Hilltop Holdings(HTH) - 2019 Q4 - Annual Report

Part I Business Hilltop Holdings Inc. is a diversified financial holding company with banking, broker-dealer, mortgage, and insurance segments, primarily concentrated in Texas Consolidated Financial Highlights (as of December 31, 2019) | Metric | Amount (Billions) | | :--- | :--- | | Total Assets | $15.2 | | Total Deposits | $9.0 | | Total Loans (incl. held for sale) | $9.4 | | Stockholders' Equity | $2.1 | - The company operates through three primary business units organized into four reportable segments: banking (PlainsCapital Bank), broker-dealer (Hilltop Securities), mortgage origination (PrimeLending), and insurance (National Lloyds Corporation)[19][25][30] - Operations are geographically concentrated, with the bank operating exclusively in Texas, 36.4% of mortgage originations in Texas, California, and Florida, and 69.6% of insurance premiums written in Texas[26][28][29] Banking Segment PlainsCapital Bank, the largest segment, focuses on commercial and consumer banking in Texas, holding $11.1 billion in assets and $8.8 billion in deposits Banking Segment Loan Portfolio (December 31, 2019) | Loan Category | Amount (in thousands) | % of Total | | :--- | :--- | :--- | | Commercial and industrial | $3,866,169 | 44.7% | | Commercial real estate (Non-owner & Owner occupied) | $3,000,523 | 34.7% | | Construction and land development | $940,564 | 10.9% | | 1-4 family residential | $792,912 | 9.2% | | Consumer | $47,046 | 0.5% | | Total loans held for investment | $8,647,214 | 100.0% | - The commercial and industrial loan category includes $2.2 billion in warehouse lines of credit extended to the company's mortgage subsidiary, PrimeLending, of which $1.8 billion was drawn at year-end[35] - The bank's services encompass business banking (term loans, lines of credit), personal banking (deposit accounts, consumer loans), and wealth management for high net worth individuals[39][46][47] Broker-Dealer Segment Hilltop Securities provides public finance, fixed income, and wealth management services, holding $3.5 billion in assets and strong net capital - The segment's four primary lines of business are public finance services, structured finance, fixed income services, and wealth management (which includes retail, clearing, and securities lending)[50] - At year-end 2019, Hilltop Securities had net capital of $318.7 million, which was $310.9 million in excess of its minimum requirement of $7.8 million[49] - The clearing services group provided back-office support to 145 financial organizations, while the retail group employed 126 registered representatives and contracted with 195 independent representatives[57][58] Mortgage Origination Segment PrimeLending, a residential mortgage banker, originated $15.6 billion in 2019, primarily in home purchases across 44 states, selling most loans to the secondary market 2019 Mortgage Origination Highlights | Metric | Value | | :--- | :--- | | Closed Loan Volume | $15.6 billion | | Home Purchase Volume % | 75% | | Number of Employees | ~2,500 | | Mortgage Loan Officers | ~1,280 | - PrimeLending sells almost all of the mortgage loans it originates to investors in the secondary market, with the majority sold servicing-released[62] - The company does not currently originate subprime loans and focuses on conforming loans eligible for sale to FNMA, FHLMC, or GNMA[64] Insurance Segment National Lloyds Corporation specializes in property and casualty insurance for low-value dwellings, primarily in southern states, managing risk through disciplined underwriting and reinsurance - NLC's insurance subsidiaries, NLIC and ASIC, had their "A" (Excellent) financial strength ratings affirmed by A.M. Best in May 2019[66] - The majority of NLC's property coverage is written on policies that provide actual cash value payments, which deducts for depreciation, as opposed to replacement cost coverage[69] - NLC purchases reinsurance to cede a portion of its risk, reducing its exposure to liability on individual risks and protecting against catastrophe losses[72][73] Government Supervision and Regulation The company and its subsidiaries are subject to extensive federal and state regulations governing capital, activities, and consumer protection across all segments - As a financial holding company, Hilltop is subject to supervision by the Federal Reserve Board and must adhere to Basel III capital adequacy requirements, which were fully phased in as of January 1, 2019[91][102][108] - The Bank is regulated by the Texas Department of Banking and the Federal Reserve; it expects to become subject to CFPB supervisory and enforcement authority starting in the second quarter of 2020 due to its asset size exceeding $10 billion[122][123] - The broker-dealer subsidiaries are regulated by the SEC and FINRA, covering aspects like sales practices, net capital requirements, and customer protection, and must comply with the upcoming Regulation Best Interest (Regulation BI) by June 30, 2020[156][157][168] - The insurance subsidiaries are regulated by state agencies, primarily the Texas Department of Insurance, which oversee solvency, capital levels (RBC), and market conduct[184][185][189] Risk Factors The company faces significant risks including credit, interest rate, geographic concentration in Texas, operational, cybersecurity, and evolving regulatory compliance challenges - The allowance for loan losses may be insufficient to cover actual losses; the adoption of the Current Expected Credit Loss (CECL) standard on January 1, 2020, is estimated to increase the allowance for credit losses by $80 million to $100 million, which will decrease opening retained earnings[211][214] - Fluctuations in interest rates present a significant risk, potentially compressing net interest income in the banking segment, reducing demand for mortgage originations, and decreasing the value of fixed-income securities held by the broker-dealer and insurance segments[216][217][218] - The company's operational systems are subject to increasing cybersecurity risks, which could lead to financial liability, regulatory penalties, and reputational damage; a "spear phishing" attack in 2018 resulted in a $4.0 million wire fraud loss[230][233] - Significant geographic concentration in Texas exposes the company to regional economic downturns; substantially all of the bank's real estate loans are in Texas, 19.3% of mortgage originations were in Texas, and 69.6% of insurance premiums were written in Texas in 2019[239][240] - The pending sale of the insurance segment (NLC) is subject to regulatory approvals and other closing conditions; failure to complete the transaction could adversely affect the company's stock price and financial condition[223][224] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[373] Properties The company operates from numerous owned and leased locations across its segments, including a new headquarters occupied in February 2020 - The company's new headquarters, Hilltop Plaza, is located in University Park, Texas and was occupied starting in February 2020[374] - As of December 31, 2019, the banking segment operated from 68 locations, the broker-dealer from 52 locations, and the mortgage segment from over 300 locations[375][376] Legal Proceedings Information regarding material pending legal proceedings is incorporated by reference from Note 19 to the Consolidated Financial Statements - For details on legal proceedings, the report refers to Note 19 of the Consolidated Financial Statements[377] Mine Safety Disclosures This item is not applicable to the company - Not applicable[378] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Hilltop's common stock trades on the NYSE, with the company paying dividends and authorizing a new $75.0 million stock repurchase program in 2020 - The company paid total cash dividends of $0.32 per common share in 2019 and increased the quarterly dividend to $0.09 per share starting in January 2020[381] - In January 2020, a new stock repurchase program was authorized for up to $75.0 million of outstanding common stock through January 2021[385] - As of December 31, 2019, there were 556,368 securities available for future issuance under the company's equity compensation plans[383] Selected Financial Data Selected financial data for 2019 shows significant growth in assets, loans, and deposits, with net income and diluted EPS nearly doubling from 2018 Selected Historical Financial Data (2017-2019) | Metric (in thousands, except per share) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total Assets | $15,172,448 | $13,683,572 | $13,365,786 | | Total Loans Held for Investment, net | $7,320,264 | $6,870,972 | $6,392,112 | | Total Deposits | $9,032,214 | $8,536,156 | $7,978,119 | | Total Stockholders' Equity | $2,128,796 | $1,973,893 | $1,914,807 | | Net Interest Income | $441,306 | $436,324 | $421,748 | | Total Noninterest Income | $1,206,016 | $1,022,790 | $1,205,064 | | Income Attributable to Hilltop | $225,291 | $121,441 | $132,544 | | Earnings per common share - diluted | $2.44 | $1.28 | $1.36 | | Book value per common share | $23.20 | $20.83 | $19.92 | | Tangible book value per common share | $19.65 | $17.31 | $16.92 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) In 2019, Hilltop's net income nearly doubled to $225.3 million, driven by strong noninterest income from broker-dealer and mortgage segments, with a subsequent agreement to sell the insurance segment Consolidated Performance Summary (2018 vs. 2019) | Metric | 2019 | 2018 | | :--- | :--- | :--- | | Net Income to Common Stockholders | $225.3M | $121.4M | | Diluted EPS | $2.44 | $1.28 | | Total Noninterest Income | $1.21B | $1.02B | | Total Assets | $15.2B | $13.7B | - On January 30, 2020, the company entered into an agreement to sell its insurance segment, NLC, for a cash purchase price of $150.0 million, with the transaction expected to close in the second quarter of 2020[406] - Results in 2019 were impacted by $9.3 million in pre-tax charges related to leadership changes and $1.7 million in efficiency initiative-related charges[414][416] Segment Results All four segments reported improved pre-tax income in 2019, with significant surges in broker-dealer and mortgage origination income Income (Loss) Before Income Taxes by Segment (in thousands) | Segment | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Banking | $182,207 | $152,424 | $164,008 | | Broker-Dealer | $89,762 | $32,582 | $64,644 | | Mortgage Origination | $64,721 | $12,871 | $49,574 | | Insurance | $17,491 | $5,669 | $(4,111) | Financial Condition The company's financial condition strengthened in 2019, marked by increased total assets, loans, and deposits, alongside improved non-performing asset ratios Key Balance Sheet Items (in billions) | Item | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Assets | $15.2 | $13.7 | | Loans Held for Sale | $2.1 | $1.4 | | Loans Held for Investment, net | $7.3 | $6.9 | | Total Deposits | $9.0 | $8.5 | - Non-performing assets decreased to $54.3 million (0.36% of total assets) at year-end 2019, down from $61.6 million (0.45% of total assets) at year-end 2018[615] - The allowance for loan losses was $61.1 million, or 0.83% of gross loans held for investment, at December 31, 2019, compared to $59.5 million, or 0.86%, at the end of 2018[608] Liquidity and Capital Resources The company maintained strong liquidity and capital in 2019, exceeding regulatory minimums and returning capital to shareholders through dividends and repurchases Regulatory Capital Ratios (as of December 31, 2019) | Ratio | Hilltop (Parent) | PlainsCapital (Bank) | Well-Capitalized Minimum | | :--- | :--- | :--- | :--- | | Common Equity Tier 1 | 16.70% | 13.45% | 6.5% | | Tier 1 Capital | 17.13% | 13.45% | 8.0% | | Total Capital | 17.55% | 14.13% | 10.0% | | Leverage Ratio | 12.71% | 11.61% | 5.0% | - During 2019, the company repurchased 3,390,247 shares of common stock for $73.4 million[641] - The holding company's primary sources of liquidity are dividends from its subsidiaries, which totaled $173.0 million in 2019[634] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate sensitivity across all segments, managed through asset-sensitive positioning and derivatives for mortgage assets Banking Segment Interest Rate Sensitivity Analysis (as of Dec 31, 2019) | Change in Interest Rates (bps) | Change in Net Interest Income ($) | Change in Net Interest Income (%) | Change in Economic Value of Equity ($) | Change in Economic Value of Equity (%) | | :--- | :--- | :--- | :--- | :--- | | +200 | $30,261 | 8.60% | $274,752 | 15.43% | | +100 | $14,776 | 4.20% | $161,765 | 9.08% | | -50 | $(1,466) | (0.42)% | $(119,377) | (6.70)% | | -100 | $(1,730) | (0.49)% | $(295,657) | (16.60)% | - The banking segment is asset sensitive, with a cumulative one-year interest sensitivity gap of $635.1 million, or 6.20% of total interest-sensitive assets[696] - The mortgage origination segment uses forward commitments to sell MBSs and other derivatives to mitigate interest rate risk on its IRLCs, loans held for sale, and MSR asset[709][710] Financial Statements and Supplementary Data This section contains the company's consolidated financial statements, which commence on page F-1 of the report - The company's audited consolidated financial statements and supplementary data are included starting on page F-1 of the Annual Report[713] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[714] Controls and Procedures Management identified a material weakness in internal controls over financial reporting related to loan loss allowance estimation, with remediation efforts underway - Management identified a material weakness in internal control over financial reporting as of December 31, 2019[717] - The weakness relates to ineffective design and maintenance of controls over the qualitative factors used in the allowance for loan losses estimation process[721] - A remediation plan was implemented during the fourth quarter of 2019 to enhance the analysis supporting the qualitative factors, but the weakness will not be considered fully remediated until the new controls have operated effectively for a sufficient time[723][724] Other Information The company reports no other information for this item - None[727] Part III Directors, Executive Officers and Corporate Governance The information required for this item is incorporated by reference from the company's definitive Proxy Statement for its 2020 Annual Meeting of Stockholders - Information is incorporated by reference from the 2020 Annual Meeting of Stockholders Proxy Statement[730] Executive Compensation The information required for this item is incorporated by reference from the company's definitive Proxy Statement for its 2020 Annual Meeting of Stockholders - Information is incorporated by reference from the 2020 Annual Meeting of Stockholders Proxy Statement[731] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required for this item is incorporated by reference from the company's definitive Proxy Statement for its 2020 Annual Meeting of Stockholders - Information is incorporated by reference from the 2020 Annual Meeting of Stockholders Proxy Statement[732] Certain Relationships and Related Transactions, and Director Independence The information required for this item is incorporated by reference from the company's definitive Proxy Statement for its 2020 Annual Meeting of Stockholders - Information is incorporated by reference from the 2020 Annual Meeting of Stockholders Proxy Statement[733] Principal Accounting Fees and Services The information required for this item is incorporated by reference from the company's definitive Proxy Statement for its 2020 Annual Meeting of Stockholders - Information is incorporated by reference from the 2020 Annual Meeting of Stockholders Proxy Statement[734] Part IV Exhibits, Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed as part of the Form 10-K, including consolidated financial statements - This section includes the Report of Independent Registered Public Accounting Firm and the company's Consolidated Financial Statements[737] - All financial statement schedules have been omitted because they are not required, not applicable, or the information is included elsewhere[737] Form 10-K Summary The company has not provided a summary for this item - None[738]