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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2024

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-31987

Hilltop Holdings Inc.

(Exact name of registrant as specified in its charter)


Maryland		84-1477939
(State or other jurisdiction of incorporation or		(I.R.S. Employer Identification No.)
organization)

6565 Hillcrest Avenue
Dallas, TX		75205
(Address of principal executive offices)		(Zip Code)

(214) 855-2177

(Registrant’s telephone number, including area code)

Securities registered pursuant to section 12(b) of the Act:


Title of each class	Trading symbol	Name of each exchange on which registered
Common Stock, par value $0.01 per share	HTH	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ⌧		Accelerated filer ◻

Non-accelerated filer ◻		Smaller reporting company ☐
		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ⌧

The number of shares of the registrant's common stock outstanding at October 24, 2024 was 64,961,742.

Table of Contents

HILLTOP HOLDINGS INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2024

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Stockholders’ Equity	6
	Consolidated Statements of Cash Flows	8
	Notes to Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	47

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	92

Item 4.	Controls and Procedures	96


PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	97

Item 1A.	Risk Factors	97

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	97

Item 5.	Other Information	97

Item 6.	Exhibits	98

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(Unaudited)


	September 30,		December 31,
	2024		2023
Assets
Cash and due from banks	$	1,961,627	$	1,858,700
Federal funds sold		3,650		650
Assets segregated for regulatory purposes		55,628		57,395
Securities purchased under agreements to resell		81,766		80,011
Securities:
Trading, at fair value		540,836		515,991
Available for sale, at fair value, net (amortized cost of $1,489,070 and $1,621,747, respectively)		1,405,700		1,507,595
Held to maturity, at amortized cost, net (fair value of $690,846 and $731,858, respectively)		754,824		812,677
Equity, at fair value		287		321
		2,701,647		2,836,584

Loans held for sale		933,724		943,846
Loans held for investment, net of unearned income		7,979,630		8,079,745
Allowance for credit losses		(110,918)		(111,413)
Loans held for investment, net		7,868,712		7,968,332

Broker-dealer and clearing organization receivables		1,220,784		1,573,931
Premises and equipment, net		157,803		168,856
Operating lease right-of-use assets		92,041		88,580
Mortgage servicing rights		45,742		96,662
Other assets		528,839		517,545
Goodwill		267,447		267,447
Other intangible assets, net		6,995		8,457
Total assets	$	15,926,405	$	16,466,996

Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing	$	2,831,539	$	3,007,101
Interest-bearing		7,959,908		8,056,091
Total deposits		10,791,447		11,063,192

Broker-dealer and clearing organization payables		1,110,373		1,430,734
Short-term borrowings		914,645		900,038
Securities sold, not yet purchased, at fair value		47,773		34,872
Notes payable		347,533		347,145
Operating lease liabilities		110,799		109,002
Other liabilities		397,976		431,684
Total liabilities		13,720,546		14,316,667
Commitments and contingencies (see Notes 13 and 14)
Stockholders' equity:
Hilltop stockholders' equity:
Common stock, $0.01 par value, 125,000,000 shares authorized; 64,959,743 and 65,153,092 shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively		650		652
Additional paid-in capital		1,050,497		1,054,662
Accumulated other comprehensive loss		(98,168)		(121,505)
Retained earnings		1,224,117		1,189,222
Deferred compensation employee stock trust, net		—		228
Employee stock trust (0 and 10,290 shares, at cost, at September 30, 2024 and December 31, 2023, respectively)		—		(292)
Total Hilltop stockholders' equity		2,177,096		2,122,967
Noncontrolling interests		28,763		27,362
Total stockholders' equity		2,205,859		2,150,329
Total liabilities and stockholders' equity	$	15,926,405	$	16,466,996

See accompanying notes.

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Interest income:
Loans, including fees	$	139,821	$	142,402	$	412,779	$	404,179
Securities borrowed		19,426		17,683		60,293		53,265
Securities:
Taxable		26,265		27,166		77,795		79,487
Tax-exempt		2,438		2,464		7,242		8,218
Other		23,092		27,040		69,690		76,459
Total interest income		211,042		216,755		627,799		621,608

Interest expense:
Deposits		70,641		64,290		207,880		154,840
Securities loaned		18,499		16,169		56,207		47,928
Short-term borrowings		10,878		14,212		33,142		44,361
Notes payable		3,555		4,026		10,749		11,852
Other		2,426		2,408		7,507		7,005
Total interest expense		105,999		101,105		315,485		265,986

Net interest income		105,043		115,650		312,314		355,622
Provision for (reversal of) credit losses		(1,270)		(40)		6,793		17,127
Net interest income after provision for (reversal of) credit losses		106,313		115,690		305,521		338,495

Noninterest income:
Net gains from sale of loans and other mortgage production income		47,816		47,262		146,468		135,763
Mortgage loan origination fees		32,119		41,478		92,955		111,695
Securities commissions and fees		30,434		22,864		90,317		73,152
Investment and securities advisory fees and commissions		42,220		39,662		105,438		98,546
Other		47,854		45,583		140,188		130,838
Total noninterest income		200,443		196,849		575,366		549,994

Noninterest expense:
Employees' compensation and benefits		177,987		173,195		513,815		517,920
Occupancy and equipment, net		22,317		21,912		65,526		67,802
Professional services		11,645		12,639		31,646		35,930
Other		52,363		52,271		159,812		155,812
Total noninterest expense		264,312		260,017		770,799		777,464

Income before income taxes		42,444		52,522		110,088		111,025
Income tax expense		9,539		13,211		24,762		24,008
Net income		32,905		39,311		85,326		87,017
Less: Net income attributable to noncontrolling interest		3,212		2,269		7,632		6,042
Income attributable to Hilltop	$	29,693	$	37,042	$	77,694	$	80,975

Earnings per common share:
Basic	$	0.46	$	0.57	$	1.19	$	1.25
Diluted	$	0.46	$	0.57	$	1.19	$	1.25

Weighted average share information:
Basic		64,928		65,106		65,070		65,011
Diluted		64,946		65,108		65,080		65,014

See accompanying notes.

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Net income	$	32,905	$	39,311	$	85,326	$	87,017
Other comprehensive income (loss):
Change in fair value of cash flow hedges, net taxes of $(1,304), $(91), $(1,656) and $(87), respectively		(4,434)		(306)		(5,476)		(169)
Net unrealized gains (losses) on securities available-for-sale, net taxes of $6,707, $(4,349), $7,246 and $(4,497), respectively		22,818		(14,585)		23,424		(15,819)
Reclassification adjustment for gains (losses) included in net income, net taxes of $0, $0, $34 and $1, respectively		—		(2)		114		4
Amortization of unrealized losses on securities transferred from available-for-sale to held-to-maturity, net taxes of $787, $459, $1,585 and $1,332, respectively		2,619		1,528		5,275		4,432
Comprehensive income		53,908		25,946		108,663		75,465
Less: comprehensive income attributable to noncontrolling interest		3,212		2,269		7,632		6,042

Comprehensive income applicable to Hilltop	$	50,696	$	23,677	$	101,031	$	69,423

See accompanying notes.

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(Unaudited)


						Accumulated				Deferred					Total
				Additional		Other				Compensation		Employee			Hilltop				Total
	Common Stock			Paid-in		Comprehensive		Retained		Employee Stock		Stock Trust			Stockholders’		Noncontrolling		Stockholders’
	Shares	Amount		Capital		Loss		Earnings		Trust, Net		Shares	Amount		Equity		Interest		Equity
Balance, June 30, 2023	65,071	$	651	$	1,050,191	$	(131,718)	$	1,144,624	$	450	21	$	(599)	$	2,063,599	$	26,655	$	2,090,254
Net income	—		—		—		—		37,042		—	—		—		37,042		2,269		39,311
Other comprehensive loss	—		—		—		(13,365)		—		—	—		—		(13,365)		—		(13,365)
Stock-based compensation expense	—		—		2,936		—		—		—	—		—		2,936		—		2,936
Common stock issued to board members	4		—		128		—		—		—	—		—		128		—		128
Issuance of common stock related to share-based awards, net	95		1		(388)		—		—		—	—		—		(387)		—		(387)
Dividends on common stock ($0.16 per share)	—		—		—		—		(10,416)		—	—		—		(10,416)		—		(10,416)
Deferred compensation plan	—		—		—		—		—		(110)	(5)		153		43		—		43
Net cash distributed to noncontrolling interest	—		—		—		—		—		—	—		—		—		(1,642)		(1,642)
Balance, September 30, 2023	65,170	$	652	$	1,052,867	$	(145,083)	$	1,171,250	$	340	16	$	(446)	$	2,079,580	$	27,282	$	2,106,862

Balance, June 30, 2024	64,953	$	650	$	1,047,523	$	(119,171)	$	1,205,467	$	1	—	$	(1)	$	2,134,469	$	28,142	$	2,162,611
Net income	—		—		—		—		29,693		—	—		—		29,693		3,212		32,905
Other comprehensive income	—		—		—		21,003		—		—	—		—		21,003		—		21,003
Stock-based compensation expense	—		—		2,886		—		—		—	—		—		2,886		—		2,886
Common stock issued to board members	4		—		120		—		—		—	—		—		120		—		120
Issuance of common stock related to share-based awards, net	3		—		(32)		—		—		—	—		—		(32)		—		(32)
Dividends on common stock ($0.17 per share)	—		—		—		—		(11,043)		—	—		—		(11,043)		—		(11,043)
Deferred compensation plan	—		—		—		—		—		(1)	—		1		—		—		—
Net cash distributed to noncontrolling interest	—		—		—		—		—		—	—		—		—		(2,591)		(2,591)
Balance, September 30, 2024	64,960	$	650	$	1,050,497	$	(98,168)	$	1,224,117	$	—	—	$	—	$	2,177,096	$	28,763	$	2,205,859

See accompanying notes.

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

(in thousands)

(Unaudited)


						Accumulated				Deferred					Total
				Additional		Other				Compensation		Employee			Hilltop				Total
	Common Stock			Paid-in		Comprehensive		Retained		Employee Stock		Stock Trust			Stockholders’		Noncontrolling		Stockholders’
	Shares	Amount		Capital		Loss		Earnings		Trust, Net		Shares	Amount		Equity		Interest		Equity
Balance, December 31, 2022	64,685	$	647	$	1,046,331	$	(133,531)	$	1,123,636	$	481	23	$	(640)	$	2,036,924	$	26,605	$	2,063,529
Net income	—		—		—		—		80,975		—	—		—		80,975		6,042		87,017
Other comprehensive loss	—		—		—		(11,552)		—		—	—		—		(11,552)		—		(11,552)
Stock-based compensation expense	—		—		12,967		—		—		—	—		—		12,967		—		12,967
Common stock issued to board members	14		—		428		—		—		—	—		—		428		—		428
Issuance of common stock related to share-based awards, net	616		7		(4,542)		—		—		—	—		—		(4,535)		—		(4,535)
Repurchases of common stock	(145)		(2)		(2,317)		—		(2,184)		—	—		—		(4,503)		—		(4,503)
Dividends on common stock ($0.48 per share)	—		—		—		—		(31,177)		—	—		—		(31,177)		—		(31,177)
Deferred compensation plan	—		—		—		—		—		(141)	(7)		194		53		—		53
Net cash distributed to noncontrolling interest	—		—		—		—		—		—	—		—		—		(5,365)		(5,365)
Balance, September 30, 2023	65,170	$	652	$	1,052,867	$	(145,083)	$	1,171,250	$	340	16	$	(446)	$	2,079,580	$	27,282	$	2,106,862

Balance, December 31, 2023	65,153	$	652	$	1,054,662	$	(121,505)	$	1,189,222	$	228	10	$	(292)	$	2,122,967	$	27,362	$	2,150,329
Net income	—		—		—		—		77,694		—	—		—		77,694		7,632		85,326
Other comprehensive income	—		—		—		23,337		—		—	—		—		23,337		—		23,337
Stock-based compensation expense	—		—		8,551		—		—		—	—		—		8,551		—		8,551
Common stock issued to board members	12		—		362		—		—		—	—		—		362		—		362
Issuance of common stock related to share-based awards, net	435		4		(2,805)		—		—		—	—		—		(2,801)		—		(2,801)
Repurchases of common stock	(640)		(6)		(10,273)		—		(9,585)		—	—		—		(19,864)		—		(19,864)
Dividends on common stock ($0.51 per share)	—		—		—		—		(33,214)		—	—		—		(33,214)		—		(33,214)
Deferred compensation plan	—		—		—		—		—		(228)	(10)		292		64		—		64
Net cash distributed to noncontrolling interest	—		—		—		—		—		—	—		—		—		(6,231)		(6,231)
Balance, September 30, 2024	64,960	$	650	$	1,050,497	$	(98,168)	$	1,224,117	$	—	—	$	—	$	2,177,096	$	28,763	$	2,205,859

See accompanying notes.

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Nine Months Ended September 30,
	2024		2023
Operating Activities
Net income	$	85,326	$	87,017
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		6,793		17,127
Depreciation, amortization and accretion, net		15,097		15,267
Equity in undistributed earnings of merchant banking subsidiaries		(9,044)		(6,369)
Deferred income taxes		(11,570)		5,268
Other, net		3,358		12,531
Net change in securities purchased under agreements to resell		(1,755)		(5,649)
Net change in trading securities		(24,845)		176,131
Net change in broker-dealer and clearing organization receivables		356,675		(348,318)
Net change in other assets		(38,748)		(33,796)
Net change in broker-dealer and clearing organization payables		(285,960)		360,433
Net change in other liabilities		(15,508)		(13,295)
Net change in securities sold, not yet purchased		12,901		(1,496)
Proceeds from sale of mortgage servicing rights asset		45,129		19,055
Change in valuation of mortgage servicing rights asset		14,913		678
Net gains from sales of loans		(146,468)		(135,763)
Loans originated for sale		(7,300,426)		(7,297,473)
Proceeds from loans sold		7,445,251		7,328,562
Net cash provided by operating activities		151,119		179,910
Investing Activities
Proceeds from maturities and principal reductions of securities held to maturity		63,633		55,006
Proceeds from sales, maturities and principal reductions of securities available for sale		169,443		204,903
Proceeds from sales, maturities and principal reductions of equity securities		12,663		—
Purchases of securities available for sale		(30,289)		(31,567)
Purchases of equity securities		(1,475)		—
Net change in loans held for investment		61,630		(184,341)
Purchases of premises and equipment and other assets		(6,215)		(6,090)
Proceeds from sales of premises and equipment, other real estate owned, and other assets		7,385		3,431
Proceeds from sale of loans held for sale transferred from loans held for investment		30,103		—
Net cash received from (paid to) Federal Home Loan Bank and Federal Reserve Bank stock		(42)		689
Net cash provided by investing activities		306,836		42,031
Financing Activities
Net change in deposits		(306,146)		(171,491)
Net change in short-term borrowings		15,132		(87,251)
Proceeds from notes payable		—		490,151
Payments on notes payable		—		(490,151)
Payments to repurchase common stock		(19,864)		(4,503)
Dividends paid on common stock		(33,214)		(31,177)
Net cash distributed to noncontrolling interest		(6,231)		(5,365)
Other, net		(3,472)		(5,165)
Net cash used in financing activities		(353,795)		(304,952)

Net change in cash, cash equivalents and restricted cash		104,160		(83,011)
Cash, cash equivalents and restricted cash, beginning of period		1,916,745		1,647,899
Cash, cash equivalents and restricted cash, end of period	$	2,020,905	$	1,564,888

Reconciliation of Cash, Cash Equivalents and Restricted Cash to Consolidated Balance Sheets
Cash and due from banks	$	1,961,627	$	1,513,747
Federal funds sold		3,650		3,650
Assets segregated for regulatory purposes		55,628		47,491
Total cash, cash equivalents and restricted cash	$	2,020,905	$	1,564,888
Supplemental Disclosures of Cash Flow Information
Cash paid for interest	$	319,231	$	252,409
Cash paid for income taxes, net of refunds	$	11,449	$	14,076
Supplemental Schedule of Non-Cash Activities
Conversion of loans to other real estate owned	$	2,871	$	5,168
Additions to mortgage servicing rights	$	9,122	$	23,859

See accompanying notes.

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

1. Summary of Significant Accounting and Reporting Policies

Nature of Operations

Hilltop Holdings Inc. (“Hilltop” and, collectively with its subsidiaries, the “Company”) is a financial holding company registered under the Bank Holding Company Act of 1956. The Company’s primary line of business is to provide business and consumer banking services from offices located throughout Texas through PlainsCapital Bank (the “Bank”). In addition, the Company provides an array of financial products and services through its broker-dealer and mortgage origination subsidiaries.

The Company, headquartered in Dallas, Texas, provides its products and services through two primary business units, PlainsCapital Corporation (“PCC”) and Hilltop Securities Holdings LLC (“Securities Holdings”). PCC is a financial holding company that provides, through its subsidiaries, traditional banking, wealth and investment management and treasury management services primarily in Texas and residential mortgage lending throughout the United States. Securities Holdings is a holding company that provides, through its subsidiaries, investment banking and other related financial services, including municipal advisory, sales, trading and underwriting of taxable and tax-exempt fixed income securities, clearing, securities lending, structured finance and retail brokerage services throughout the United States.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”), and in conformity with the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, these financial statements contain all adjustments necessary for a fair statement of the results of the interim periods presented. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (“2023 Form 10-K”). Results for interim periods are not necessarily indicative of results to be expected for a full year or any future period.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates regarding the allowance for credit losses, the fair values of financial instruments, the mortgage loan indemnification liability, and the potential impairment of goodwill and identifiable intangible assets are particularly subject to change. The Company has applied its critical accounting policies and estimation methods consistently in all periods presented in these consolidated financial statements. Actual amounts and values as of the balance sheet dates may be materially different than the amounts and values reported due to the inherent uncertainty in the estimation process. Also, future amounts and values could differ materially from those estimates due to changes in values and circumstances after the balance sheet date.

Hilltop owns 100% of the outstanding stock of PCC. PCC owns 100% of the outstanding stock of the Bank and 100% of the membership interest in Hilltop Opportunity Partners LLC, a merchant bank utilized to facilitate investments in companies engaged in non-financial activities. The Bank owns 100% of the outstanding stock of PrimeLending, a PlainsCapital Company (“PrimeLending”).

Hilltop has a 100% membership interest in Securities Holdings, which operates through its wholly-owned subsidiaries, Hilltop Securities Inc. (“Hilltop Securities”), Momentum Independent Network Inc. (“Momentum Independent Network” and collectively with Hilltop Securities, the “Hilltop Broker-Dealers”) and Hilltop Securities Asset Management, LLC. Hilltop Securities is a broker-dealer registered with the SEC and Financial Industry Regulatory Authority (“FINRA”) and a member of the New York Stock Exchange (“NYSE”). Momentum Independent Network is an introducing broker-dealer

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

that is also registered with the SEC and FINRA. Hilltop Securities, Momentum Independent Network and Hilltop Securities Asset Management, LLC are registered investment advisers under the Investment Advisers Act of 1940.

In addition, Hilltop owns 100% of the membership interest in each of HTH Hillcrest Project LLC and Hilltop Investments I, LLC. Hilltop Investments I, LLC owns 50% of the membership interest in HTH Diamond Hillcrest Land LLC (“Hillcrest Land LLC”) which is consolidated under the requirements of the Variable Interest Entities (“VIE”) Subsections of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). These entities are related to the Hilltop Plaza investment discussed in detail in Note 17 to the consolidated financial statements included in the Company’s 2023 Form 10-K and are collectively referred to as the “Hilltop Plaza Entities.”

The consolidated financial statements include the accounts of the above-named entities. Intercompany transactions and balances have been eliminated. Noncontrolling interests have been recorded for minority ownership in entities that are not wholly owned and are presented in compliance with the provisions of Noncontrolling Interest in Subsidiary Subsections of the ASC.

In preparing these consolidated financial statements, subsequent events were evaluated through the time the financial statements were issued. Financial statements are considered issued when they are widely distributed to all stockholders and other financial statement users, or filed with the SEC.

Significant accounting policies are detailed in Note 1 to the consolidated financial statements included in the Company’s 2023 Form 10-K.

Revision of Previously Issued Financial Statements

During the second quarter of 2024, the Company identified an immaterial error related to the classification within noninterest income associated with the allocation of earned revenue between commission and principal gains on certain principal trades of fixed income securities. As a result, certain prior period amounts have been corrected for consistency with the current period presentation. The Company assessed the materiality of this error and change in presentation on prior period consolidated financial statements in accordance with the SEC Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements.” Based on this assessment, the Company concluded that previously issued financial statements were not materially misstated based upon overall considerations of both quantitative and qualitative factors. The revisions had no impact on the Consolidated Balance Sheets, Consolidated Statements of Cash Flows, Consolidated Statements of Comprehensive Income or Consolidated Statements of Changes in Stockholders’ Equity within these financial statements, or within previously filed financial statements. Further, the revisions did not result in a change in quarterly or year-to-date net income, basic or diluted earnings per share, or regulatory capital ratios. Accordingly, the Company corrected the immaterial error for the previously reported three and nine months ended September 30, 2023 in this Quarterly Report on Form 10-Q. The following table presents the impact of the revisions of the previously filed financial statements for the three and nine months ended September 30, 2023 to correct for prior period immaterial errors (in thousands).


	Three Months Ended September 30, 2023						Nine Months Ended September 30, 2023
	As previously		Impact of				As previously		Impact of
	reported		Revision		As adjusted		reported		Revision		As adjusted
Noninterest income:
Securities commission and fees	$	28,044	$	(5,180)	$	22,864	$	88,873	$	(15,721)	$	73,152
Other		40,403		5,180		45,583		115,117		15,721		130,838

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

The following tables present line items for prior period impacts to the Company’s Consolidated Statements of Operations that have been affected by the immaterial error discussed above and will be revised in conjunction with future filings (in thousands).


	Three Months Ended March 31, 2024						Three Months Ended March 31, 2023
	As previously		Impact of				As previously		Impact of
	reported		Revision		As adjusted		reported		Revision		As adjusted
Noninterest income:
Securities commission and fees	$	35,557	$	(5,184)	$	30,373	$	31,223	$	(5,290)	$	25,933
Other		49,200		5,184		54,384		35,680		5,290		40,970


	Year Ended December 31, 2023						Year Ended December 31, 2022						Year Ended December 31, 2021
	(unaudited)						(unaudited)						(unaudited)
	As previously		Impact of				As previously		Impact of				As previously		Impact of
	reported		Revision		As adjusted		reported		Revision		As adjusted		reported		Revision		As adjusted
Noninterest income:
Securities commission and fees	$	121,875	$	(21,343)	$	100,532	$	139,122	$	(23,941)	$	115,181	$	143,827	$	(36,412)	$	107,415
Other		156,082		21,343		177,425		113,957		23,941		137,898		128,034		36,412		164,446

The following table presents line items for prior period impacts to the components of other noninterest income as included in the Company’s Notes to Consolidated Financial Statements that have been affected by the immaterial error discussed above (in thousands).


	Year Ended December 31, 2023						Year Ended December 31, 2022						Year Ended December 31, 2021
	(unaudited)						(unaudited)						(unaudited)
	As previously		Impact of				As previously		Impact of				As previously		Impact of
	reported		Revision		As adjusted		reported		Revision		As adjusted		reported		Revision		As adjusted
Other noninterest income:
Net gains from Hilltop Broker-Dealer structured product and derivative activities	$	42,284	$	1,844	$	44,128	$	37,407	$	3,911	$	41,318	$	48,816	$	5,908	$	54,724
Net gain from trading securities portfolio		54,750		19,499		74,249		23,666		20,030		43,696		26,353		30,504		56,857

2. Recently Issued Accounting Standards

Accounting Standards Issued But Not Yet Adopted

In August 2023, the FASB issued Accounting Standards Update (“ASU”) 2023-05 to require joint ventures to initially measure all contributions received and liabilities assumed upon its formation at fair value. The guidance is applicable to joint venture entities with a formation date on or after January 1, 2025, with early adoption permitted. The Company does not expect the future adoption of this amendment to have a material impact on its future consolidated statements.

In October 2023, the FASB issued ASU 2023-06 to clarify or improve disclosure and presentation requirements of a variety of topics, which will allow users to more easily compare entities subject to the SEC's existing disclosures with those entities that were not previously subject to the requirements, and align the requirements in the FASB accounting standard codification with the SEC's regulations. The amendments will be effective on the date the SEC removes related disclosure requirements from Regulation S-X or Regulation S-K. If by June 30, 2027, the SEC has not removed the applicable disclosure requirements, the pending amendments will not become effective. Early adoption is prohibited. The Company does not expect the future adoption of this amendment to have a material impact on its consolidated financial statements since the Company is currently subject to the SEC’s disclosure and presentation requirements under Regulation S-X and Regulation S-K.

In November 2023, the FASB issued ASU 2023-07 to enhance disclosures of significant expense and segment profitability categories and amounts for each of the Company’s reportable business segments. The amendments are effective in annual periods beginning after December 15, 2023 and subsequent interim periods, with early adoption permitted. The Company does not expect the adoption of the provisions of the amendments to have an impact on its financial condition or results of operations. The Company expects to adopt this guidance beginning with the Annual Report on Form 10-K for the year ending December 31, 2024.

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

In December 2023, the FASB issued ASU 2023-09 to improve disclosures and presentation requirements to the transparency of the income tax disclosures by requiring consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid disaggregated by jurisdiction. The amendments are effective in annual periods beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the provisions of the amendments, which are not expected to have an impact on its financial condition or results of operations. The Company expects to adopt this guidance in its Annual Report on Form 10-K for the year ending December 31, 2025.

In March 2024, the FASB issued ASU 2024-01 to clarify how an entity should determine whether a profits interest or similar award should be accounted for as a share-based payment arrangement or similar to a cash bonus or profit-sharing arrangement. The amendments are effective in annual periods beginning after December 15, 2024, and interim periods within those annual periods, with early adoption permitted. The Company is currently evaluating the new guidance and the impact on its future consolidated statements.

3. Fair Value Measurements

Fair Value Measurements and Disclosures

The Company determines fair values in compliance with The Fair Value Measurements and Disclosures Topic of the ASC (the “Fair Value Topic”). The Fair Value Topic defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. The Fair Value Topic defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Fair Value Topic assumes that transactions upon which fair value measurements are based occur in the principal market for the asset or liability being measured. Further, fair value measurements made under the Fair Value Topic exclude transaction costs and are not the result of forced transactions.

The Fair Value Topic includes a fair value hierarchy that classifies fair value measurements based upon the inputs used in valuing the assets or liabilities that are the subject of fair value measurements. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs, as indicated below.

●

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities that the Company can access at the measurement date.

●

Level 2 Inputs: Observable inputs other than Level 1 prices. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, yield curves, prepayment speeds, default rates, credit risks and loss severities), and inputs that are derived from or corroborated by market data, among others.

●

Level 3 Inputs: Unobservable inputs that reflect an entity’s own estimates about the assumptions that market participants would use in pricing the assets or liabilities. Level 3 inputs include pricing models and discounted cash flow techniques, among others.

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

Fair Value Option

The Company has elected to measure substantially all of PrimeLending’s mortgage loans held for sale and the retained mortgage servicing rights (“MSR”) asset at fair value, under the provisions of the Fair Value Option Subsections of the ASC (the “Fair Value Option”). The Company elected to apply the provisions of the Fair Value Option to these items so that it would have the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. At September 30, 2024 and December 31, 2023, the aggregate fair value of PrimeLending’s mortgage loans held for sale accounted for under the Fair Value Option was $768.2 million and $822.2 million, respectively, and the unpaid principal balance of those loans was $754.1 million and $802.3 million, respectively. The interest component of fair value is reported as interest income on loans in the accompanying consolidated statements of operations.

The Company holds a number of financial instruments that are measured at fair value on a recurring basis, either by the application of the Fair Value Option or other authoritative pronouncements. The fair values of those instruments are determined primarily using Level 2 inputs. Those inputs include quotes from mortgage loan investors and derivatives dealers and data from independent pricing services. The fair value of loans held for sale is determined using an exit price method.

The following tables present information regarding financial assets and liabilities measured at fair value on a recurring basis (in thousands).


	Level 1		Level 2		Level 3		Total
September 30, 2024	Inputs		Inputs		Inputs		Fair Value
Trading securities	$	5,515	$	535,321	$	—	$	540,836
Available for sale securities		—		1,376,614		29,086		1,405,700
Equity securities		287		—		—		287
Loans held for sale		—		746,840		48,304		795,144
Derivative assets		—		67,968		—		67,968
MSR asset		—		—		45,742		45,742
Equity investments		—		—		22,547		22,547
Securities sold, not yet purchased		44,886		2,887		—		47,773
Derivative liabilities		—		13,093		—		13,093


	Level 1		Level 2		Level 3			Total
December 31, 2023	Inputs		Inputs		Inputs			Fair Value
Trading securities	$	8,929	$	507,062	$	—	$	515,991
Available for sale securities		—		1,483,177		24,418		1,507,595
Equity securities		321		—		—		321
Loans held for sale		—		784,158		38,036		822,194
Loans held for investment		—		—		10,858		10,858
Derivative assets		—		76,778		820		77,598
MSR asset		—		—		96,662		96,662
Equity investments		—		—		19,540		19,540
Securities sold, not yet purchased		14,027		20,845		—		34,872
Derivative liabilities		—		27,106		—		27,106

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

The following tables include a rollforward for those material financial instruments measured at fair value using Level 3 inputs (in thousands).


									Total Gains or Losses
									(Realized or Unrealized)
	Balance,						Transfers				Included in Other
	Beginning of		Purchases/		Sales/		to (from)		Included in		Comprehensive		Balance,
	Period		Additions		Reductions		Level 3		Net Income		Income (Loss)		End of Period
Three Months Ended September 30, 2024
Available for sale securities	$	21,145	$	6,250	$	—	$	—	$	691	$	1,000	$	29,086
Loans held for sale		56,168		23,979		(30,740)		—		(1,103)		—		48,304
MSR asset		52,902		3,033		—		—		(10,193)		—		45,742
Equity investment		19,540		1,475		—		—		1,532		—		22,547
Total	$	149,755	$	34,737	$	(30,740)	$	—	$	(9,073)	$	1,000	$	145,679

Nine Months Ended September 30, 2024
Available for sale securities	$	24,418	$	6,250	$	(4,702)	$	—	$	1,942	$	1,178	$	29,086
Loans held for sale		38,036		70,086		(47,925)		—		(11,893)		—		48,304
Loans held for investment		10,858		—		(11,352)		—		494		—		—
Derivative assets		820		—		(2,598)		—		1,778		—		—
MSR asset		96,662		9,122		(45,129)		—		(14,913)		—		45,742
Equity investment		19,540		1,475		—		—		1,532		—		22,547
Total	$	190,334	$	86,933	$	(111,706)	$	—	$	(21,060)	$	1,178	$	145,679

Three Months Ended September 30, 2023
Available for sale securities	$	—	$	11,696	$	—	$	—	$	304	$	—	$	12,000
Loans held for sale		41,292		17,219		(9,171)		—		(13,142)		—		36,198
Loans held for investment		9,714		—		—		—		285		—		9,999
MSR asset		95,101		3,759		—		—		6,091		—		104,951
Total	$	146,107	$	32,674	$	(9,171)	$	—	$	(6,462)	$	—	$	163,148

Nine Months Ended September 30, 2023
Available for sale securities	$	—	$	11,696	$	—	$	—	$	304	$	—	$	12,000
Loans held for sale		40,707		54,727		(39,900)		(446)		(18,890)		—		36,198
Loans held for investment		9,181		—		—		—		818		—		9,999
MSR asset		100,825		23,859		(19,055)		—		(678)		—		104,951
Total	$	150,713	$	90,282	$	(58,955)	$	(446)	$	(18,446)	$	—	$	163,148

All net realized and unrealized gains (losses) in the tables above are reflected in the accompanying consolidated financial statements. The unrealized gains (losses) relate to financial instruments still held at September 30, 2024.

For material Level 3 financial instruments measured at fair value on a recurring basis at September 30, 2024 and December 31, 2023, the significant unobservable inputs used in the fair value measurements were as follows.


					Range (Weighted-Average)
Financial Instrument	Fair Value		Valuation Technique	Unobservable Inputs	September 30, 2024							December 31, 2023
Available for sale securities	$	22,789	Discounted cash flow	Discount rate	12.50	-	13.25	%				14.25	-	15.50	%
		6,297	Recent transaction	Recent transaction

Loans held for sale		48,304	Market comparable	Projected price	78	-	94	%	(	93	%)	78	-	92	%	(	90	%)

Loans held for investment		-	Discounted cash flow	Discount rate											10.00		%

Derivative assets		-	Discounted cash flow	Discount rate											15.00		%

MSR asset		45,742	Discounted cash flow	Constant prepayment rate				9.74		%					8.65		%
				Discount rate				16.55		%					11.67		%

Equity investments		21,072	Market comparable	Market multiple				10.4x
		1,475	Recent transaction	Recent transaction

The fair value of certain available for sale securities, and loans held for investment prior to the sale of such instrument during the second quarter of 2024, held by the Company’s merchant bank subsidiary are measured, under the provisions of the Fair Value Option, using the income approach with Level 3 inputs. The fair value of such financial instruments are based upon estimates of expected cash flows using unobservable inputs, including credit spreads derived from comparable securities and benchmark credit curves, and management’s knowledge of underlying collateral.

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

The fair value of certain loans held for sale that cannot be sold through normal sale channels or are non-performing is measured using Level 3 inputs. The fair value of such loans is generally based upon estimates of expected cash flows using unobservable inputs, including listing prices of comparable assets, uncorroborated expert opinions, and/or management’s knowledge of underlying collateral.

The fair value of certain derivatives held by the Company’s merchant bank subsidiary were measured using Level 3 inputs based upon estimates of expected cash flows using unobservable inputs, including management’s knowledge of underlying collateral prior to the sale of such instruments during the second quarter of 2024.

The MSR asset is reported at fair value, under the provisions of the Fair Value Option, using Level 3 inputs. The MSR asset is valued by projecting net servicing cash flows, which are then discounted to estimate the fair value. The fair value of the MSR asset is impacted by a variety of factors. Prepayment and discount rates, the most significant unobservable inputs, are discussed further in Note 7 to the consolidated financial statements.

The Company has elected to measure certain equity investments held by the Company’s merchant bank subsidiary under the provisions of the Fair Value Option using Level 3 inputs to mitigate volatility in reported earnings changes in fair value and better align with merchant bank investment strategy. Changes in fair value are reported within other noninterest income in the accompanying consolidated statements of operations.

The Company had no transfers between Levels 1 and 2 during the periods presented. Any transfers are based on changes in the observability and/or significance of the valuation inputs and are assumed to occur at the beginning of the quarterly reporting period in which they occur.

The following table presents those changes in fair value of material instruments recognized in the consolidated statements of operations that are accounted for under the Fair Value Option (in thousands).


	Three Months Ended September 30, 2024						Three Months Ended September 30, 2023
	Net		Other		Total		Net		Other		Total
	Gains		Noninterest		Changes in		Gains		Noninterest		Changes in
	(Losses)		Income		Fair Value		(Losses)		Income		Fair Value
Loans held for sale	$	(4,666)	$	—	$	(4,666)	$	(3,330)	$	—	$	(3,330)
MSR asset		(10,193)		—		(10,193)		6,091		—		6,091
Equity investment		—		1,532		1,532		—		—		—


	Nine Months Ended September 30, 2024						Nine Months Ended September 30, 2023
	Net		Other		Total		Net		Other		Total
	Gains		Noninterest		Changes in		Gains		Noninterest		Changes in
	(Losses)		Income		Fair Value		(Losses)		Income		Fair Value
Loans held for sale	$	(7,789)	$	—	$	(7,789)	$	(5,563)	$	—	$	(5,563)
Loans held for investment		94		—		94		—		—		—
MSR asset		(14,913)		—		(14,913)		(678)		—		(678)
Equity investment		—		1,532		1,532		—		—		—

Financial Assets and Liabilities Not Measured at Fair Value on Recurring or Non-Recurring Basis

The Fair Value of Financial Instruments Subsection of the ASC requires disclosure of the fair value of financial assets and liabilities, including the financial assets and liabilities previously discussed. There have been no changes to the methods for determining estimated fair value for financial assets and liabilities as described in detail in Note 3 to the consolidated financial statements included in the Company’s 2023 Form 10-K.

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

The following tables present the carrying values and estimated fair values of financial instruments not measured at fair value on either a recurring or non-recurring basis (in thousands).


			Estimated Fair Value
	Carrying		Level 1		Level 2		Level 3
September 30, 2024	Amount		Inputs		Inputs		Inputs		Total
Financial assets:
Cash and cash equivalents	$	1,965,277	$	1,965,277	$	—	$	—	$	1,965,277
Assets segregated for regulatory purposes		55,628		55,628		—		—		55,628
Securities purchased under agreements to resell		81,766		—		81,766		—		81,766
Held to maturity securities		754,824		—		690,846		—		690,846
Loans held for sale		138,580		—		119,914		19,413		139,327
Loans held for investment, net		7,868,712		—		340,644		7,727,873		8,068,517
Broker-dealer and clearing organization receivables		1,220,784		—		1,220,784		—		1,220,784
Other assets		71,742		—		71,742		—		71,742

Financial liabilities:
Deposits		10,791,447		—		10,788,548		—		10,788,548
Broker-dealer and clearing organization payables		1,110,373		—		1,110,373		—		1,110,373
Short-term borrowings		914,645		—		914,645		—		914,645
Debt		347,533		—		335,970		—		335,970
Other liabilities		21,059		—		21,059		—		21,059


			Estimated Fair Value
	Carrying		Level 1		Level 2		Level 3
December 31, 2023	Amount		Inputs		Inputs		Inputs		Total
Financial assets:
Cash and cash equivalents	$	1,859,350	$	1,859,350	$	—	$	—	$	1,859,350
Assets segregated for regulatory purposes		57,395		57,395		—		—		57,395
Securities purchased under agreements to resell		80,011		—		80,011		—		80,011
Held to maturity securities		812,677		—		731,858		—		731,858
Loans held for sale		121,652		—		99,358		22,882		122,240
Loans held for investment, net		7,957,474		—		344,172		7,696,393		8,040,565
Broker-dealer and clearing organization receivables		1,573,931		—		1,573,931		—		1,573,931
Other assets		74,613		—		74,613		—		74,613

Financial liabilities:
Deposits		11,063,192		—		11,045,957		—		11,045,957
Broker-dealer and clearing organization payables		1,430,734		—		1,430,734		—		1,430,734
Short-term borrowings		900,038		—		900,038		—		900,038
Debt		347,145		—		319,505		—		319,505
Other liabilities		24,280		—		24,280		—		24,280

The Company held equity investments other than securities of $34.7 million and $59.2 million at September 30, 2024 and December 31, 2023, respectively, which are included within other assets in the consolidated balance sheets. Of the $34.7 million of such equity investments held at September 30, 2024, $2.8 million do not have readily determinable fair values and each is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

The following table presents the adjustments to the carrying value of these investments during the periods presented (in thousands).


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Balance, beginning of period	$	6,549	$	22,654	$	6,608	$	27,264
Additional investments		—		374		—		374
Upward adjustments		—		186		—		611
Impairments and downward adjustments		(1,433)		(21)		(1,492)		(5,056)
Dispositions		(2,324)		—		(2,324)		—
Balance, end of period	$	2,792	$	23,193	$	2,792	$	23,193

4. Securities

The fair value of trading securities is summarized as follows (in thousands).


	September 30,		December 31,
	2024		2023
U.S. Treasury securities	$	127	$	3,736
U.S. government agencies:
Bonds		9,141		12,867
Residential mortgage-backed securities		127,499		124,768
Collateralized mortgage obligations		55,061		86,281
Other		23,381		13,079
Corporate debt securities		41,867		37,569
States and political subdivisions		260,323		180,890
Private-label securitized product		13,130		47,768
Other		10,307		9,033
Totals	$	540,836	$	515,991

In addition to the securities shown above, the Hilltop Broker-Dealers enter into transactions that represent commitments to purchase and deliver securities at prevailing future market prices to facilitate customer transactions and satisfy such commitments. Accordingly, the Hilltop Broker-Dealers’ ultimate obligations 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 $47.8 million and $34.9 million at September 30, 2024 and December 31, 2023, respectively.

The amortized cost and fair value of available for sale and held to maturity securities are summarized as follows (in thousands).


	Available for Sale
	Amortized		Unrealized		Unrealized
September 30, 2024	Cost		Gains		Losses		Fair Value
U.S. Treasury securities	$	4,990	$	—	$	(228)	$	4,762
U.S. government agencies:
Bonds		115,645		381		(343)		115,683
Residential mortgage-backed securities		358,539		449		(29,321)		329,667
Commercial mortgage-backed securities		204,089		744		(6,673)		198,160
Collateralized mortgage obligations		741,458		606		(46,066)		695,998
Corporate debt securities		29,408		215		(537)		29,086
States and political subdivisions		34,941		40		(2,637)		32,344
Totals	$	1,489,070	$	2,435	$	(85,805)	$	1,405,700

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)


	Available for Sale
	Amortized		Unrealized		Unrealized
December 31, 2023	Cost		Gains		Losses		Fair Value
U.S. Treasury securities	$	4,985	$	—	$	(368)	$	4,617
U.S. government agencies:
Bonds		166,617		360		(811)		166,166
Residential mortgage-backed securities		389,160		25		(39,315)		349,870
Commercial mortgage-backed securities		200,236		468		(8,958)		191,746
Collateralized mortgage obligations		797,876		291		(61,686)		736,481
Corporate debt securities		25,919		—		(1,501)		24,418
States and political subdivisions		36,954		39		(2,696)		34,297
Totals	$	1,621,747	$	1,183	$	(115,335)	$	1,507,595


	Held to Maturity
	Amortized		Unrealized		Unrealized
September 30, 2024	Cost		Gains		Losses		Fair Value
U.S. government agencies:
Residential mortgage-backed securities	$	261,526	$	—	$	(20,625)	$	240,901
Commercial mortgage-backed securities		152,657		—		(7,777)		144,880
Collateralized mortgage obligations		263,546		—		(30,857)		232,689
States and political subdivisions		77,095		107		(4,826)		72,376
Totals	$	754,824	$	107	$	(64,085)	$	690,846


	Held to Maturity
	Amortized		Unrealized		Unrealized
December 31, 2023	Cost		Gains		Losses		Fair Value
U.S. government agencies:
Residential mortgage-backed securities	$	278,172	$	—	$	(25,765)	$	252,407
Commercial mortgage-backed securities		172,879		—		(12,670)		160,209
Collateralized mortgage obligations		284,208		—		(37,189)		247,019
States and political subdivisions		77,418		149		(5,344)		72,223
Totals	$	812,677	$	149	$	(80,968)	$	731,858

Additionally, the Company had unrealized net gains of $0.2 million and $0.3 million at September 30, 2024 and December 31, 2023, respectively, from equity securities with fair values of $0.3 million and $0.3 million held at September 30, 2024 and December 31, 2023, respectively. The Company recognized nominal net gains during the three months ended September 30, 2024 and 2023, respectively, and recognized nominal net losses and net gains of $0.1 million during the nine months ended September 30, 2024 and 2023, respectively, due to changes in the fair value of equity securities still held at the balance sheet date. During the three and nine months ended September 30, 2024 and 2023, net gains and losses recognized from equity securities sold were nominal.

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Information regarding available for sale and held to maturity securities that were in an unrealized loss position is shown in the following tables (dollars in thousands).


	September 30, 2024					December 31, 2023
	Number of			Unrealized		Number of			Unrealized
	Securities	Fair Value		Losses		Securities	Fair Value		Losses
Available for Sale
U.S. treasury securities:
Unrealized loss for less than twelve months	—	$	—	$	—	—	$	—	$	—
Unrealized loss for twelve months or longer	1		4,762		228	1		4,617		368
	1		4,762		228	1		4,617		368
U.S. government agencies:
Bonds:
Unrealized loss for less than twelve months	—		—		—	4		28,988		103
Unrealized loss for twelve months or longer	15		77,173		343	20		112,502		708
	15		77,173		343	24		141,490		811
Residential mortgage-backed securities:
Unrealized loss for less than twelve months	13		7,804		448	14		8,989		616
Unrealized loss for twelve months or longer	107		305,146		28,873	109		338,769		38,699
	120		312,950		29,321	123		347,758		39,315
Commercial mortgage-backed securities:
Unrealized loss for less than twelve months	—		—		—	2		10,413		282
Unrealized loss for twelve months or longer	20		196,733		6,673	18		162,470		8,676
	20		196,733		6,673	20		172,883		8,958
Collateralized mortgage obligations:
Unrealized loss for less than twelve months	1		810		2	2		11,560		22
Unrealized loss for twelve months or longer	134		662,145		46,064	138		709,571		61,665
	135		662,955		46,066	140		721,131		61,687
Corporate debt securities:
Unrealized loss for less than twelve months	1		8,618		537	2		13,483		1,501
Unrealized loss for twelve months or longer	—		—		—	—		—		—
	1		8,618		537	2		13,483		1,501
States and political subdivisions:
Unrealized loss for less than twelve months	—		—		—	10		7,023		55
Unrealized loss for twelve months or longer	52		25,648		2,637	50		20,857		2,640
	52		25,648		2,637	60		27,880		2,695
Total available for sale:
Unrealized loss for less than twelve months	15		17,232		987	34		80,456		2,579
Unrealized loss for twelve months or longer	329		1,271,607		84,818	336		1,348,786		112,756
	344	$	1,288,839	$	85,805	370	$	1,429,242	$	115,335


	September 30, 2024					December 31, 2023
	Number of			Unrealized		Number of			Unrealized
	Securities	Fair Value		Losses		Securities	Fair Value		Losses
Held to Maturity
U.S. government agencies:
Residential mortgage-backed securities:
Unrealized loss for less than twelve months	—	$	—	$	—	—	$	—	$	—
Unrealized loss for twelve months or longer	45		240,901		20,625	44		278,172		25,765
	45		240,901		20,625	44		278,172		25,765
Commercial mortgage-backed securities:
Unrealized loss for less than twelve months	—		—		—	—		—		—
Unrealized loss for twelve months or longer	27		144,880		7,777	31		160,208		12,670
	27		144,880		7,777	31		160,208		12,670
Collateralized mortgage obligations:
Unrealized loss for less than twelve months	—		—		—	—		—		—
Unrealized loss for twelve months or longer	54		232,688		30,857	54		247,019		37,189
	54		232,688		30,857	54		247,019		37,189
States and political subdivisions:
Unrealized loss for less than twelve months	11		6,223		56	39		15,506		479
Unrealized loss for twelve months or longer	158		58,520		4,770	128		45,208		4,865
	169		64,743		4,826	167		60,714		5,344
Total held to maturity:
Unrealized loss for less than twelve months	11		6,223		56	39		15,506		479
Unrealized loss for twelve months or longer	284		676,989		64,029	257		730,607		80,489
	295	$	683,212	$	64,085	296	$	746,113	$	80,968

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties. The amortized cost and fair value of securities, excluding trading and equity securities, at September 30, 2024 are shown by contractual maturity below (in thousands).


	Available for Sale				Held to Maturity
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	21,587	$	21,579	$	—	$	—
Due after one year through five years		63,709		63,311		3,823		3,693
Due after five years through ten years		54,250		53,730		49,427		47,044
Due after ten years		45,438		43,255		23,845		21,639
		184,984		181,875		77,095		72,376

Residential mortgage-backed securities		358,539		329,667		261,526		240,901
Commercial mortgage-backed securities		204,089		198,160		152,657		144,880
Collateralized mortgage obligations		741,458		695,998		263,546		232,689
	$	1,489,070	$	1,405,700	$	754,824	$	690,846

The Company recognized net gains of $7.4 million and $9.4 million from its trading portfolio during the three months ended September 30, 2024 and 2023, respectively, and net gains of $27.4 million and $39.0 million during the nine months ended September 30, 2024 and 2023, respectively. In addition, the Hilltop Broker-Dealers realized net gains from structured product trading activities of $14.6 million and $8.2 million during the three months ended September 30, 2024 and 2023, respectively, and net gains from structured product trading activities of $55.4 million and $52.8 million during the nine months ended September 30, 2024 and 2023, respectively. The Company had no other realized gains and losses on securities during the three and nine months ended September 30, 2024 and nominal other realized losses on securities during the three and nine months ended September 30, 2023, respectively. All such realized gains and losses are recorded as a component of other noninterest income within the consolidated statements of operations.

Securities with a carrying amount of $590.5 million and $537.2 million (with a fair value of $556.1 million and $503.1 million, respectively) at September 30, 2024 and December 31, 2023, respectively, were pledged by the Bank to secure public and trust deposits, federal funds purchased and securities sold under agreements to repurchase, and for other purposes as required or permitted by law. Substantially all of these pledged securities were included in the available for sale and held to maturity securities portfolios at September 30, 2024 and December 31, 2023.

Mortgage-backed securities and collateralized mortgage obligations consist primarily of Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) pass-through and participation certificates. GNMA securities are guaranteed by the full faith and credit of the United States, while FNMA and FHLMC securities are fully guaranteed by those respective United States government-sponsored agencies, and conditionally guaranteed by the full faith and credit of the United States.

5. Loans Held for Investment

The Bank originates loans to customers primarily in Texas. Although the Bank has diversified loan and leasing portfolios and, generally, holds collateral against amounts advanced to customers, its debtors’ ability to honor their contracts is substantially dependent upon the general economic conditions of the region and of the industries in which its debtors operate, which consist primarily of real estate (including construction and land development), wholesale/retail trade, agribusiness and energy. 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.

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

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


	September 30,		December 31,
	2024		2023
Commercial real estate:
Non-owner occupied	$	1,874,641	$	1,889,882
Owner occupied		1,427,628		1,422,234
Commercial and industrial		1,662,225		1,607,833
Construction and land development		870,764		1,031,095
1-4 family residential		1,774,891		1,757,178
Consumer		28,837		27,351
Broker-dealer ⁽¹⁾		340,644		344,172
		7,979,630		8,079,745
Allowance for credit losses		(110,918)		(111,413)
Total loans held for investment, net of allowance	$	7,868,712	$	7,968,332

(1)

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

Past Due Loans and Nonaccrual Loans

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
September 30, 2024	30-59 Days		60-89 Days		90 Days or More		Due Loans		Loans		Loans		90 Days or More
Commercial real estate:
Non-owner occupied	$	236	$	3,483	$	795	$	4,514	$	1,870,127	$	1,874,641	$	—
Owner occupied		—		—		9		9		1,427,619		1,427,628		—
Commercial and industrial		4,108		8,901		30,029		43,038		1,619,187		1,662,225		5
Construction and land development		10,092		2,225		877		13,194		857,570		870,764		—
1-4 family residential		3,275		1,495		2,382		7,152		1,767,739		1,774,891		—
Consumer		110		6		—		116		28,721		28,837		—
Broker-dealer		—		—		—		—		340,644		340,644		—
	$	17,821	$	16,110	$	34,092	$	68,023	$	7,911,607	$	7,979,630	$	5


													Accruing Loans
	Loans Past Due						Total Past		Current		Total		Past Due
December 31, 2023	30-59 Days		60-89 Days		90 Days or More		Due Loans		Loans		Loans		90 Days or More
Commercial real estate:
Non-owner occupied	$	6,125	$	—	$	799	$	6,924	$	1,882,958	$	1,889,882	$	—
Owner occupied		6,823		386		3,897		11,106		1,411,128		1,422,234		—
Commercial and industrial		3,348		1,496		2,074		6,918		1,600,915		1,607,833		—
Construction and land development		767		1,554		276		2,597		1,028,498		1,031,095		—
1-4 family residential		8,625		1,292		3,203		13,120		1,744,058		1,757,178		—
Consumer		28		4		5		37		27,314		27,351		—
Broker-dealer		—		—		—		—		344,172		344,172		—
	$	25,716	$	4,732	$	10,254	$	40,702	$	8,039,043	$	8,079,745	$	—

In addition to the loans shown in the tables above, PrimeLending had $140.8 million and $115.1 million of loans included in loans held for sale (with an aggregate unpaid principal balance of $141.6 million and $115.7 million, respectively) that were 90 days past due and accruing interest at September 30, 2024 and December 31, 2023, respectively. These loans are guaranteed by U.S. government agencies and include loans that are subject to repurchase, or have been repurchased, by PrimeLending.

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

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


	Non-accrual Loans
	September 30, 2024						December 31, 2023						Interest Income Recognized
	With		With No				With		With No				Three Months Ended September 30,				Nine Months Ended September 30,
	Allowance		Allowance		Total		Allowance		Allowance		Total		2024		2023		2024		2023
Commercial real estate:
Non-owner occupied	$	412	$	7,630	$	8,042	$	33,728	$	2,712	$	36,440	$	155	$	83	$	1,666	$	264
Owner occupied		87		2,323		2,410		4,630		468		5,098		82		141		845		465
Commercial and industrial		32,493		34,436		66,929		5,216		4,286		9,502		1,056		1,564		1,619		1,833
Construction and land development		877		1,607		2,484		533		2,749		3,282		(13)		9		49		45
1-4 family residential		478		7,398		7,876		726		9,283		10,009		256		432		1,328		1,267
Consumer		—		—		—		6		—		6		—		—		—		—
Broker-dealer		—		—		—		—		—		—		—		—		—		—
	$	34,347	$	53,394	$	87,741	$	44,839	$	19,498	$	64,337	$	1,536	$	2,229	$	5,507	$	3,874

At September 30, 2024 and December 31, 2023, $3.4 million and $4.0 million, respectively, of real estate loans secured by residential properties and classified as held for sale were in non-accrual status.

As shown in the table above, loans accounted for on a non-accrual basis increased from December 31, 2023 to September 30, 2024 by $23.4 million. The change in non-accrual loans was primarily due to increases in commercial and industrial loans of $57.4 million, partially offset by decreases in commercial real estate non-owner occupied loans of $28.4 million, commercial real estate owner occupied loans of $2.7 million and 1-4 family residential loans of $2.1 million. The increase in commercial and industrial loans in non-accrual status since December 31, 2023 was primarily due to the addition of loans with an aggregate loan balance of $64.5 million, partially offset by principal payoffs. Of the $57.4 million increase in commercial and industrial loans in non-accrual status, $54.0 million was due to the addition of two credit relationships from the auto note financing industry subsector. The decrease in commercial real estate non-owner occupied loans in non-accrual status since December 31, 2023 was primarily due to the reclassification of a single non-accrual loan from loans held for investment during the first quarter of 2024. This loan was subsequently sold in the second quarter of 2024. The decrease in commercial real estate owner occupied loans in non-accrual status was primarily due to the payoff of a single relationship with a loan balance of $3.9 million since December 31, 2023. The decrease in 1-4 family residential loans in non-accrual status since December 31, 2023 was primarily due to principal payoffs.

For non-accrual loans that are considered to be collateral-dependent, the Company has implemented the practical expedient to measure the allowance using the fair value of the collateral. For non-accrual loans that are not collateral dependent, the Company measures the allowance based on discounted expected cash flows.

Loan Modifications

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 following table presents the amortized cost basis of the loans held for investment modified for borrowers experiencing financial difficulty grouped by portfolio segment and type of modification granted during the periods presented (in thousands).


											Total
									Combination		Modifications as a
	Interest Rate		Term		Principal		Payment		Term Extension and		% of Portfolio
Three Months Ended September 30, 2024	Reduction		Extension		Forgiveness		Delay		Rate Reduction		Segment
Commercial real estate:
Non-owner occupied	$	—	$	1,448	$	—	$	—	$	—	0.1	%
Owner occupied		—		332		—		—		—	—	%
Commercial and industrial		—		34,030		—		—		—	2.0	%
Construction and land development		—		—		—		—		—	—	%
1-4 family residential		—		142		—		—		—	—	%
Consumer		—		—		—		—		—	—	%
Broker-dealer		—		—		—		—		—	—	%
Total	$	—	$	35,952	$	—	$	—	$	—	0.5	%

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)


											Total
									Combination		Modifications as a
	Interest Rate		Term		Principal		Payment		Term Extension and		% of Portfolio
Nine Months Ended September 30, 2024	Reduction		Extension		Forgiveness		Delay		Rate Reduction		Segment
Commercial real estate:
Non-owner occupied	$	—	$	1,448	$	—	$	—	$	—	0.1	%
Owner occupied		—		500		—		—		—	—	%
Commercial and industrial		—		43,819		—		—		469	2.7	%
Construction and land development		—		—		—		—		—	—	%
1-4 family residential		—		170		—		—		—	—	%
Consumer		—		—		—		—		—	—	%
Broker-dealer		—		—		—		—		—	—	%
Total	$	—	$	45,937	$	—	$	—	$	469	0.6	%


											Total
									Combination		Modifications as a
	Interest Rate		Term		Principal		Payment		Term Extension and		% of Portfolio
Three Months Ended September 30, 2023	Reduction		Extension		Forgiveness		Delay		Payment Delay		Segment
Commercial real estate:
Non-owner occupied	$	—	$	382	$	—	$	—	$	—	—	%
Owner occupied		—		12		—		—		—	—	%
Commercial and industrial		—		11,440		—		—		—	0.7	%
Construction and land development		—		—		—		—		—	—	%
1-4 family residential		—		—		—		—		—	—	%
Consumer		—		—		—		—		—	—	%
Broker-dealer		—		—		—		—		—	—	%
Total	$	—	$	11,834	$	—	$	—	$	—	0.1	%


											Total
									Combination		Modifications as a
	Interest Rate		Term		Principal		Payment		Term Extension and		% of Portfolio
Nine Months Ended September 30, 2023	Reduction		Extension		Forgiveness		Delay		Payment Delay		Segment
Commercial real estate:
Non-owner occupied	$	—	$	34,784	$	—	$	—	$	—	1.9	%
Owner occupied		—		2,205		—		—		—	0.2	%
Commercial and industrial		—		15,057		—		2,868		—	1.1	%
Construction and land development		—		286		—		—		—	—	%
1-4 family residential		—		—		—		—		—	—	%
Consumer		—		—		—		—		—	—	%
Broker-dealer		—		—		—		—		—	—	%
Total	$	—	$	52,332	$	—	$	2,868	$	—	0.7	%

As shown in the tables above, loans modified for borrowers experiencing financial difficulty during the three and nine months ended September 30, 2024 included a term extension modification for a single loan of $25 million in the auto note financing subsector within the commercial and industrial loan portfolio.

For those loans held for investment modified for borrowers experiencing financial difficulty during the last twelve months, the following table provides aging and non-accrual details grouped by portfolio segment (in thousands).


	Modified Loans Past Due						Total Modified		Modified
September 30, 2024	30-59 Days		60-89 Days		90 Days or More		Past Due Loans		Non-accrual Loans
Commercial real estate:
Non-owner occupied	$	—	$	—	$	—	$	—	$	372
Owner occupied		—		—		—		—		111
Commercial and industrial		775		—		—		775		33,605
Construction and land development		—		—		—		—		—
1-4 family residential		—		—		—		—		28
Consumer		—		—		—		—		—
Broker-dealer		—		—		—		—		—
Total	$	775	$	—	$	—	$	775	$	34,116

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

The following tables present the financial effects of the loans held for investment modified for borrowers experiencing financial difficulty during the periods presented (in thousands).


	Three Months Ended September 30, 2024			Nine Months Ended September 30, 2024
	Weighted-Average		Weighted-Average	Weighted-Average		Weighted-Average
	Interest Rate		Term Extension	Interest Rate		Term Extension
	Reduction		(in months)	Reduction		(in months)
Commercial real estate:
Non-owner occupied	—	%	15	—	%	15
Owner occupied	—	%	18	—	%	20
Commercial and industrial	—	%	27	0.5	%	24
Construction and land development	—	%	—	—	%	—
1-4 family residential	—	%	60	—	%	56
Consumer	—	%	—	—	%	—
Broker-dealer	—	%	—	—	%	—
Total	—	%	27	0.5	%	24


	Three Months Ended September 30, 2023			Nine Months Ended September 30, 2023
	Weighted-Average		Weighted-Average	Weighted-Average		Weighted-Average
	Interest Rate		Term Extension	Interest Rate		Term Extension
	Reduction		(in months)	Reduction		(in months)
Commercial real estate:
Non-owner occupied	—	%	12	—	%	26
Owner occupied	—	%	24	—	%	35
Commercial and industrial	—	%	11	—	%	11
Construction and land development	—	%	—	—	%	9
1-4 family residential	—	%	—	—	%	—
Consumer	—	%	—	—	%	—
Broker-dealer	—	%	—	—	%	—
Total	—	%	11	—	%	22

Credit Risk Profile

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 5 to the consolidated financial statements in the Company’s 2023 Form 10-K.

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

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														Loans
												2019 and			Converted to
September 30, 2024	2024		2023		2022		2021		2020			Prior	Revolving		Term Loans		Total
Commercial real estate: non-owner occupied
Internal Grade 1-3 (Pass low risk)	$	5,063	$	4,968	$	45,238	$	83,544	$	2,764	$	4,434	$	—	$	—	$	146,011
Internal Grade 4-7 (Pass normal risk)		173,720		105,605		237,394		261,324		93,358		84,684		5,405		16,523		978,013
Internal Grade 8-11 (Pass high risk and watch)		59,430		119,065		189,049		77,901		115,557		55,670		36,718		1,241		654,631
Internal Grade 12 (Special mention)		—		—		—		4,384		5,211		36,458		—		—		46,053
Internal Grade 13 (Substandard accrual)		3,330		4,530		7,585		23,698		993		1,657		—		98		41,891
Internal Grade 14 (Substandard non-accrual)		372		3,784		1,361		1,228		—		1,297		—		—		8,042
Current period gross charge-offs		—		1,647		—		—		—		—		—		—		1,647

Commercial real estate: owner occupied
Internal Grade 1-3 (Pass low risk)	$	14,479	$	48,275	$	12,584	$	13,889	$	37,182	$	43,027	$	7,226	$	12,735	$	189,397
Internal Grade 4-7 (Pass normal risk)		81,510		111,922		134,368		213,090		57,241		185,094		15,915		9,139		808,279
Internal Grade 8-11 (Pass high risk and watch)		32,636		43,824		116,225		57,707		78,557		48,715		4,418		509		382,591
Internal Grade 12 (Special mention)		353		—		440		—		1,191		99		—		—		2,083
Internal Grade 13 (Substandard accrual)		2,063		4,199		8,619		7,487		4,970		15,530		—		—		42,868
Internal Grade 14 (Substandard non-accrual)		602		9		818		619		—		362		—		—		2,410
Current period gross charge-offs		—		—		—		—		—		—		—		—		—

Commercial and industrial
Internal Grade 1-3 (Pass low risk)	$	26,114	$	12,011	$	11,891	$	50,400	$	3,426	$	208	$	24,563	$	—	$	128,613
Internal Grade 4-7 (Pass normal risk)		63,665		28,951		55,852		26,620		19,018		26,279		339,359		2,608		562,352
Internal Grade 8-11 (Pass high risk and watch)		115,792		66,415		57,699		82,790		15,758		7,254		220,097		3,462		569,267
Internal Grade 12 (Special mention)		—		758		—		827		—		268		1,193		—		3,046
Internal Grade 13 (Substandard accrual)		5,549		3,146		3,385		3,242		1,251		714		5,262		5,799		28,348
Internal Grade 14 (Substandard non-accrual)		10,422		8,029		7,912		1,991		311		171		2,399		35,694		66,929
Current period gross charge-offs		623		383		749		110		312		1,487		1,095		2,611		7,370

Construction and land development
Internal Grade 1-3 (Pass low risk)	$	4,961	$	—	$	2,790	$	864	$	—	$	204	$	—	$	—	$	8,819
Internal Grade 4-7 (Pass normal risk)		129,816		147,471		133,448		50,029		5,899		2,727		5,681		—		475,071
Internal Grade 8-11 (Pass high risk and watch)		167,470		130,653		32,683		6,409		2,821		2,404		3,536		—		345,976
Internal Grade 12 (Special mention)		—		272		—		—		—		—		—		—		272
Internal Grade 13 (Substandard accrual)		12,758		1,923		156		105		—		—		—		—		14,942
Internal Grade 14 (Substandard non-accrual)		1,138		1,264		82		—		—		—		—		—		2,484
Current period gross charge-offs		—		—		—		—		—		—		—		—		—

Construction and land development - individuals
FICO less than 620	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
FICO between 620 and 720		4,473		—		—		—		—		836		—		—		5,309
FICO greater than 720		10,072		7,535		—		118		48		—		—		—		17,773
Substandard non-accrual		—		—		—		—		—		—		—		—		—
Other ⁽¹⁾		118		—		—		—		—		—		—		—		118
Current period gross charge-offs		—		—		—		—		—		—		—		—		—

1-4 family residential
FICO less than 620	$	305	$	628	$	1,147	$	467	$	734	$	21,583	$	208	$	—	$	25,072
FICO between 620 and 720		15,080		20,856		17,912		9,187		4,165		26,764		1,512		1,102		96,578
FICO greater than 720		88,185		132,526		501,830		677,934		80,890		73,566		2,997		654		1,558,582
Substandard non-accrual		28		—		—		1,103		—		6,745		—		—		7,876
Other ⁽¹⁾		39,253		14,523		5,219		—		1,344		4,515		1,573		20,356		86,783
Current period gross charge-offs		—		—		—		—		—		1		—		—		1

Consumer
FICO less than 620	$	642	$	230	$	253	$	23	$	47	$	4	$	377	$	6	$	1,582
FICO between 620 and 720		2,597		1,639		812		231		134		35		1,958		32		7,438
FICO greater than 720		4,026		2,275		1,522		547		185		1		2,692		—		11,248
Substandard non-accrual		—		—		—		—		—		—		—		—		—
Other ⁽¹⁾		6,313		1,211		644		105		13		11		272		—		8,569
Current period gross charge-offs		114		79		—		—		—		3		10		5		211

Total loans with credit quality measures	$	1,082,335	$	1,028,497	$	1,588,918	$	1,657,863	$	533,068	$	651,316	$	683,361	$	109,958	$	7,335,316
Commercial and industrial (mortgage warehouse lending)																	$	303,670
Broker-dealer (margin loans and correspondent receivables)																	$	340,644
Total loans held for investment																	$	7,979,630

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

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

6. Allowance for Credit Losses

Available for Sale Securities and Held to Maturity Securities

The Company has evaluated available for sale debt securities that are in an unrealized loss position and has determined that any decline in value is unrelated to credit loss and related to changes in market interest rates since purchase. None of the available for sale debt securities held were past due at September 30, 2024. In addition, as of September 30, 2024, the Company had not made a decision to sell any of its debt securities held, nor did the Company consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis. The Company does not expect to have credit losses associated with the debt securities, and no allowance was recognized on the debt securities portfolio.

Loans Held for Investment

The allowance for credit losses for loans held for investment represents management’s best estimate of all expected credit losses over the expected contractual life of the Company’s existing portfolio. Management’s methodology for determining the allowance for credit losses uses the current expected credit losses (“CECL”) standard. Management considers the level of allowance for credit losses to be a reasonable and supportable estimate of expected credit losses inherent within the loans held for investment portfolio as of September 30, 2024. While the Company believes it has an appropriate allowance for the existing loan portfolio at September 30, 2024, additional provision for losses on existing loans may be necessary in the future. Future changes in the allowance for credit losses are expected to be volatile given dependence upon, among other things, the portfolio composition and quality, as well as changes in macroeconomic forecasts and loan cash flow assumptions. In addition to the allowance for credit losses, the Company maintains a separate allowance for credit losses related to off-balance sheet credit exposures, including unfunded loan commitments, and this amount is included in other liabilities within the consolidated balance sheets. For further information on the policies that govern the estimation of the allowances for credit losses levels, see Note 1 to the consolidated financial statements in the Company’s 2023 Form 10-K.

One of the most significant judgments involved in estimating the Company’s allowance for credit losses relates to the macroeconomic forecasts used to estimate credit losses over the reasonable and supportable forecast period. To determine the Company’s best estimate of expected credit losses as of September 30, 2024, the Company utilized a single macroeconomic alternative scenario, or S5, published by Moody’s Analytics in September 2024 that was updated to reflect the U.S. economic outlook. During our previous macroeconomic assessment as of December 31, 2023, we utilized a single macroeconomic alternative scenario, or S7, published by Moody’s Analytics in December 2023. The S5 alternative economic scenario expects the economy to underperform in the long-term. In this alternative scenario, elevated borrowing costs reduce credit-sensitive spending, upcoming fiscal disputes in Congress weaken business and consumer sentiment, and concerns grow about broader international conflicts. Significant variables that impact the modeled losses across the Company’s loan portfolios are the U.S. Real Gross Domestic Product, or GDP, growth rates and unemployment rate assumptions. Changes in these assumptions and forecasts of economic conditions could significantly affect the estimate of expected credit losses at the balance sheet date or between reporting periods.

During the three months ended September 30, 2023, the slight reversal of credit losses reflected improvements to the U.S. economic outlook and decreases in specific reserves of $0.7 million within our broker dealer segment, offset by increases in specific reserves and net portfolio changes within the banking segment. The increase in the provision for credit losses during the nine months ended September 30, 2023 reflected a significant build in the allowance related to loan portfolio changes since December 31, 2022 and a deteriorating outlook for commercial real estate markets. Specific to the Bank, the net impact to the allowance of changes associated with collectively evaluated loans during the three and nine months ended September 30, 2023 included a reversal of credit losses of $0.3 million, compared to a provision for credit losses of $14.2 million, respectively, on collectively evaluated loans, while the net impact to the allowance of changes associated with individually evaluated loans during the three and nine months ended September 30, 2023 included a provision for credit losses of $0.9 million and $3.0 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, and changes in loan balances and qualitative factors from the prior quarter. The changes in the allowance during the three and nine months ended September 30, 2023 were also impacted by net recoveries of $1.6 million and net charge-offs of $1.7 million, respectively.

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

During the three months ended September 30, 2024, the reversal of credit losses was primarily driven by net charge-offs and loan portfolio changes, including a change in the macroeconomic outlook scenario utilized, associated with collectively evaluated loans, partially offset by a build in the allowance related to specific reserves within the banking segment since the prior quarter. The provision for credit losses during the nine months ended September 30, 2024 reflected a build in the allowance related to specific reserves and loan portfolio changes within the banking segment since the prior period, partially offset by the change in the macroeconomic outlook scenario utilized. Specific to the Bank, the net impact to the allowance of changes associated with individually evaluated loans during the three and nine months ended September 30, 2024 included a provision for credit losses of $1.2 million and $13.3 million, respectively, while the net impact to the allowance of changes associated with collectively evaluated loans during the three and nine months ended September 30, 2024 included a reversal of credit losses of $2.5 million and $6.5 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, and changes in loan balances and qualitative factors from the prior quarter. The changes in the allowance during the three and nine months ended September 30, 2024 were also impacted by net charge-offs of $2.9 million and $7.3 million, respectively.

Changes in the allowance for credit losses for loans held for investment, distributed by portfolio segment, are shown below (in thousands).


	Balance,		Provision for				Recoveries on		Balance,
	Beginning of		(Reversal of)		Loans		Charged Off		End of
Three Months Ended September 30, 2024	Period		Credit Losses		Charged Off		Loans		Period
Commercial real estate:
Non-owner occupied	$	37,321	$	(4,991)	$	—	$	—	$	32,330
Owner occupied		32,772		1,593		—		13		34,378
Commercial and industrial		28,869		2,323		(3,772)		888		28,308
Construction and land development		7,594		330		—		—		7,924
1-4 family residential		7,912		(756)		—		5		7,161
Consumer		547		61		(65)		37		580
Broker-dealer		67		170		—		—		237
Total	$	115,082	$	(1,270)	$	(3,837)	$	943	$	110,918


	Balance,		Provision for				Recoveries on		Balance,
	Beginning of		(Reversal of)		Loans		Charged Off		End of
Nine Months Ended September 30, 2024	Period		Credit Losses		Charged Off		Loans		Period
Commercial real estate:
Non-owner occupied	$	40,061	$	(6,084)	$	(1,647)	$	—	$	32,330
Owner occupied		28,114		6,236		—		28		34,378
Commercial and industrial		20,926		13,070		(7,370)		1,682		28,308
Construction and land development		12,102		(4,180)		—		2		7,924
1-4 family residential		9,461		(2,408)		(1)		109		7,161
Consumer		648		23		(211)		120		580
Broker-dealer		101		136		—		—		237
Total	$	111,413	$	6,793	$	(9,229)	$	1,941	$	110,918


	Balance,		Provision for				Recoveries on		Balance,
	Beginning of		(Reversal of)		Loans		Charged Off		End of
Three Months Ended September 30, 2023	Period		Credit Losses		Charged Off		Loans		Period
Commercial real estate:
Non-owner occupied	$	43,582	$	(3,116)	$	(34)	$	1	$	40,433
Owner occupied		27,880		1,549		—		9		29,438
Commercial and industrial		17,315		838		(936)		2,505		19,722
Construction and land development		7,395		1,575		—		—		8,970
1-4 family residential		11,618		(179)		—		33		11,472
Consumer		615		8		(152)		130		601
Broker-dealer		901		(715)		—		—		186
Total	$	109,306	$	(40)	$	(1,122)	$	2,678	$	110,822

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)


	Balance,		Provision for				Recoveries on		Balance,
	Beginning of		(Reversal of)		Loans		Charged Off		End of
Nine Months Ended September 30, 2023	Period		Credit Losses		Charged Off		Loans		Period
Commercial real estate:
Non-owner occupied	$	39,247	$	1,210	$	(34)	$	10	$	40,433
Owner occupied		24,008		6,376		(977)		31		29,438
Commercial and industrial		16,035		4,417		(4,015)		3,285		19,722
Construction and land development		6,051		2,919		—		—		8,970
1-4 family residential		9,313		2,147		(73)		85		11,472
Consumer		554		106		(274)		215		601
Broker-dealer		234		(48)		—		—		186
Total	$	95,442	$	17,127	$	(5,373)	$	3,626	$	110,822

Unfunded Loan Commitments

The Bank uses a process similar to that used in estimating the allowance for credit losses on the funded portion to estimate the allowance for credit loss on unfunded loan commitments. The allowance is based on the estimated exposure at default, multiplied by the lifetime 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. There is no reserve calculated for letters of credit as they are issued primarily as credit enhancements and the likelihood of funding is low.

Changes in the allowance for credit losses for loans with off-balance sheet credit exposures are shown below (in thousands).


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Balance, beginning of period	$	8,585	$	7,992	$	8,876	$	7,784
Other noninterest expense		(153)		559		(444)		767
Balance, end of period	$	8,432	$	8,551	$	8,432	$	8,551

The increases in the reserve for unfunded commitments during the three and nine months ended September 30, 2023 were primarily due to increases in expected loss rates. During the three and nine months ended September 30, 2024, the decreases in the reserve for unfunded commitments were primarily due to decreases in commitment balances.

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

7. Mortgage Servicing Rights

The following tables present the changes in fair value of the Company’s MSR asset and other information related to the serviced portfolio (dollars in thousands).


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024			2023
Balance, beginning of period	$	52,902	$	95,101	$	96,662		$	100,825
Additions		3,033		3,759		9,122			23,859
Sales		—		—		(45,129)			(19,055)
Changes in fair value:
Due to changes in model inputs or assumptions ⁽¹⁾		(9,541)		7,373		(11,549)			2,834
Due to customer payoffs		(652)		(1,282)		(3,364)			(3,512)
Balance, end of period	$	45,742	$	104,951	$	45,742		$	104,951

					September 30,			December 31,
					2024			2023
Mortgage loans serviced for others ⁽²⁾					$	2,547,659		$	5,227,404
MSR asset as a percentage of serviced mortgage loans						1.80	%		1.85	%

(1)

Primarily represents normal customer payments, the impact of changes in interest rates, changes in discount rates and prepayment speed assumptions, and the refinement of other MSR model assumptions. Included in the three and nine months ended September 30, 2024 are MSR asset fair value adjustments totaling $4.2 million which reflect the difference between the MSR carrying value and the sales price reflected in a signed letter of intent, dated September 17, 2024, to sell certain MSR assets.

(2)

Represents unpaid principal balance of mortgage loans serviced for others.

The key assumptions used in measuring the fair value of the Company’s MSR asset were as follows.


	September 30,		December 31,
	2024		2023
Weighted average constant prepayment rate	9.74	%	8.65	%
Weighted average discount rate	16.55	%	11.67	%
Weighted average life (in years)	7.6		8.2

A sensitivity analysis of the fair value of the Company’s MSR asset to certain key assumptions is presented in the following table (in thousands).


	September 30,		December 31,
	2024		2023
Constant prepayment rate:
Impact of 10% adverse change	$	(1,677)	$	(3,511)
Impact of 20% adverse change		(3,252)		(6,796)
Discount rate:
Impact of 10% adverse change		(2,466)		(4,474)
Impact of 20% adverse change		(4,668)		(8,537)

This sensitivity analysis presents the effect of hypothetical changes in key assumptions on the fair value of the MSR asset. The effect of such hypothetical change in assumptions generally cannot be extrapolated because the relationship of the change in one key assumption to the change in the fair value of the MSR asset is not linear. In addition, in the analysis, the impact of an adverse change in one key assumption is calculated independent of any impact on other assumptions. In reality, changes in one assumption may change another assumption.

Contractually specified servicing fees, late fees and ancillary fees earned of $4.2 million and $8.5 million during the three months ended September 30, 2024 and 2023, respectively, and $20.9 million and $24.2 million during the nine months ended September 30, 2024 and 2023, respectively, were included in net gains from sale of loans and other mortgage production income within the consolidated statements of operations.

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

8. Deposits

Deposits are summarized as follows (in thousands).


	September 30,		December 31,
	2024		2023
Noninterest-bearing demand	$	2,831,539	$	3,007,101
Interest-bearing:
Demand accounts		4,011,842		4,496,682
Brokered - demand		4,722		156,692
Money market		2,437,731		1,869,809
Brokered - money market		10,413		8,828
Savings		224,633		259,745
Time		1,270,567		1,221,935
Brokered - time		—		42,400
	$	10,791,447	$	11,063,192

At September 30, 2024, remaining maturities of estimated uninsured time deposits greater than $250,000 were $610.7 million.

9. Short-term Borrowings

Short-term borrowings are summarized as follows (in thousands).


	September 30,		December 31,
	2024		2023
Federal funds purchased	$	495,258	$	459,658
Securities sold under agreements to repurchase		198,804		240,050
Federal Home Loan Bank		—		—
Short-term bank loans		—		—
Commercial paper		220,583		200,330
	$	914,645	$	900,038

Federal Funds Purchased and Securities Sold under Agreements to Repurchase

Federal funds purchased and securities sold under agreements to repurchase generally mature one to ninety days from the transaction date, on demand, or on some other short-term basis. The Bank and the Hilltop Broker-Dealers execute transactions to sell securities under agreements to repurchase with both customers and other broker-dealers. Securities involved in these transactions are held by the Bank, the Hilltop Broker-Dealers or a third-party dealer.

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Information concerning federal funds purchased and securities sold under agreements to repurchase is shown in the following tables (dollars in thousands).


	Nine Months Ended September 30,
	2024			2023
Average balance during the period	$	722,752		$	797,489
Average interest rate during the period		5.50	%		5.40	%

	September 30,			December 31,
	2024			2023
Average interest rate at end of period		5.21	%		5.60	%
Securities underlying the agreements at end of period:
Carrying value	$	198,619		$	239,103
Estimated fair value	$	218,915		$	262,408

Federal Home Loan Bank (“FHLB”)

FHLB short-term borrowings mature over terms not exceeding 365 days and are collateralized by FHLB Dallas stock, nonspecified real estate loans and certain specific commercial real estate loans. Other information regarding FHLB short-term borrowings is shown in the following table (dollars in thousands).


	Nine Months Ended September 30,
	2024			2023
Average balance during the period	$	—		$	180,861
Average interest rate during the period		5.73	%		5.08	%

Short-Term Bank Loans

The Hilltop Broker-Dealers use short-term bank loans periodically to finance securities owned, margin loans to customers and correspondents and underwriting activities. Interest on the borrowings varies with the federal funds rate. At September 30, 2024 there were no outstanding short-term bank loans.

Commercial Paper

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. The CP Notes are not redeemable prior to maturity or subject to voluntary prepayment and do not bear interest, but are sold at a discount to par. The CP Notes are secured by a pledge of collateral owned by Hilltop Securities. As of September 30, 2024, the weighted average maturity of the CP Notes was 155 days at a rate of 5.80%, with a weighted average remaining life of 71 days. At September 30, 2024, the aggregate amount outstanding under these secured arrangements was $220.6 million, which was collateralized by securities held for Hilltop Securities accounts valued at $241.1 million.

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

10. Notes Payable

Notes payable consisted of the following (in thousands).


	September 30,		December 31,
	2024		2023
Senior Notes due April 2025, net of discount of $347 and $502, respectively	$	149,653	$	149,498
Subordinated Notes due May 2030, net of discount of $432 and $511, respectively		49,568		49,489
Subordinated Notes due May 2035, net of discount of $1,688 and $1,842, respectively		148,312		148,158
	$	347,533	$	347,145

11. Leases

Supplemental balance sheet information related to finance leases is as follows (in thousands).


	September 30,		December 31,
	2024		2023
Finance leases:
Premises and equipment	$	4,780	$	7,780
Accumulated depreciation		(3,959)		(6,537)
Premises and equipment, net	$	821	$	1,243

The components of lease costs, including short-term lease costs, are as follows (in thousands).


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Operating lease cost	$	8,231	$	8,488	$	25,214	$	26,231
Less operating lease and sublease income		(454)		(655)		(1,805)		(1,965)
Net operating lease cost	$	7,777	$	7,833	$	23,409	$	24,266

Finance lease cost:
Amortization of ROU assets	$	126	$	147	$	421	$	442
Interest on lease liabilities		85		104		271		324
Total finance lease cost	$	211	$	251	$	692	$	766

Supplemental cash flow information related to leases is as follows (in thousands).


	Nine Months Ended September 30,
	2024		2023
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	25,290	$	27,899
Operating cash flows from finance leases		275		326
Financing cash flows from finance leases		666		628
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	22,723	$	11,396
Finance leases		—		—

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

Information regarding the lease terms and discount rates of the Company’s leases is as follows.


	September 30, 2024			December 31, 2023
	Weighted Average			Weighted Average
	Remaining Lease	Weighted Average		Remaining Lease	Weighted Average
Lease Classification	Term (Years)	Discount Rate		Term (Years)	Discount Rate
Operating	5.4	5.69	%	5.3	4.59	%
Finance	2.9	5.09	%	3.3	4.98	%

Future minimum lease payments under lease agreements as of September 30, 2024, are presented below (in thousands).


	Operating Leases		Finance Leases
2024	$	7,670	$	222
2025		29,863		886
2026		24,105		813
2027		19,181		448
2028		14,716		149
Thereafter		33,835		—
Total minimum lease payments		129,370		2,518
Less amount representing interest		(18,571)		(639)
Lease liabilities	$	110,799	$	1,879

As of September 30, 2024, the Company had additional operating leases that have not yet commenced with aggregate future minimum lease payments of approximately $0.2 million. Certain of these operating leases commenced in October 2024 with an additional operating lease expected to commence in January 2025 with lease terms ranging from two to three years.

12. Income Taxes

The Company applies an estimated annual effective rate to interim period pre-tax income to calculate the income tax provision for the quarter in accordance with the principal method prescribed by the accounting guidance established for computing income taxes in interim periods. The Company’s effective tax rates were 22.5% and 25.2% for the three months ended September 30, 2024 and 2023, respectively, and 22.5% and 21.6% for the nine months ended September 30, 2024 and 2023, respectively. The effective tax rate during the three months ended September 30, 2023 was higher than the applicable statutory rate primarily due to the impact of non-deductible compensation expense and other permanent adjustments. During the nine months ended September 30, 2023, the effective tax rate differed from the applicable statutory rate primarily due to the impacts of excess tax benefits on share-based payment awards, investments in tax-exempt instruments and changes in accumulated tax reserves, partially offset by nondeductible expenses and the booking of additional taxes from a recent change in the source of funding for an acquired non-qualified, deferred compensation plan. During the three and nine months ended September 30, 2024, the effective tax rate was higher than the applicable statutory rate primarily due to the impact of nondeductible expenses, nondeductible compensation expense and other permanent adjustments, partially offset by the discrete impact of restricted stock vesting during the quarter and investments in tax-exempt instruments.

13. Commitments and Contingencies

Legal Matters

The Company is subject to loss contingencies related to litigation, claims, investigations and legal and administrative cases and proceedings arising in the ordinary course of business. The Company evaluates these contingencies based on information currently available, including advice of counsel. The Company establishes accruals for those matters when a loss contingency is considered probable and the related amount is reasonably estimable. Any accruals are periodically reviewed and may be adjusted as circumstances change. A portion of the Company’s exposure with respect to loss contingencies may be offset by applicable insurance coverage. In determining the amounts of any accruals or estimates of possible loss contingencies, the Company does not take into account the availability of insurance coverage. When it is

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practicable, the Company estimates loss contingencies for possible litigation and claims, whether or not there is an accrued probable loss. When the Company is able to estimate such probable losses, and when it estimates that it is reasonably possible it could incur losses in excess of amounts accrued, the Company is required to make a disclosure of the aggregate estimation. As available information changes, however, the matters for which the Company is able to estimate, as well as the estimates themselves, will be adjusted accordingly.

Assessments of litigation and claims exposures are difficult due to many factors that involve inherent unpredictability. Those factors include the following: the varying stages of the proceedings, particularly in the early stages; unspecified, unsupported, or uncertain damages; damages other than compensatory, such as punitive damages; a matter presenting meaningful legal uncertainties, including novel issues of law; multiple defendants and jurisdictions; whether discovery has begun or is complete; whether meaningful settlement discussions have commenced; and whether the claim involves a class action and if so, how the class is defined. As a result of some of these factors, the Company may be unable to estimate reasonably possible losses with respect to some or all of the pending and threatened litigation and claims asserted against the Company.

The Company is involved in information-gathering requests and investigations (both formal and informal), as well as reviews, examinations and proceedings (collectively, “Inquiries”) by various governmental regulatory agencies, law enforcement authorities and self-regulatory bodies regarding certain of its businesses, business practices and policies, as well as the conduct of persons with whom it does business. Additional Inquiries will arise from time to time. In connection with those Inquiries, the Company receives document requests, subpoenas and other requests for information. The Inquiries could develop into administrative, civil or criminal proceedings or enforcement actions that could result in consequences that have a material effect on the Company’s consolidated financial position, results of operations or cash flows as a whole. Such consequences could include adverse judgments, findings, settlements, penalties, fines, orders, injunctions, restitution, or alterations in the Company’s business practices, and could result in additional expenses and collateral costs, including reputational damage.

In September 2020, PrimeLending received an investigative inquiry from the United States Attorney for the Western District of Virginia regarding PrimeLending’s float down option. The United States Attorney issued grand jury subpoenas to PrimeLending and PlainsCapital Bank for additional materials regarding this matter. PrimeLending and PlainsCapital Bank are continuing to cooperate with requests for information with respect to this matter.

While the final outcome of litigation and claims exposures or of any Inquiries is inherently unpredictable, management is currently of the opinion that the outcome of pending and threatened litigation and Inquiries will not, except related to specific matters disclosed above, have a material effect on the Company’s business, consolidated financial position, results of operations or cash flows as a whole. However, in the event of unexpected future developments, it is reasonably possible that an adverse outcome in any matter, including the matters discussed above, could be material to the Company’s business, consolidated financial position, results of operations or cash flows for any particular reporting period of occurrence.

Indemnification Liability Reserve

The mortgage origination segment may be responsible to agencies, investors, or other parties for errors or omissions relating to its representations and warranties that each loan sold meets certain requirements, including representations as to underwriting standards and the validity of certain borrower representations in connection with the loan. If determined to be at fault, the mortgage origination segment either repurchases the affected loan from or indemnifies the claimant against loss. The mortgage origination segment has established an indemnification liability reserve for such probable losses.

Generally, the mortgage origination segment first becomes aware that an agency, investor, or other party believes a loss has been incurred on a sold loan when it receives a written request from the claimant to repurchase the loan or reimburse the claimant’s losses. Upon completing its review of the claimant’s request, the mortgage origination segment establishes a specific claims reserve for the loan if it concludes its obligation to the claimant is both probable and reasonably estimable.

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(Unaudited)

An additional reserve has been established for probable agency, investor or other party losses that may have been incurred, but not yet reported to the mortgage origination segment based upon a reasonable estimate of such losses. Factors considered in the calculation of this reserve include, but are not limited to, the total volume of loans sold exclusive of specific claimant requests, actual claim Inquiries, claim settlements and the severity of estimated losses resulting from future claims, and the mortgage origination segment’s history of successfully curing defects identified in claim requests.

While the mortgage origination segment’s sales contracts typically include borrower early payment default repurchase provisions, these provisions have not been a primary driver of claims to date, and therefore, are not a primary factor considered in the calculation of this reserve.

At September 30, 2024 and December 31, 2023, the mortgage origination segment’s indemnification liability reserve totaled $8.5 million and $11.7 million, respectively. The provision for indemnification losses was $0.9 million and $0.5 million during the three months ended September 30, 2024 and 2023, respectively, and $2.0 million and $1.3 million during the nine months ended September 30, 2024 and 2023, respectively.

The following tables provide for a rollforward of claims activity for loans put-back to the mortgage origination segment based upon an alleged breach of a representation or warranty with respect to a loan sold and related indemnification liability reserve activity (in thousands).


	Representation and Warranty Specific Claims
	Activity - Origination Loan Balance
	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Balance, beginning of period	$	22,990	$	27,567	$	26,909	$	31,244
Claims made		10,773		6,572		27,925		37,582
Claims resolved with no payment		(2,871)		(1,633)		(10,330)		(11,418)
Repurchases		(6,430)		(4,430)		(18,747)		(25,430)
Indemnification payments		(1,434)		(386)		(2,729)		(4,288)
Balance, end of period	$	23,028	$	27,690	$	23,028	$	27,690

	Indemnification Liability Reserve Activity
	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Balance, beginning of period	$	9,095	$	15,058	$	11,691	$	20,528
Additions for new sales		856		480		1,966		1,317
Repurchases		(1,308)		(1,896)		(4,391)		(7,781)
Early payment defaults		(74)		(65)		(565)		(295)
Indemnification payments		(59)		(27)		(191)		(219)
Balance, end of period	$	8,510	$	13,550	$	8,510	$	13,550

	September 30,		December 31,
	2024		2023
Reserve for Indemnification Liability:
Specific claims	$	1,083	$	951
Incurred but not reported claims		7,427		10,740
Total	$	8,510	$	11,691

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14. Financial Instruments with Off-Balance Sheet Risk

Banking

The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit that involve varying degrees of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received. The contract amounts of those instruments reflect the extent of involvement (and therefore the exposure to credit loss) the Bank has in particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer provided that the terms established in the contract are met. Commitments generally have fixed expiration dates and may require payment of fees. Because some commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third-party. These letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.

In the aggregate, the Bank had outstanding unused commitments to extend credit of $2.0 billion at September 30, 2024 and outstanding financial and performance standby letters of credit of $69.7 million at September 30, 2024.

The Bank uses the same credit policies in making commitments and standby letters of credit as it does for loans held for investment. The amount of collateral obtained, if deemed necessary, in these transactions is based on management’s credit evaluation of the borrower. Collateral held varies but may include real estate, accounts receivable, marketable securities, interest-bearing deposit accounts, inventory, and property, plant and equipment.

Broker-Dealer

In the normal course of business, the Hilltop Broker-Dealers execute, settle, and finance various securities transactions that may expose the Hilltop Broker-Dealers to off-balance sheet risk in the event that a customer or counterparty does not fulfill its contractual obligations. Examples of such transactions include the sale of securities not yet purchased by customers or for the accounts of the Hilltop Broker-Dealers, use of derivatives to support certain non-profit housing organization clients and to hedge changes in the fair value of certain securities, clearing agreements between the Hilltop Broker-Dealers and various clearinghouses and broker-dealers, secured financing arrangements that involve pledged securities, and when-issued underwriting and purchase commitments.

15. Stock-Based Compensation

During the nine months ended September 30, 2024 and 2023, Hilltop granted 11,779 and 14,440 shares of common stock, respectively, pursuant to the Hilltop Holdings Inc. 2020 Equity Incentive Plan (the “2020 Equity Plan”) to certain non-employee members of the Company’s board of directors for services rendered to the Company.

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Restricted Stock Units

The following table summarizes information about stock-based incentive awards issued pursuant to the 2020 Equity Plan and nonvested restricted stock unit (“RSU”) activity for the nine months ended September 30, 2024 (shares in thousands).


		RSUs
			Weighted
			Average
			Grant Date
		Outstanding	Fair Value
Balance, December 31, 2023		1,252	$	34.10
	Granted	556	$	30.62
	Vested/Released	(526)	$	33.02
	Forfeited	(19)	$	32.86
Balance, September 30, 2024		1,263	$	33.04

Vested/Released RSUs include an aggregate of 90,923 shares withheld to satisfy employee statutory tax obligations during the nine months ended September 30, 2024.

During the nine months ended September 30, 2024, the Compensation Committee of the board of directors of the Company awarded certain executives and key employees an aggregate of 458,676 RSUs pursuant to the 2020 Equity Plan. Of the RSUs granted during the nine months ended September 30, 2024, 347,946 that were outstanding at September 30, 2024, are subject to time-based vesting conditions and generally cliff vest on the third anniversary of the grant date. Of the RSUs granted during the nine months ended September 30, 2024, 103,995 that were outstanding at September 30, 2024, provide for cliff vesting based upon the achievement of certain performance goals over a three-year period.

At September 30, 2024, in the aggregate, 934,915 of the outstanding RSUs are subject to time-based vesting conditions and generally cliff vest on the third anniversary of the grant date, and 327,626 outstanding RSUs cliff vest based upon the achievement of certain performance goals over a three-year period. At September 30, 2024, unrecognized compensation expense related to outstanding RSUs of $17.6 million is expected to be recognized over a weighted average period of 1.39 years.

16. Regulatory Matters

Banking and Hilltop

PlainsCapital, which includes the Bank and PrimeLending, and Hilltop are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct, material effect on the consolidated financial statements. The regulations require PlainsCapital and Hilltop to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company performs reviews of the classification and calculation of risk-weighted assets to ensure accuracy and compliance with the Basel III regulatory capital requirements as implemented by the Board of Governors of the Federal Reserve System. The capital classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the companies to maintain minimum amounts and ratios (set forth in the following table) of Tier 1 capital (as defined in the regulations) to total average assets (as defined), and minimum ratios of common equity Tier 1, Tier 1 and total capital (as defined) to risk-weighted assets (as defined).

In order to avoid limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary bonus payments to executive officers, Basel III requires banking organizations to maintain a capital conservation buffer above minimum risk-based capital requirements measured relative to risk-weighted assets.

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(Unaudited)

The following table shows PlainsCapital’s and Hilltop’s actual capital amounts and ratios in accordance with Basel III compared to the regulatory minimum capital requirements including the conservation buffer ratio in effect at the end of the period (dollars in thousands). Based on actual capital amounts and ratios shown in the following table, PlainsCapital’s ratios place it in the “well capitalized” (as defined) capital category under regulatory requirements. Actual capital amounts and ratios as of September 30, 2024 reflect PlainsCapital’s and Hilltop’s decision to elect the transition option as issued by the federal banking regulatory agencies in March 2020 that permits banking institutions to mitigate the estimated cumulative regulatory capital effects from CECL over a five-year transitionary period through December 31, 2024.


									Minimum
									Capital
									Requirements
									Including
									Conservation		To Be Well
	September 30, 2024				December 31, 2023				Buffer		Capitalized
	Amount		Ratio		Amount		Ratio		Ratio		Ratio
Tier 1 capital (to average assets):
PlainsCapital	$	1,312,378	10.34	%	$	1,407,660	10.55	%	4.0	%	5.0	%
Hilltop		2,004,620	12.95	%		1,974,918	12.23	%	4.0	%	N/A
Common equity Tier 1 capital (to risk-weighted assets):
PlainsCapital		1,312,378	14.94	%		1,407,660	15.44	%	7.0	%	6.5	%
Hilltop		2,004,620	20.48	%		1,974,918	19.32	%	7.0	%	N/A
Tier 1 capital (to risk-weighted assets):
PlainsCapital		1,312,378	14.94	%		1,407,660	15.44	%	8.5	%	8.0	%
Hilltop		2,004,620	20.48	%		1,974,918	19.32	%	8.5	%	N/A
Total capital (to risk-weighted assets):
PlainsCapital		1,416,982	16.13	%		1,511,239	16.58	%	10.5	%	10.0	%
Hilltop		2,318,545	23.68	%		2,284,357	22.34	%	10.5	%	N/A

Broker-Dealer

Pursuant to the net capital requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Hilltop Securities has elected to determine its net capital requirements using the alternative method. Accordingly, Hilltop Securities is required to maintain minimum net capital, as defined in Rule 15c3-1 promulgated under the Exchange Act, equal to the greater of $1,000,000 or 2% of aggregate debit balances, as defined in Rule 15c3-3 promulgated under the Exchange Act. Additionally, the net capital rule of the NYSE provides that equity capital may not be withdrawn or cash dividends paid if resulting net capital would be less than 5% of the aggregate debit items. Momentum Independent Network follows the primary (aggregate indebtedness) method, as defined in Rule 15c3-1 promulgated under the Exchange Act, which requires the maintenance of the larger of $250,000 or 6-2/3% of aggregate indebtedness.

At September 30, 2024, the net capital position of each of the Hilltop Broker-Dealers was as follows (in thousands).


				Momentum
	Hilltop			Independent
	Securities			Network
Net capital	$	227,445		$	3,641
Less: required net capital		6,995			319
Excess net capital	$	220,450		$	3,322

Net capital as a percentage of aggregate debit items		65.0	%
Net capital in excess of 5% aggregate debit items	$	209,957

Under certain conditions, Hilltop Securities may be required to segregate cash and securities in a special reserve account for the benefit of customers under Rule 15c3-3 promulgated under the Exchange Act. Assets segregated for regulatory purposes under the provisions of the Exchange Act are restricted and not available for general corporate purposes. At September 30, 2024 and December 31, 2023, the Hilltop Broker-Dealers held cash of $55.6 million and $57.4 million,

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respectively, segregated in special reserve bank accounts for the benefit of customers. The Hilltop Broker-Dealers were not required to segregate cash and securities in special reserve accounts for the benefit of proprietary accounts of introducing broker-dealers at September 30, 2024.

Mortgage Origination

As a mortgage originator, PrimeLending and its subsidiaries are subject to minimum capital, net worth and liquidity requirements established by the Department of Housing and Urban Development (“HUD”) and GNMA, as applicable. On an annual basis, PrimeLending and its subsidiaries submit audited financial statements to HUD and GNMA documenting their respective compliance with minimum capital, net worth and liquidity requirements, including timely reporting if a quarter’s operating loss exceeds more than 20% of its previous quarter or year-end net worth (the “operating loss ratio”) and/or if a quarter’s capital ratio is below 6% (the “GNMA capital ratio”). If this occurs, certain additional financial reporting submissions are required. During the third quarter of 2024, PrimeLending received a $10 million capital infusion from its parent company, PlainsCapital Bank, in September 2024 and reported a HUD operating gain. As of September 30, 2024, PrimeLending exceeded the GNMA minimum capital ratio requirement of 6% with a ratio of 6.38%. This trend has been reported to GNMA. As of September 30, 2024, PrimeLending and its subsidiaries’ net worth and liquidity exceeded the amounts required by both HUD and GNMA, as applicable.

17. Stockholders’ Equity

Dividends

During the nine months ended September 30, 2024 and 2023, the Company declared and paid cash dividends of $0.51 and $0.48 per common share, or an aggregate of $33.2 million and $31.2 million, respectively.

On October 24, 2024, Hilltop’s board of directors declared a quarterly cash dividend of $0.17 per common share, payable on November 22, 2024, to all common stockholders of record as of the close of business on November 8, 2024.

Stock Repurchases

In January 2024, the Hilltop board of directors authorized a new stock repurchase program through January 2025, pursuant to which the Company is authorized to repurchase, in the aggregate, up to $75.0 million of the Company’s outstanding common stock, inclusive of repurchases to offset dilution related to grants of stock-based compensation. During the nine months ended September 30, 2024, Hilltop paid $19.9 million to repurchase an aggregate of 640,042 shares of the Company’s common stock at an average price of $31.04 per share pursuant to the stock repurchase program.

The Company’s stock repurchase program, prior year repurchases, and related accounting policy are discussed in detail in Note 1 and Note 22 to the consolidated financial statements included in the Company’s 2023 Form 10-K.

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18. Derivative Financial Instruments

The Company uses various derivative financial instruments to mitigate interest rate risk. The Bank’s interest rate risk management strategy involves effectively managing the re-pricing characteristics of certain assets and liabilities to mitigate potential adverse impacts from changes in interest rates on the Bank’s net interest margin. Additionally, the Bank manages variability of cash flows associated with its variable rate debt in interest-related cash outflows with interest rate swap contracts. PrimeLending has interest rate risk relative to interest rate lock commitments (“IRLCs”) and its inventory of mortgage loans held for sale. PrimeLending is exposed to such interest rate risk from the time an IRLC is made to an applicant to the time the related mortgage loan is sold. To mitigate interest rate risk, PrimeLending executes forward commitments to sell mortgage-backed securities (“MBSs”) and futures contracts. Additionally, PrimeLending has interest rate risk relative to its MSR asset and uses derivative instruments, including U.S. Treasury bond futures and options to hedge this risk. The Hilltop Broker-Dealers use forward commitments to both purchase and sell MBSs to facilitate customer transactions and as a means to hedge related exposure to interest rate risk in certain inventory positions. Additionally, Hilltop Securities uses various derivative instruments, including U.S. Treasury bond futures and options, futures contracts, credit default swaps and municipal market data rate locks, to hedge changes in the fair value of its securities.

Non-Hedging Derivative Instruments and the Fair Value Option

As discussed in Note 3 to the consolidated financial statements, the Company has elected to measure substantially all mortgage loans held for sale at fair value under the provisions of the Fair Value Option. The election provides the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without applying hedge accounting provisions. The fair values of PrimeLending’s IRLCs and forward commitments are recorded in other assets or other liabilities, as appropriate, and changes in the fair values of these derivative instruments are recorded as a component of net gains from sale of loans and other mortgage production income. These changes in fair value are attributable to changes in the volume of IRLCs, mortgage loans held for sale, commitments to purchase and sell MBSs and MSR assets, and changes in market interest rates. Changes in market interest rates also conversely affect the value of PrimeLending’s mortgage loans held for sale and its MSR asset, which are measured at fair value under the Fair Value Option. The effect of the change in market interest rates on PrimeLending’s loans held for sale and MSR asset is discussed in Note 7 to the consolidated financial statements. The fair values of the Hilltop Broker-Dealers’ and the Bank’s derivative instruments are recorded in other assets or other liabilities, as appropriate. Changes in the fair value of derivatives are presented in the following table (in thousands).


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Increase (decrease) in fair value of derivatives during period:
PrimeLending	$	(29)	$	(946)	$	11,177	$	5,840
Hilltop Broker-Dealers		10,570		13,214		5,949		(4,016)
Bank		(7)		92		6		76

Hedging Derivative Instruments

The Company has entered into interest rate swap contracts to manage the exposure to changes in fair value associated with certain available for sale fixed rate collateralized mortgage-backed securities and fixed rate loans held for investment attributable to changes in the designated benchmark interest rate. Certain of these fair value hedges have been designated as a portfolio layer, which provides the Company the ability to execute a fair value hedge of the interest rate risk associated with a portfolio of similar prepayable assets whereby the last dollar amount estimated to remain in the portfolio of assets is identified as the hedged item. Additionally, the Company has outstanding interest rate swap contracts designated as cash flow hedges and utilized to manage the variability of cash flows associated with its variable rate borrowings.

Under each of its interest rate swap contracts designated as cash flow hedges, the Company receives a floating rate and pays a fixed rate on the outstanding notional amount. The Company assesses the hedge effectiveness both at the onset of the hedge and at regular intervals throughout the life of the derivative. To the extent that the derivative instruments are highly effective in offsetting the variability of the hedged cash flows or fair value, changes in the fair value of the derivatives designated as hedges of cash flows are included as a component of accumulated other comprehensive income

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or loss on the Company’s consolidated balance sheets, and changes in the fair value of the derivatives designated as hedges of fair value are included in current earnings. Although the Company has determined at the onset of the hedges that the derivative instruments will be highly effective hedges throughout the term of the contract, any portion of derivative instruments subsequently determined to be ineffective will be recognized in earnings.

Derivative positions are presented in the following table (in thousands).


	September 30, 2024				December 31, 2023
	Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value
Derivative instruments (not designated as hedges):
IRLCs	$	625,180	$	8,321	$	383,767	$	7,734
Commitments to purchase MBSs		2,486,073		15,563		1,470,142		15,666
Commitments to sell MBSs		2,874,891		102		2,222,225		(17,870)
Interest rate swaps		44,770		(2,607)		33,500		(5,349)
Interest rate swaps back-to-back (asset) ⁽¹⁾		10,247		192		1,421		176
Interest rate swaps back-to-back (liability) ⁽¹⁾		10,247		(201)		1,421		(191)
U.S. Treasury bond futures and options ⁽²⁾		80,600		—		306,200		430
Interest rate and other futures ⁽²⁾		199,900		—		224,800		—
Credit default swaps		15,000		—		—		—
Warrants		—		—		866		820

Derivative instruments (designated as hedges):
Interest rate swaps designated as cash flow hedges	$	335,000	$	7,039	$	410,000	$	14,277
Interest rate swaps designated as fair value hedges ⁽³⁾		361,153		26,466		325,193		34,799

(1)

Noted derivative instruments include both customer-facing derivatives as well as offsetting derivatives facing other dealer banks. The fair value of these derivatives include a net credit valuation adjustment that was nominal at September 30, 2024 and December 31, 2023, respectively, reducing the fair value of the liability.

(2)	Noted derivative instruments include contracts between the Hilltop Broker-Dealers and PrimeLending and their respective counterparties with changes in fair value of the contracts that are settled daily.

(3)

The Company designated $361.2 million and $325.3 million as the hedged amount (from a closed portfolio of prepayable available for sale securities and loans held for investment with a carrying value of $334.5 million and $290.2 million as of September 30, 2024 and December 31, 2023, respectively), of which, a subset of these hedges are in portfolio layer hedging relationships. The cumulative basis adjustment included in the carrying value of the hedged items totaled $26.6 million and $35.0 million as of September 30, 2024 and December 31, 2023, respectively.

The Bank and PrimeLending held aggregate cash collateral advances of $35.3 million and $51.8 million to offset net asset derivative positions on its commitments to sell MBSs and derivative instruments designated as hedges at September 30, 2024 and December 31, 2023, respectively. PrimeLending had advanced cash collateral totaling $2.8 million and $14.7 million to offset net liability positions on its commitments to sell MBSs at September 30, 2024 and December 31, 2023, respectively. In addition, PrimeLending and the Hilltop Broker-Dealers had advanced cash collateral totaling $4.3 million and $7.6 million on various derivative instruments at September 30, 2024 and December 31, 2023, respectively. These cash collateral amounts are included in either other assets or other liabilities within the consolidated balance sheets.

Derivatives on Behalf of Customers

The Bank offers derivative contracts to certain customers in connection with their risk management needs. These derivatives include back-to-back interest rate swaps. The Bank manages the risk associated with these contracts by entering into an equal and offsetting derivative with a third-party dealer bank. These derivatives generally work together as an economic interest rate hedge, but the Bank does not designate them for hedge accounting treatment. Consequently, changes in fair value of the corresponding derivative financial asset or liability were recorded as either a charge or credit to current earnings during the period in which the changes in fair value occurred, typically resulting in no net earnings impact.

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

19. Balance Sheet Offsetting

Certain financial instruments, including resale and repurchase agreements, securities lending arrangements and derivatives, may be eligible for offset in the consolidated balance sheets and/or subject to master netting arrangements or similar agreements. The Company’s accounting policy is to present required disclosures related to collateral and derivative positions on a gross basis.

The following tables present the assets and liabilities subject to enforceable master netting arrangements, repurchase agreements, or similar agreements with offsetting rights (in thousands).


							Gross Amounts Not Offset in
					Net Amounts		the Balance Sheet
	Gross Amounts		Gross Amounts		of Assets				Cash
	of Recognized		Offset in the		Presented in the		Financial		Collateral		Net
	Assets		Balance Sheet		Balance Sheet		Instruments		Pledged		Amount
September 30, 2024
Securities borrowed:
Institutional counterparties	$	1,077,956	$	—	$	1,077,956	$	(1,023,786)	$	—	$	54,170

Interest rate swaps:
Institutional counterparties		34,195		—		34,195		—		(34,195)		—

Reverse repurchase agreements:
Institutional counterparties		81,766		—		81,766		(81,340)		—		426

Forward MBS derivatives:
Institutional counterparties		19,156		—		19,156		(845)		—		18,311
	$	1,213,073	$	—	$	1,213,073	$	(1,105,971)	$	(34,195)	$	72,907
December 31, 2023
Securities borrowed:
Institutional counterparties	$	1,406,937	$	—	$	1,406,937	$	(1,332,856)	$	—	$	74,081

Interest rate swaps:
Institutional counterparties		49,253		—		49,253		—		(49,253)		—

Reverse repurchase agreements:
Institutional counterparties		80,011		—		80,011		(80,011)		—		—

Forward MBS derivatives:
Institutional counterparties		16,755		—		16,755		(194)		—		16,561

Treasury futures and options derivatives:
Institutional counterparties		430		—		430		—		—		430
	$	1,553,386	$	—	$	1,553,386	$	(1,413,061)	$	(49,253)	$	91,072

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)


							Gross Amounts Not Offset in
					Net Amounts		the Balance Sheet
	Gross Amounts		Gross Amounts		of Liabilities				Cash
	of Recognized		Offset in the		Presented in the		Financial		Collateral		Net
	Liabilities		Balance Sheet		Balance Sheet		Instruments		Pledged		Amount
September 30, 2024
Securities loaned:
Institutional counterparties	$	1,066,651	$	—	$	1,066,651	$	(1,010,533)	$	—	$	56,118

Interest rate swaps:
Institutional counterparties		3,306		—		3,306		—		—		3,306

Repurchase agreements:
Institutional counterparties		198,619		—		198,619		(198,619)		—		—

Forward MBS derivatives:
Institutional counterparties		3,490		—		3,490		(845)		(264)		2,381
	$	1,272,066	$	—	$	1,272,066	$	(1,209,997)	$	(264)	$	61,805
December 31, 2023
Securities loaned:
Institutional counterparties	$	1,371,896	$	—	$	1,371,896	$	(1,296,828)	$	—	$	75,068

Interest rate swaps:
Institutional counterparties		5,349		—		5,349		(5,349)		—		—

Repurchase agreements:
Institutional counterparties		239,103		—		239,103		(239,103)		—		—

Forward MBS derivatives:
Institutional counterparties		18,958		—		18,958		(194)		(10,515)		8,249
	$	1,635,306	$	—	$	1,635,306	$	(1,541,474)	$	(10,515)	$	83,317

Secured Borrowing Arrangements

Secured Borrowings (Repurchase Agreements) — The Company participates in transactions involving securities sold under repurchase agreements, which are secured borrowings and generally mature one to ninety days from the transaction date or involve arrangements with no definite termination date. Securities sold under repurchase agreements are reflected at the amount of cash received in connection with the transactions. The Company may be required to provide additional collateral based on the fair value of the underlying securities, which is monitored on a daily basis.

Securities Lending Activities — The Company’s securities lending activities include lending securities for other broker-dealers, lending institutions and its own clearing and retail operations. These activities involve lending securities to other broker-dealers to cover short sales, to complete transactions in which there has been a failure to deliver securities by the required settlement date and as a conduit for financing activities.

When lending securities, the Company receives cash or similar collateral and generally pays interest (based on the amount of cash deposited) to the other party to the transaction. Securities lending transactions are executed pursuant to written agreements with counterparties that generally require securities loaned to be marked-to-market on a daily basis. The Company receives collateral in the form of cash in an amount generally in excess of the fair value of securities loaned. The Company monitors the fair value of securities loaned on a daily basis, with additional collateral obtained or refunded, as necessary. Collateral adjustments are made on a daily basis through the facilities of various clearinghouses. The Company is a principal in these securities lending transactions and is liable for losses in the event of a failure of any other party to honor its contractual obligation. Management sets credit limits with each counterparty and reviews these limits regularly to monitor the risk level with each counterparty. The Company is subject to credit risk through its securities lending activities if securities prices decline rapidly because the value of the Company’s collateral could fall below the amount of the indebtedness it secures. In rapidly appreciating markets, credit risk increases due to short positions. The Company’s securities lending business subjects the Company to credit risk if a counterparty fails to perform or if collateral securing its obligations is insufficient. In securities transactions, the Company is subject to credit risk during the period between the execution of a trade and the settlement by the customer.

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

The following tables present the remaining contractual maturities of repurchase agreement and securities lending transactions accounted for as secured borrowings (in thousands). The Company had no repurchase-to-maturity transactions outstanding at both September 30, 2024 and December 31, 2023.


	Remaining Contractual Maturities
	Overnight and						Greater Than
September 30, 2024	Continuous		Up to 30 Days		30-90 Days		90 Days		Total
Repurchase agreement transactions:
U.S. Treasury and agency securities	$	33,886	$	—	$	—	$	—	$	33,886
Asset-backed securities		76,487		88,246		—		—		164,733

Securities lending transactions:
Corporate securities		60		—		—		—		60
Equity securities		1,066,591		—		—		—		1,066,591
Total	$	1,177,024	$	88,246	$	—	$	—	$	1,265,270

Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above									$	1,265,270
Amount related to agreements not included in offsetting disclosure above									$	—

	Remaining Contractual Maturities
	Overnight and						Greater Than
December 31, 2023	Continuous		Up to 30 Days		30-90 Days		90 Days		Total
Repurchase agreement transactions:
U.S. Treasury and agency securities	$	8,389	$	—	$	—	$	—	$	8,389
Asset-backed securities		81,419		149,295		—		—		230,714

Securities lending transactions:
Corporate securities		52		—		—		—		52
Equity securities		1,371,844		—		—		—		1,371,844
Total	$	1,461,704	$	149,295	$	—	$	—	$	1,610,999

Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above									$	1,610,999
Amount related to agreements not included in offsetting disclosure above									$	—

20. Broker-Dealer and Clearing Organization Receivables and Payables

Broker-dealer and clearing organization receivables and payables consisted of the following (in thousands).


	September 30,		December 31,
	2024		2023
Receivables:
Securities borrowed	$	1,077,956	$	1,406,937
Securities failed to deliver		15,592		28,120
Trades in process of settlement		110,530		123,722
Other		16,706		15,152
	$	1,220,784	$	1,573,931
Payables:
Securities loaned	$	1,066,651	$	1,371,896
Correspondents		26,152		33,286
Securities failed to receive		11,272		18,135
Other		6,298		7,417
	$	1,110,373	$	1,430,734

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

21. Segment and Related Information

The Company has two primary business units, PCC (banking and mortgage origination) and Securities Holdings (broker-dealer). Under GAAP, the Company’s business units are comprised of three reportable business segments organized primarily by the core products offered to the segments’ respective customers: banking, broker-dealer and mortgage origination. These segments reflect the manner in which operations are managed and the criteria used by the chief operating decision maker, the Company’s President and Chief Executive Officer, to evaluate segment performance, develop strategy and allocate resources.

The banking segment includes the operations of the Bank. The broker-dealer segment includes the operations of Securities Holdings, and the mortgage origination segment is composed of PrimeLending.

Balance sheet amounts not discussed previously and the elimination of intercompany transactions are included in “All Other and Eliminations.” The following tables present certain information about reportable business segment revenues, operating results, goodwill and assets (in thousands).


					Mortgage				All Other and		Hilltop
Three Months Ended September 30, 2024	Banking		Broker-Dealer		Origination		Corporate		Eliminations		Consolidated
Net interest income (expense)	$	93,536	$	12,409	$	(4,417)	$	(3,303)	$	6,818	$	105,043
Provision for (reversal of) credit losses		(1,440)		170		—		—		—		(1,270)
Noninterest income		10,726		111,849		79,922		4,962		(7,016)		200,443
Noninterest expense		57,557		107,094		84,223		15,631		(193)		264,312
Income (loss) before taxes	$	48,145	$	16,994	$	(8,718)	$	(13,972)	$	(5)	$	42,444

					Mortgage				All Other and		Hilltop
Nine Months Ended September 30, 2024	Banking		Broker-Dealer		Origination		Corporate		Eliminations		Consolidated
Net interest income (expense)	$	277,600	$	36,896	$	(13,240)	$	(9,560)	$	20,618	$	312,314
Provision for (reversal of) credit losses		6,657		136		—		—		—		6,793
Noninterest income		31,884		308,480		239,489		16,747		(21,234)		575,366
Noninterest expense		171,527		302,102		250,067		47,731		(628)		770,799
Income (loss) before taxes	$	131,300	$	43,138	$	(23,818)	$	(40,544)	$	12	$	110,088

					Mortgage				All Other and		Hilltop
Three Months Ended September 30, 2023	Banking		Broker-Dealer		Origination		Corporate		Eliminations		Consolidated
Net interest income (expense)	$	99,047	$	12,215	$	(5,482)	$	(3,175)	$	13,045	$	115,650
Provision for (reversal of) credit losses		675		(715)		—		—		—		(40)
Noninterest income		11,668		106,488		88,747		3,159		(13,213)		196,849
Noninterest expense		56,887		97,865		91,505		13,937		(177)		260,017
Income (loss) before taxes	$	53,153	$	21,553	$	(8,240)	$	(13,953)	$	9	$	52,522


					Mortgage				All Other and		Hilltop
Nine Months Ended September 30, 2023	Banking		Broker-Dealer		Origination		Corporate		Eliminations		Consolidated
Net interest income (expense)	$	304,804	$	39,279	$	(15,590)	$	(9,976)	$	37,105	$	355,622
Provision for (reversal of) credit losses		17,175		(48)		—		—		—		17,127
Noninterest income		34,046		297,164		247,655		8,944		(37,815)		549,994
Noninterest expense		170,450		283,063		278,918		45,750		(717)		777,464
Income (loss) before taxes	$	151,225	$	53,428	$	(46,853)	$	(46,782)	$	7	$	111,025


					Mortgage				All Other and		Hilltop
	Banking		Broker-Dealer		Origination		Corporate		Eliminations		Consolidated
September 30, 2024
Goodwill	$	247,368	$	7,008	$	13,071	$	—	$	—	$	267,447

Total assets	$	13,112,176	$	2,607,105	$	1,057,679	$	2,616,401	$	(3,466,956)	$	15,926,405

December 31, 2023
Goodwill	$	247,368	$	7,008	$	13,071	$	—	$	—	$	267,447

Total assets	$	13,288,627	$	2,929,296	$	1,181,316	$	2,543,057	$	(3,475,300)	$	16,466,996

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

22. Earnings per Common Share

The following table presents the computation of basic and diluted earnings per common share (in thousands, except per share data).


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Basic earnings per share:
Income attributable to Hilltop	$	29,693	$	37,042	$	77,694	$	80,975

Weighted average shares outstanding - basic		64,928		65,106		65,070		65,011

Basic earnings per common share:	$	0.46	$	0.57	$	1.19	$	1.25

Diluted earnings per share:
Income attributable to Hilltop	$	29,693	$	37,042	$	77,694	$	80,975

Weighted average shares outstanding - basic		64,928		65,106		65,070		65,011
Effect of potentially dilutive securities		18		2		10		3
Weighted average shares outstanding - diluted		64,946		65,108		65,080		65,014

Diluted earnings per common share:	$	0.46	$	0.57	$	1.19	$	1.25

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 to Hilltop Holdings Inc. and its direct and indirect wholly owned subsidiaries, references to “Hilltop” refer solely to Hilltop Holdings Inc., references to “PCC” refer to PlainsCapital Corporation (a wholly owned subsidiary of Hilltop), references to “Securities Holdings” refer to Hilltop Securities Holdings LLC (a wholly owned subsidiary of Hilltop), references to “Hilltop Securities” refer to Hilltop Securities Inc. (a wholly owned subsidiary of Securities Holdings), references to “Momentum Independent Network” refer to Momentum Independent Network Inc. (a wholly owned subsidiary of Securities Holdings, Hilltop Securities and Momentum Independent Network are collectively referred to as the “Hilltop Broker-Dealers”), references to the “Bank” refer to PlainsCapital Bank (a wholly owned subsidiary of PCC), references to “FNB” refer to First National Bank, references to “SWS” refer to the former SWS Group, Inc., references to “PrimeLending” refer to PrimeLending, a PlainsCapital Company (a wholly owned subsidiary of the Bank) and its subsidiaries as a whole.

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, information technology expenses, cybersecurity incidents, 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, 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 and any legal, reputational and financial risks following a cybersecurity incident;

●

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;

●

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;

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●

disruptions to the economy and financial services industry, risks associated with uninsured deposits and responsive measures by federal or state governments or banking regulators, including increases in the cost of our deposit insurance assessments;

●

cost and availability of capital;

●

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;

●

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 ended December 31, 2023 (“2023 Form 10-K”), which was filed with the Securities and Exchange Commission (“SEC”) on February 14, 2024, this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other filings we have made with the SEC. 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.

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OVERVIEW

We are a financial holding company registered under the Bank Holding Company Act of 1956. Our primary line of business is to provide business and consumer banking services from offices located throughout Texas through the Bank. We also provide an array of financial products and services through our broker-dealer and mortgage origination segments. The following includes additional details regarding the financial products and services provided by each of our primary business units.

PCC. PCC is a financial holding company that provides, through its subsidiaries, traditional banking and wealth, investment and treasury management services primarily in Texas and residential mortgage loans throughout the United States.

Securities Holdings. Securities Holdings is a holding company that provides, through its subsidiaries, investment banking and other related financial services, including municipal advisory, sales, trading and underwriting of taxable and tax-exempt fixed income securities, clearing, securities lending, structured finance and retail brokerage services throughout the United States.

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 and shares in thousands, except per share data).


	Three Months Ended September 30,						Nine Months Ended September 30,
	2024			2023			2024			2023
Statement of Operations Data:
Net interest income	$	105,043		$	115,650		$	312,314		$	355,622
Provision for (reversal of) credit losses		(1,270)			(40)			6,793			17,127
Total noninterest income		200,443			196,849			575,366			549,994
Total noninterest expense		264,312			260,017			770,799			777,464
Income before income taxes		42,444			52,522			110,088			111,025
Income tax expense		9,539			13,211			24,762			24,008
Net income		32,905			39,311			85,326			87,017
Less: Net income attributable to noncontrolling interest		3,212			2,269			7,632			6,042
Income attributable to Hilltop	$	29,693		$	37,042		$	77,694		$	80,975

Per Share Data:
Diluted earnings per common share	$	0.46		$	0.57		$	1.19		$	1.25
Diluted weighted average shares outstanding		64,946			65,108			65,080			65,014
Cash dividends declared per common share	$	0.17		$	0.16		$	0.51		$	0.48
Dividend payout ratio ⁽¹⁾		37.17	%		28.12	%		42.71	%		38.54	%
Book value per common share (end of period)							$	33.51		$	31.91
Tangible book value per common share ⁽²⁾(end of period)							$	29.29		$	27.67

							September 30,			December 31,
							2024			2023
Balance Sheet Data:
Total assets							$	15,926,405		$	16,466,996
Cash and due from banks								1,961,627			1,858,700
Securities								2,701,647			2,836,584
Loans held for sale								933,724			943,846
Loans held for investment, net of unearned income								7,979,630			8,079,745
Allowance for credit losses								(110,918)			(111,413)
Total deposits								10,791,447			11,063,192
Notes payable								347,533			347,145
Total stockholders' equity								2,205,859			2,150,329

Capital Ratios:
Common equity to assets ratio								13.67	%		12.89	%
Tangible common equity to tangible assets ⁽²⁾								12.16	%		11.41	%

(1) Dividend payout ratio is defined as cash dividends declared per common share divided by basic earnings per common share.

(2) For a reconciliation to the nearest GAAP measure, see “—Reconciliation and Management’s Explanation of Non-GAAP Financial Measures.”

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Consolidated income before income taxes during the three and nine months ended September 30, 2024 included the following contributions from our reportable business segments.

●

The banking segment contributed $48.1 million and $131.3 million of income before income taxes during the three and nine months ended September 30, 2024;

●

The broker-dealer segment contributed $17.0 million and $43.1 million of income before income taxes during the three and nine months ended September 30, 2024; and

●

The mortgage origination segment incurred $8.7 million and $23.8 million of losses before income taxes during the three and nine months ended September 30, 2024.

During the nine months ended September 30, 2024, we declared and paid total common dividends of $33.2 million.

On October 24, 2024, our board of directors declared a quarterly cash dividend of $0.17 per common share, payable on November 22, 2024 to all common stockholders of record as of the close of business on November 8, 2024.

In January 2024, our board of directors authorized a new stock repurchase program through January 2025, pursuant to which we are authorized to repurchase, in the aggregate, up to $75.0 million of our outstanding common stock, inclusive of repurchases to offset dilution related to grants of stock-based compensation. During the nine months ended September 30, 2024, we paid $19.9 million to repurchase an aggregate of 640,042 shares of our common stock at an average price of $31.04 per share pursuant to the 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 in the 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).


	September 30,
	2024			2023
Book value per common share	$	33.51		$	31.91
Effect of goodwill and intangible assets per share		(4.22)			(4.24)
Tangible book value per common share	$	29.29		$	27.67

	September 30,			December 31,
	2024			2023
Hilltop stockholders’ equity	$	2,177,096		$	2,122,967
Less: goodwill and intangible assets, net		274,442			275,904
Tangible common equity	$	1,902,654		$	1,847,063

Total assets	$	15,926,405		$	16,466,996
Less: goodwill and intangible assets, net		274,442			275,904
Tangible assets	$	15,651,963		$	16,191,092

Equity to assets		13.67	%		12.89	%
Tangible common equity to tangible assets		12.16	%		11.41	%

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Recent Developments

Economic Environment

The extent of the impacts of uncertain economic conditions on our financial performance that began in 2022, and have continued into 2024, will depend in part on developments outside of our control including, among others, the timing and significance of further changes in U.S. Treasury yields and mortgage interest rates, changes in funding costs, inflationary pressures, and international armed conflicts and their impact on supply chains.

As discussed in more detail within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2023 Form 10-K, events in early 2023 relating to the failures of certain banking entities caused general uncertainty and concern regarding the liquidity adequacy of the banking sector as a whole. In light of these events, we have continued our efforts to monitor deposit flows and balance sheet trends to ensure that our liquidity needs and financial flexibility are maintained. During 2023, we increased interest-bearing deposit rates to address rising market interest rates and intense competition for liquidity to combat deposit outflows. Throughout 2023 and into the third quarter of 2024, we experienced net interest margin compression reflecting deposit repricing activity and demand deposit migration into interest-bearing accounts. Deposit costs remained elevated through the third quarter of 2024; however, the interest paid on our deposits increased at a slower pace during the second and third quarters of 2024 as we reduced higher cost brokered deposits and our interest-bearing deposits yield flattened and market expectations for a decrease in the Federal Reserve funds emerged. Additionally, at September 30, 2024, we continued to access core deposits from our Hilltop Securities Federal Deposit Insurance Corporation (“FDIC”) insured sweep program, while the Bank was not utilizing any of its Federal Home Loan Bank (“FHLB”) borrowing capacity.

Market conditions and external factors may unpredictably impact the competitive landscape for deposits such as those experienced during the first quarter of 2023. Additionally, throughout 2023 and into the third quarter of 2024, the market interest rate environment increased competition for liquidity and the premium at which liquidity was available to meet funding needs. While funding costs will continue to be influenced by various factors, including competitive pressures and broader economic conditions, with the recent 50-basis point decrease in the target range for the federal funds rate in September 2024 and the possibility of additional rate cuts in 2024, we anticipate that our cost of deposits will begin to trend modestly downward. An unexpected influx of withdrawals of deposits could adversely impact our ability to rely on organic deposits to primarily fund our operations, potentially requiring greater reliance on secondary sources of liquidity to meet withdrawals of deposits or to fund continuing operations. These sources may include proceeds from FHLB advances, sales of investment securities and loans, federal fund lines of credit with correspondent banks, securities sold under agreements to repurchase, brokered time deposits, borrowings from the Federal Reserve and borrowings under lines of credit with other financial institutions. Refer to the discussions in the “Segment Results – Banking Segment” and “Liquidity and Capital Resources – Banking Segment” sections that follow for more details regarding the Bank’s deposits, available liquidity and borrowing capacity at September 30, 2024.

We expect uncertainties discussed above, the impact of interest rate movements on the shape and inversions of the yield curve and challenge for deposits that persisted through 2023 and during the first three quarters of 2024, to continue during the remainder of 2024.

Asset Valuation

As discussed in more detail within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2023 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.

Given the potential impacts as a result of the operating performance of our reporting segments and overall economic conditions, actual results may differ materially from our current estimates as the scope of such impacts evolves or if the duration of business disruptions is longer than currently anticipated. We continue to monitor developments regarding overall economic conditions, market capitalization, and any other triggering events or circumstances that may indicate an impairment in the future. Specifically, the mortgage origination segment experienced operating losses during 2023, which have continued at a lesser extent into the first nine months of 2024 due to conditions and challenges discussed in detail within the discussion of segment results that follow.

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To the extent future operating performance of our reporting segments remain challenged and below forecasted projections during 2024, significant assumptions such as expected future cash flows or the risk-adjusted discount rate used to estimate fair value are adversely impacted, or upon the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform impairment tests on our goodwill and other intangible assets, an impairment charge may be recorded for that period. In the event that we conclude that all or a portion of our goodwill and other intangible assets are impaired, a non-cash charge for the respective amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.

Outlook

Our balance sheet, operating results and certain metrics during 2023 and the first nine months of 2024 reflected economic conditions that remain uncertain, and will depend in part on several developments outside of our control including, among others, the timing and significance of further changes in U.S. Treasury yields and mortgage interest rates, and a volatile economic forecast. As noted within our 2023 Form 10-K, these conditions, coupled with exposure to changes in funding costs, inflationary pressures, and international armed conflicts and their impact on supply chains within our business segments during 2023 have had, and are expected to continue to have, an adverse impact on our operating results during 2024.

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 is 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.

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.

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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.

The eliminations of intercompany transactions are included in “All Other and Eliminations.” Additional information concerning our reportable business segments is presented in Note 21, “Segment and Related Information”, in the notes to our consolidated financial statements.

The following table presents certain information about the results of our reportable business 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 September 30,				Variance 2024 vs 2023			Nine Months Ended September 30,				Variance 2024 vs 2023
	2024		2023		Amount		Percent	2024		2023		Amount		Percent
Net interest income (expense):
Banking	$	93,536	$	99,047	$	(5,511)	(6)	$	277,600	$	304,804	$	(27,204)	(9)
Broker-Dealer		12,409		12,215		194	2		36,896		39,279		(2,383)	(6)
Mortgage Origination		(4,417)		(5,482)		1,065	19		(13,240)		(15,590)		2,350	15
Corporate		(3,303)		(3,175)		(128)	(4)		(9,560)		(9,976)		416	4
All Other and Eliminations ⁽¹⁾		6,818		13,045		(6,227)	(48)		20,618		37,105		(16,487)	(44)
Hilltop Consolidated	$	105,043	$	115,650	$	(10,607)	(9)	$	312,314	$	355,622	$	(43,308)	(12)

Provision for (reversal of) credit losses:
Banking	$	(1,440)	$	675	$	(2,115)	(313)	$	6,657	$	17,175	$	(10,518)	(61)
Broker-Dealer		170		(715)		885	124		136		(48)		184	383
Mortgage Origination		—		—		—	—		—		—		-	—
Corporate		—		—		—	—		—		—		-	—
All Other and Eliminations		—		—		—	—		—		—		-	—
Hilltop Consolidated	$	(1,270)	$	(40)	$	(1,230)	NM	$	6,793	$	17,127	$	(10,334)	(60)

Noninterest income:
Banking	$	10,726	$	11,668	$	(942)	(8)	$	31,884	$	34,046	$	(2,162)	(6)
Broker-Dealer		111,849		106,488		5,361	5		308,480		297,164		11,316	4
Mortgage Origination		79,922		88,747		(8,825)	(10)		239,489		247,655		(8,166)	(3)
Corporate		4,962		3,159		1,803	57		16,747		8,944		7,803	87
All Other and Eliminations ⁽¹⁾		(7,016)		(13,213)		6,197	47		(21,234)		(37,815)		16,581	44
Hilltop Consolidated	$	200,443	$	196,849	$	3,594	2	$	575,366	$	549,994	$	25,372	5

Noninterest expense:
Banking	$	57,557	$	56,887	$	670	1	$	171,527	$	170,450	$	1,077	1
Broker-Dealer		107,094		97,865		9,229	9		302,102		283,063		19,039	7
Mortgage Origination		84,223		91,505		(7,282)	(8)		250,067		278,918		(28,851)	(10)
Corporate		15,631		13,937		1,694	12		47,731		45,750		1,981	4
All Other and Eliminations		(193)		(177)		(16)	(9)		(628)		(717)		89	12
Hilltop Consolidated	$	264,312	$	260,017	$	4,295	2	$	770,799	$	777,464	$	(6,665)	(1)

Income (loss) before taxes:
Banking	$	48,145	$	53,153	$	(5,008)	(9)	$	131,300	$	151,225	$	(19,925)	(13)
Broker-Dealer		16,994		21,553		(4,559)	(21)		43,138		53,428		(10,290)	(19)
Mortgage Origination		(8,718)		(8,240)		(478)	(6)		(23,818)		(46,853)		23,035	49
Corporate		(13,972)		(13,953)		(19)	(0)		(40,544)		(46,782)		6,238	13
All Other and Eliminations		(5)		9		(14)	(156)		12		7		5	71
Hilltop Consolidated	$	42,444	$	52,522	$	(10,078)	(19)	$	110,088	$	111,025	$	(937)	(1)

(1)	All other and eliminations amounts during each period include FDIC sweep program revenues and expenses earned on broker-dealer segment deposits placed with the banking segment that are eliminated in consolidation.

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.

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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.

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. The change in reportable business segment net interest income during the nine months ended September 30, 2024, compared with the same period in 2023, primarily reflected decreases within our banking and broker-dealer segments, partially offset by a decrease in net interest expense within our mortgage origination segment.

The other component of our revenue is noninterest income, which is primarily comprised of the following:

(i)

Income from broker-dealer operations. Through Securities Holdings, we provide investment banking and other related financial services that generated $195.8 million and $171.7 million in securities commissions and fees and investment and securities advisory fees and commissions, respectively, and $88.8 million and $87.8 million in gains from derivative and trading portfolio activities (included within other noninterest income), respectively, during the nine months ended September 30, 2024 and 2023.

(ii)

Income from mortgage operations. Through PrimeLending, we generate noninterest income by originating and selling mortgage loans. During the nine months ended September 30, 2024 and 2023, we generated $239.4 million and $247.5 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 an increase in noninterest income during the nine months ended September 30, 2024, compared to the same period in 2023, as noted in the segment results table previously presented, primarily due to an increase in gains from investment and securities advisory fees and commissions within our broker-dealer segment, an increase in net gains from sale of loans within our mortgage loan origination segment and an increase in pre-tax gains associated with the sale of merchant bank equity investments within corporate, partially offset by decreases of mortgage loan origination fees and other mortgage production income within our mortgage origination 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 ended September 30, 2024 was $29.7 million, or $0.46 per diluted share, compared with $37.0 million, or $0.57 per diluted share, during the three months ended September 30, 2023. Income applicable to common stockholders during the nine months ended September 30, 2024 was $77.7 million, or $1.19 per diluted share, compared to $81.0 million, or $1.25 per diluted share, during nine months ended September 30, 2023.

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Hilltop’s financial results for the three months ended September 30, 2024, compared with the same period in 2023, included a decline in net interest income, partially offset by changes in the provision for credit losses within the banking segment, an increase in net revenues in the structured finance and fixed income services business lines, a decline in net revenues in the wealth management business line and higher noninterest expenses within the broker-dealer segment, while the mortgage origination segment had declines in both noninterest income and expense. During the nine months ended September 30, 2024, compared to the same period in 2023, Hilltop’s financial results included changes consistent with those noted above within our banking and mortgage origination segments, and within our broker-dealer segment an increase in net revenues in the structured finance business line, a decline in net revenues in the wealth management and fixed income services business lines and higher noninterest expenses within the broker-dealer segment.

Certain items included in net income for the three and nine months ended September 30, 2024 and 2023 resulted from purchase accounting associated with the merger of PlainsCapital Corporation with and into a wholly owned subsidiary of Hilltop on November 30, 2012, the FDIC-assisted transaction whereby the Bank acquired certain assets and assumed certain liabilities of FNB, the acquisition of SWS Group, Inc. in a stock and cash transaction, and the acquisition of The Bank of River Oaks in an all-cash transaction (collectively, the “Bank Transactions”). Income before income taxes during the three months ended September 30, 2024 and 2023 included net accretion on earning assets and liabilities of $0.7 million and $2.5 million, respectively, and amortization of identifiable intangibles of $0.4 million and $0.7 million, respectively, related to the Bank Transactions. During the nine months ended September 30, 2024 and 2023, income before income taxes included net accretion on earning assets and liabilities of $4.0 million and $7.6 million, respectively, and amortization of identifiable intangible of $1.5 million and $2.2 million, respectively, related to the Bank transactions.

The information shown in the table below includes certain key performance indicators on a consolidated basis.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Return on average stockholders' equity⁽¹⁾	5.51	%	7.11	%	4.88	%	5.26	%
Return on average assets ⁽²⁾	0.84	%	0.94	%	0.72	%	0.70	%
Net interest margin^{(3) (4)}	2.84	%	3.02	%	2.84	%	3.11	%
Leverage ratio⁽⁵⁾ (end of period)					12.95	%	11.92	%
Common equity Tier 1 risk-based capital ratio ⁽⁶⁾ (end of period)					20.48	%	18.60	%

(1)	Return on average stockholders’ equity is defined as consolidated income attributable to Hilltop divided by average total Hilltop stockholders’ equity.

(2)	Return on average assets is defined as consolidated net income before noncontrolling interest divided by average assets.

(3)	Net interest margin is defined as net interest income divided by average interest-earning assets. We consider net interest margin as a key indicator of profitability, as it represents interest earned on our interest-earning assets compared to interest incurred.

(4)

The securities financing operations within our broker-dealer segment had the effect of lowering both the net interest margin and taxable equivalent net interest margin by 24 basis points and 25 basis points during the three months ended September 30, 2024 and 2023, respectively, and 25 basis points and 27 basis points during the nine months ended September 30, 2024 and 2023, respectively.

(5)	The leverage ratio is a regulatory capital ratio and is defined as Tier 1 risk-based capital divided by average consolidated assets.

(6)

The common equity Tier 1 risk-based capital ratio is a regulatory capital ratio and is defined as common equity Tier 1 risk-based capital divided by risk weighted assets. Common equity includes common equity Tier 1 capital (common stockholders’ equity and certain minority interests in the equity capital accounts of consolidated subsidiaries, but excluding goodwill and various intangible assets) and additional Tier 1 capital (certain qualifying minority interests not included in common equity Tier 1 capital, certain preferred stock and related surplus, and certain subordinated debt).

We present net interest margin and net interest income below on a taxable-equivalent basis. Net interest margin (taxable equivalent), a non-GAAP measure, is defined as taxable equivalent net interest income divided by average interest-earning assets. Taxable equivalent adjustments are based on the applicable corporate federal income tax rate of 21% for all periods presented. The Company performs periodic reviews of the classification and categorization of the components impacting the calculation of net interest margin. 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 ended September 30, 2024 and 2023, purchase accounting contributed 2 and 7 basis points, respectively, to our consolidated taxable equivalent net interest margin of 2.85% and 3.04%, respectively. During the nine months ended September 30, 2024 and 2023, purchase accounting contributed 4 and 7 basis points, respectively, to our consolidated taxable equivalent net interest margin of 2.86% and 3.12%, respectively. The purchase accounting

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activity was primarily related to the accretion of discount of loans which totaled $0.7 million and $2.2 million during the three months ended September 30, 2024 and 2023, respectively, and $4.0 million and $7.4 million during the nine months ended September 30, 2024 and 2023, respectively, associated with the Bank Transactions.

The tables below provide additional details regarding our consolidated net interest income (dollars in thousands).


	Three Months Ended September 30,
	2024						2023
	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	$	990,902	$	14,645	5.91	%	$	1,075,518	$	15,649	5.82	%
Loans held for investment, gross ⁽¹⁾		8,024,771		125,176	6.19	%		7,972,604		126,753	6.31	%
Investment securities - taxable		2,477,014		26,264	4.24	%		2,690,977		27,166	4.04	%
Investment securities - non-taxable ⁽²⁾		323,479		3,020	3.73	%		315,294		3,069	3.89	%
Federal funds sold and securities purchased under agreements to resell		97,686		1,845	7.49	%		142,324		2,313	6.45	%
Interest-bearing deposits in other financial institutions		1,373,051		17,800	5.14	%		1,550,991		20,320	5.20	%
Securities borrowed		1,260,420		19,426	6.03	%		1,371,625		17,683	5.04	%
Other		137,105		3,447	9.97	%		69,827		4,407	25.04	%
Interest-earning assets, gross ⁽²⁾		14,684,428		211,623	5.72	%		15,189,160		217,360	5.68	%
Allowance for credit losses		(115,113)						(110,398)
Interest-earning assets, net		14,569,315						15,078,762
Noninterest-earning assets		1,070,833						1,448,834
Total assets	$	15,640,148					$	16,527,596

Liabilities and Stockholders' Equity
Interest-bearing liabilities
Interest-bearing deposits	$	7,744,588	$	70,641	3.62	%	$	7,893,384	$	64,290	3.23	%
Securities loaned		1,247,392		18,499	5.88	%		1,303,883		16,169	4.92	%
Notes payable and other borrowings		1,333,671		16,859	5.02	%		1,527,371		20,646	5.36	%
Total interest-bearing liabilities		10,325,651		105,999	4.07	%		10,724,638		101,105	3.74	%
Noninterest-bearing liabilities
Noninterest-bearing deposits		2,737,942						3,347,752
Other liabilities		405,768						362,133
Total liabilities		13,469,361						14,434,523
Stockholders’ equity		2,143,252						2,066,564
Noncontrolling interest		27,535						26,509
Total liabilities and stockholders' equity	$	15,640,148					$	16,527,596

Net interest income ⁽²⁾			$	105,624					$	116,255
Net interest spread ⁽²⁾					1.65	%					1.94	%
Net interest margin ⁽²⁾					2.85	%					3.04	%

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	Nine Months Ended September 30,
	2024						2023
	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	$	909,446	$	39,795	5.83	%	$	979,099	$	40,497	5.51	%
Loans held for investment, gross ⁽¹⁾		7,918,156		372,984	6.30	%		7,967,075		363,682	6.17	%
Investment securities - taxable		2,569,408		77,795	4.04	%		2,759,436		79,487	3.84	%
Investment securities - non-taxable ⁽²⁾		312,617		8,972	3.83	%		380,269		10,306	3.61	%
Federal funds sold and securities purchased under agreements to resell		99,100		5,436	7.33	%		142,970		6,872	6.43	%
Interest-bearing deposits in other financial institutions		1,356,604		52,581	5.18	%		1,581,345		57,708	4.88	%
Securities borrowed		1,353,564		60,293	5.87	%		1,422,798		53,265	4.94	%
Other		168,716		11,673	9.25	%		71,909		11,879	22.09	%
Interest-earning assets, gross ⁽²⁾		14,687,611		629,529	5.73	%		15,304,901		623,696	5.45	%
Allowance for credit losses		(110,101)						(101,664)
Interest-earning assets, net		14,577,510						15,203,237
Noninterest-earning assets		1,151,827						1,380,989
Total assets	$	15,729,337					$	16,584,226

Liabilities and Stockholders' Equity
Interest-bearing liabilities
Interest-bearing deposits	$	7,703,843	$	207,880	3.61	%	$	7,625,569	$	154,840	2.71	%
Securities loaned		1,329,098		56,207	5.65	%		1,333,652		47,928	4.80	%
Notes payable and other borrowings		1,396,686		51,398	4.92	%		1,626,306		63,218	5.20	%
Total interest-bearing liabilities		10,429,627		315,485	4.04	%		10,585,527		265,986	3.36	%
Noninterest-bearing liabilities
Noninterest-bearing deposits		2,834,140						3,557,765
Other liabilities		309,635						357,547
Total liabilities		13,573,402						14,500,839
Stockholders’ equity		2,128,683						2,056,885
Noncontrolling interest		27,252						26,502
Total liabilities and stockholders' equity	$	15,729,337					$	16,584,226

Net interest income ⁽²⁾			$	314,044					$	357,710
Net interest spread ⁽²⁾					1.69	%					2.09	%
Net interest margin ⁽²⁾					2.86	%					3.12	%

(1)	Average balance includes non-accrual loans.

(2)

Presented on a taxable equivalent basis with annualized taxable equivalent adjustments based on the applicable corporate federal income tax rate of 21% for the periods presented. The adjustment to interest income was $0.6 million and $0.6 million for the three months ended September 30, 2024 and 2023, respectively, and $1.8 million and $2.1 million for the nine months ended September 30, 2024 and 2023, 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 reduces 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 lines of credit extended to other operating segments by the banking segment, are eliminated from the consolidated financial statements.

On a consolidated basis, the change in net interest income during the three and nine months ended September 30, 2024, compared with the same periods in 2023, was primarily due to increased costs of deposits from rate increases and the shift from noninterest-bearing deposits into interest-bearing products during the year-over-year period, and increased net yields on loans held for investment within the banking segment for the nine months ended September 30, 2024. 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. During the three months ended June 30, 2024, the provision for credit losses reflected a build in the allowance related to specific reserves and loan portfolio changes within the banking segment since the prior quarter, slightly offset by improvements to the U.S. economic outlook, while during the three months ended September 30, 2024, the reversal of credit losses was primarily driven by net charge-offs and loan

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portfolio changes, including a change in the macroeconomic outlook scenario utilized, associated with collectively evaluated loans, partially offset by a build in the allowance related to specific reserves within the banking segment since the prior quarter. The provision for credit losses during the nine months ended September 30, 2024 reflected a build in the allowance related to specific reserves and loan portfolio changes within the banking segment since the prior period, partially offset by the change in the macroeconomic outlook scenario utilized. Refer to the discussion under the heading “Financial Condition – Allowance for Credit Losses on Loans” for more details regarding the significant assumptions and estimates involved in estimating credit losses.

Noninterest income increased during the three months ended September 30, 2024, compared with the same period in 2023, primarily due to net increases within the broker-dealer segment’s structured finance and fixed income services business lines, partially offset by a decline within the broker-dealer segment’s wealth management business line and a decline in mortgage loan origination fees within our mortgage origination segment. Noninterest income increased during the nine months ended September 30, 2024, compared with the same period in 2023, primarily due to net increases within the broker-dealer segment’s structured finance and public finance services business lines, an increase in pre-tax gains associated with the sale of merchant bank equity investments within corporate, and increases in mortgage loan gains from sale of loans within our mortgage origination segment, partially offset by declines in mortgage loan origination fees and other related income within the mortgage origination segment and by declines within the broker-dealer segment’s fixed income services and wealth management business lines.

Noninterest expense increased during the three months ended September 30, 2024, compared with the same period in 2023, primarily due to increases in both variable and non-variable compensation and other segment operating costs within our broker-dealer segment, partially offset by decreases in both variable and non-variable compensation and other segment costs within our mortgage origination segment associated with decreased mortgage loan originations. Noninterest expense decreased during the nine months ended September 30, 2024, compared with the same period in 2023, primarily due to changes noted above within our mortgage origination segment, partially offset by increases in both variable and non-variable compensation and other segment operating costs within our broker-dealer segment. We have experienced an increase in certain noninterest expenses during 2024 and 2023, compared with respective prior periods, 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 2024.

Effective income tax rates during the three months ended September 30, 2024 and 2023 were 22.5% and 25.2%, respectively, and for the nine months ended September 30, 2024 and 2023 were 22.5% and 21.6%, respectively. The effective tax rate during the three months ended September 30, 2023 was higher than the applicable statutory rate primarily due to the impact of non-deductible compensation expense and other permanent adjustments. During the nine months ended September 30, 2023, the effective tax rate differed from the applicable statutory rate primarily due to the impacts of excess tax benefits on share-based payment awards, investments in tax-exempt instruments and changes in accumulated tax reserves, partially offset by nondeductible expenses and the booking of additional taxes from a recent change in the source of funding for an acquired non-qualified, deferred compensation plan. During the three and nine months ended September 30, 2024, the effective tax rate was higher than the applicable statutory rate primarily due to the impact of nondeductible expenses, nondeductible compensation expense and other permanent adjustments, partially offset by the discrete impact of restricted stock vesting during the quarter and investments in tax-exempt instruments.

Segment Results

Banking Segment

The following table presents certain information about the operating results of our banking segment (in thousands).


	Three Months Ended September 30,				Variance		Nine Months Ended September 30,				Variance
	2024		2023		2024 vs 2023		2024		2023		2024 vs 2023
Net interest income	$	93,536	$	99,047	$	(5,511)	$	277,600	$	304,804	$	(27,204)
Provision for (reversal of) credit losses		(1,440)		675		(2,115)		6,657		17,175		(10,518)
Noninterest income		10,726		11,668		(942)		31,884		34,046		(2,162)
Noninterest expense		57,557		56,887		670		171,527		170,450		1,077
Income before income taxes	$	48,145	$	53,153	$	(5,008)	$	131,300	$	151,225	$	(19,925)

The decreases in income before income taxes during the three and nine months ended September 30, 2024, compared with the same periods in 2023, were primarily due to declines in net interest income and noninterest income, partially offset by the changes in the provision for credit losses. Changes to net interest income related to the component changes

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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.

As discussed in more detail below, the banking segment’s cost of deposits increased during the first nine months of 2024, due to intense competition for liquidity and customers seeking higher yields on deposits. While we expect deposit costs during the remainder of 2024 to continue to be driven by various factors, including competitive pressures and broader economic conditions, with the recent 50-basis point decrease in the target range for the federal funds rate in September 2024 and the possibility of additional rate cuts in 2024, we anticipate that our cost of deposits will begin to trend modestly downward. The resulting net interest income spread compression has had, and is expected to continue to have, a negative impact on banking segment operating results.

The information shown in the table below includes certain key indicators of the performance and asset quality of our banking segment.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Efficiency ratio ⁽¹⁾	55.20	%	51.38	%	55.42	%	50.30	%
Return on average assets ⁽²⁾	1.14	%	1.20	%	1.05	%	1.17	%
Net interest margin ⁽³⁾	3.05	%	3.08	%	3.06	%	3.19	%
Net recoveries (charge-offs) to average loans outstanding⁽⁴⁾	(0.15)	%	0.08	%	(0.13)	%	(0.03)	%

(1)	Efficiency ratio is defined as noninterest expenses divided by the sum of total noninterest income and net interest income for the period. We consider the efficiency ratio to be a measure of the banking segment’s profitability.

(2)	Return on average assets is defined as net income before noncontrolling interest divided by average assets.

(3)	Net interest margin is defined as net interest income divided by average interest-earning assets. We consider net interest margin as a key indicator of profitability, as it represents interest earned on interest-earning assets compared to interest incurred.

(4)	Net recoveries (charge-offs) to average loans outstanding is defined as the 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 table 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 banking segment performs periodic reviews of the classification and categorization of the components impacting the calculation of net interest margin. 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 ended September 30, 2024 and 2023, purchase accounting contributed 3 and 8 basis points, respectively, to the banking segment’s taxable equivalent net interest margin of 3.06% and 3.09%, respectively. During the nine months ended September 30, 2024 and 2023, purchase accounting contributed 4 and 9 basis points, respectively, to the banking segment’s taxable equivalent net interest margin of 3.06% and 3.20%, 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.

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The tables below provide additional details regarding our banking segment’s net interest income (dollars in thousands).


	Three Months Ended September 30,
	2024						2023
	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	$	7,057	$	127	7.20	%	$	—	$	—	—	%
Loans held for investment, gross ⁽¹⁾		7,698,935		117,861	6.07	%		7,831,250		118,307	5.99	%
Subsidiary warehouse lines of credit		920,245		18,766	7.98	%		982,621		20,515	8.17	%
Investment securities - taxable		2,064,919		17,281	3.35	%		2,227,564		18,070	3.24	%
Investment securities - non-taxable ⁽²⁾		109,494		926	3.38	%		112,161		960	3.42	%
Federal funds sold and securities purchased under agreements to resell		84,493		1,197	5.62	%		51,518		725	5.58	%
Interest-bearing deposits in other financial institutions		1,229,597		16,910	5.46	%		1,496,590		20,320	5.39	%
Other		38,347		440	4.55	%		54,599		649	4.72	%
Interest-earning assets, gross ⁽²⁾		12,153,087		173,508	5.66	%		12,756,303		179,546	5.58	%
Allowance for credit losses		(114,911)						(109,798)
Interest-earning assets, net		12,038,176						12,646,505
Noninterest-earning assets		773,262						841,953
Total assets	$	12,811,438					$	13,488,458

Liabilities and Stockholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits	$	7,685,509	$	76,273	3.94	%	$	7,774,751	$	75,728	3.86	%
Notes payable and other borrowings		475,309		3,557	2.97	%		494,660		4,611	3.70	%
Total interest-bearing liabilities		8,160,818		79,830	3.88	%		8,269,411		80,339	3.85	%
Noninterest-bearing liabilities
Noninterest-bearing deposits		2,971,442						3,493,995
Other liabilities		109,513						159,681
Total liabilities		11,241,773						11,923,087
Stockholders’ equity		1,569,665						1,565,371
Total liabilities and stockholders’ equity	$	12,811,438					$	13,488,458

Net interest income ⁽²⁾			$	93,678					$	99,207
Net interest spread ⁽²⁾					1.78	%					1.73	%
Net interest margin ⁽²⁾					3.06	%					3.09	%


	Nine Months Ended September 30,
	2024						2023
	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	$	8,988	$	127	1.89	%	$	—	$	—	—	%
Loans held for investment, gross ⁽¹⁾		7,716,784		351,307	6.09	%		7,797,199		337,811	5.79	%
Subsidiary warehouse lines of credit		856,280		52,048	8.02	%		889,810		53,147	7.88	%
Investment securities - taxable		2,111,439		53,184	3.36	%		2,328,786		54,541	3.12	%
Investment securities - non-taxable ⁽²⁾		110,181		2,794	3.38	%		113,257		2,970	3.50	%
Federal funds sold and securities purchased under agreements to resell		73,556		3,121	5.67	%		55,788		2,142	5.19	%
Interest-bearing deposits in other financial institutions		1,214,926		49,725	5.47	%		1,525,746		57,708	5.06	%
Other		37,855		1,313	4.64	%		55,261		1,880	4.55	%
Interest-earning assets, gross ⁽²⁾		12,130,009		513,619	5.66	%		12,765,847		510,199	5.34	%
Allowance for credit losses		(109,970)						(100,653)
Interest-earning assets, net		12,020,039						12,665,194
Noninterest-earning assets		790,731						849,505
Total assets	$	12,810,770					$	13,514,699

Liabilities and Stockholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits	$	7,620,040	$	224,673	3.94	%	$	7,481,101	$	186,557	3.33	%
Notes payable and other borrowings		489,640		10,912	2.98	%		623,179		18,293	3.92	%
Total interest-bearing liabilities		8,109,680		235,585	3.88	%		8,104,280		204,850	3.38	%
Noninterest-bearing liabilities
Noninterest-bearing deposits		3,024,169						3,696,399
Other liabilities		100,788						150,247
Total liabilities		11,234,637						11,950,926
Stockholders’ equity		1,576,133						1,563,773
Total liabilities and stockholders’ equity	$	12,810,770					$	13,514,699

Net interest income ⁽²⁾			$	278,034					$	305,349
Net interest spread ⁽²⁾					1.78	%					1.96	%
Net interest margin ⁽²⁾					3.06	%					3.20	%

(1)	Average balance includes non-accrual loans.

(2)

Presented on a taxable equivalent basis with annualized taxable equivalent adjustments based on the applicable corporate federal income tax rates of 21% for all the periods presented. The adjustment to interest income was $0.2 million and $0.2 million for the three months ended September 30, 2024 and 2023, respectively, and $0.4 million and $0.6 million for the nine months ended September 30, 2024 and 2023, respectively.

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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, 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 lines of credit extended to other operating segments by the banking segment, 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 September 30,						Nine Months Ended September 30,
	2024 vs. 2023						2024 vs. 2023
	Change Due To ⁽¹⁾						Change Due To ⁽¹⁾
	Volume		Yield/Rate		Change		Volume		Yield/Rate		Change
Interest income
Loans held for sale	$	—	$	127	$	127	$	—	$	127	$	127
Loans held for investment, gross ⁽²⁾		(1,998)		1,552		(446)		(3,495)		16,991		13,496
Subsidiary warehouse lines of credit ⁽³⁾		(1,284)		(465)		(1,749)		(1,982)		883		(1,099)
Investment securities - taxable		(1,330)		541		(789)		(5,095)		3,738		(1,357)
Investment securities - non-taxable ⁽⁴⁾		(23)		(11)		(34)		(81)		(95)		(176)
Federal funds sold and securities purchased under agreements to resell		464		8		472		692		287		979
Interest-bearing deposits in other financial institutions		(3,625)		215		(3,410)		(11,799)		3,816		(7,983)
Other		(193)		(16)		(209)		(594)		27		(567)
Total interest income ⁽⁴⁾		(7,989)		1,951		(6,038)		(22,354)		25,774		3,420

Interest expense
Deposits	$	(869)	$	1,414	$	545	$	3,477	$	34,639	$	38,116
Notes payable and other borrowings		(180)		(874)		(1,054)		(3,934)		(3,447)		(7,381)
Total interest expense		(1,049)		540		(509)		(457)		31,192		30,735

Net interest income ⁽⁴⁾	$	(6,940)	$	1,411	$	(5,529)	$	(21,897)	$	(5,418)	$	(27,315)

(1)	Changes attributable to both volume and yield/rate are included in yield/rate column.

(2)

Changes in the yields earned on loans held for investment, gross included declines of $1.5 million and $3.4 million, respectively, in accretion of discount on loans during the three and nine months ended September 30, 2024, compared with the same periods in 2023. 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 net interest income, as of September 30, 2024, the banking segment maintained 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 declining interest rates, being asset sensitive tends to result in a decrease in net interest income, but during a period of rising interest rates, being asset sensitive tends to result in an increase in net interest income. Given projected impacts on net interest income associated with the expected transition into the next phase of the interest rate cycle, we continue to evaluate our current GAP position, which may result in a repositioning of the banking segment towards a more neutral or liability sensitive balance sheet.

The decreases in net interest income, as noted in the table above, were primarily driven by the increased funding costs on our deposit products from rate increases in 2023 and the migration from non-interest-bearing deposits into interest-bearing products during the year over year period, partially offset by increased earnings on interest-earning assets, primarily loan yields. The average rate paid on interest-bearing liabilities increased 50 basis points from 3.38% for the nine months ended September 30, 2023 to 3.88% for the nine months ended September 30, 2024, while the average yield

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on interest-earning assets increased 32 basis points from 5.34% for the nine months ended September 30, 2023 to 5.66% for the nine months ended September 30, 2024.

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. At September 30, 2024, approximately $599 million 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 66% are not scheduled to reprice for more than one year based upon agreed-upon terms. If interest rates were to continue to fall, the impact on our interest income for certain variable-rate loans would be limited by these rate floors. If interest rates rise, yields on the portion of our loan portfolio that remain at applicable rate floors would rise more slowly than increases in market interest rates, unless such loans are refinanced or repaid. Competition for loan growth could also continue to put pressure on new loan origination rates.

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. As discussed above, our cost of deposits increased during the three and nine months ended September 30, 2024, compared to the same periods of 2023. While we expect such costs during 2024 to continue to be driven by various factors, including competitive pressures and broader economic conditions, with the recent 50-basis point decrease in the target range of the federal funds rate in September 2024 and the possibility of additional rate cuts in 2024, we anticipate that our cost of deposits will begin to trend modestly downward. The Bank’s deposit base primarily includes a combination of commercial, wealth and public funds deposits, without a high level of industry concentration. At September 30, 2024, total estimated uninsured deposits were $5.3 billion, or approximately 49% of total deposits, while estimated uninsured deposits, excluding collateralized deposits of $312.3 million, were $5.0 billion, or approximately 46% of total deposits.

Refer to the discussion in the “Liquidity and Capital Resources – Banking Segment” section that follows for more detail regarding the Bank’s activities regarding deposits, available liquidity and borrowing capacity.

To help mitigate net interest income spread volatility between our assets and liabilities, management maintains derivative trades, as either cash flow hedges or fair value hedges, that better align repricing characteristics. Despite having these hedges in place, changes in interest rates across the term structure may 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.

The banking segment retained approximately $7.3 million and $8.8 million in mortgage loans originated by the mortgage origination segment during the three months ended September 30, 2024 and 2023, respectively, and $79.2 million and $135.2 million in mortgage loans originated by the mortgage origination segment during the nine months ended September 30, 2024 and 2023, respectively. 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 economic outlook, macroeconomic forecast assumptions and the resulting impact on reserves. During the three months ended September 30, 2024, the reversal of credit losses was primarily driven by net charge-offs and loan portfolio changes, including a change in the macroeconomic outlook scenario utilized, associated with collectively evaluated loans, partially offset by a build in the allowance related to specific reserves within the banking segment since the prior quarter. The increase in the provision for credit losses during the nine months ended September 30, 2024 reflected a build in the allowance related to specific reserves and loan portfolio changes within the banking segment since the prior period, partially offset by the change in the macroeconomic outlook scenario utilized. The net impact to the allowance of changes associated with individually evaluated loans during the three and nine months ended September 30, 2024 included a provision for credit losses of $1.2 million and $13.3 million, respectively, while collectively evaluated loans included a reversal of credit losses of

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$2.5 million and $6.5 million, respectively. The change in the allowance for credit losses during the three and nine months ended September 30, 2024 was also impacted by net charge-offs of $2.9 million and $7.3 million, respectively. During the three months ended September 30, 2023, the banking segment’s provision for credit losses reflected increases in specific reserves and net portfolio changes since the prior period, while the provision for credit losses during the nine months ended September 30, 2023, reflected a significant build in the allowance related to loan portfolio changes since December 31, 2022 and a deteriorating outlook for commercial real estate markets. The net impact to the allowance of changes associated with collectively evaluated loans during the three and nine months ended September 30, 2023 included a reversal of credit losses of $0.3 million, compared to a provision for credit losses of $14.2 million, respectively, while individually evaluated loans included a provision for credit losses of $0.9 million and $3.0 million, respectively. The change in the allowance for credit losses during the three and nine months ended September 30, 2023 were also impacted by net recoveries of $1.6 million and net charge-offs of $1.7 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 decreased during the three months ended September 30, 2024, compared to the same period in 2023, primarily due to a decrease in oil and gas management fees. The decrease in noninterest income during the nine months ended September 30, 2024, compared to the same period in 2023, was primarily due to valuation adjustments associated with the sale of a single loan from loans held for sale during the second quarter of 2024.

The banking segment’s noninterest expense increased during the three months ended September 30, 2024, compared to the same period in 2023, primarily due to increases in employees’ compensation and benefits and occupancy and equipment expenses, partially offset by decreases in professional fees. The increase in noninterest expense during the nine months ended September 30, 2024, compared to the same period in 2023, was primarily due to one-time compensation expenses associated with Bank leadership changes, partially offset by decreases in professional fees.

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Broker-Dealer Segment

The following table provides additional details regarding our broker-dealer segment operating results (in thousands).


	Three Months Ended September 30,				Variance		Nine Months Ended September 30,				Variance
	2024		2023		2024 vs 2023		2024		2023		2024 vs 2023
Net interest income:
Wealth management:
Securities lending	$	927	$	1,514	$	(587)	$	4,086	$	5,337	$	(1,251)
Clearing services		2,601		2,458		143		7,918		5,416		2,502
Structured finance		1,803		1,603		200		5,098		5,980		(882)
Fixed income services		79		(895)		974		(1,231)		1,827		(3,058)
Other		6,999		7,535		(536)		21,025		20,719		306
Total net interest income		12,409		12,215		194		36,896		39,279		(2,383)
Noninterest income:
Securities commissions and fees by business line ^{(1) (5)}:
Fixed income services		7,161		5,305		1,856		20,712		16,436		4,276
Wealth management:
Retail		15,806		17,149		(1,343)		49,336		53,115		(3,779)
Clearing services		8,616		10,073		(1,457)		26,642		30,501		(3,859)
Structured finance		3,999		2,378		1,621		10,007		6,286		3,721
Other		1,426		606		820		3,358		2,272		1,086
		37,008		35,511		1,497		110,055		108,610		1,445
Investment and securities advisory fees and commissions by business line:
Public finance services		29,251		29,317		(66)		70,491		68,858		1,633
Fixed income services		3,096		1,477		1,619		5,995		4,481		1,514
Wealth management:
Retail		9,019		7,888		1,131		26,457		23,068		3,389
Clearing services		467		427		40		1,355		1,250		105
Structured finance		325		479		(154)		918		698		220
Other		90		74		16		252		191		61
		42,248		39,662		2,586		105,468		98,546		6,922
Other ⁽⁵⁾:
Structured finance		20,678		17,987		2,691		56,319		49,083		7,236
Fixed income services		7,334		8,741		(1,407)		20,109		26,004		(5,895)
Other		4,581		4,587		(6)		16,529		14,921		1,608
		32,593		31,315		1,278		92,957		90,008		2,949
Total noninterest income		111,849		106,488		5,361		308,480		297,164		11,316
Net revenue ⁽²⁾		124,258		118,703		5,555		345,376		336,443		8,933
Noninterest expense:
Variable compensation ⁽³⁾		42,569		39,929		2,640		110,578		105,548		5,030
Non-variable compensation and benefits		33,343		30,001		3,342		100,973		92,101		8,872
Segment operating costs ⁽⁴⁾		31,352		27,220		4,132		90,687		85,366		5,321
Total noninterest expense		107,264		97,150		10,114		302,238		283,015		19,223

Income before income taxes	$	16,994	$	21,553	$	(4,559)	$	43,138	$	53,428	$	(10,290)

(1)

Securities commissions and fees includes income from FDIC sweep investments with the banking segment of $6.6 million and $12.7 million during the three months ended September 30, 2024 and 2023, respectively, and $19.7 million and $35.5 million during the nine months ended September 30, 2024 and 2023, respectively, that is eliminated in consolidation.

(2)

Net revenue is defined as the sum of total net interest income and total noninterest income. We consider net revenue to be a key performance measure in the evaluation of the broker-dealer segment’s financial position and operating performance as we believe it is the primary revenue performance measure used by investors and analysts. Net revenue provides for some level of comparability of trends across the financial services industry as it reflects both noninterest income, including investment and securities advisory fees and commissions, as well as net interest income. Internally, we assess the broker-dealer segment’s performance on a revenue basis for comparability with our banking segment.

(3)	Variable compensation represents performance-based commissions and incentives.

(4)	Segment operating costs include provision for (reversal of) credit losses associated with the broker-dealer segment within other noninterest expenses.

(5)

The changes in net revenue and income before income taxes for the nine months ended September 30, 2024, compared with the same period in 2023, were primarily due to improved period-over-period results within our structured finance and public finance services business lines, partially offset by declines within our fixed income services and wealth management business lines. The increase in the structured finance business line’s net revenues was primarily due to an increase in unrealized gains from the U.S. Agency to-be-announced (“TBA”) business and commissions earned on commodities transactions. The increase in net revenues in the broker-dealer segment’s public finance services business line was primarily due to fees earned from managed assets and municipal advisory revenues. The wealth management business line’s net revenue decrease was driven by decreases in commissions earned from our FDIC sweep program on lower customer balances. These decreases were partially offset by improved advisory fees revenues generated from customer assets under management. The decrease in net revenues in the broker-dealer segment’s fixed income services business line was primarily due to declines in revenues from net interest income earned on inventory positions and

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trading profits, particularly from a decrease in underwriting activities. Income before income taxes was impacted by increased noninterest expense primarily due to increased segment compensation.

The changes in net revenue and income before income taxes for the three months ended September 30, 2024, compared with the same period in 2023, were primarily due to improved period-over-period results within our structured finance and fixed income services business lines, partially offset by declines within our wealth management business line. Public finance remained relatively flat period-over-period. The structured finance business line’s net revenues increase was primarily due to an increase in our structured housing business due to gains from the U.S. Agency TBA business and commissions earned on commodities transactions. The wealth management business line’s net revenue decline was driven by a reduction in the FDIC program sweep revenue resulting from an overall decrease in customer assets. These decreases were partially offset by improved advisory fees revenues generated from customer assets under management. The increase in net revenues in the broker-dealer segment’s fixed income services business line was primarily due to increases in revenues from net interest income earned on inventory positions and investment banking and advisory fees, partially offset from decreases in trading profits from underwriting activities.

The broker-dealer segment is subject to interest rate risk as a consequence of maintaining inventory positions, trading in interest rate sensitive financial instruments and maintaining a matched stock loan book. Changes in interest rates are likely to have a meaningful impact on our overall financial performance. Our broker-dealer segment has historically earned a significant portion of its revenues from advisory fees upon the successful completion of client transactions, which could be adversely impacted by interest rate volatility. Rapid or significant changes in interest rates could adversely affect the broker-dealer segment’s bond trading, sales, underwriting activities and other interest spread-sensitive activities described below. The broker-dealer segment also receives administrative fees for providing money market and FDIC investment alternatives to clients, which tend to be sensitive to short-term interest rates. In addition, the profitability of the broker-dealer segment depends, to an extent, on the spread between revenues earned on customer loans and excess customer cash balances, and the interest expense paid on customer cash balances, as well as the interest revenue earned on trading securities, net of financing costs. 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 resulting 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 decrease in net interest income during the nine months ended September 30, 2024, compared with the same period in 2023, was primarily due to the decrease in net interest income from the fixed income services business line due to decreases in net interest earned on inventory positions. Net interest income during the three months ended September 30, 2024, compared with the same period in 2023 remained relatively flat.

Noninterest income increased during the three and nine months ended September 30, 2024, compared with the same periods in 2023, due to increases in securities commissions and fees, investment and securities advisory fees and other income.

Securities commissions and fees increased during the three months ended September 30, 2024, compared with the same period in 2023, primarily due to an increase in commodities and insurance product sales commissions, partially offset by decreases in FDIC sweep revenues and net clearing revenues. Securities commissions and fees increased during the nine months ended September 30, 2024, compared with the same period in 2023 due to increases in both the broker-dealer segment’s structured finance and fixed income services business lines. The increase in the structured finance business line was primarily due to an increase in commissions earned on commodities transactions, and the increase in the fixed income services business line was primarily due to increased volumes. These increases were partially offset by declines in securities commissions and fees in the broker-dealer segment’s wealth management business line due to decreases in FDIC sweep revenues and net clearing revenues, as well as a decline in commissions earned on insurance product sales.

Investment and securities advisory fees and commissions increased during the three and nine months ended September 30, 2024, compared with the same periods in 2023, primarily due to increases in fees earned from managed assets and municipal advisory transactions.

The increases in other noninterest income during the three and nine months ended September 30, 2024, compared with the same periods in 2023, were primarily due to increases in trading gains earned from structured finance trading activities and distributions received on investments, partially offset by decreases in trading gains earned from fixed

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income trading activities. Both mortgage originations and buy-side demand have increased in the third quarter of fiscal year 2024, resulting in increases in noninterest income in the structured finance service line for both the three and nine months ended September 30, 2024, when compared to the same periods in 2023. Decreased fixed income trading gains for the three and nine months ended September 30, 2024, compared with the same periods in 2023, were primarily driven by municipal and taxable securities trading.

The increases in noninterest expense during the three and nine months ended September 30, 2024, compared with the same periods in 2023, were primarily due to increases in segment compensation and other segment operating costs, primarily quotation expenses.

Selected information concerning the broker-dealer segment, including key performance indicators, follows (dollars in thousands).


	Three Months Ended September 30,						Nine Months Ended September 30,
	2024				2023		2024				2023
Total compensation as a % of net revenue ⁽¹⁾		61.1	%		58.9	%		61.3	%		58.7	%
Pre-tax margin ⁽²⁾		13.7	%		18.2	%		12.5	%		15.9	%
FDIC insured program balances at the Bank (end of period)							$	762,209		$	1,382,088
Other FDIC insured program balances (end of period)							$	1,034,984		$	686,920
Customer funds on deposit, including short credits (end of period)							$	224,538		$	223,582

Public finance services:
Number of issues ⁽³⁾		285			230			723			648
Aggregate amount of offerings ⁽³⁾	$	23,946,330		$	16,853,446		$	52,327,828		$	37,884,255

Structured finance:
Lock production/TBA volume ⁽³⁾	$	2,512,400		$	2,517,155		$	3,961,102		$	5,285,003

Fixed income services:
Total volumes	$	95,389,537		$	69,964,657		$	298,689,423		$	177,028,598
Net inventory (end of period)							$	493,009		$	527,302

Wealth management (Retail and Clearing services groups):
Retail employee representatives (end of period)								91			94
Independent registered representatives (end of period)								169			188
Correspondents (end of period)								102			109
Correspondent receivables (end of period)							$	124,541		$	125,874
Customer margin balances (end of period)							$	210,670		$	231,369

Wealth management (Securities lending group):
Interest-earning assets - stock borrowed (end of period)							$	1,077,956		$	1,368,945
Interest-bearing liabilities - stock loaned (end of period)							$	1,066,651		$	1,304,884

(1)	Total compensation includes the sum of non-variable compensation and benefits and variable compensation. We consider total compensation as a percentage of net revenue to be a key performance measure and indicator of segment profitability.

(2)	Pre-tax margin is defined as income before income taxes divided by net revenue. We consider pre-tax margin to be a key performance measure given its use as a profitability metric representing the percentage of net revenue earned that results in a profit.

(3)	Noted balances during all prior periods include certain reclassifications to conform to current period presentation.

Mortgage Origination Segment

The following table presents certain information regarding the operating results of our mortgage origination segment (in thousands).


	Three Months Ended September 30,				Variance		Nine Months Ended September 30,				Variance
	2024		2023		2024 vs 2023		2024		2023		2024 vs 2023
Net interest income (expense)	$	(4,417)	$	(5,482)	$	1,065	$	(13,240)	$	(15,590)	$	2,350
Noninterest income		79,922		88,747		(8,825)		239,489		247,655		(8,166)
Noninterest expense		84,223		91,505		(7,282)		250,067		278,918		(28,851)
Loss before income taxes	$	(8,718)	$	(8,240)	$	(478)	$	(23,818)	$	(46,853)	$	23,035

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. While changes in mortgage interest rates have historically had a lesser impact on home purchases volume than on refinancing volume, net increases in mortgage interest rates since 2022 have continued to negatively impact home purchase volume through the first nine months of 2024. A modest decline in mortgage rates experienced since the fourth

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quarter of 2023 has had a slight impact on loan origination volume in 2024, with a minor increase in refinancings as a percentage of total loan origination 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 2023, and continuing through the first nine months of 2024, certain events have adversely impacted total mortgage market origination volumes because of their effect on the economy, including inflation and an increase in average interest rates during these periods when compared to the average of the three years prior to 2023, geopolitical events, and the Federal Reserve’s actions and communications. 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 are impacting customers’ abilities to purchase homes. In September 2024, the Federal Reserve cut the target range for the federal funds rate by 50 basis points to 4.75% - 5.0%, the first reduction since March 2022 when the target range was 0.25% - 0.50%. Since this cut occurred during the later part of the third quarter of 2024, it had minimal impact on loan origination volumes during the nine months ended September 30, 2024. We expect the fourth quarter of 2024 to more closely follow loan production experienced during the first quarter of 2024. PrimeLending continues to evaluate its cost structure to address the current mortgage environment.

We believe that ongoing initiatives are critical to improving PrimeLending’s short- and long-term financial condition and operating results. The mortgage origination segment experienced operating losses during 2023 due to conditions and challenges discussed in detail within this discussion of segment results. Operating losses have continued into the first nine months of 2024 due to the same conditions and challenges, but at a lesser extent than during the nine months ended September 30, 2023. In light of these macroeconomic challenges in the mortgage industry including tight housing inventories and mortgage interest rate levels, the fair value of the mortgage origination reporting unit may decline, and we may be required to record a goodwill impairment charge. These conditions will continue to be considered during future impairment evaluations of reporting unit goodwill.

As a Government National Mortgage Association (“GNMA”) approved lender, we are subject to certain Department of Housing and Urban Development (“HUD”) and GNMA minimum capital ratio reporting requirements, including timely reporting if a quarter’s operating loss exceeds more than 20% of its previous quarter or year-end net worth (the “operating loss ratio”) and/or if a quarter’s capital ratio is below 6% (the “GNMA capital ratio”). If this occurs, certain additional financial reporting submissions are required. During the first and fourth quarters of 2023, the HUD operating loss ratio was 21.2% and 20.5%, respectively, while during the second and third quarters of 2023, the HUD operating loss ratio decreased to 15.8% and 10.0%, respectively. During the first quarter of 2024, the HUD operating loss ratio was 22.6%, while during the second quarter of 2024, PrimeLending reported a HUD operating gain. During the third quarter of 2024, the operating loss ratio was below the 20% threshold at 14.4%. During each quarter of 2023, the GNMA capital ratio exceeded the required 6%. However, during the first and second quarters of 2024, the GNMA capital ratio decreased to 5.56% and 4.41%, respectively. Including a $10 million capital infusion received by PrimeLending from its parent company, PlainsCapital Bank, in September 2024, the GNMA capital ratio increased to 6.38%. All trends requiring notification to GNMA and HUD have been reported to those entities, respectively. Such capital infusions are likely in future periods, including those in the near-term, based on various factors including PrimeLending’s financial performance.

In addition, as a Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) approved lender, we are subject to certain minimum capital, net worth and liquidity requirements established by FNMA and FHLMC, including maintaining a minimum capital ratio of 6% (the “FNMA/FHLMC capital ratio”). During each quarter of 2023 and the first quarter of 2024, the FNMA/FHLMC capital ratio exceeded the required 6%, however during the second quarter of 2024, the FNMA/FHLMC capital ratio decreased to 5.52%. During the third quarter of 2024, the capital ratio, including the capital infusion previously noted, exceeded the required 6%. FNMA and FHLMC may also monitor additional financial performance trends at their discretion, including risk-based analyses focused on loans that the mortgage origination segment is currently responsible for representations and warranties that agency loans sold meet certain requirements, including representations as to underwriting standards and the validity of certain borrower representations in connection with the loan. One FNMA discretionary performance trend monitors the change in adjusted net worth during the prior twelve months. FNMA’s acceptable threshold for this performance trend is less than minus 30%, but is only considered if a company has four consecutive quarterly losses. During the second, third and fourth quarters of 2023, PrimeLending experienced four consecutive quarterly losses; the loss ratio during these periods were 50.2%, 37.6% and 39.8%, respectively. PrimeLending also recognized four consecutive quarterly losses during the first, second and third quarters of 2024; the loss ratio during these periods was 37.5%, 29.9% and 23.9%, respectively. All trends requiring notification to FNMA and FHLMC have been reported to those entities, respectively.

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The loss before income taxes during the three months ended September 30, 2024, approximated the loss before income taxes PrimeLending reported during the same period in 2023. Decreases in noninterest income and noninterest expense approximated each other during these periods. The loss before income taxes decreased during the nine months ended September 30, 2024, compared with the same period in 2023, primarily as a result of a decrease in noninterest expense.

During 2022 and continuing through the beginning of the fourth quarter of 2023, the U.S. 10-Year Treasury Rate and mortgage interest rates increased significantly. During the later part of the fourth quarter of 2023, both rates decreased to levels that approximated rates at the beginning of 2023. Between January 1 and September 30, 2024, both rates decreased slightly. Average interest rates during the three months ended September 30, 2024, decreased slightly compared to average interest rates during the same period in 2023, while average interest rates during the nine months ended September 30, 2024, were comparable to the same period in 2023. Refinancing volume as a percentage of total origination volume was slightly higher during the three and nine months ended September 30, 2024, as compared to the same periods in 2023. Although we anticipate a slightly higher percentage of refinancing volume relative to total loan origination volume during 2024, as compared to 2023, an even 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 and affordability challenges 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 nine months ended September 30, 2024, funded volume through ABAs was approximately 15% of the mortgage origination segment’s total loan volume. Currently, PrimeLending owns a greater than 50% membership interest in two ABAs. We expect total production within the ABA channel to continue to approximate 15% of loan volume of the mortgage origination segment during the remainder of 2024.

The following table provides further details regarding our mortgage loan originations and sales for the periods indicated below (dollars in thousands).


	Three Months Ended September 30,										Nine Months Ended September 30,
	2024				2023						2024				2023
			% of				% of			Variance			% of				% of			Variance
	Amount		Total		Amount		Total			2024 vs 2023	Amount		Total		Amount		Total			2024 vs 2023
Mortgage Loan Originations - units		7,270				7,353				(83)		20,119				21,004				(885)

Mortgage Loan Originations - volume:
Conventional	$	1,434,323	62.16	%	$	1,403,008	62.53	%	$	31,315	$	3,874,308	60.89	%	$	4,038,367	62.82	%	$	(164,059)
Government		467,082	20.24	%		497,055	22.15	%		(29,973)		1,353,183	21.27	%		1,486,169	23.12	%		(132,986)
Jumbo		110,139	4.77	%		73,769	3.29	%		36,370		321,462	5.05	%		237,304	3.69	%		84,158
Other		295,919	12.83	%		269,869	12.03	%		26,050		814,294	12.79	%		666,264	10.37	%		148,030
	$	2,307,463	100.00	%	$	2,243,701	100.00	%	$	63,762	$	6,363,247	100.00	%	$	6,428,104	100.00	%	$	(64,857)

Home purchases	$	2,096,009	90.84	%	$	2,091,444	93.21	%	$	4,565	$	5,850,106	91.94	%	$	6,003,749	93.40	%	$	(153,643)
Refinancings		211,454	9.16	%		152,257	6.79	%		59,197		513,141	8.06	%		424,355	6.60	%		88,786
	$	2,307,463	100.00	%	$	2,243,701	100.00	%	$	63,762	$	6,363,247	100.00	%	$	6,428,104	100.00	%	$	(64,857)

Texas	$	692,919	30.03	%	$	624,953	27.85	%	$	67,966	$	1,979,994	31.12	%	$	1,762,179	27.41	%	$	217,815
California		183,239	7.94	%		176,879	7.88	%		6,360		499,387	7.85	%		536,718	8.35	%		(37,331)
South Carolina		112,023	4.85	%		119,124	5.31	%		(7,101)		336,242	5.28	%		344,224	5.36	%		(7,982)
Missouri		95,882	4.16	%		79,735	3.55	%		16,147		278,985	4.38	%		225,068	3.50	%		53,917
New York		115,987	5.03	%		101,560	4.53	%		14,427		269,159	4.23	%		271,929	4.23	%		(2,770)
Florida		77,800	3.37	%		96,945	4.32	%		(19,145)		242,934	3.82	%		308,155	4.79	%		(65,221)
Arizona		76,291	3.31	%		84,103	3.75	%		(7,812)		203,943	3.21	%		290,972	4.53	%		(87,029)
Ohio		73,053	3.17	%		71,467	3.19	%		1,586		192,029	3.02	%		200,273	3.12	%		(8,244)
Washington		68,010	2.95	%		53,532	2.39	%		14,478		180,112	2.83	%		153,705	2.39	%		26,407
North Carolina		41,753	1.81	%		67,342	3.00	%		(25,589)		133,972	2.11	%		196,764	3.06	%		(62,792)
All other states		770,506	33.38	%		768,061	34.23	%		2,445		2,046,490	32.15	%		2,138,117	33.26	%		(91,627)
	$	2,307,463	100.00	%	$	2,243,701	100.00	%	$	63,762	$	6,363,247	100.00	%	$	6,428,104	100.00	%	$	(64,857)

Mortgage Loan Sales - volume:
Third parties	$	2,562,350	99.71	%	$	2,386,552	99.63	%	$	175,798	$	6,079,164	98.71	%	$	6,037,382	97.81	%	$	41,782
Banking segment		7,328	0.29	%		8,805	0.37	%		(1,477)		79,213	1.29	%		135,201	2.19	%		(55,988)
	$	2,569,678	100.00	%	$	2,395,357	100.00	%	$	174,321	$	6,158,377	100.00	%	$	6,172,583	100.00	%	$	(14,206)

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.

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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 increased 2.8% and decreased 1.0%, respectively, during the three and nine months ended September 30, 2024, compared to the same periods in 2023. The loss before taxes increased 5.8% and decreased 49.2%, respectively, during the three and nine months ended September 30, 2024, compared to the same periods in 2023. The increase in loss before income taxes during the three months ended September 30, 2024, when compared to the same period in 2023, was primarily due to an increase in the loss on the change in the net fair value and related derivative activity related to mortgage servicing rights assets and a decrease in servicing fees, almost entirely offset by decreases in non-variable compensation and benefits expense, segment operating costs, and servicing fee expense. The decrease in loss before income taxes during the nine months ended September 30, 2024, when compared to the same period in 2023, was primarily due to decreases in non-variable compensation and benefits expense and segment operating costs, partially offset by an increase in the loss on the change in the net fair value and related derivative activity related to mortgage servicing rights assets.

The information shown in the table below includes certain additional key performance indicators for the mortgage origination segment.


	Three Months Ended September 30,					Nine Months Ended September 30,
		2024		2023		2024			2023
Net gains from mortgage loan sales (basis points):
Loans sold to third parties		224		199			226			200
Impact of loans retained by banking segment		0		(1)			(3)			(4)
As reported		224		198			223			196
Variable compensation as a percentage of total compensation		55.9	%	51.7	%		52.0	%		48.1	%
Mortgage servicing rights asset ($000's) (end of period) ⁽¹⁾						$	45,742		$	104,951

(1)	Reported on a consolidated basis and therefore does not include mortgage servicing rights assets related to loans serviced for the banking segment, which are eliminated in consolidation.

Net interest expense was comprised of interest income earned on loans held for sale offset by interest incurred on warehouse lines of credit primarily held with the Bank, and related intercompany financing costs. Net interest expense decreased during the three and nine months ended September 30, 2024, as compared to the same periods in 2023, primarily due to a decrease in the negative net interest margin.

Noninterest income was comprised of the items set forth in the table below (in thousands).


	Three Months Ended September 30,				Variance		Nine Months Ended September 30,				Variance
	2024		2023		2024 vs 2023		2024		2023		2024 vs 2023
Net gains from sale of loans	$	57,456	$	47,494	$	9,962	$	137,338	$	120,857	$	16,481
Mortgage loan origination fees and other related income		32,119		41,478		(9,359)		92,955		111,695		(18,740)
Other mortgage production income:
Change in net fair value and related derivative activity:
IRLCs and loans held for sale		(8,332)		(5,774)		(2,558)		6,975		3,719		3,256
Mortgage servicing rights asset		(5,473)		(2,987)		(2,486)		(18,628)		(12,797)		(5,831)
Servicing fees		4,152		8,536		(4,384)		20,849		24,181		(3,332)
Total noninterest income	$	79,922	$	88,747	$	(8,825)	$	239,489	$	247,655	$	(8,166)

Net gains from sale of loans increased 13.6%, while total loans sales volume was flat during the nine months ended September 30, 2024, compared with the same period in 2023. The increase in net gains from sales of loans was primarily the result of an increase in average loan sale margin.

The 16.8% decrease in mortgage loan origination fees during the nine months ended September 30, 2024, compared with the same period in 2023, was primarily the result of a decrease in average mortgage loan origination fees as loan origination volume was flat during the same period, and to a lesser extent, a decrease in loan origination volume during both periods.

Fluctuations in mortgage loan origination fees and net gains on sale of loans are not always aligned with fluctuations in loan origination and loan sale volumes, respectively, since customers may opt to pay PrimeLending discount fees on their mortgage loans, which are included in mortgage loan origination fees, in exchange for a lower interest rate, which decreases the value of a loan in the secondary market.

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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 mortgage loan sales margin is defined as net gains from sale of loans divided by mortgage 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 fees 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 three months ended September 30, 2024 and 2023 were $7.3 million and $8.8 million, respectively, and $79.2 million and $135.2 million during the nine months ended September 30, 2024 and 2023, respectively. 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 interest rate lock commitments (“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 (“net fair value of IRLCs and loans held for sale”). The decrease in net fair value of IRLCs and loans held for sale during the three months ended September 30, 2024, was the result of a decrease in the total volume of individual IRLCs and loans held for sale since June 30, 2024, while the average value of individual IRLCs and loans held for sale was flat since June 30, 2024. The increase in net fair value of IRLCs and loans held for sale during the nine months ended September 30, 2024, was the result of an increase in the total volume of individual IRLCs and loans held for sale and the average value of individual IRLCs and loans held for sale since December 31, 2023.

The mortgage origination segment sells substantially all mortgage loans it originates to various investors in the secondary market. 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, refinancing and market activity, and balance sheet positioning at Hilltop. During the three and nine months ended September 30, 2024, PrimeLending retained servicing on approximately 6% and 8%, respectively, of the loans sold, compared with approximately 9% and 20%, respectively, of loans sold during the same periods in 2023. A reduction in third-party mortgage servicers purchasing mortgage servicing rights, even if modest, may result in PrimeLending increasing the rate of retained servicing on mortgage loans sold at any time. 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, including U.S. Treasury bond futures and options and MBS commitments, to mitigate interest rate risk associated with its MSR asset. During the three and nine months ended September 30, 2024, changes in the net fair value of the MSR asset and the related derivatives resulted in net losses of $5.5 million and $18.6 million, respectively. In addition to normal customer payments and customer payoffs, these changes were primarily driven by losses of $4.2 million and $12.3 million during the three and nine months ended September 30, 2024, respectively, to account for MSR valuation assumption changes, including prepayment and discount rates used as inputs to value the MSR asset, and differences between MSR carrying values and sales prices related to the sale of MSR assets. Fluctuations in the net fair value of the MSR asset driven by net changes in long-term U.S. Treasury bond rates and the related derivatives used to hedge the MSR during the respective periods resulted in net losses of $0.7 million and $3.0 million, respectively. During June 2024, the mortgage origination segment sold MSR assets of $45.1 million, which represented $2.9 billion of its serviced loan volume at the time. In addition, on September 17, 2024, the mortgage origination segment signed a letter of intent to sell MSR assets of $42.6 million, which represented $2.3 billion of its serviced loan volume and is scheduled to be completed during the fourth quarter of 2024. As a result, the mortgage origination segment does not currently expect the level of MSR assets to be significant in the short-term. In addition to gains and losses generated by changes in the net fair value of the MSR asset and related derivatives, net servicing income of $1.5 million and $8.7 million was recognized during the three and nine months ended September 30, 2024, respectively.

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During the three and nine months ended September 30, 2023, the operating results of the mortgage origination segment were impacted by an increase of $6.1 million and a decrease of $0.7 million, respectively, in the net fair value of the MSR asset, of which $5.5 million of the decrease during the nine months ended September 30, 2023, was primarily driven by market sales trends during the first quarter of 2023. The remaining fluctuations in the net fair value of the MSR asset during the respective periods were primarily due to the net gains driven by the net changes in long-term U.S. Treasury bond rates and customer payoffs during the three and nine months ended September 30, 2023, and losses of $9.1 million and $12.3 million generated by the derivatives used to hedge the MSR. During June 2023, the mortgage origination segment sold MSR assets of $19.1 million, which represented $991.0 million of its serviced loan volume at the time. In addition to gains and losses generated by changes in the net fair value of the MSR asset, net servicing income of $3.7 million and $10.5 million was recognized during the three and nine months ended September 30, 2023, respectively.

Noninterest expenses were comprised of the items set forth in the table below (in thousands).


	Three Months Ended September 30,				Variance		Nine Months Ended September 30,				Variance
	2024		2023		2024 vs 2023		2024		2023		2024 vs 2023
Variable compensation	$	33,862	$	33,070	$	792	$	90,934	$	94,892	$	(3,958)
Non-variable compensation and benefits		26,711		30,946		(4,235)		83,957		102,461		(18,504)
Segment operating costs		18,205		21,471		(3,266)		56,952		64,125		(7,173)
Lender paid closing costs		2,840		1,179		1,661		6,093		3,741		2,352
Servicing expense		2,605		4,839		(2,234)		12,131		13,699		(1,568)
Total noninterest expense	$	84,223	$	91,505	$	(7,282)	$	250,067	$	278,918	$	(28,851)

Total employees’ compensation and benefits accounted for the majority of noninterest expenses incurred during all periods presented. Historically, variable compensation comprises the majority of total employees’ compensation and benefits expenses. 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 increased 2.8% and decreased 1.0% during the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023, the aggregate non-variable compensation and benefits of the mortgage origination segment decreased by 13.7% and 18.1% during the same periods. These decreases during the three and nine months ended September 30, 2024, compared to the same periods in 2023, were primarily due to a decrease in salaries associated with a reduction in underwriting and loan fulfillment, operations and corporate staff as PrimeLending continued to evaluate its cost structure to address the current mortgage environment. Segment operating costs decreased during the three and nine months ended September 30, 2024, compared to the same periods in 2023, primarily due to decreases in occupancy and equipment expense.

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.

Between January 1, 2015 and September 30, 2024, the mortgage origination segment sold mortgage loans totaling $144.1 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 2015, it does not anticipate experiencing significant losses in the future on loans originated prior to 2015 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

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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.

The following is a summary of the mortgage origination segment’s claims resolution activity relating to loans sold between January 1, 2015 and September 30, 2024 (dollars in thousands).


	Original Loan Balance				Loss Recognized
			% of				% of
	Amount		Loans Sold		Amount		Loans Sold
Claims resolved with no payment	$	227,260	0.16	%	$	—	-	%
Claims resolved because of a loan repurchase or payment to an investor for losses incurred ⁽¹⁾		328,167	0.23	%		26,041	0.02	%
	$	555,427	0.39	%	$	26,041	0.02	%

(1)	Losses incurred include refunded purchased servicing rights.

For each loan, when 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. Factors considered in the calculation of this reserve include, but are not limited to, the total volume of loans sold exclusive of specific claimant requests, actual claim inquiries, claim settlements and the severity of estimated losses resulting from future claims, and the mortgage origination segment’s history of successfully curing defects identified in claim requests.

Although management considers the total indemnification liability reserve to be appropriate, there may be changes in the reserve over time to address incurred losses due to unanticipated adverse changes in the economy and historical loss patterns, discrete events adversely affecting specific borrowers or industries, and/or actions taken by institutions or investors. The impact of such matters is considered in the reserving process when probable and estimable. During the second quarter of 2024, PrimeLending increased the indemnification reserve rate applied to loans sold subsequent to April 30, 2024, to address recent loss trends. During the third quarter of 2024, there was no adjustment made to the indemnification liability reserve. PrimeLending will continue to monitor agency claim inquiry trends and assess its potential impact on the indemnification liability reserve.

At September 30, 2024 and December 31, 2023, the mortgage origination segment’s total indemnification liability reserve totaled $8.5 million and $11.7 million, respectively. The related provision for indemnification losses was $0.9 million and $0.5 million during the three months ended September 30, 2024 and 2023, respectively, and $2.0 million and $1.3 million during the nine months ended September 30, 2024 and 2023, respectively.

Corporate

The following table presents certain financial information regarding the operating results of corporate (in thousands).


	Three Months Ended September 30,				Variance		Nine Months Ended September 30,				Variance
	2024		2023		2024 vs 2023		2024		2023		2024 vs 2023
Net interest income (expense)	$	(3,303)	$	(3,175)	$	(128)	$	(9,560)	$	(9,976)	$	416
Noninterest income		4,962		3,159		1,803		16,747		8,944		7,803
Noninterest expense		15,631		13,937		1,694		47,731		45,750		1,981
Loss before income taxes	$	(13,972)	$	(13,953)	$	(19)	$	(40,544)	$	(46,782)	$	6,238

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, youth sports and entertainment, dental health, and industrial equipment manufacturing, with an aggregate carrying value of approximately $75 million at September 30, 2024.

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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 nine months ended September 30, 2024 was primarily comprised of dividend income from merchant banking investment activities, in addition to interest income earned on intercompany notes.

Interest expense during each of the three months ended September 30, 2024 and 2023 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”), on our $50 million aggregate principal amount of subordinated notes due 2030 (“2030 Subordinated Notes”) and on our $150 million aggregate principal amount of subordinated notes due 2035 (“2035 Subordinated Notes,” the 2030 Subordinated Notes and the 2035 Subordinated Notes, collectively, the “Subordinated Notes”).

Noninterest income during each period included activity related to our investment in a real estate development in Dallas’ 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. During the three and nine months ended September 30, 2024, noninterest income included pre-tax gains of $0.6 million and $5.3 million, respectively, associated with the sale of merchant bank equity investments.

Noninterest expenses were primarily comprised of employees’ compensation and benefits, occupancy expenses and professional fees, including corporate governance, legal and transaction costs. During the three and nine months ended September 30, 2024, noninterest expenses increased, compared to the same periods in 2023, primarily due to increases associated with employees’ compensation and benefits and software costs.

Financial Condition

The following discussion contains a more detailed analysis of our financial condition at September 30, 2024, as compared with December 31, 2023.

Securities Portfolio

At September 30, 2024, investment securities consisted of securities of the U.S. Treasury, U.S. government and its agencies, obligations of municipalities and other political subdivisions, primarily in the State of Texas, as well as mortgage-backed, corporate debt, and equity securities. We may categorize investments as trading, available for sale, held to maturity and equity securities.

Trading securities are bought and held principally for the purpose of selling them in the near term and are carried at fair value, marked to market through operations and held at the Bank and the Hilltop Broker-Dealers. Securities classified as available for sale may, from time to time, be bought and sold in response to changes in market interest rates, changes in securities’ prepayment risk, increases in loan demand, general liquidity needs and to take advantage of market conditions that create more economically attractive returns. Such securities are carried at estimated fair value, with unrealized gains and losses recorded in accumulated other comprehensive income (loss). Equity investments are carried at fair value, with all changes in fair value recognized in net income. Securities are classified as held to maturity based on the intent and ability of our management, at the time of purchase, to hold such securities to maturity. These securities are carried at amortized cost.

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The table below summarizes our securities portfolio (in thousands).


	September 30,		December 31,
	2024		2023
Trading securities, at fair value
U.S. Treasury securities	$	127	$	3,736
U.S. government agencies:
Bonds		9,141		12,867
Residential mortgage-backed securities		127,499		124,768
Collateralized mortgage obligations		55,061		86,281
Other		23,381		13,079
Corporate debt securities		41,867		37,569
States and political subdivisions		260,323		180,890
Private-label securitized product		13,130		47,768
Other		10,307		9,033
		540,836		515,991
Securities available for sale, at fair value
U.S. Treasury securities		4,762		4,617
U.S. government agencies:
Bonds		115,683		166,166
Residential mortgage-backed securities		329,667		349,870
Commercial mortgage-backed securities		198,160		191,746
Collateralized mortgage obligations		695,998		736,481
Corporate debt securities		29,086		24,418
States and political subdivisions		32,344		34,297
		1,405,700		1,507,595
Securities held to maturity, at amortized cost
U.S. government agencies:
Residential mortgage-backed securities		261,526		278,172
Commercial mortgage-backed securities		152,657		172,879
Collateralized mortgage obligations		263,546		284,208
States and political subdivisions		77,095		77,418
		754,824		812,677

Equity securities, at fair value		287		321
Total securities portfolio	$	2,701,647	$	2,836,584

We had net unrealized losses of $83.4 million and $114.2 million at September 30, 2024 and December 31, 2023, respectively, related to the available for sale investment portfolio, and net unrealized losses of $64.0 million and $80.8 million at September 30, 2024 and December 31, 2023, respectively, associated with the securities held to maturity portfolio. Equity securities included net unrealized gains of $0.2 million and $0.3 million at September 30, 2024 and December 31, 2023, respectively. 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).

Banking Segment

The banking segment’s securities portfolio plays a role in the management of our interest rate sensitivity and generates additional interest income. In addition, the securities portfolio is used to meet collateral requirements for public and trust deposits, securities sold under agreements to repurchase and other purposes. The available for sale and equity securities portfolios serve as a source of liquidity. Historically, the Bank’s policy has been to invest primarily in securities of the U.S. government and its agencies, obligations of municipalities in the State of Texas and other high grade fixed income securities to minimize credit risk. At September 30, 2024, the banking segment’s securities portfolio of $2.1 billion was comprised of trading securities of $0.1 million, available for sale securities of $1.4 billion, held to maturity securities of $754.8 million and equity securities of $0.3 million, in addition to $10.4 million of other investments included in other assets within the consolidated balance sheets.

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Broker-Dealer Segment

The broker-dealer segment holds securities to support sales, underwriting and other customer activities. The interest rate risk inherent in holding these securities is managed by setting and monitoring limits on the size and duration of positions and on the length of time the securities can be held. The Hilltop Broker-Dealers are required to carry their securities at fair value and record changes in the fair value of the portfolio to the statement of operations. Accordingly, the securities portfolio of the Hilltop Broker-Dealers included trading securities of $540.8 million at September 30, 2024. 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 $47.8 million at September 30, 2024.

Corporate

At September 30, 2024, the corporate portfolio included other investments, including those associated with merchant banking, of available for sale securities of $29.1 million and other assets of $45.3 million within the consolidated balance sheets.

Allowance for Credit Losses for Available for Sale Securities and Held to Maturity Securities

We have evaluated available for sale debt securities that are in an unrealized loss position and have determined that any declines in value are unrelated to credit loss and related to changes in market interest rates since purchase. None of the available for sale debt securities held were past due at September 30, 2024. In addition, as of September 30, 2024, we 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 September 30, 2024.

Loan Portfolio

Consolidated loans held for investment are detailed in the table below, classified by portfolio segment (in thousands).


	September 30,		December 31,
	2024		2023
Commercial real estate:
Non-owner occupied	$	1,874,641	$	1,889,882
Owner occupied		1,427,628		1,422,234
Commercial and industrial		1,662,225		1,607,833
Construction and land development		870,764		1,031,095
1-4 family residential		1,774,891		1,757,178
Consumer		28,837		27,351
Broker-dealer		340,644		344,172
Loans held for investment, gross		7,979,630		8,079,745
Allowance for credit losses		(110,918)		(111,413)
Loans held for investment, net of allowance	$	7,868,712	$	7,968,332

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. As discussed in more detail within the section captioned “Financial Condition – Allowance for Credit Losses on Loans” set forth in Part II, Item 7 of our 2023 Form 10-K and further within the section captioned “Financial Condition – Allowance for Credit Losses on Loans” below, the banking segment’s credit policies emphasize strong underwriting and governance standards and early detection of potential problem credits in order to develop and implement action plans on a timely basis to mitigate potential losses.

To manage the credit risks associated with its loan portfolio, management may, depending upon current or anticipated economic conditions and related exposures, apply enhanced risk management measures to loans through analysis of a

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specific borrower’s financial condition, including cash flow, collateral values, and guarantees, among other credit factors. Given the current market dynamics, including economic uncertainties, the heightened level of market interest rates since 2022, and a deteriorating outlook for commercial real estate markets, management has heightened its specific review procedures of credits maturing in the next six to twelve months as well as those credits associated with real estate.

The banking segment’s total loans held for investment, net of the allowance for credit losses, were $8.3 billion and $8.5 billion at September 30, 2024 and December 31, 2023, respectively. At September 30, 2024, the banking segment’s loan portfolio included warehouse lines of credit extended to PrimeLending and its ABAs of $1.3 billion, of which $758.7 million was drawn. At December 31, 2023, amounts drawn on the available warehouse lines of credit was $0.9 billion. 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.

A significant portion of the banking segment’s loan portfolio at September 30, 2024, consisted of commercial real estate loans secured by properties. Such loans can involve high principal loan amounts, and the repayment of these loans is dependent, in large part, on a borrower’s ongoing business operations or on income generated from the properties that are leased to third parties.

The table below sets forth the banking segment’s commercial real estate loan portfolio, by portfolio industry sector and collateral location as of September 30, 2024 (in thousands).


							Brownsville-							Other
	Dallas-						Harlingen-		San						Outside
Commercial Real Estate	Fort Worth		Austin		Houston		McAllen		Antonio		Lubbock		Texas		Texas		Total
Non-owner occupied:
Office	$	136,092	$	186,246	$	33,947	$	16,027	$	21,184	$	2,925	$	57,233	$	318	$	453,972
Retail		155,454		73,905		27,060		19,815		20,514		8,868		44,227		8,368		358,211
Hotel/Motel		53,388		24,405		34,622		17,210		105		17,160		35,207		13,734		195,831
Multifamily		10,981		53,705		38,898		49,434		44,355		35,717		55,292		16,438		304,820
Industrial		87,452		66,234		9,187		3,242		2,501		794		21,515		7,012		197,937
All other		97,391		57,865		33,774		11,636		19,595		49,010		59,991		34,608		363,870
	$	540,758	$	462,360	$	177,488	$	117,364	$	108,254	$	114,474	$	273,465	$	80,478	$	1,874,641
Owner occupied:
Office	$	137,042	$	86,822	$	21,742	$	13,176	$	33,673	$	7,337	$	10,418	$	4,377	$	314,587
Retail		11,059		15,179		3,191		1,012		681		153		5,791		967		38,033
Industrial		199,745		42,802		34,480		7,703		22,453		6,772		29,195		20,411		363,561
All other		321,508		66,653		73,092		21,343		47,815		16,707		141,986		22,343		711,447
	$	669,354	$	211,456	$	132,505	$	43,234	$	104,622	$	30,969	$	187,390	$	48,098	$	1,427,628
Total commercial real estate loans	$	1,210,112	$	673,816	$	309,993	$	160,598	$	212,876	$	145,443	$	460,855	$	128,576	$	3,302,269

At September 30, 2024, 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 43.2%, 23.2% and 11.4%, respectively, of the banking segment’s total loans held for investment at September 30, 2024. The banking segment’s loan concentrations were within regulatory guidelines at September 30, 2024.

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 remain uncertain given future supply and demand for oil are influenced by international armed conflicts, return to business travel, new energy policies and government regulation, and the pace of transition towards renewable energy resources. At September 30, 2024, the Bank’s energy loan exposure was approximately $53 million of loans held for investment with unfunded commitment balances of approximately $15 million. The allowance for credit losses on the Bank’s energy portfolio was $0.2 million, or 0.4% of loans held for investment at September 30, 2024.

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The following table provides information regarding the maturities of the banking segment’s gross loans held for investment, net of unearned income (in thousands). The commercial and industrial portfolio segment includes amounts advanced against the warehouse lines of credit extended to PrimeLending.


	September 30, 2024
	Due Within		Due From One		Due from Five		Due After
	One Year		To Five Years		To Fifteen Years		Fifteen Years		Total
Commercial real estate:
Non-owner occupied	$	712,366	$	885,454	$	276,624	$	197	$	1,874,641
Owner occupied		402,271		508,952		498,645		17,760		1,427,628
Commercial and industrial		2,046,721		298,827		81,441		—		2,426,989
Construction and land development		755,775		100,646		13,477		866		870,764
1-4 family residential		188,686		537,430		326,361		722,414		1,774,891
Consumer		16,371		12,393		63		10		28,837
Total	$	4,122,190	$	2,343,702	$	1,196,611	$	741,247	$	8,403,750

The following table provides information regarding the interest rate composition, based on contractual terms, of the banking segment's loans held for investment, net of unearned income (in thousands).


	Loans maturing after one year
	Fixed Interest		Floating Interest
September 30, 2024	Rate		Rate		Total
Commercial real estate:
Non-owner occupied	$	643,428	$	518,847	$	1,162,275
Owner occupied		677,436		347,921		1,025,357
Commercial and industrial		283,928		96,340		380,268
Construction and land development		74,067		40,922		114,989
1-4 family residential		947,477		638,728		1,586,205
Consumer		12,466		—		12,466
Total	$	2,638,802	$	1,642,758	$	4,281,560

In the table above, floating interest rate loans totaling $397.4 million as of September 30, 2024 had reached their applicable rate floor and are expected to reprice, subject to their scheduled repricing timing and frequency terms. The majority of floating rate loans carry an interest rate tied to a SOFR rate or 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 $340.4 million and $344.1 million at September 30, 2024 and December 31, 2023, respectively. This decrease from December 31, 2023 to September 30, 2024 was primarily attributable to a decrease of $12.7 million, or 6%, in customer margin accounts, partially offset by increases of $4.6 million from non-customer cash accounts and $4.5 million, or 4%, in receivables from correspondents.

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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).


	September 30,		December 31,
	2024		2023
Loans held for sale:
Unpaid principal balance	$	754,110	$	802,348
Fair value adjustment		14,045		19,846
	$	768,155	$	822,194
IRLCs:
Unpaid principal balance	$	625,180	$	383,767
Fair value adjustment		8,321		7,734
	$	633,501	$	391,501

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 September 30, 2024 and December 31, 2023 were $1.0 billion and $1.0 billion, respectively, while the related estimated fair values were $0.9 million and ($10.2) 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 2023 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. As discussed in more detail within the section captioned “Financial Condition – Allowance for Credit Losses on Loans” set forth in Part II, Item 7 of our 2023 Form 10-K, the Bank’s underwriting procedures address financial components based on the size and complexity of the credit, while 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 allowance for credit losses for loans held for investment represents management’s best estimate of all expected credit losses over the expected contractual life of our existing portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods. Such future changes in the allowance for credit losses are expected to be volatile given dependence upon, among other things, the portfolio composition and quality, as well as the impact of significant drivers, including prepayment assumptions and macroeconomic conditions and forecasts.

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 of September 30, 2024, we utilized a single macroeconomic alternative scenario, or S5, published by Moody’s Analytics in September 2024. During our previous quarterly macroeconomic assessment as of June 30, 2024, we utilized a single macroeconomic alternative scenario, or S7, published by Moody’s Analytics in June 2024. Management determined it appropriate to utilize the S5 macroeconomic alternative scenario as of September 30, 2024 given that the

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ongoing resilience of the U.S. economy, continued moderation of inflation, and recent 50-basis point decrease in the target range for the federal funds rate set by the Federal Reserve best align with our internal economic outlook.

The following table and paragraphs summarize the U.S. Real Gross Domestic Product (“GDP”) growth rates and unemployment rate assumptions used in our economic forecast, and based on the single macroeconomic alternative scenario selected for respective period, to determine our best estimate of expected credit losses.


		As of
		September 30,	June 30,	March 31,	December 31,	September 30,
		2024	2024	2024	2023	2023
GDP growth rates:
	Q3 2023					2.9%
	Q4 2023				1.1%	0.2%
	Q1 2024			2.4%	(1.6)%	(1.9)%
	Q2 2024		2.1%	0.7%	(2.4)%	(3.0)%
	Q3 2024	2.0%	1.2%	0.4%	(1.3)%	(1.5)%
	Q4 2024	1.3%	0.6%	0.0%	1.3%	1.4%
	Q1 2025	1.2%	1.0%	(1.8)%	2.6%	3.1%
	Q2 2025	1.5%	(2.0)%	(2.8)%	3.0%
	Q3 2025	1.5%	(2.5)%	(1.7)%
	Q4 2025	1.5%	(1.3)%
	Q1 2026	1.5%

Unemployment rates:
	Q3 2023					3.8%
	Q4 2023				3.8%	4.1%
	Q1 2024			3.8%	4.8%	4.9%
	Q2 2024		4.0%	4.0%	5.6%	5.7%
	Q3 2024	4.3%	4.1%	4.0%	6.1%	6.0%
	Q4 2024	4.4%	4.1%	4.0%	5.6%	5.7%
	Q1 2025	4.7%	4.1%	4.8%	5.2%	5.3%
	Q2 2025	4.9%	4.8%	5.6%	5.0%
	Q3 2025	5.2%	5.6%	6.0%
	Q4 2025	5.2%	6.0%
	Q1 2026	5.1%

As of September 30, 2024, our U.S. economic forecast assumes elevated borrowing costs reduce credit-sensitive spending, upcoming fiscal disputes in Congress weaken business and consumer sentiment, and concerns grow about broader international conflicts. As a result, the economy underperforms in the long run. The changes in real GDP on an annual average basis are 2.6% in 2024 and 1.5% in 2025. The unemployment rate increases in 2025 and reaches a peak of 5.2% in second half of 2025 before slowly receding. Our forecast considers the potential for monetary policy to ease from the Federal Reserve with the federal funds rate at 4.9% by year end 2024 and 3.8% by year end 2025. Vacancy rates for several commercial real estate sectors remain elevated, and the interest rate outlook challenges the recovery.

Since December 31, 2023, we updated our U.S. economic outlook for recent consumer and business spending. Real GDP growth was assumed to contract more modestly (0.0%) on an annual average basis and (1.3%) peak to trough in 2024. Labor market conditions remained tighter than expected as the unemployment rate decreased to 3.7% in December despite several downward revisions to recent payroll data. We expected monetary policy to remain restrictive at 5.25% to 5.5% in the near term but revert to 3.5% by year end 2025 as the Federal Reserve balances slower economic growth with its inflation and unemployment mandates.

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three and nine months ended September 30, 2024 included a reversal of credit losses of $2.5 million and $6.5 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, and changes in loan balances and qualitative factors from the prior quarter. The changes in the allowance during the three and nine months ended September 30, 2024 were also impacted by net charge-offs of $2.9 million and $7.3 million, respectively.

As noted above, the combined impacts of specific reserves and loan portfolio changes within the banking segment and changes in the U.S. economic outlook since December 31, 2023 have resulted in a net decrease in the allowance at September 30, 2024, compared to December 31, 2023. The resulting 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 programs, was 1.51% and 1.47% as of September 30, 2024 and December 31, 2023. While changes in the U.S. economic outlook have been reflected in our current allowance at September 30, 2024, uncertainties that include, among others, the uncertain timing, duration and significance of further changes in market interest rates and an uncertain macroeconomic forecast could adversely impact borrower cash flows and result in increases in the allowance during future periods. While all industries could experience adverse impacts, certain of our loan portfolio industry sectors and subsectors, including real estate collateralized by office buildings and auto note financing, have an increased level of risk.

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 programs, are presented in the following table (dollars in thousands).

cv
					Allowance For
					Credit Losses
			Total		as a % of
	Total		Allowance		Total Loans
	Loans Held		for Credit		Held For
September 30, 2024	For Investment		Losses		Investment
Commercial real estate:
Non-owner occupied ⁽¹⁾	$	1,874,641	$	32,330	1.72	%
Owner occupied ⁽²⁾		1,427,628		34,378	2.41	%
Commercial and industrial ⁽³⁾		1,358,555		28,153	2.07	%
Construction and land development ⁽⁴⁾		870,764		7,924	0.91	%
Total commercial loans		5,531,588		102,785	1.86	%

1-4 family residential		1,774,891		7,161	0.40	%
Consumer		28,837		580	2.01	%
Total retail loans		1,803,728		7,741	0.43	%

Total commercial and retail loans		7,335,316		110,526	1.51	%

Broker-dealer		340,644		237	0.07	%
Mortgage warehouse lending		303,670		155	0.05	%
Total loans held for investment	$	7,979,630	$	110,918	1.39	%

(1)

Included within commercial real estate non-owner occupied portfolio are loans within the office, retail and hotel/motel portfolio industry subsectors. At September 30, 2024, the office, retail and hotel/motel loans held for investment balances of approximately $454 million, $358 million and $196 million, respectively, had an allowance for credit losses of approximately $14 million, $4 million and $3 million, respectively, and an allowance for credit losses as a percentage of total loans held for investment of 3.1%, 1.2% and 1.7%, respectively.

(2)

Included within commercial real estate owner occupied portfolio are loans within the industrial and office portfolio industry subsectors. At September 30, 2024, the industrial and office loans held for investment balances of approximately $364 million and $315 million, respectively, had an allowance for credit losses of approximately $9 million and $7 million, respectively, and an allowance for credit losses as a percentage of total loans held for investment of 2.4% and 2.2%, respectively.

(3)

Commercial and industrial portfolio amounts reflect balances excluding banking segment mortgage warehouse lending. Included within commercial and industrial portfolio are loans within the auto note financing industry subsector. At September 30, 2024, the auto note financing loans held for investment balance of approximately $112 million had an allowance for credit losses of approximately $8 million, and an allowance for credit losses as a percentage of total loans held for investment of 7.3%.

(4)

Included within construction and land development portfolio are loans within the retail and office portfolio industry subsectors. At September 30, 2024, the retail and office loans held for investment balances of approximately $32 million and $25 million, respectively, had an allowance for credit losses of approximately $0.4 million and $0.4 million, respectively, and an allowance for credit losses as a percentage of total loans held for investment of 1.2% and 1.7%, respectively.

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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 inputs 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 September 30, 2024, excluding margin loans in the broker-dealer segment, and the banking segment mortgage warehouse 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 the economic impacts from international armed conflicts recede faster than expected and an increased demand for U.S. exports and manufacturing. Business sentiment and consumer confidence rise significantly. Real GDP is expected to grow 4.1% in the fourth quarter of 2024, 3.7% in the first quarter of 2025, 3.4% in the second quarter of 2025, and 3.5% in the third quarter of 2025. Average unemployment rates are expected to decline to 3.7% by the fourth quarter of 2024 and to 3.1% by the fourth quarter of 2025 before reverting to historical data. Inflation is expected to trend back toward the Federal Reserve’s target sooner than expected, and we expect the federal funds rate to peak at 5.3% during 2024.

Compared to our economic forecast, the downside scenario assumes the Federal Reserve’s efforts to resolve bank failures are not successful at restoring consumer and business confidence, causing banks to tighten lending standards while the Federal Reserve keeps the federal funds rate elevated due to inflation concerns. The international armed conflicts persist longer than anticipated and global supply chain issues worsen causing weaker manufacturing, increased good shortages, and the economy to fall back into recession. Real GDP is expected to decrease 3.4% in the fourth quarter of 2024, 3.5% in the first quarter of 2025, and 3.4% in the second quarter of 2025. Average unemployment rates are expected to increase to 6.0% by the fourth quarter of 2024, and to 8.3% by the fourth quarter of 2025 and then revert back to historical average rates over time. The Federal Reserve reduces the federal funds rate to support the economy to a 4.6% target by the fourth quarter of 2024 and to a 1.0% target by the first quarter of 2026.

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 $22 million or a weighted average expected loss rate of 1.2% as a percentage of our total loan portfolio, excluding margin loans in the broker-dealer segment and the banking segment mortgage warehouse 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 $52 million or a weighted average expected loss rate of 2.2% as a percentage of our total loan portfolio, excluding margin loans in the broker-dealer segment and the banking segment mortgage warehouse 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 macroeconomic outlook, inflationary pressures and labor market conditions, international armed conflicts and their impact on supply chains, the U.S elections and other various fiscal and monetary policy decisions. The sensitivities of many of these assumptions are often correlated and nonlinear so these results should not be simply extrapolated to estimate the allowance for credit losses accurately for more severe changes in economic scenarios. Future allowance for credit losses may vary considerably for these reasons.

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Allowance Activity

The following table presents the activity in our allowance for credit losses and selected credit metrics within our loan portfolio for the periods presented (in thousands). Substantially all of the activity shown within the allowance for credit losses below occurred within the banking segment.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2024			2023			2024			2023
Loans Held for Investment:
Balance, beginning of period	$	115,082		$	109,306		$	111,413		$	95,442
Provision for (reversal of) credit losses		(1,270)			(40)			6,793			17,127
Recoveries of loans previously charged off:
Commercial real estate:
Non-owner occupied		—			1			—			10
Owner occupied		13			9			28			31
Commercial and industrial		888			2,505			1,682			3,285
Construction and land development		—			—			2			—
1-4 family residential		5			33			109			85
Consumer		37			130			120			215
Broker-dealer		—			—			—			—
Total recoveries		943			2,678			1,941			3,626
Loans charged off:
Commercial real estate:
Non-owner occupied		—			34			1,647			34
Owner occupied		—			—			—			977
Commercial and industrial		3,772			936			7,370			4,015
Construction and land development		—			—			—			—
1-4 family residential		—			—			1			73
Consumer		65			152			211			274
Broker-dealer		—			—			—			—
Total charge-offs		3,837			1,122			9,229			5,373
Net recoveries (charge-offs)		(2,894)			1,556			(7,288)			(1,747)
Balance, end of period	$	110,918		$	110,822		$	110,918		$	110,822

Average loans held for investment for the period	$	8,024,771		$	7,972,604		$	7,918,156		$	7,967,075
Total loans held for investment (end of period)							$	7,979,630		$	8,204,052

Loans Held for Sale:
Average loans held for sale for the period	$	990,902		$	1,075,518		$	909,446		$	979,099
Total loans held for sale (end of period)							$	933,724		$	1,058,806

Selected Credit Metrics:
Net recoveries (charge-offs) to average total loans held for investment⁽¹⁾		(0.14)	%		0.08	%		(0.12)	%		(0.03)	%
Non-accrual loans:
Loans held for investment (end of period)							$	87,741		$	27,569
Loans held for sale (end of period)							$	3,445		$	3,929
Non-accrual loans to total loans (end of period)								1.02	%		0.34	%
Allowance for credit losses on loans held for investment to:
Total loans (end of period)								1.24	%		1.20	%
Total loans held for investment (end of period)								1.39	%		1.35	%
Total non-accrual loans (end of period)								121.64	%		351.84	%
Non-accrual loans held for investment (end of period)								126.42	%		401.98	%

(1)	Net recoveries (charge-offs) to average total loans held for investment ratio presented on a consolidated basis for all periods given relative immateriality of resulting measure by loan portfolio segment.

Total non-accrual loans classified as loans held for investment increased by $23.4 million from December 31, 2023 to September 30, 2024. This increase was primarily due to the addition of commercial and industrial loans to non-accrual status, partially offset by a decrease due to the reclassification of a single commercial real estate non-owner occupied loan

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from loans held for investment to loans held for sale, which was sold during the second quarter of 2024, and decreases in commercial real estate owner occupied loans and 1-4 family residential loans.

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. 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).


	September 30, 2024				December 31, 2023
			% of				% of
Allocation of the Allowance for Credit Losses	Reserve		Gross Loans		Reserve		Gross Loans
Commercial real estate:
Non-owner occupied	$	32,330	23.49	%	$	40,061	23.39	%
Owner occupied		34,378	17.89	%		28,114	17.60	%
Commercial and industrial		28,308	20.83	%		20,926	19.90	%
Construction and land development		7,924	10.91	%		12,102	12.76	%
1-4 family residential		7,161	22.25	%		9,461	21.75	%
Consumer		580	0.36	%		648	0.34	%
Broker-dealer		237	4.27	%		101	4.26	%
Total	$	110,918	100.00	%	$	111,413	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).


	September 30,		June 30,		March 31,		December 31,		September 30,
	2024		2024		2024		2023		2023
Commercial real estate:
Non-owner occupied	$	32,330	$	37,321	$	39,563	$	40,061	$	40,433
Owner occupied		34,378		32,772		28,737		28,114		29,438
Commercial and industrial		28,308		28,869		16,552		20,926		19,722
Construction and land development		7,924		7,594		10,008		12,102		8,970
1-4 family residential		7,161		7,912		8,744		9,461		11,472
Consumer		580		547		544		648		601
Broker-dealer		237		67		83		101		186
	$	110,918	$	115,082	$	104,231	$	111,413	$	110,822

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. 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 September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Balance, beginning of period	$	8,585	$	7,992	$	8,876	$	7,784
Other noninterest expense		(153)		559		(444)		767
Balance, end of period	$	8,432	$	8,551	$	8,432	$	8,551

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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 or whether repayment may depend on collateral or other risk mitigation. 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 include those loans assigned a grade of special mention and substandard accrual within our risk grading matrix. Potential problem loans do not include purchased credit deteriorated (“PCD”) loans because PCD loans exhibited evidence of more than insignificant credit deterioration at acquisition that made it probable that all contractually required principal payments would not be collected.

At September 30, 2024, we had $197.9 million of potential problem loans, compared to $207.4 million at December 31, 2023. Our potential problem loans designated as substandard accrual at September 30, 2024 and December 31, 2023, totaled $146.4 million and $204.1 million, respectively. The decrease from December 31, 2023 to September 30, 2024 was primarily attributable to decreases in commercial and industrial loans and construction and land development loans, partially offset by increases in commercial real estate owner occupied loans and 1-4 family residential loans. Of the $146.4 million of potential problem loans designated as substandard accrual at September 30, 2024, $42.9 million, $41.9 million and $28.3 million were associated with commercial real estate owner occupied loans, commercial real estate non-owner occupied loans and commercial and industrial loans.

Potential problem loans designated as special mention were comprised of ten credit relationships totaling $51.5 million at September 30, 2024, compared with three credit relationships totaling $3.2 million at December 31, 2023. Of the $51.5 million of potential problem loans at September 30, 2024, $44.4 million was associated with four credit relationships included in our commercial real estate non-owner occupied loan portfolio within the office and hotel/motel industry subsectors, commercial and industrial loan portfolio and commercial real estate owner occupied loan portfolio within the retail industry subsector.

Non-Performing Assets

The following table presents components of our non-performing assets (dollars in thousands).


	September 30,			December 31,
	2024			2023			Variance
Loans accounted for on a non-accrual basis:
Commercial real estate:
Non-owner occupied	$	8,042		$	36,440		$	(28,398)
Owner occupied		2,410			5,098			(2,688)
Commercial and industrial		66,929			9,502			57,427
Construction and land development		2,682			3,480			(798)
1-4 family residential		11,123			13,801			(2,678)
Consumer		—			6			(6)
Broker-dealer		—			—			—
Non-accrual loans	$	91,186		$	68,327		$	22,859

Non-accrual loans as a percentage of total loans		1.02	%		0.76	%		0.26	%

Other real estate owned	$	2,744		$	5,095		$	(2,351)

Other repossessed assets	$	413		$	—		$	413

Non-performing assets	$	94,343		$	73,422		$	20,921

Non-performing assets as a percentage of total assets		0.59	%		0.45	%		0.14	%

Loans past due 90 days or more and still accruing	$	140,763		$	115,090		$	25,673

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At September 30, 2024, non-accrual loans included 25 commercial and industrial relationships with loans secured by finance company notes receivable, accounts receivable, inventory and equipment. Commercial and industrial non-accrual loans increased by $57.4 million from December 31, 2023 to September 30, 2024 primarily due to the additions of two credit relationships within our auto note financing industry subsector with an aggregate loan balance of $54.0 million. Non-accrual loans at September 30, 2024 also included $3.4 million of loans secured by residential and commercial real estate which were classified as loans held for sale. At December 31, 2023, non-accrual loans included 40 commercial and industrial relationships with loans secured primarily by notes receivable, accounts receivable and equipment. Non-accrual loans at December 31, 2023 also included $4.0 million of loans secured by residential real estate which were classified as loans held for sale.

Other real estate owned (“OREO”) decreased from December 31, 2023 to September 30, 2024, primarily due to disposals and valuation adjustments totaling $4.7 million, offset by additions totaling $2.4 million. At both September 30, 2024 and December 31, 2023, OREO was primarily comprised of commercial properties.

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. Currently, the banking segment is facing intense competition for its deposit base as customers seek higher yields on deposits. Consistent with the consolidated trend in average rates paid on interest-bearing deposits noted in the table below, the banking segment’s average rate paid on interest-bearing deposits during the three months ended September 30, 2024 was 3.94%, compared to 3.92% during the three months ended June 30, 2024 and 3.86% during the three months ended September 30, 2023.

Given the significance of the increases in interest rates that began during the first quarter of 2022 and which remained elevated until the Federal Reserve announced the recent 50-basis point decrease in the target range for the federal funds rate in September 2024, the Bank’s cumulative interest-bearing deposit pricing beta, excluding deposits from the Hilltop Securities FDIC-insured sweep program and brokered deposits, has approximated 68%. The deposit pricing beta represents the change in interest-bearing deposit pricing in response to a change in market interest rates. The historical interest-bearing deposit pricing beta for the Bank, excluding deposits from our Hilltop Securities FDIC-insured sweep program and brokered deposits, has approximated 55%. We expect that the Bank’s cost related to interest-bearing deposits during 2024 to continue to be driven by various factors, including competition as well as economic and market area factors.

The table below presents the average balance of, and rate paid on, consolidated deposits (dollars in thousands).


	Nine Months Ended September 30,
	2024				2023
	Average		Average		Average		Average
	Balance		Rate Paid		Balance		Rate Paid
Noninterest-bearing demand deposits	$	2,834,140	0.00	%	$	3,557,765	0.00	%
Interest-bearing deposits:
Demand		6,244,342	3.55	%		6,324,203	2.76	%
Savings		241,405	1.19	%		289,191	1.05	%
Time		1,218,096	4.37	%		1,012,175	2.90	%
		7,703,843	3.61	%		7,625,569	2.71	%
Total deposits	$	10,537,983	2.64	%	$	11,183,334	1.85	%

The table above includes interest-bearing brokered deposits with balances of approximately $15 million at September 30, 2024, compared with approximately $208 million at December 31, 2023. As previously discussed, to bolster our liquidity position given banking sector uncertainties in early 2023, we increased brokered deposits at the Bank by approximately $390 million during the second quarter of 2023, which have subsequently matured during the first and second quarters of 2024. The variability in the level of brokered deposits has been, and will continue to be, managed through asset/liability strategy and policies that address diversification of funding sources and market conditions, including demand by customers and other investors for those deposits, and the cost of funds available from alternative sources at the time.

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At September 30, 2024, total estimated uninsured deposits were $5.3 billion, or approximately 49% of total deposits, while estimated uninsured deposits, excluding collateralized deposits of $312.3 million, were $5.0 billion, or approximately 46% of total deposits. Total estimated uninsured deposits were $4.7 billion, or approximately 42% of total deposits, as of December 31, 2023. The increase in estimated uninsured deposit balances during 2024 was primarily due to the increase in existing deposit customers’ balances, while estimated uninsured deposit balances were also impacted by new commercial and consumer depositors of approximately $200 million and $130 million, respectively.

The following table presents the scheduled maturities of the portion of our time deposits that are in excess of the FDIC insurance limit of $250,000 as of September 30, 2024 (in thousands).


Months to maturity:
3 months or less	$	315,881
3 months to 6 months		116,765
6 months to 12 months		75,023
Over 12 months		102,985
	$	610,654

Borrowings

Our consolidated borrowings are shown in the table below (dollars in thousands).


	September 30, 2024				December 31, 2023
			Average				Average
	Balance		Rate Paid		Balance		Rate Paid		Variance
Short-term borrowings	$	914,645	4.72	%	$	900,038	4.75	%	$	14,607
Notes payable		347,533	4.13	%		347,145	4.27	%		388
	$	1,262,178	4.56	%	$	1,247,183	4.64	%	$	14,995

Short-term borrowings consisted of federal funds purchased, securities sold under agreements to repurchase, borrowings at the FHLB, short-term bank loans and commercial paper. The increase in short-term borrowings at September 30, 2024, compared with December 31, 2023, primarily reflected increases in federal funds purchased by the banking segment and commercial paper by the broker dealer segment, offset by a decrease in securities sold under agreements to repurchase by the broker-dealer segment. Notes payable at September 30, 2024 was comprised of $149.7 million related to the Senior Notes, net of loan origination fees, and Subordinated Notes, net of origination fees, of $197.9 million.

Liquidity and Capital Resources

Hilltop is a financial holding company whose assets primarily consist of the stock of its subsidiaries and invested assets. Hilltop’s primary investment objectives, as a holding company, are to support capital deployment for organic growth and to preserve capital to be deployed through acquisitions, dividend payments and stock repurchases. At September 30, 2024, Hilltop had $227.1 million in cash and cash equivalents, an increase of $35.5 million from $191.6 million at December 31, 2023. This increase in cash and cash equivalents was primarily due to the receipt of $114.3 million of dividends from subsidiaries, partially offset by cash outflows of $33.2 million in cash dividends declared, $19.9 million in stock repurchases and other general corporate expenses. Subject to regulatory restrictions, Hilltop has received, and may also continue to receive, dividends from its subsidiaries. If necessary or appropriate, we may also finance acquisitions with the proceeds from equity or debt issuances. We believe that Hilltop’s liquidity is sufficient for the foreseeable future, with current short-term liquidity needs including operating expenses, interest on debt obligations, dividend payments to stockholders and potential stock repurchases.

As discussed in more detail below, our Senior Notes mature in April 2025, and we have the ability to redeem the 2030 Subordinated Notes, in whole or in part, beginning in May 2025. We continue to evaluate our options, including early redemption of these notes per their respective indentures, and may choose to refinance and/or utilize available cash on hand to satisfy such existing indebtedness. Although it is difficult in the current economic environment to predict the terms and conditions of financing that may be available in the future, we believe that we have sufficient access to credit from financial institutions and/or financing from public and private debt and equity markets to refinance or repay our Senior Notes.

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Economic Environment

As previously discussed, operational and financial headwinds during 2023 have had, and are expected to continue to have, an adverse impact on our operating results during 2024. The extent of the impacts of uncertain economic conditions on our financial performance that began in 2022, and have continued into 2024, will depend in part on developments outside of our control, including, among others, the timing and significance of further changes in U.S. Treasury yields and mortgage interest rates, changes in funding costs, inflationary pressures, and international armed conflicts and their impact on supply chains. As demonstrated during both the extreme volatility and disruptions in the capital and credit markets beginning in March 2020 resulting from the pandemic and banking sector-related uncertainty and concerns associated with liquidity primarily due to high-profile bank failures during early 2023 and their respective negative impacts on the economy, we will continue to monitor the economic environment and evaluate appropriate actions to enhance our financial flexibility, protect capital, minimize losses and ensure target liquidity levels.

Dividend Declaration

Future dividends on our common stock are subject to the determination by the board of directors based on an evaluation of our earnings and financial condition, liquidity and capital resources, the general economic and regulatory climate, our ability to service any equity or debt obligations senior to our common stock and other factors.

Stock Repurchases

In January 2024, our board of directors authorized a new stock repurchase program through January 2025, pursuant to which we are authorized to repurchase, in the aggregate, up to $75.0 million of our outstanding common stock, inclusive of repurchases to offset dilution related to grants of stock-based compensation. During the nine months ended September 30, 2024, Hilltop paid $19.9 million to repurchase an aggregate of 640,042 shares of our common stock at an average price of $31.04 per share pursuant to the stock repurchase program.

Senior Notes due 2025

The Senior Notes bear interest at a rate of 5% per year, payable semi-annually in arrears in cash on April 15 and October 15 of each year, commencing on October 15, 2015. The Senior Notes will mature on April 15, 2025, unless we redeem the Senior Notes, in whole at any time or in part from time to time, on or after January 15, 2025 (three months prior to the maturity date of the Senior Notes) at our election at a redemption price equal to 100% of the principal amount of the Senior Notes to be redeemed plus accrued and unpaid interest to, but excluding, the redemption date. At September 30, 2024, $150.0 million of our Senior Notes was outstanding.

Subordinated Notes due 2030 and 2035

On May 7, 2020, we completed a public offering of $50 million aggregate principal amount of 2030 Subordinated Notes and $150 million aggregate principal amount of 2035 Subordinated Notes that mature on May 15, 2030 and May 15, 2035, respectively. The price to the public for the Subordinated Notes was 100% of the principal amount of the Subordinated Notes. The net proceeds from the offering, after deducting underwriting discounts and fees and expenses of $3.4 million, were $196.6 million.

We may redeem the Subordinated Notes, in whole or in part, from time to time, subject to obtaining Federal Reserve approval, beginning with the interest payment date of May 15, 2025 for the 2030 Subordinated Notes and beginning with the interest payment date of May 15, 2030 for the 2035 Subordinated Notes at a redemption price equal to 100% of the principal amount of the Subordinated Notes being redeemed plus accrued and unpaid interest to but excluding the date of redemption.

The 2030 Subordinated Notes bear interest at a rate of 5.75% per year, payable semi-annually in arrears commencing on November 15, 2020. The interest rate for the 2030 Subordinated Notes will reset quarterly beginning May 15, 2025 to an interest rate, per year, equal to the then-current benchmark rate, which is expected to be three-month term SOFR rate, plus 5.68%, payable quarterly in arrears. The 2035 Subordinated Notes bear interest at a rate of 6.125% per year,

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payable semi-annually in arrears commencing on November 15, 2020. The interest rate for the 2035 Subordinated Notes will reset quarterly beginning May 15, 2030 to an interest rate, per year, equal to the then-current benchmark rate, which is expected to be three-month term SOFR rate plus 5.80%, payable quarterly in arrears. At September 30, 2024, $200.0 million of our Subordinated Notes was outstanding.

Regulatory Capital

We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material adverse effect on our financial condition and results of operations. Under capital adequacy and regulatory requirements, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The following table shows PlainsCapital’s and Hilltop’s actual capital amounts and ratios in accordance with Basel III compared to the regulatory minimum capital requirements including the conservation buffer ratio in effect at September 30, 2024 (dollars in thousands). Based on actual capital amounts and ratios shown in the following table, PlainsCapital’s ratios place it in the “well capitalized” (as defined) capital category under regulatory requirements. Actual capital amounts and ratios as of September 30, 2024 reflect PlainsCapital’s and Hilltop’s decision to elect the transition option as issued by the federal banking regulatory agencies in March 2020 that permits banking institutions to mitigate the estimated cumulative regulatory capital effects from current expected credit losses over a five-year transitionary period through December 31, 2024.


					Minimum Capital
					Requirements Including		To Be Well
	September 30, 2024				Conservation Buffer		Capitalized
	Amount		Ratio		Ratio		Ratio
Tier 1 capital (to average assets):
PlainsCapital	$	1,312,378	10.34	%	4.0	%	5.0	%
Hilltop		2,004,620	12.95	%	4.0	%	N/A
Common equity Tier 1 capital (to risk-weighted assets):
PlainsCapital		1,312,378	14.94	%	7.0	%	6.5	%
Hilltop		2,004,620	20.48	%	7.0	%	N/A
Tier 1 capital (to risk-weighted assets):
PlainsCapital		1,312,378	14.94	%	8.5	%	8.0	%
Hilltop		2,004,620	20.48	%	8.5	%	N/A
Total capital (to risk-weighted assets):
PlainsCapital		1,416,982	16.13	%	10.5	%	10.0	%
Hilltop		2,318,545	23.68	%	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 BASEL III” set forth in Part I, Item 1, of our 2023 Form 10-K.

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

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collateralized mortgage obligations, the possible sale of available for sale securities and the ability to securitize certain types of loans provide sources of liquidity from an asset perspective. The liability base provides sources of liquidity through deposits and the maturity structure of short-term borrowed funds. For short-term liquidity needs, we utilize federal fund lines of credit with correspondent banks, securities sold under agreements to repurchase, borrowings from the Federal Reserve and borrowings under lines of credit with other financial institutions. For intermediate liquidity needs, we utilize advances from the FHLB. To supply liquidity over the longer term, we have access to brokered time deposits, term loans at the FHLB and borrowings under lines of credit with other financial institutions.

The above sources of liquidity allow the banking segment to meet increased liquidity demands without adversely affecting daily operations. The Bank’s borrowing capacity through access to secured funding sources is summarized in the following table (in millions). Available liquidity noted below does not include borrowing capacity available through the discount window at the Federal Reserve.


	September 30,		December 31,
	2024		2023
FHLB capacity	$	4,374	$	4,205
Investment portfolio (available)		1,405		1,594
Fed deposits (excess daily requirements)		1,750		1,612
	$	7,529	$	7,411

As previously discussed, the banking sector experienced increased uncertainty and concerns associated with its liquidity positions primarily due to high-profile bank failures during early 2023 as depositors sought to reduce risks associated with uninsured deposits and withdraw such deposits from existing bank relationships. As a result, both regulatory scrutiny and market focus on liquidity increased. These failures underscore the importance of maintaining access to diverse sources of funding. In light of these events, we have continued our efforts to monitor deposit flows and balance sheet trends to ensure that our liquidity needs are maintained. During 2023, we began increasing interest-bearing deposit rates to address rising market interest rates and intense competition for liquidity to combat deposit outflows. During the first nine months of 2024, our deposit funding costs increased due to intense competition for liquidity and customers seeking higher yields on deposits. While we expect deposit costs during 2024 to continue to be driven by various factors, including competitive pressures and broader economic conditions, with the recent 50-basis point decrease in the target range of the federal funds rate in September 2024 and the possibility of additional rate cuts in 2024, we anticipate that our cost of deposits will begin to trend modestly downward. At September 30, 2024, the Bank also accessed and included approximately $760 million of core deposits on its balance sheet from our Hilltop Securities FDIC-insured sweep program, while the Bank is not utilizing any of its FHLB borrowing capacity noted above through the use of short-term borrowings.

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. Currently, the Bank is facing intense competition from bank and non-bank competitors for its deposit base and expects that its interest expense on certain deposits will continue to be driven by various factors, including competition as well as economic and market area factors.

The Bank’s 15 largest depositors, excluding Hilltop and Hilltop Securities, collectively accounted for 12.14% of the Bank’s total deposits, and the Bank’s five largest depositors, excluding Hilltop and Hilltop Securities, collectively accounted for 6.42% of the Bank’s total deposits at September 30, 2024. 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.

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Broker-Dealer Segment

The Hilltop Broker-Dealers rely on their equity capital, short-term bank borrowings, interest-bearing and noninterest-bearing client credit balances, correspondent deposits, securities lending arrangements, repurchase agreement financing, commercial paper issuances and other payables to finance their assets and operations, subject to their respective compliance with broker-dealer net capital and customer protection rules. At September 30, 2024, Hilltop Securities had credit arrangements with two unaffiliated banks, with maximum aggregate commitments of up to $425.0 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 two unaffiliated banks, with aggregate availability of up to $200.0 million. At September 30, 2024, Hilltop Securities had no borrowings under its credit arrangements or under 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 of September 30, 2024, the weighted average maturity of the CP Notes was 155 days at a rate of 5.80% with a weighted average remaining life of 71 days. At September 30, 2024, the aggregate amount outstanding under these secured arrangements was $220.6 million, which was collateralized by securities held for Hilltop Securities accounts valued at $241.1 million.

Mortgage Origination Segment

PrimeLending funds the mortgage loans it originates through a warehouse line of credit maintained with the Bank, which had a total commitment of $1.2 billion, of which $717.7 million was drawn at September 30, 2024. 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 at September 30, 2024.

PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC (“Ventures Management”), which holds a controlling ownership interest in and is the managing member of certain ABAs. At September 30, 2024, these ABAs had combined available lines of credit totaling $65.0 million, all of which was with the Bank, with outstanding borrowings of $41.0 million.

Other Material Contractual Obligations, Off-Balance Sheet Arrangements, Commitments and Guarantees

Since December 31, 2023, 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 2023 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.

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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.

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. However, inflation rose sharply at the end of 2021 and continued to rise in 2023 at levels not seen for over 40 years. Inflationary pressures have moderated in recent periods with the inflation rate coming down from its peak with the expectation that there will be continued moderation of inflation during the remainder of 2024. Furthermore, a prolonged period of inflation has, and could continue to cause our costs, including compensation, occupancy and software costs, to increase, which could adversely affect our results of operations and financial condition.

While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond our control, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the U.S. government, its agencies and various other governmental regulatory authorities.

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 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, 2023, there have been no changes in critical accounting estimates as further described under “Critical Accounting Estimates” in our 2023 Form 10-K.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Our assessment of market risk as of September 30, 2024 indicates there are no material changes in the quantitative and qualitative disclosures from those previously reported in our 2023 Form 10-K, except as discussed below.

The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. Market risk represents the risk of loss that may result from changes in value of a financial instrument as a result of changes in interest rates, market prices and the credit perception of an issuer. The disclosure is not meant to be a precise indicator of expected future losses, but rather an indicator of reasonably possible losses, and therefore our actual results may differ from any of the following projections. This forward-looking information provides an indicator of how we view and manage our ongoing market risk exposures.

Banking Segment

The banking segment is engaged primarily in the business of investing funds obtained from deposits and borrowings in interest-earning loans and investments, and our primary component of market risk is sensitivity to changes in interest rates. Consequently, our earnings depend to a significant extent on our net interest income, which is the difference between interest income on loans and investments and our interest expense on deposits and borrowings. To the extent that our interest-bearing liabilities do not reprice or mature at the same time as our interest-bearing assets, we are subject to interest rate risk and corresponding fluctuations in net interest income.

There are several common sources of interest rate risk that must be effectively managed if there is to be minimal impact on our earnings and capital. Repricing risk arises largely from timing differences in the pricing of assets and liabilities. Reinvestment risk refers to the reinvestment of cash flows from interest payments and maturing assets at lower or higher rates. Basis risk exists when different yield curves or pricing indices do not change at precisely the same time or in the same magnitude such that assets and liabilities with the same maturity are not all affected equally. Yield curve risk refers to unequal movements in interest rates across a full range of maturities.

We have employed asset/liability management policies that attempt to manage our interest-earning assets and interest-bearing liabilities, thereby attempting to control the volatility of net interest income, without having to incur unacceptable levels of risk. We employ procedures which include interest rate shock analysis, repricing gap analysis and balance sheet decomposition techniques to help mitigate interest rate risk in the ordinary course of business. In addition, the asset/liability management policies permit the use of various derivative instruments to manage interest rate risk or hedge specified assets and liabilities. To help mitigate net interest income spread volatility between our assets and liabilities, management maintains derivative trades, as either cash flow hedges or fair value hedges, that better align repricing characteristics. Any changes in interest rates across the term structure may 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.

An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market interest rates. The management of interest rate risk is performed by analyzing the maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time (“GAP”) and by analyzing the effects of interest rate changes on net interest income over specific periods of time by projecting the performance of the mix of assets and liabilities in varied interest rate environments. Interest rate sensitivity reflects the potential effect on net interest income resulting from a movement in interest rates. A company is considered to be asset sensitive, or have a positive GAP, when the amount of its interest-earning assets maturing or repricing within a given period exceeds the amount of its interest-bearing liabilities also maturing or repricing within that time period. Conversely, a company is considered to be liability sensitive, or have a negative GAP, when the amount of its interest-bearing liabilities maturing or repricing within a given period exceeds the amount of its interest-earning assets also maturing or repricing within that time period. During a period of rising interest rates, a negative GAP would tend to affect net interest income adversely, while a positive GAP would tend to result in an increase in net interest income. During a period of falling interest rates, a negative GAP would tend to result in an increase in net interest income, while a positive GAP would tend to affect net interest income adversely.

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As illustrated in the table below, the banking segment is currently asset sensitive overall. Loans that adjust daily or monthly to the Wall Street Journal Prime rate comprise a large percentage of interest sensitive assets and are the primary cause of the banking segment’s asset sensitivity. To help neutralize interest rate sensitivity, the banking segment has kept the terms of most of its borrowings under one year as shown in the following table (dollars in thousands).


	September 30, 2024
	3 Months or				> 3 Months to						> 1 Year to			> 3 Years to
	Less				1 Year						3 Years			5 Years			> 5 Years				Total
Interest sensitive assets:
Loans	$	4,238,159			$		1,263,344				$	1,725,246		$	699,880		$	504,385			$	8,431,014
Securities		491,545					204,333					414,966			310,341			878,065				2,299,250
Federal funds sold and securities purchased under agreements to resell		1,918,893					—					—			—			—				1,918,893
Other interest sensitive assets		8,783					—					—			—			59,504				68,287
Total interest sensitive assets		6,657,380					1,467,677					2,140,212			1,010,221			1,441,954				12,717,444

Interest sensitive liabilities:
Interest bearing checking	$		6,400,270			$		—		$		—		$	—		$	—		$		6,400,270
Savings		224,633					—					—			—			—				224,633
Time deposits		636,900					461,577					122,335			49,756			—				1,270,568
Notes payable and other borrowings		495,477					—					—			—			—				495,477
Total interest sensitive liabilities		7,757,280					461,577					122,335			49,756			—				8,390,948

Interest sensitivity gap	$	(1,099,900)			$		1,006,100				$	2,017,877		$	960,465		$	1,441,954			$	4,326,496

Cumulative interest sensitivity gap	$	(1,099,900)			$		(93,800)				$	1,924,077		$	2,884,542		$	4,326,496

Percentage of cumulative gap to total interest sensitive assets		(8.65)		%			(0.74)		%			15.13	%		22.68	%		34.02	%

The positive GAP in the interest rate analysis indicates that banking segment net interest income would generally rise if rates increase. Because of inherent limitations in interest rate GAP analysis, the banking segment uses multiple interest rate risk measurement techniques. Simulation analysis is used to subject the current repricing conditions to rising and falling interest rates in increments and decrements of 50 to 100 basis points to determine the effect on net interest income changes for the next twelve months. The banking segment also measures the effects of changes in interest rates on economic value of equity by discounting projected cash flows of deposits and loans. Economic value changes in the investment portfolio are estimated by discounting future cash flows and using duration analysis. Investment security prepayments are estimated using current market information. We believe the simulation analysis presents a more accurate picture than the GAP analysis. Simulation analysis recognizes that deposit products may not react to changes in interest rates as quickly or with the same magnitude as earning assets contractually tied to a market rate index. The sensitivity to changes in market rates varies across deposit products. Also, unlike GAP analysis, simulation analysis takes into account the effect of embedded options in the securities and loan portfolios as well as any off-balance sheet derivatives.

The table below shows the estimated impact of a range of changes in interest rates on net interest income and on economic value of equity for the banking segment at September 30, 2024 (dollars in thousands).


Change in	Changes in				Changes in
Interest Rates	Net Interest Income				Economic Value of Equity
(basis points)	Amount		Percent		Amount		Percent
+200	$	41,508	10.63	%	$	212,679	16.49	%
+100	$	21,813	5.58	%	$	128,357	9.95	%
-50	$	(10,649)	(2.73)	%	$	(89,086)	(6.91)	%
-100	$	(21,368)	(5.47)	%	$	(198,272)	(15.37)	%
-200	$	(34,897)	(8.93)	%	$	(424,294)	(32.89)	%

The projected changes in the table above were in compliance with established internal policy guidelines, with the exception of the estimated change in economic value of equity impact based on a -200 basis points change in interest rates, which marginally exceeded management’s internal policy limit. These projected changes are based on numerous assumptions. Upon implementation of pending assumption updates based on the expected transition into the next interest rate cycle, management anticipates that over time the estimated change in economic value of equity impact will return to compliance with established internal policy limit. Furthermore, the projected changes in net interest income are being impacted by the heightened level of cash balances, which represent a significant portion of the Bank’s sensitivity given simulation analysis assumptions/limitations. As a result, the timing and magnitude of future changes in interest rates and any runoff of deposits, and related decline in cash, may impact projected changes in net interest income as noted in the table above. Given projected impacts on net interest income associated with the expected transition into the next phase of

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the interest rate cycle, we continue to evaluate our current GAP position, which may result in a repositioning of the banking segment towards a more neutral or liability sensitive balance sheet.

Our portfolio includes loans that periodically reprice or mature prior to the end of an amortized term. Some of our variable-rate loans remain at applicable rate floors, which may delay and/or limit changes in interest income during a period of changing rates. If interest rates were to fall, the impact on our interest income would be limited by these rate floors. In addition, declining interest rates may negatively affect our cost of funds on deposits. The extent of this impact will ultimately be driven by the timing, magnitude and frequency of interest rate and yield curve movements, as well as changes in market conditions and timing of management strategies. If interest rates were to rise, yields on the portion of our portfolio that remain at applicable rate floors would rise more slowly than increases in market interest rates. Any changes in interest rates across the term structure will continue to impact net interest income and net interest margin. The impact of rate movements will change with the shape of the yield curve, including any changes in steepness or flatness and inversions at any points on the yield curve.

Broker-Dealer Segment

Our broker-dealer segment is exposed to market risk primarily due to its role as a financial intermediary in customer transactions, which may include purchases and sales of securities, use of derivatives and securities lending activities, and in our trading activities, which are used to support sales, underwriting and other customer activities. We are subject to the risk of loss that may result from the potential change in value of a financial instrument as a result of fluctuations in interest rates, market prices, investor expectations and changes in credit ratings of the issuer.

Our broker-dealer segment is exposed to interest rate risk as a result of maintaining inventories of interest rate sensitive financial instruments and other interest-earning assets including customer and correspondent margin loans and receivables and securities borrowing activities. Our funding sources, which include customer and correspondent cash balances, bank borrowings, repurchase agreements and securities lending activities, also expose the broker-dealer to interest rate risk. Movement in short-term interest rates could reduce the positive spread between the broker-dealer segment’s interest income and interest expense.

With respect to securities held, our interest rate risk is managed by setting and monitoring limits on the size and duration of positions and on the length of time securities can be held. Much of the interest rates on customer and correspondent margin loans and receivables are indexed and can vary daily. Our funding sources are generally short-term with interest rates that can vary daily. The following table categorizes the broker-dealer segment’s net trading securities, which are subject to interest rate and market price risk (dollars in thousands).


	September 30, 2024
	1 Year			> 1 Year			> 5 Years
	or Less			to 5 Years			to 10 Years			> 10 Years			Total
Trading securities, at fair value
Municipal obligations	$	6,195		$	28,449		$	38,405		$	187,274		$	260,323
U.S. government and government agency obligations		(669)			(6,123)			(7,084)			184,146			170,270
Corporate obligations		11,983			8,653			10,320			23,707			54,663
Total debt securities		17,509			30,979			41,641			395,127			485,256
Corporate equity securities		—			—			—			—			—
Other		7,753			—			—			—			7,753
	$	25,262		$	30,979		$	41,641		$	395,127		$	493,009

Weighted average yield
Municipal obligations		0.61	%		3.55	%		4.18	%		4.97	%		4.10	%
U.S. government and government agency obligations		4.22	%		3.68	%		2.60	%		6.41	%		5.62	%
Corporate obligations		4.09	%		4.54	%		5.04	%		4.38	%		4.47	%

Derivatives are used to support certain customer programs and hedge our related exposure to interest rate risks.

Our broker-dealer segment is engaged in various brokerage and trading activities that expose us to credit risk arising from potential non-performance from counterparties, customers or issuers of securities. This risk is managed by setting and monitoring position limits for each counterparty, conducting periodic credit reviews of counterparties, reviewing concentrations of securities and conducting business through central clearing organizations.

Collateral underlying margin loans to customers and correspondents and with respect to securities lending activities is marked to market daily and additional collateral is required as necessary.

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Mortgage Origination Segment

Within our mortgage origination segment, our principal market exposure is to interest rate risk due to the impact on our mortgage-related assets and commitments, including mortgage loans held for sale, IRLCs and MSR. Changes in interest rates could also materially and adversely affect our volume of mortgage loan originations.

IRLCs represent an agreement to extend credit to a mortgage loan applicant, whereby the interest rate on the loan is set prior to funding. Our mortgage loans held for sale, which we hold in inventory while awaiting sale into the secondary market, and our IRLCs are subject to the effects of changes in mortgage interest rates from the date of the commitment through the sale of the loan into the secondary market. As a result, we are exposed to interest rate risk and related price risk during the period from the date of the lock commitment until (i) the lock commitment cancellation or expiration date or (ii) the date of sale into the secondary mortgage market. Loan commitments generally range from 20 to 60 days, and our average holding period of the mortgage loan from funding to sale is approximately 30 days. An integral component of our interest rate risk management strategy is our execution of forward commitments to sell MBSs to minimize the impact on earnings resulting from significant fluctuations in the fair value of mortgage loans held for sale and IRLCs caused by changes in interest rates.

As a result of our mortgage servicing business, we have a portfolio of retained MSR. One of the principal risks associated with MSR is that in a declining interest rate environment, they will likely lose a substantial portion of their value as a result of higher than anticipated prepayments. Moreover, if prepayments are greater than expected, the cash we receive over the life of the mortgage loans would be reduced. The mortgage origination segment uses derivative financial instruments, including U.S. Treasury bond futures and options, and MBS commitments, as a means to mitigate market risk associated with MSR assets. No hedging strategy can protect us completely, and hedging strategies may fail because they are improperly designed, improperly executed and documented or based on inaccurate assumptions and, as a result, could actually increase our risks and losses. The MSR portfolio exposes us to interest rate risk and, correspondingly, the volatility of our earnings, especially if we cannot adequately hedge the interest rate risk relating to our MSR.

The goal of our interest rate risk management strategy within our mortgage origination segment is not to eliminate interest rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, we have established policies and procedures, which include guidelines on the amount of exposure to interest rate changes we are willing to accept.

Consolidated

At September 30, 2024, total debt obligations on our consolidated balance sheet, excluding short-term borrowings and unamortized debt issuance costs and premiums, were $350 million, and was all subject to fixed interest rates. If interest rates were to increase by one eighth of one percent (0.125%), the increase in interest expense on the variable rate debt would not have a significant impact on our future consolidated earnings or cash flows.

As noted above within the discussion for each business segment, on a consolidated basis, our primary component of market risk is sensitivity to changes in interest rates. Consequently, and in large part due to the significance of our banking segment, our consolidated earnings depend to a significant extent on our net interest income. Refer to the discussion in the “Banking Segment” section above that provides more details regarding sources of interest rate risk and asset/liability management policies and procedures employed to manage our interest-earning assets and interest-bearing liabilities, and potential future repositioning of our GAP position, thereby attempting to control the volatility of net interest income, without having to incur unacceptable levels of risk.

The table below shows the estimated impact of a range of changes in interest rates on net interest income on a consolidated basis at September 30, 2024 (dollars in thousands).


Change in	Changes in
Interest Rates	Net Interest Income
(basis points)	Amount		Percent
+200	$	53,934	12.85	%
+100	$	27,972	6.66	%
-50	$	(13,695)	(3.26)	%
-100	$	(27,440)	(6.54)	%
-200	$	(51,206)	(12.20)	%

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The projected changes in the table above were in compliance with established internal policy guidelines. These projected changes are based on numerous assumptions of growth and changes in the mix of assets or liabilities. The projected changes in net interest income are being impacted by the heightened level of cash balances, which represent a significant portion of our asset sensitivity given simulation analysis assumptions/limitations. As a result, the timing and magnitude of future changes in interest rates including runoff of deposits, and related decline in cash, may impact projected changes in net interest income as noted in the table above.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the supervision and participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report.

Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to the Company’s management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the third fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

For a description of material pending legal proceedings, see the discussion set forth under the heading “Legal Matters” in Note 13 to our Consolidated Financial Statements, which is incorporated by reference herein.

Item 1A. Risk Factors.

There have been no material changes to the risk factors disclosed under “Item 1A. Risk Factors” of our 2023 Form 10-K. For additional information concerning our risk factors, please refer to “Item 1A. Risk Factors” of our 2023 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table details our repurchases of shares of common stock during the three months ended September 30, 2024.


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
July 1 - July 31, 2024	—	$	—	—	$	55,152,099
August 1 - August 31, 2024	—		—	—		55,152,099
September 1 - September 30, 2024	—		—	—		55,152,099
Total	—	$	—	—

(1)

Item 5. Other Information

Pursuant to Item 408(a) of Regulation S-K, none of our directors or executive officers adopted, terminated or modified a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the three months ended September 30, 2024.

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Item 6. Exhibits.


Exhibit Number		Description of Exhibit

31.1*		Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2*		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1**		Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH*		Inline XBRL Taxonomy Extension Schema

101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase

101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase

104		Cover Page Interactive File (formatted as Inline XBRL and contained in Exhibit 101)

*	Filed herewith.

** Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	HILLTOP HOLDINGS INC.

Date: October 25, 2024	By:	/s/ William B. Furr
		William B. Furr
		Chief Financial Officer (Principal Financial Officer and duly authorized officer)