual status prior to the deferral). The
Company elected to accrue and recognize interest income on these modifications during the payment deferral period.
Additionally, the Company granted temporary forbearance to borrowers of a federally backed mortgage loan experiencing
financial hardship due, directly or indirectly, to the COVID-19 pandemic. The CARES Act, which among other things,
established the ability for financial institutions to grant a forbearance for up to 180 days, which can be extended for an additional
180-day period upon the request of the borrower. During that time, no fees, penalties or interest beyond the amounts scheduled or
calculated as if the borrower made all contractual payments on time and in full under the mortgage contract will accrue on the
borrower’s account. As of December 31, 2020, PrimeLending had $198.8 million of loans subject to repurchase under a
forbearance agreement.
Management tracks credit quality trends on a quarterly basis related to: (i) past due levels, (ii) non-performing asset levels, (iii)
classified loan levels, and (v) general economic conditions in state and local markets. The Company defines classified loans as
loans with a risk rating of substandard, doubtful or loss.
F-37
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
A description of the risk rating internal grades for commercial loans to is presented in the following table.
Risk Rating
Internal Grade
Pass low risk
Pass normal risk
1 - 3
4 - 7
Pass high risk
8 - 10
Watch
Special mention
Substandard accrual
Substandard non-accrual
Doubtful
Loss
11
12
13
14
15
16
Risk Rating Description
Represents loans to very high credit quality commercial borrowers of investment or near investment grade.
These borrowers have significant capital strength, moderate leverage, stable earnings and growth, and readily
available financing alternatives. Commercial borrowers entirely cash secured are also included in this
category.
Represents loans to commercial borrowers of solid credit quality with moderate risk. Borrowers in these
grades are differentiated from higher grades on the basis of size (capital and/or revenue), leverage, asset
quality and the stability of the industry or market area.
Represents "pass grade" loans to commercial borrowers of higher, but acceptable credit quality and risk.
Such borrowers are differentiated from Pass Normal Risk in terms of size, secondary sources of repayment
or they are of lesser stature in other key credit metrics.
Represents loans on management's "watch list" and is intended to be utilized on a temporary basis for pass
grade commercial borrowers where a significant risk-modifying action is anticipated in the near term.
Represents loans with potential weaknesses that deserve management's close attention. If left uncorrected,
these potential weaknesses may result in a deterioration of the repayment prospects for the loans and weaken
the Company's credit position at some future date.
Represents loans for which the accrual of interest has not been stopped, but are inadequately protected by the
current sound worth and paying capacity of the obligor or the collateral pledged, if any. Loans so classified
have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and are characterized
by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.
Represents loans for which the accrual of interest has been stopped and includes loans where interest is more
than 90 days past due and not fully secured and loans where a specific valuation allowance may be
necessary.
Represents loans that are placed on non-accrual status and may be dependent upon collateral having a value
that is difficult to determine or upon some near-term event which lacks certainty.
Represents loans that are to be charged-off or charged-down when payment is acknowledged to be uncertain
or when the timing or value of payments cannot be determined. Rating is not intended to imply that the loan
or some portion of it will never be paid, nor does it in any way imply that there has been a forgiveness of
debt.
F-38
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The following table presents loans held for investment grouped by asset class and credit quality indicator, segregated by year of
origination or renewal (in thousands).
December 31, 2020
Commercial real estate: non-owner occupied
Internal Grade 1-3 (Pass low risk)
Internal Grade 4-7 (Pass normal risk)
Internal Grade 8-11 (Pass high risk and watch)
Internal Grade 12 (Special mention)
Internal Grade 13 (Substandard accrual)
Internal Grade 14 (Substandard non-accrual)
Commercial real estate: owner occupied
Internal Grade 1-3 (Pass low risk)
Internal Grade 4-7 (Pass normal risk)
Internal Grade 8-11 (Pass high risk and watch)
Internal Grade 12 (Special mention)
Internal Grade 13 (Substandard accrual)
Internal Grade 14 (Substandard non-accrual)
Commercial and industrial
Internal Grade 1-3 (Pass low risk)
Internal Grade 4-7 (Pass normal risk)
Internal Grade 8-11 (Pass high risk and watch)
Internal Grade 12 (Special mention)
Internal Grade 13 (Substandard accrual)
Internal Grade 14 (Substandard non-accrual)
Construction and land development
Internal Grade 1-3 (Pass low risk)
Internal Grade 4-7 (Pass normal risk)
Internal Grade 8-11 (Pass high risk and watch)
Internal Grade 12 (Special mention)
Internal Grade 13 (Substandard accrual)
Internal Grade 14 (Substandard non-accrual)
Construction and land development - individuals
FICO less than 620
FICO between 620 and 720
FICO greater than 720
Substandard non-accrual
Other (1)
1-4 family residential
FICO less than 620
FICO between 620 and 720
FICO greater than 720
Substandard non-accrual
Other (1)
Consumer
FICO less than 620
FICO between 620 and 720
FICO greater than 720
Substandard non-accrual
Other (1)
Amortized Cost Basis by Origination Year
2020
2019
2018
2017
2016
2015 and
Prior
Revolving
Total
2,735 $
88,119
99,473
—
29,810
—
44,163 $
56,801
23,588
—
10,315
5,345
5,486 $
29,778
13,459
—
5,531
315
264 $
3,210
9,659
—
5,385
—
— $
—
—
—
—
$
21,135 $
22,913 $
3,171 $
245,833
227,440
—
34,020
—
138,836
133,246
—
16,139
—
83,951
122,022
—
29,166
—
$
60,809 $
21,011 $
12,712 $
164,939
118,328
365
8,372
506
169,582
80,375
—
5,620
1,259
131,821
49,601
3,691
69,617
441
$
30,754 $
179,394
95,835
757
9,863
25,107
15,764 $
202,624
194,432
—
8,684
—
— $
557
13,207
—
1,224
1,109 $
17,269
125,094
—
27,407
955 $
5,194
6,849
—
5,050
$
$
$
$
27,144 $
54,423
62,411
14
3,689
5,084
2,710 $
103,864
97,206
—
29
405
— $
—
—
—
—
819 $
18,461
80,688
—
10,085
1,235 $
2,627
1,674
—
1,141
7,149 $
53,908
20,162
3,723
13,788
2,021
4,176 $
63,135
47,102
—
—
—
— $
1,253
2,539
—
—
3,674 $
9,545
65,975
—
5,998
106 $
478
2,952
—
129
12,896 $
108,371
108,536
—
33,353
—
21,567 $
53,811
23,330
—
8,663
1,045
15,263 $
64,200
64,031
—
33,467
1,658
37,688 $
75,372
30,249
527
12,040
879
1 $
47,920
488
—
118
—
1 $
39,868
1,291
—
—
—
3,587 $
335 $
21,651 $
24,179
13,885
152
5,759
16
10,945
2,144
—
253
98
395,320
197,273
2,093
19,360
1,408
4,129 $
2,596
3,552
—
—
—
— $
—
—
—
—
331 $
624 $
3,142
544
—
65
102
28,387
7,951
—
—
—
— $
—
—
—
—
— $
—
—
—
—
318 $
1,289
5,313
—
714
56 $
883 $
8,714
37,943
96
1,899
8,171
29,171
714
920
32,077 $
41,625
70,815
20,567
2,529
128 $
536
292
27
43
43 $
118
60
—
36
22 $
79
34
1
—
334 $
2,157
3,054
—
313
78,114
777,230
755,236
—
176,073
1,658
197,951
692,194
326,762
4,583
114,627
9,475
96,106
747,947
405,169
6,739
58,243
34,049
27,998
406,958
360,446
—
14,163
507
—
1,810
15,746
—
1,224
38,936
105,074
414,999
21,377
49,552
2,823
11,189
14,915
28
6,712
Total loans with credit quality measures
Commercial and industrial (mortgage warehouse lending)
Commercial and industrial (Paycheck Protection Program loans)
Broker-Dealer (margin loans and correspondent receivables)
Total loans held for investment
$ 1,848,876 $ 1,062,690 $ 814,006 $ 483,170 $ 469,543 $ 521,082 $ 777,246 $ 5,976,613
792,806
$
486,715
$
$
437,007
$ 7,693,141
(1) Loans classified in this category were assigned a FICO score based on various factors specific to the borrower for credit modeling purposes.
F-39
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Allowance for Credit Losses
Available for Sale Securities and Held to Maturity Securities
The Company has evaluated available for sale debt securities that are in an unrealized loss position and has determined that any
declines in value is unrelated to credit loss and related to changes in market interest rates since purchase. None of the available
for sale debt securities held were past due at December 31, 2020. In addition, as of December 31, 2020, the Company had not
made a decision to sell any of its debt securities held, nor did the Company consider it more likely than not that it would be
required to sell such securities before recovery of their amortized cost basis. The Company does not expect to have credit losses
associated with the debt securities and no allowance was recognized on the debt securities portfolio at transition.
Loans Held for Investment
The allowance for credit losses for loans held for investment represents management’s best estimate of all expected credit losses
over the expected contractual life of our existing portfolio. Management revised its methodology for determining the allowance
for credit losses upon the implementation of CECL. Management considers the level of allowance for credit losses to be a
reasonable and supportable estimate of expected credit losses inherent within the loans held for investment portfolio as of
December 31, 2020. While the Company believes it has an appropriate allowance for the existing loan portfolio at December 31,
2020, additional provision for losses on existing loans may be necessary in the future. Future changes in the allowance for credit
losses are expected to be volatile given dependence upon, among other things, the portfolio composition and quality, as well as
the impact of significant drivers, including prepayment assumptions and macroeconomic conditions and forecasts. In addition to
the allowance for credit losses, the Company maintains a separate allowance for credit losses related to off-balance sheet credit
exposures, including unfunded loan commitments, and this amount is included in other liabilities within the consolidated balance
sheets. For further information on the policies that govern the estimation of the allowances for credit losses levels, see Note 1 to
the consolidated financial statements.
One of the most significant judgments involved in estimating the Company’s allowance for credit losses relates to the
macroeconomic forecasts used to estimate credit losses over the reasonable and supportable forecast period. To determine our
best estimate of expected credit losses as of December 31, 2020, the Company utilized a single macroeconomic baseline scenario
published by a third party in December 2020 that was updated to reflect the U.S. economic outlook due to COVID-19 conditions.
This baseline scenario utilizes multiple economic variables in forecasting the economic outlook. Significant variables that impact
the modeled losses across our loan portfolios are the U.S. Real Gross Domestic Product, or GDP, growth rates and
unemployment rate assumptions. Changes in these assumptions and forecasts of economic conditions could significantly affect
the estimate of expected credit losses at the balance sheet date or between reporting periods.
The COVID-19 pandemic has resulted in a weak labor market and weak overall economic conditions that will affect borrowers
across our lending portfolios and significant judgment is required to estimate the severity and duration of the current economic
downturn, as well as its potential impact on borrower defaults and loss severity. In particular, macroeconomic conditions and
forecasts regarding the duration and severity of the economic downturn are rapidly changing and remain highly uncertain as the
resurgence of COVID-19 cases evolves nationally and in key geographies. It is difficult to predict exactly how borrower behavior
will be impacted by these economic conditions as the effectiveness of government stimulus, customer relief and enhanced
unemployment benefits should help mitigate in the short term, but the extent and duration of government stimulus as well as
performance of recently implemented payment deferral programs remains uncertain.
During the first quarter of 2020, the Company adopted the new CECL standard and recorded transition adjustment entries that
resulted in an allowance for credit losses of $73.7 million as of January 1, 2020, an increase of $12.6 million. This increase
included an increase in credit losses of $18.9 million from the expansion of the loss horizon to life of loan, partially offset by the
elimination of the non-credit component within the historical allowance related to previously categorized PCI loans of $6.3
million.
F-40
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
During 2020, the significant build in the allowance included provision for credit losses on individually evaluated loans of $20.2
million, while the provision for credit losses on expected losses of collectively evaluated loans accounted for $76.1 million of the
total provision primarily due to the identified changes in the Bank’s loan portfolio composition and credit quality and the increase
in the expected lifetime credit losses under CECL attributable to the deteriorating economic outlook associated with the impact of
the market disruption caused by the COVID-19 pandemic. The change to the reserve due to the impact of COVID-19 reflects
economic uncertainty which, along with the expectation of continued higher unemployment and lower GDP, has increased the
probability of default and loss given default rates used in our estimate of the lifetime expected credit losses for our loan portfolio.
The change in the allowance for credit losses during 2020 was primarily attributable to the Bank and also reflected other factors
including, but not limited to, loan growth, loan mix, and changes in risk rating grades, macroeconomic factor assumptions and
qualitative factors. The change in the allowance during 2020 was also impacted by net charge-offs of $21.1 million, primarily
associated with loans specifically reserved for during the first quarter of 2020.
Changes in the allowance for credit losses for loans held for investments, distributed by portfolio segment, are shown below (in
thousands).
Transition Provision for
Balance,
Beginning of
Year
Adjustment
CECL
$
$
31,595
17,964
4,878
6,386
265
48
61,136
$
$
8,073
3,193
577
(29)
748
—
12,562
$
Loans
(Reversal of)
Credit Losses Charged Off
(4,517)
$
(18,158)
(2)
(748)
(615)
—
(24,040)
73,865
22,870
1,222
(1,717)
86
165
96,491
$
$
Recoveries on
Charged Off
Loans
$
$
613
1,834
2
54
392
—
2,895
$
$
Balance,
Beginning of
Year
Transition
Adjustment
CECL
$
$
$
$
27,100
21,980
6,061
3,956
267
122
59,486
$
$
27,232
23,698
7,847
4,245
311
353
63,686
$
$
Balance,
Beginning of
Year
Transition
Adjustment
CECL
Provision for
(Reversal of)
Credit Losses
5,649
(921)
(1,183)
3,276
459
(74)
7,206
— $
—
—
—
—
—
— $
Loans
Charged Off
(1,160)
$
(5,924)
—
(907)
(498)
—
(8,489)
$
Recoveries on
Charged Off
Loans
$
$
6
2,829
$
—
61
37
—
2,933
$
Provision for
(Reversal of)
Credit Losses
668
6,750
(1,792)
(292)
(15)
(231)
5,088
— $
—
—
—
—
—
— $
Loans
Charged Off
(800)
$
(12,741)
—
(143)
(93)
—
(13,777)
$
Recoveries on
Charged Off
Loans
$
$
— $
4,273
6
146
64
—
4,489
$
Balance,
End of Year
109,629
27,703
6,677
3,946
876
213
149,044
Balance,
End of Year
31,595
17,964
4,878
6,386
265
48
61,136
Balance,
End of Year
27,100
21,980
6,061
3,956
267
122
59,486
Year Ended December 31, 2020
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Total
Year Ended December 31, 2019
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Total
Year Ended December 31, 2018
Commercial real estate
Commercial and industrial
Construction and land development
1-4 family residential
Consumer
Broker-dealer
Total
Unfunded Loan Commitments
The Bank uses a process similar to that used in estimating the allowance for credit losses on the funded portion to estimate the
allowance for credit loss on unfunded loan commitments. The allowance is based on the estimated exposure at default, multiplied
by the lifetime PD grade and LGD grade for that particular loan segment. The Bank estimates expected losses by calculating a
commitment usage factor based on industry usage factors. The commitment usage factor is applied over the relevant contractual
period. Loss factors from the underlying loans to which commitments are related are applied to the results of the usage
calculation to estimate any liability for credit losses related for each loan type. The expected losses on unfunded commitments
align with statistically calculated parameters used to calculate the allowance
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Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
for credit losses on the funded portion. There is no reserve calculated for letters of credit as they are issued primarily as credit
enhancements and the likelihood of funding is low.
Changes in the allowance for credit losses for loans with off-balance sheet credit exposures are shown below (in thousands).
Balance, beginning of year
Transition adjustment CECL accounting standard
Other noninterest expense
Balance, end of year
2020
Year Ended December 31,
2019
2018
$
$
2,075
3,837
2,476
8,388
$
$
2,366
—
(291)
2,075
$
$
1,932
—
434
2,366
As previously discussed, the Company adopted the new CECL standard and recorded a transition adjustment entry that resulted
in an allowance for credit losses of $5.9 million as of January 1, 2020. During 2020, the increase in the reserve for unfunded
commitments was primarily due to the macroeconomic uncertainties associated with the impact of the market disruption caused
by COVID-19 conditions.
9. Cash and Due from Banks
Cash and due from banks consisted of the following (in thousands).
Cash on hand
Clearings and collection items
Deposits at Federal Reserve Bank
Deposits at Federal Home Loan Bank
Deposits in FDIC-insured institutions
December 31,
2020
$
45,207
82,396
874,998
1,607
58,352
$ 1,062,560
$
$
2019
39,590
129,055
232,019
1,458
31,504
433,626
The amounts above include interest-bearing deposits of $878.0 million and $235.4 million at December 31, 2020 and 2019,
respectively. Cash on hand and deposits at the Federal Reserve Bank satisfy regulatory reserve requirements at December 31,
2020 and December 31, 2019.
10. Premises and Equipment
The components of premises and equipment are summarized as follows (in thousands).
Land and premises
Furniture and equipment
Less accumulated depreciation and amortization
December 31,
2020
125,701
257,810
383,511
(171,916)
211,595
$
$
$
$
2019
130,312
265,602
395,914
(185,539)
210,375
The amounts shown above include gross assets recorded under finance leases of $7.8 million, with accumulated amortization of
$4.8 million and $4.2 million at December 31, 2020 and 2019, respectively.
Occupancy expense was reduced by rental income of $1.7 million, $2.7 million and $1.4 million during 2020, 2019 and 2018,
respectively. Depreciation and amortization expense on premises and equipment, which includes amortization of finance leases,
amounted to $27.9 million, $27.3 million and $30.8 million during 2020, 2019 and 2018, respectively.
F-42
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Goodwill and Other Intangible Assets
At December 31, 2020, the carrying amount of goodwill of $267.4 million was comprised of $39.6 million recorded in
connection with the BORO Acquisition and $227.8 million recorded in connection with the completion of the merger with PCC
(the “PlainsCapital Merger”).
Other intangible assets were $20.4 million and $26.7 million at December 31, 2020 and 2019, respectively.
The Company performed required annual impairment tests of its goodwill and other intangible assets having an indefinite useful
life as of October 1st for each of its reporting units. At October 1, 2020, the Company determined that the estimated fair value of
each of its reporting units exceeded its carrying value. The Company estimated the fair values of its reporting units based on both
a market and income approach using historical, normalized actual and forecasted results. Based on this evaluation, at December
31, 2020, the Company concluded that the goodwill and other identifiable intangible assets were fully realizable.
The Company’s evaluation includes multiple assumptions, including estimated discounted cash flows and other estimates that
may change over time. If future discounted cash flows become less than those projected by the Company, future impairment
charges may become necessary that could have a materially adverse impact on the Company’s results of operations and financial
condition. As quoted market prices in active stock markets are relevant evidence of fair value, a significant decline in the
Company’s common stock trading price may indicate an impairment of goodwill.
Additionally, given the potential impacts as a result of COVID-19, actual results may differ materially from the Company’s
current estimates as the scope of COVID-19 evolves or if the duration of business disruptions is longer than currently anticipated.
While certain valuation assumptions and judgments may change to account for pandemic-related circumstances, the Company
does not anticipate significant changes in methodology used to determine the fair value of its goodwill, intangible assets and
other long-lived assets. The Company will continue to monitor developments regarding the COVID-19 pandemic and measures
implemented in response to the pandemic, market capitalization, overall economic conditions and any other triggering events or
circumstances that may indicate an impairment in the future.
The carrying value of intangible assets subject to amortization was as follows (in thousands).
December 31, 2020
Core deposits
Trademarks and trade names
Noncompete agreements
Customer contracts and relationships
Useful Life
(Years)
4 - 12
20
4
12 - 14
Estimated Gross
Intangible Accumulated
Amortization
$
December 31, 2019
Core deposits
Trademarks and trade names
Noncompete agreements
Customer contracts and relationships
12
Useful Life
(Years)
4 -
20
4
12 -
14
Estimated Gross
Intangible Accumulated
Amortization
$
Assets
$ 48,930
16,500
4,310
15,300
$ 85,040
Assets
$ 48,930
16,500
4,310
15,300
$ 85,040
$
$
Net
Intangible
Assets
7,933
(40,997) $
8,937
(7,563)
—
(4,310)
(11,806)
3,494
(64,676) $ 20,364
Net
Intangible
Assets
(36,576) $ 12,354
9,688
(6,812)
—
(4,310)
(10,676)
4,624
(58,374) $ 26,666
Amortization expense related to intangible assets during 2020, 2019 and 2018 was $6.3 million, $7.5 million and $8.0 million,
respectively.
F-43
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The estimated aggregate future amortization expense for intangible assets at December 31, 2020 is as follows (in thousands).
2021
2022
2023
2024
2025
Thereafter
$
$
5,080
3,967
2,860
1,826
1,028
5,603
20,364
12. Mortgage Servicing Rights
The following tables present the changes in fair value of the Company’s MSR asset, and other information related to the serviced
portfolio (dollars in thousands).
Balance, beginning of year
Additions
Sales
Changes in fair value:
Due to changes in model inputs or assumptions (1)
Due to customer payoffs
Balance, end of year
Mortgage loans serviced for others (2)
MSR asset as a percentage of serviced mortgage loans
Year Ended December 31,
2020
2019
2018
$
$
55,504
162,914
(36,750)
(27,261)
(10,665)
143,742
$
$
66,102
13,755
—
(16,054)
(8,299)
55,504
$
$
December 31,
2020
$
14,643,623
$
2019
4,948,441
0.98 %
1.12 %
54,714
25,028
(9,303)
159
(4,496)
66,102
(1) Primarily represents normal customer payments, changes in discount rates and prepayment speed assumptions, which are primarily affected by
changes in interest rates and the refinement of other MSR model assumptions.
(2) Represents unpaid principal balance of mortgage loans serviced for others.
The key assumptions used in measuring the fair value of the Company’s MSR asset were as follows.
Weighted average constant prepayment rate
Weighted average discount rate
Weighted average life (in years)
December 31,
2020
2019
12.15 %
14.60 %
6.3
13.16 %
11.14 %
6.0
A sensitivity analysis of the fair value of the Company’s MSR asset to certain key assumptions is presented in the following table
(in thousands).
Constant prepayment rate:
Impact of 10% adverse change
Impact of 20% adverse change
Discount rate:
Impact of 10% adverse change
Impact of 20% adverse change
December 31,
2020
2019
$
(5,639) $
(11,164)
(6,435)
(12,287)
(3,072)
(5,943)
(2,094)
(4,028)
This sensitivity analysis presents the effect of hypothetical changes in key assumptions on the fair value of the MSR asset. The
effect of such hypothetical changes in assumptions generally cannot be extrapolated because the relationship
F-44
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 $35.4 million, $25.3 million and $23.3 million during
2020, 2019 and 2018, respectively, were included in other noninterest income within the consolidated statements of operations.
13. Deposits
Deposits are summarized as follows (in thousands).
Noninterest-bearing demand
Interest-bearing:
Demand accounts
Brokered - demand
Money market
Brokered - money market
Savings
Time
Brokered - time
December 31,
2020
3,612,384
2019
$ 2,769,556
2,399,341
282,426
2,716,878
124,243
276,327
1,506,435
324,285
11,242,319
1,881,614
—
2,641,116
5,000
199,076
1,505,375
30,477
$ 9,032,214
$
$
At December 31, 2020, deposits include $1.1 billion of time deposit accounts that meet or exceed the FDIC insurance limit of
$250,000. Scheduled maturities of interest-bearing time deposits at December 31, 2020 are as follows (in thousands).
2021
2022
2023
2024
2025 and thereafter
14. Short-term Borrowings
Short-term borrowings are summarized as follows (in thousands).
Federal funds purchased
Securities sold under agreements to repurchase
Federal Home Loan Bank
Short-term bank loans
Commercial paper
$
$
$ 1,600,039
148,404
49,026
22,091
11,160
$ 1,830,720
December 31,
2020
180,325
237,856
—
—
277,617
695,798
2019
$
81,625
612,125
600,000
111,000
19,260
$ 1,424,010
Federal funds purchased and securities sold under agreements to repurchase generally mature daily, on demand, or on some other
short-term basis. The Bank and the Hilltop Broker-Dealers execute transactions to sell securities under agreements to repurchase
with both customers and other broker-dealers. Securities involved in these transactions are held by the Bank, the Hilltop Broker-
Dealers or a third-party dealer.
F-45
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Information concerning federal funds purchased and securities sold under agreements to repurchase is shown in the following
tables (dollars in thousands).
Year Ended December 31,
Average balance during the year
Average interest rate during the year
Maximum month-end balance during the year
Average interest rate at end of year
Securities underlying the agreements at end of year:
Carrying value
Estimated fair value
$
$
$
$
2020
509,577
0.89 %
714,507
$
$
2019
605,858
$
2.48 %
$
693,750
2018
701,622
1.96 %
849,568
December 31,
2020
2019
0.25 %
1.97 %
237,913
262,554
$
$
612,515
661,023
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. At December 31, 2020, the Bank had available
collateral of $4.4 billion, substantially all of which was blanket collateral. Other information regarding FHLB short-term
borrowings is shown in the following tables (dollars in thousands).
Average balance during the year
Average interest rate during the year
Maximum month-end balance during the year
Average interest rate at end of year
2020
Year Ended December 31,
2019
$
$
38,634
1.63 %
150,000
$
$
329,356
2.16 %
700,000
$
$
2018
214,110
2.09 %
675,000
December 31,
2020
— %
2019
1.56 %
The Hilltop Broker-Dealers use short-term bank loans periodically to finance securities owned, margin loans to customers and
correspondents, and underwriting activities. Interest on the borrowings varies with the federal funds rate. The weighted average
interest rate on the short-term bank loan borrowings at December 31, 2020 and 2019 was 0.00% and 2.52%, respectively.
During 2019, Hilltop Securities initiated two commercial paper programs in the ordinary course of its business of which the net
proceeds (after deducting related issuance expenses) from the sale will be used for general corporate purposes, including working
capital and the funding of a portion of its securities inventories. The commercial paper notes (“CP Notes”) may be issued with
maturities of 14 days to 270 days from the date of issuance. The CP Notes are issued under two separate programs, Series 2019-1
CP Notes and Series 2019-2 CP Notes, in maximum aggregate amounts of $300 million and $200 million, respectively. The CP
Notes are not redeemable prior to maturity or subject to voluntary prepayment and do not bear interest, but are sold at a discount
to par. The CP Notes are secured by a pledge of collateral owned by Hilltop Securities. As of December 31, 2020, the weighted
average maturity of the CP Notes was 146 days at a rate of 1.23%, with a weighted average remaining life of 70 days. At
December 31, 2020, the amount outstanding under these secured arrangements was $277.6 million, which was collateralized by
securities held for firm accounts valued at $296.3 million.
F-46
Table of Contents
15. Notes Payable
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Notes payable consisted of the following (in thousands).
Senior Notes due April 2025, net of discount of $1,063 and $1,232, respectively
Subordinated Notes due May 2030, net of discount of $793
Subordinated Notes due May 2035, net of discount of $2,392
FHLB notes, including premium of $0 and $146, respectively
Ventures Management lines of credit
December 31,
2020
2019
$
$
148,937
49,207
147,608
—
36,235
381,987
$
$
148,768
—
—
28,848
78,653
256,269
Senior Notes
On April 9, 2015, Hilltop completed an offering of $150.0 million aggregate principal amount of its 5% senior notes due 2025
(“Senior Unregistered Notes”) in a private offering that was exempt from the registration requirements of the Securities Act of
1933, as amended (the “Securities Act”). The Senior Unregistered Notes were offered within the United States only to qualified
institutional buyers pursuant to Rule 144A under the Securities Act, and to persons outside of the United States under Regulation
S under the Securities Act. The Senior Unregistered Notes were issued pursuant to an indenture, dated as of April 9, 2015, by and
between Hilltop and U.S. Bank National Association, as trustee. The net proceeds from the offering, after deducting estimated
fees and expenses and the initial purchasers’ discounts, were approximately $148 million. Hilltop used the net proceeds of the
offering to redeem all of Hilltop’s outstanding Non-Cumulative Perpetual Preferred Stock, Series B at an aggregate liquidation
value of $114.1 million, plus accrued but unpaid dividends of $0.4 million, and Hilltop utilized the remainder for general
corporate purposes. Unamortized debt issuance costs presented as a reduction from the Senior Notes are discussed further in Note
1 to the consolidated financial statements.
In connection with the issuance of the Senior Unregistered Notes, on April 9, 2015, the Company entered into a registration rights
agreement with the initial purchasers of the Senior Unregistered Notes. Under the terms of the registration rights agreement, the
Company agreed to offer to exchange the Senior Unregistered Notes for notes registered under the Securities Act (the “Senior
Registered Notes”). The terms of the Senior Registered Notes are substantially identical to the Senior Unregistered Notes for
which they were exchanged (including principal amount, interest rate, maturity and redemption rights), except that the Senior
Registered Notes generally are not subject to transfer restrictions. On May 22, 2015 and subject to the terms and conditions set
forth in the Senior Registered Notes prospectus, the Company commenced an offer to exchange the Senior Unregistered Notes
for Senior Registered Notes. Substantially all of the Senior Unregistered Notes were tendered in the exchange offer, and on June
22, 2015, the Company fulfilled its requirements under the registration rights agreement for the Senior Unregistered Notes by
issuing Senior Registered Notes in exchange for the tendered Senior Unregistered Notes. The Senior Registered Notes and the
Senior Unregistered Notes that remain outstanding are collectively referred to as the “Senior Notes.”
The Senior Notes bear interest at a rate of 5% per year, payable semi-annually in arrears in cash on April 15 and October 15 of
each year. The Senior Notes will mature on April 15, 2025, unless Hilltop redeems 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 its 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 indenture contains covenants that limit the Company’s ability to, among other things and subject to certain significant
exceptions: (i) dispose of or issue voting stock of certain of the Company’s bank subsidiaries or subsidiaries that own voting
stock of the Company’s bank subsidiaries, (ii) incur or permit to exist any mortgage, pledge, encumbrance or lien or charge on
the capital stock of certain of the Company’s bank subsidiaries or subsidiaries that own capital stock of the Company’s bank
subsidiaries and (iii) sell all or substantially all of the Company’s assets or merge or consolidate with or into other companies.
The indenture also provides for certain events of default, which, if any of them occurs, would permit or require the principal
amount, premium, if any, and accrued and unpaid interest on the then outstanding Senior Notes to be declared immediately due
and payable.
F-47
Table of Contents
Subordinated Notes
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
On May 7, 2020, Hilltop completed a public offering of $50 million aggregate principal amount of 5.75% fixed-to-floating rate
subordinated notes due May 15, 2030 (the “2030 Subordinated Notes”) and $150 million aggregate principal amount of 6.125%
fixed-to-floating rate subordinated notes due May 15, 2035 (the “2035 Subordinated Notes”) (collectively, the “Subordinated
Notes”). The price for the Subordinated Notes was 100% of the principal amount of the Subordinated Notes. The net proceeds
from the offering, after deducting underwriting discounts and fees and expenses of $3.4 million, were $196.6 million.
The 2030 Subordinated Notes and the 2035 Subordinated Notes will mature on May 15, 2030 and May 15, 2035, respectively.
Hilltop may redeem the Subordinated Notes, in whole or in part, from time to time, subject to obtaining regulatory approval,
beginning with the interest payment date of May 15, 2025 for the 2030 Subordinated Notes and beginning with the interest
payment date of May 15, 2030 for the 2035 Subordinated Notes, in each case at a redemption price equal to 100% of the principal
amount of the Subordinated Notes being redeemed plus accrued and unpaid interest to but excluding the date of redemption.
The 2030 Subordinated Notes bear interest at the rate of 5.75% per year, payable semi-annually in arrears commencing on
November 15, 2020. The interest rate for the 2030 Subordinated Notes will reset quarterly beginning May 15, 2025 to an interest
rate, per year, equal to the then-current benchmark rate, which is expected to be three-month term Secured Overnight Financing
Rate (“SOFR rate”), plus 5.68%, payable quarterly in arrears. The 2035 Subordinated Notes bear interest at the rate of 6.125%
per year, payable semi-annually in arrears commencing on November 15, 2020. The interest rate for the 2035 Subordinated Notes
will reset quarterly beginning May 15, 2030 to an interest rate, per year, equal to the then-current benchmark rate, which is
expected to be three-month term SOFR rate plus 5.80%, payable quarterly in arrears.
Federal Home Loan Bank notes
The FHLB notes, as well as other borrowings from the FHLB, are collateralized by FHLB stock, a blanket lien on commercial
and real estate loans, as well as by the amount of securities that are in safekeeping at the FHLB.
Ventures Management Lines of Credit
At December 31, 2020, Ventures Management’s ABAs had combined available lines of credit totaling $170.0 million, $80.0
million of which was with a single unaffiliated bank and $90.0 million of which was with the Bank. At December 31, 2020,
Ventures Management had outstanding borrowings of $47.5 million, $11.3 million of which was with the Bank with stated
interest rates of the greater of a calculated index rate on mortgage notes or 3.13% to 3.75%. The weighted average interest rate of
these lines of credit at December 31, 2020 was 3.27%. The Ventures Management lines of credit are collateralized by mortgage
notes, and the loan agreements relating to the lines of credit contain various financial and other covenants which must be
maintained until all indebtedness to the financial institution is repaid.
Scheduled Maturities
Scheduled maturities for notes payable outstanding at December 31, 2020 are as follows (in thousands).
2021
2022
2023
2024
2025
Thereafter
$
$
36,235
—
—
—
150,000
200,000
386,235
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Table of Contents
16. Leases
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Hilltop and its subsidiaries lease space, primarily for corporate offices, branch facilities and automated teller machines, under
both operating and finance leases. Certain of the Company’s leases have options to extend, with the longest extension option
being ten years, and some of the Company’s leases include options to terminate within one year. The Company’s leases contain
customary restrictions and covenants. The Company has certain intercompany leases and subleases between its subsidiaries, and
these transactions and balances have been eliminated in consolidation and are not reflected in the tables and information
presented below.
Supplemental balance sheet information related to finance leases is as follows (in thousands).
Finance leases:
Premises and equipment
Accumulated depreciation
Premises and equipment, net
Year Ended December 31,
2020
2019
$
$
7,780
(4,768)
3,012
$
$
7,780
(4,178)
3,602
Operating lease rental cost and finance lease amortization of ROU assets is included within occupancy and equipment, net in the
consolidated statements of operations. Finance lease interest expense is included within other interest expense in the consolidated
statements of operations. The Company does not generally enter into leases which contain variable payments, other than due to
the passage of time. The components of lease costs, including short-term lease costs, are as follows (in thousands).
Operating lease cost
Less operating lease and sublease income
Net operating lease cost
Finance lease cost:
Amortization of ROU assets
Interest on lease liabilities
Total finance lease cost
Year Ended December 31,
2020
2019
41,903
(1,676)
40,227
590
561
1,151
$
$
$
$
44,331
(2,657)
41,674
590
596
1,186
$
$
$
$
Supplemental cash flow information related to leases is as follows (in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases
Finance leases
Year Ended December 31,
2020
2019
$
$
31,850 $
561
636
37,527
587
603
11,723 $
—
27,055
—
Information regarding the lease terms and discount rates of the Company’s leases is as follows.
Lease Classification
Operating
Finance
December 31, 2020
December 31, 2019
Weighted Average
Remaining Lease
Term (Years)
5.5
5.6
Weighted Average
Weighted Average Remaining Lease
Discount Rate
4.67 %
4.81 %
Term (Years)
5.9
6.5
Weighted Average
Discount Rate
5.29 %
4.79 %
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Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Maturities of lease liabilities at December 31, 2020, under lease agreements that had commenced as of or subsequent to January
1, 2019, are presented below (in thousands).
2021
2022
2023
2024
2025
Thereafter
Total minimum lease payments
Less amount representing interest
Lease liabilities
Operating Leases
Finance Leases
36,132
28,189
22,645
15,395
11,177
29,636
143,174
(17,724)
125,450
$
$
1,212
1,241
1,280
1,163
886
1,411
7,193
(2,334)
4,859
$
$
As of December 31, 2020, the Company had additional operating leases that have not yet commenced with aggregate future
minimum lease payments of approximately $22.9 million. These leases are expected to commence between January 2021 and
October 2021 with lease terms ranging from two to eleven years.
17. Junior Subordinated Debentures and Trust Preferred Securities
PCC has four statutory Trusts, three of which were formed under the laws of the state of Connecticut and one of which, PCC
Statutory Trust IV, was formed under the laws of the state of Delaware. The Trusts were created for the sole purpose of issuing
and selling preferred securities and common securities, using the resulting proceeds to acquire junior subordinated debentures
issued by PCC (the “Debentures”). Accordingly, the Debentures are the sole assets of the Trusts, and payments under the
Debentures are the sole revenue of the Trusts. All of the common securities are owned by PCC; however, PCC is not the primary
beneficiary of the Trusts. Accordingly, the Trusts are not included in the Company’s consolidated financial statements.
The Trusts have issued $65,000,000 of floating rate preferred securities and $2,012,000 of common securities and have invested
the proceeds from the securities in floating rate Debentures of PCC.
Information regarding the PCC Debentures is shown in the following table (in thousands).
Investor
PCC Statutory Trust I
PCC Statutory Trust II
PCC Statutory Trust III
PCC Statutory Trust IV
Issue Date
Amount
July 31, 2001
March 26, 2003
September 17, 2003
February 22, 2008
$
$
$
$
18,042
18,042
15,464
15,464
The stated term of the Debentures is 30 years with interest payable quarterly. The rate on the Debentures, which resets quarterly,
is 3-month LIBOR plus an average spread of 3.22%. The total average interest rate at December 31, 2020 was 3.45%. The term,
rate and other features of the preferred securities are the same as the Debentures. PCC’s obligations under the Debentures and
related documents, taken together, constitute a full and unconditional guarantee of the Trust’s obligations under the preferred
securities.
F-50
Table of Contents
18. Income Taxes
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The significant components of the income tax provision are as follows (in thousands).
Current:
Federal
State
Deferred:
Federal
State
Year Ended December 31,
2019
2018
2020
$
97,338
19,150
116,488
$
13,325
3,258
16,583
$ 133,071
$
$
$
58,562
9,215
67,777
(2,690)
(1,373)
(4,063)
63,714
$
$
$
18,977
2,241
21,218
11,153
1,856
13,009
34,227
The income tax provision differs from the amount that would be computed by applying the statutory Federal income tax rate to
income before income taxes as a result of the following (in thousands). The applicable corporate federal income tax rates were
21% for all periods presented.
Computed tax at federal statutory rate
Tax effect of:
Nondeductible expenses
State income taxes
Tax-exempt income, net
Minority interest
Other
2020
$ 118,629
Year Ended December 31,
2019
59,392
$
$
2018
32,572
2,304
17,702
(1,706)
(4,587)
729
$ 133,071
$
2,681
6,195
(1,727)
(1,614)
(1,213)
63,714
$
1,373
3,236
(1,432)
(900)
(622)
34,227
The components of the tax effects of temporary differences that give rise to the net deferred tax asset included in other assets
within the consolidated balance sheets are as follows (in thousands).
Deferred tax assets:
Net operating and built-in loss carryforward
Purchase accounting adjustment - loans
Allowance for credit losses
Compensation and benefits
Legal and other reserves
Foreclosed property
Operating lease liabilities
Other
Deferred tax liabilities:
Premises and equipment
Intangible assets
Derivatives
Loan servicing
Operating lease ROU assets
Other
Net deferred tax asset
F-51
December 31,
2020
2019
$
$
5,736
11,814
35,542
22,513
7,097
1,913
29,348
9,717
123,680
20,076
4,518
17,688
34,868
24,755
8,015
109,920
13,760
$
$
7,823
15,850
14,796
17,723
1,272
5,456
29,125
6,475
98,520
10,079
6,098
4,342
13,278
26,498
5,251
65,546
32,974
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Company’s effective tax rate was 23.6%, 22.5% and 22.1% during 2020, 2019 and 2018, respectively. The increase in the
effective tax rate during 2020 was primarily attributable to the percentage of income at subsidiaries with higher state effective tax
rates, while the effective tax rates for 2019 and 2018 approximated statutory rates and included the effect of investments in tax-
exempt instruments, offset by nondeductible expenses.
At December 31, 2020 and 2019, the Company had net operating loss carryforwards for Federal income tax purposes of $2.7
million and $12.2 million, respectively (or $0.6 million and $2.4 million, respectively, on a tax effected basis at applicable rates
for respective tax years). The net operating loss carryforwards are subject to an annual Section 382 limitation on their usage.
These net operating loss carryforwards expire starting in 2034. The Company expects to realize its current deferred tax asset for
these net operating loss carryforwards through the implementation of certain tax planning strategies, core earnings, and reversal
of timing differences. At December 31, 2020, the Company also had a recognized built-in loss (“RBIL”) carryover of
$20.5 million from the ownership change resulting from the SWS Merger. These RBILs that were recognized during a five year
recognition period before January 1, 2020 are subject to the annual Section 382 limitation rules similar to the Company’s net
operating loss carryforwards. The RBILs are expected to be fully realized prior to any expiration.
Based on the Company’s evaluation of its deferred tax assets, management determined that no valuation allowance against its
gross deferred tax assets was necessary at December 31, 2020 or 2019.
GAAP requires the measurement of uncertain tax positions. Uncertain tax positions are the difference between a tax position
taken, or expected to be taken, in a tax return and the benefit recognized for accounting purposes. At December 31, 2020 and
2019, the total amount of gross unrecognized tax benefits was $3.8 million and $2.8 million, respectively, of which $3.0 million
and $2.1 million, respectively, if recognized, would favorably impact the Company’s effective tax rate.
The aggregate changes in gross unrecognized tax benefits, which excludes interest and penalties, are as follows (in thousands).
Balance, beginning of year
Increases related to tax positions taken during a prior year
Decreases related to tax positions taken during a prior year
Increases related to tax positions taken during the current year
Decreases related to expiration of the statute of limitations
Balance, end of year
2020
Year Ended December 31,
2019
2018
$
$
2,808
327
—
1,017
(374)
3,778
$
$
3,056
317
(423)
288
(430)
2,808
$
$
1,574
770
—
712
—
3,056
Specific positions that may be resolved include issues involving apportionment and tax credits. At December 31, 2020, the
unrecognized tax benefit is a component of taxes receivable, which is included in other assets within the consolidated balance
sheet.
The Company files income tax returns in U.S. federal and numerous state jurisdictions. The Company is subject to tax
examinations in numerous jurisdictions in the United States until the applicable statute of limitations expires. The Company is no
longer subject to U.S. federal tax examinations for tax years prior to 2017. The Company is open for various state tax
examinations for tax years 2016 and later.
19. Employee Benefits
Hilltop and its subsidiaries have benefit plans that provide for elective deferrals by employees under Section 401(k) of the
Internal Revenue Code. Employee contributions are determined by the level of employee participation and related salary levels
per Internal Revenue Service regulations. Hilltop and its subsidiaries match a portion of employee contributions based on the
amount of eligible employees’ contributions and salaries. The amount charged to operating expense for these matching
contributions totaled $17.7 million, $15.5 million and $14.8 million during 2020, 2019 and 2018, respectively.
In July 2020, pursuant to stockholders’ approval, the Company adopted the Hilltop Holdings Inc. Employee Stock Purchase Plan
(the “ESPP”) to provide a means for eligible employees of the Company to purchase shares of Hilltop
F-52
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
common stock at a discounted price by accumulating funds, normally through payroll deductions and is intended to qualify under
Section 423 of the Internal Revenue Code. Participating employees may purchase shares of common stock at 90% of the fair
market value on the last day of each quarterly offering period. The initial offering period commenced on January 1, 2021.
Effective upon the completion of the PlainsCapital Merger, the Company recorded a liability associated with separate retention
agreements originally entered into between Hilltop and two executive officers. At December 31, 2020 and 2019, the recorded
liability, including interest, was $2.6 million and related to a single executive officer.
The Bank purchased $15.0 million of flexible premium universal life insurance in 2001 to help finance the annual expense
incurred in providing various employee benefits. At December 31, 2020 and 2019, the carrying value of the policies included in
other assets was $26.8 million and $26.2 million, respectively. During each of 2020, 2019 and 2018, the Bank recorded income
of $0.5 million, $1.0 million and $0.6 million, respectively, related to the policies that was reported in other noninterest income
within the consolidated statement of operations.
Deferred Compensation Plan
As a result of the SWS Merger, the Company assumed a deferred compensation plan (the “SWS Plan”) that allows former SWS
eligible officers and employees to defer a portion of their bonus compensation and commissions. The SWS Plan matched 15% of
the deferrals made by participants up to a predetermined limit through matching contributions that vest ratably over four years.
Pursuant to the terms of the SWS Plan, the trustee periodically purchased the former SWS common stock in the open market. As
a result of the SWS Merger, the former SWS common shares were converted into Hilltop common stock based on the terms of
the merger agreement. No further contributions can be made to this plan.
The assets of the SWS Plan are held in a rabbi trust and primarily include investments in company-owned life insurance
(“COLI”) and Hilltop common stock. These assets are consolidated with those of the Company. Investments in COLI are carried
at the cash surrender value of the insurance policies and recorded in other assets within the consolidated balance sheet at
December 31, 2020 and 2019, respectively. Investments in Hilltop common stock, which are carried at cost, and the
corresponding liability related to the deferred compensation plan are presented as components of stockholders’ equity as
employee stock trust and deferred compensation employee stock trust, net, respectively, at December 31, 2020 and 2019,
respectively.
20. Related Party Transactions
Jeremy B. Ford, a director and the President and Chief Executive Officer of Hilltop, is the beneficiary of a trust that owns a 49%
limited partnership interest in Diamond A Financial, L.P., which owned 18.9% of the outstanding Hilltop common stock at
December 31, 2020.
Jeremy B. Ford is the son of Gerald J. Ford. Corey G. Prestidge, Hilltop’s General Counsel and Secretary, is the son-in-law of
Gerald J. Ford. Accordingly, Messrs. Jeremy Ford and Corey Prestidge are brothers-in-law.
In the ordinary course of business, the Bank has granted loans to certain directors, executive officers and their affiliates
(collectively referred to as related parties) totaling $0.6 million and $5 thousand at December 31, 2020 and 2019, respectively.
These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for
comparable transactions with other unaffiliated persons and do not involve more than normal risk of collectability. For such loans
during 2020, principal additions and payments were $0.6 million and $2 thousand, respectively.
At December 31, 2020 and 2019, the Bank held deposits of related parties of $154.1 million and $141.2 million, respectively.
A related party is the lessor in an operating lease with Hilltop. Hilltop’s minimum payment under the lease is $0.5 million
annually through 2028, for an aggregate remaining obligation of $4.2 million at December 31, 2020.
The Bank purchased loans from a company for which a related party served as a director, president and chief executive officer.
At December 31, 2020 and 2019, the outstanding balance of the purchased loans was $0.5 million and $0.7 million, respectively.
The loans were purchased with recourse in the ordinary course of business and the related party had no direct financial interest in
the transaction.
F-53
Table of Contents
Hilltop Plaza Investment
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
On July 31, 2018, Hillcrest Land LLC purchased approximately 1.7 acres of land in the City of University Park, Texas for $38.5
million. Hillcrest Land LLC is owned equally between Hilltop Investments I, LLC, a wholly owned entity of Hilltop, and
Diamond Ground, LLC, an affiliate of Mr. Gerald J. Ford. Each of Hilltop Investments I, LLC and Diamond Ground, LLC
contributed $19.3 million to Hillcrest Land LLC to complete the purchase. As the voting rights of Hillcrest Land LLC are shared
equally between the Company and Diamond Ground, LLC, there is no primary beneficiary, and Diamond Ground, LLC’s interest
in Hillcrest Land LLC has been reflected as a noncontrolling interest in the Company’s consolidated financial statements.
Therefore, the Company has consolidated Hillcrest Land LLC under the VIE model according to the “most-closely associated”
test. The purchased land is included within premises and equipment, net in the consolidated balance sheets. Any income (loss)
associated with Hillcrest Land LLC is included within other noninterest income in the consolidated statements of operations.
Trusts for which Jeremy Ford and the wife of Corey Prestidge are a beneficiary own 10.2% and 10.1%, respectively, of Diamond
Ground, LLC.
In connection with the purchase of the land, Hillcrest Land LLC entered into a 99-year ground lease of the land with three
tenants-in-common: SPC Park Plaza Partners LLC (“Park Plaza LLC”), an unaffiliated entity which received an undivided 50%
leasehold interest; HTH Project LLC, a wholly owned subsidiary of Hilltop, which received an undivided 25% leasehold interest;
and Diamond Hillcrest, LLC (“Diamond Hillcrest”), an entity owned by Mr. Gerald J. Ford, which received an undivided 25%
leasehold interest (collectively, the “Co-Owners”). The ground lease is triple net. The base rent from the Co-Owners under the
ground lease commences 18 months after the ground lease was signed at $1.8 million per year and increases 1.0% per year each
January 1 thereafter. The ground lease was classified as an operating lease under ASC 840, and the accounting commencement
date was determined to be July 31, 2018, the date the land was available to the Co-Owners.
Concurrent with the ground lease, the Co-Owners entered into an agreement to purchase the improvements of a mixed-use project
containing a six-story building (“Hilltop Plaza”). HTH Project LLC and Diamond Hillcrest each own an undivided 25% interest
in Hilltop Plaza. Park Plaza LLC owns the remaining undivided 50% interest in Hilltop Plaza. Park Plaza LLC has agreed to
serve as the Co-Owner property manager under the Co-Owners Agreement; however, certain actions require unanimous approval
of all Co-Owners. Hilltop Plaza was funded through a $41.0 million construction loan from an unaffiliated third party bank, as
well as cash contributions of $5.3 million from each of HTH Project LLC and Diamond Hillcrest. HTH Project LLC’s undivided
interest in Hilltop Plaza is accounted for as an equity method investment as the tenants-in-common have joint control over
decisions regarding Hilltop Plaza. The investment is included within other assets in the consolidated balance sheets and any
income (loss) is included within other noninterest income in the consolidated statements of operations.
Hilltop and the Bank entered into leases for a significant portion of the total rentable corporate office space in Hilltop Plaza
which serves as the headquarters for both companies. Affiliates of Mr. Gerald J. Ford also entered into leases for office space in
the building. The two separate 129-month office and retail leases of Hilltop and the Bank, respectively, have combined total base
rent of approximately $35 million with the first nine months of rent abated. The accounting commencement date of both leases
was determined to be June 20, 2019, the date the building was delivered in order for tenant improvement work to commence. The
combined operating lease liability, net of lease incentives, recognized during the second quarter of 2019 as a result of the
commencement of these leases was $18.9 million. During 2018, the office and retail leases were considered under the build-to-
suit provisions of ASC 840, and the Company was determined to be the accounting owner of the project as its affiliate, HTH
Project LLC, has an equity investment in the project. As such, the assets of Hilltop Plaza were recognized during the construction
period through December 31, 2018, as costs were incurred to construct the asset, with a corresponding liability representing the
costs paid for by the lessor (the Co-Owners). At December 31, 2018, the $27.8 million of costs incurred to date were included
within premises and equipment and other liabilities, respectively, in the consolidated balance sheets. The Company reassessed its
accounting ownership of the Hilltop Plaza assets under construction as of January 1, 2019, under the build-to-suit provisions of
the newly adopted ASC 842, Leases and concluded it was not the accounting owner. As such, the assets and liabilities of the
project were derecognized on January 1, 2019, with the $1.4 million offset representing deferred expenses recognized on the date
through December 31, 2018, recorded as an increase to retained earnings.
All intercompany transactions associated with the Hilltop Plaza investment and the related transactions discussed above are
eliminated in consolidation.
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Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
21. Commitments and Contingencies
During 2020, the Bank acted as agent on behalf of certain correspondent banks in the purchase and sale of federal funds that
aggregated to $2.5 million and zero at December 31, 2020 and 2019, respectively.
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. When it is practicable, the Company estimates loss contingencies for
possible litigation and claims, whether or not there is an accrued probable loss. When the Company is able to estimate such
probable losses, and when it estimates that it is reasonably possible it could incur losses in excess of amounts accrued, the
Company is required to make a disclosure of the aggregate estimation. As available information changes, however, the matters
for which the Company is able to estimate, as well as the estimates themselves, will be adjusted accordingly.
Assessments of litigation and claims exposures are difficult due to many factors that involve inherent unpredictability. Those
factors include the following: the varying stages of the proceedings, particularly in the early stages; unspecified, unsupported, or
uncertain damages; damages other than compensatory, such as punitive damages; a matter presenting meaningful legal
uncertainties, including novel issues of law; multiple defendants and jurisdictions; whether discovery has begun or is complete;
whether meaningful settlement discussions have commenced; and whether the claim involves a class action and if so, how the
class is defined. As a result of some of these factors, the Company may be unable to estimate reasonably possible losses with
respect to some or all of the pending and threatened litigation and claims asserted against the Company.
The Company is involved in information-gathering requests and investigations (both formal and informal), as well as reviews,
examinations and proceedings (collectively, “Inquiries”) by various governmental regulatory agencies, law enforcement
authorities and self-regulatory bodies regarding certain of its businesses, business practices and policies, as 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 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.
While the final outcome of litigation and claims exposures or of any Inquiries is inherently unpredictable, management is
currently of the opinion that the outcome of pending and threatened litigation and Inquiries will not, except related to specific
matters disclosed above, have a material effect on the Company’s business, consolidated financial position, results of operations
or cash flows as a whole. However, in the event of unexpected future developments, it is reasonably possible that an adverse
outcome in any matter, including the matters discussed above, could be material to the Company’s business, consolidated
financial position, results of operations or cash flows for any particular reporting period of occurrence.
Indemnification Liability Reserve
The mortgage origination segment may be responsible to agencies, investors, or other parties for errors or omissions relating to
its representations and warranties that each loan sold meets certain requirements, including representations as to underwriting
standards and the validity of certain borrower representations in connection with the loan. If determined to be at fault, the
mortgage origination segment either repurchases the affected loan from or indemnifies the claimant against loss. The mortgage
origination segment has established an indemnification liability reserve for such probable losses.
F-55
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Generally, the mortgage origination segment first becomes aware that an agency, investor, or other party believes a loss has been
incurred on a sold loan when it receives a written request from the claimant to repurchase the loan or reimburse the claimant’s
losses. Upon completing its review of the claimant’s request, the mortgage origination segment establishes a specific claims
reserve for the loan if it concludes its obligation to the claimant is both probable and reasonably estimable.
An additional reserve has been established for probable agency, investor or other party losses that may have been incurred, but
not yet reported to the mortgage origination segment based upon a reasonable estimate of such losses. Factors considered in the
calculation of this reserve include, but are not limited to, the total volume of loans sold exclusive of specific claimant requests,
actual claim settlements and the severity of estimated losses resulting from future claims, and the mortgage origination segment’s
history of successfully curing defects identified in claim requests. In addition, the mortgage origination segment has considered
that GNMA, FNMA and FHLMC have imposed certain restrictions on loans the agencies will accept under a forbearance
agreement resulting from the COVID-19 pandemic, which could increase the magnitude of indemnification losses on these loans.
While the mortgage origination segment’s sales contracts typically include borrower early payment default repurchase provisions,
these provisions have not been a primary driver of claims to date, and therefore, are not a primary factor considered in the
calculation of this reserve.
At December 31, 2020 and 2019, the mortgage origination segment’s indemnification liability reserve totaled $21.5 million and
$11.8 million, respectively. The provision for indemnification losses was $11.2 million, $3.1 million, and $3.2 million during
2020, 2019, and 2018, respectively.
The following tables provide for a rollforward of claims activity for loans put-back to the mortgage origination segment based
upon an alleged breach of a representation or warranty with respect to a loan sold and related indemnification liability reserve
activity (in thousands).
Balance, beginning of year
Claims made
Claims resolved with no payment
Repurchases
Indemnification payments
Balance, end of year
Balance, beginning of year
Additions for new sales
Repurchases
Early payment defaults
Indemnification payments (1)
Change in reserves for loans sold in prior years
Balance, end of year
Reserve for Indemnification Liability:
Specific claims
Incurred but not reported claims
Total
Representation and Warranty Specific Claims
Activity - Origination Loan Balance
Year Ended December 31,
2019
2018
2020
32,144
17,429
(7,778)
(11,588)
(122)
30,085
$
$
33,784
20,054
(14,154)
(6,170)
(1,370)
32,144
$
$
Indemnification Liability Reserve Activity
Year Ended December 31,
2019
2018
2020
11,776
9,991
(768)
(624)
(39)
1,195
21,531
$
$
10,701
3,116
(495)
(380)
(352)
(814)
11,776
$
$
December 31,
2020
2019
961
20,570
21,531
$
$
1,071
10,705
11,776
33,702
22,156
(13,169)
(8,250)
(655)
33,784
23,472
3,170
(612)
(368)
(13,687)
(1,274)
10,701
$
$
$
$
$
$
(1)
Indemnification payments in 2018 included $13.5 million related to agreements with the DOJ and HUD in exchange for release of any civil claims
related to certain loans originated by PrimeLending. These claims were included in incurred but not reported claims in prior periods.
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Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Although management considers the total indemnification liability reserve to be appropriate, there may be changes in the reserve
over time to address incurred losses due to unanticipated adverse changes in the economy and historical loss patterns, discrete
events adversely affecting specific borrowers or industries, and/or actions taken by institutions or investors. The impact of such
matters is considered in the reserving process when probable and estimable.
Other Contingencies
As discussed in Note 19 to the consolidated financial statements, effective upon completion of the PlainsCapital Merger, Hilltop
entered into separate retention agreements with certain executive officers. As of December 31, 2020, a single retention agreement
remains, with an initial term of two years (with automatic one-year renewals at the end of the first year and each anniversary
thereof). This retention agreement provides for severance pay benefits if the executive officer’s employment is terminated
without “cause”.
In addition to this retention agreement, Hilltop and its subsidiaries maintain employment contracts with certain officers that
provide for benefits in the event of a “change in control” as defined in these agreements.
22. Financial Instruments with Off-Balance Sheet Risk
Banking
The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit that
involve varying degrees of credit and interest rate risk in excess of the amount recognized in the consolidated financial
statements. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees
are incurred or received. The contract amounts of those instruments reflect the extent of involvement (and therefore the exposure
to credit loss) the Bank has in particular classes of financial instruments.
Commitments to extend credit are agreements to lend to a customer provided that the terms established in the contract are met.
Commitments generally have fixed expiration dates and may require payment of fees. Because some commitments are expected
to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These
letters of credit are primarily issued to support public and private 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 December 31, 2020 and
outstanding financial and performance standby letters of credit of $91.5 million at December 31, 2020.
The Bank uses the same credit policies in making commitments and standby letters of credit as it does for loans held for
investment. The amount of collateral obtained, if deemed necessary, in these transactions is based on management’s credit
evaluation of the borrower. Collateral held varies but may include real estate, accounts receivable, marketable securities, interest-
bearing deposit accounts, inventory, and property, plant and equipment.
Broker-Dealer
In the normal course of business, the Hilltop Broker-Dealers execute, settle, and finance various securities transactions that may
expose the Hilltop Broker-Dealers to off-balance sheet risk in the event that a customer or counterparty does not fulfill its
contractual obligations. Examples of such transactions include the sale of securities not yet purchased by customers or for the
accounts of the Hilltop Broker-Dealers, use of derivatives to support certain non-profit housing organization clients and to hedge
changes in the fair value of certain securities, clearing agreements between the Hilltop Broker-Dealers and various clearinghouses
and broker-dealers, secured financing arrangements that involve pledged securities, and when-issued underwriting and purchase
commitments.
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Table of Contents
23. Stock-Based Compensation
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Since 2012, the Company has issued stock-based incentive awards pursuant to the Hilltop Holdings Inc. 2012 Equity Incentive
Plan (the “2012 Plan”). In July 2020, pursuant to stockholders’ approval, the Company adopted the Hilltop Holdings Inc. 2020
Equity Incentive Plan (the “2020 Plan”). The 2020 Plan serves as successor to the 2012 Plan. The 2012 Plan and the 2020 Plan
are referred to collectively as “the Equity Plans.” The Equity Plans provide for the grant of nonqualified stock options, stock
appreciation rights, restricted stock, RSUs, performance awards, dividend equivalent rights and other awards to employees of the
Company, its subsidiaries and outside directors of the Company. Shares available for grant under the 2012 Plan that were
reserved but not issued as of the effective date of the 2020 Plan were added to the reserves of the 2020 Plan. No additional
awards may be made under the 2012 Plan, but the 2012 Plan remains in effect as to outstanding awards. Outstanding awards
under the Equity Plans continue to be subject to the terms and conditions of the respective Plans. The number of shares
authorized for issuance pursuant to awards under the 2020 Plan is 3,650,000 plus any shares that become available upon the
forfeiture, expiration, cancellation or settlement in cash awards outstanding under the 2012 Plan as of April 30, 2020. At
December 31, 2020, 3,428,547 shares of common stock remained available for issuance pursuant to awards granted under the
2020 Plan, excluding shares that may be delivered pursuant to outstanding awards. Compensation expense related to the Equity
Plans was $14.6 million, $11.8 million and $9.1 million during 2020, 2019 and 2018, respectively.
During 2020, 2019 and 2018, Hilltop granted 31,222, 26,659 and 30,400 shares of common stock, respectively, pursuant to the
Equity Plans to certain non-employee members of the Company’s board of directors for services rendered to the Company.
Restricted Stock Units
The Compensation Committee of the board of directors of the Company issued RSUs to certain employees pursuant to the Equity
Plans.
Certain RSUs are subject to time-based vesting conditions and generally provided for a cliff vest on the third anniversary of the
grant date, while other RSUs provided for vesting based upon the achievement of certain performance goals over a three-year
period subject to service conditions set forth in the award agreements, with associated costs generally recognized on a straight-
line basis over the respective vesting periods. The RSUs are not transferable, and the shares of common stock issuable upon
conversion of vested RSUs may be subject to transfer restrictions for a period of one year following conversion, subject to certain
exceptions. In addition, the applicable RSU award agreements provide for accelerated vesting under certain conditions.
The following table summarizes information about nonvested RSU activity (shares in thousands).
Balance, December 31, 2017
Granted
Vested/Released
Forfeited
Balance, December 31, 2018
Granted
Vested/Released
Forfeited
Balance, December 31, 2019
Granted
Vested/Released
Forfeited
Balance, December 31, 2020
RSUs
Weighted
Average
Grant Date
Fair Value
Outstanding
1,318
510
(406)
(152)
1,270
719
(496)
(56)
1,437
777
(350)
(31)
1,833
$
$
$
$
$
$
$
$
$
$
$
$
$
20.89
24.00
19.92
20.97
22.44
20.02
18.17
24.12
22.64
21.79
26.83
22.38
21.48
F-58
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Vested/Released RSUs include an aggregate of 238,914 shares withheld to satisfy employee statutory tax obligations during
2020, 2019 and 2018. Pursuant to certain RSU award agreements, an aggregate of 5,482 vested RSUs at December 31, 2020
require deferral of the settlement in shares and statutory tax obligations to a future date.
During 2020, the Compensation Committee of the board of directors of the Company awarded certain executives and key
employees an aggregate of 763,140 RSUs pursuant to the Equity Plans. At December 31, 2020, 636,208 of these RSUs are
subject to time-based vesting conditions and generally cliff vest on the third anniversary of the grant date, and 122,232 of these
outstanding RSUs will cliff vest based upon the achievement of certain performance goals over a three-year period.
At December 31, 2020, in the aggregate, 1,543,756 of the RSUs are subject to time-based vesting conditions and generally cliff
vest on the third anniversary of the grant date, and 289,493 outstanding RSUs cliff vest based upon the achievement of certain
performance goals over a three-year period. At December 31, 2020, unrecognized compensation expense related to outstanding
RSUs of $20.1 million is expected to be recognized over a weighted average period of 1.49 years.
24. Regulatory Matters
Banking and Hilltop
PlainsCapital, which includes the Bank and PrimeLending, and Hilltop are subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory — and
possibly additional discretionary — actions by regulators that, if undertaken, could have a direct, material effect on the
consolidated financial statements. The regulations require PlainsCapital and Hilltop to meet specific capital adequacy guidelines
that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Company performs reviews of the classification and calculation of risk-weighted assets to ensure
accuracy and compliance with the Basel III regulatory capital requirements as implemented by the Board of Governors of the
Federal Reserve System. The capital classifications are also subject to qualitative judgments by the regulators about components,
risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the
companies to maintain minimum amounts and ratios (set forth in the following table) of Tier 1 capital (as defined in the
regulations) to total average assets (as defined), and minimum ratios of common equity Tier 1, Tier 1 and total capital (as
defined) to risk-weighted assets (as defined).
In order to avoid limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary
bonus payments to executive officers, Basel III requires banking organizations to maintain a capital conservation buffer above
minimum risk-based capital requirements measured relative to risk-weighted assets.
In addition, bank holding companies with less than $15 billion in assets as of December 31, 2009 are allowed to include junior
subordinated debentures in Tier 1 capital, subject to certain restrictions. However, because Hilltop has grown above $15 billion in
assets, if we make an acquisition in the future, the debentures issued to the PCC Statutory Trusts I, II, III and IV (the “Trusts”)
may be phased out of Tier 1 and into Tier 2 capital. All of the debentures issued to the Trusts, less the common stock of the
Trusts, qualified as Tier 1 capital as of December 31, 2020, under guidance issued by the Board of Governors of the Federal
Reserve System.
The following tables show PlainsCapital’s and Hilltop’s actual capital amounts and ratios in accordance with Basel III compared
to the regulatory minimum capital requirements including conservation buffer ratio in effect at the end of the period (dollars in
thousands). Based on actual capital amounts and ratios shown in the following table, PlainsCapital’s ratios place it in the “well
capitalized” (as defined) capital category under regulatory requirements. Actual capital amounts and ratios as of December 31,
2020 reflect PlainsCapital’s and Hilltop’s decision to elect the transition option as issued by the federal banking regulatory
agencies in March 2020 that permits banking institutions to mitigate the estimated cumulative regulatory capital effects from
CECL over a five-year transitionary period. Capital amounts and ratios in the following table as of December 31, 2019 are
presented on a consolidated basis and include discontinued operations and those assets and liabilities classified as discontinued.
F-59
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
December 31, 2020
Tier 1 capital (to average assets):
PlainsCapital
Hilltop
Common equity Tier 1 capital (to risk-weighted assets):
PlainsCapital
Hilltop
Tier 1 capital (to risk-weighted assets):
PlainsCapital
Hilltop
Total capital (to risk-weighted assets):
PlainsCapital
Hilltop
December 31, 2019
Tier 1 capital (to average assets):
PlainsCapital
Hilltop
Common equity Tier 1 capital (to risk-weighted assets):
PlainsCapital
Hilltop
Tier 1 capital (to risk-weighted assets):
PlainsCapital
Hilltop
Total capital (to risk-weighted assets):
PlainsCapital
Hilltop
Actual
Amount
Ratio
Minimum Capital
Requirements
Including
Conservation Buffer
Ratio
To Be Well
Capitalized
Ratio
$ 1,385,842
2,111,580
10.44 %
12.64 %
1,385,842
2,046,580
14.40 %
18.97 %
1,385,842
2,111,580
14.40 %
19.57 %
1,470,364
2,409,684
15.27 %
22.34 %
4.0 %
4.0 %
7.0 %
7.0 %
8.5 %
8.5 %
10.5 %
10.5 %
5.0 %
N/A
6.5 %
N/A
8.0 %
N/A
10.0 %
N/A
Actual
Amount
Ratio
Minimum Capital
Requirements
Including
Conservation Buffer
Ratio
To Be Well
Capitalized
Ratio
$ 1,236,289
1,822,970
11.61 %
12.71 %
1,236,289
1,776,381
13.45 %
16.70 %
1,236,289
1,822,970
13.45 %
17.13 %
1,299,453
1,867,771
14.13 %
17.55 %
F-60
4.0 %
4.0 %
7.0 %
7.0 %
8.5 %
8.5 %
10.5 %
10.5 %
5.0 %
N/A
6.5 %
N/A
8.0 %
N/A
10.0 %
N/A
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
A reconciliation of equity capital to common equity Tier 1, Tier 1 and total capital (as defined) is as follows (in thousands).
Total equity capital
Add:
Net unrealized holding losses (gains) on securities available
for sale and held in trust
CECL transition adjustment
Deduct:
Goodwill and other disallowed intangible assets
Other
Common equity Tier 1 capital (as defined)
Add: Tier 1 capital
Trust preferred securities
Deduct:
Additional Tier 1 capital deductions
Tier 1 capital (as defined)
Add: Allowable Tier 2 capital
Allowance for credit losses, including unfunded
commitments
Capital instruments
Deduct:
Additional Tier 2 capital deductions
Total capital (as defined)
Broker-Dealer
December 31, 2020
December 31, 2019
PlainsCapital
$ 1,654,249
Hilltop
$ 2,323,939
PlainsCapital
$ 1,523,549
Hilltop
$ 2,103,039
(17,763)
22,905
(17,763)
23,842
(9,452)
—
(11,419)
—
(273,330)
(219)
1,385,842
(283,187)
(251)
2,046,580
(276,249)
(1,559)
1,236,289
(313,756)
(1,483)
1,776,381
—
65,000
—
65,000
—
—
1,385,842
2,111,580
1,236,289
—
(18,411)
1,822,970
120,334
—
134,853
200,000
63,164
—
63,212
—
(35,812)
$ 1,470,364
(36,749)
$ 2,409,684
$ 1,299,453
—
(18,411)
$ 1,867,771
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 requirement 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. Momentum Independent Network
follows the primary (aggregate indebtedness) method, as defined in Rule 15c3-1 promulgated under the Exchange Act, which
requires the maintenance of the larger of $250,000 or 6-2/3% of aggregate indebtedness.
At December 31, 2020, the net capital position of each of the Hilltop Broker-Dealers was as follows (in thousands).
Net capital
Less: required net capital
Excess net capital
Net capital as a percentage of aggregate debit items
Net capital in excess of 5% aggregate debit items
Hilltop
Securities
Momentum
Independent
Network
$
$
$
291,228
7,045
284,183
$
$
82.7 %
273,616
3,220
250
2,970
Under certain conditions, Hilltop Securities may be required to segregate cash and securities in a special reserve account for the
benefit of customers under Rule 15c3-3 promulgated under the Exchange Act. Assets segregated for regulatory purposes under
the provisions of the Exchange Act are restricted and not available for general corporate purposes. At December 31, 2020 and
2019, the Hilltop Broker-Dealers held cash of $290.4 million and $157.4 million, respectively, segregated in special reserve bank
accounts for the benefit of customers. The Hilltop Broker-Dealers were not required to segregate cash or securities in special
reserve accounts for the benefit of proprietary accounts of introducing broker-dealers at December 31, 2020.
F-61
Table of Contents
Mortgage Origination
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
As a mortgage originator, PrimeLending and its subsidiaries are subject to minimum net worth and liquidity requirements
established by HUD and GNMA, as applicable. On an annual basis, PrimeLending and its subsidiaries submit audited financial
statements to HUD and GNMA, as applicable, documenting their respective compliance with minimum net worth and liquidity
requirements. As of December 31, 2020, PrimeLending and its subsidiaries net worth and liquidity exceeded the amounts
required by HUD and GNMA, as applicable.
25. Stockholders’ Equity
The Bank is subject to certain restrictions on the amount of dividends it may declare without prior regulatory approval. At
December 31, 2020, $248.1 million of its earnings was available for dividend declaration without prior regulatory approval.
Dividends
During 2020, 2019 and 2018, the Company declared and paid cash dividends of $0.36, $0.32 and $0.28 per common share, or
$32.5 million, $29.6 million and $26.7 million, respectively.
On January 28, 2021, the Company announced that its board of directors declared a quarterly cash dividend of $0.12 per common
share, payable on February 26, 2021, to all common stockholders of record as of the close of business on February 15, 2021.
Stock Repurchase Programs
The Company’s board of directors has periodically approved stock repurchase programs under which it authorized the Company
to repurchase its outstanding common stock. Under the respective stock repurchase program authorized, the Company could
repurchase shares in open-market purchases or through privately negotiated transactions as permitted under Rule 10b-18
promulgated under the Exchange Act. The extent to which the Company repurchased its shares and the timing of such
repurchases depended upon market conditions and other corporate considerations, as determined by Hilltop’s management team.
Repurchased shares will be returned to the Company’s pool of authorized but unissued shares of common stock.
In January 2018, the Hilltop board of directors authorized a stock repurchase program through January 2019 pursuant to which
the Company was originally authorized to repurchase, in the aggregate, up to $50.0 million of its outstanding common stock. In
July 2018, the Hilltop board of directors authorized an increase to the aggregate amount of common stock the Company may
repurchase under this program to $100.0 million, inclusive of repurchases to offset dilution related to grants of stock-based
compensation. During 2018, the Company paid $59.0 million to repurchase an aggregate of 2,729,568 shares of common stock at
a weighted average price of $21.61 per share. This stock repurchase program expired in January 2019. The purchases were
funded from available cash balances.
In January 2019, the Hilltop board of directors authorized a stock repurchase program through January 2020, pursuant to which
the Company was authorized to repurchase, in the aggregate, up to $50.0 million of its outstanding common stock. On August 19,
2019, the Company entered into a Securities Purchase Agreement to purchase 2,175,404 shares of its common stock from Oak
Hill Capital Partners III, L.P., Oak Hill Capital Management Partners III, L.P. and Oak Hill Capital Management, LLC
(collectively, “Oak Hill Capital”). The Hilltop board of directors, other than Messrs. J. Taylor Crandall and Gerald J. Ford,
considered and approved the purchase of the shares of Hilltop common stock from Oak Hill Capital. Hilltop director J. Taylor
Crandall is a founding Managing Partner of Oak Hill Capital Management, LLC. The purchase was consummated on August 20,
2019 at a purchase price of $48.4 million, or $22.25 per share. The purchase price per share was determined by the weighted
average of the closing prices of Hilltop common stock as reported by the New York Stock Exchange for each trading day
commencing on August 12, 2019 and ending on August 16, 2019. The repurchase of shares by Hilltop from Oak Hill Capital
fully utilized all remaining availability of the stock repurchase program previously authorized in January 2019.
F-62
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
During 2019, the Company paid $73.4 million to repurchase an aggregate of 3,390,247 shares of common stock at a weighted
average price of $21.64 per share. These amounts are inclusive of the repurchase of shares by Hilltop from Oak Hill Capital
discussed above. This stock repurchase program expired in January 2020. The purchases were funded from available cash
balances.
In January 2020, the Hilltop board of directors authorized a new stock repurchase program through January 2021, pursuant to
which the Company is authorized to repurchase, in the aggregate, up to $75.0 million of its outstanding common stock, inclusive
of repurchases to offset dilution related to grants of stock-based compensation. As previously announced on April 30, 2020, in
light of the uncertain outlook for 2020 due to the COVID-19 pandemic, Hilltop’s board of directors suspended its stock
repurchase program. During 2020, prior to its suspension, the Company paid $15.2 million to repurchase an aggregate of 720,901
shares of common stock at a weighted average price of $21.13 per share associated with the stock repurchase program
In January 2021, the Hilltop board of directors authorized a new stock repurchase program through January 2022, pursuant to
which the Company is authorized to repurchase, in the aggregate, up to $75.0 million of its outstanding common stock, inclusive
of repurchases to offset dilution related to grants of stock-based compensation.
Tender Offer
On September 23, 2020, the Company announced the commencement of a modified “Dutch auction” tender offer to purchase
shares of its common stock for an aggregate cash purchase price up to $350 million. On November 17, 2020, the Company
completed its tender offer, repurchasing 8,058,947 shares of outstanding common stock at a price of $24.00 per share for a total
of $193.4 million excluding fees and expenses. The Company funded the tender offer with cash on hand.
26. Other Noninterest Income and Expense
The following table shows the components of other noninterest income and expense (in thousands).
Other noninterest income:
Net gains from trading securities portfolio
Net gains from Hilltop Broker-Dealer structured product and derivative
activities
Service charges on depositor accounts
Trust fees
Other
Other noninterest expense:
Software and information technology
Mortgage origination and servicing
Brokerage commissions and fees
Unreimbursed loan closing costs
Business development
Amortization of intangible assets
Travel, meals and entertainment
Funding fees
Office supplies
Other
Year Ended December 31,
2019
2018
2020
$
121,983
$
20,521
$
6,197
81,111
14,845
9,804
15,862
243,605
56,872
27,808
24,113
21,696
10,190
6,301
4,804
4,461
3,953
64,560
224,758
$
$
$
129,571
15,170
10,255
10,833
186,350
50,751
19,892
20,039
16,784
12,940
7,567
12,160
5,393
4,809
43,051
193,386
$
$
$
41,543
14,484
9,807
18,365
90,396
52,882
19,705
20,674
16,798
15,853
8,026
11,968
5,414
5,788
55,284
212,392
$
$
$
F-63
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
27. Derivative Financial Instruments
The Company uses various derivative financial instruments to mitigate interest rate risk. The Bank’s interest rate risk
management strategy involves effectively managing the re-pricing characteristics of certain assets and liabilities to mitigate
potential adverse impacts from changes in interest rates on the Bank’s net interest margin. Additionally, the Bank manages
variability of cash flows associated with its variable rate debt in interest-related cash outflows with interest rate swap contracts.
PrimeLending has interest rate risk relative to interest rate lock commitments (“IRLCs”) and its inventory of mortgage loans held
for sale. PrimeLending is exposed to such interest rate risk from the time an IRLC is made to an applicant to the time the related
mortgage loan is sold. To mitigate interest rate risk, PrimeLending executes forward commitments to sell mortgage-backed
securities (“MBSs”) and Eurodollar futures. Additionally, PrimeLending has interest rate risk relative to its MSR asset and uses
derivative instruments, including interest rate swaps and U.S. Treasury bond futures and options, to hedge this risk. The Hilltop
Broker-Dealers use forward commitments to both purchase and sell MBSs to facilitate customer transactions and as a means to
hedge related exposure to interest rate risk in certain inventory positions. Additionally, Hilltop Securities uses U.S. Treasury
bond, Eurodollar futures and municipal market data, or MMD, rate locks to hedge changes in the fair value of its securities.
Non-Hedging Derivative Instruments and the Fair Value Option
As discussed in Note 5 to the consolidated financial statements, the Company has elected to measure substantially all mortgage
loans held for sale at fair value under the provisions of the Fair Value Option. The election provides the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and liabilities differently without applying hedge accounting
provisions. The fair values of PrimeLending’s IRLCs and forward commitments are recorded in other assets or other liabilities, as
appropriate, and changes in the fair values of these derivative instruments are recorded as a component of net gains from sale of
loans and other mortgage production income. These changes in 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 12 to the consolidated financial statements. The fair
values of the Hilltop Broker-Dealers’ and the Bank’s derivative instruments are recorded in other assets or other liabilities, as
appropriate.
Changes in the fair value of derivatives are presented in the following table (in thousands).
Increase (decrease) in fair value of derivatives during period:
PrimeLending
Hilltop Broker-Dealers
Bank
Hedging Derivative Instruments
Year Ended December 31,
2019
2020
2018
$
$
33,714
3,969
(7)
$
8,550
(3,085)
(148)
(12,788)
(381)
30
During 2020, the Company entered into interest rate swap contracts with the initial notional amount of $61 million to manage the
exposure to changes in fair value associated with certain available for sale fixed rate collateralized mortgage backed securities
attributable to changes in the designated benchmark interest rate. These fair value hedges have been designated as a last-of-layer
hedge, which provides the Company the ability to execute a fair value hedge of the interest rate risk associated with a portfolio of
similar prepayable assets whereby the last dollar amount estimated to remain in the portfolio of assets is identified as the hedged
item. Under these interest rate swap contracts, we receive a floating rate and pay a fixed rate on the outstanding notional amount.
The Company recorded a cumulative basis adjustment. The Company has assessed the hedge effectiveness both at the onset of
the hedge and at regular intervals throughout the life of the derivative. For derivatives designated and that qualify as fair value
hedges, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk
are recognized in interest income.
The Company has outstanding interest rate swap contracts utilized to manage the variability of cash flows associated with our
variable rate borrowings. Under these interest rate swap contract, we receive a floating rate and pay a fixed rate on the
outstanding notional amount. The Company has designated the interest rate swap as a cash flow hedge and
F-64
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
assessed the hedge effectiveness both at the onset of the hedge and at regular intervals throughout the life of the derivative. To the
extent that the interest rate swap is highly effective in offsetting the variability of the hedged cash flows, changes in the fair value
of the derivative are included as a component of other comprehensive loss on our consolidated balance sheets. Although the
Company has determined at the onset of the hedge that the interest rate swap will be a highly effective hedge throughout the term
of the contract, any portion of fair value swap subsequently determined to be ineffective will be recognized in earnings.
Derivative positions are presented in the following table (in thousands).
December 31, 2020
December 31, 2019
Notional
Amount
Estimated
Fair Value
Notional
Amount
Estimated
Fair Value
Derivative instruments (not designated as hedges):
IRLCs
Customer-based written options
Customer-based purchased options
Commitments to purchase MBSs
Commitments to sell MBSs
Interest rate swaps
U.S. Treasury bond futures and options (1)
Eurodollar futures (1)
Derivative instruments (designated as hedges):
$ 2,470,013
$
—
—
2,478,041
6,141,079
43,786
225,400
—
76,048
$
—
—
22,311
(40,621)
(2,196)
—
—
914,526
31,200
31,200
3,346,946
5,988,198
15,012
283,500
934,000
$
18,222
—
—
3,321
(5,904)
(178)
—
—
Interest rate swaps designated as cash flow hedges
Interest rate swaps designated as fair value hedges (2)
$
105,000
60,618
$
(3,112) $
(130)
50,000
—
$
528
—
(1)
(2)
Changes in the fair value of these contracts are settled daily with the respective counterparties of PrimeLending and the Hilltop Broker-
Dealers.
The Company designated $60.6 million as the hedged amount (from a closed portfolio of prepayable available for sale securities with a
carrying value of $60.7 million as of December 31, 2020) in a last-of-layer hedging relationship, which commenced in the fourth quarter
of 2020. The cumulative basis adjustment included in the carrying value of the hedged items totaled $0.1 million.
The increase in the estimated fair value of the IRLCs at December 30, 2020, compared to December 31, 2019, was driven by the
accelerated decrease in mortgage interest rates during 2020 triggered by the economic impact of the COVID-19 pandemic, and an
increase in the average value of individual IRLCs. The increase in average value of individual IRLCs was primarily driven by
PrimeLending managing increased loan origination volumes to a level that could be supported by its loan fulfillment operations
and addressing anticipated enhanced credit and liquidity risks triggered by the economic impact of the COVID-19 pandemic.
PrimeLending has cash collateral advances totaling $26.1 million and $4.5 million to offset net liability derivative positions on its
commitments to sell MBSs at December 31, 2020 and 2019, respectively. In addition, PrimeLending and the Hilltop Broker-
Dealers advanced cash collateral totaling $2.7 million and $3.7 million on its U.S. Treasury bond futures and options and
Eurodollar futures at December 31, 2020 and 2019, respectively. These amounts are included in other assets within the
consolidated balance sheets.
F-65
Table of Contents
28. Balance Sheet Offsetting
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
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 Gross Amounts
of Recognized
Assets
Offset in the
Balance Sheet
Net Amounts
of Assets
Presented in the
Balance Sheet
Gross Amounts Not Offset in
the Balance Sheet
Financial
Instruments
Cash
Collateral
Pledged
Net
Amount
December 31, 2020
Securities borrowed:
Institutional counterparties
$
1,338,855
$
— $
1,338,855
$
(1,273,955)
$
— $
64,900
Reverse repurchase agreements:
Institutional counterparties
Forward MBS derivatives:
Institutional counterparties
December 31, 2019
Securities borrowed:
Institutional counterparties
Reverse repurchase agreements:
Institutional counterparties
Forward MBS derivatives:
Institutional counterparties
December 31, 2020
Securities loaned:
80,319
—
80,319
(79,925)
—
394
22,311
1,441,485
1,634,782
59,031
3,640
1,697,453
$
$
$
$
$
$
—
— $
22,311
1,441,485
— $
1,634,782
—
59,031
—
— $
3,640
1,697,453
$
$
$
(22,311)
(1,376,191)
$
—
— $
—
65,294
(1,586,820)
$
— $
47,962
(58,619)
—
412
(3,640)
(1,649,079)
$
—
— $
—
48,374
Gross Amounts
of Recognized
Liabilities
Gross Amounts
Offset in the
Balance Sheet
Net Amounts
of Liabilities
Presented in the
Balance Sheet
Gross Amounts Not Offset in
the Balance Sheet
Financial
Instruments
Cash
Collateral
Pledged
Net
Amount
Institutional counterparties
$
1,245,066
$
— $
1,245,066
$
(1,179,090)
$
— $
65,976
Interest rate swaps:
Institutional counterparties
Repurchase agreements:
Institutional counterparties
Forward MBS derivatives:
Institutional counterparties
December 31, 2019
Securities loaned:
Institutional counterparties
Interest rate swaps:
Institutional counterparties
Repurchase agreements:
Institutional counterparties
Customer counterparties
Forward MBS derivatives:
Institutional counterparties
2,196
237,856
40,741
1,525,859
1,555,964
$
$
178
586,651
25,474
—
—
2,196
(2,123)
237,856
(237,856)
—
—
73
—
(120)
(120)
$
40,621
1,525,739
— $
1,555,964
$
$
(12,670)
(1,431,739)
$
—
— $
27,951
94,000
(1,509,933)
$
— $
46,031
—
—
—
178
(112)
586,651
25,474
(586,651)
(25,474)
—
—
—
66
—
—
6,890
2,175,157
$
(667)
(667)
$
6,223
2,174,490
$
(2,384)
(2,124,554)
$
—
— $
3,839
49,936
$
$
$
F-66
Table of Contents
Secured Borrowing Arrangements
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Secured Borrowings (Repurchase Agreements) — The Company participates in transactions involving securities sold under
repurchase agreements, which are secured borrowings and generally mature one to ninety days from the transaction date or
involve arrangements with no definite termination date. Securities sold under repurchase agreements are reflected at the amount
of cash received in connection with the transactions. The Company may be required to provide additional collateral based on the
fair value of the underlying securities, which is monitored on a daily basis.
Securities Lending Activities — The Company’s securities lending activities include lending securities for other broker-dealers,
lending institutions and its own clearing and retail operations. These activities involve lending securities to other broker-dealers
to cover short sales, to complete transactions in which there has been a failure to deliver securities by the required settlement date
and as a conduit for financing activities.
When lending securities, the Company receives cash or similar collateral and generally pays interest (based on the amount of
cash deposited) to the other party to the transaction. Securities lending transactions are executed pursuant to written agreements
with counterparties that generally require securities loaned to be marked-to-market on a daily basis. The Company receives
collateral in the form of cash in an amount generally in excess of the fair value of securities loaned. The Company monitors the
fair value of securities loaned on a daily basis, with additional collateral obtained or refunded, as necessary. Collateral
adjustments are made on a daily basis through the facilities of various clearinghouses. The Company is a principal in these
securities lending transactions and is liable for losses in the event of a failure of any other party to honor its contractual
obligation. Management sets credit limits with each counterparty and reviews these limits regularly to monitor the risk level with
each counterparty. The Company is subject to credit risk through its securities lending activities if securities prices decline
rapidly because the value of the Company’s collateral could fall below the amount of the indebtedness it secures. In rapidly
appreciating markets, credit risk increases due to short positions. The Company’s securities lending business subjects the
Company to credit risk if a counterparty fails to perform or if collateral securing its obligations is insufficient. In securities
transactions, the Company is subject to credit risk during the period between the execution of a trade and the settlement by the
customer.
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 December 31, 2020 and 2019.
December 31, 2020
Repurchase agreement transactions:
Asset-backed securities
Securities lending transactions:
Corporate securities
Equity securities
Total
$
$
113
1,244,953
1,355,897
$
—
—
— $
—
—
127,025
$
Overnight and
Continuous
Up to 30 Days
30-90 Days
Greater Than
90 Days
Total
Remaining Contractual Maturities
110,831
$
— $
127,025
$
— $
237,856
Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above
Amount related to agreements not included in offsetting disclosure above
December 31, 2019
Repurchase agreement transactions:
U.S. Treasury and agency securities
Asset-backed securities
Securities lending transactions:
Corporate securities
Equity securities
Total
Overnight and
Continuous
$
$
45,950
257,396
120
1,555,844
1,859,310
$
$
— $
12,892
— $
295,887
—
—
12,892
$
—
—
295,887
$
Remaining Contractual Maturities
Up to 30 Days
30-90 Days
Greater Than
90 Days
Total
—
—
— $
$
$
113
1,244,953
1,482,922
1,482,922
—
— $
—
—
—
— $
$
$
45,950
566,175
120
1,555,844
2,168,089
2,168,089
—
Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above
Amount related to agreements not included in offsetting disclosure above
F-67
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
29. Broker-Dealer and Clearing Organization Receivables and Payables
Broker-dealer and clearing organization receivables and payables consisted of the following (in thousands).
Receivables:
Securities borrowed
Securities failed to deliver
Trades in process of settlement
Other
Payables:
Securities loaned
Correspondents
Securities failed to receive
Trades in process of settlement
Other
December 31,
2020
2019
1,338,855
58,244
$
—
7,628
1,404,727
1,245,066
33,547
61,589
21,765
6,406
1,368,373
$
$
$
1,634,782
18,726
104,922
21,850
1,780,280
1,555,964
37,036
8,568
—
3,950
1,605,518
$
$
$
$
30. Segment and Related Information
Following the sale of NLC on June 30, 2020, we have two primary business units within continuing operations, PCC (banking
and mortgage origination) and Securities Holdings (broker-dealer). Under GAAP, our continuing operations business units are
comprised of three reportable business segments organized primarily by the core products offered to the segments’ respective
customers: banking, broker-dealer and mortgage origination. These segments reflect the manner in which operations are managed
and the criteria used by the chief operating decision maker, the Company’s President and Chief Executive Officer, to evaluate
segment performance, develop strategy and allocate resources.
The banking segment includes the operations of the Bank. The broker-dealer segment includes the operations of Securities
Holdings, and the mortgage origination segment is composed of PrimeLending.
As discussed in Note 3 to the consolidated financial statements, during the first quarter of 2020, management had determined that
the insurance segment met the criteria to be presented as discontinued operations. On June 30, 2020, Hilltop completed the sale of
NLC, which comprised the operations of the former insurance segment. As a result, insurance segment results and its assets and
liabilities have been presented as discontinued operations in the consolidated financial statements. Income from discontinued
operations before taxes was $38.9 million, $17.6 million and $5.8 million during 2020, 2019 and 2018, respectively. At
December 31, 2019, goodwill and assets of discontinued operations were $24.0 million and $248.4 million, respectively.
Corporate includes certain activities not allocated to specific business segments. These activities include holding company
financing and investing activities, merchant banking investment opportunities and management and administrative services to
support the overall operations of the Company.
Balance sheet amounts not discussed previously and the elimination of intercompany transactions are included in “All Other and
Eliminations.” The following tables present certain information about continuing operations reportable business segment
revenues, operating results, goodwill and assets (in thousands).
Year Ended December 31, 2020
Net interest income (expense)
Provision for credit losses
Noninterest income
Noninterest expense
Income (loss) from continuing operations before taxes
Banking
390,871
96,326
41,376
232,447
103,474
Broker-Dealer
39,912
165
491,355
415,463
115,639
$
$
$
$
$
$
Mortgage
Origination
Corporate
(10,489)
—
1,172,450
753,917
408,044
$
$
(14,192)
—
3,945
53,040
(63,287)
F-68
All Other and
Eliminations
18,064
—
(18,646)
(1,064)
482
$
$
Continuing
Operations
424,166
96,491
1,690,480
1,453,803
564,352
$
$
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Year Ended December 31, 2019
Net interest income (expense)
Provision for (reversal of) credit losses
Noninterest income
Noninterest expense
Income (loss) from continuing operations before taxes
Year Ended December 31, 2018
Net interest income (expense)
Provision for (reversal of) credit losses
Noninterest income
Noninterest expense
Income (loss) from continuing operations before taxes
December 31, 2020
Goodwill
Total assets
December 31, 2019
Goodwill
Total assets in continuing operations
31. Earnings per Common Share
Banking
379,258
7,280
41,753
231,524
182,207
Broker-Dealer
51,308
(74)
404,411
366,031
89,762
$
$
Banking
370,732
5,319
43,588
256,577
152,424
Broker-Dealer
50,878
(231)
301,714
320,241
32,582
$
$
Banking
Broker-Dealer
247,368
13,338,930
247,368
11,147,344
$
$
$
$
7,008
3,196,346
7,008
3,457,068
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,485
—
551,860
540,474
12,871
Mortgage
Origination
13,071
3,285,005
13,071
2,357,415
$
$
$
$
$
$
Mortgage
Origination
Corporate
All Other and Continuing
Operations
(6,273)
—
634,992
563,998
64,721
$
$
(5,541)
—
2,104
50,968
(54,405)
$
$
Eliminations
20,227
—
(20,443)
(632)
416
$
$
438,979
7,206
1,062,817
1,211,889
282,701
Mortgage
Origination
Corporate
All Other and Continuing
Operations
(9,176)
—
4,798
36,628
(41,006)
$
$
Eliminations
19,380
—
(21,830)
(592)
(1,858)
$
$
433,299
5,088
880,130
1,153,328
155,013
Corporate
All Other and Continuing
Operations
Eliminations
— $
— $
267,447
2,823,374
$
(5,699,391)
$
16,944,264
— $
— $
267,447
2,393,604
$
(4,431,412)
$
14,924,019
The following table presents the computation of basic and diluted earnings per common share (in thousands, except per share
data).
Basic earnings per share:
Income from continuing operations
Income from discontinued operations
Income attributable to Hilltop
Weighted average shares outstanding - basic
Basic earnings per common share:
Income from continuing operations
Income from discontinued operations
Diluted earnings per share:
Income from continuing operations
Income from discontinued operations
Income attributable to Hilltop
Weighted average shares outstanding - basic
Effect of potentially dilutive securities
Weighted average shares outstanding - diluted
Diluted earnings per common share:
Income from continuing operations
Income from discontinued operations
2020
Year Ended December 31,
2019
2018
$
$
$
$
$
$
$
$
409,440
38,396
447,836
89,280
4.59
0.43
5.02
409,440
38,396
447,836
89,280
24
89,304
4.58
0.43
5.01
$
$
$
$
$
$
$
$
211,301
13,990
225,291
92,345
2.29
0.15
2.44
211,301
13,990
225,291
92,345
49
92,394
2.29
0.15
2.44
$
$
$
$
$
$
$
$
116,500
4,941
121,441
94,969
1.23
0.05
1.28
116,500
4,941
121,441
94,969
98
95,067
1.23
0.05
1.28
F-69
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
32. Financial Statements of Parent
The following tables present the condensed combined financial statements of the Company’s bank holding company entities,
Hilltop and PCC. The tables also include the corporate activities associated with Hilltop Opportunity Partners LLC and the
Hilltop Plaza Entities (in thousands). Investments in subsidiaries are determined using the equity method of accounting.
Condensed Combined Statements of Operations and Comprehensive Income
Dividends from bank subsidiaries
Dividends from nonbank subsidiaries
Investment income
Interest expense
Other income
General and administrative expense
Income before income taxes and equity in undistributed earnings of
subsidiaries activity
Income tax benefit
Equity in undistributed earnings of subsidiaries
Net income
Other comprehensive income (loss), net
Comprehensive income
Condensed Combined Balance Sheets
Assets:
Cash and cash equivalents
Investment in subsidiaries:
Bank subsidiaries
Nonbank subsidiaries
Other assets
Total assets
Liabilities and Stockholders’ Equity:
Accounts payable and accrued expenses
Notes payable
Stockholders’ equity
Total liabilities and stockholders’ equity
2020
Year Ended December 31,
2019
2018
249,771
56,150
4,102
18,294
45,887
58,130
279,486
(13,897)
176,294
469,677
6,344
476,021
$
$
$
143,000
36,950
5,933
11,474
2,221
50,968
125,662
(12,706)
94,609
232,977
20,046
253,023
$
$
$
42,000
37,500
3,089
12,265
4,893
36,628
38,589
(7,767)
79,371
125,727
(5,656)
120,071
2020
December 31,
2019
2018
478,826
$
116,471
$
54,405
1,654,249
453,847
236,452
2,823,374
64,635
412,764
2,345,975
2,823,374
$
$
$
1,523,549
533,844
219,740
2,393,604
53,418
215,780
2,124,406
2,393,604
$
$
$
1,459,984
483,593
245,200
2,243,182
58,319
215,620
1,969,243
2,243,182
$
$
$
$
$
$
$
F-70
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Condensed Combined Statements of Cash Flows
Operating Activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed earnings of subsidiaries
Net realized gains on equity investments
Net realized gains on disposal of discontinued operations
Deferred income taxes
Other, net
Net cash provided by operating activities
Investing Activities:
Purchases of equity investments
Purchases of premises and equipment and other
Proceeds from sales of equity investments
Proceeds from sale of discontinued operations
Net cash provided by (used in) investing activities
Financing Activities:
Payments to repurchase common stock
Proceeds from issuance of notes payable
Dividends paid on common stock
Net cash contributed from noncontrolling interest
Other, net
Net cash used in financing activities
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental Schedule of Non-Cash Activities:
Construction in progress related to build-to-suit lease obligations
Note receivable contributed from nonbank subsidiary
F-71
2020
Year Ended December 31,
2019
2018
$
469,677
$
232,977
$
125,727
(176,294)
—
(41,901)
4,432
37,465
293,379
(29,365)
(12,547)
—
154,963
113,051
(208,664)
196,657
(32,524)
825
(369)
(44,075)
(94,609)
—
—
(123)
44,943
183,188
—
(17,302)
—
—
(17,302)
(73,385)
—
(29,627)
100
(908)
(103,820)
362,355
116,471
478,826
$
62,066
54,405
116,471
$
(79,371)
(5,336)
—
217
19,368
60,605
(12,492)
(42,390)
16,174
—
(38,708)
(58,990)
—
(26,698)
19,250
2,182
(64,256)
(42,359)
96,764
54,405
— $
— $
— $
— $
27,802
111,653
$
$
$
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
33. Selected Quarterly Financial Information (Unaudited)
Selected quarterly financial information is summarized as follows (in thousands, except per share data).
Interest income
Interest expense
Net interest income
Provision for (reversal of) credit losses
Noninterest income
Noninterest expense
Income from continuing operations before income taxes
Income tax expense
Income from continuing operations
Income from discontinued operations, net of income taxes
Net income
Less: Net income attributable to noncontrolling interest
Income attributable to Hilltop
Year Ended December 31, 2020
Fourth
Quarter
$ 136,861
29,489
107,372
(3,482)
447,931
402,348
156,437
39,295
117,142
3,734
120,876
4,431
$ 116,445
Third
Quarter
$ 129,828
27,928
101,900
(602)
502,711
399,345
205,868
46,820
159,048
736
159,784
6,505
$ 153,279
Second
Quarter
$ 134,931
30,373
104,558
66,026
468,125
370,209
136,448
31,808
104,640
30,775
135,415
6,939
$ 128,476
First
Quarter
$ 144,875
34,539
110,336
34,549
271,713
281,901
65,599
15,148
50,451
3,151
53,602
3,966
49,636
$
$
Full
Year
546,495
122,329
424,166
96,491
1,690,480
1,453,803
564,352
133,071
431,281
38,396
469,677
21,841
447,836
$
Earnings per common share:
Basic:
Earnings from continuing operations
Earnings from discontinued operations
Diluted:
Earnings from continuing operations
Earnings from discontinued operations
Cash dividends declared per common share
$
$
$
$
$
1.31
0.04
1.35
1.30
0.05
1.35
0.09
$
$
$
$
$
1.69
0.01
1.70
1.69
0.01
1.70
0.09
$
$
$
$
$
1.08
0.34
1.42
1.08
0.34
1.42
0.09
$
$
$
$
$
0.51
0.04
0.55
0.51
0.04
0.55
0.09
$
$
$
$
$
4.59
0.43
5.02
4.58
0.43
5.01
0.36
F-72
Table of Contents
Hilltop Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Interest income
Interest expense
Net interest income
Provision for (reversal of) credit losses
Noninterest income
Noninterest expense
Income from continuing operations before
income taxes
Income tax expense
Income from continuing operations
Income (loss) from discontinued operations,
net of income taxes
Net income
Less: Net income attributable to
noncontrolling interest
Income attributable to Hilltop
Earnings per common share:
Basic:
Earnings from continuing operations
Earnings (losses) from discontinued
operations
Diluted:
Earnings from continuing operations
Earnings (losses) from discontinued
operations
Cash dividends declared per common share
$
$
$
$
$
$
Fourth
Quarter
151,818
41,058
110,760
6,880
263,646
307,868
59,658
13,579
46,079
5,623
51,702
Year Ended December 31, 2019
$
Third
Quarter
160,940
48,294
112,646
47
306,505
321,186
97,918
21,472
76,446
5,261
81,707
$
Second
Quarter
149,000
41,716
107,284
(672)
276,703
304,088
80,571
18,526
62,045
(2,254)
59,791
$
First
Quarter
148,938
40,649
108,289
951
215,963
278,747
$
Full
Year
610,696
171,717
438,979
7,206
1,062,817
1,211,889
44,554
10,137
34,417
5,360
39,777
282,701
63,714
218,987
13,990
232,977
2,426
$ 49,276
2,289
$ 79,418
1,980
$ 57,811
991
38,786
$
7,686
225,291
$
0.81
0.06
0.87
0.81
0.05
0.86
0.08
$
$
$
$
$
0.64
(0.02)
0.62
0.64
(0.02)
0.62
0.08
$
$
$
$
$
0.36
0.05
0.41
0.36
0.05
0.41
0.08
$
$
$
$
$
2.29
0.15
2.44
2.29
0.15
2.44
0.32
0.48
0.06
0.54
0.48
0.06
0.54
0.08
$
$
$
$
$
F-73
Exhibit 4.10
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
Hilltop Holdings Inc. (“Hilltop,” “we,” “us,” or “our”) has common stock registered under Section 12 of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”).
The following is a brief description of the terms of our capital stock. This summary does not purport to be complete
in all respects. This description is subject to, and qualified in its entirety by reference to, the Maryland General Corporation
Law, federal law and our amended and restated charter, as amended, and our amended and restated bylaws, as amended,
copies of which have been filed with the Securities and Exchange Commission (the “SEC”) and also are available upon
request.
Our authorized capital stock consists of 125,000,000 shares of common stock, par value $0.01 per share,
10,000,000 shares of special voting stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par value
$0.01 per share. Our common stock is listed on the New York Stock Exchange under the symbol “HTH.” Pursuant to our
amended and restated charter, as amended, and the Maryland General Corporation Law, our board of directors, without
stockholder approval, may amend our amended and restated charter, as amended, to increase or decrease the aggregate
number of authorized shares of our stock or the number of authorized shares of any class of our stock.
Common Stock
General
We may issue shares of common stock from time to time at the direction of our board of directors.
Preemptive Rights and Appraisal Rights
Holders of our common stock have no preemptive rights to subscribe for shares of common stock or any other class
of stock that may be issued in the future. Holders of our stock also are not entitled to exercise any rights of an objecting
stockholder provided for under Maryland General Corporation Law, unless our board of directors, upon an affirmative vote
of a majority of the entire board of directors, shall determine that such rights apply, with respect to all or any classes or series
of stock, to a particular transaction or all transactions occurring after the date of such determination.
Dividend Rights
Holders of all of our common stock are entitled to receive their pro rata share of dividends in the amounts and at the
times declared by our board of directors in its discretion out of funds legally available for the payment of dividends. Any
holders of preferred stock then outstanding may have a priority over the holders of our common stock with respect to
dividends.
Voting Rights
Each holder of our common stock is entitled to one vote per share of common stock. Directors are elected by a
plurality of the shares actually voting on the matter. No share of common stock has any cumulative voting rights or is
redeemable, assessable or entitled to the benefits of any sinking or repurchase fund. Any holders of preferred stock or special
voting stock then outstanding also may possess voting rights.
Liquidation Rights
In the event of the liquidation, dissolution or winding up of Hilltop, whether voluntary or involuntary, the holders
of our common stock would be entitled to receive, after payment or provision for payment of all our debts and liabilities and
subject to the prior rights of any holders of preferred stock then outstanding, all of our assets available for distribution.
Holders of common stock will share equally in our assets on liquidation after payment or
provision for all liabilities and any preferential liquidation rights of any preferred stock then outstanding. Under Maryland
law, our stockholders are generally not liable for our debts or obligations. All outstanding shares of common stock are fully
paid and non-assessable.
Preferred Stock
At the direction of our board of directors, we may issue shares of preferred stock from time to time. Pursuant to our
amended and restated charter, as amended, our board of directors may, without any action by holders of common stock,
adopt resolutions to issue preferred stock by establishing the number, rights and preferences of, and designating, one or more
series of preferred stock. The rights of any series of preferred stock may include, among others:
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general or special voting rights;
preferential liquidation or preemptive rights;
preferential cumulative or noncumulative dividend rights;
redemption or put rights; and
conversion or exchange rights.
We may issue shares of, or rights to purchase shares of, preferred stock the terms of which might:
adversely affect voting or other rights evidenced by, or amounts otherwise payable with respect to, the common
stock;
discourage an unsolicited proposal to acquire us; or
facilitate a particular business combination involving us.
Any of these actions could discourage a transaction that some or a majority of our stockholders might believe to be
in their best interests or in which our stockholders might receive a premium for their stock over our then market price.
The summary of terms of the preferred stock contained in this Description of Securities is not complete. You should
refer to our amended and restated charter, as amended, and specifically the articles supplementary for the applicable series of
preferred stock, that will be filed with the SEC.
Business Combinations Under Maryland Law
Maryland Business Combination Statute
Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an
affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested
stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share
exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An
interested stockholder is defined as:
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any person who beneficially owns, directly or indirectly, 10% or more of the voting power of the corporation’s then
outstanding voting stock; or
an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question,
was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding voting
stock of the corporation.
A person is not an interested stockholder under the statute if the board of directors approved in advance the
transaction by which he otherwise would have become an interested stockholder. However, in approving a transaction, the
board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and
conditions determined by the board.
After the five-year prohibition, any business combination between the Maryland corporation and an interested
stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative
vote of at least:
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80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and
two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the
interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an
affiliate or associate of the interested stockholder, voting together as a single class.
These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum
price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as
previously paid by the interested stockholder for its shares.
The statute permits the board of directors to adopt a resolution opting out of the application of the statute, and our
board of directors has adopted such a resolution. In addition, our amended and restated bylaws, as amended, contain a
provision that requires us to obtain the approval of a majority of the votes cast by stockholders entitled to vote generally in
the election of directors before it can opt back into the statute.
Maryland Control Share Acquisition Statute
Maryland law provides that control shares of a Maryland corporation acquired in a control share acquisition have
no voting rights except to the extent approved by a vote of at least two-thirds of the votes entitled to be cast on the matter.
Shares owned by the acquirer, by officers or by directors who are employees of the corporation are excluded from shares
entitled to vote on the matter. Control shares are voting shares of stock which, if aggregated with all other shares of stock
owned by the acquirer or in respect of which the acquirer is able to exercise or direct the exercise of voting power (except
solely by virtue of a revocable proxy), would entitle the acquirer to exercise voting power in electing directors within one of
the following ranges of voting power:
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one-tenth or more but less than one-third;
one-third or more but less than a majority; or
a majority or more of all voting power.
Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously
obtained stockholder approval or shares acquired directly from the corporation. A control share acquisition means the
acquisition of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition may compel the board of directors of the
corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the
shares. The right to compel the calling of a special meeting is subject to the satisfaction of certain conditions, including an
undertaking to pay the expenses of the meeting. If no request for a meeting is made, the corporation may itself present the
question at any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person
statement as required by the statute, then the corporation may redeem for fair value any or all of the control shares, except
those for which voting rights have previously been approved. The right of the corporation to redeem control shares is subject
to certain conditions and limitations. Fair value is determined, without regard to the absence of voting rights for the control
shares, as of the date of the last control share acquisition by the acquirer or of any meeting of stockholders at which the
voting rights of the shares are considered and not approved. If voting rights for
control shares are approved at a stockholders meeting and the acquirer becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes
of appraisal rights may not be less than the highest price per share paid by the acquirer in the control share acquisition.
The control share acquisition statute does not apply (i) to shares acquired in a merger, consolidation or share
exchange if the corporation is a party to the transaction or (ii) to acquisitions approved or exempted by the charter or bylaws
of the corporation.
Our amended and restated bylaws, as amended, contain a provision exempting from the control share acquisition
statute any and all acquisitions by any person of shares of our stock. In addition, our amended and restated bylaws, as
amended, contain a provision that requires us to obtain the approval of a majority of the votes cast by stockholders entitled to
vote generally in the election of directors before it can opt back into the statute.
Maryland Unsolicited Takeovers Statute
Notwithstanding any contrary provision in our amended and restated charter, as amended, or amended and restated
bylaws, as amended, Maryland law provides that any Maryland corporation with a class of equity securities registered under
the Exchange Act and at least three independent directors may elect to be subject, by a provision in its charter or bylaws or a
resolution of its board of directors, to any or all of the following provisions:
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classifying the board;
requiring a two-thirds vote to remove a director;
requiring that the number of directors be fixed only by vote of the board of directors;
requiring that a vacancy on the board of directors be filled only by the remaining directors and for the remainder of
the full term of the class of directors in which the vacancy occurred; and
requiring that a stockholder meeting only be called upon the request of stockholders if stockholders entitled to cast
a majority of the votes entitled to be cast at a meeting deliver a written request for the calling of a special meeting
of stockholders.
We currently have more than three independent directors and have a class of equity securities registered under the
Exchange Act, and therefore, our board of directors may elect to provide for any of the foregoing provisions. As of the date
hereof, our board of directors has elected to vest in our board of directors the power to fix the number of directors.
Additionally, through other provisions of our amended and restated charter, as amended, and amended and restated bylaws,
as amended, unrelated to the Maryland unsolicited takeovers statute, we (a) require a two-thirds vote to remove a director
and (b) require vacancies on the board of directors to be filled by the remaining directors for the full term of the directorship
in which the vacancy occurred.
Action by Consent
Our amended and restated bylaws, as amended, and Maryland law provide that any action that can be taken at any
special or annual meeting of stockholders may be taken by unanimous written consent of all stockholders entitled to vote.
Certain Charter and Bylaw Provisions
Anti-Takeover Provisions
Our amended and restated charter, as amended, and amended and restated bylaws, as amended, contain certain
provisions that could discourage potential takeover attempts and make it more difficult for our stockholders to change
management or receive a premium for their shares. These provisions include:
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authorizations for our board of directors to increase the number of authorized shares of any class of stock and to
issue preferred stock without stockholder approval;
authorization for our board of directors to alter, amend or repeal the bylaws, or to enact new bylaws;
that directors may only be removed for cause and then by an affirmative vote of at least two-thirds of the votes
entitled to be cast in the election of directors;
a limitation that only one or more stockholders that collectively hold, and have continuously collectively held for at
least one year, as of the record date of the proposed meeting, 15% or more of the shares entitled to be voted at such
proposed meeting may require a special meeting of stockholders to be called;
limitations on the ability of stockholders to require multiple special meetings relating to a similar item to be called;
and
advance notice procedures with respect to stockholder proposals of matters to be acted upon at a stockholder
meeting and stockholder nominations of candidates for election as directors.
Further, the Maryland General Corporation Law provides that stockholders are not entitled to cumulative voting in the
election of directors unless the charter provides otherwise. Our charter does not provide for cumulative voting.
Choice of Forum
Our amended and restated bylaws, as amended, provide that, unless we consent in writing to the selection of an
alternative forum, the sole and exclusive forum for (a) any derivative action or proceeding brought on our behalf, (b) any
action asserting a claim of breach of a fiduciary duty owed by any director or officer or other employee of Hilltop to us or
our stockholders, (c) any action asserting a claim against us or any director or officer or other employee of Hilltop arising
pursuant to any provision of the Maryland General Corporation Law or our amended and restated charter, as amended, or
amended and restated bylaws, as amended, or (d) any action asserting a claim against us or any director or officer or other
employee of Hilltop governed by the internal affairs doctrine shall be a state court located within the State of Maryland (or,
if no state court located within the State of Maryland has jurisdiction, the federal district court for the District of Maryland).
There is uncertainty as to whether a court would enforce our forum selection provision as written in connection
with claims arising under the federal securities laws. This forum selection provision may limit our stockholders’ ability to
obtain a favorable judicial forum for disputes with us. It is also possible that, notwithstanding the forum selection clause
included in our amended and restated bylaws, as amended, a court could rule that such a provision is inapplicable or
unenforceable.
Ownership Limitations
Federal and state laws, including the Bank Holding Company Act and the Change in Bank Control Act, impose
notice, approval and ongoing regulatory requirements on any investor that seeks to acquire direct or indirect “control” of a
regulated holding company, such as our Company. The determination of whether an investor “controls” a regulated holding
company is based on all of the facts and circumstances surrounding the investment. As a general matter, an investor is
deemed to control a depository institution or other company if the investor owns or controls 25% or more of any class of
voting stock, and in certain other circumstances, an investor may be presumed to control a depository institution or other
company if the investor owns or controls less than 25% or more of any class of voting stock.
Further, under FINRA rules, any change in control of our subsidiaries Hilltop Securities Inc. and Hilltop Securities
Independent Network Inc., including through acquisition, is subject to prior regulatory approval by FINRA.
Any of these laws or regulations may discourage potential acquisition proposals and may delay, deter or prevent
change of control transactions involving Hilltop, including those that some or all of our stockholders might consider to be
desirable.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company.
List of Subsidiaries of Hilltop Holdings Inc.
As of February 16, 2021
Exhibit 21.1
Name
ARC Insurance Holdings, Inc.
First Southwest Holdings LLC
First Southwest Capital Investments, Inc.
First Southwest Leasing Company
FSC Asset Administrator, LLC
Grand Home Loans, LLC
Green Brick Mortgage, LLC
Highland HomeLoans, LLC
Hilltop Investments I LLC
Hilltop Opportunity Partners LLC
Hilltop OP Moser Holdings GP LLC
Hilltop OP Moser Holdings LP
Hilltop Securities Asset Management, LLC
Hilltop Securities Holdings LLC
Hilltop Securities Inc.
HTH Diamond Hillcrest Land LLC
HTH Hillcrest Project LLC
Momentum Independent Network Inc.
OpenRange Capital LLC
PlainsCapital Corporation
PlainsCapital Bank
PCB – ARC, Inc.
PCC Statutory Trust I
PCC Statutory Trust II
PCC Statutory Trust III
PCC Statutory Trust IV
PrimeLending, a PlainsCapital Company
PrimeLending Ventures Management, LLC
RGV – ARC, Inc.
Southwest Financial Insurance Agency, Inc.
Southwest Insurance Agency, Inc.
State or Other Jurisdiction
of Incorporation or Formation
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Texas
Delaware
Delaware
Delaware
Delaware
Delaware
Texas
Texas
Texas
Delaware
Maryland
Texas
Texas
Connecticut
Connecticut
Connecticut
Delaware
Texas
Texas
Texas
Oklahoma
Texas
The names of particular subsidiaries may be omitted if the unnamed subsidiaries, considered in the aggregate as a single subsidiary, would not constitute
a significant subsidiary as of the end of the year covered by this report. (See the definition of “significant subsidiary” in Rule 1-02(w) (17 CFR 210.1-
02(w)) of Regulation S-X.)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Post Effective Amendment No. 1 on Form S-8 to the Registration
Statement on Form S-4 (No. 333-196367), the Registration Statement on Form S-3 (No. 333-237447), and the Registration
Statement on Form S-8 (No. 333-240090) of Hilltop Holdings Inc. of our report dated February 16, 2021 relating to the financial
statements, and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
Exhibit 23.1
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 16, 2021
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Jeremy B. Ford, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Hilltop Holdings Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 16, 2021
By: /s/ Jeremy B. Ford
Jeremy B. Ford
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, William B. Furr, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Hilltop Holdings Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons
performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 16, 2021
By: /s/ William B. Furr
William B. Furr
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report on Form 10-K for the period ended December 31, 2020 (the “Report”) of Hilltop Holdings
Inc. (the “Company”), the undersigned hereby certify in their capacities as President and Chief Executive Officer and Chief
Financial Officer, respectively, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to their knowledge:
(1)
(2)
the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities
Exchange Act of 1934, as amended; and
the information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company as of, and for, the periods presented in the Report.
Date: February 16, 2021
Date: February 16, 2021
By: /s/ Jeremy B. Ford
Jeremy B. Ford
President and Chief Executive Officer
By: /s/ William B. Furr
William B. Furr
Chief Financial Officer
The foregoing certification is furnished as an exhibit to the Report and will not be deemed “filed” for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended, and will not be deemed to be incorporated by reference into any filing under
the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the
date hereof, regardless of any general incorporation language in such filing.