HILLTOP HOLDINGS INC. The following discussion should be read in conjunction with the consolidated historical financial statements and notes appearing elsewhere in this Quarterly Report on Form 10-Q (this "Quarterly Report") and the financial information set forth in the tables herein. Unless the context otherwise indicates, all references in this Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, to the "Company," "we," "us," "our" or "ours" or similar words are toHilltop Holdings Inc. and its direct and indirect wholly owned subsidiaries, references to "Hilltop" refer solely toHilltop Holdings Inc. , references to "PCC" refer toPlainsCapital Corporation (a wholly owned subsidiary of Hilltop), references to "Securities Holdings " refer toHilltop Securities Holdings LLC (a wholly owned subsidiary of Hilltop), references to "Hilltop Securities " refer toHilltop Securities Inc. (a wholly owned subsidiary ofSecurities Holdings ), references to "Momentum Independent Network" refer toMomentum Independent Network Inc. (a wholly owned subsidiary ofSecurities Holdings ),Hilltop Securities and Momentum Independent Network are collectively referred to as the "Hilltop Broker-Dealers", references to the "Bank" refer toPlainsCapital Bank (a wholly owned subsidiary of PCC), references to "FNB" refer toFirst National Bank , references to "SWS" refer to the former SWS Group, Inc., references to "PrimeLending" refer to PrimeLending, aPlainsCapital Company (a wholly owned subsidiary of the Bank) and its subsidiaries as a whole.
FORWARD-LOOKING STATEMENTS
This Quarterly Report includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"), as
amended by the Private Securities Litigation Reform Act of 1995. All statements,
other than statements of historical fact, included in this Quarterly Report that
address results or developments that we expect or anticipate will or may occur
in the future, and statements that are preceded by, followed by or include,
words such as "anticipates," "believes," "could," "estimates," "expects,"
"forecasts," "goal," "intends," "may," "might," "plan," "probable," "projects,"
"seeks," "should," "target," "view" or "would" or the negative of these words
and phrases or similar words or phrases, including such things as our business
strategy, our financial condition, our 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, 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,
expected future benchmark rates, anticipated investment yields, our expectations
regarding accretion of discount on loans in future periods, the collectability
of loans, cybersecurity incidents and the outcome of litigation are
forward-looking statements.
These forward-looking statements are based on our beliefs, assumptions and
expectations of our future performance taking into account all information
currently available to us. These beliefs, assumptions and expectations are
subject to risks and uncertainties and can change as a result of many possible
events or factors, not all of which are known to us. If an event occurs, our
business, business plan, financial condition, liquidity and results of
operations may vary materially from those expressed in our forward-looking
statements. Certain factors that could cause actual results to differ include,
among others:
the credit risks of lending activities, including our ability to estimate
? credit losses and the allowance for credit losses, 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;
? changes in the interest rate environment;
the COVID-19 pandemic and the response of governmental authorities to the
? pandemic, which have had, and may continue to have, an adverse impact on the
global economy and our business operations and performance;
? transitions away from London Interbank Offered Rate ("LIBOR");
41
Table of Contents
? risks associated with concentration in real estate related loans;
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 "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2021 ("2021 Form 10-K"), which was filed with theSecurities and Exchange Commission (the "SEC") onFebruary 15, 2022 , this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and other filings we have made with theSEC . We caution that the foregoing list of factors is not exhaustive, and new factors may emerge, or changes to the foregoing factors may occur, that could impact our business. All subsequent written and oral forward-looking statements concerning our business attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements above. We do not undertake any obligation to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Quarterly Report except to the extent required by federal securities laws. 42 Table of Contents 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 throughoutTexas 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
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 throughoutthe United States . The following historical consolidated data for the periods indicated has been derived from our historical consolidated financial statements included elsewhere in this Quarterly Report (dollars in thousands, except per share data). Three Months EndedJune 30 ,
Six Months Ended
2022 2021 2022 2021
Statement of Operations Data:
Net interest income $ 112,056 $ 107,916 $ 212,047 $ 213,598
Provision for (reversal of)
credit losses 5,336 (28,720) 5,451 (33,829)
Total noninterest income 239,273 339,899 455,701 757,484
Total noninterest expense 298,543 343,368 584,893 710,030
Income before income taxes 47,450 133,167
77,404 294,881
Income tax expense 12,127 31,234 17,942 69,004
Net income 35,323 101,933 59,462 225,877
Less: Net income attributable to
noncontrolling interest 2,063 2,873 3,952 6,473
Income attributable to Hilltop
55,510
Per Share Data: Diluted earnings per common share$ 0.45 $ 1.21$ 0.73 $ 2.66 Diluted weighted average shares outstanding 73,838 82,199 76,569 82,407 Cash dividends declared per common share$ 0.15 $ 0.12$ 0.30 $ 0.24 Dividend payout ratio (2) 33.33 % 9.92 % 41.10 % 8.99 % Book value per common share (end of period)$ 31.43 $ 30.44 Tangible book value per common share (1) (end of period)$ 27.08 $ 26.93 June 30, December 31, 2022 2021 Balance Sheet Data: Total assets$ 16,715,739 $ 18,689,080 Cash and due from banks 1,783,554 2,823,138 Securities 3,076,275 3,046,500 Loans held for sale 1,491,579 1,878,190 Loans held for investment, net of unearned income 7,930,619 7,879,904 Allowance for credit losses
(95,298) (91,352) Total deposits 11,920,786 12,818,077 Notes payable 389,722 387,904
Total stockholders' equity
2,057,403 2,549,203
Capital Ratios: Common equity to assets ratio 12.14 % 13.50 % Tangible common equity to tangible assets (1)
10.64 % 12.17 %
(1) For a reconciliation to the nearest GAAP measure, see "-Reconciliation and Management's Explanation of Non-GAAP Financial Measures."
(2) Dividend payout ratio is defined as cash dividends declared per common share divided by basic earnings per common share.
43
Table of Contents
Consolidated income before income taxes during the three and six months endedJune 30, 2022 included the following contributions from our reportable business segments.
? The banking segment contributed
before income taxes during the three and six months ended
? The broker-dealer segment contributed
before income taxes during the three and six months ended
? The mortgage origination segment contributed
income before income taxes during the three and six months ended
During the six months ended
OnJuly 21, 2022 , our board of directors declared a quarterly cash dividend of$0.15 per common share, payable onAugust 26, 2022 to all common stockholders of record as of the close of business onAugust 12, 2022 . OnMay 2, 2022 , 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$400 million , inclusive of the aforementioned stock repurchase program. OnMay 27, 2022 , including the exercise of our right to purchase up to an additional 2% of our outstanding shares, we completed our tender offer, repurchasing 14,868,469 shares of outstanding common stock at a price of$29.75 per share for a total of$442.3 million , excluding fees and expenses. We funded the tender offer with cash on hand. As a result of share repurchases during 2022, we have no further available share repurchase capacity associated with our previously authorized stock repurchase program. Reconciliation and Management's Explanation of Non-GAAP Financial Measures We present certain measures in our selected financial data that are not measures of financial performance recognized by accounting principles generally accepted inthe United States ("GAAP"). "Tangible book value per common share" is defined as our total stockholders' equity reduced by goodwill and other intangible assets, divided by total common shares outstanding. "Tangible common equity to tangible assets" is defined as our total stockholders' equity reduced by goodwill and other intangible assets, divided by total assets reduced by goodwill and other intangible assets. These measures are important to investors interested in changes from period to period in tangible common equity per share exclusive of changes in intangible assets. For companies such as ours that have engaged in business combinations, purchase accounting can result in the recording of significant amounts of goodwill and other intangible assets related to those transactions. You should not view this disclosure as a substitute for results determined in accordance with GAAP, and our disclosure is not necessarily comparable to that of other companies that use non-GAAP measures. The following table reconciles these non-GAAP financial measures to the most comparable GAAP financial measures, "book value per common share" and "equity to total assets" (dollars in thousands, except per share data). June 30, 2022 2021 Book value per common share$ 31.43 $ 30.44
Effect of goodwill and intangible assets per share (4.35)
(3.51)
Tangible book value per common share$ 27.08 $
26.93
June 30, December 31,
2022 2021
Hilltop stockholders' equity $ 2,029,577 $ 2,522,668
Less: goodwill and intangible assets, net 280,629
282,731 Tangible common equity$ 1,748,948 $ 2,239,937 Total assets$ 16,715,739 $ 18,689,080
Less: goodwill and intangible assets, net 280,629
282,731 Tangible assets$ 16,435,110 $ 18,406,349 Equity to assets 12.14 % 13.50 %
Tangible common equity to tangible assets 10.64 %
12.17 %
44
Table of Contents
Recent Developments
COVID-19
The COVID-19 pandemic and related governmental control measures severely
disrupted financial markets and overall economic conditions throughout 2020.
While the impact of the pandemic and the uncertainties have remained into 2022,
significant progress associated with COVID-19 vaccination levels in the United
States has resulted in easing of restrictive measures in the United States even
as additional variants have emerged. Further, the U.S. federal government
enacted policies to provide fiscal stimulus to the economy and relief to those
affected by the pandemic, with the stimulus intended to bolster household
finances as well as those of small businesses, states and municipalities.
Throughout the pandemic, 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.
Beginning in the second quarter of 2021, we returned a majority of our employees
to their respective office locations based initially on a rotational team
schedule and, with limited exceptions due to the emergence of new variants of
the virus, have since generally returned to pre-pandemic work arrangements with
available hybrid options for designated roles. We are continuing to monitor and
assess the impacts of the COVID-19 pandemic on our employees and customerson a regular basis. Asset Valuation As discussed in more detail within "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2021 Form 10-K, at each reporting date between annual impairment tests, we consider potential indicators of impairment including the condition of the economy and financial services industry; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of our stock and other relevant events. We continue to monitor developments regarding the overall economic conditions, COVID-19 pandemic and measures implemented in response to the pandemic, market capitalization, and any other triggering events or circumstances that may indicate an impairment in
the
future.
Loan Portfolio
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 (the "PPP/HCE Act") were passed in March 2020 , which were
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 was the creation of the Paycheck Protection Program ("PPP") that provided
federal government loan forgiveness for Small Business Administration ("SBA")
Section 7(a) loans for small businesses to pay up to eight weeks of employee
compensation and other basic expenses such as electric and telephone bills. 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. Further, the CARES Act allowed the Bank to suspend the troubled
debt restructuring ("TDR") requirements for certain loan modifications to be
categorized as a TDR through January 1, 2022 .
Starting 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 both the initial and second
round PPP efforts 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
allowed 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 PPP efforts included approval and funding of over 4,100 PPP loans,
with approximately $7 million remaining outstanding at June 30, 2022 . 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 the Bank's PPP forgiveness applications and remitting
forgiveness payments to PPP lenders for PPP borrowers. Through July 15, 2022 ,
the SBA had approved approximately 4,100 PPP forgiveness applications from the
Bank totaling approximately $893 million , with PPP loans of approximately $2
million currently pending SBA review and approval.
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. Crude oil prices have increased since historical lows
observed in 2020, but uncertainty remains given future supply and demand for oil
are influenced by the Russia -Ukraine conflict, return to business travel, new
energy policies
45
Table of Contents
and government regulation, and the pace of transition towards renewable energy
resources. At June 30, 2022 , the Bank's energy loan exposure was approximately
$66 million of loans held for investment with unfunded commitment balances of
approximately $32 million . The allowance for credit losses on the Bank's energy
portfolio was $0.1 million , or 0.2% of loans held for investment at June 30,
2022 .
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.
Outlook for 2022
Our balance sheet, operating results and certain metrics during 2021 reflected strong credit quality, significant reversals of credit losses, heightened capital and liquidity levels, and low mortgage interest rates. As noted within our 2021 Form 10-K, we identified expected headwinds in 2022, including tight housing inventories on mortgage volumes, declining deposit balances, and increases in market interest rates, while also noting that inflationary pressures associated with compensation, occupancy and software costs within our business segments were expected to be uncertain in 2022. These headwinds, coupled with a declining economic forecast, rapid increases in the 10-yearU.S. treasury bond yield and mortgage interest rates, and exposure to increasing funding costs during the first half of 2022 have had, and are expected to continue to have, an adverse impact on our operating results during the remainder of 2022. The COVID-19 pandemic may also continue to adversely impact financial markets and overall economic conditions. The extent of the impact of the pandemic on our operational and financial performance for the remainder of 2022 remains uncertain. See "Item 1A. Risk Factors" of our 2021 Form 10-K for additional discussion of the potential adverse impact of COVID-19 on our business, results of operations and financial condition.
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
LIBOR
As discussed in more detail within "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our 2021 Form 10-K, one week and two-month LIBOR ceased to be published onDecember 31, 2021 , and all remaining USD LIBOR tenors will cease to be published or lose representativeness immediately afterJune 30, 2023 . Certain loans we originated 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. The cessation of publication of LIBOR will create various risks surrounding the financial, operational, compliance and legal aspects associated with changing certain elements of existing contracts. The Alternative Reference Rates Committee ("ARRC") has proposed a paced market transition plan to the Secured Overnight Financing Rate ("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. The ARRC has formally recommended SOFR as its preferred alternative rate for LIBOR. However, at this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR and it is impossible to predict the
effect of any such
46
Table of Contents
alternatives on the value of LIBOR-based securities and variable rate loans, or
other securities or financial arrangements, given LIBOR's role in determining
market interest rates globally.
We have completed our targeted assessment of exposures across the organization
associated with the migration away from LIBOR and have transitioned to the
impact assessment and implementation stages. In light of the above described
recent changes to the LIBOR phase out dates being pushed out to 2023, we have
begun taking necessary actions, including negotiating certain of our agreements
based on alternative benchmark rates that have been established. Since the third
quarter of 2020, PrimeLending has been originating conventional adjustable-rate
mortgage, or ARM, loan products utilizing a SOFR rate with terms consistent with
government-sponsored enterprise, or GSE, guidelines. In addition, the Bank's
management team continues to work with its commercial relationships that have
LIBOR-based contracts maturing in 2022 and future periods to amend terms and
establish an alternative benchmark rate. We also continue to evaluate the
impacts of the LIBOR phase-out and transition requirements as it pertains to
contracts, models and systems. To date, an immaterial amount of expenses have
been incurred as a result of our efforts; however, in the future we may incur
additional expenses as we finalize the transition of our systems and processes
away from LIBOR.
Segment Information
The Company has two primary business units, PCC (banking and mortgage
origination) and Securities Holdings (broker-dealer). Under GAAP, the Company's
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 21, Segment and Related Information, in the notes to our consolidated financial statements.
47
Table of Contents
The following table presents certain information about the 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.
Three Months Ended June 30 , Variance 2022 vs 2021
Six Months Ended
2022 2021 Amount Percent 2022 2021 Amount Percent
Net interest
income (expense):
Banking $ 101,259 $ 105,468 $ (4,209) (4)
12,578 10,682 1,896 18 24,096 21,196 2,900 14
Mortgage
Origination (1,291) (5,953) 4,662 78 (3,127) (13,051) 9,924 76
Corporate (3,190) (4,687) 1,497 32 (6,580) (9,379) 2,799 30All Other and Eliminations 2,700 2,406 294 12 4,329 5,480 (1,151) (21) Hilltop
Consolidated
Provision for (reversal of) credit losses: Banking $ 5,025$ (28,775) $ 33,800 117 $ 4,975$ (33,950) $ 38,925 115 Broker-Dealer 311 55 256 NM 476 121 355 NM Mortgage Origination - - - - - - - - Corporate - - - - - - - - All Other and Eliminations - - - - - - - - Hilltop Consolidated $ 5,336$ (28,720) $ 34,056 119 $ 5,451$ (33,829) $ 39,280 116 Noninterest income: Banking$ 12,467 $ 10,242 $ 2,225 22$ 25,237 $ 21,566 $ 3,671 17 Broker-Dealer 87,651 83,463 4,188 5 148,341 182,086 (33,745) (19)
Mortgage
Origination 140,082 241,965 (101,883) (42) 283,276 552,409 (269,133) (49) Corporate 2,080 6,877 (4,797) (70) 3,846 7,383 (3,537) (48) All Other and Eliminations (3,007) (2,648) (359) (14) (4,999) (5,960) 961 16
Hilltop
Consolidated
Noninterest
expense:
Banking$ 57,331 $ 57,514 $ (183)
(0)
90,817 87,234 3,583 4 171,464 178,638 (7,174) (4)
Mortgage
Origination 133,169 186,963 (53,794) (29) 268,027 397,297 (129,270) (33) Corporate 17,561 12,072 5,489 45 30,354 21,660 8,694 40 All Other and Eliminations (335) (415) 80 19 (713) (867) 154 18
Hilltop
Consolidated
Income (loss) before taxes: Banking$ 51,370 $ 86,971 $ (35,601)
(41)
9,101 6,856 2,245 33 497 24,523 (24,026) (98)
Mortgage
Origination 5,622 49,049 (43,427) (89) 12,122 142,061 (129,939) (91)
Corporate (18,671) (9,882) (8,789) (89) (33,088) (23,656) (9,432) (40)All Other and Eliminations 28 173 (145) (84) 43 387 (344) (89) Hilltop Consolidated$ 47,450 $ 133,167 $ (85,717) (64)$ 77,404 $ 294,881 $ (217,477) (74) NM Not meaningful. Key Performance Indicators We utilize several key indicators of financial condition and operating performance to evaluate the various aspects of our business. In addition to traditional financial metrics, such as revenue and growth trends, we monitor several other financial measures and non-financial operating metrics to help us evaluate growth trends, measure the adequacy of our capital based on regulatory reporting requirements, measure the effectiveness of our operations and assess operational efficiencies. These indicators change from time to time as the opportunities and challenges in our businesses change. Specifically, performance ratios and asset quality ratios are typically used for measuring the performance of banking and financial institutions. We consider return on average stockholders' equity, return on average assets and net interest margin to be important supplemental measures of operating performance that are commonly used by securities analysts, investors and other parties interested in the banking and financial industry. The net recoveries (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. 48 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. Net interest income decreased during the six months endedJune 30, 2022 , compared with the same period in 2021, primarily due to a decrease within our banking segment, significantly offset by increases within our mortgage origination and broker-dealer segments.
The other component of our revenue is noninterest income, which is primarily comprised of the following:
Income from broker-dealer operations. Through
investment banking and other related financial services that generated
million and
(i) and securities advisory fees and commissions, and
million in gains from derivative and trading portfolio activities (included
within other noninterest income), respectively, during the six months ended
June 30, 2022 and 2021. Income from mortgage operations. Through PrimeLending, we generate
noninterest income by originating and selling mortgage loans. During the six
(ii) months ended
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 experienced a decrease in noninterest income during the six months endedJune 30, 2022 , compared to the same period in 2021, as noted in the segment results table previously presented, primarily due to a decrease of$269.1 million in net gains from sale of loans, other mortgage production income and mortgage loan origination fees within our mortgage origination segment and decreases in gains from derivative and trading portfolio activities and fixed income services business line revenues 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 applicable to common stockholders during the three months endedJune 30, 2022 was$33.3 million , or$0.45 per diluted share, compared with$99.1 million , or$1.21 per diluted share, during the three months endedJune 30, 2021 . Income applicable to common stockholders during the six months endedJune 30, 2022 was$55.5 million , or$0.73 per diluted share, compared with$219.4 million , or$2.66 per diluted share, during the six months endedJune 30, 2021 . Hilltop's financial results for the three and six months endedJune 30, 2022 , compared with the same periods in 2021, reflect significant decreases in year-over-year mortgage origination segment net gains from sales of loans and other mortgage production income, declines in net revenues within certain of the broker-dealer segment's business lines, and declines in the year-over-year changes in provision for (reversal of) credit losses within the banking segment. Certain items included in net income for the three and six months endedJune 30, 2022 and 2021 resulted from purchase accounting associated with the merger ofPlainsCapital Corporation with and into a wholly owned subsidiary of Hilltop onNovember 30, 2012 , theFDIC -assisted transaction whereby the Bank acquired certain assets and assumed certain liabilities of FNB, the acquisition ofSWS Group, Inc. in a stock and cash transaction, and the acquisition ofThe Bank of River Oaks in an all-cash transaction (collectively, the "Bank Transactions"). Income before income taxes during the three months endedJune 30, 2022 and 2021 included net accretion on earning assets and liabilities of$3.1 million and$6.2 million , respectively, and amortization of identifiable intangibles of$1.1 million and$1.3 million , respectively, related to the Bank Transactions. During the six months endedJune 30, 2022 and 2021, income before income taxes included net accretion on earning assets and liabilities of$5.7 million and$11.0 million , respectively, and amortization of identifiable intangibles of$2.2 million and$2.7 million , respectively, related to the Bank Transactions. 49
Table of Contents
The information shown in the table below includes certain key performance indicators on a consolidated basis.
Three Months Ended June
30, Six Months Ended June 30,
2022 2021 2022 2021
Return on average stockholders'
equity (1) 5.82 % 16.42 % 4.67 % 18.47 %
Return on average assets (2) 0.80 % 2.29 % 0.66 % 2.59 %
Net interest margin (3) (4) 2.75 % 2.62 % 2.55 % 2.66 %Leverage ratio (5) (end of period) 10.53 % 12.87 % Common equity Tier 1 risk-based capital ratio (6) (end of period) 17.24 % 20.22 %
Return on average stockholders' equity is defined as consolidated income (1) attributable to Hilltop divided by average total Hilltop stockholders'
equity.
(2) Return on average assets is defined as consolidated net income divided by
average assets.
Net interest margin is defined as net interest income divided by average (3) 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.
The securities financing operations within our broker-dealer segment had the
effect of lowering both the net interest margin and taxable equivalent net (4) interest margin by 18 basis points and 17 basis points during the three
months ended
basis points during the six months ended
respectively.
(5) The leverage ratio is a regulatory capital ratio and is defined as Tier 1
risk-based capital divided by average consolidated assets.
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 (6) (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 rate of 21% for all periods presented. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest margins for all earning assets, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. During the three months endedJune 30, 2022 and 2021, purchase accounting contributed 8 and 16 basis points, respectively, to our consolidated taxable equivalent net interest margin of 2.76% and 2.63%, respectively. During the six months endedJune 30, 2022 and 2021, purchase accounting contributed 7 and 15 basis points respectively, to our consolidated taxable equivalent net interest margin of 2.56% and 2.66%, respectively. The purchase accounting activity was primarily related to the accretion of discount of loans which totaled$3.0 million and$6.0 million during the three months endedJune 30, 2022 and 2021, respectively, associated with the Bank Transactions. The purchase accounting activity was primarily related to the accretion of discount of loans which totaled$5.5 million and$10.9 million during the six months endedJune 30, 2022 and 2021, respectively, associated with the Bank Transactions. 50
Table of Contents
The table below provides additional details regarding our consolidated net interest income (dollars in thousands).
Three Months Ended June 30,
2022 2021
Average Interest Annualized Average Interest Annualized
Outstanding Earned Yield or Outstanding Earned Yield or
Balance or Paid Rate Balance or Paid Rate
Assets
Interest-earning assets
Loans held for sale $ 1,375,395 $ 14,302 4.16 % $ 2,450,897 $ 17,128 2.80 %
Loans held for investment, gross
(1) 7,838,090 84,426 4.32 % 7,725,906 87,034 4.48 %
Investment securities - taxable 2,779,458 17,288 2.49 % 2,443,486 11,106 1.82 %
Investment securities -
non-taxable (2) 250,303 2,557 4.09 % 320,685 2,731 3.41 %
Federal funds sold and securities
purchased under agreements to
resell 193,851 481 1.00 % 159,400 - 0.00 %
Interest-bearing deposits in
other financial institutions 2,602,154 4,984 0.77 % 1,861,861 628 0.14 %
Securities borrowed 1,273,368 10,498 3.26 % 1,490,097 15,586 4.14 %
Other 53,962 1,013 7.53 % 49,579 994 8.04 %
Interest-earning assets, gross
(2) 16,366,581 135,549 3.32 % 16,501,911 135,207 3.26 %
Allowance for credit losses (91,619) (144,105)
Interest-earning assets, net 16,274,962 16,357,806
Noninterest-earning assets 1,516,266 1,475,422
Total assets $ 17,791,228 $ 17,833,228
Liabilities and Stockholders'
Equity
Interest-bearing liabilities
Interest-bearing deposits $ 7,768,772 $ 5,456 0.28 % $ 7,740,066 $ 6,176 0.32 %
Securities loaned 1,114,923 8,512 3.06 % 1,411,961 12,345 3.51 %
Notes payable and other
borrowings 1,303,678 9,109 2.80 % 1,271,609 8,381 2.64 %
Total interest-bearing
liabilities 10,187,373 23,077 0.91 % 10,423,636 26,902 1.03 %
Noninterest-bearing liabilities
Noninterest-bearing deposits 4,552,424
4,090,425
Other liabilities 731,635 872,916
Total liabilities 15,471,432 15,386,977
Stockholders' equity 2,292,816 2,420,436
Noncontrolling interest 26,980 25,815
Total liabilities and
stockholders' equity $ 17,791,228 $ 17,833,228
Net interest income (2) $ 112,472 $ 108,305
Net interest spread (2) 2.41 % 2.23 %
Net interest margin (2) 2.76 % 2.63 %
Six Months Ended June 30,
2022 2021
Average Interest Annualized Average Interest Annualized
Outstanding Earned Yield or Outstanding Earned Yield or
Balance or Paid Rate Balance or Paid Rate
Assets
Interest-earning assets
Loans held for sale $ 1,421,440 $ 26,266 3.70 % $ 2,511,653 $ 33,361 2.66 %
Loans held for investment, gross
(1) 7,838,566 162,870 4.21 % 7,686,116 175,078 4.55 %
Investment securities - taxable 2,774,183 32,869 2.37 % 2,356,083 21,338 1.81 %
Investment securities -
non-taxable (2) 286,990 5,439 3.79 % 302,444 4,998 3.31 %
Federal funds sold and securities
purchased under agreements to
resell 175,683 617 0.71 % 126,644 - - %
Interest-bearing deposits in
other financial institutions 2,857,841 6,412 0.45 % 1,714,688 1,210 0.14 % Securities borrowed 1,363,765 19,315 2.82 % 1,471,504 44,558 6.02 % Other 54,280 1,762 6.55 % 49,746 1,756 7.11 % Interest-earning assets, gross (2) 16,772,748 255,550 3.07 % 16,218,878 282,299 3.47 % Allowance for credit losses (91,927) (146,737) Interest-earning assets, net 16,680,821 16,072,141 Noninterest-earning assets 1,459,242 1,517,000 Total assets$ 18,140,063 $ 17,589,141 Liabilities and Stockholders' Equity Interest-bearing liabilities Interest-bearing deposits$ 7,984,102 $ 9,649 0.24 %$ 7,683,634 $ 13,917 0.37 % Securities loaned 1,242,660 15,984 2.59 % 1,384,108 37,831 5.51 % Notes payable and other borrowings 1,276,600 16,990 2.68 % 1,201,230 16,394 2.73 % Total interest-bearing liabilities 10,503,362 42,623 0.82 % 10,268,972 68,142 1.34 % Noninterest-bearing liabilities Noninterest-bearing deposits 4,530,166 3,911,205 Other liabilities 681,989 986,810 Total liabilities 15,715,517 15,166,987 Stockholders' equity 2,398,015 2,395,994 Noncontrolling interest 26,531 26,160 Total liabilities and stockholders' equity$ 18,140,063 $ 17,589,141 Net interest income (2)$ 212,927 $ 214,157 Net interest spread (2) 2.25 % 2.13 % Net interest margin (2) 2.56 % 2.66 % 51 Table of Contents
(1) Average balance includes non-accrual loans.
Presented on a taxable equivalent basis with annualized taxable equivalent
adjustments based on the applicable corporate federal income tax rate of 21%
(2) for the periods presented. The adjustment to interest income was
and
respectively, and
30, 2022 and 2021, 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, such as securities borrowed in the broker-dealer segment and securities loaned 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. On a consolidated basis, the changes in net interest income during the three and six months endedJune 30, 2022 , compared with the same periods in 2021, were primarily due to the effects of volume and rate changes within the mortgage warehouse lending, securities and deposits portfolios within the banking segment and increased net yields on mortgage loans held for sale within the 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 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. Substantially all of our consolidated provision for (reversal of) credit losses is related to the banking segment. During the three and six months endedJune 30, 2022 , the increases in the allowance reflected a deterioratingU.S. economic outlook since the prior quarter, partially offset by decreases in specific reserves and positive risk rating grade migration. 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. Noninterest income decreased during the three months endedJune 30, 2022 , compared with the same period in 2021, primarily due to decreases in total mortgage loan sales volume and average loan sales margin within our mortgage origination segment. The decrease in noninterest income during the six months endedJune 30, 2022 , compared with the same period in 2021, was primarily due to decreases in total mortgage loan sales volume and average loan sales margin, and changes in net fair value and related derivative activity within our mortgage origination segment, as well as declines in net revenues within the broker-dealer segment's structured finance and fixed income services business lines. Noninterest expense decreased during the three months endedJune 30, 2022 , compared with the same period in 2021, primarily due to decreases in both variable and non-variable compensation within our mortgage origination segment associated with the decreased mortgage loan originations. Noninterest expense decreased during the six months endedJune 30, 2022 , compared with the same period in 2021, primarily due to decreases in both variable and non-variable compensation within our mortgage origination segment associated with the decreased mortgage loan originations, and a decline in variable compensation within our broker-dealer segment. We have experienced an increase in certain noninterest expenses during the first half of 2022, including compensation, occupancy, and software costs, due to inflationary pressures. We expect such inflationary headwinds to continue and result in higher fixed costs during the remainder of 2022. Effective income tax rates during the three months endedJune 30, 2022 and 2021 were 25.6% and 23.5%, respectively, and for the six months endedJune 30, 2022 and 2021, were 23.2% and 23.4%, respectively. The effective tax rate for the six months endedJune 30, 2022 was higher than the applicable statutory rate primarily due to the impact of non-deductible compensation expense and other permanent adjustments during the second quarter of 2022. 52 Table of Contents Segment Results Banking Segment
The following table presents certain information about the operating results of our banking segment (in thousands).
Three Months Ended June 30 , Variance
Six Months Ended
2022 2021 2022 vs 2021 2022 2021 2022 vs 2021
Net interest income $ 101,259 $ 105,468 $ (4,209) $ 193,329 $ 209,352 $ (16,023)
Provision for (reversal of)
credit losses 5,025 (28,775) 33,800 4,975 (33,950) 38,925
Noninterest income 12,467 10,242 2,225 25,237 21,566 3,671
Noninterest expense 57,331 57,514 (183) 115,761 113,302 2,459
Income (loss) before income
taxes $ 51,370 $ 86,971 $
(35,601)
The decreases in income before income taxes during the three and six months endedJune 30, 2022 , compared with the same periods in 2021, were primarily due to declines in the respective year-over-year changes in provision for (reversal of) credit losses and the combined impact of net interest income volume and rate changes within the loans held for investment and mortgage warehouse lending portfolios. 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.
Three Months Ended June
30 ,
Six Months Ended
2022 2021 2022 2021
Efficiency ratio (1) 50.41 % 49.71 % 52.96 % 49.07 %
Return on average assets (2) 1.09 % 1.91 % 1.03 % 1.70 %
Net interest margin (3) 2.97 % 3.19 % 2.81 % 3.25 %
Net recoveries (charge-offs) to
average loans outstanding (4) (0.07) % 0.03 % (0.04) % 0.00 %
Efficiency ratio is defined as noninterest expenses divided by the sum of (1) 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 on average assets is defined as net income divided by average assets.
Net interest margin is defined as net interest income divided by average (3) 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.
Net recoveries (charge-offs) to average loans outstanding is defined as the (4) greater of recoveries or charge-offs during the reported period minus
charge-offs or 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 rate of 21% for all periods presented. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest margins for all earning assets, we use net interest income on a taxable equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments. During the three months endedJune 30, 2022 and 2021, purchase accounting contributed 10 and 20 basis points, respectively, to the banking segment's taxable equivalent net interest margin of 2.98% and 3.20%, respectively. During the six months endedJune 30, 2022 and 2021, purchase accounting contributed 9 and 18 basis points, respectively, to the banking segment's taxable equivalent net interest margin of 2.81% and 3.25%, respectively. These purchase accounting items are primarily related to accretion of discount of loans associated with the Bank Transactions presented in the Consolidated Operating Results section. 53 Table of Contents
The table below provides additional details regarding our banking segment's net interest income (dollars in thousands).
Three Months Ended June 30,
2022 2021
Average Interest Annualized Average Interest Annualized
Outstanding Earned Yield or Outstanding Earned Yield or
Balance or Paid Rate Balance or Paid Rate
Assets
Interest-earning assets
Loans held for investment, gross
(1) $ 7,302,343 $ 79,305 4.36 % $ 7,158,625 $ 82,987 4.61 %
Subsidiary warehouse lines of
credit 1,298,673 14,483 4.41 % 2,349,513 22,292 3.75 %
Investment securities - taxable 2,354,096 9,841 1.67 % 1,961,289 7,244 1.48 %
Investment securities - non-taxable
(2) 106,178 929 3.50 % 116,391 1,001 3.44 %
Federal funds sold and securities
purchased under agreements to
resell 117,476 311 1.06 % 413 - 0.14 %
Interest-bearing deposits in other
financial institutions 2,451,889 4,984 0.82 % 1,617,437 406 0.10 %
Other 36,824 99 1.08 % 36,912 155 1.68 %
Interest-earning assets, gross (2) 13,667,479 109,952 3.23 % 13,240,580 114,085 3.42 %
Allowance for credit losses (91,155) (143,857)
Interest-earning assets, net 13,576,324 13,096,723
Noninterest-earning assets 933,480 968,430
Total assets $ 14,509,804 $ 14,065,153
Liabilities and Stockholders'
Equity
Interest-bearing liabilities
Interest-bearing deposits $ 7,614,093 $ 7,286 0.38 % $ 7,589,397 $ 8,014 0.42 %
Notes payable and other borrowings 287,335 1,209 1.69 % 130,157 397 1.22 %
Total interest-bearing liabilities 7,901,428 8,495 0.43 % 7,719,554 8,411 0.44 %
Noninterest-bearing liabilities
Noninterest-bearing deposits 4,850,513 4,525,940
Other liabilities 141,979 138,282
Total liabilities 12,893,920 12,383,776
Stockholders' equity 1,615,884 1,681,377
Total liabilities and stockholders'
equity $ 14,509,804 Net interest income (2)$ 101,457 $ 105,674 Net interest spread (2) 2.80 % 2.98 % Net interest margin (2) 2.98 % 3.20 % Six Months Ended June 30, 2022 2021 Average Interest Annualized Average Interest Annualized Outstanding Earned Yield or Outstanding Earned Yield or Balance or Paid Rate Balance or Paid Rate Assets Interest-earning assets Loans held for investment, gross (1)$ 7,229,731 $ 153,116 4.27 %$ 7,171,946 $ 167,506 4.66 % Subsidiary warehouse lines of credit 1,321,090 27,200 4.12 % 2,344,094 44,202 3.75 % Investment securities - taxable 2,347,813 18,683 1.59 % 1,874,582 13,517 1.44 % Investment securities - non-taxable (2) 107,508 1,862 3.46 % 115,734 1,986 3.43 % Federal funds sold and securities purchased under agreements to resell 141,111 485 0.69 % 399 - 0.07 % Interest-bearing deposits in other financial institutions 2,698,431 6,412 0.48 % 1,452,810 727 0.10 % Other 36,812 22 0.12 % 36,861 229 1.24 % Interest-earning assets, gross (2) 13,882,496 207,780 3.02 % 12,996,426 228,167 3.50 % Allowance for credit losses (91,481) (146,455) Interest-earning assets, net 13,791,015 12,849,971 Noninterest-earning assets 912,748 982,294 Total assets$ 14,703,763 $ 13,832,265 Liabilities and Stockholders' Equity Interest-bearing liabilities Interest-bearing deposits$ 7,854,733 $ 12,275 0.32 %$ 7,550,463 $ 17,595 0.47 % Notes payable and other borrowings 238,956 1,773 1.50 % 139,598 800 1.15 % Total interest-bearing liabilities 8,093,689 14,048 0.35 % 7,690,061 18,395 0.48 % Noninterest-bearing liabilities Noninterest-bearing deposits 4,826,177 4,302,949 Other liabilities 127,952 163,294 Total liabilities 13,047,818 12,156,304 Stockholders' equity 1,655,945 1,675,961 Total liabilities and stockholders' equity$ 14,703,763
Net interest income (2)$ 193,732 $ 209,772 Net interest spread (2) 2.67 % 3.02 % Net interest margin (2) 2.81 % 3.25 % 54 Table of Contents
(1) Average balance includes non-accrual loans.
Presented on a taxable equivalent basis with annualized taxable equivalent
adjustments based on the applicable corporate federal income tax rates of 21%
(2) for all the periods presented. The adjustment to interest income was
million and
respectively, and
30, 2022 and 2021, 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 following table summarizes the changes in the banking segment's net interest
income for the periods indicated below, including the component changes in the
volume of average interest-earning assets and interest-bearing liabilities and
changes in the rates earned or paid on those items (in thousands).
Three Months Ended June 30, Six Months Ended June 30,
2022 vs. 2021 2022 vs. 2021
Change Due To (1) Change Due To (1)
Volume Yield/Rate Change Volume Yield/Rate Change
Interest income
Loans held for investment, gross
(2) $ 1,652 $ (5,334) $ (3,682) $ 1,335 $ (15,725) $ (14,390)
Subsidiary warehouse lines of
credit (3) (9,834) 2,025 (7,809) (19,026) 2,024 (17,002)Investment securities - taxable 1,447 1,150 2,597
3,384 1,782 5,166
Investment securities -
non-taxable (4) (88) 16 (72) (140) 16 (124)
Federal funds sold and
securities purchased under
agreements to resell 41 270 311 51 434 485
Interest-bearing deposits in
other financial institutions 210 4,368 4,578 624 5,061 5,685
Other - (56) (56) - (207) (207)
Total interest income (4) (6,572) 2,439 (4,133) (13,772) (6,615) (20,387)
Interest expense
Deposits $ 26 $ (754) $ (728) $ 709 $ (6,029) $ (5,320)
Notes payable and other
borrowings 479 333 812 569 404 973
Total interest expense 505 (421) 84 1,278 (5,625) (4,347)
Net interest income (4) $ (7,077) $ 2,860 $ (4,217) $ (15,050) $ (990) $ (16,040) (1) Changes attributable to both volume and yield/rate are included in yield/rate
column.
Changes in the yields earned on loans held for investment, gross included
declines during the three and six months ended
same periods in 2021, of
accretion of discount on loans. Accretion of discount on loans is expected to
decrease in future periods as loans acquired in the Bank Transactions are
repaid, refinanced or renewed.
(3) Subsidiary warehouse lines of credit extended to PrimeLending are eliminated
from the consolidated financial statements.
(4) Annualized taxable equivalent.
With regard to the net interest income, the banking segment maintains an asset sensitive rate risk position, meaning 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. During a period of rising interest rates, being asset sensitive tends to result in an increase in net interest income. Our portfolio includes loans that periodically reprice or mature prior to the end of an amortized term. The extent and timing of this impact on interest income 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. AtJune 30, 2022 , approximately$1 billion of our floating rate loans held for investment remained at or below their applicable rate floor, exclusive of our mortgage warehouse lending program, of which approximately half are not scheduled to reprice for more than one year. If interest rates rise further, yields on the portion of our loan portfolio that remain at applicable rate floors would rise more slowly than increases in market interest rates, unless such loans are refinanced or repaid. Competition for loan growth could also continue to put pressure on new loan origination rates. If interest rates were to fall, the impact on our interest income for certain variable-rate loans would be limited by these rate floors. 55
Table of Contents
Additionally, within our banking segment, the composition of the deposit base and ultimate cost of funds on deposits and net interest income 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. Deposit products and pricing structures relative to the market are regularly evaluated to maintain competitiveness over time. Consistent with our loan portfolio, rising interest rates may increase our cost of funds on deposit, and therefore, negatively impact net interest income. To help mitigate net interest income spread compression between our assets and liabilities as theFederal Reserve increases interest rates, management continues to execute certain derivative trades, as either cash flow hedges or fair value hedges, that benefit the banking segment as interest rates rise. 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. We will continue to monitor developments regarding the COVID-19 pandemic and measures implemented in response to the pandemic, market capitalization, overall economic conditions, effectiveness of vaccinations, the emergence of new variants, government stimulus, payment deferral programs and any other triggering events or circumstances that may indicate an impairment of goodwill or core deposit intangible assets in the future. See further discussion in the "Recent Developments" section above. The banking segment retained approximately$104.3 million and$181.1 million during the three months endedJune 30, 2022 and 2021, respectively, and$213.0 million and$339.8 million during the six months endedJune 30, 2022 and 2021, 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. 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 (reversal of) credit losses has been subject to significant year-over-year and quarterly changes primarily attributable to the effects of changes in the economic outlook, macroeconomic forecast assumptions and resulting impact on reserves. Specifically, during the three and six months endedJune 30, 2022 , the banking segment's increases in the allowance reflected a deterioratingU.S. economic outlook since the prior quarter, partially offset by decreases in specific reserves and positive risk rating grade migration. The net impact to the allowance of changes associated with collectively evaluated loans during the three and six months endedJune 30, 2022 included a provision for credit losses of$6.6 million and$6.4 million , respectively, while individually evaluated loans included a reversal of credit losses of$1.6 million and$1.5 million , respectively. The changes in the allowance for credit losses during the three and six months endedJune 30, 2022 were also impacted by net charge-offs of$1.2 million and$1.5 million , respectively. The banking segment's reversals of credit losses during the three and six months endedJune 30, 2021 of$27.7 million and$34.2 million , respectively, were primarily due to improvements in the macroeconomic forecast assumptions and positive risk rating grade migration, including a high concentration of credits within the restaurant and commercial real estate industry sectors. The net impact to the allowance of changes associated with individually evaluated loans during the three months endedJune 30, 2021 was a reversal of credit losses of$1.1 million , while the six months endedJune 30, 2021 included a provision of credit losses of$0.3 million . The changes in the allowance for credit losses during the three and six months endedJune 30, 2021 were also impacted by net charge-offs of$0.5 million and net recoveries of$0.1 million , respectively. The changes in the allowance for credit losses during the noted periods also reflected other factors including, but not limited to, loan growth, loan mix and changes in risk grades and qualitative factors from the prior quarter. 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 increased during the three and six
months ended
The banking segment's noninterest expense increased during the six months endedJune 30, 2022 , compared to the same period in 2021, primarily due to increases in expenses associated with employees' compensation and benefits and professional fees. 56 Table of Contents Broker-Dealer Segment
The following table provides additional details regarding our broker-dealer segment operating results (in thousands).
Three Months Ended June 30 ,
Variance Six Months Ended
2022 2021 2022 vs 2021 2022 2021 2022 vs 2021
Net interest income:
Wealth management:
Securities lending $ 1,986 $ 3,241 $ (1,255) $ 3,331 $ 6,727 $ (3,396)
Clearing services 1,989 1,784 205 4,110 3,233 877
Structured finance 1,640 477 1,163 3,451 873 2,578
Fixed income services 5,500 4,185 1,315 10,613 8,313 2,300
Other 1,463 995 468 2,591 2,050 541
Total net interest income 12,578 10,682 1,896 24,096 21,196 2,900
Noninterest income:
Securities commissions and
fees by business line (1):
Fixed income services 7,476 15,239 (7,763) 18,674 28,913 (10,239)
Wealth management:
Retail 19,011 18,035 976 37,623 36,789 834
Clearing services 6,362 5,580 782 11,482 11,822 (340)
Structured finance 2,640 337 2,303 4,585 671 3,914
Other 1,009 843 166 1,959 1,887 72
36,498 40,034 (3,536) 74,323 80,082 (5,759)
Investment and securities
advisory fees and
commissions by business
line:
Public finance services 21,554 23,187 (1,633) 40,150 40,650 (500)
Fixed income services 1,553 212 1,341 3,378 2,116 1,262
Wealth management:
Retail 8,141 7,781 360 16,480 15,031 1,449
Clearing services 462 563 (101) 948 1,008 (60)
Structured finance 201 446
(245) 566 1,002 (436)
Other 91 79 12 185 156 29
32,002 32,268 (266) 61,707 59,963 1,744
Other:Structured finance 15,757 10,248 5,509 16,391 34,799 (18,408) Fixed income services 4,340 (1,089)
5,429 (2,618) 4,946 (7,564)
Other (946) 2,002 (2,948) (1,462) 2,296 (3,758)
19,151 11,161 7,990 12,311 42,041 (29,730)Total noninterest income 87,651 83,463 4,188 148,341 182,086 (33,745) Net revenue (2) 100,229 94,145 6,084 172,437 203,282 (30,845) Noninterest expense: Variable compensation (3) 37,471 34,409 3,062 64,096 71,820 (7,724) Non-variable compensation and benefits 27,023 27,880 (857) 56,223 56,626 (403) Segment operating costs (4) 26,634 25,000 1,634 51,621 50,313 1,308 Total noninterest expense 91,128 87,289 3,839 171,940 178,759 (6,819)
Income before income taxes
2,245 $ 497
Securities commissions and fees includes income of
and
and 2021, respectively, that is eliminated in consolidation.
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 we believe it is the primary revenue performance (2) measure used by investors and analysts. Net revenue provides for some level
of comparability of trends across the financial services industry as it
reflects both noninterest income, including investment and securities
advisory fees and commissions, as well as net interest income. Internally, we
assess the broker-dealer segment's performance on a revenue basis for
comparability with our banking segment.
(3) Variable compensation represents performance-based commissions and
incentives.
(4) Segment operating costs include provision for credit losses associated with
the broker-dealer segment within other noninterest expenses.
The changes in net revenue and income before income taxes between the noted periods were primarily related to the combined impacts of the rising interest rate environment and market turbulence, which impacted period-over-period customer demand and volumes within our various business lines. Specifically, during the second quarter of 2022, the broker-dealer segment's structured finance business line experienced an increase in net revenues compared to the second quarter of 2021 despite lower production volumes and continued rate volatility. Though not to the levels of 2020, the business line has noted an improvement in the environment resulting in a net increase of$5.5 million in other noninterest income. The decrease in net revenues in the broker-dealer segment's public finance business line was due to the unfavorable issuance trends both nationally and inTexas in the second quarter of 2022 compared to the second quarter of 2021. Net revenues in the broker-dealer segment's fixed income services and wealth management business lines were relatively flat when compared to the second quarter of 2021. The changes in the broker-dealer segment's income before income taxes during the three and six months endedJune 30, 2022 compared with the same periods in 2021, were primarily as a result of the following:
decreases in the broker-dealer segment's structured finance business line's net
? revenues for the six months ended
and market turbulence in the first quarter of 2022, resulting in
57
Table of Contents
decreases in the business line's other noninterest income. As noted above, the
structured finance business line's net revenues increased for the three months
ended
decreases were due to lower mortgage originations, with mortgage loan lock
volumes totaling
decline compared with the same period in 2021. Additionally, the structured
finance business line, particularly in the three months ended
saw weaker demand from the buyside for call-protected collateral given the
expectation that interest rates would continue to rise. The environment improved
modestly in the second quarter of 2022 despite a 62% decline in the mortgage
loan lock volumes.
decreases in the broker-dealer segment's fixed income services net revenues for
the six months ended
trading division as a result of lower customer demand and a less favorable
? trading environment. Specifically, in the first quarter of 2022, all product
areas experienced declines in customer demand and volumes as compared to the
same period in 2021 given higher inflation and the expectation of higher
interest rates. However, results for the second quarter of 2022 were relatively
similar to the same period in 2021.
decrease in compensation expense for the six months ended
which
associated with revenue declines in our structured finance and fixed income
services business lines. Compensation expense for the three months ended June
? 30, 2022 increased
increase was primarily comprised of an increase of
compensation associated with the increases in revenues within our structured
finance business line, partially offset by a decline in non-variable
compensation.
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 andFDIC 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. The broker-dealer segment is also exposed to interest rate risk through its structured finance business line, which is dependent on mortgage loan production that tends to be adversely impacted by increasing interest rates and may result in valuation-related adjustments. In the broker-dealer segment, interest is earned from securities lending activities, interest charged on customer margin loan balances and interest earned on investment securities used to support sales, underwriting and other customer activities. The increases in net interest income during the three and six months endedJune 30, 2022 , compared with the same periods in 2021, were primarily due to the increases in net interest income from our structured finance and fixed income services business lines, partially offset by a decrease in net interest income from the securities lending division of our wealth management business line. With the 45-basis point decrease in the weighted average interest rate spread for the three months endedJune 30, 2022 and 36-basis point decrease in the weighted average interest rate spread for the six months endedJune 30, 2022 , net interest earned within the broker-dealer segment's stock lending business decreased$1.3 million and$3.4 million for the three and six months endedJune 30, 2022 , respectively, when compared with the same periods in 2021. Noninterest income increased during the three months endedJune 30, 2022 and decreased during the six months endedJune 30, 2022 , compared with the same periods in 2021, primarily due to changes in securities commissions and fees as well as other noninterest income. Securities commissions and fees decreased during the three and six months endedJune 30, 2022 , compared with the same periods in 2021, primarily due to the decrease in customer demand for fixed income services as previously discussed. In addition, securities commissions and fees during the three and six months endedJune 30, 2022 , compared with the same periods in 2021, were impacted by decreases of$0.9 million and$1.6 million , respectively, in commissions earned in insurance product sales transactions, decreases of$0.4 million and$0.9 million , respectively, in net clearing revenues due to the decrease in clearing fees, and decreases in commissions earned on sales transactions, in particular corporate bonds for both the three and six months endedJune 30, 2022 . These decreases were offset by 58 Table of Contents increases of$3.1 million and$2.0 million , respectively, in our money market andFDIC sweep revenues. As money market andFDIC sweep revenues are closely correlated to short term interest rates, we expect that any additional increases in short term interest rates will cause these revenues to rise. Investment and securities advisory fees and commissions increased during the six months endedJune 30, 2022 , compared with the same period in 2021, primarily due to increases in fees earned from our competitive underwriting transactions and from improved wealth management advisory services fees. The increase in other noninterest income during the three months endedJune 30, 2022 , compared with the same period in 2021, was primarily due to improved trading gains earned from our structured finance and fixed income business lines. The decrease in other noninterest income during the six months endedJune 30, 2022 , compared with the same period in 2021, was primarily due to decreases in trading gains earned from our structured finance business line's derivative activities given decreased volumes and interest rate volatility as previously discussed. These year-over-year decreases in other noninterest income were heightened by decreases within our fixed income services business line within our taxable and municipal securities trading portfolios as previously discussed. With the expected rise in interest rates through the end of 2022, we anticipate continued volatility and generally lower levels of other noninterest income related to our structured finance and fixed income services business lines.
The changes in noninterest expenses during the three and six months ended
Selected information concerning the broker-dealer segment, including key performance indicators, follows (dollars in thousands).
Three Months Ended June 30 ,
Six Months Ended
2022 2021 2022 2021
Total compensation as a % of net
revenue (1) 64.3 % 66.2 % 69.8 % 63.2 %
Pre-tax margin (2) 9.1 % 7.3 % 0.3 % 12.1 %
FDIC insured program balances at the
Bank (end of period) $ 758,485 $ 721,472
Other FDIC insured program balances
(end of period) $ 1,447,421 $ 1,627,673
Customer funds on deposit, including
short credits (end of period) Public finance services: Number of issues 282 388 513 619
Aggregate amount of offerings
Structured finance: Lock production/TBA volume$ 677,488 $ 1,784,094
Fixed income services: Total volumes$ 62,551,045 $ 67,695,308 $ 125,210,898 $ 131,025,503 Net inventory (end of period)
Wealth management (Retail and Clearing services groups): Retail employee representatives (end of period) 93 107 Independent registered representatives (end of period) 173 187 Correspondents (end of period) 112 124 Correspondent receivables (end of period)$ 145,262 $ 295,908 Customer margin balances (end of period)
Wealth management (Securities lending group): Interest-earning assets - stock borrowed (end of period)$ 1,013,025 $ 1,336,847 Interest-bearing liabilities - stock loaned (end of period)
Total compensation includes the sum of non-variable compensation and benefits (1) 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 (2) 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.
59
Table of Contents
Mortgage Origination Segment
The following table presents certain information regarding the operating results of our mortgage origination segment (in thousands).
Three Months Ended June 30, Variance Six Months Ended June 30, Variance
2022 2021 2022 vs 2021 2022 2021 2022 vs 2021
Net interest income (expense) $ (1,291) $
(5,953)
140,082 241,965 (101,883) 283,276 552,409 (269,133)
Noninterest expense 133,169 186,963 (53,794) 268,027 397,297
(129,270)
Income before income taxes $ 5,622 $
49,049
The mortgage lending business is subject to variables that can impact loan origination volume, including seasonal transaction volumes and interest rate fluctuations. Historically, the mortgage origination segment has experienced increased loan origination volume from purchases of homes during the spring and summer months, when more people tend to move and buy or sell homes. An increase in mortgage interest rates tends to result in decreased loan origination volume from refinancings, while a decrease in mortgage interest rates tends to result in increased loan origination volume from refinancings. Changes in mortgage interest rates have historically had a lesser impact on home purchases volume than on refinancing volume. See details regarding loan origination volume in the table below. Recent trends, as well as typical historical patterns in loan origination volume from purchases of homes or from refinancings because of movements in mortgage interest rates, may not be indicative of future loan origination volumes. During 2022, certain events have adversely impacted origination volumes because of their effect on the economy, including inflation and rising interest rates, the negative residual impact of the COVID-19 pandemic, theFederal Reserve's recent actions and communications, and current geopolitical threats. These events have also adversely impacted the willingness and ability of the mortgage origination segment's customers to conduct mortgage transactions. Specifically, current home inventory shortages and affordability challenges, in addition to supply chain problems, are impacting customers' abilities to purchase homes. The increase in interest rates during the first six months of 2022, which has led to a sharp reduction in national refinancing volume and the reduction of willing and eligible home buyers, has resulted in competitive mortgage pricing pressure, leading to a decline in average loans sales margin. We expect that these trends will persist during the remainder of 2022 and will continue to have a negative impact on the mortgage origination segment's operating results. In addition, these trends could also alter the percentage mix of refinancing and purchase volumes relative to total loan origination volume compared to 2021. Income before income taxes decreased 88.5% and 91.5% during the three and six months endedJune 30, 2022 , compared with the same periods in 2021. The decreases during both periods were primarily the result of a decrease in interest rate lock commitments ("IRLCs") related to a decrease in mortgage loan applications and a decrease in the average value of individual IRLCs. The impact of these trends was partially offset by a decrease in noninterest expense during both periods, and during the second quarter of 2022, also an increase in MSR net hedge gains and gains realized on fair value adjustments to the MSR asset. SinceMarch 2020 , the CARES Act has provided borrowers the ability to request forbearance of residential mortgage loan payments. A significant increase in nationwide forbearance requests that began at that time resulted in the reduction of third-party mortgage servicers willing to purchase mortgage servicing rights. Due to this market dynamic, beginning in the second quarter of 2020, we increased the amount of retained servicing on mortgage loan sales, resulting in the retention of almost 90% of servicing on mortgage loan sales during the second and third quarters of 2020. Beginning in the fourth quarter of 2020, PrimeLending began to reduce the amount of servicing it retained as the willingness of third-party mortgage servicers to purchase mortgage servicing rights improved. However, amounts currently retained continue to exceed amounts retained prior to the second quarter of 2020. PrimeLending utilizes a third-party to manage its servicing portfolio. Therefore, we do not expect significant fluctuations in infrastructure costs to manage changes in PrimeLending's servicing portfolio if we experience a significant increase in the amount of retained servicing. However, PrimeLending may be at risk of third-party servicers increasing their pricing to address increased regulatory requirements surrounding servicers. PrimeLending's liquidity has not been, and we do not expect that it will be significantly impacted by forbearance requests resulting from the CARES Act.Government National Mortgage Association ("GNMA"), Federal National Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation ("FHLMC") may impose restrictions on loans the agencies will accept, including loans under a forbearance agreement, which could result in PrimeLending seeking non-agency investors or choosing to retain these loans. During the three and six months endedJune 30, 2022 , and the six months endedJune 30, 2021 , mortgage interest rates increased, while during the three months endedJune 30, 2021 , mortgage interest rates remained relatively flat. Average 60 Table of Contents interest rates during the three and six months endedJune 30, 2022 , exceeded average interest rates during the same periods in 2021, and refinancing volume as a percentage of total origination volume decreased during the three and six months endedJune 30, 2022 , as compared to the same periods in 2021. Refinancing volume as a percentage of total origination volume during the three months endedJune 30, 2022 decreased to 12.3% from 31.9% during the same period in 2021, while refinancing volume during the six months endedJune 30, 2022 , decreased to 19.5% from 42.7% during the same period in 2021. If current mortgage interest rates remain relatively unchanged during the remainder of 2022, we anticipate a lower percentage of refinancing volume relative to total loan origination volume during 2022, as compared to 2021. However, a higher refinance percentage could be driven by a slowing of purchase volume due to the negative impact on new and existing home sales resulting from existing home inventory shortages, affordability challenges, and supply chain problems related to new home construction, and/or an increase in all-cash buyers. The mortgage origination segment primarily originates its mortgage loans through a retail channel, with limited lending through its affiliated business arrangements ("ABAs"). For the six months endedJune 30, 2022 , funded volume through ABAs was approximately 7% of the mortgage origination segment's total loan volume. As ofJune 30, 2022 , PrimeLending owned a greater than 50% membership interest in five ABAs. We expect total production within the ABA channel to increase slightly to approximately 10% of loan volume of the mortgage origination segment during the remainder of 2022. The following table provides further details regarding our mortgage loan originations and sales for the periods indicated below (dollars in thousands). Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 % of % of Variance % of % of Variance Amount Total Amount Total 2022 vs 2021 Amount Total Amount Total 2022 vs 2021 Mortgage Loan Originations - units 12,090 19,991 (7,901) 24,309 41,732 (17,423) Mortgage Loan Originations - volume: Conventional$ 2,523,426 66.25$ 4,055,964 68.75$ (1,532,538) $ 5,036,525 66.50$ 8,538,727 70.66$ (3,502,202) Government 705,741 18.53 873,453 14.80 (167,712) 1,349,055 17.81 1,676,625 13.88 (327,570) Jumbo 362,810 9.52 731,798 12.40 (368,988) 750,652 9.91 1,439,341 11.91 (688,689) Other 217,243 5.70 238,828 4.05 (21,585) 437,471 5.78 429,456 3.55 8,015$ 3,809,220 100.00$ 5,900,043 100.00$ (2,090,823) $ 7,573,703 100.00$ 12,084,149 100.00$ (4,510,446) Home purchases$ 3,342,103 87.74$ 4,018,922 68.12$ (676,819) $ 6,095,134 80.48$ 6,921,632 57.28$ (826,498) Refinancings 467,117 12.26 1,881,121 31.88 (1,414,004) 1,478,569 19.52 5,162,517 42.72 (3,683,948)$ 3,809,220 100.00$ 5,900,043 100.00$ (2,090,823) $ 7,573,703 100.00$ 12,084,149 100.00$ (4,510,446) Texas$ 805,767 21.15$ 1,094,085 18.54$ (288,318) $ 1,594,803 21.06$ 2,170,977 17.97$ (576,174) California 320,923 8.42 730,421 12.38 (409,498) 724,692 9.57 1,525,481 12.62 (800,789) Florida 186,320 4.89 271,973 4.61 (85,653) 383,744 5.07 552,880 4.57 (169,136) Arizona 167,930 4.41 266,816 4.52 (98,886) 357,335 4.72 557,251 4.61 (199,916) South Carolina 179,894 4.72 264,222 4.48 (84,328) 342,816 4.52 525,440 4.35 (182,624) Ohio 172,317 4.52 227,592 3.86 (55,275) 313,261 4.14 450,231 3.73 (136,970) New York 151,409 3.97 166,857 2.83 (15,448) 293,162 3.87 335,454 2.78 (42,292) Missouri 121,100 3.18 179,969 3.05 (58,869) 241,260 3.18 368,981 3.05 (127,721) North Carolina 127,683 3.35 192,436 3.26 (64,753) 235,644 3.11 418,902 3.47 (183,258) Washington 108,513 2.85 176,333 2.99 (67,820) 201,165 2.65 391,793 3.24 (190,628) Georgia 93,957 2.47 146,204 2.48 (52,247) 196,810 2.60 301,116 2.49 (104,306) Maryland 98,902 2.60 194,877 3.30 (95,975) 195,235 2.58 389,990 3.23 (194,755) All other states 1,274,505 33.47 1,988,258 33.70 (713,753) 2,493,776 32.93 4,095,653 33.89 (1,601,877)$ 3,809,220 100.00$ 5,900,043 100.00$ (2,090,823) $ 7,573,703 100.00$ 12,084,149 100.00$ (4,510,446) . Mortgage Loan Sales - volume: Third parties$ 3,768,589 97.31$ 5,343,169 96.72$ (1,574,580) $ 7,528,495 97.25$ 11,535,242 97.14$ (4,006,747) Banking segment 104,346 2.69 181,057 3.28 (76,711) 213,036 2.75 339,821 2.86 (126,785)$ 3,872,935 100.00$ 5,524,226 100.00$ (1,651,291) $ 7,741,531 100.00$ 11,875,063 100.00$ (4,133,532) 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, mortgage loan origination fees, and other mortgage production income. 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. The mortgage origination segment's total loan origination volume decreased 35.4% and 37.3% during the three and six months endedJune 30, 2022 , compared to the same periods in 2021, respectively, while income before income taxes decreased 88.5% and 91.5%, respectively, during those same periods. The decreases in
income before income taxes
61
Table of Contents
during the three and six months endedJune 30, 2022 , were primarily due to a decrease in net gains from sale of loans, partially offset by a decrease in variable compensation, and to a lesser extent, a decrease in non-variable compensation and benefits expense, segment operating costs, and net interest expense.
The information shown in the table below includes certain additional key performance indicators for the mortgage origination segment.
Three Months Ended June
30, Six Months Ended June 30,
2022 2021 2022 2021
Net gains from mortgage loan sales
(basis points):
Loans sold to third parties 260 376 291 388
Impact of loans retained by banking
segment (7) (12) (8) (11)
As reported 253 364 283 377
Variable compensation as apercentage of total compensation 56.4 % 66.8 % 55.6 % 68.2 % Mortgage servicing rights asset ($000 's) (end of period) (1) $
121,688
Reported on a consolidated basis and therefore does not include mortgage (1) servicing rights assets related to loans serviced for the banking segment,
which are eliminated in consolidation.
Net interest expense was comprised of interest incurred on warehouse lines of credit primarily held with the Bank, and related intercompany financing costs offset by interest income earned on loans held for sale. The year-over-year improvement in net interest expense between both the three and six months endedJune 30, 2022 and 2021 reflected the effects of increased net yields on mortgage loans held for sale and a decrease in the average warehouse line balance between each of the periods compared. Noninterest income was comprised of the items set forth in the table below (in thousands). Three Months Ended June 30, Variance Six Months Ended June 30, Variance 2022 2021 2022 vs 2021 2022 2021 2022 vs 2021
Net gains from sale of loans$ 98,110
$ (228,536) Mortgage loan origination fees and other related income 42,378 42,146 232 74,440 85,301
(10,861)
Other mortgage production income: Change in net fair value and related derivative activity: IRLCs and loans held for sale
(16,770) (19,766) 2,996 (37,191) (24,372) (12,819)
Mortgage servicing rights asset 7,443
2,553 4,890 9,636 11,685 (2,049)
Servicing fees 8,921 16,150 (7,229) 17,457 32,325 (14,868)
Total noninterest income $ 140,082 The decrease in net gains from sale of loans during the three and six months endedJune 30, 2022 , compared with the same periods in 2021, was primarily the result of decreases of 29.9% and 34.8% in total loan sales volume during those periods, respectively, in addition to a decrease in average loan sales margin during both periods. Since PrimeLending sells substantially all mortgage loans it originates to various investors in the secondary market, the decrease in loan sales volume during the six months endedJune 30, 2022 , was consistent with the decrease in loan origination volume during the period. The decrease in average loan sales margins during the six months endedJune 30, 2022 was primarily attributable to competitive pricing pressure resulting from home inventory shortages and a reduction in national refinancing volume. The decrease in mortgage loan origination fees during the six months endedJune 30, 2022 , compared with the same period in 2021, was primarily the result of a decrease in loan origination volume, partially offset by an increase in average mortgage loan origination fees. Fluctuations in mortgage loan origination fees are not always aligned with fluctuations in loan origination volume since customers may opt to pay PrimeLending discount fees on their mortgage loans in exchange for a lower interest rate. 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 and may include loans sold to third parties and loans sold to and retained by the banking segment. For origination services provided, the mortgage origination segment was reimbursed direct origination costs associated with loans retained by the banking segment, 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. Loan volumes to be originated on behalf of and retained by the banking segment are evaluated each quarter. Loans sold to and retained by the banking segment during the second quarter of 2022 were relatively flat when compared to the first quarter of 2022. We anticipate quarterly sales for the remainder of 2022 will increase compared to 62
Table of Contents
the first half of 2022 sales. Loan volumes to be originated on behalf of and retained by the banking segment are expected to 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. 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 mortgage loans held for sale. The decrease in fair value of IRLCs and loans held for sale during the three and six months endedJune 30, 2022 , was the result of a decrease in the average value of individual IRLCs and loans held for sale, and to a lesser extent a decrease in the total volume of individual IRLCs and loans held for sale. The mortgage origination segment sells substantially all mortgage loans it originates to various investors in the secondary market, historically with the majority servicing released. 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 the three and six months endedJune 30, 2022 , PrimeLending retained servicing on approximately 20% and 16%, respectively, of loans sold, compared with approximately 25% and 39% of loans sold during the same periods in 2021, respectively. A recent reduction in third-party mortgage servicers purchasing mortgage servicing rights, while modest, may result in PrimeLending increasing the rate of retained servicing on mortgage loans sold during the remainder of 2022 to as much as 50%. 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 and retained by 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, includingU.S. Treasury bond futures and options, 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 gains (losses) as noted in the table above. During the three and six months endedJune 30, 2022 , the operating results of the mortgage origination segment were positively impacted by the noted increases of$7.4 million and$9.6 million , respectively, in the net fair value of the MSR asset. These increases in the net fair value of the MSR asset during the respective periods were primarily driven by changes in the prepayment and discount rates used as inputs to value the MSR asset to address the impact of increased mortgage rates reducing consumer refinancing activity and recent market trends related to MSR sales. OnMarch 31, 2021 andJune 30, 2021 , the mortgage origination segment sold MSR assets of$52.8 million , which represented$4.9 billion of its serviced loan volume at the time, and$31.9 million , which represented$2.6 billion of its serviced loan volume at the time, respectively. There were no MSR assets sold during the six months endedJune 30, 2022 . OnJuly 20, 2022 , the mortgage origination segment had executed a letter of intent for a pending sale of MSR assets with a serviced loan volume totaling$1.8 billion . The sale of these MSR assets is expected to be completed during the third quarter of 2022 at a total price of approximately$38 million . Noninterest expenses were comprised of the items set forth in the table below (in thousands). Three Months Ended June 30, Variance Six Months Ended June 30, Variance 2022 2021 2022 vs 2021 2022 2021 2022 vs 2021
Variable compensation$ 56,525 $ 97,081
48,320 (4,639) 90,187 99,082 (8,895)
Segment operating costs 25,052 29,368 (4,316) 49,027 59,788 (10,761)
Lender paid closing costs 3,809 4,913 (1,104) 7,461 10,381 (2,920)
Servicing expense 4,102 7,281 (3,179) 8,585 15,479 (6,894)
Total noninterest expense $ 133,169 $ 186,963 Total employees' compensation and benefits accounted for the majority of noninterest expenses incurred during all periods presented. Specifically, variable compensation comprised the majority of total employees' compensation and benefits expenses during the three and six months endedJune 30, 2022 and 2021. Variable compensation, which is primarily driven by loan origination volume, tends to fluctuate to a greater degree than loan origination volume, because mortgage loan originator and fulfillment staff incentive compensation plans are structured to pay at increasing rates as higher monthly volume tiers are achieved. However, certain other incentive compensation plans driven by non-mortgage production criteria may alter this trend. While total loan origination volume decreased 35.4% and 37.3%, during the three and six months endedJune 30, 2022 , respectively, compared to the same periods in 2021, the aggregate non-variable compensation and benefits of the 63
Table of Contents
mortgage origination segment decreased by 9.6% and 9.0% during the same periods, respectively. This decrease during the three and six months endedJune 30, 2022 , compared to the same periods in 2021, was primarily due to a decrease in salaries associated with decreased underwriting and loan fulfillment and operations staff given the decrease in loan origination volume starting in the fourth quarter of 2021. PrimeLending is continuing to evaluate staffing levels. Segment operating costs decreased during the three and six months endedJune 30, 2022 , compared to the same periods in 2021, primarily due to a decrease in business development, professional fees, occupancy and loan related costs. In exchange for a higher interest rate, customers may opt to have PrimeLending pay certain costs associated with the origination of their mortgage loans ("lender paid closing costs"). Fluctuations in lender paid closing costs are not always aligned with fluctuations in loan origination volume. Other loan pricing conditions, including the mortgage loan interest rate, loan origination fees paid by the customer, and a customer's willingness to pay closing costs, may influence fluctuations in lender paid closing costs. BetweenJanuary 1, 2013 andJune 30, 2022 , the mortgage origination segment sold mortgage loans totaling$146.6 billion . These loans were sold under sales contracts that generally include provisions that hold the mortgage origination segment responsible for errors or omissions relating to its representations and warranties that loans sold meet certain requirements, including representations as to underwriting standards and the validity of certain borrower representations in connection with the loan. In addition, the sales contracts typically require the refund of purchased servicing rights plus certain investor servicing costs if a loan experiences an early payment default. While the mortgage origination segment sold loans prior to 2013, it does not anticipate experiencing significant losses in the future on loans originated prior to 2013 as a result of investor claims under these provisions of its sales contracts. When a claim for indemnification of a loan sold is made by an agency, investor, or other party, the mortgage origination segment evaluates the claim and determines if the claim can be satisfied through additional documentation or other deliverables. If the claim is valid and cannot be satisfied in that manner, the mortgage origination segment negotiates with the claimant to reach a settlement of the claim. Settlements typically result in either the repurchase of a loan or reimbursement to the claimant for losses incurred on the loan. Following is a summary of the mortgage origination segment's claims resolution activity relating to loans sold betweenJanuary 1, 2013 andJune 30, 2022 (dollars in thousands). Original Loan Balance Loss Recognized % of % of Amount Loans Sold Amount Loans Sold
Claims resolved with no payment$ 211,668 0.14 % $ - - % Claims resolved because of a loan repurchase or payment to an investor for losses incurred (1) 227,639 0.16 %
12,030 0.01 %
$ 439,307 0.30 % $ 12,030 0.01 %
(1) Losses incurred include refunded purchased servicing rights.
For each loan the mortgage origination segment concludes its obligation to a claimant is both probable and reasonably estimable, the mortgage origination segment has established a specific claims indemnification liability reserve. An additional indemnification liability reserve has been established for probable agency, investor or other party losses that may have been incurred, but not yet reported to the mortgage origination segment based upon a reasonable estimate of such losses. In addition to other factors, the mortgage origination segment has considered that GNMA,FNMA and FHLMC have imposed certain restrictions on loans the agencies will accept under a forbearance agreement resulting from the COVID-19 pandemic, which could increase the magnitude of indemnification losses on these loans. AtJune 30, 2022 andDecember 31, 2021 , the mortgage origination segment's total indemnification liability reserve totaled$23.8 million and$27.4 million , respectively. The related provision for indemnification losses was$0.8 million and$2.5 million during the three months endedJune 30, 2022 and 2021, respectively, and$1.2 million and$5.5 million during the six months endedJune 30, 2022 and 2021, respectively. 64 Table of Contents Corporate
The following table presents certain financial information regarding the operating results of corporate (in thousands).
Three Months Ended June 30 ,
Variance Six Months Ended
2022 2021 2022 vs 2021 2022 2021 2022 vs 2021
Net interest income (expense)
1,497$ (6,580) $ (9,379) $ 2,799 Noninterest income 2,080 6,877 (4,797) 3,846 7,383 (3,537) Noninterest expense 17,561 12,072 5,489 30,354 21,660 8,694
Income (loss) before income taxes
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 . These merchant banking activities currently include investments within various industries, including power generation, consumer services, industrial equipment manufacturing and animal health, with an aggregate carrying value of approximately$47 million atJune 30, 2022 . 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 the three and six months endedJune 30, 2022 was primarily comprised of dividend income from merchant banking investment activities, in addition to interest income earned on intercompany notes. Interest expense during each period included recurring quarterly interest expense of$5.0 million incurred on our$150.0 million aggregate principal amount of 5% senior notes due 2025 ("Senior Notes") and on our$200 million aggregate principal amount of Subordinated Notes (defined hereafter). Additionally, during the three and six months endedJune 30, 2021 , we incurred interest expense of$0.5 million and$1.1 million , respectively, on junior subordinated debentures of$67.0 million issued by PCC (the "Debentures"). As discussed in more detail within the section titled "Liquidity and Capital Resources - Junior Subordinated Debentures" below, during the third quarter of 2021, PCC fully redeemed all outstanding Debentures. Noninterest income during each period included activity related to our investment in a real estate development inDallas' University Park , which also serves as headquarters for both Hilltop and the Bank, and net noninterest income associated with activity within our merchant bank subsidiary. Noninterest expenses were primarily comprised of employees' compensation and benefits, occupancy expenses and professional fees, including corporate governance, legal and transaction costs. Noninterest expenses increased during the three and six months endedJune 30, 2022 , compared to the same periods in 2021, primarily due to increases in expenses associated with employees' compensation and benefits related to both headcount increases and inflationary pressures, as well as professional fees, which included$4.4 million related to the recently completed tender offer inMay 2022 .
Financial Condition
The following discussion contains a more detailed analysis of our financial
condition at
Securities Portfolio
At
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
65
Table of Contents
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.
The table below summarizes our securities portfolio (in thousands).
June 30 , December
31,
2022 2021
Trading securities, at fair value
U.S. Treasury securities $ 3,689 $ 3,728
U.S. government agencies:
Bonds 17,303 3,410
Residential mortgage-backed securities 133,290 152,093
Collateralized mortgage obligations 124,997
126,389
Corporate debt securities 64,543
60,671
States and political subdivisions 226,986
285,376
Private-label securitized product 16,529 11,377
Other 5,936 4,954
593,273 647,998
Securities available for sale, at fair value
U.S. Treasury securities 24,337 14,862
U.S. government agencies:
Bonds 77,322 44,133
Residential mortgage-backed securities 453,938 898,446
Commercial mortgage-backed securities 166,016
210,699
Collateralized mortgage obligations 802,523
916,866
States and political subdivisions 38,086
45,562
1,562,222 2,130,568
Securities held to maturity, at amortized costU.S. government agencies: Residential mortgage-backed securities 315,666
9,892
Commercial mortgage-backed securities 196,733
145,742
Collateralized mortgage obligations 336,313
43,990
States and political subdivisions 71,871
68,060
920,583 267,684
Equity securities, at fair value 197
250 Total securities portfolio$ 3,076,275 $ 3,046,500 We had net unrealized losses of$105.6 million and$18.1 million atJune 30, 2022 andDecember 31, 2021 , respectively, related to the available for sale investment portfolio, and net unrealized losses of$44.1 million atJune 30, 2022 , compared with net unrealized gains of$8.6 million associated with the securities held to maturity portfolio atDecember 31, 2021 . Equity securities included net unrealized gains of$0.1 million and$0.2 million atJune 30, 2022 andDecember 31, 2021 , respectively. The noted significant change in net unrealized gains (losses) within our available for sale investment portfolio, and recorded in accumulated other comprehensive income (loss), fromDecember 31, 2021 toJune 30, 2022 was related to increases in market interest rates since purchase and the resulting decline in associated estimated fair values of such portfolio investments. In future periods, we expect changes in prevailing market interest rates, coupled with changes in the aggregate size of the investment portfolio, to be significant drivers of changes in the unrealized losses or gains in these portfolios, and therefore accumulated other comprehensive income (loss). We transferred certain agency-issued securities from the available-for-sale to held-to-maturity portfolio onMarch 31, 2022 having a book value of approximately$782 million and a market value of approximately$708 million . As of the date of transfer, the related pre-tax net unrecognized losses of approximately$74 million within the accumulated other comprehensive loss balance are being amortized over the remaining term of the securities using the effective interest method. This transfer was completed after careful consideration of our intent and ability to hold these securities to maturity. Factors used in assessing the ability to hold these securities to maturity were future liquidity needs and sources of funding.
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
66
Table of Contents
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 June 30, 2022 , the banking segment's
securities portfolio of $2.5 billion was comprised of trading securities of $0.1
million , available for sale securities of $1.6 billion , equity securities of
$0.2 million and held to maturity securities of $920.6 million , in addition to
$13.9 million of other investments included in other assets within the
consolidated balance sheets.
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$593.2 million atJune 30, 2022 . 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$136.0 million atJune 30, 2022 .
Corporate
AtJune 30, 2022 , the corporate portfolio included other investments, including those associated with merchant banking, of$40.0 million in other assets within the consolidated balance sheets.
Allowance for Credit Losses for Available for
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 atJune 30, 2022 . In addition, as ofJune 30, 2022 , 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
June 30, 2022 . Loan Portfolio
Consolidated loans held for investment are detailed in the table below, classified by portfolio segment (in thousands).
June 30, December 31,
2022 2021
Commercial real estate $ 3,262,628 $ 3,042,729
Commercial and industrial 1,786,116 1,875,420
Construction and land development 922,047 892,783
1-4 family residential 1,468,962 1,303,430
Consumer 27,862 32,349
Broker-dealer 463,004 733,193
Loans held for investment, gross 7,930,619 7,879,904
Allowance for credit losses (95,298)
(91,352)
Loans held for investment, net of allowance
Banking Segment 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$8.7 billion and$8.8 billion atJune 30, 2022 andDecember 31, 2021 , respectively. The banking segment's loan portfolio includes warehouse lines of credit extended to PrimeLending of$2.7 billion , of which$1.3 billion and$1.7 billion was drawn atJune 30 , 67
Table of Contents
2022 andDecember 31, 2021 , 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 approximately$7 million related to both initial and second round PPP loans atJune 30, 2022 . While these loans have terms of up to 60 months, borrowers can apply for forgiveness of these loans with the SBA. ThroughJuly 15, 2022 , the SBA had approved approximately 4,100 PPP forgiveness applications from the Bank totaling approximately$893 million , with PPP loans of approximately$2 million pending SBA review and approval. We anticipate a significant amount of these remaining PPP loans pending approval being forgiven during the next quarter. The forgiveness/payoff of the PPP loans would generate an increase in interest income as we would recognize the remaining unamortized origination fee at the time of payoff or forgiveness. AtJune 30, 2022 , the banking segment had loan concentrations (loans to borrowers engaged in similar activities) that exceeded 10% of total loans in its real estate portfolio. The areas of concentration within our real estate portfolio were non-construction commercial real estate loans, non-construction residential real estate loans, and construction and land development loans, which represented 43.7%, 19.7% and 12.3%, respectively, of the banking segment's total loans held investment atJune 30, 2022 . The banking segment's loan concentrations were within regulatory guidelines atJune 30, 2022 . The following table provides information regarding the maturities of the banking segment's gross loans held for investment, net of unearned income (in thousands). June 30, 2022 Due Within Due From One Due from Five Due After One Year To Five Years To Fifteen Years Fifteen Years Total
Commercial real estate$ 704,910 $ 1,337,864 $ 1,096,057 $ 123,797 $ 3,262,628 Commercial and industrial 2,634,567 295,469 178,132 - 3,108,168 Construction and land development 685,100 159,356
73,520 4,071 922,047
1-4 family residential 153,059 175,715 290,143 850,045 1,468,962
Consumer 14,052 13,559 232 19 27,862
Total $ 4,191,688 $ 1,981,963 $ 1,638,084 $ 977,932 $ 8,789,667
Fixed rate loans $ 2,251,502 $ 1,749,831 $ 1,549,344 $ 977,932 $ 6,528,609
Floating rate loans 1,940,186 232,132 88,740 - 2,261,058
Total $ 4,191,688 $ 1,981,963 $ 1,638,084 $ 977,932 $ 8,789,667
In the table above, commercial and industrial includes amounts advanced against
the warehouse lines of credit extended to PrimeLending. 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 June 30, 2022 , floating rate loans
totaling $786 million had reached their applicable rate floor and were expected
to reprice, subject to their scheduled repricing timing and frequency terms. An
additional $175 million of floating rate loans would be adjustable if published
rates increase by a sufficient amount to move past their floored levels. 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 margin loans to customers and correspondents that are due within one year. The interest rate on margin accounts is computed on the settled margin balance at a fixed rate established by management. 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$462.4 million and$733.0 million atJune 30, 2022 andDecember 31, 2021 , respectively. This decrease fromDecember 31, 2021 toJune 30, 2022 was primarily attributable to a decrease of$160.8 million , or 53%, in receivables from correspondents, and a decrease of$109.1 million , or 26%, in customer
margin accounts.
68
Table of Contents
Mortgage Origination Segment
The loan portfolio of the mortgage origination segment consists of loans held
for sale, primarily single-family residential mortgages funded through
PrimeLending, and IRLCs with customers pursuant to which we agree to originate a
mortgage loan on a future date at an agreed-upon interest rate. The components
of the mortgage origination segment's loans held for sale and IRLCs are as
follows (in thousands).
June 30, December 31,
2022 2021
Loans held for sale:
Unpaid principal balance $ 1,354,041 $ 1,728,255
Fair value adjustment 18,342 54,336
$ 1,372,383 $ 1,782,591
IRLCs:
Unpaid principal balance $ 1,404,328 $ 1,283,152
Fair value adjustment 15,061 25,489
$ 1,419,389 $ 1,308,641
The mortgage origination segment uses forward commitments to mitigate interest
rate risk associated with its loans held for sale and IRLCs. The notional
amounts of these forward commitments at June 30, 2022 and December 31, 2021 were
$2.3 billion and $2.4 billion , while the related estimated fair values were
($2.4) million and $0.4 million , respectively.
Allowance for Credit Losses on Loans
For additional information regarding the allowance for credit losses, refer to the section captioned "Critical Accounting Estimates" set forth in Part II,
Item
7 of our 2021 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, the Bank's board of
directors and the Risk Committee of the board of directors of the Company.
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
69
Table of Contents
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 adversely impacted financial markets and overall economic conditions, and may continue to have implications on borrowers across our lending portfolios. Significant judgment is required to estimate the severity and duration of the current economic uncertainties, as well as its potential impact on borrower defaults and loss severity. In particular, macroeconomic conditions and forecasts are rapidly changing and remain highly 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 ofJune 30, 2022 , we utilized a single macroeconomic alternative scenario, or S7, published by Moody's Analytics inJune 2022 . During our previous quarterly macroeconomic assessment as ofMarch 31, 2022 , we also utilized the S7 economic scenario based on our evaluation of the Moody's baseline economic forecast compared to other industry surveys over the reasonable and supportable period and our assessment of the reasonableness of impacts associated with key monetary and fiscal policy assumptions.
The following table summarizes the
As of
June 30, March 31, December 31, September 30, June 30,
2022 2022 2021 2021 2021
GDP growth rates:
Q2 2021 10.8%
Q3 2021 5.0% 6.6%
Q4 2021 6.7% 7.5% 6.9%
Q1 2022 0.7% 3.6% 4.6% 5.4%
Q2 2022 2.6% 4.7% 3.5% 2.8% 2.8%
Q3 2022 2.0% 2.4% 2.3% 1.3% 2.3%
Q4 2022 0.6% 2.6% 2.7% 1.5% 1.8%
Q1 2023 0.9% 2.9% 3.0% 2.4%
Q2 2023 1.0% 3.0% 2.4%
Q3 2023 (1.0)% 3.1%
Q4 2023 (3.0)%
Unemployment rates:
Q2 2021 5.8%
Q3 2021 5.2% 5.2%
Q4 2021 4.3% 4.5% 4.5%
Q1 2022 3.9% 4.3% 3.9% 4.0%
Q2 2022 3.6% 3.7% 4.0% 3.5% 3.7%
Q3 2022 3.5% 3.5% 3.8% 3.4% 3.6%
Q4 2022 3.6% 3.4% 3.6% 3.3% 3.5%
Q1 2023 3.6% 3.4% 3.7% 3.3%
Q2 2023 3.6% 3.3% 3.7%
Q3 2023 5.0% 3.2%
Q4 2023 6.4%
As of June 30, 2022 , our economic forecast was revised lower since March 31,
2022 . Real GDP growth decreased at an annualized rate of 1.6% during the first
quarter of 2022. Moody's also no longer expects any additional fiscal stimulus
from the Build Back Better proposal in its most recent economic forecasts. Both
of these reduced real GDP growth expectations during 2022 and the Federal
Reserve increased the federal funds rate target to 1.5% to 1.75% during the
period. Unemployment rates remained unchanged at 3.6% since March 2022 despite
recent news of several layoffs and tight labor market and supply chain
conditions. We now expect a mild recession to occur during the second half of
2023 as the Federal Reserve is expected to increase the federal funds rate to
3.5% by the third quarter of 2023 where the unemployment rate is also expected
to increase.
As of December 31, 2021 , our economic forecast improved from September 30, 2021
based on updated economic data, including November unemployment rates improving
faster than the prior quarter's forecast despite tight labor market
70
Table of Contents
conditions and accelerated rates of theFederal Reserve's taper of monthly asset purchases. We now assume theFederal Reserve continues to support a target range of the federal funds rate near 0% through monetary policy support and assume interest rates begin to rise as early as the second quarter of 2022. Real GDP growth rates were revised lower due to persistently higher inflation data and observed supply-chain impacts on business and consumer spending due to the delta variant. Given the timing of the Moody's economic forecast release in earlyDecember 2021 , the forecast utilized also assumed that COVID-19 cases peaked inJanuary 2021 , but did not assume a third wave of COVID-19 cases due to the omicron variant into the winter months. The forecast also did not consider uncertainty related to additional fiscal
support from the Build Back Better proposal, so our model results were
qualitatively adjusted to consider these recent developments as of
During the three and six months endedJune 30, 2022 , the increase in the allowance reflected a deterioratingU.S. economic outlook since the prior quarter, partially offset by decreases in specific reserves and positive risk rating grade migration. The net impact to the allowance of changes associated with individually evaluated loans during the three and six months endedJune 30, 2022 included a reversal of credit losses of$1.3 million and$1.0 million , respectively, while collectively evaluated loans included a provision for credit losses of$6.6 million and$6.4 million , respectively. The changes in the allowance for credit losses during the noted periods were primarily attributable to the Bank and also reflected other factors including, but not limited to, loan mix, changes in loan balances and qualitative factors from the prior quarter. The changes in the allowance during the three and six months endedJune 30, 2022 were also impacted by net charge-offs of$1.2 million and$1.5 million , respectively. As discussed under the section titled "Loan Portfolio" earlier in this Item 2, the Bank's actions beginning in 2020 included supporting our impacted banking clients experiencing an increased level of risk due to the COVID-19 pandemic through loan modifications. This deteriorating economic outlook resulted in a significant build in the allowance and included provision for credit losses through the second quarter of 2020. During 2021, improvement in both economic results and the macroeconomic outlook, coupled with government stimulus and positive risk rating grade migration within the Bank, resulted in aggregate reversals of a significant portion of previously recorded credit losses. During the first half of 2022, the impact of a deterioratingU.S. economic outlook and resulting impact on collectively evaluated loans has resulted in a build in the allowance. As a result, the allowance for credit losses as a percentage of our total loan portfolio, excluding margin loans in the broker-dealer segment and banking segment mortgage warehouse lending and PPP lending programs, was 1.33% as ofJune 30, 2022 , down from a high since the initial impacts of the COVID-19 pandemic of 2.63% as ofSeptember 30, 2020 . The respective distribution of the allowance for credit losses as a percentage of our total loan portfolio, excluding margin loans in the broker-dealer segment and banking segment mortgage warehouse lending and PPP lending programs, are presented in the following table (dollars in thousands). Allowance For Credit Losses Total as a % of Total Allowance Total Loans Loans Held for Credit Held For June 30, 2022 For Investment Losses Investment Commercial real estate$ 3,262,628 $ 63,719 1.95 % Commercial and industrial (1) 1,434,438 19,664 1.37 %
Construction and land development 922,047 4,996
0.54 %
1-4 family residential 1,468,962 5,554 0.38 %
Consumer 27,862 542 1.95 %
7,115,937 94,475 1.33 %
Broker-dealer 463,004 651 0.14 %
Mortgage warehouse lending 344,662 172 0.05 %
Paycheck Protection Program 7,016 - - %
$ 7,930,619 $ 95,298 1.20 %
(1) Commercial and industrial portfolio amounts reflect balances excluding
banking segment mortgage warehouse lending and PPP loans.
71
Table of Contents
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 June 30, 2022 , excluding margin loans in the broker-dealer
segment, 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 economic forecast, the upside scenario assumes consumer and
business confidence increases as new cases, hospitalizations and deaths from
COVID-19, military conflicts between Russia and Ukraine , and global supply chain
concerns recede faster than expected. Real GDP is expected to grow 6.7% in the
third quarter of 2022, 5.4% in the fourth quarter of 2022, 5.3% in the first
quarter of 2023, and 5.4% in the second quarter of 2023. Average unemployment
rates are expected to decline to 3.2% by the third quarter of 2022 and 2.9% by
the end of 2023. Inflation is expected to trend back toward the Federal
Reserve's target sooner than expected and monetary policy increases the federal
funds rate at a slower pace to 2.7% by late 2023.
Compared to our economic forecast, the downside scenario assumes consumer and
business confidence declines as new cases, hospitalizations and deaths from
COVID-19 rise, military conflict between Russia and Ukraine worsens
significantly and persists longer than anticipated, and global supply chain
issues intensify increasing inflation rates substantially. As a result, consumer
confidence and spending erode causing the economy to fall back into recession.
Real GDP is expected to decrease 1.0% in the third quarter of 2022, 6.1% in the
fourth quarter of 2022, and 1.8% in the first quarter of 2023. Average
unemployment rates are expected to increase to 6.4% by the fourth quarter of
2022 and 7.9% by the third quarter of 2023, but improves to 5.8% by year-end
2024 and reverts back to historical average rates over time. The Federal Reserve
increases the federal funds rate to 2.9% by the first quarter of 2023 to slow
inflation, but proceeds to reduce it to a near 0% target by the fourth quarter
of 2024 where it is maintained until late 2025 to support the economy.
Disagreements in Congress prevent any additional stimulus from being enacted
beyond the American Rescue Plan and Infrastructure Investment and Jobs Acts
passed in 2021.
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 $27 million or a
weighted average expected loss rate of 0.9% 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 $15 million or a
weighted average expected loss rate of 1.5% 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.
Our allowance for credit losses reflects our best estimate of current expected
credit losses, which is highly dependent on several assumptions, including the
COVID-19 pandemic continuing to recede, the Russia -Ukraine conflict and its
impact on supply chains, inflation and labor market conditions. Future allowance
for credit losses may vary considerably for these reasons.
72
Table of Contents
Allowance Activity
The following table presents 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.
Three Months Ended June 30, Six Months Ended June 30,
Loans Held for Investment 2022 2021 2022 2021
Balance, beginning of period $ 91,185 $ 144,499 $ 91,352 $ 149,044
Provision for (reversal of) credit losses 5,336 (28,720) 5,451 (33,829)
Recoveries of loans previously charged
off:
Commercial real estate 11 220 43 234
Commercial and industrial 727 701 1,634 1,134Construction and land development -
- - - 1-4 family residential 35 53 48 462 Consumer 28 69 131 145 Broker-dealer - - - - Total recoveries 801 1,043 1,856 1,975 Loans charged off: Commercial real estate - 186 - 186 Commercial and industrial 1,892 1,242 3,101 1,421
Construction and land development -
- - - 1-4 family residential 33 51 48 161 Consumer 99 74 212 153 Broker-dealer - - - - Total charge-offs 2,024 1,553 3,361 1,921 Net recoveries (charge-offs) (1,223) (510) (1,505) 54 Balance, end of period$ 95,298 $
115,269
Average total loans for the period$ 7,838,090 $ 7,725,906 $ 7,838,566 $ 7,686,116 Total loans held for investment (end of period)$ 7,930,619 $ 7,645,227 Ratios: Net recoveries (charge-offs) to average total loans held for investment (1) (0.06) % (0.03) % (0.04) % 0.00 % Non-accrual loans to total loans held for investment (end of period) 0.40 % 0.81 % Allowance for credit losses on loans held for investment to: Total loans held for investment (end of period) 1.20 % 1.51 % Non-accrual loans held for investment (end of period) 301.16 % 186.91 %
Net recoveries (charge-offs) to average total loans held for investment ratio (1) presented on a consolidated basis for all periods given relative
immateriality of resulting measure by loan portfolio segment.
Total non-accrual loans decreased by$15.4 million fromDecember 31, 2021 toJune 30, 2022 . These changes in non-accrual loans were impacted by loans secured by residential real estate within our mortgage origination segment, which were classified as loans held for sale, of$3.2 million and$2.9 million atJune 30, 2022 andDecember 31, 2021 , respectively. In addition to changes in non-accrual loans classified as loans held for sale, the decrease in non-accrual loans during 2022 was primarily due to principal paydowns associated with several commercial and industrial and single family residential loan relationships. As previously discussed in detail within this section, the allowance for credit losses has fluctuated from period to period, which impacted the resulting ratios noted in the table above. 73 Table of Contents The distribution of the allowance for credit losses among loan types and the percentage of the loans for that type to gross loans, excluding unearned income, within our loan portfolio are presented in the table below (dollars in thousands). June 30, 2022 December 31, 2021 % of % of Gross Gross Allocation of the Allowance for Credit Losses Reserve Loans Reserve Loans Commercial real estate$ 63,719 41.14 %$ 59,354 38.61 % Commercial and industrial 19,836 22.52 % 21,982 23.80 %
Construction and land development 4,996 11.63 % 4,674
11.33 %
1-4 family residential 5,554 18.52 % 4,589 16.54 %
Consumer 542 0.35 % 578 0.41 %
Broker-dealer 651 5.84 % 175 9.31 %
Total $ 95,298 100.00 % $ 91,352 100.00 %
The following table summarizes historical levels of the allowance for credit
losses on loans held for investment, distributed by portfolio segment (in
thousands).
June 30, March 31, December 31, September 31, June 30,
2022 2022 2021 2021 2021
Commercial real estate $ 63,719 $ 60,361 $ 59,354 $ 68,535 $ 77,633
Commercial and industrial 19,836 20,130 21,982 30,545 27,866
Construction and land development 4,996 5,515 4,674 5,100 5,185
1-4 family residential 5,554 4,340 4,589 4,538 3,659
Consumer 542 499 578 504 592
Broker-dealer 651 340 175 290 334
$ 95,298 $ 91,185 $ 91,352 $ 109,512 $ 115,269
Unfunded Loan Commitments
In order to estimate the allowance for credit losses on unfunded loan
commitments, the Bank uses a process similar to that used in estimating the
allowance for credit losses on the funded portion. The allowance is based on the
estimated exposure at default, multiplied by the lifetime probability of default
grade and loss given default grade for that particular loan segment. The Bank
estimates expected losses by calculating a commitment usage factor based on
industry usage factors. The commitment usage factor is applied over the relevant
contractual period. Loss factors from the underlying loans to which commitments
are related are applied to the results of the usage calculation to estimate any
liability for credit losses related for each loan type. The expected losses on
unfunded commitments align with statistically calculated parameters used to
calculate the allowance for credit losses on the funded portion. Letters of
credit are not currently reserved because they are issued primarily as credit
enhancements and the likelihood of funding is low.
Changes in the allowance for credit losses for loans with off-balance sheet credit exposures are shown below (in thousands).
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Balance, beginning of period $ 6,487 $ 8,807 $ 5,880 $ 8,388
Other noninterest expense 444 (826) 1,051 (407)
Balance, end of period $ 6,931 $ 7,981 $ 6,931 $ 7,981
During the three and six months ended June 30, 2022 the increases in the reserve
for unfunded commitments were primarily due to increases in both loan expected
loss rates and available commitment balances.
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
74
Table of Contents
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 one credit relationship totaling$0.1 million of potential problem loans atJune 30, 2022 , compared with two credit relationships totaling$3.1 million of potential problem loans atDecember 31, 2021 .
Non-Performing Assets
In response to the COVID-19 pandemic, the CARES Act was passed inMarch 2020 , which among other things, allowed the Bank to suspend the TDR requirements for certain loan modifications to be categorized as a TDR. Subsequent legislation extended such provisions throughJanuary 1, 2022 . Starting inMarch 2020 , the Bank implemented several actions to better support our impacted banking clients and allow for loan modifications such as principal and/or interest payment deferrals, participation in the PPP as an SBA preferred lender and personal banking assistance including waived fees, increased daily spending limits and suspension of residential foreclosure activities. The COVID-19 payment deferment programs allowed for a deferral of principal and/or interest payments with such deferred principal payments due and payable on the maturity date of the existing loan. The following table presents components of our non-performing assets (dollars in thousands). June 30, December 31, 2022 2021 Variance Loans accounted for on a non-accrual basis: Commercial real estate$ 4,947 $ 6,601 $ (1,654) Commercial and industrial 13,315 22,478
(9,163)
Construction and land development 1 2
(1)
1-4 family residential 16,542 21,123 (4,581)
Consumer 19 23 (4)
Broker-dealer - - -
$ 34,824 $ 50,227 $ (15,403)
Troubled debt restructurings included in
accruing loans held for investment 857 922 (65)
Non-performing loans$ 35,681 $ 51,149
Non-performing loans as a percentage of total loans 0.38 % 0.52 % (0.14) % Other real estate owned$ 1,516 $ 2,833 $ (1,317) Other repossessed assets $ - $ - $ - Non-performing assets$ 37,197 $ 53,982 $ (16,785) Non-performing assets as a percentage of total assets 0.22 % 0.29 %
(0.07) %
Loans past due 90 days or more and still accruing$ 82,410 $ 60,775
AtJune 30, 2022 , non-accrual loans included 39 commercial and industrial relationships with loans secured by accounts receivable, equipment and notes receivable. Non-accrual loans atJune 30, 2022 also included$3.2 million of loans secured by residential real estate which were classified as loans held for sale. AtDecember 31, 2021 , non-accrual loans included 45 commercial and industrial relationships with loans secured by accounts receivable, life insurance, oil and gas, livestock and equipment. Non-accrual loans atDecember 31, 2021 also included$2.9 million of loans secured by residential real estate which were classified as loans held for sale. AtJune 30, 2022 , TDRs were comprised of$0.9 million of loans that are considered to be performing and accruing, and$7.6 million of loans considered to be non-performing reported in non-accrual loans. AtDecember 31, 2021 , TDRs were comprised of$0.9 million of loans that are considered to be performing and accruing, and$5.9 million of loans that were considered to be non-performing reported in non-accrual loans. OREO decreased fromDecember 31, 2021 toJune 30, 2022 , primarily due to disposals and valuation adjustments totaling$1.5 million , partially offset by additions totaling$0.2 million . At bothJune 30, 2022 andDecember 31, 2021 , OREO was primarily comprised of commercial properties. 75
Table of Contents
Loans past due 90 days or more and still accruing atJune 30, 2022 andDecember 31, 2021 , were primarily comprised of loans held for sale and guaranteed byU.S. government agencies, including GNMA related loans subject to repurchase within our mortgage origination segment. As ofJune 30, 2022 ,$36.1 million of loans subject to repurchase were under a forbearance agreement resulting from the COVID-19 pandemic. DuringMay 2020 , GNMA announced that it would temporarily exclude any new GNMA lender delinquencies, occurring on or afterApril 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 theirApril 2020 investor accounting report. The mortgage origination segment qualified for this exclusion as ofJune 30, 2022 . As ofJune 30, 2022 ,$36.1 million of loans subject to repurchase under a forbearance agreement had delinquencies on or afterApril 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 titled "Liquidity and Capital Resources - Banking Segment" below, is constantly changing due to the banking segment's needs and market conditions. In an effort to assist its customers avoid overdraft-related fees, our banking segment plans to implement certain fee enhancements during the fourth quarter of 2022. Such fee enhancements are not expected to have a material impact on its overall operating results.
The table below presents the average balance of, and rate paid on, consolidated deposits (dollars in thousands).
Six Months Ended June 30,
2022 2021
Average Average Average Average
Balance Rate Paid Balance Rate Paid
Noninterest-bearing demand deposits $ 4,530,166 0.00 % $ 3,911,205 0.00 %
Interest-bearing demand deposits 6,698,325 0.22 % 5,829,890 0.22 %
Savings deposits 344,009 0.05 % 279,481 0.07 %
Time deposits 941,768 0.47 % 1,574,263 0.97 %
$ 12,514,268 0.16 % $ 11,594,839 0.24 %
The following table presents the scheduled maturities of uninsured deposits
greater than
Months to maturity: 3 months or less$ 80,368 3 months to 6 months 121,283 6 months to 12 months 94,018 Over 12 months 109,625$ 405,294 Borrowings Our consolidated borrowings are shown in the table below (dollars in thousands). June 30, 2022 December 31, 2021 Average Average Balance Rate Paid Balance Rate Paid Variance Short-term borrowings$ 822,649 1.13 %$ 859,444 1.22 %$ (36,795) Notes payable 389,722 4.46 % 387,904 5.79 % 1,818 Junior subordinated debentures - - %
- 3.45 % -
$ 1,212,371 2.10 % $ 1,247,348 1.32 % $ (34,977) Short-term borrowings consisted of federal funds purchased, securities sold under agreements to repurchase, borrowings at theFederal Home Loan Bank ("FHLB"), short-term bank loans and commercial paper. The decrease in short-term borrowings atJune 30, 2022 , compared withDecember 31, 2021 , primarily included decreases in short-term bank loans 76
Table of Contents
and commercial paper within the broker-dealer segment, partially offset by an increase in federal funds purchased by the banking segment. Notes payable atJune 30, 2022 was comprised of$149.2 million related to the Senior Notes, net of loan origination fees, Subordinated Notes, net of origination fees, of$197.2 million and mortgage origination segment borrowings of$43.3 million . As discussed in more detail within the section titled "Liquidity and Capital Resources - Junior Subordinated Debentures" below, during the third quarter of 2021, PCC fully redeemed all outstanding Debentures.
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. AtJune 30, 2022 , Hilltop had$137.6 million in cash and cash equivalents, a decrease of$230.3 million from$367.9 million atDecember 31, 2021 . This decrease in cash and cash equivalents was primarily due to cash outflows of$442.3 million in stock repurchases related to the tender offer,$23.8 million in cash dividends declared and other general corporate expenses, partially offset by the receipt of$265.7 million of dividends from subsidiaries. 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
The COVID-19 pandemic has adversely impacted financial markets and overall economic conditions, and may continue to have implications on our business and operations. The extent of the impact of the pandemic on our operational and financial performance for the remainder of 2022 is currently uncertain and will depend on certain developments outside of our control, including, among others, the ongoing distribution and effectiveness of vaccines, emergence of new variants of the virus, government stimulus, the ultimate impact of the pandemic on our customers and clients, and additional, or extended, federal, state and local government orders and regulations that might be imposed in response to the pandemic. Dividend Declaration
OnJuly 21, 2022 , our board of directors declared a quarterly cash dividend of$0.15 per common share, payable onAugust 26, 2022 to all common stockholders of record as of the close of business onAugust 12, 2022 . 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
InJanuary 2022 , our board of directors authorized a new stock repurchase program throughJanuary 2023 , pursuant to which we were originally authorized to repurchase, in the aggregate, up to$100.0 million of our outstanding common stock, inclusive of repurchases to offset dilution related to grants of stock-based compensation.
Tender Offer
OnMay 2, 2022 , 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$400 million , inclusive of the aforementioned stock repurchase program. OnMay 27, 2022 , including the exercise of our right to purchase up to an additional 2% of our outstanding shares, we completed our tender offer, repurchasing 14,868,469 shares of outstanding common stock at a price of$29.75 per share for a total of$442.3 million , excluding fees and expenses. We funded the tender offer with cash on hand. As a result of share repurchases during 2022, we have no further available share repurchase capacity associated with our previously authorized stock repurchase program. 77 Table of Contents Senior Notes due 2025 The Senior Notes bear interest at a rate of 5% per year, payable semi-annually in arrears in cash onApril 15 andOctober 15 of each year, commencing onOctober 15, 2015 . The Senior Notes will mature onApril 15, 2025 , unless we redeem the Senior Notes, in whole at any time or in part from time to time, on or afterJanuary 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. AtJune 30, 2022 ,$150.0 million of our Senior Notes was outstanding.
Subordinated Notes due 2030 and 2035
OnMay 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 . The 2030 Subordinated Notes and the 2035 Subordinated Notes will mature onMay 15, 2030 andMay 15, 2035 , respectively. We may redeem the Subordinated Notes, in whole or in part, from time to time, subject to obtainingFederal Reserve approval, beginning with the interest payment date ofMay 15, 2025 for the 2030 Subordinated Notes and beginning with the interest payment date ofMay 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 onNovember 15, 2020 . The interest rate for the 2030 Subordinated Notes will reset quarterly beginningMay 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 onNovember 15, 2020 . The interest rate for the 2035 Subordinated Notes will reset quarterly beginningMay 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. AtJune 30, 2022 ,$200.0 million of our Subordinated Notes was outstanding.
Junior Subordinated Debentures
Following receipt of regulatory approval, during June, July andAugust 2021 , PCC submitted to the trustees of each of the statutory trusts a notice to redeem in full outstanding Debentures of$67.0 million issued by PCC, which resulted in the full redemption to the holders of the associated preferred securities and common securities during the third quarter of 2021. The Debentures, which were held by four statutory trusts created for the sole purpose of issuing and selling preferred securities and common securities used to acquire the Debentures, had an original stated term of 30 years with original maturities ranging fromJuly 2031 toFebruary 2038 . The Debentures were callable at PCC's discretion with a minimum of a 45- to 60- day notice. AtJune 30, 2022 , PCC had no remaining borrowings associated with the Debentures. The redemptions noted above were funded from available cash balances held at PCC.
We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material adverse effect on our financial condition and results of operations. Under capital adequacy and regulatory requirements, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
In order to avoid limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary bonus payments to executive officers, Basel III requires banking organizations to maintain a capital conservation buffer above minimum risk-based capital requirements measured relative to risk-weighted assets.
78
Table of Contents
The following table showsPlainsCapital'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 atJune 30, 2022 (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 ofJune 30, 2022 reflectPlainsCapital's and Hilltop's decision to elect the transition option as issued by the federal banking regulatory agencies inMarch 2020 that permits banking institutions to mitigate the estimated cumulative regulatory capital effects from CECL over a five-year transitionary period. Minimum Capital Requirements Including Conservation To Be Well June 30, 2022 Buffer Capitalized Amount Ratio Ratio Ratio Tier 1 capital (to average assets): PlainsCapital$ 1,406,640 9.67 % 4.0 % 5.0 % Hilltop 1,853,729 10.53 % 4.0 % N/A Common equity Tier 1 capital (to risk-weighted assets): PlainsCapital 1,406,640 14.65 % 7.0 % 6.5 % Hilltop 1,853,729 17.24 % 7.0 % N/A Tier 1 capital (to risk-weighted assets): PlainsCapital 1,406,640 14.65 % 8.5 % 8.0 % Hilltop 1,853,729 17.24 % 8.5 % N/A Total capital (to risk-weighted assets): PlainsCapital 1,492,639 15.55 % 10.5 % 10.0 % Hilltop 2,139,683 19.90 % 10.5 % N/A
We discuss regulatory capital requirements in more detail in Note 16 to our
consolidated financial statements, as well as under the caption "Government
Supervision and Regulation - Corporate - Capital Adequacy Requirements and
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 theFederal 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. Given the continued strong cash and liquidity levels at the Bank, the Bank's borrowing capacity available liquidity position and access to secured funding sources continues to be at a heightened level as summarized in the following table (in millions). June 30, December 31, 2022 2021 FHLB capacity$ 4,146 $ 4,221 Investment portfolio (available) 1,567 1,478
Fed deposits (excess daily requirements) 1,602 2,686
$ 7,315 $ 8,385 79 Table of Contents As noted in the table above, the Bank's available liquidity position and borrowing capacity atJune 30, 2022 continues to be at a heightened level. The Bank is targeting available liquidity of between approximately$5 billion and$6 billion during the remainder of 2022 given general economic uncertainties. Available liquidity does not include borrowing capacity available through the discount window at theFederal 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. 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, excludingHilltop and Hilltop Securities , collectively accounted for 10.86% of the Bank's total deposits, and the Bank's five largest depositors, excludingHilltop and Hilltop Securities , collectively accounted for 6.01% of the Bank's total deposits atJune 30, 2022 . The loss of one or more of our largest Bank customers, or a significant decline in our deposit balances due to ordinary course fluctuations related to these customers' businesses, could adversely affect our liquidity and might require us to raise deposit rates to attract new deposits, purchase federal funds or borrow funds on a short-term basis to replace such deposits.
Broker-Dealer Segment
The Hilltop Broker-Dealers 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. AtJune 30, 2022 ,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 . AtJune 30, 2022 ,Hilltop Securities had no borrowings under its credit arrangements or its credit facilities.Hilltop Securities uses the net proceeds (after deducting related issuance expenses) from the sale of two commercial paper programs 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. As ofJune 30, 2022 , the weighted average maturity of the CP Notes was 160 days at a rate of 1.80% with a weighted average remaining life of 70 days. AtJune 30, 2022 , the aggregate amount outstanding under these secured arrangements was 289.1 million, which was collateralized by securities held for firm accounts valued at$315.3 million .
Mortgage Origination Segment
PrimeLending funds the mortgage loans it originates through a warehouse line of credit maintained with the Bank, which has an aggregate commitment of$2.7 billion , of which$1.3 billion was drawn atJune 30, 2022 . 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 drawn atJune 30, 2022 . PrimeLending owns a 100% membership interest inPrimeLending Ventures Management, LLC ("Ventures Management") which holds an ownership interest in and is the managing member of certain ABAs. AtJune 30, 2022 , these ABAs had combined available lines of credit totaling$215.0 million ,$80.0 million of which was with a single unaffiliated bank, and the remaining$135.0 million of which was with the Bank. AtJune 30, 2022 , Ventures Management had outstanding borrowings of$84.0 million ,$40.7 million of which was with the Bank. 80
Table of Contents
Other Material Contractual Obligations, Off-Balance Sheet Arrangements, Commitments and Guarantees
SinceDecember 31, 2021 , there have been no material changes in other material contractual obligations disclosed within the section captioned "Other Material Contractual Obligations, Off-Balance Sheet Arrangements, Commitments and Guarantees" set forth in Part II, Item 7 of our 2021 Form 10-K.
Additionally, 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.
In the aggregate, the Bank had outstanding unused commitments to extend credit
of
Broker-Dealer Segment
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.
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. Historically, 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 theU.S. government, its agencies and various other governmental regulatory authorities.
Critical Accounting Estimates
We have identified certain accounting estimates which involve a significant
level of estimation uncertainty and have had or are reasonably likely to have a
material impact on our financial condition or results of operations. Our
accounting policies are more fully described in Note 1 to the 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 critical accounting estimates,
as summarized below, which we
81
Table of Contents
believe to be the most critical in preparing our consolidated financial
statements relate to allowance for credit losses, mortgage servicing rights
asset, goodwill and identifiable intangible assets, mortgage loan
indemnification liability and acquisition accounting. Since December 31, 2021 ,
there have been no changes in critical accounting estimates as further described
under "Critical Accounting Estimates" in our 2021 Form 10-K.
© Edgar Online, source
