The Bank originates loans to customers primarily in Texas. Although the Bank has diversified loan and leasing portfolios and, generally, holds collateral against amounts advanced to customers, its debtors’ ability to honor their contracts is substantially dependent upon the general economic conditions of the region and of the industries in which its debtors operate, which consist primarily of agribusiness, construction, energy, real estate and wholesale/retail trade. The Hilltop Broker-Dealers make loans to customers and correspondents through transactions originated by both employees and independent retail representatives throughout the United States. The Hilltop Broker-Dealers control risk by requiring customers to maintain collateral in compliance with various regulatory and internal guidelines, which may vary based upon market conditions. Securities owned by customers and held as collateral for loans are not included in the consolidated financial statements.

Loans held for investment summarized by portfolio segment are as follows (in thousands).

(1)

Included loans totaling $7.0 million and $77.7 million at June 30, 2022 and December 31, 2021, respectively, funded through the Paycheck Protection Program.

(2)

Primarily represents margin loans to customers and correspondents associated with broker-dealer segment operations.

The following table provides details associated with non-accrual loans, excluding those classified as held for sale (in thousands).


	Non-accrual Loans
	June 30, 2022						December 31, 2021						Interest Income Recognized
	With		With No				With		With No				Three Months Ended June 30,				Six Months Ended June 30,
	Allowance		Allowance		Total		Allowance		Allowance		Total		2022		2021		2022		2021
Commercial real estate:
Non-owner occupied	$	603	$	653	$	1,256	$	413	$	1,853	$	2,266	$	60	$	54	$	157	$	128
Owner occupied		3,084		607		3,691		3,058		1,277		4,335		334		139		417		229
Commercial and industrial		9,112		4,203		13,315		16,536		5,942		22,478		439		331		627		474
Construction and land development		1		—		1		2		—		2		8		20		15		35
1-4 family residential		531		12,831		13,362		902		17,306		18,208		1,304		1,106		1,725		2,030
Consumer		19		—		19		23		—		23		—		(121)		—		(121)
Broker-dealer		—		—		—		—		—		—		—		—		—		—
	$	13,350	$	18,294	$	31,644	$	20,934	$	26,378	$	47,312	$	2,145	$	1,529	$	2,941	$	2,775

At June 30, 2022 and December 31, 2021, $3.2 million and $2.9 million, respectively, of real estate loans secured by residential properties and classified as held for sale were in non-accrual status.

Loans accounted for on a non-accrual basis decreased from December 31, 2021 to June 30, 2022, by $15.7 million. The change in nonaccrual loans was primarily due to decreases in commercial and industrial loans of $9.2 million, 1-4 family residential loans of $4.8 million, and commercial real estate non-owner occupied loans of $1.0 million. The respective decreases in commercial and industrial loans and commercial real estate non-owner occupied loans in non-accrual status since December 31, 2021 were primarily due to principal paydowns, settlements, and charge-offs associated with five relationships.

The Company considers non-accrual loans to be collateral-dependent unless there are underlying mitigating circumstances, such as expected cash flow recovery. The practical expedient to measure the allowance using the fair value of the collateral has been implemented.

The Bank classifies loan modifications as troubled debt restructurings (“TDRs”) when it concludes that it has both granted a concession to a debtor and that the debtor is experiencing financial difficulties. Loan modifications are typically structured to create affordable payments for the debtor and can be achieved in a variety of ways. The Bank modifies loans by reducing interest rates and/or lengthening loan amortization schedules. The Bank may also reconfigure a single loan into two or more loans (“A/B Note”). The typical A/B Note restructure results in a “bad” loan which is charged off and a “good” loan or loans, the terms of which comply with the Bank’s customary underwriting policies. The debt charged off on the “bad” loan is not forgiven to the debtor.

In March 2020, the CARES Act was passed, which, among other things, allows the Bank to suspend the requirements for certain loan modifications to be categorized as a TDR, including the related impairment for accounting purposes. On

December 27, 2020, the Consolidated Appropriations Act 2021 was signed into law. Section 541 of this legislation, “Extension of Temporary Relief From Troubled Debt Restructurings and Insurer Clarification,” extended certain relief provisions from the CARES Act to January 1, 2022. The Bank’s novel coronavirus (“COVID-19”) payment deferral programs allowed for a deferral of principal and/or interest payments with such deferred principal payments due and payable on maturity date of the existing loan.

There were two TDRs granted during the three months ended June 30, 2022 with a balance at date of extension of $3.0 million and a balance at June 30, 2022 of $3.0 million that do not qualify for the CARES Act exemption. There were three TDRs granted during the six months ended June 30, 2022 with a balance at date of extension of $3.6 million and a balance at June 30, 2022 of $3.1 million that do not qualify for the CARES Act exemption. During the three and six months ended June 30, 2021 there was one TDR granted with a balance at date of extension of $0.7 million and a balance at June 30, 2021 of $0.7 million that did not qualify for the CARES Act exemption. The Bank had no unadvanced commitments to borrowers whose loans had been restructured in TDRs at June 30, 2022 and nominal unadvanced commitments to such borrowers at December 31, 2021. There were no TDRs granted during the twelve months preceding June 30, 2022 and 2021 for which a payment was at least 30 days past due.

An analysis of the aging of the Company’s loan portfolio is shown in the following tables (in thousands).


													Accruing Loans
	Loans Past Due						Total Past		Current		Total		Past Due
June 30, 2022	30-59 Days		60-89 Days		90 Days or More		Due Loans		Loans		Loans		90 Days or More
Commercial real estate:
Non-owner occupied	$	—	$	—	$	198	$	198	$	1,910,938	$	1,911,136	$	—
Owner occupied		3,020		36		83		3,139		1,348,353		1,351,492		—
Commercial and industrial		9,086		59		8,025		17,170		1,768,946		1,786,116		—
Construction and land development		4,288		116		—		4,404		917,643		922,047		—
1-4 family residential		4,709		1,551		5,876		12,136		1,456,826		1,468,962		102
Consumer		191		15		18		224		27,638		27,862		—
Broker-dealer		—		—		—		—		463,004		463,004		—
	$	21,294	$	1,777	$	14,200	$	37,271	$	7,893,348	$	7,930,619	$	102


													Accruing Loans
	Loans Past Due						Total Past		Current		Total		Past Due
December 31, 2021	30-59 Days		60-89 Days		90 Days or More		Due Loans		Loans		Loans		90 Days or More
Commercial real estate:
Non-owner occupied	$	117	$	—	$	1,173	$	1,290	$	1,728,409	$	1,729,699	$	—
Owner occupied		590		688		2,273		3,551		1,309,479		1,313,030		—
Commercial and industrial		1,059		277		13,640		14,976		1,860,444		1,875,420		1
Construction and land development		946		—		—		946		891,837		892,783		—
1-4 family residential		7,642		2,738		4,842		15,222		1,288,208		1,303,430		100
Consumer		123		22		22		167		32,182		32,349		—
Broker-dealer		—		—		—		—		733,193		733,193		—
	$	10,477	$	3,725	$	21,950	$	36,152	$	7,843,752	$	7,879,904	$	101

In addition to the loans shown in the tables above, PrimeLending had $82.3 million and $60.7 million of loans included in loans held for sale (with an aggregate unpaid principal balance of $82.8 million and $61.7 million, respectively) that were 90 days past due and accruing interest at June 30, 2022 and December 31, 2021, respectively. These loans are guaranteed by U.S. government agencies and include loans that are subject to repurchase, or have been repurchased, by PrimeLending.

In response to the COVID-19 pandemic, the Company allowed modifications, such as payment deferrals for up to 90 days and temporary forbearance, to credit-worthy borrowers who are experiencing temporary hardship due to the effects of COVID-19. These short-term modifications generally meet the criteria of the CARES Act and, therefore, they are not reported as past due or placed on non-accrual status (provided the loans were not past due or on non-accrual status prior to the deferral). The Company elected to accrue and recognize interest income on these modifications during the payment deferral period.

Additionally, the Company granted temporary forbearance to borrowers of a federally backed mortgage loan experiencing financial hardship due, directly or indirectly, to the COVID-19 pandemic. The CARES Act, which among other things, established the ability for financial institutions to grant a forbearance for up to 180 days, which can be extended for an additional 180-day period upon the request of the borrower. During that time, no fees, penalties or interest beyond the

amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the mortgage contract will accrue on the borrower’s account. As of June 30, 2022, PrimeLending had $36.1 million of loans subject to repurchase under a forbearance agreement related to delinquencies on or after April 1, 2020.

Management tracks credit quality trends on a quarterly basis related to: (i) past due levels, (ii) non-performing asset levels, (iii) classified loan levels, and (iv) general economic conditions in state and local markets. The Company defines classified loans as loans with a risk rating of substandard, doubtful or loss. There have been no changes to the risk rating internal grades utilized for commercial loans as described in detail in Note 6 to the consolidated financial statements in the Company’s 2021 Form 10-K.

The following table presents loans held for investment grouped by asset class and credit quality indicator, segregated by year of origination or renewal (in thousands).


	Amortized Cost Basis by Origination Year
												2017 and
June 30, 2022	2022		2021		2020		2019		2018			Prior	Revolving		Total
Commercial real estate: non-owner occupied
Internal Grade 1-3 (Pass low risk)	$	44,621	$	74,976	$	20,075	$	9,882	$	8,788	$	11,757	$	2	$	170,101
Internal Grade 4-7 (Pass normal risk)		284,152		296,372		143,410		115,193		41,986		80,885		28,181		990,179
Internal Grade 8-11 (Pass high risk and watch)		82,153		166,149		181,713		81,382		72,866		92,202		1,550		678,015
Internal Grade 12 (Special mention)		—		—		—		—		—		—		—		—
Internal Grade 13 (Substandard accrual)		37,929		14,659		4,093		8,222		25		6,657		—		71,585
Internal Grade 14 (Substandard non-accrual)		—		403		—		—		—		853		—		1,256
Commercial real estate: owner occupied
Internal Grade 1-3 (Pass low risk)	$	24,732	$	111,984	$	58,631	$	18,662	$	13,920	$	60,532	$	6,002	$	294,463
Internal Grade 4-7 (Pass normal risk)		128,192		178,018		96,688		88,070		93,945		73,876		13,760		672,549
Internal Grade 8-11 (Pass high risk and watch)		45,893		70,970		92,234		30,607		63,765		30,528		13,571		347,568
Internal Grade 12 (Special mention)		—		—		—		—		—		—		—		—
Internal Grade 13 (Substandard accrual)		4,185		487		6,090		3,029		6,246		13,184		—		33,221
Internal Grade 14 (Substandard non-accrual)		108		893		—		(4)		335		2,359		—		3,691
Commercial and industrial
Internal Grade 1-3 (Pass low risk)	$	17,214	$	29,527	$	28,377	$	23,373	$	2,385	$	2,819	$	41,940	$	145,635
Internal Grade 4-7 (Pass normal risk)		111,653		136,239		70,470		17,397		12,734		18,508		367,904		734,905
Internal Grade 8-11 (Pass high risk and watch)		53,684		81,940		53,889		20,382		3,850		5,998		268,569		488,312
Internal Grade 12 (Special mention)		92		—		—		—		—		—		—		92
Internal Grade 13 (Substandard accrual)		3,220		1,910		7,413		6,175		7,624		7,377		9,433		43,152
Internal Grade 14 (Substandard non-accrual)		241		1,442		11,094		—		229		309		—		13,315
Construction and land development
Internal Grade 1-3 (Pass low risk)	$	9,291	$	18,711	$	22,587	$	929	$	1,514	$	3,151	$	—	$	56,183
Internal Grade 4-7 (Pass normal risk)		172,579		283,798		51,938		15,522		3,381		2,208		60,345		589,771
Internal Grade 8-11 (Pass high risk and watch)		93,777		102,553		32,549		862		118		1,596		15,517		246,972
Internal Grade 12 (Special mention)		—		—		—		—		—		—		—		—
Internal Grade 13 (Substandard accrual)		—		1,328		—		23		—		5,276		—		6,627
Internal Grade 14 (Substandard non-accrual)		—		—		—		—		—		1		—		1
Construction and land development - individuals
FICO less than 620	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
FICO between 620 and 720		530		72		—		—		993		—		—		1,595
FICO greater than 720		11,714		5,822		55		—		—		—		—		17,591
Substandard non-accrual		—		—		—		—		—		—		—		—
Other ⁽¹⁾		3,133		174		—		—		—		—		—		3,307
1-4 family residential
FICO less than 620	$	204	$	814	$	784	$	834	$	3,561	$	23,679	$	253	$	30,129
FICO between 620 and 720		3,130		14,876		8,634		5,992		6,269		28,804		2,715		70,420
FICO greater than 720		194,965		816,610		111,904		48,471		30,196		54,972		3,279		1,260,397
Substandard non-accrual		—		—		(1)		—		266		13,097		—		13,362
Other ⁽¹⁾		54,621		28,516		3,146		2,503		583		4,705		580		94,654
Consumer
FICO less than 620	$	1,288	$	411	$	138	$	83	$	15	$	47	$	336	$	2,318
FICO between 620 and 720		2,824		2,020		670		573		44		401		1,809		8,341
FICO greater than 720		3,184		2,063		1,614		542		120		2		3,072		10,597
Substandard non-accrual		—		—		—		—		—		19		—		19
Other ⁽¹⁾		3,627		1,924		492		241		8		25		270		6,587

Total loans with credit quality measures	$	1,392,936	$	2,445,661	$	1,008,687	$	498,945	$	375,766	$	545,827	$	839,088	$	7,106,910
Commercial and industrial (mortgage warehouse lending)															$	344,662
Commercial and industrial (Paycheck Protection Program loans)															$	7,016
Commercial and industrial (loans accounted for at fair value)															$	9,027
Broker-Dealer (margin loans and correspondent receivables)															$	463,004
Total loans held for investment															$	7,930,619

(1) Loans classified in this category were assigned a FICO score for credit modeling purposes.