Hilltop Holdings Inc

Previous wording

Consolidated income before income taxes during the three months ended March 31, 2024 included the following contributions from our reportable business segments.

Current wording

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

Previous wording

During the three months ended March 31, 2024, we declared and paid total common dividends of $11.1 million.

Current wording

During the six months ended June 30, 2024, we declared and paid total common dividends of $22.2 million.

Previous wording

In January 2024, our board of directors authorized a new stock repurchase program through January 2025, pursuant to which we are authorized to repurchase, in the aggregate, up to $75.0 million of our outstanding common stock, inclusive of repurchases to offset dilution related to grants of stock-based compensation. During the three months ended March 31, 2024, we paid $9.9 million to repurchase an aggregate of 320,042 shares of our common stock at an average price of $31.04 per share pursuant to the stock repurchase program.

Current wording

In January 2024, our board of directors authorized a new stock repurchase program through January 2025, pursuant to which we are authorized to repurchase, in the aggregate, up to $75.0 million of our outstanding common stock, inclusive of repurchases to offset dilution related to grants of stock-based compensation. During the six months ended June 30, 2024, we paid $19.9 million to repurchase an aggregate of 640,042 shares of our common stock at an average price of $31.01 per share pursuant to the stock repurchase program.

Previous wording

The impacts of economic headwinds that began in 2022, and continued into 2024, remain uncertain and will depend on several developments outside of our control including, among others, the timing and significance of further changes in U.S. treasury yields and mortgage interest rates, exposure to increasing funding costs, inflationary pressures associated with compensation, occupancy and software costs and labor market conditions, and international armed conflicts and their impact on supply chains.

Current wording

The impacts of economic headwinds that began in 2022, and have continued into 2024, remain uncertain and will depend on several developments outside of our control including, among others, the timing and significance of further changes in U.S. Treasury yields and mortgage interest rates, exposure to increasing funding costs, inflationary pressures associated with compensation, occupancy and software costs and labor market conditions, and international armed conflicts and their impact on supply chains.

Previous wording

As discussed in more detail within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2023 Form 10-K, events in early 2023 relating to the failures of certain banking entities caused general uncertainty and concern regarding the liquidity adequacy of the banking sector as a whole. In light of these events, we have continued our efforts to monitor deposit flows and balance sheet trends to ensure that our liquidity needs and financial flexibility are maintained. During 2023, we increased interest-bearing deposit rates to address rising market interest rates and intense competition for liquidity to combat deposit outflows. Further, during the second quarter of 2023, we bolstered our liquidity position by increasing brokered deposits at the Bank by approximately $390 million with a remaining balance of approximately $160 million at March 31, 2024, of which approximately $150 million matured in April 2024. Additionally, at March 31, 2024, we continued to access core deposits from our Hilltop Securities Federal Deposit Insurance Corporation (“FDIC”) insured sweep program, while the Bank is not utilizing any of its Federal Home Loan Bank (“FHLB”) borrowing capacity.

Current wording

As discussed in more detail within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2023 Form 10-K, events in early 2023 relating to the failures of certain banking entities caused general uncertainty and concern regarding the liquidity adequacy of the banking sector as a whole. In light of these events, we have continued our efforts to monitor deposit flows and balance sheet trends to ensure that our liquidity needs and financial flexibility are maintained. During 2023, we increased interest-bearing deposit rates to address rising market interest rates and intense competition for liquidity to combat deposit outflows. Further, during the second quarter of 2023, we bolstered our liquidity position by increasing brokered deposits at the Bank by approximately $390 million, which have subsequently matured during the first and second quarters of 2024. During the second quarter of 2024, our deposit funding costs began to stabilize as higher cost brokered deposits were fully returned and our interest-bearing deposits yield flattened. Additionally, at June 30, 2024, we continued to access core deposits from our Hilltop Securities Federal Deposit Insurance Corporation (“FDIC”) insured sweep program, while the Bank is not utilizing any of its Federal Home Loan Bank (“FHLB”) borrowing capacity.

Previous wording

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, to continue during the remainder of 2024.

Current wording

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 challenge for deposits that persisted through 2023, to continue during the remainder of 2024.

Previous wording

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

Current wording

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

Previous wording

To the extent future operating performance of our reporting segments remain challenged and below forecasted projections during 2024, significant assumptions such as expected future cash flows or the risk-adjusted discount rate used to estimate fair value are adversely impacted, or upon the occurrence of what management would deem to be a

Current wording

To the extent future operating performance of our reporting segments remain challenged and below forecasted projections during 2024, significant assumptions such as expected future cash flows or the risk-adjusted discount rate

Previous wording

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.

Current wording

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.

Previous wording

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

Current wording

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

Previous wording

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.

Current wording

Specifically, 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.

Previous wording

We generate revenue from net interest income and from noninterest income. Net interest income represents the difference between the income earned on our assets, including our loans and investment securities, and our cost of funds, including the interest paid on the deposits and borrowings that are used to support our assets. Net interest income is a significant contributor to our operating results. Fluctuations in interest rates, as well as the amounts and types of interest-earning assets and interest-bearing liabilities we hold, affect net interest income. The change in reportable business segment net interest income during the three months ended March 31, 2024, compared with the same period in 2023, primarily reflected a decrease within our banking segment from increased cost of deposits due to the intense competition for liquidity as customers seek higher yields on deposits.

Current wording

We generate revenue from net interest income and from noninterest income. Net interest income represents the difference between the income earned on our assets, including our loans and investment securities, and our cost of funds, including the interest paid on the deposits and borrowings that are used to support our assets. Net interest income is a significant contributor to our operating results. Fluctuations in interest rates, as well as the amounts and types of interest-earning assets and interest-bearing liabilities we hold, affect net interest income. The change in reportable business segment net interest income during the six months ended June 30, 2024, compared with the same period in 2023, primarily reflected a decrease within our banking segment from increased cost of deposits due to the intense competition for liquidity as customers seek higher yields on deposits.

Previous wording

In the aggregate, we experienced an increase in noninterest income during the three months ended March 31, 2024, compared to the same period in 2023, as noted in the segment results table previously presented, primarily due to an increase in gains from derivative and trading portfolio activities within our broker-dealer segment and an increase in net gains from sale of loans within our mortgage loan origination segment, partially offset by decreases of other mortgage production income and mortgage loan origination fees within our mortgage origination segment.

Current wording

In the aggregate, we experienced an increase in noninterest income during the six months ended June 30, 2024, compared to the same period in 2023, as noted in the segment results table previously presented, primarily due to an increase in gains from investment and securities advisory fees and commissions within our broker-dealer segment, an increase in net gains from sale of loans within our mortgage loan origination segment and an increase in pre-tax gains associated with the sale of merchant bank equity investments within corporate, partially offset by decreases of other mortgage production income and mortgage loan origination fees within our mortgage origination segment.

Previous wording

Income applicable to common stockholders during the three months ended March 31, 2024 was $27.7 million, or $0.42 per diluted share, compared with $25.8 million, or $0.40 per diluted share, during the three months ended March 31, 2023. Hilltop’s financial results for the three months ended March 31, 2024, compared with the same period in 2023, included a decline in net interest income, partially offset by a reversal of credit losses due to an improved economic outlook within the banking segment, an increase in net revenues within certain of the broker-dealer segment’s business lines, and a decline in other mortgage production income, partially offset by an increase in net gains from sale of loans within the mortgage origination segment.

Current wording

Hilltop’s financial results for the three months ended June 30, 2024, compared with the same period in 2023, included a decline in net interest income, partially offset by changes in the provision for credit losses within the banking segment, a decrease in net revenues within all of the broker-dealer segment’s business lines except public finance services, and a decline in noninterest expense within the mortgage origination segment. During the six months ended June 30, 2024, compared with the same period in 2023, Hilltop’s financial results included changes consistent with those noted above

Previous wording

Certain items included in net income for the three months ended March 31, 2024 and 2023 resulted from purchase accounting associated with the merger of PlainsCapital Corporation with and into a wholly owned subsidiary of Hilltop on November 30, 2012, the FDIC-assisted transaction whereby the Bank acquired certain assets and assumed certain liabilities of FNB, the acquisition of SWS Group, Inc. in a stock and cash transaction, and the acquisition of The Bank of River Oaks in an all-cash transaction (collectively, the “Bank Transactions”). Income before income taxes during the three months ended March 31, 2024 and 2023 included net accretion on earning assets and liabilities of $1.4 million and $1.9 million, respectively, and amortization of identifiable intangibles of $0.5 million and $0.8 million, respectively, related to the Bank Transactions.

Current wording

Certain items included in net income for the three and six months ended June 30, 2024 and 2023 resulted from purchase accounting associated with the merger of PlainsCapital Corporation with and into a wholly owned subsidiary of Hilltop on November 30, 2012, the FDIC-assisted transaction whereby the Bank acquired certain assets and assumed certain liabilities of FNB, the acquisition of SWS Group, Inc. in a stock and cash transaction, and the acquisition of The Bank of River Oaks in an all-cash transaction (collectively, the “Bank Transactions”). Income before income taxes during the three months ended June 30, 2024 and 2023 included net accretion on earning assets and liabilities of $2.0 million and $3.2 million, respectively, and amortization of identifiable intangibles of $0.5 million and $0.8 million, respectively, related to the Bank Transactions. During the six months ended June 30, 2024 and 2023, income before income taxes included net accretion on earning assets and liabilities of $3.4 million and $5.1 million, respectively, and amortization of identifiable intangible of $1.0 million and $1.6 million, respectively, related to the Bank transactions.

Previous wording

During the three months ended March 31, 2024 and 2023, purchase accounting contributed 4 and 6 basis points, respectively, to our consolidated taxable equivalent net interest margin of 2.87% and 3.28%, respectively. The purchase accounting activity was primarily related to the accretion of discount of loans which totaled $1.3 million and $1.9 million during the three months ended March 31, 2024 and 2023, respectively, associated with the Bank Transactions.

Current wording

During the three months ended June 30, 2024 and 2023, purchase accounting contributed 6 and 9 basis points, respectively, to our consolidated taxable equivalent net interest margin of 2.92% and 3.03%, respectively. During the six months ended June 30, 2024 and 2023, purchase accounting contributed 5 and 7 basis points, respectively, to our consolidated taxable equivalent net interest margin of 2.89% and 3.15%, respectively. The purchase accounting activity was primarily related to the accretion of discount of loans which totaled $1.9 million and $3.3 million during the three months ended June 30, 2024 and 2023, respectively, and $3.2 million and $5.2 million during the six months ended June 30, 2024 and 2023, respectively, associated with the Bank Transactions.

Previous wording

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

Current wording

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

Previous wording

On a consolidated basis, the change in net interest income during the three months ended March 31, 2024, compared with the same period in 2023, was primarily due to increased costs of deposits and increased average interest-bearing deposits with the banking segment and increased net yields on loans held for investment within the banking segment. 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.

Current wording

On a consolidated basis, the change in net interest income during the three and six months ended June 30, 2024, compared with the same periods in 2023, was primarily due to increased costs of deposits, and increased net yields on loans held for investment within the banking segment and, for the six months ended June 30, 2024, due to increased average interest-bearing deposits within the banking segment. 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.

Previous wording

The provision for (reversal of) credit losses is determined by management as the amount necessary to maintain the allowance for credit losses at the amount of expected credit losses inherent within the loans held for investment portfolio. The amount of expense and the corresponding level of allowance for credit losses for loans are based on our evaluation of the collectability of the loan portfolio based on historical loss experience, reasonable and supportable forecasts, and other significant qualitative and quantitative factors. During the three months ended March 31, 2024, the reversal of credit losses reflected improvements to the U.S. economic outlook, offset by increases in specific reserves within the banking segment. Refer to the discussion under the heading “Financial Condition – Allowance for Credit Losses on Loans” for more details regarding the significant assumptions and estimates involved in estimating credit losses.

Current wording

The provision for (reversal of) credit losses is determined by management as the amount necessary to maintain the allowance for credit losses at the amount of expected credit losses inherent within the loans held for investment portfolio. The amount of expense and the corresponding level of allowance for credit losses for loans are based on our evaluation of the collectability of the loan portfolio based on historical loss experience, reasonable and supportable forecasts, and other significant qualitative and quantitative factors. During the three months ended March 31, 2024, the reversal of credit losses reflected improvements to the U.S. economic outlook, while during the three months ended June 30, 2024, the provision for credit losses reflected a build in the allowance related to specific reserves and loan portfolio changes within the banking segment since the prior quarter, slightly offset by improvements to the U.S. economic outlook. Refer to the discussion under the heading “Financial Condition – Allowance for Credit Losses on Loans” for more details regarding the significant assumptions and estimates involved in estimating credit losses.

Previous wording

Noninterest income increased during the three months ended March 31, 2024, compared with the same period in 2023, primarily due to net increases within the broker-dealer segment’s structured finance, public finance services and wealth management business lines and increases in net gains from sale of loans within our mortgage origination segment loan sales volume and average loan sales margin within our mortgage origination segment, partially offset by decreases in mortgage loan origination fees and other mortgage production income.

Current wording

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

Previous wording

Noninterest expense was relatively flat during the three months ended March 31, 2024, compared with the same period in 2023, primarily due to decreases in both variable and non-variable compensation and other segment costs within our mortgage origination segment associated with decreased mortgage loan originations, partially offset by increases in both variable and non-variable compensation within our broker-dealer segment. We have experienced an increase in certain noninterest expenses during 2024 and 2023, compared with respective prior periods, including compensation, occupancy, and software costs, due to inflationary pressures. We expect such inflationary headwinds to continue and result in higher fixed costs during 2024.

Current wording

Noninterest expense decreased during the three months ended June 30, 2024, compared with the same period in 2023, primarily due to decreases in both variable and non-variable compensation and other segment costs within our mortgage origination segment associated with decreased mortgage loan originations, partially offset by an increase in non-variable compensation and other segment operating costs within our broker-dealer segment. Noninterest expense decreased during the six months ended June 30, 2024, compared with the same period in 2023, primarily due to changes noted above within our mortgage origination segment, partially offset by increases in both variable and non-variable compensation and other segment operating costs within our broker-dealer segment. We have experienced an increase in certain noninterest expenses during 2024 and 2023, compared with respective prior periods, including compensation, occupancy, and software costs, due to inflationary pressures. We expect such inflationary headwinds to continue and result in higher fixed costs during 2024.

Previous wording

Effective income tax rates during the three months ended March 31, 2024 and 2023 were 22.5% and 11.6%, respectively. The effective tax rate during the three months ended March 31, 2023 was lower than the applicable statutory rate primarily due to the impacts of excess tax benefits on share-based payment awards, investments in tax-exempt instruments and changes in accumulated tax reserves, partially offset by nondeductible expenses. The effective tax rate during the three months ended March 31, 2024 was higher than the applicable statutory rate primarily due to the impact of nondeductible expenses, nondeductible compensation expense and other permanent adjustments, partially offset by the discrete impact of restricted stock vesting during the quarter and investments in tax-exempt instruments.

Current wording

Effective income tax rates during the three months ended June 30, 2024 and 2023 were 22.5% and 26.4%, respectively, and for the six months ended June 30, 2024 and 2023 were 22.5% and 18.5%, respectively. The effective tax rate during the three months ended June 30, 2023 was higher than the applicable statutory rate primarily due to the booking of additional taxes from a change in the source of funding for an acquired nonqualified, deferred compensation plan. During the six months ended June 30, 2023, the effective tax rate was lower than the applicable statutory rate primarily due to the impacts of excess tax benefits on share-based payment awards, investments in tax-exempt instruments and changes in accumulated tax reserves, partially offset by nondeductible expenses and the increase in taxes noted above. During the

Previous wording

The decrease in income before income taxes during the three months ended March 31, 2024, compared with the same period in 2023, was primarily due to a decline in net interest income, partially offset by a reversal of credit losses. 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.

Current wording

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

Previous wording

As discussed in more detail below, given the intense competition for liquidity and as customers seek higher yields on deposits, the banking segment’s cost of deposits increased during the first quarter of 2024. We expect such costs during 2024 to continue to be driven by various factors, including continued intense competition for deposits, as well as economic and market area factors. The resulting net interest income spread compression has had, and is expected to continue to have, a negative impact on banking segment operating results.

Current wording

As discussed in more detail below, given the intense competition for liquidity and as customers seek higher yields on deposits, the banking segment’s cost of deposits increased during the first half of 2024. While we expect deposit costs during 2024 to continue to be driven by various factors, including continued intense competition for deposits, as well as economic and market area factors, our deposit funding costs began to stabilize during the second quarter of 2024, as higher cost brokered deposits were fully returned and our interest-bearing deposits yield flattened. The resulting net interest income spread compression has had, and is expected to continue to have, a negative impact on banking segment operating results.

Previous wording

During the three months ended March 31, 2024 and 2023, purchase accounting contributed 5 and 7 basis points, respectively, to the banking segment’s taxable equivalent net interest margin of 3.00% and 3.41%, respectively. These purchase accounting items are primarily related to accretion of discount of loans associated with the Bank Transactions presented in the Consolidated Operating Results section.

Current wording

During the three months ended June 30, 2024 and 2023, purchase accounting contributed 7 and 11 basis points, respectively, to the banking segment’s taxable equivalent net interest margin of 3.10% and 3.11%, respectively. During the six months ended June 30, 2024 and 2023, purchase accounting contributed 6 and 9 basis points, respectively, to the banking segment’s taxable equivalent net interest margin of 3.05% and 3.25%, respectively. These purchase accounting

Previous wording

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

Current wording

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

Previous wording

With regard to net interest income, as of March 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 rising interest rates, being asset sensitive tends to result in an increase in net interest income, but during a period of declining interest rates, tends to result in a decrease in net interest income. Even with the rising interest rate environment during the three months ended March 31 2024, net interest income decreased as compared to the same period in 2023 due to increased costs of our deposits given the intense competition for liquidity and the banking industry disruption, and as customers seek higher yields on deposits.

Current wording

With regard to net interest income, as of June 30, 2024, the banking segment maintained an asset sensitive rate risk position, meaning the amount of its interest-earning assets maturing or repricing within a given period exceeds the amount of its interest-bearing liabilities also maturing or repricing within that time period. During a period of rising interest rates, being asset sensitive tends to result in an increase in net interest income, but during a period of declining interest rates, tends to result in a decrease in net interest income. Net interest income decreased during the three and six months ended June 30, 2024, compared to the same periods in 2023, primarily due to increased costs of our deposits given the intense competition for liquidity and the banking industry disruption, and as customers seek higher yields on deposits, as well as decreases in our deposits in other financial institutions.

Previous wording

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 March 31, 2024, approximately $680 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 79% are not scheduled to reprice for more than one year based upon agreed-upon terms. If interest rates rise further, 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. If interest rates were to fall, the impact on our interest income for certain variable-rate loans would be limited by these rate floors.

Current wording

2024, approximately $643 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 69% are not scheduled to reprice for more than one year based upon agreed-upon terms. If interest rates rise further, 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. If interest rates were to fall, the impact on our interest income for certain variable-rate loans would be limited by these rate floors.

Previous wording

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. During a period of rising interest rates, the cost of funds on deposits, and therefore, interest expense, tends to increase. Given the intense competition for liquidity and the banking industry disruption, and as customers seek higher yields on deposits, our cost of deposits increased during the three months ended March 31, 2024, compared to the same period of 2023. We expect such costs during 2024 to continue to be driven by various factors, including continued intense competition for deposits, as well as economic and

Current wording

Additionally, within our banking segment, the composition of the deposit base and ultimate cost of funds on deposits and net interest income are affected by the level of market interest rates, the interest rates and products offered by competitors, the volatility of equity markets and other factors. Deposit products and pricing structures relative to the market are regularly evaluated to maintain competitiveness over time. As discussed above, our cost of deposits increased during the three and six months ended June 30, 2024, compared to the same periods of 2023. While we expect such costs during 2024 to continue to be driven by various factors, including continued intense competition for deposits, as well as economic and market area factors, our deposit funding costs began to stabilize during the second quarter of 2024 as higher cost brokered deposits were fully returned and our interest-bearing deposits yield flattened. The Bank’s deposit base primarily includes a combination of commercial, wealth and public funds deposits, without a high level of industry concentration. At June 30, 2024, total estimated uninsured deposits were $4.8 billion, or approximately 46% of total deposits, while estimated uninsured deposits, excluding collateralized deposits of $325.4 million, were $4.5 billion, or approximately 43% of total deposits.

Previous wording

The banking segment retained approximately $32.3 million and $66.0 million in mortgage loans originated by the mortgage origination segment during the three months ended March 31, 2024 and 2023, respectively. These loans are purchased by the banking segment at par. For origination services provided, the banking segment reimburses the mortgage origination segment for direct origination costs associated with these mortgage loans, in addition to payment of a correspondent fee. The correspondent fees are eliminated in consolidation. The determination of mortgage loan retention levels by the banking segment will be impacted by, among other things, an ongoing review of the prevailing mortgage rates, balance sheet positioning at Hilltop and the banking segment’s outlook for commercial loan growth.

Current wording

The banking segment retained approximately $39.6 million and $60.4 million in mortgage loans originated by the mortgage origination segment during the three months ended June 30, 2024 and 2023, respectively, and $71.9 million and $126.4 million in mortgage loans originated by the mortgage origination segment during the six months ended June 30, 2024 and 2023, respectively. These loans are purchased by the banking segment at par. For origination services provided, the banking segment reimburses the mortgage origination segment for direct origination costs associated with these mortgage loans, in addition to payment of a correspondent fee. The correspondent fees are eliminated in consolidation. The determination of mortgage loan retention levels by the banking segment will be impacted by, among other things, an ongoing review of the prevailing mortgage rates, balance sheet positioning at Hilltop and the banking segment’s outlook for commercial loan growth.

Previous wording

The banking segment’s provision for (reversal of) credit losses has been subject to significant year-over-year and quarterly changes primarily attributable to the effects of changes in economic outlook, macroeconomic forecast assumptions and the resulting impact on reserves. Specifically, during the three months ended March 31, 2024, the reversal of credit losses reflected improvements to the U.S. economic outlook, offset by increases in specific reserves within the banking segment. The net impact to the allowance of changes associated with collectively evaluated loans during the three months ended March 31, 2024 included a reversal of credit losses of $7.0 million, while individually evaluated loans included a provision for credit losses of $4.1 million. The change in the allowance for credit losses during the three months ended March 31, 2024 was also impacted by net charge-offs of $4.3 million. During the three months ended March 31, 2023, the banking segment’s provision for credit losses reflected a build in the allowance related to loan portfolio changes since the prior quarter, offset by an updated economic outlook with a mild U.S. recession from the fourth quarter of 2023 and recovery from the third quarter of 2024 compared to the prior quarter’s U.S. recession assumption during the last three quarters of 2023. The net impact to the allowance of changes associated with individually and collectively evaluated loans during the three months ended March 31, 2023 included a provision for credit losses of $0.1 million and $1.5 million, respectively. The change in the allowance for credit losses during the three months ended March 31, 2023 was also impacted by net charge-offs of $0.4 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.

Current wording

The banking segment’s provision for (reversal of) credit losses has been subject to significant year-over-year and quarterly changes primarily attributable to the effects of changes in economic outlook, macroeconomic forecast assumptions and the resulting impact on reserves. Specifically, during the three and six months ended June 30, 2024, the provision for credit losses reflected a build in the allowance related to specific reserves and loan portfolio changes within the banking segment, slightly offset by improvements to the U.S. economic outlook. The net impact to the allowance of changes associated with individually evaluated loans during the three and six months ended June 30, 2024 included a provision for credit losses of $8.0 million and $12.1 million, respectively, while collectively evaluated loans included a provision for credit losses of $3.0 million and a reversal of credit losses of $4.0 million, respectively. The change in the allowance for credit losses during the three and six months ended June 30, 2024 was also impacted by net charge-offs of $0.1 million and $4.4 million, respectively. During the three and six months ended June 30, 2023, the banking segment’s provision for credit losses reflected a significant build in the allowance related to loan portfolio changes since the prior quarter and a deteriorating outlook for commercial real estate markets. The net impact to the allowance of changes associated with collectively evaluated loans during the three and six months ended June 30, 2023 included a provision for credit losses of $12.9 million and $14.5 million, respectively, while individually evaluated loans included a provision for credit losses of $1.9 million and $2.0 million, respectively. The change in the allowance for credit losses during the three and six months ended June 30, 2023 were also impacted by net charge-offs of $2.9 million and $3.3 million, respectively. The changes in the allowance for credit losses during the noted periods also reflected other factors

Previous wording

The banking segment’s noninterest expense was relatively flat during the three months ended March 31, 2024, compared to the same period in 2023.

Current wording

The banking segment’s noninterest expense increased during the three and six months ended June 30, 2024, compared to the same periods in 2023, primarily due to one-time compensation expenses associated with bank leadership changes.

Previous wording

The increase in net revenue and income before income taxes for the three months ended March 31, 2024, compared with the same period in 2023, was primarily due to improved period-over-period results within our structured finance, public finance services and wealth management business lines, partially offset by declines within our fixed income services business line. The structured finance business line’s net revenues increase was primarily due to an increase in our structured housing business which benefited from certain states’ support of their Down Payment Assistance programs as well as an increase in 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 improvement was driven by improved advisory fees revenues generated from customer assets under management. This increase was partially offset by a decrease in underwriting revenues due to weaker investment grade underwriting results. 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, partially offset by increases in commission revenues.

Current wording

The changes in net revenue and income before income taxes for the six months ended June 30, 2024, compared with the same period in 2023, were primarily due to improved period-over-period results within our structured finance and public finance services business lines, partially offset by declines within our fixed income services and wealth management business lines. The increase in the structured finance business line’s net revenues was primarily due to an increase in unrealized gains from the U.S. Agency to-be-announced (“TBA”) business and commissions earned on commodities transactions. The increase in net revenues in the broker-dealer segment’s public finance services business line was primarily due to fees earned from managed assets and municipal advisory revenues. The wealth management business line’s net revenue decrease was driven by decreases in commissions earned from the sale of insurance products and revenue 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, particularly from a decrease in underwriting activities. Income before income taxes was impacted by increased noninterest expense primarily due to increased segment compensation.

Previous wording

likely to have a meaningful impact on our overall financial performance. Our broker-dealer segment has historically earned a significant portion of its revenues from advisory fees upon the successful completion of client transactions, which could be adversely impacted by interest rate volatility. Rapid or significant changes in interest rates could adversely affect the broker-dealer segment’s bond trading, sales, underwriting activities and other interest spread-sensitive activities described below. The broker-dealer segment also receives administrative fees for providing money market and FDIC investment alternatives to clients, which tend to be sensitive to short-term interest rates. In addition, the profitability of the broker-dealer segment depends, to an extent, on the spread between revenues earned on customer loans and excess customer cash balances, and the interest expense paid on customer cash balances, as well as the interest revenue earned on trading securities, net of financing costs. The broker-dealer segment is also exposed to interest rate risk through its structured finance business line, which is dependent on mortgage loan production that tends to be adversely impacted by increasing interest rates and may result in valuation-related adjustments.

Current wording

The broker-dealer segment is subject to interest rate risk as a consequence of maintaining inventory positions, trading in interest rate sensitive financial instruments and maintaining a matched stock loan book. Changes in interest rates are likely to have a meaningful impact on our overall financial performance. Our broker-dealer segment has historically earned a significant portion of its revenues from advisory fees upon the successful completion of client transactions, which could be adversely impacted by interest rate volatility. Rapid or significant changes in interest rates could adversely affect the broker-dealer segment’s bond trading, sales, underwriting activities and other interest spread-sensitive activities described below. The broker-dealer segment also receives administrative fees for providing money market and FDIC investment alternatives to clients, which tend to be sensitive to short-term interest rates. In addition, the profitability of the broker-dealer segment depends, to an extent, on the spread between revenues earned on customer loans and excess customer cash balances, and the interest expense paid on customer cash balances, as well as the interest revenue earned on trading securities, net of financing costs. The broker-dealer segment is also exposed to interest rate risk through its structured finance business line, which is dependent on mortgage loan production that tends to be adversely impacted by increasing interest rates and resulting in valuation-related adjustments.

Previous wording

In the broker-dealer segment, interest is earned from securities lending activities, interest charged on customer margin loan balances and interest earned on investment securities used to support sales, underwriting and other customer activities. The decrease in net interest income during the three months ended March 31, 2024, compared with the same period in 2023, was primarily due to the decrease in net interest income from the fixed income services business line due to decreases in interest earned on inventory positions.

Current wording

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 decreases in net interest income during the three and six months ended June 30, 2024, compared with the same periods in 2023, were primarily due to the decrease in net interest income from the fixed income services business line due to decreases in net interest earned on inventory positions.

Previous wording

Noninterest income increased during the three months ended March 31, 2024, compared with the same period in 2023, due to increases in securities commissions and fees, investment and securities advisory fees and commissions and other income.

Current wording

Noninterest income decreased during the three months ended June 30, 2024, compared with the same period in 2023, due to decreases in securities commissions and fees and other income, partially offset by increases in investment and securities advisory fees. Noninterest income increased during the six months ended June 30, 2024, compared with the same period in 2023, due primarily to increases in investment and securities advisory fees and commissions.

Previous wording

Securities commissions and fees increased during the three months ended March 31, 2024, compared with the same period in 2023, primarily due to increases in fixed income and commodities commissions, partially offset by a decrease in FDIC sweep revenues and net clearing revenues due to a decrease in the number of correspondents.

Current wording

Securities commissions and fees decreased during the three months ended June 30, 2024, compared with the same period in 2023, primarily due to decreases in FDIC sweep revenues and net clearing revenues as well as a decline in commissions earned on insurance product sales. These decreases were partially offset by an increase in commodities

Previous wording

Investment and securities advisory fees and commissions increased during the three months ended March 31, 2024, compared with the same period in 2023, primarily due to increases in fees earned from managed assets and municipal advisory transactions.

Current wording

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

Previous wording

The increase in other noninterest income during the three months ended March 31, 2024, compared with the same period in 2023, was primarily due to increases in trading gains earned from structured finance trading activities, partially offset by decreases in trading gains earned from fixed income trading activities. Despite the decrease in mortgage originations for the three months ended March 31, 2024, the rates received from the closed pools increased 80 basis points and buy-side demand improved when compared with the same period in 2023. Decreased fixed income trading gains for the three months ended March 31, 2024, compared with the same period in 2023, was primarily driven by municipal and taxable securities trading. With the expected rise in interest rates continuing during 2024, we anticipate continued volatility in trading revenues.

Current wording

The decrease in other noninterest income during the three months ended June 30, 2024, compared with the same period in 2023, was primarily due to decreases in trading gains earned from fixed income and structured finance trading activities, partially offset by distributions received on investments. Other noninterest income increased during the six months ended June 30, 2024, compared to the same period in 2023, 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. Mortgage originations decreased and buy-side demand declined for the three and six months ended June 30, 2024. Demand declined during the three months period when compared with the same period in 2023. Decreased fixed income trading gains for the three and six months ended June 30, 2024, compared with the same periods in 2023, were primarily driven by municipal and taxable securities trading.

Previous wording

The increase in noninterest expenses during the three months ended March 31, 2024, compared with the same period in 2023, was primarily due to increases in segment compensation.

Current wording

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