Hilltop Holdings(HTH) - 2024 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION This section provides the unaudited consolidated financial information for Hilltop Holdings Inc. for the quarter ended June 30, 2024, including financial statements and management's discussion and analysis Item 1. Financial Statements This section presents Hilltop Holdings Inc.'s unaudited consolidated financial statements for the quarter ended June 30, 2024, detailing assets, liabilities, equity, revenues, expenses, and cash flows Consolidated Balance Sheets The Consolidated Balance Sheets provide a snapshot of the company's financial position at June 30, 2024, compared to December 31, 2023, showing a decrease in total assets and liabilities, while stockholders' equity slightly increased Consolidated Balance Sheets (in thousands) | Metric | June 30, 2024 (in thousands) | December 31, 2023 (in thousands) | | :---------------------- | :--------------------------- | :------------------------------- | | Total Assets | $15,620,490 | $16,466,996 | | Total Liabilities | $13,457,879 | $14,316,667 | | Total Stockholders' Equity | $2,162,611 | $2,150,329 | | Cash and due from banks | $798,300 | $1,858,700 | | Total Deposits | $10,373,856 | $11,063,192 | - Total assets decreased by $846.5 million from December 31, 2023, to June 30, 2024, primarily driven by a significant reduction in cash and due from banks[4] - Total deposits decreased by $689.3 million, with noninterest-bearing deposits seeing a larger proportional decline[4] Consolidated Statements of Operations The Consolidated Statements of Operations detail the company's financial performance for the three and six months ended June 30, 2024 and 2023, showing an increase in net income for both periods despite a decline in net interest income Consolidated Statements of Operations (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Interest Income | $207,143 | $213,426 | $416,757 | $404,853 | | Total Interest Expense | $103,493 | $95,160 | $209,486 | $164,882 | | Net Interest Income | $103,650 | $118,266 | $207,271 | $239,971 | | Provision for Credit Losses | $10,934 | $14,836 | $8,063 | $17,167 | | Total Noninterest Income | $193,305 | $190,652 | $374,923 | $353,146 | | Total Noninterest Expense | $256,464 | $266,977 | $506,487 | $517,447 | | Income Before Income Taxes | $29,557 | $27,105 | $67,644 | $58,503 | | Net Income | $22,899 | $19,938 | $52,421 | $47,706 | | Income Attributable to Hilltop | $20,333 | $18,133 | $48,001 | $43,933 | | Basic EPS | $0.31 | $0.28 | $0.74 | $0.68 | | Diluted EPS | $0.31 | $0.28 | $0.74 | $0.68 | - Net interest income decreased by 12.36% for the three months ended June 30, 2024, and by 13.63% for the six months ended June 30, 2024, compared to the same periods in 2023, primarily due to higher interest expense on deposits[6] - Net income increased by 14.85% for the three months ended June 30, 2024, and by 9.88% for the six months ended June 30, 2024, driven by lower provision for credit losses and increased noninterest income[6] Consolidated Statements of Comprehensive Income The Consolidated Statements of Comprehensive Income show the total comprehensive income for the three and six months ended June 30, 2024 and 2023, including net income and other comprehensive income (loss) components Consolidated Statements of Comprehensive Income (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :-------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Income | $22,899 | $19,938 | $52,421 | $47,706 | | Other comprehensive income (loss): | | | | | | Change in fair value of cash flow hedges, net taxes | $(1,583) | $3,386 | $(1,042) | $137 | | Net unrealized gains (losses) on AFS securities, net taxes | $692 | $(11,097) | $606 | $(1,234) | | Reclassification adjustment for gains (losses) included in net income, net taxes | — | $6 | $114 | $6 | | Amortization of unrealized losses on HTM securities, net taxes | $1,326 | $1,447 | $2,656 | $2,904 | | Comprehensive income | $23,334 | $13,680 | $54,755 | $49,519 | | Comprehensive income applicable to Hilltop | $20,768 | $11,875 | $50,335 | $45,746 | - Comprehensive income applicable to Hilltop increased by 74.89% for the three months ended June 30, 2024, and by 10.03% for the six months ended June 30, 2024, primarily due to improved net income and reduced unrealized losses on available-for-sale securities[7] Consolidated Statements of Stockholders' Equity The Consolidated Statements of Stockholders' Equity detail changes in equity components for Hilltop Holdings Inc., including net income, other comprehensive income, stock-based compensation, dividends, and stock repurchases Consolidated Statements of Stockholders' Equity (in thousands) | Metric (in thousands) | Balance, March 31, 2024 | Net Income | Other Comprehensive Income | Stock-based Compensation Expense | Common Stock Issued to Board Members | Issuance of Common Stock Related to Share-based Awards, Net | Repurchases of Common Stock | Dividends on Common Stock | Deferred Compensation Plan | Net Cash Distributed to Noncontrolling Interest | Balance, June 30, 2024 | | :-------------------------------------------------- | :---------------------- | :--------- | :------------------------- | :------------------------------- | :----------------------------------- | :---------------------------------------------------------- | :-------------------------- | :------------------------ | :------------------------- | :---------------------------------------------- | :--------------------- | | Common Stock Amount | $653 | — | — | — | — | — | $(3) | — | — | — | $650 | | Additional Paid-in Capital | $1,049,831 | — | — | $2,725 | $121 | $(18) | $(5,136) | — | — | — | $1,047,523 | | Accumulated Other Comprehensive Loss | $(119,606) | — | $435 | — | — | — | — | — | — | — | $(119,171) | | Retained Earnings | $1,201,013 | $20,333 | — | — | — | — | $(4,784) | $(11,095) | — | — | $1,205,467 | | Total Hilltop Stockholders' Equity | $2,131,864 | $20,333 | $435 | $2,725 | $121 | $(18) | $(9,923) | $(11,095) | $27 | $(1,990) | $2,134,469 | | Noncontrolling Interests | $27,566 | $2,566 | — | — | — | — | — | — | — | $(1,990) | $28,142 | | Total Stockholders' Equity | $2,159,430 | $22,899 | $435 | $2,725 | $121 | $(18) | $(9,923) | $(11,095) | $27 | $(3,980) | $2,162,611 | - Total Hilltop stockholders' equity increased by $2.6 million from March 31, 2024, to June 30, 2024, primarily driven by net income and stock-based compensation, partially offset by stock repurchases and dividends[12][15] - Dividends on common stock for the three months ended June 30, 2024, totaled $11.095 million ($0.17 per share), an increase from $10.410 million ($0.16 per share) in the prior year period[12] Consolidated Statements of Cash Flows The Consolidated Statements of Cash Flows present cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2024 and 2023, showing a significant net decrease in cash in 2024 Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :-------------------------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(364,459) | $(323,621) | | Net cash provided by (used in) investing activities | $29,497 | $(192,718) | | Net cash provided by (used in) financing activities | $(726,787) | $504,510 | | Net change in cash, cash equivalents and restricted cash | $(1,061,749) | $(11,829) | | Cash, cash equivalents and restricted cash, end of period | $854,996 | $1,636,070 | - Net cash used in operating activities increased by $40.8 million, or 12.6%, for the six months ended June 30, 2024, compared to the same period in 2023[16] - Investing activities shifted from a net cash outflow of $192.7 million in 2023 to a net cash inflow of $29.5 million in 2024, primarily due to changes in loans held for investment and proceeds from sales of securities[16] - Financing activities experienced a significant reversal, moving from a net cash inflow of $504.5 million in 2023 to a net cash outflow of $726.8 million in 2024, largely driven by a substantial net change in deposits[16] Notes to Consolidated Financial Statements The Notes to Consolidated Financial Statements provide detailed disclosures on accounting policies, financial instruments, credit risk, and other significant financial information, offering context to the primary financial statements 1. Summary of Significant Accounting and Reporting Policies This note outlines Hilltop Holdings Inc.'s nature of operations, primary business units, and the basis of presentation for its unaudited consolidated financial statements, emphasizing GAAP and SEC conformity - Hilltop Holdings Inc. operates as a financial holding company, providing business and consumer banking services through PlainsCapital Bank, and financial products/services through its broker-dealer and mortgage origination subsidiaries[18][19] - The company corrected an immaterial error in noninterest income classification for prior periods (three and six months ended June 30, 2023), which had no impact on net income, EPS, or regulatory capital ratios[26] Noninterest Income (in thousands) | Noninterest Income (in thousands) | As Previously Reported (3 Months) | Impact of Revision (3 Months) | As Adjusted (3 Months) | As Previously Reported (6 Months) | Impact of Revision (6 Months) | As Adjusted (6 Months) | | :-------------------------------- | :-------------------------------- | :---------------------------- | :--------------------- | :-------------------------------- | :---------------------------- | :--------------------- | | Securities commission and fees | $29,606 | $(5,251) | $24,355 | $60,829 | $(10,541) | $50,288 | | Other | $39,034 | $5,251 | $44,285 | $74,714 | $10,541 | $85,255 | 2. Recently Issued Accounting Standards This note discusses recently issued FASB Accounting Standards Updates (ASUs) not yet adopted, generally not expecting a material impact on financial statements, except for enhanced segment disclosures - ASU 2023-05 (Joint Ventures) is effective for formations after January 1, 2025; no material impact expected[30] - ASU 2023-06 (Disclosure & Presentation) will align FASB with SEC regulations; no material impact expected as the company is already subject to SEC requirements[31] - ASU 2023-07 (Segment Profitability) will enhance disclosures of significant expense and segment profitability categories, effective for annual periods after December 15, 2023. Adoption is expected in the 2024 Form 10-K[32] - ASU 2023-09 (Income Tax Disclosures) will improve transparency in income tax disclosures, effective for annual periods after December 15, 2024; impact on financial condition or results of operations is not expected[33] 3. Fair Value Measurements This note details the company's fair value measurement practices, adhering to the Fair Value Topic of the ASC, and summarizes financial assets and liabilities measured at fair value on a recurring basis - The company applies the Fair Value Option to substantially all PrimeLending's mortgage loans held for sale and the MSR asset to reduce earnings volatility[38] Financial Instrument (in thousands) | Financial Instrument (in thousands) | June 30, 2024 Total Fair Value | December 31, 2023 Total Fair Value | | :---------------------------------- | :----------------------------- | :------------------------------- | | Trading securities | $721,384 | $515,991 | | Available for sale securities | $1,433,107 | $1,507,595 | | Loans held for sale | $1,138,549 | $822,194 | | MSR asset | $52,902 | $96,662 | | Securities sold, not yet purchased | $75,546 | $34,872 | - Loans held for sale measured at fair value increased from $822.2 million at December 31, 2023, to $1.14 billion at June 30, 2024[38] - The MSR asset, measured at fair value using Level 3 inputs, decreased from $96.662 million at December 31, 2023, to $52.902 million at June 30, 2024[40] 4. Securities This note provides a detailed breakdown of the company's securities portfolio, including trading, available-for-sale, and held-to-maturity securities, categorized by type and fair value Security Type (in thousands) | Security Type (in thousands) | June 30, 2024 Fair Value | December 31, 2023 Fair Value | | :--------------------------- | :----------------------- | :--------------------------- | | Trading securities | $721,384 | $515,991 | | Available for sale securities | $1,433,107 | $1,507,595 | | Held to maturity securities | $777,456 | $812,677 | | Equity securities | $254 | $321 | | Total Securities Portfolio | $2,932,201 | $2,836,584 | - Trading securities increased by $205.393 million (39.8%) from December 31, 2023, to June 30, 2024, primarily in collateralized mortgage obligations and states and political subdivisions[294] - Available for sale securities decreased by $74.488 million (4.9%) from December 31, 2023, to June 30, 2024[294] - The company held net unrealized losses of $112.9 million on available-for-sale securities and $90.3 million on held-to-maturity securities at June 30, 2024[295] 5. Loans Held for Investment This note provides a detailed breakdown of the company's loans held for investment, categorized by portfolio segment, and includes an analysis of past due and nonaccrual loans Loan Type (in thousands) | Loan Type (in thousands) | June 30, 2024 | December 31, 2023 | | :------------------------------------ | :------------ | :---------------- | | Commercial real estate: Non-owner occupied | $2,001,338 | $1,889,882 | | Commercial real estate: Owner occupied | $1,475,218 | $1,422,234 | | Commercial and industrial | $1,687,502 | $1,607,833 | | Construction and land development | $858,185 | $1,031,095 | | 1-4 family residential | $1,775,571 | $1,757,178 | | Consumer | $27,291 | $27,351 | | Broker-dealer | $348,415 | $344,172 | | Total Loans Held for Investment, Gross | $8,173,520 | $8,079,745 | | Allowance for Credit Losses | $(115,082) | $(111,413) | | Total Loans Held for Investment, Net | $8,058,438 | $7,968,332 | - Total loans held for investment, net, increased by $90.106 million (1.13%) from December 31, 2023, to June 30, 2024[66] Loan Status (in thousands) | Loan Status (in thousands) | June 30, 2024 | December 31, 2023 | | :------------------------- | :------------ | :---------------- | | Total Past Due Loans | $24,218 | $40,702 | | Non-accrual Loans | $101,605 | $64,337 | - Non-accrual loans increased by $37.268 million (57.9%) from December 31, 2023, to June 30, 2024, primarily due to increases in commercial and industrial loans ($71.3 million), partially offset by decreases in commercial real estate non-owner occupied loans ($29.5 million)[71] 6. Allowance for Credit Losses This note details the company's methodology for estimating the allowance for credit losses (ACL) for loans and unfunded commitments, adhering to the CECL standard and using Moody's Analytics' S7 scenario - The company uses Moody's Analytics' S7 macroeconomic scenario (June 2024) for its CECL model, which assumes persistent inflation, elevated interest rates, and a recession in Q2 2025[86] Allowance for Credit Losses (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2024 | | :-------------------------------------------------- | :------------------------------- | :----------------------------- | | Balance, Beginning of Period | $104,231 | $111,413 | | Provision for Credit Losses | $10,934 | $8,063 | | Loans Charged Off | $(681) | $(5,392) | | Recoveries on Charged Off Loans | $598 | $998 | | Balance, End of Period | $115,082 | $115,082 | - For the three months ended June 30, 2024, the provision for credit losses was $10.934 million, reflecting a build in the allowance due to specific reserves and loan portfolio changes, partially offset by improvements in the U.S. economic outlook[88] - The allowance for credit losses for unfunded loan commitments increased to $8.585 million at June 30, 2024, from $8.296 million at the beginning of the period, primarily due to an increase in expected loss rates[93][344] 7. Mortgage Servicing Rights This note provides an overview of the company's Mortgage Servicing Rights (MSR) asset, including fair value changes, key valuation assumptions, and a sensitivity analysis Mortgage Servicing Rights (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :----------------------------- | | Balance, Beginning of Period | $95,591 | $96,662 | | Additions | $2,778 | $6,089 | | Sales | $(45,129) | $(45,129) | | Changes in fair value: Due to changes in model inputs or assumptions | $986 | $(2,008) | | Changes in fair value: Due to customer payoffs | $(1,324) | $(2,712) | | Balance, End of Period | $52,902 | $52,902 | - The MSR asset decreased significantly from $96.662 million at the beginning of the six-month period to $52.902 million at June 30, 2024, primarily due to sales of MSR assets totaling $45.129 million[94] Key Assumption | Key Assumption | June 30, 2024 | December 31, 2023 | | :-------------------------------- | :------------ | :---------------- | | Weighted average constant prepayment rate | 8.69% | 8.65% | | Weighted average discount rate | 13.93% | 11.67% | | Weighted average life (in years) | 8.2 | 8.2 | Sensitivity Analysis (in thousands) | Sensitivity Analysis (in thousands) | June 30, 2024 | December 31, 2023 | | :---------------------------------- | :------------ | :---------------- | | Impact of 10% adverse change in constant prepayment rate | $(1,782) | $(3,511) | | Impact of 10% adverse change in discount rate | $(2,741) | $(4,474) | 8. Deposits This note summarizes the company's deposit base, categorized by noninterest-bearing and interest-bearing accounts, and details remaining maturities of uninsured time deposits, highlighting a decrease in total deposits Deposit Type (in thousands) | Deposit Type (in thousands) | June 30, 2024 | December 31, 2023 | | :-------------------------------- | :------------ | :---------------- | | Noninterest-bearing demand | $2,845,441 | $3,007,101 | | Interest-bearing: Demand accounts | $3,932,560 | $4,496,682 | | Interest-bearing: Money market | $2,145,639 | $1,869,809 | | Interest-bearing: Savings | $232,048 | $259,745 | | Interest-bearing: Time | $1,203,068 | $1,221,935 | | Total Deposits | $10,373,856 | $11,063,192 | - Total deposits decreased by $689.336 million (6.23%) from December 31, 2023, to June 30, 2024[100] - Noninterest-bearing demand deposits decreased by $161.660 million (5.38%)[100] - At June 30, 2024, remaining maturities of estimated uninsured time deposits greater than $250,000 totaled $554.5 million[100] 9. Short-term Borrowings This note details the company's short-term borrowings, including federal funds purchased, securities sold under repurchase agreements, and commercial paper, providing balances and average interest rates Short-term Borrowing Type (in thousands) | Short-term Borrowing Type (in thousands) | June 30, 2024 | December 31, 2023 | | :--------------------------------------- | :------------ | :---------------- | | Federal funds purchased | $417,508 | $459,658 | | Securities sold under agreements to repurchase | $255,861 | $240,050 | | Commercial paper | $224,244 | $200,330 | | Total Short-term Borrowings | $897,613 | $900,038 | - Total short-term borrowings slightly decreased by $2.425 million (0.27%) from December 31, 2023, to June 30, 2024[102] - Commercial paper outstanding increased by $23.914 million (11.94%) to $224.244 million at June 30, 2024, with a weighted average maturity of 148 days at a rate of 6.13%[107] Average Balance and Rate of Federal Funds Purchased and Securities Sold Under Agreements to Repurchase (in thousands) | Metric | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :-------------------------------------- | :----------------------------- | :----------------------------- | | Average balance of federal funds purchased and securities sold under agreements to repurchase | $729,891 | $768,514 | | Average interest rate during the period | 5.50% | 5.16% | 10. Notes Payable This note details the company's notes payable, including Senior Notes due April 2025 and Subordinated Notes due May 2030 and May 2035, presented net of discount Note Type (in thousands) | Note Type (in thousands) | June 30, 2024 | December 31, 2023 | | :------------------------------------ | :------------ | :---------------- | | Senior Notes due April 2025, net | $149,600 | $149,498 | | Subordinated Notes due May 2030, net | $49,542 | $49,489 | | Subordinated Notes due May 2035, net | $148,260 | $148,158 | | Total Notes Payable | $347,402 | $347,145 | - Total notes payable slightly increased by $0.257 million (0.07%) from December 31, 2023, to June 30, 2024[109] 11. Leases This note provides supplemental information on the company's finance and operating leases, including balance sheet components, lease costs, cash flow impacts, and future minimum lease payments Lease Cost (in thousands) | Lease Cost (in thousands) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net operating lease cost | $7,753 | $8,337 | $15,633 | $16,433 | | Total finance lease cost | $237 | $255 | $480 | $515 | Cash Flow (in thousands) | Cash Flow (in thousands) | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Operating cash flows from operating leases | $17,262 | $19,150 | | Operating cash flows from finance leases | $188 | $222 | | Financing cash flows from finance leases | $462 | $409 | Weighted Average Lease Term and Discount Rate | Lease Classification | June 30, 2024 Weighted Average Remaining Lease Term (Years) | June 30, 2024 Weighted Average Discount Rate | | :------------------- | :--------------------------------------------------------- | :------------------------------------------- | | Operating | 5.5 | 5.45% | | Finance | 3.0 | 5.06% | Future Minimum Lease Payments (in thousands) | Future Minimum Lease Payments (in thousands) | Operating Leases | Finance Leases | | :------------------------------------------- | :--------------- | :------------- | | Total minimum lease payments | $131,633 | $2,808 | | Less amount representing interest | $(18,537) | $(725) | | Lease liabilities | $113,096 | $2,083 | 12. Income Taxes This note outlines the company's income tax provision calculation based on an estimated annual effective rate, explaining factors influencing these rates for the periods ended June 30, 2024 and 2023 Effective Tax Rate | Period | Effective Tax Rate (2024) | Effective Tax Rate (2023) | | :-------------------------------- | :------------------------ | :------------------------ | | Three months ended June 30 | 22.5% | 26.4% | | Six months ended June 30 | 22.5% | 18.5% | - The effective tax rate for the three months ended June 30, 2024, was 22.5%, lower than 26.4% in the prior year, primarily due to the discrete impact of restricted stock vesting and investments in tax-exempt instruments, partially offset by nondeductible expenses[118] - For the six months ended June 30, 2024, the effective tax rate was 22.5%, higher than 18.5% in the prior year, influenced by similar factors[118] 13. Commitments and Contingencies This note addresses the company's legal matters and indemnification liability reserve, detailing ongoing litigation, regulatory inquiries, and the methodology for establishing reserves for probable losses - The company is involved in various legal proceedings and regulatory inquiries, including a $13.0 million claim against Hilltop Securities by WR Investments, LP, which the company intends to vigorously defend[122] - PrimeLending received an investigative inquiry from the United States Attorney for the Western District of Virginia regarding its float down option[123] - The mortgage origination segment maintains an indemnification liability reserve for probable losses related to representations and warranties on sold loans[124] Indemnification Liability Reserve (in thousands) | Indemnification Liability Reserve (in thousands) | June 30, 2024 | December 31, 2023 | | :----------------------------------------------- | :------------ | :---------------- | | Total Indemnification Liability Reserve | $9,095 | $11,691 | | Provision for Indemnification Losses (3 months) | $800 | $500 | | Provision for Indemnification Losses (6 months) | $1,100 | $800 | 14. Financial Instruments with Off-Balance Sheet Risk This note describes the company's financial instruments with off-balance sheet risk, primarily commitments to extend credit and standby letters of credit, outlining the nature of these risks and management strategies - The Bank had outstanding unused commitments to extend credit of $2.0 billion and standby letters of credit of $62.6 million at June 30, 2024[133] - The Hilltop Broker-Dealers are exposed to off-balance sheet risk from transactions like securities not yet purchased, derivatives, clearing agreements, and secured financing arrangements[134] - Credit risk for these instruments is managed through credit evaluations, collateral requirements, and regulatory/internal guidelines[133] 15. Stock-Based Compensation This note details the company's stock-based compensation activities, including grants of common stock to board members and restricted stock units (RSUs) to executives and key employees - During the six months ended June 30, 2024, Hilltop granted 8,050 shares of common stock to non-employee board members[135] RSU Activity (in thousands) | RSU Activity (in thousands) | RSUs Outstanding | Weighted Average Grant Date Fair Value | | :-------------------------- | :--------------- | :------------------------------------- | | Balance, December 31, 2023 | 1,252 | $34.10 | | Granted | 512 | $30.53 | | Vested/Released | (522) | $33.01 | | Forfeited | (15) | $32.98 | | Balance, June 30, 2024 | 1,227 | $33.09 | - Unrecognized compensation expense related to outstanding RSUs was $19.4 million at June 30, 2024, expected to be recognized over a weighted average period of 1.59 years[138] 16. Regulatory Matters This note outlines regulatory capital requirements for Hilltop and its segments, presenting actual capital amounts and ratios compared to minimums, highlighting PrimeLending's failure to meet GNMA capital ratio Capital Ratio (June 30, 2024) | Capital Ratio (June 30, 2024) | PlainsCapital Actual Ratio | Hilltop Actual Ratio | Minimum Capital Requirements Including Conservation Buffer Ratio | | :---------------------------- | :------------------------- | :------------------- | :--------------------------------------------------------------- | | Tier 1 capital (to average assets) | 11.36% | 12.87% | 4.0% | | Common equity Tier 1 capital (to risk-weighted assets) | 15.58% | 19.45% | 7.0% | | Tier 1 capital (to risk-weighted assets) | 15.58% | 19.45% | 8.5% | | Total capital (to risk-weighted assets) | 16.77% | 22.57% | 10.5% | - PlainsCapital's capital ratios place it in the 'well capitalized' category under regulatory requirements at June 30, 2024[141] Broker-Dealer Net Capital (in thousands) | Broker-Dealer Net Capital (in thousands) | Hilltop Securities | Momentum Independent Network | | :--------------------------------------- | :----------------- | :--------------------------- | | Net capital | $270,835 | $4,046 | | Required net capital | $6,539 | $280 | | Excess net capital | $264,296 | $3,766 | - PrimeLending failed the GNMA minimum capital ratio requirement of 6% with a ratio of 4.41% at June 30, 2024, and also the FNMA/FHLMC capital ratio with 5.52%. This trend has been reported to GNMA and FNMA/FHLMC[145][256][257] 17. Stockholders' Equity This note provides information on dividends declared and paid, as well as the company's stock repurchase program, detailing cash dividends per common share and aggregate repurchased stock - During the six months ended June 30, 2024, the company declared and paid cash dividends of $0.34 per common share, totaling $22.2 million[146] - On July 25, 2024, Hilltop's board declared a quarterly cash dividend of $0.17 per common share, payable on August 30, 2024[146] - A new stock repurchase program authorized in January 2024 allows for repurchases up to $75.0 million through January 2025. $19.9 million was used to repurchase 640,042 shares in H1 2024 at an average price of $31.01 per share[147] 18. Derivative Financial Instruments This note describes the company's use of various derivative financial instruments to manage interest rate risk, distinguishing between non-hedging and hedging derivatives, and providing fair value changes and notional amounts - The company uses derivatives to mitigate interest rate risk, including interest rate swaps for the Bank, forward commitments for PrimeLending's IRLCs and mortgage loans held for sale, and various instruments for Hilltop Broker-Dealers' securities inventory[148] Derivative Type (in thousands) | Derivative Type (in thousands) | June 30, 2024 Notional Amount | June 30, 2024 Estimated Fair Value | | :----------------------------- | :---------------------------- | :--------------------------------- | | IRLCs | $683,767 | $8,465 | | Commitments to purchase MBSs | $1,207,778 | $3,885 | | Commitments to sell MBSs | $2,433,655 | $(967) | | Interest rate swaps (non-hedge) | $41,000 | $(1,485) | | Interest rate swaps (cash flow hedges) | $335,000 | $12,712 | | Interest rate swaps (fair value hedges) | $347,033 | $39,280 | - PrimeLending's non-hedging derivatives (IRLCs and loans held for sale) saw an increase of $580 thousand in fair value for the three months ended June 30, 2024, and $11.206 million for the six months ended June 30, 2024[150] - The company also offers back-to-back interest rate swaps to customers, offsetting risk with third-party dealer banks, typically resulting in no net earnings impact[156] 19. Balance Sheet Offsetting This note provides disclosures regarding financial instruments eligible for offset in the consolidated balance sheets or subject to master netting arrangements, such as securities borrowed/loaned, interest rate swaps, and repurchase agreements Financial Instrument Gross and Net Assets (in thousands) | Financial Instrument (in thousands) | June 30, 2024 Gross Assets | June 30, 2024 Net Amount | | :---------------------------------- | :------------------------- | :----------------------- | | Securities borrowed | $1,258,578 | $72,801 | | Interest rate swaps | $52,301 | $35 | | Reverse repurchase agreements | $111,914 | $744 | | Forward MBS derivatives | $6,371 | $5,441 | Financial Instrument Gross and Net Liabilities (in thousands) | Financial Instrument (in thousands) | June 30, 2024 Gross Liabilities | June 30, 2024 Net Amount | | :---------------------------------- | :------------------------------ | :----------------------- | | Securities loaned | $1,244,028 | $74,037 | | Interest rate swaps | $1,795 | $1,795 | | Repurchase agreements | $255,160 | $0 | | Forward MBS derivatives | $3,452 | $2,163 | - The company's securities lending activities involve receiving cash collateral generally in excess of the fair value of securities loaned, with daily mark-to-market adjustments[162] 20. Broker-Dealer and Clearing Organization Receivables and Payables This note provides a summary of the company's broker-dealer and clearing organization receivables and payables, detailing components such as securities borrowed/loaned, failed deliveries, and trades in process of settlement Receivable Type (in thousands) | Receivable Type (in thousands) | June 30, 2024 | December 31, 2023 | | :------------------------------------ | :------------ | :---------------- | | Securities borrowed | $1,258,578 | $1,406,937 | | Securities failed to deliver | $18,479 | $28,120 | | Trades in process of settlement | $6,220 | $123,722 | | Other | $13,898 | $15,152 | | Total Receivables | $1,297,175 | $1,573,931 | Payable Type (in thousands) | Payable Type (in thousands) | June 30, 2024 | December 31, 2023 | | :------------------------------------ | :------------ | :---------------- | | Securities loaned | $1,244,028 | $1,371,896 | | Correspondents | $21,377 | $33,286 | | Securities failed to receive | $12,649 | $18,135 | | Other | $7,172 | $7,417 | | Total Payables | $1,285,226 | $1,430,734 | - Total broker-dealer and clearing organization receivables decreased by $276.756 million (17.58%) from December 31, 2023, to June 30, 2024[167] 21. Segment and Related Information This note provides financial information for the company's three reportable business segments: banking, broker-dealer, and mortgage origination, along with corporate activities and eliminations Segment Income (Loss) Before Taxes (in thousands) | Segment (in thousands) | 3 Months Ended June 30, 2024 Income (Loss) Before Taxes | 6 Months Ended June 30, 2024 Income (Loss) Before Taxes | | :--------------------- | :------------------------------------------------------ | :------------------------------------------------------ | | Banking | $32,813 | $83,155 | | Broker-Dealer | $7,225 | $26,143 | | Mortgage Origination | $1,350 | $(15,099) | | Corporate | $(11,868) | $(26,571) | | Hilltop Consolidated | $29,557 | $67,644 | - The mortgage origination segment returned to profitability with $1.350 million in income before taxes for the three months ended June 30, 2024, a significant improvement from a $14.482 million loss in the prior year period[171] Segment Total Assets (in thousands) | Segment (in thousands) | June 30, 2024 Total Assets | December 31, 2023 Total Assets | | :--------------------- | :------------------------- | :----------------------------- | | Banking | $12,669,765 | $13,288,627 | | Broker-Dealer | $2,805,261 | $2,929,296 | | Mortgage Origination | $1,476,286 | $1,181,316 | | Corporate | $2,560,614 | $2,543,057 | | Hilltop Consolidated | $15,620,490 | $16,466,996 | 22. Earnings per Common Share This note provides the basic and diluted earnings per common share (EPS) for Hilltop Holdings Inc., along with the weighted average shares outstanding, for the three and six months ended June 30, 2024 and 2023 Earnings per Common Share (in thousands, except per share) | Metric | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income attributable to Hilltop (in thousands) | $20,333 | $18,133 | $48,001 | $43,933 | | Basic earnings per common share | $0.31 | $0.28 | $0.74 | $0.68 | | Diluted earnings per common share | $0.31 | $0.28 | $0.74 | $0.68 | | Weighted average shares outstanding - basic (in thousands) | 65,085 | 65,025 | 65,142 | 64,963 | | Weighted average shares outstanding - diluted (in thousands) | 65,086 | 65,054 | 65,149 | 64,993 | - Diluted EPS increased to $0.31 for the three months ended June 30, 2024, from $0.28 in the prior year, and to $0.74 for the six months ended June 30, 2024, from $0.68 in the prior year[172] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, including business units, economic developments, segment performance, and liquidity OVERVIEW The overview introduces Hilltop Holdings Inc. as a financial holding company with primary business lines in banking, broker-dealer services, and mortgage origination, presenting key consolidated financial data - Hilltop Holdings Inc. operates through PlainsCapital Corporation (banking, wealth, investment, treasury management, residential mortgage lending) and Hilltop Securities Holdings LLC (investment banking, municipal advisory, sales, trading, underwriting, clearing, securities lending, structured finance, retail brokerage)[180][181] Key Consolidated Financial Data (in thousands, except per share) | Metric (in thousands, except per share) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net interest income | $103,650 | $118,266 | $207,271 | $239,971 | | Net income attributable to Hilltop | $20,333 | $18,133 | $48,001 | $43,933 | | Diluted earnings per common share | $0.31 | $0.28 | $0.74 | $0.68 | | Cash dividends declared per common share | $0.17 | $0.16 | $0.34 | $0.32 | Balance Sheet Data (in thousands) | Balance Sheet Data (in thousands) | June 30, 2024 | December 31, 2023 | | :-------------------------------- | :------------ | :---------------- | | Total assets | $15,620,490 | $16,466,996 | | Total deposits | $10,373,856 | $11,063,192 | | Total stockholders' equity | $2,162,611 | $2,150,329 | | Common equity to assets ratio | 13.66% | 12.89% | | Tangible common equity to tangible assets | 12.12% | 11.41% | - The banking segment contributed $32.8 million and $83.2 million to income before income taxes for the three and six months ended June 30, 2024, respectively[183] Recent Developments This section discusses ongoing economic headwinds, including interest rate movements, funding costs, and inflationary pressures, and their impact on the company, highlighting liquidity and asset valuation risks - Economic headwinds, including U.S. Treasury yields, mortgage interest rates, increasing funding costs, and inflationary pressures, continue to create uncertainty[187] - The company has monitored deposit flows and balance sheet trends, stabilizing deposit funding costs in Q2 2024 as higher-cost brokered deposits matured[188] - The mortgage origination segment experienced operating losses in 2023 and H1 2024, leading to ongoing monitoring for potential goodwill impairment[192] Outlook The outlook reiterates the expectation of continued adverse impacts on operating results in 2024 due to economic headwinds, including interest rate changes, funding costs, and inflationary pressures - Uncertainties related to economic headwinds, interest rate movements, funding costs, and inflationary pressures are expected to continue adversely impacting operating results in 2024[194] - The company's financial performance is directly affected by general economic and market conditions, including interest rates, securities fluctuations, inflation, and regulatory changes[195] Factors Affecting Results of Operations This section identifies key external and internal factors influencing the company's results, including general economic and market conditions, interest rate fluctuations, and regulatory changes - Key factors impacting results include general economic and market conditions, interest rate levels and yield curve shape, fluctuations in securities volume and price, inflation, political events, and regulatory requirements[195] - Recent legislative and regulatory initiatives could substantially change the financial services industry and significantly impact the company[195] Segment Information This section details the company's three reportable business segments: banking, broker-dealer, and mortgage origination, describing their primary revenue sources and historical volatility - The company has three reportable segments: banking (PlainsCapital Bank), broker-dealer (Hilltop Securities Holdings LLC), and mortgage origination (PrimeLending)[196] - Banking segment revenue is primarily from net interest income; broker-dealer from fees and commissions; mortgage origination from loan origination and servicing fees and sales in the secondary market[197][198][199] - Operating results for the mortgage origination segment have historically been more volatile than the banking and broker-dealer segments[196] Segment Income (Loss) Before Taxes (in thousands) | Segment (in thousands) | 3 Months Ended June 30, 2024 Income (Loss) Before Taxes | 6 Months Ended June 30, 2024 Income (Loss) Before Taxes | | :--------------------- | :------------------------------------------------------ | :------------------------------------------------------ | | Banking | $32,813 | $83,155 | | Broker-Dealer | $7,225 | $26,143 | | Mortgage Origination | $1,350 | $(15,099) | | Corporate | $(11,868) | $(26,571) | | Hilltop Consolidated | $29,557 | $67,644 | Key Performance Indicators This section outlines the key financial and non-financial indicators used to evaluate the company's performance, including profitability, asset quality, and regulatory capital ratios Key Performance Indicator | Key Performance Indicator | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Return on average stockholders' equity | 3.84% | 3.53% | 4.54% | 4.32% | | Return on average assets | 0.59% | 0.47% | 0.67% | 0.58% | | Net interest margin | 2.90% | 3.03% | 2.88% | 3.15% | | Leverage ratio (end of period) | 12.87% | 11.47% | 12.87% | 11.47% | | Common equity Tier 1 risk-based capital ratio (end of period) | 19.45% | 17.63% | 19.45% | 17.63% | - Net interest margin (taxable equivalent) decreased to 2.92% for the three months ended June 30, 2024, from 3.03% in the prior year, and to 2.89% for the six months ended June 30, 2024, from 3.15% in the prior year[213][214] - Purchase accounting contributed 6 and 9 basis points to consolidated taxable equivalent net interest margin for the three months ended June 30, 2024 and 2023, respectively[213] How We Generate Revenue The company generates revenue from net interest income, driven by interest rates and asset/liability volumes, and noninterest income, primarily from broker-dealer and mortgage operations - Net interest income is a significant contributor to operating results, affected by interest rates and the volume/types of interest-earning assets and interest-bearing liabilities[205] - Noninterest income sources include broker-dealer operations ($123.1 million in securities commissions and fees, $109.2 million in advisory fees, $56.3 million in trading gains for H1 2024) and mortgage operations ($159.5 million in net gains from loan sales, other mortgage production income, and origination fees for H1 2024)[205] - Noninterest income increased in H1 2024 compared to H1 2023, driven by gains in broker-dealer advisory fees, mortgage loan sales, and merchant bank equity investment sales[206] Consolidated Operating Results This section provides a consolidated view of the company's operating results, highlighting income applicable to common stockholders, net interest income, provision for credit losses, and noninterest income/expense Consolidated Operating Results (in thousands, except per share) | Metric (in thousands, except per share) | Three Months Ended June 30, 2024 | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2024 | Six Months Ended June 30, 2023 | | :-------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income applicable to common stockholders | $20,333 | $18,133 | $48,001 | $43,933 | | Diluted EPS | $0.31 | $0.28 | $0.74 | $0.68 | | Net interest income | $103,650 | $118,266 | $207,271 | $239,971 | | Provision for credit losses | $10,934 | $14,836 | $8,063 | $17,167 | | Noninterest income | $193,305 | $190,652 | $374,923 | $353,146 | | Noninterest expense | $256,464 | $266,977 | $506,487 | $517,447 | - Income applicable to common stockholders increased by 12.14% for the three months and 9.26% for the six months ended June 30, 2024, compared to the same periods in 2023[207] - Net interest income declined by 12% for the three months and 14% for the six months ended June 30, 2024, primarily due to increased costs of deposits[201][217] - Noninterest income increased by 1% for the three months and 6% for the six months ended June 30, 2024, driven by increases in mortgage production income, broker-dealer advisory fees, and merchant bank equity investment sales[201][219] - Noninterest expense decreased by 4% for the three months and 2% for the six months ended June 30, 2024, mainly due to lower compensation and other costs in the mortgage origination segment[201][220] - Effective income tax rates were 22.5% for both the three and six months ended June 30, 2024, compared to 26.4% and 18.5% respectively in 2023[221][222] Segment Results This section provides a detailed analysis of the operating results for each of the company's reportable business segments: Banking, Broker-Dealer, and Mortgage Origination, as well as Corporate activities Banking Segment The banking segment's income before income taxes decreased due to declines in net interest income and noninterest income, despite stabilizing deposit funding costs in Q2 2024 Banking Segment Performance (in thousands) | Metric (in thousands) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net interest income | $92,458 | $100,986 | $184,064 | $205,756 | | Provision for (reversal of) credit losses | $10,950 | $14,900 | $8,097 | $16,500 | | Noninterest income | $9,255 | $11,189 | $21,158 | $22,379 | | Noninterest expense | $57,950 | $57,436 | $113,970 | $113,563 | | Income before income taxes | $32,813 | $39,839 | $83,155 | $98,072 | - Income before income taxes decreased by 17.63% for the three months and 15.21% for the six months ended June 30, 2024, compared to the same periods in 2023[223] - The banking segment's cost of deposits increased in H1 2024 due to intense competition, but funding costs began to stabilize in Q2 2024 as higher-cost brokered deposits matured[224] Banking Segment Key Indicators | Key Indicator | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Efficiency ratio | 56.97% | 51.20% | 55.54% | 49.78% | | Net interest margin (taxable equivalent) | 3.10% | 3.11% | 3.05% | 3.25% | - The banking segment maintained an asset-sensitive rate risk position at June 30, 2024, meaning net interest income would generally rise if rates increase[233] - The provision for credit losses for the banking segment reflected a build in the allowance related to specific reserves and loan portfolio changes, slightly offset by improvements to the U.S. economic outlook[239] Broker-Dealer Segment The broker-dealer segment experienced a decline in income before income taxes for both the three and six months ended June 30, 2024, primarily due to decreases in net interest income and noninterest income from various business lines, despite some improvements in structured finance and public finance services Broker-Dealer Segment Performance (in thousands) | Metric (in thousands) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total net interest income | $12,218 | $13,201 | $24,486 | $27,064 | | Total noninterest income | $92,053 | $100,040 | $196,631 | $190,675 | | Total noninterest expense | $97,046 | $94,789 | $194,974 | $185,865 | | Income before income taxes | $7,225 | $18,452 | $26,143 | $31,874 | - Income before income taxes decreased by 60.85% for the three months and 18.0% for the six months ended June 30, 2024, compared to the same periods in 2023[241] - Net revenue for the six months ended June 30, 2024, improved in structured finance (due to unrealized gains from U.S. Agency TBA business and commodities commissions) and public finance services (managed assets and municipal advisory revenues)[243] - Wealth management net revenue decreased due to lower FDIC sweep program revenue and insurance product sales, partially offset by improved advisory fees[243] - Noninterest expense increased due to higher segment compensation and other operating costs[251] Mortgage Origination Segment The mortgage origination segment reported income before income taxes for the three months ended June 30, 2024, and a reduced loss for the six months, driven by decreased noninterest expense and an increase in average loan sales margin Mortgage Origination Segment Performance (in thousands) | Metric (in thousands) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net interest income (expense) | $(4,571) | $(5,901) | $(8,823) | $(10,109) | | Noninterest income | $92,867 | $90,079 | $159,567 | $158,909 | | Noninterest expense | $86,946 | $98,660 | $165,843 | $187,413 | | Income (loss) before income taxes | $1,350 | $(14,482) | $(15,099) | $(38,613) | - The segment achieved income before income taxes of $1.350 million for the three months ended June 30, 2024, a 109.3% improvement from a loss in the prior year[253][263] - Total loan origination volume decreased by 3.0% for the three months and 3.1% for the six months ended June 30, 2024, compared to the same periods in 2023[263] - PrimeLending failed the GNMA minimum capital ratio (4.41% vs. 6% required) and FNMA/FHLMC capital ratio (5.52% vs. 6% required) at June 30, 2024, which has been reported to the respective entities[256][257] - Net gains from sale of loans increased by 8.9% for the six months ended June 30, 2024, despite a 5.0% decrease in total loan sales volume, due to an increase in average loan sale margin[266] - Noninterest expense decreased by 12% for the three months and 12% for the six months ended June 30, 2024, primarily due to reductions in non-variable compensation and benefits, and segment operating costs[274][276] Corporate The Corporate segment reported a reduced loss before income taxes for both the three and six months ended June 30, 2024, driven by increased noninterest income from merchant bank equity investment sales and decreased noninterest expenses Corporate Segment Performance (in thousands) | Metric (in thousands) | 3 Months Ended June 30, 2024 | 3 Months Ended June 30, 2023 | 6 Months Ended June 30, 2024 | 6 Months Ended June 30, 2023 | | :-------------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Net interest income (expense) | $(3,153) | $(3,479) | $(6,255) | $(6,801) | | Noninterest income | $6,001 | $3,081 | $11,785 | $5,786 | | Noninterest expense | $14,716 | $16,301 | $32,101 | $31,814 | | Loss before income taxes | $(11,868) | $(16,699) | $(26,571) | $(32,829) | - Loss before income taxes decreased by $4.831 million (28.93%) for the three months and $6.258 million (19.06%) for the six months ended June 30, 2024, compared to the same periods in 2023[288] - Noninterest income included pre-tax gains of $1.9 million and $4.7 million for the three and six months ended June 30, 2024, respectively, from the sale of merchant bank equity investments[286] - Noninterest expenses decreased for the three months ended June 30, 2024, primarily due to lower employees' compensation and benefits and professional fees[287] Financial Condition This section analyzes the company's financial condition, focusing on its securities and loan portfolios, allowance for credit losses, potential problem loans, non-performing assets, deposits, and borrowings Securities Portfolio The securities portfolio, comprising trading, available-for-sale, held-to-maturity, and equity securities, saw an increase in trading securities but a decrease in available-for-sale and held-to-maturity securities Security Type (in thousands) | Security Type (in thousands) | June 30, 2024 | December 31, 2023 | | :--------------------------- | :------------ | :---------------- | | Trading securities | $721,384 | $515,991 | | Available for sale securities | $1,433,107 | $1,507,595 | | Held to maturity securities | $777,456 | $812,677 | | Equity securities | $254 | $321 | | Total securities portfolio | $2,932,201 | $2,836,584 | - The total securities portfolio increased by $95.617 million (3.37%) from December 31, 2023, to June 30, 2024, driven by trading securities[294] - Net unrealized losses on available-for-sale securities were $112.9 million and on held-to-maturity securities were $90.3 million at June 30, 2024[295] - No allowance for credit losses was recognized on debt securities as declines in value were deemed unrelated to credit loss[298] Loan Portfolio The loan portfolio, a primary earning asset, is detailed by segment, highlighting the banking segment's real estate and energy exposure, the broker-dealer's margin loans, and the mortgage origination segment's loans held for sale Loan Type (in thousands) | Loan Type (in thousands) | June 30, 2024 | December 31, 2023 | | :------------------------------------ | :------------ | :---------------- | | Commercial real estate: Non-owner occupied | $2,001,338 | $1,889,882 | | Commercial and industrial | $1,687,502 | $1,607,833 | | Construction and land development | $858,185 | $1031,095 | | Total Loans Held for Investment, Gross | $8,173,520 | $8,079,745 | - The banking segment's total loans held for investment, net of allowance, were $8.9 billion at June 30, 2024, with significant concentrations in non-construction commercial real estate (44.4%), non-construction residential real estate (22.7%), and construction and land development (11.0%)[304][307] - The Bank's energy loan exposure was approximately $49 million at June 30, 2024, with an allowance for credit losses of $0.2 million (0.3%)[308] - The broker-dealer segment's loans held for investment increased to $348.3 million at June 30, 2024, primarily due to increases in receivables from correspondents[313] Mortgage Origination Segment (in thousands) | Mortgage Origination Segment (in thousands) | June 30, 2024 | December 31, 2023 | | :------------------------------------------ | :------------ | :---------------- | | Loans held for sale: Unpaid principal balance | $1,118,242 | $802,348 | | IRLCs: Unpaid principal balance | $683,767 | $383,767 | Allowance for Credit Losses on Loans This section details the company's methodology for estimating the allowance for credit losses (ACL) for loans and unfunded commitments, using Moody's Analytics' S7 scenario, and provides sensitivity analysis - The company utilizes Moody's Analytics' S7 macroeconomic alternative scenario (June 2024) for its CECL model, assuming persistent inflation, elevated interest rates, and a recession in Q2 2025[319][323] Allowance for Credit Losses (in thousands) | Metric (in thousands) | 3 Months Ended June 30, 2024 | 6 Months Ended June 30, 2024 | | :-------------------------------------------------- | :--------------------------- | :--------------------------- | | Balance, beginning of period | $104,231 | $111,413 | | Provision for credit losses | $10,934 | $8,063 | | Net recoveries (charge-offs) | $(83) | $(4,394) | | Balance, end of period | $115,082 | $115,082 | - The allowance for credit losses as a percentage of total loan portfolio (excluding margin loans and mortgage warehouse lending) was 1.52% at June 30, 2024, up from 1.47% at December 31, 2023[326][327] - Applying an upside economic scenario (S1) would decrease ACL by approximately $27 million, while a downside scenario (S3) would increase ACL by approximately $50 million[333] Allowance for Credit Losses by Loan Type (in thousands) | Allowance for Credit Losses (in thousands) | June 30, 2024 | December 31, 2023 | | :----------------------------------------- | :------------ | :---------------- | | Commercial real estate: Non-owner occupied | $37,321 | $40,061 | | Commercial and industrial | $28,869 | $20,926 | | 1-4 family residential | $7,912 | $9,461 | | Total | $115,082 | $111,413 | Potential Problem Loans This section defines potential problem loans as those with concerns about repayment ability, categorized as special mention and substandard accrual, reporting a decrease in total potential problem loans - Potential problem loans totaled $176.8 million at June 30, 2024, down from $207.4 million at December 31, 2023[346] - Substandard accrual loans decreased to $123.8 million at June 30, 2024, from $204.1 million at December 31, 2023, primarily due to decreases in commercial and industrial, construction and land d