Hilltop Holdings Inc. (HTH) FY 2024 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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The following discussion is intended to help the reader understand our results of operations and financial condition and is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements and the accompanying notes thereto commencing on page F-1. In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Item 1A. Risk Factors” and elsewhere in this Annual Report. See “Forward-Looking Statements.”

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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.

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OVERVIEW

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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.

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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.

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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.

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The following historical consolidated data for the periods indicated has been derived from our historical consolidated financial statements included elsewhere in this Annual Report (dollars and shares in thousands, except per share data).

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Consolidated income before income taxes during 2024 included the following contributions from our reportable business segments.

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During 2024, we paid an aggregate of $19.9 million to repurchase shares of our common stock, and declared and paid total common dividends of $44.3 million.

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On January 25, 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.

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On January 30, 2025, our board of directors declared a quarterly cash dividend of $0.18 per common share, a 6% increase from the prior quarter, payable on February 27, 2025 to all common stockholders of record as of the close of business on February 13, 2025. Additionally, our board of directors authorized a new stock repurchase program through January 2026, pursuant to which we are authorized to repurchase, in the aggregate, up to $100.0 million of our outstanding common stock, an increase from the $75.0 million authorized under our previous program. We commenced share repurchases under the stock repurchase program in the first quarter of 2025.

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During 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. During 2023, we paid $5.1 million to repurchase an aggregate of 164,604 shares of our common stock at an average price of $30.95 per share. These shares were repurchased under previous stock repurchase programs and returned to the pool of authorized but unissued shares of common stock.

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Reconciliation and Management’s Explanation of Non-GAAP Financial Measures

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We present certain measures in our selected financial data that are not measures of financial performance recognized by 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.

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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).

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Recent Developments

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Senior Notes Redemption

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On January 15, 2025 (the “Redemption Date”), we redeemed all of our outstanding 5% senior notes due 2025 (the “Senior Notes”) at a redemption price equal to the aggregate principal amount of $150 million, plus accrued and unpaid interest to, but excluding, the Redemption Date (collectively, the “Redemption Price”). The redemption of the Senior Notes was pursuant to the indenture, dated as of April 9, 2015 (the “Senior Notes Indenture”), between the Company and U.S. Bank National Association, as Trustee (solely in its capacity as trustee for the Senior Notes), which permitted the redemption of the Senior Notes beginning 90 days prior to April 15, 2025 (the maturity date of the Senior Notes). The Company irrevocably deposited with the trustee funds using cash on hand in an amount sufficient to pay the Redemption Price on the Redemption Date to satisfy and discharge its obligations under the Senior Notes and the Senior Notes Indenture.

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Pending Merchant Bank Transaction

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In January 2025, our merchant bank subsidiary entered into a definitive agreement to sell all of the capital stock of Moser Acquisition, Inc. Our approximate 30% aggregate interest in Moser Holdings, LLC, which owns Moser Acquisition, Inc., is expected to result in an estimated net gain on sale of approximately $23 million to $27 million. The closing of the transaction, which is expected to occur in the first quarter of 2025, is subject to customary closing conditions.

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Economic Environment

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The extent of the impacts of uncertain economic conditions on our financial performance that began in 2022, and have continued during 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, changes in the political environment and international armed conflicts and their impact on supply chains.

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In addition, the banking sector experienced increased uncertainty and concerns associated with 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. While financial institution safety and soundness concerns have subsided, these failures underscore the importance of maintaining access to diverse sources of funding.

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In light of the above 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 2024, we experienced net interest margin compression reflecting deposit repricing activity and demand deposit migration into interest-bearing accounts. Deposit costs remained elevated throughout 2024; however, the interest paid on our deposits increased at a slower pace during the second, third and fourth 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 December 31, 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.

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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 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 cumulative 100-basis point decrease in the target range for the federal funds rate since September 2024 and the possibility of additional rate cuts in 2025, 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

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organic deposits to primarily fund our operations, potentially requiring greater reliance on secondary sources of liquidity to meet withdrawal 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 December 31, 2024.

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We expect uncertainties related to economic headwinds discussed above, the impact of interest rate movements on the shape and inversions of the yield curve, and the increasing cost and challenge for deposits that persisted through 2023 and 2024 to continue in 2025.

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Asset Valuation

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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 business segment; performance of our stock and other relevant events.

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Continuing macroeconomic challenges related to mortgage loan origination volumes, customer sensitivity to interest rates and resulting demand for certain products have resulted in a challenging environment associated with our reporting segments, resulting in variability in their operating results.

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Given the potential impacts 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 are longer than currently anticipated. We further considered the amount by which fair value exceeded book value in the most recent quantitative analysis and sensitivities performed. Accordingly, at the conclusion of the annual assessments, we determined that as of October 1, 2024 it was more likely than not that the fair value of goodwill and other intangible assets exceeded their respective carrying values. 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.

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To the extent future operating performance of our reporting segments remain challenged and below forecasted projections during 2025, 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.

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Outlook

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Our balance sheet, operating results and certain metrics during 2024 reflected economic conditions that remain uncertain for 2025, and will depend in part on several developments outside of our control including, among others, changes in the political environment, the timing and significance of further changes in U.S. treasury yields and mortgage interest rates, and a volatile economic forecast. These economic 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 and 2024 have had, and are expected to continue to have, an adverse impact on our operating results during 2025.

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See “Item 1A. Risk Factors” for additional discussion of the potential adverse impacts of unpredictable economic, market and business conditions on our business, results of operations and financial condition.

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Factors Affecting Results of Operations

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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.

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Acquisitions

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On November 30, 2012, we acquired PlainsCapital Corporation pursuant to a plan of merger whereby PlainsCapital Corporation merged with and into our wholly owned subsidiary (the “PlainsCapital Merger”), which continued as the surviving entity under the name “PlainsCapital Corporation”. Concurrent with the consummation of the PlainsCapital Merger, Hilltop became a financial holding company registered under the Bank Holding Company Act of 1956.

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On September 13, 2013, the Bank assumed substantially all of the liabilities, including all of the deposits, and acquired substantially all of the assets of Edinburg, Texas-based FNB from the FDIC, as receiver, and reopened former branches of FNB acquired from the FDIC under the “PlainsCapital Bank” name (the “FNB Transaction”).

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On January 1, 2015, we acquired SWS in a stock and cash transaction (the “SWS Merger”), whereby SWS’s broker-dealer subsidiaries became subsidiaries of Securities Holdings and SWS’s banking subsidiary, Southwest Securities, FSB, was merged into the Bank. On October 5, 2015, Southwest Securities, Inc. was renamed “Hilltop Securities Inc.”

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On August 1, 2018, we acquired privately-held, Houston-based BORO in an all-cash transaction (“BORO Acquisition”). In connection with the BORO Acquisition, we merged BORO into the Bank, and all customer accounts were converted to the PlainsCapital Bank platform.

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Segment Information

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The Company has two primary business units, PCC (banking and mortgage origination) and Securities Holdings (broker-dealer). Under accounting principles generally accepted in the United States (“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.

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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.

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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 Securities and Exchange Commission (the “SEC”) and the Financial Industry Regulatory Authority, Inc. (“FINRA”) and a member of the New York Stock Exchange. Momentum Independent Network is an introducing broker-dealer that is also registered with the

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

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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.

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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.

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The eliminations of intercompany transactions are included in “All Other and Eliminations.” Additional information concerning our reportable business segments is presented in Note 27, “Segment and Related Information,” in the notes to our consolidated financial statements.

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The following table presents certain information about the continuing operating 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.

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Key Performance Indicators

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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.

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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.

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How We Generate Revenue

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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. We generated $417.8 million in net interest income during 2024, compared with net interest income of $466.8 million and $459.0 million during 2023 and 2022, respectively. The change in reportable business segment net interest income during 2024, compared with 2023, primarily reflected decreases within our banking and broker-dealer segments.

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

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In the aggregate, we generated $771.0 million, $729.0 million and $832.5 million in noninterest income during 2024, 2023 and 2022, respectively. The increase in noninterest income during 2024, compared with 2023, was predominantly attributable, as noted in the segment results table previously presented, to increases in securities commissions and fees and investment and securities advisory fees and commissions, and gains from derivative and trading portfolio activities

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within our broker-dealer segment, partially offset by a net decline in net gains from sale of loans, other mortgage production income and mortgage loan origination fees within our mortgage origination segment.

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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.

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Consolidated Operating Results

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Income applicable to common stockholders during 2024 was $113.2 million, or $1.74 per diluted share, compared with $109.6 million, or $1.69 per diluted share, during 2023, and $113.1 million, or $1.60 per diluted share, during 2022. Hilltop’s financial results during 2024, compared with 2023, included a decline in net interest income, partially offset by a decline in the provision for credit losses within the banking segment, net revenues and noninterest expenses increased within the broker-dealer segment, and the mortgage origination segment had decreases in both noninterest income and expenses.

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Hilltop’s financial results during 2023, compared with 2022, reflected decreases in year-over-year mortgage origination segment net gains from sales of loans and other mortgage production income, a decline in net interest income within the banking segment, and increases in net revenues within all of the broker-dealer segment’s business lines.

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Certain items included in net income during 2024, 2023 and 2022 resulted from purchase accounting associated with the PlainsCapital Merger, the FNB Transaction, the SWS Merger and the BORO Acquisition (collectively, the “Bank Transactions”). Income before income taxes during 2024, 2023 and 2022 included net accretion on earning assets and liabilities of $5.1 million, $8.6 million and $10.8 million, respectively, and amortization of identifiable intangibles of $1.8 million, $2.9 million and $4.5 million, respectively, related to the Bank Transactions.

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

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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,

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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.

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During 2024, 2023 and 2022, purchase accounting contributed 4, 6 and 7 basis points, respectively, to our consolidated taxable equivalent net interest margin of 2.83%, 3.09% and 2.88%, respectively. The purchase accounting activity is primarily related to the accretion of discount on loans which totaled $5.1 million, $8.6 million and $10.5 million during 2024, 2023 and 2022, respectively, associated with the Bank Transactions.

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

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The banking segment’s net interest margin exceeds our consolidated net interest margin shown above. Our consolidated net interest margin includes certain items that are not reflected in the calculation of our net interest margin within our banking segment and reduce our consolidated net interest margin, such as the borrowing costs of Hilltop and the yields and costs associated with certain items within interest-earning assets and interest-bearing liabilities, such as securities borrowed in the broker-dealer segment and securities loaned in the broker-dealer segment, including items related to securities financing operations that particularly decrease net interest margin. In addition, yields and costs on certain

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interest-earning assets, such as lines of credit extended to other operating segments by the banking segment, are eliminated from the consolidated financial statements.

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On a consolidated basis, the changes in net interest income during 2024, compared with 2023, were primarily due to changes within the banking segment related to changes in the rates earned or paid on interest-earning assets and interest-bearing liabilities. 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.

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The provision for (reversal of) credit losses is determined by management as the amount necessary to maintain the allowance for credit losses at the amount of expected credit losses inherent within the loans held for investment portfolio. The amount of expense and the corresponding level of allowance for credit losses for loans are based on our evaluation of the collectability of the loan portfolio based on historical loss experience, reasonable and supportable forecasts, and other significant qualitative and quantitative factors. Substantially all of our consolidated provision for (reversal of) credit losses is related to the banking segment. During 2024, the provision for credit losses reflected a build in the allowance related to specific reserves since December 31, 2023, significantly offset by both the change in the U.S. economic outlook and changes in the collectively evaluated loan portfolio. During 2023, the provision for credit losses 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. 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.

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Noninterest income increased during 2024, compared with 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 declines within the broker-dealer segment’s fixed income services and wealth management business lines. The decrease in noninterest income during 2023, compared with 2022, was primarily due to decreases in total mortgage loan sales volume and average loan sales margin within our mortgage origination segment, partially offset by net increases within all of the broker-dealer segment’s business lines.

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Noninterest expense increased during 2024, compared with 2023, primarily due to increases in both variable and non-variable compensation and other segment operating costs within our broker-dealer segment and an increase in variable compensation within our mortgage origination segment, partially offset by decreases in non-variable compensation and other segment operating costs within our mortgage origination segment. We continue to experience increases 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 further increased fixed costs during 2025.

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Effective income tax rates were 20.1%, 20.9% and 23.6% for 2024, 2023 and 2022, respectively. The effective tax rate for 2024 was lower than the applicable statutory rate primarily due to investments in tax-exempt instruments, state refund claims and return to provision adjustments, partially offset by the impact of nondeductible expenses, nondeductible compensation expense and other permanent adjustments. The effective tax rate for 2023 was lower than the applicable statutory rate 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, while 2022 approximated statutory rates and included the effect of investments in tax-exempt instruments, offset by nondeductible expenses.

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Segment Results

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Banking Segment

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

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The decrease in income before income taxes during 2024, compared with 2023, was primarily due to a decline in net interest income and an increase in noninterest expense, partially offset by a decline in the provision for credit losses. The decrease in income before income taxes during 2023, compared with 2022, was primarily due to a decrease in net interest income and an increase in the provision for credit losses, partially offset by a decline in noninterest expense. Changes to net interest income related to the component changes in the volume of average interest-earning assets and interest-bearing liabilities and changes in the rates earned or paid on those items are discussed in more detail below.

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As discussed in more detail below, the banking segment’s cost of deposits increased during 2024 due to continued competition for liquidity and customers seeking higher yields on deposits. The resulting net interest income spread compression has had, and is expected to continue to have, a negative impact on banking segment operating results. While we expect deposit costs during 2025 to continue to be driven by various factors, including competitive pressures and broader economic conditions, with the cumulative 100-basis point decrease in the target range for the federal funds rate since September 2024, and the possibility of additional rate cuts in 2025, we anticipate that our cost of deposits will begin to trend modestly downward.

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

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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 rates 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

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interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments.

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During 2024, 2023 and 2022, purchase accounting contributed 4, 7 and 9 basis points, respectively, to the banking segment’s taxable equivalent net interest margin of 3.04%, 3.14% and 3.11%, respectively. These purchase accounting items are primarily related to accretion of discount on loans associated with the Bank Transactions presented in the Consolidated Operating Results section.

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

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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-

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earning assets, such as lines of credit extended to other operating segments by the banking segment, are eliminated from the consolidated financial statements.

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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).

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With regard to net interest income, as of December 31, 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.

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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, the migration from non-interest-bearing deposits into interest-bearing products during the year over year period, and decreases in average loans held for investment, investment securities and deposits held in other financial institutions, partially offset by increased earnings on interest-earning assets, primarily loan yields. The average rate paid on interest-bearing liabilities increased 24 basis points from 3.53% for 2023 to 3.77% for 2024, while the average yield on interest-earning assets increased 18 basis points from 5.40% for 2023 to 5.58% for 2024.

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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 December 31, 2024, approximately $602 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 59% 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.

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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 2024, compared to 2023. While we expect such costs during 2025 to continue to be driven by various factors, including competitive pressures and broader economic conditions, with the cumulative 100-basis point decrease in the target range for the federal funds rate since September 2024 and the possibility of additional rate cuts in 2025, 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 December 31, 2024, total estimated uninsured deposits were $5.7 billion, or approximately 52% of total deposits, while estimated uninsured deposits, excluding collateralized deposits of $363.1 million, were $5.3 billion, or approximately 48% of total deposits.

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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.

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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.

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During 2024, 2023 and 2022, the banking segment retained approximately $124 million, $140 million and $532 million, respectively, in mortgage loans originated by the mortgage origination segment. These loans are purchased by the banking segment at par. For origination services provided, the banking segment reimburses the mortgage origination segment for direct origination costs associated with these mortgage loans, in addition to payment of a correspondent fee. The correspondent fees are eliminated in consolidation. The determination of mortgage loan retention levels by the banking segment will be impacted by, among other things, an ongoing review of the prevailing mortgage rates, balance sheet positioning at Hilltop and the banking segment’s outlook for commercial loan growth.

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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 the changing economic outlook, macroeconomic forecast assumptions and resulting impact on reserves. Specifically, during 2024, the banking segment’s provision for credit losses reflected a build in the allowance related to specific reserves since December 31, 2023, significantly offset by both the change in the U.S. economic outlook and changes in the collectively evaluated loan portfolio. The net impact to the allowance of changes associated with individually evaluated loans during 2024 included a provision for credit losses of $15.2 million, while collectively evaluated loans during 2024 included a reversal of credit losses of $14.2 million. The change in the allowance during 2024 was also impacted by net charge-offs of $11.2 million. During 2023, the banking segment’s provision for credit losses reflected a 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 2023 included a provision for credit losses of $12.7 million, while individually evaluated loans included a provision for credit losses of $5.8 million. The change in the allowance during 2023 was also impacted by net charge-offs of $2.4 million. During 2022, the banking segment’s provision for credit

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losses was driven by a deteriorating U.S. economic outlook since December 31, 2021. The change in the allowance during 2022 was also impacted by net charge-offs of $4.2 million. 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.

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The banking segment’s noninterest income decreased during 2024, compared with 2023, primarily due to valuation adjustments associated with the sale of a single loan from loans held for sale during the second quarter of 2024 and a decrease in oil and gas management fees, partially offset by an increase in service charges on depositor accounts. Noninterest income during 2023, compared with 2022, decreased primarily due to a decline in service charges on depositor accounts, oil and gas management fees and non-recurring income related to the Community Reinvestment Act of 1977 investment that occurred in 2022.

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The banking segment’s noninterest expenses increased during 2024, compared with 2023, primarily due to a long-lived asset impairment charge of $4.8 million associated with one of the Bank’s support facilities that management has the intent to sell. The facility was written down to the estimated fair value of the property less the estimated costs to sell. The sale of the facility is expected to be completed during the first quarter of 2025. Additionally, during 2024, the Bank incurred one-time compensation expenses associated with Bank leadership changes, partially offset by decreases in professional fees. Noninterest expenses during 2023, compared with 2022, decreased primarily due to decreases in compensation-related expenses, partially offset by an increase in FDIC assessment, professional fees and software related expenses.

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Broker-Dealer Segment

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

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The decline in income before income taxes during 2024, compared with 2023, was primarily due to increases in segment compensation and other segment operating costs, partially offset by an increase in net revenue. The increase in net revenue during 2024, compared with 2023, was 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 trading 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 trading profits.

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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, resulting in valuation-related adjustments.

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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 2024, compared with 2023, was primarily due to the decrease in the net interest income from the fixed income services business line due to decreases in net interest earned on inventory positions. The increase in net interest income during 2023, compared with 2022, was primarily due to the increase in corporate interest, retail and clearing services business line revenues and the amount of interest received on a structured product investments offset by a decrease in net interest income from the fixed income services business line due to the increased cost to carry inventory positions.

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Noninterest income increased during 2024, compared with 2023, primarily due to increases in securities commissions and fees, investment and securities advisory fees and other noninterest income. Noninterest income increased during 2023, compared with 2022, primarily due to increases in other noninterest income, securities commissions and fees and investment and securities advisory fees and commissions.

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Securities commissions and fees increased during 2024, compared with 2023, primarily due to increases in both the broker-dealer segment’s fixed income services and structured finance business lines. The increase in the fixed income services business line was primarily due to increased volumes and the increase in the structured finance business line was primarily due to an increase in commissions earned on commodities transactions. 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. Securities commissions and fees increased during 2023, compared with 2022, primarily due to an increase in FDIC sweep revenue given higher short-term interest rates, partially offset by a decrease in fixed income and retail commissions. As FDIC sweep revenues are closely correlated to short-term interest rates, changes in short-term interest rates may affect these revenues.

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Investment and securities advisory fees and commissions increased during 2024, compared with 2023, primarily due to increases in fees earned from managed assets and municipal advisory transactions. Investment and securities advisory fees and commissions increased during 2023, compared with 2022, primarily due increases in fees earned from managed assets within our treasury management and government investment pool divisions of our public finance services business line and underwriting transactions.

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The increase in other noninterest income during 2024, compared with 2023, was 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 income trading activities. Buy-side demand improved resulting in increases in noninterest income in the structured finance business line for 2024, when compared to 2023. The decrease in fixed income trading gains in 2024, compared with 2023, was primarily driven by municipal and taxable securities trading. Other noninterest income increased during 2023, compared with 2022, was primarily due to fixed income trading activities and increases in trading gains earned from structured finance. Specifically, mortgage originations increased 72% during 2023 and customer demand improved compared with 2022. Increased fixed income trading gains during 2023, compared with 2022, were primarily driven by government and agency, mortgage and asset-backed securities trading, partially offset by a decrease in net trading gains from derivative transactions. Also contributing to the overall increase in noninterest income was an increase in the value of the broker-dealer segment’s deferred compensation plan’s assets of $2.5 million during 2023, compared with 2022.

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The increase in noninterest expenses during 2024, compared with 2023, was due to increases in segment compensation and other segment operating costs, primarily quotation expenses. The increase in noninterest expenses during 2023, compared with 2022, was primarily due to increases in segment operating costs, including software expenses, travel expenses, quotation and transaction clearing costs, legal fees and both non-variable and variable compensation expenses.

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

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Mortgage Origination Segment

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

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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. A decrease in mortgage interest rates tends to result in increased loan origination volume from refinancings, while an increase in mortgage interest rates tends to result in decreased 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 continued to negatively impact home purchase volume through 2024. A modest decline in mortgage rates experienced between the fourth quarter of 2023 and the third quarter of 2024 had a slight impact on loan origination volume in 2024, with a moderate increase in refinancings as a percentage of total loan origination volume. During the fourth quarter of 2024, mortgage interest rates approached levels approximating rates at the end of 2023. See details regarding loan origination volume in the table below.

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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 2024, certain events adversely impacted total mortgage market origination volumes because of their effect on the economy, including inflation, an increase in average interest rates during these periods when compared to the average of the three years prior to 2023, the Federal Reserve’s actions and communications, and geopolitical events. 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. Between September and December 2024, the Federal Reserve cut the target range for the federal funds rate by 100 basis points to 4.25% - 4.5% as of December 31, 2024 and were the first reductions since March 2022 when the target range was 0.25% - 0.50%. PrimeLending experienced a measurable increase in interest rate lock commitments (“IRLCs”) in September 2024 due to the first rate cut and a corresponding decrease in mortgage interest rates. However, despite the decrease in the federal funds rate since September 2024, average mortgage interest rates increased during the fourth quarter of 2024, which hampered mortgage production. PrimeLending continues to evaluate its cost structure to address the current mortgage environment.

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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 that began during the second half of 2022 and continued as expected during 2023 and, to lesser extent, during 2024 due to conditions and challenges discussed in detail within this discussion of segment results. 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 goodwill.

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As a GNMA approved lender, we are subject to certain 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 operating loss ratios were 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 and fourth quarters of 2024, the operating loss ratios were below the 20% threshold at 14.4% and 16.6%, respectively. 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 two $10 million capital infusions received by PrimeLending from its parent company, PlainsCapital Bank, in September and December 2024, the GNMA capital ratio increased to 6.38% and 6.36% during the third and fourth quarters of 2024, respectively. 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.

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In addition, as a FNMA and 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 and fourth quarters of 2024, the capital ratio, including the capital infusions 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, third and fourth quarters of 2024; the loss ratio during these periods was 37.5%, 29.9%, 23.9% and 11.5%, respectively. All trends requiring notification to FNMA and FHLMC have been reported to those entities.

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The loss before income taxes decreased in 2024, compared with 2023. This decrease was primarily the result of a decrease in noninterest expense. The loss before income taxes increased significantly in 2023, compared with 2022. This decrease was primarily the result of decreases in the volume of IRLCs, mortgage loan originations and sales and an increase in the net interest expense, partially offset by a decrease in noninterest expense.

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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, then increased during the fourth quarter to levels that approximated rates at the beginning of 2024. Refinancing volume as a percentage of total origination volume was slightly higher during 2024, compared with 2023. Although we anticipate a slightly higher percentage of refinancing volume relative to total loan origination volume during 2025, as compared to 2024, 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.

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The mortgage origination segment primarily originates its mortgage loans through a retail channel, with additional lending through its affiliated business arrangements (“ABAs”). For 2024, funded volume through ABAs was approximately 16% of the mortgage origination segment’s total loan volume. Currently, PrimeLending owns a greater than 50% interest in two ABAs. We expect total production within the ABA channel to approximate 13% of loan volume of the mortgage origination segment during 2025.

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

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We consider the mortgage origination segment’s total loan origination volume to be a key performance measure. Loan origination volume is central to the segment’s ability to generate income by originating and selling mortgage loans, resulting in net gains from the sale of loans, mortgage loan origination fees, and other mortgage production income. Total loan origination volume is a measure utilized by management, our investors, and analysts in assessing market share and growth of the mortgage origination segment.

The mortgage origination segment’s total loan origination volume increased 4.5% during 2024, compared with 2023, while loss before income taxes decreased 46.3%, compared with 2023. The decrease in loss before income taxes during 2024 was primarily due to an increase in average loan sales margin, increases in average value of IRLCs and decreases in non-variable compensation and benefits expense and segment operating costs, partially offset by a decrease in the average value of mortgage loan origination fees and to a lesser extent, decreases in net servicing income and an increase in the loss on the change in the net fair value and related derivative activity related to mortgage servicing rights assets, compared with 2023. During 2023, the mortgage origination segment’s total loan origination volume decreased 34.9% compared with 2022, while loss before income taxes increased 71.8% during 2023, compared with 2022. The increase in loss before income taxes during 2023 was primarily due to decreases in the volume of IRLCs and mortgage loan originations and sales, a decrease in the average value of IRLCs, and to a lesser extent, an increase in net interest expense, compared with 2022. These trends were partially offset by a decrease in variable compensation, an increase in the average value of mortgage loan origination fees, and to a lesser extent, decreases in non-variable compensation and benefits expense, and segment operating costs, compared with 2022.

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

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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. The changes in net interest expense during 2024, compared with 2023, reflected a decrease in the negative net interest margin, and during 2023, compared with 2022, reflected the effects of an increased net interest margin on mortgage loans held for sale, partially offset by a decrease in the average warehouse line balance between the two periods.

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

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Net gains from sale of loans increased 17.1%, while total loans sales volume was relatively flat during 2024, compared with 2023. The increase in net gains from sales of loans was primarily the result of an increase in average loan sale margin. The decrease in net gains from sale of loans during 2023, compared with 2022, was primarily the result of a decrease of 39.0% in total loan sales volume, in addition to a decrease in average loan sales margin.

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The 14.9% decrease in mortgage loan origination fees and other related income during 2024, compared with 2023, was primarily the result of a decrease in average mortgage loan origination fees as loan origination volume increased 4.5%. The decrease in mortgage loan origination fees during 2023, compared with 2022, was minimal at 3.4%. The negative impact on fees resulting from a decrease in loan origination volume, was mostly offset by an increase in average mortgage loan origination fees.

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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 fee

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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 2024, 2023 and 2022 were $124 million, $140 million and $532 million, 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.

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Noninterest income included changes in the net fair value of the mortgage origination segment’s IRLCs and loans held for sale and the related activity associated with forward commitments used by the mortgage origination segment to mitigate interest rate risk associated with its IRLCs and mortgage loans held for sale (“net fair value of IRLCs and loans held for sale”). The increase in net fair value of IRLCs and loans held for sale during 2024, compared with 2023, was primarily the result of an increase in the average value of individual IRLCs and loans held for sale.

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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 2024, 2023 and 2022, the mortgage origination segment retained servicing on approximately 7%, 18% and 25%, respectively, of loans sold. 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.

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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 2024, changes in the net fair value of the MSR asset and the related derivatives resulted in net losses of $19.2 million. In addition to normal customer payments and customer payoffs, these changes were primarily driven by losses totaling $12.3 million during 2024, 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 $3.2 million. During the second quarter of 2024, the mortgage origination segment signed a letter of intent to sell and completed the sale of MSR assets of $45.1 million, which represented $2.9 billion of its serviced loan volume at the time. In addition, during September 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. This sale was 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 $8.6 million was recognized during 2024. During 2023, the operating results of the mortgage origination segment were impacted by a decrease of $12.5 million in the net fair value of the MSR asset. This decrease was primarily driven by market sales trends during the first quarter of 2023 and 2022. The remaining losses of $4.1 million were 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. During 2022, the mortgage origination segment sold MSR assets of approximately $65 million, with a serviced loan volume totaling $3.7 billion. In addition to net losses generated by changes in the net fair value of the MSR asset and related derivatives, net servicing income of $13.5 million was recognized during 2023.

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

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Total employees’ compensation and benefits accounted for the majority of the noninterest expenses incurred during all periods presented. Historically, variable compensation comprises the majority of total employees’ compensation and benefits expenses, but during 2023, as opposed to 2024 and 2022, non-variable compensation was greater than variable compensation. 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.

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While total loan origination volumes increased 4.5% during 2024, compared with 2023, the aggregate non-variable compensation and benefits of the mortgage origination segment decreased by 17.1%. This decrease was primarily due to a decrease in salaries and health insurance expense associated with a reduction in underwriting and loan fulfillment, operations and corporate staff as PrimeLending continued to evaluate its cost structure to address current mortgage environment. Segment operating costs decreased during 2024, compared with 2023, primarily due to decreases in occupancy and software expense. During 2023, compared with 2022, segment operating costs decreased primarily due to decreases in occupancy and equipment expense, advertising expense, professional fees and net loan related expenses, excluding credit report expense.

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In exchange for a higher interest rate, customers may opt to have PrimeLending pay certain costs associated with the origination of their mortgage loan (“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.

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Between January 1, 2015 and December 31, 2024, the mortgage origination segment sold mortgage loans totaling $146.2 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.

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When a claim for indemnification of a loan sold is made by an agency, investor, or other party, the mortgage origination segment evaluates the claim and determines if the claim can be satisfied through additional documentation or other deliverables. If the claim is valid and cannot be satisfied in that manner, the mortgage origination segment negotiates with the claimant to reach a settlement of the claim. Settlements typically result in either the repurchase of a loan or reimbursement to the claimant for losses incurred on the loan.

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The following is a summary of the mortgage origination segment’s claims resolution activity relating to loans sold between January 1, 2015 and December 31, 2024 (dollars in thousands).

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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.

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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.

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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 and fourth 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.

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At December 31, 2024 and 2023, the mortgage origination segment’s total indemnification liability reserve totaled $8.1 million and $11.7 million, respectively. The related provision for indemnification losses was $2.8 million, $1.6 million and $1.5 million during 2024, 2023 and 2022, respectively.

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Corporate

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

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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 $74 million at December 31, 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 2024 was primarily comprised of dividend income from merchant banking investment activities, in addition to interest income earned on intercompany notes.

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Interest expense during 2024, 2023 and 2022 included recurring annual interest expense of $7.7 million incurred on our $150.0 million aggregate principal amount of 5% Senior Notes due April 15, 2025. During 2024, 2023 and 2022, we incurred interest expense of $12.4 million, $12.4 million and $12.3 million, respectively, on our $50 million aggregate principal amount of 5.75% fixed-to-floating rate subordinated notes due May 15, 2030 (“2030 Subordinated Notes”) and on our $150 million aggregate principal amount of 6.125% fixed-to-floating subordinated notes due May 15, 2035 (“2035 Subordinated Notes,” the 2030 Subordinated Notes and the 2035 Subordinated Notes, collectively, the “Subordinated Notes”), which were issued in May 2020. On January 15, 2025, we redeemed all of our outstanding Senior Notes using cash on hand, which also satisfied and discharged our obligations under the Senior Notes and Senior Notes Indenture.

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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 2024, noninterest income included pre-tax gains of $5.3 associated with the sale of merchant bank equity investments.

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Noninterest expenses were primarily comprised of employees’ compensation and benefits, occupancy expenses and professional fees, including corporate governance, legal and transaction costs. During 2024, compared with 2023, the increase in noninterest expenses was primarily due to increases associated with software costs and employees’ compensation and benefits, partially offset by a decrease in professional services expenses. During 2023, compared with 2022, the increase in noninterest expenses was primarily due to inflationary increases associated with employees’ compensation and benefits, partially offset by decreases in professional services and occupancy expenses.

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Financial Condition

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The following discussion contains a more detailed analysis of our financial condition at December 31, 2024 as compared with December 31, 2023 and December 31, 2022.

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Securities Portfolio

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At December 31, 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.

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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).

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