Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion should be read in conjunction with the consolidated historical financial statements and notes appearing elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”) and the financial information set forth in the tables herein.
Unless the context otherwise indicates, all references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, to the “Company,” “we,” “us,” “our” or “ours” or similar words are to Hilltop Holdings Inc. and its direct and indirect wholly owned subsidiaries, references to “Hilltop” refer solely to Hilltop Holdings Inc., references to “PCC” refer to PlainsCapital Corporation (a wholly owned subsidiary of Hilltop), references to “Securities Holdings” refer to Hilltop Securities Holdings LLC (a wholly owned subsidiary of Hilltop), references to “Hilltop Securities” refer to Hilltop Securities Inc. (a wholly owned subsidiary of Securities Holdings), references to “Momentum Independent Network” refer to Momentum Independent Network Inc. (a wholly owned subsidiary of Securities Holdings, Hilltop Securities and Momentum Independent Network are collectively referred to as the “Hilltop Broker-Dealers”), references to the “Bank” refer to PlainsCapital Bank (a wholly owned subsidiary of PCC), references to “FNB” refer to First National Bank, references to “SWS” refer to the former SWS Group, Inc., references to “PrimeLending” refer to PrimeLending, a PlainsCapital Company (a wholly owned subsidiary of the Bank) and its subsidiaries as a whole.
FORWARD-LOOKING STATEMENTS
This Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended by the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, included in this Quarterly Report that address results or developments that we expect or anticipate will or may occur in the future, and statements that are preceded by, followed by or include, words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “goal,” “intends,” “may,” “might,” “plan,” “probable,” “projects,” “seeks,” “should,” “target,” “view” or “would” or the negative of these words and phrases or similar words or phrases, including such things as our business strategy, our financial condition, our revenue, our liquidity and sources of funding, market trends, operations and business, taxes, the impact of natural disasters or public health emergencies, information technology expenses, cybersecurity incidents, capital levels, mortgage servicing rights (“MSR”) assets, stock repurchases, dividend payments, expectations concerning mortgage loan origination volume, servicer advances and interest rate compression, expected levels of refinancing as a percentage of total loan origination volume, projected losses on mortgage loans originated, total expenses, the effects of government regulation applicable to our operations, the appropriateness of, and changes in, our allowance for credit losses and provision for (reversal of) credit losses, expected future benchmark rates, anticipated investment yields, our expectations regarding accretion of discount on loans in future periods, the collectability of loans, and the outcome of litigation are forward-looking statements.
These forward-looking statements are based on our beliefs, assumptions and expectations of our future performance taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If an event occurs, our business, business plan, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Certain factors that could cause actual results to differ include, among others:
● the credit risks of lending activities, including our ability to estimate credit losses and the allowance for credit losses, as well as the effects of changes in the level of, and trends in, loan delinquencies and write-offs;
● effectiveness of our data security controls in the face of cyber attacks and any legal, reputational and financial risks following a cybersecurity incident;
● changes in general economic, market and business conditions in areas or markets where we compete, including changes in the price of crude oil;
● changes in the interest rate environment;
● risks associated with concentration in real estate related loans;
● the effects of our indebtedness on our ability to manage our business successfully, including the restrictions imposed by the indenture governing our indebtedness;
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● disruptions to the economy and financial services industry, risks associated with uninsured deposits and responsive measures by federal or state governments or banking regulators, including increases in the cost of our deposit insurance assessments;
● cost and availability of capital;
● changes in state and federal laws, regulations or policies affecting one or more of our business segments, including changes in policies under the new Presidential administration, changes in regulatory fees, deposit insurance premiums, capital requirements and the Dodd-Frank Wall Street Reform and Consumer Protection Act;
● changes in key management;
● competition in our banking, broker-dealer and mortgage origination segments from other banks and financial institutions as well as investment banking and financial advisory firms, mortgage bankers, asset-based non-bank lenders and government agencies;
● legal and regulatory proceedings;
● risks associated with merger and acquisition integration; and
● our ability to use excess capital in an effective manner.
For a more detailed discussion of these and other factors that may affect our business and that could cause the actual results to differ materially from those anticipated in these forward-looking statements, see “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2024 (“2024 Form 10-K”), which was filed with the Securities and Exchange Commission (“SEC”) on February 14, 2025, this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other filings we have made with the SEC. We caution that the foregoing list of factors is not exhaustive, and new factors may emerge, or changes to the foregoing factors may occur, that could impact our business. All subsequent written and oral forward-looking statements concerning our business attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements above. We do not undertake any obligation to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Quarterly Report except to the extent required by federal securities laws.
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OVERVIEW
We are a financial holding company registered under the Bank Holding Company Act of 1956. Our primary line of business is to provide business and consumer banking services from offices located throughout Texas through the Bank. We also provide an array of financial products and services through our broker-dealer and mortgage origination segments. The following includes additional details regarding the financial products and services provided by each of our primary business units.
PCC . PCC is a financial holding company that provides, through its subsidiaries, traditional banking and wealth, investment and treasury management services primarily in Texas and residential mortgage loans throughout the United States.
Securities Holdings . Securities Holdings is a holding company that provides, through its subsidiaries, investment banking and other related financial services, including municipal advisory, sales, trading and underwriting of taxable and tax-exempt fixed income securities, clearing, securities lending, structured finance and retail brokerage services throughout the United States.
The following historical consolidated data for the periods indicated has been derived from our historical consolidated financial statements included elsewhere in this Quarterly Report (dollars and shares in thousands, except per share data).
Three Months Ended March 31,
2025
2024
Statement of Operations Data:
Net interest income
$
105,117
$
103,621
Provision for (reversal of) credit losses
9,338
(2,871)
Total noninterest income
213,340
181,618
Total noninterest expense
251,473
250,023
Income before income taxes
57,646
38,087
Income tax expense
13,114
8,565
Net income
44,532
29,522
Less: Net income attributable to noncontrolling interest
2,416
1,854
Income attributable to Hilltop
$
42,116
$
27,668
Per Share Data:
Diluted earnings per common share
$
0.65
$
0.42
Diluted weighted average shares outstanding
64,615
65,214
Cash dividends declared per common share
$
0.18
$
0.17
Dividend payout ratio (1)
27.62
%
40.06
%
Book value per common share (end of period)
$
34.29
$
32.66
Tangible book value per common share (2) (end of period)
$
30.02
$
28.44
March 31,
December 31,
2025
2024
Balance Sheet Data:
Total assets
$
15,812,699
$
16,268,129
Cash and due from banks
1,702,623
2,298,977
Securities
2,814,983
2,659,661
Loans held for sale
818,328
858,665
Loans held for investment, net of unearned income
7,966,777
7,950,551
Allowance for credit losses
(106,197)
(101,116)
Total deposits
10,831,966
11,065,322
Notes payable
198,043
347,667
Total stockholders' equity
2,228,822
2,218,312
Capital Ratios:
Common equity to assets ratio
13.91
%
13.46
%
Tangible common equity to tangible assets (2)
12.39
%
11.98
%
(1) Dividend payout ratio is defined as cash dividends declared per common share divided by basic earnings per common share.
(2) For a reconciliation to the nearest GAAP measure, see “—Reconciliation and Management’s Explanation of Non-GAAP Financial Measures.”
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Consolidated income before income taxes during the three months ended March 31, 2025 included the following contributions from our reportable business segments.
● The banking segment contributed $40.1 million of income before income taxes during the three months ended March 31, 2025;
● The broker-dealer segment contributed $9.2 million of income before income taxes during the three months ended March 31, 2025; and
● The mortgage origination segment incurred $8.3 million of losses before income taxes during the three months ended March 31, 2025.
During the three months ended March 31, 2025, we declared and paid total common dividends of $11.6 million.
On April 24, 2025, our board of directors declared a quarterly cash dividend of $0.18 per common share, payable on May 22, 2025 to all common stockholders of record as of the close of business on May 8, 2025.
In January 2025, 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, inclusive of repurchases to offset dilution related to grants of stock-based compensation. During the three months ended March 31, 2025, we paid $33.3 million to repurchase an aggregate of 1,046,540 shares of our common stock at an average price of $31.80 per share pursuant to the stock repurchase program.
Reconciliation and Management’s Explanation of Non-GAAP Financial Measures
We present certain measures in our selected financial data that are not measures of financial performance recognized by accounting principles generally accepted in the United States (“GAAP”). “Tangible book value per common share” is defined as our total stockholders’ equity reduced by goodwill and other intangible assets, divided by total common shares outstanding. “Tangible common equity to tangible assets” is defined as our total stockholders’ equity reduced by goodwill and other intangible assets, divided by total assets reduced by goodwill and other intangible assets. These measures are important to investors interested in changes from period to period in tangible common equity per share exclusive of changes in intangible assets. For companies such as ours that have engaged in business combinations, purchase accounting can result in the recording of significant amounts of goodwill and other intangible assets related to those transactions. You should not view this disclosure as a substitute for results determined in accordance with GAAP, and our disclosure is not necessarily comparable to that of other companies that use non-GAAP measures. The following table reconciles these non-GAAP financial measures to the most comparable GAAP financial measures, “book value per common share” and “equity to total assets” (dollars in thousands, except per share data).
March 31,
2025
2024
Book value per common share
$
34.29
$
32.66
Effect of goodwill and intangible assets per share
(4.27)
(4.22)
Tangible book value per common share
$
30.02
$
28.44
March 31,
December 31,
2025
2024
Hilltop stockholders’ equity
$
2,199,712
$
2,189,965
Less: goodwill and intangible assets, net
273,823
274,080
Tangible common equity
$
1,925,889
$
1,915,885
Total assets
$
15,812,699
$
16,268,129
Less: goodwill and intangible assets, net
273,823
274,080
Tangible assets
$
15,538,876
$
15,994,049
Equity to assets
13.91
%
13.46
%
Tangible common equity to tangible assets
12.39
%
11.98
%
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Recent Developments
Senior Notes Redemption
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.
Merchant Bank Transaction
In January 2025, our merchant bank subsidiary entered into a definitive agreement to sell all of the capital stock of Moser Acquisition, Inc to Atlas Energy Solutions Inc. (“Atlas”) for consideration including cash and Atlas common stock. On February 24, 2025, the noted transaction to sell the operations associated with our approximate 30% aggregate interest in Moser Holdings, LLC, which owns Moser Acquisition, Inc., was consummated. Our aggregate interest in Moser Holdings, LLC included equity investments that were included, and will continue to be included, within other assets in the consolidated balance sheets until liquidation of Moser Holdings, LLC. A preliminary pre-tax gain of $30.5 million ($23.6 million net of tax) was recorded during the first quarter of 2025 based on our aggregate interest in Moser Holdings, LLC as a component of other noninterest income within the consolidated statements of operations. The preliminary gain is subject to change given customary post-closing adjustments, changes in the market value of the stock consideration included in transaction given certain restrictions, and liquidation of Moser Holdings, LLC.
Economic Environment
The extent of the impact of uncertain economic conditions on our financial performance during the remainder of 2025, 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, the impact of tariffs and reciprocal tariffs, and international armed conflicts and their impact on supply chains.
Uncertainty of general economic, market and business conditions impact our ability to estimate credit losses and the allowance for credit losses, as well as the effects of changes in the level of, and trends in, loan delinquencies and write-offs. Significant judgment is required to estimate the severity and duration of the current economic uncertainties, as well as its potential impact on borrower cash flow. While all industries could experience volatility and adverse impacts, certain of our loan portfolio industry sectors and subsectors, including office buildings, retail, hotel/motel and auto note financing, have an increased level of risk given business and consumer sensitivity to interest rates and the size and permanence of tariffs. Refer to the discussions in the “Financial Condition – Loan Portfolio” and “Financial Condition – Allowance for Credit Losses” sections that follow for more details regarding the Bank’s loan portfolio and significant assumptions and estimates involved in estimating credit losses.
Historically, high-profile banking failures periodically increase market uncertainty and concerns associated with banking sector liquidity positions, increase regulatory scrutiny and underscore the importance of maintaining access to diverse sources of funding. In light of these events, we have continued our efforts to monitor deposit flows and balance sheet trends to ensure that our liquidity needs and financial flexibility are maintained. During 2024, we increased interest-bearing deposit rates to address rising market interest rates and intense competition for liquidity to combat deposit outflows. Throughout 2024, we experienced net interest margin compression reflecting deposit repricing activity and demand deposit migration into interest-bearing accounts. Despite deposits costs remaining elevated during the first quarter of 2025, our cost of deposits decreased during the three months ended March 31, 2025, compared to the same period of 2024, as we took actions to reduce the interest paid on our interest-bearing deposits. Additionally, at March 31, 2025, 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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While funding costs will continue to be influenced by various factors, including competitive pressures, broader economic conditions, future changes in the target range for the federal funds rate, our customers’ appetite for higher yields on deposits, and our overall liquidity profile, we anticipate that our cost of deposits will continue to trend modestly downward. An unexpected influx of withdrawals of deposits could adversely impact our ability to rely on organic deposits to primarily fund our operations, potentially requiring greater reliance on secondary sources of liquidity to meet withdrawals of deposits or to fund continuing operations. These sources may include proceeds from FHLB advances, sales of investment securities and loans, federal fund lines of credit with correspondent banks, securities sold under agreements to repurchase, brokered time deposits, borrowings from the Federal Reserve and borrowings under lines of credit with other financial institutions. Refer to the discussions in the “Segment Results – Banking Segment” and “Liquidity and Capital Resources – Banking Segment” sections that follow for more details regarding the Bank’s deposits, available liquidity and borrowing capacity at March 31, 2025.
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 increased cost and challenge for deposits that persisted through 2024, to continue during 2025.
Asset Valuation
As discussed in more detail within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2024 Form 10-K, at each reporting date between annual impairment tests, we consider potential indicators of impairment including the condition of the economy and financial services industry; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of our stock and other relevant events.
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.
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 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.
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.
Outlook
Our balance sheet, operating results and certain metrics during 2025 reflected economic conditions that remain uncertain, and will depend in part on several developments outside of our control including, among others, changes in the political environment, the impact of tariffs and reciprocal tariffs, 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 2024 Form 10-K, 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 2024 have had, and are expected to continue to have, an adverse impact on our operating results during the remainder of 2025.
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Factors Affecting Results of Operations
As a financial institution providing products and services through our banking, broker-dealer and mortgage origination segments, we are directly affected by general economic and market conditions, many of which are beyond our control and unpredictable. A key factor impacting our results of operations is changes in the level of interest rates in addition to twists in the shape of the yield curve with the magnitude and direction of the impact varying across the different lines of business. Other factors impacting our results of operations include, but are not limited to, fluctuations in volume and price levels of securities, inflation, political events, investor confidence, investor participation levels, legal, regulatory, and compliance requirements and competition. All of these factors have the potential to impact our financial position, operating results and liquidity. In addition, the recent economic and political environment has led to legislative and regulatory initiatives, both enacted and proposed, that could substantially change the regulation of the financial services industry and may significantly impact us.
Segment Information
The Company has two primary business units, PCC (banking and mortgage origination) and Securities Holdings (broker-dealer). Under GAAP, the Company’s units are comprised of three reportable business segments organized primarily by the core products offered to the segments’ respective customers: banking, broker-dealer and mortgage origination. Consistent with our historical segment operating results, we anticipate that future revenues will be driven primarily from the banking segment, with the remainder being generated by our broker-dealer and mortgage origination segments. Operating results for the mortgage origination segment have historically been more volatile than operating results for the banking and broker-dealer segments.
The banking segment includes the operations of the Bank. The banking segment primarily provides business and consumer banking services from offices located throughout Texas and generates revenue from its portfolio of earning assets. The Bank’s results of operations are primarily dependent on net interest income. The Bank also derives revenue from other sources, including service charges on customer deposit accounts and trust fees.
The broker-dealer segment includes the operations of Securities Holdings, which operates through its wholly owned subsidiaries Hilltop Securities, Momentum Independent Network and Hilltop Securities Asset Management, LLC. The broker-dealer segment generates a majority of its revenues from fees and commissions earned from investment advisory and securities brokerage services. Hilltop Securities is a broker-dealer registered with the SEC and the Financial Industry Regulatory Authority (“FINRA”) and a member of the New York Stock Exchange (“NYSE”). Momentum Independent Network is an introducing broker-dealer that is also registered with the SEC and FINRA. Hilltop Securities, Momentum Independent Network and Hilltop Securities Asset Management, LLC are registered investment advisers under the Investment Advisers Act of 1940.
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.
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.
The eliminations of intercompany transactions are included in “All Other and Eliminations.” Additional information concerning our reportable business segments is presented in Note 21, “Segment and Related Information,” in the notes to our consolidated financial statements.
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The following table presents certain information about the results of our reportable business segments (in thousands). This table serves as a basis for the discussion and analysis in the segment operating results sections that follow.
Three Months Ended March 31,
Variance 2025 vs 2024
2025
2024
Amount
Percent
Net interest income (expense):
Banking
$
90,550
$
91,606
$
(1,056)
(1)
Broker-Dealer
11,568
12,269
(701)
(6)
Mortgage Origination
(1,397)
(4,252)
2,855
67
Corporate
(869)
(3,103)
2,234
72
All Other and Eliminations (1)
5,265
7,101
(1,836)
(26)
Hilltop Consolidated
$
105,117
$
103,621
$
1,496
1
Provision for (reversal of) credit losses:
Banking
$
9,372
$
(2,853)
$
12,225
428
Broker-Dealer
(34)
(18)
(16)
NM
Mortgage Origination
—
-
—
—
Corporate
—
-
—
—
All Other and Eliminations
—
-
—
—
Hilltop Consolidated
$
9,338
$
(2,871)
$
12,209
425
Noninterest income:
Banking
$
10,810
$
11,903
$
(1,093)
(9)
Broker-Dealer
96,937
104,578
(7,641)
(7)
Mortgage Origination
67,775
66,700
1,075
2
Corporate
43,379
5,785
37,594
650
All Other and Eliminations (1)
(5,561)
(7,348)
1,787
24
Hilltop Consolidated
$
213,340
$
181,618
$
31,722
17
Noninterest expense:
Banking
$
51,930
$
56,020
$
(4,090)
(7)
Broker-Dealer
99,323
97,947
1,376
1
Mortgage Origination
74,660
78,898
(4,238)
(5)
Corporate
25,891
17,384
8,507
49
All Other and Eliminations
(331)
(226)
(105)
(46)
Hilltop Consolidated
$
251,473
$
250,023
$
1,450
1
Income (loss) before taxes:
Banking
$
40,058
$
50,342
$
(10,284)
(20)
Broker-Dealer
9,216
18,918
(9,702)
(51)
Mortgage Origination
(8,282)
(16,450)
8,168
50
Corporate
16,619
(14,702)
31,321
213
All Other and Eliminations
35
(21)
56
267
Hilltop Consolidated
$
57,646
$
38,087
$
19,559
51
(1) All other and eliminations amounts during each period include FDIC sweep program revenues and expenses earned on broker-dealer segment deposits placed with the banking segment that are eliminated in consolidation.
NM
Not meaningful
Key Performance Indicators
We utilize several key indicators of financial condition and operating performance to evaluate the various aspects of our business. In addition to traditional financial metrics, such as revenue and growth trends, we monitor several other financial measures and non-financial operating metrics to help us evaluate growth trends, measure the adequacy of our capital based on regulatory reporting requirements, measure the effectiveness of our operations and assess operational efficiencies. These indicators change from time to time as the opportunities and challenges in our businesses change.
Performance ratios and asset quality ratios are typically used for measuring the performance of banking and financial institutions. We consider return on average stockholders’ equity, return on average assets and net interest margin to be important supplemental measures of operating performance that are commonly used by securities analysts, investors and other parties interested in the banking and financial industry. The net recoveries (charge-offs) to average loans outstanding ratio is also considered a key measure for our banking segment as it indicates the performance of our loan portfolio.
In addition, we consider regulatory capital ratios to be key measures that are used by us, as well as banking regulators, investors and analysts, to assess our regulatory capital position and to compare our regulatory capital to that of other financial services companies. We monitor our capital strength in terms of both leverage ratio and risk-based capital ratios based on capital requirements administered by the federal banking agencies. The risk-based capital ratios are minimum supervisory ratios generally applicable to banking organizations, but banking organizations are widely expected to operate with capital positions well above the minimum ratios. Failure to meet minimum capital requirements
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can initiate certain mandatory actions by regulators that, if undertaken, could have a material effect on our financial condition or results of operations.
How We Generate Revenue
We generate revenue from net interest income and from noninterest income. Net interest income represents the difference between the income earned on our assets, including our loans and investment securities, and our cost of funds, including the interest paid on the deposits and borrowings that are used to support our assets. Net interest income is a significant contributor to our operating results. Fluctuations in interest rates, as well as the amounts and types of interest-earning assets and interest-bearing liabilities we hold, affect net interest income. The change in reportable business segment net interest income during the three months ended March 31, 2025, compared with the same period in 2024, primarily reflected increases within our mortgage origination and corporate segments, partially offset by a slight decrease within our banking segment.
The other component of our revenue is noninterest income, which is primarily comprised of the following:
(i) Income from broker-dealer operations. Through Securities Holdings, we provide investment banking and other related financial services that generated $70.4 million and $60.6 million in securities commissions and fees and investment and securities advisory fees and commissions, respectively, and $21.6 million and $36.4 million in gains from derivative and trading portfolio activities (included within other noninterest income), respectively, during the three months ended March 31, 2025 and 2024.
(ii) Income from mortgage operations. Through PrimeLending, we generate noninterest income by originating and selling mortgage loans. During the three months ended March 31, 2025 and 2024, we generated $67.7 million and $66.6 million, respectively, in net gains from sale of loans, other mortgage production income (including income associated with retained mortgage servicing rights), and mortgage loan origination fees.
In the aggregate, we experienced an increase in noninterest income during the three months ended March 31, 2025, compared to the same period in 2024, as noted in the segment results table previously presented, primarily due to an increase in pre-tax gains associated with merchant bank equity investment activity within corporate, increases in investment and securities advisory fees and commissions and securities commissions and fees, offset by decreases in trading gains earned from trading activities within our broker-dealer segment.
We also incur noninterest expenses in the operation of our businesses. Our businesses engage in labor intensive activities and, consequently, employees’ compensation and benefits represent the majority of our noninterest expenses.
Consolidated Operating Results
Income applicable to common stockholders during the three months ended March 31, 2025 was $42.1 million, or $0.65 per diluted share, compared with $27.7 million, or $0.42 per diluted share, during the three months ended March 31, 2024. Hilltop’s financial results for the three months ended March 31, 2025, compared with the same period in 2024, included a significant preliminary gain associated with the sale of operations by a merchant bank equity investment within corporate, a significant increase in the provision for credit losses and a decrease in noninterest expenses within the banking segment, net revenues decreased and noninterest expenses increased within the broker-dealer segment, and the mortgage origination segment had a slight increase in net interest income and declines in net interest expense and noninterest expense.
Certain items included in net income for the three months ended March 31, 2025 and 2024 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, 2025 and 2024 included net accretion on earning assets and liabilities of $1.1 million and $1.4 million, respectively, and amortization of identifiable intangibles of $0.3 million and $0.5 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.
Three Months Ended March 31,
2025
2024
Return on average stockholders' equity (1)
7.82
%
5.23
%
Return on average assets (2)
1.13
%
0.74
%
Net interest margin (3) (4)
2.84
%
2.85
%
Leverage ratio (5) (end of period)
12.86
%
12.49
%
Common equity Tier 1 risk-based capital ratio (6)
(end of period)
21.29
%
19.73
%
(1) Return on average stockholders’ equity is defined as consolidated income attributable to Hilltop divided by average total Hilltop stockholders’ equity.
(2) Return on average assets is defined as consolidated net income before noncontrolling interest divided by average assets.
(3) Net interest margin is defined as net interest income divided by average interest-earning assets. We consider net interest margin as a key indicator of profitability, as it represents interest earned on our interest-earning assets compared to interest incurred.
(4) The securities financing operations within our broker-dealer segment had the effect of lowering both the net interest margin and taxable equivalent net interest margin by 25 basis points and 26 basis points during the three months ended March 31, 2025 and 2024, respectively.
(5) The leverage ratio is a regulatory capital ratio and is defined as Tier 1 risk-based capital divided by average consolidated assets.
(6) The common equity Tier 1 risk-based capital ratio is a regulatory capital ratio and is defined as common equity Tier 1 risk-based capital divided by risk weighted assets. Common equity includes common equity Tier 1 capital (common stockholders’ equity and certain minority interests in the equity capital accounts of consolidated subsidiaries, but excluding goodwill and various intangible assets) and additional Tier 1 capital (certain qualifying minority interests not included in common equity Tier 1 capital, certain preferred stock and related surplus, and certain subordinated debt).
We present net interest margin and net interest income below on a taxable-equivalent basis. Net interest margin (taxable equivalent), a non-GAAP measure, is defined as taxable equivalent net interest income divided by average interest-earning assets. Taxable equivalent adjustments are based on the applicable corporate federal income tax rate of 21% for all periods presented. The Company performs periodic reviews of the classification and categorization of the components impacting the calculation of net interest margin. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest margins for all earning assets, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments.
During the three months ended March 31, 2025 and 2024, purchase accounting contributed 4 and 4 basis points, respectively, to our consolidated taxable equivalent net interest margin of 2.86% and 2.87%, respectively. The purchase accounting activity was primarily related to the accretion of discount of loans which totaled $1.1 million and $1.3 million during the three months ended March 31, 2025 and 2024, 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).
Three Months Ended March 31,
2025
2024
Average
Interest
Annualized
Average
Interest
Annualized
Outstanding
Earned
Yield or
Outstanding
Earned
Yield or
Balance
or Paid
Rate
Balance
or Paid
Rate
Assets
Interest-earning assets
Loans held for sale
$
709,094
$
11,438
6.45
%
$
802,098
$
11,655
5.81
%
Loans held for investment, gross (1)
7,890,745
113,254
5.82
%
7,835,647
122,676
6.28
%
Investment securities - taxable
2,455,590
24,782
4.04
%
2,619,081
26,241
4.01
%
Investment securities - non-taxable (2)
321,128
3,253
4.05
%
293,420
2,992
4.08
%
Federal funds sold and securities purchased under agreements to resell
100,691
1,820
7.33
%
94,108
1,631
6.95
%
Interest-bearing deposits in other financial institutions
2,037,462
21,192
4.22
%
1,458,784
19,245
5.29
%
Securities borrowed
1,390,797
15,809
4.55
%
1,442,870
20,561
5.64
%
Other
117,155
1,891
6.55
%
39,885
5,190
52.19
%
Interest-earning assets, gross (2)
15,022,662
193,439
5.22
%
14,585,893
210,191
5.78
%
Allowance for credit losses
(100,704)
(110,583)
Interest-earning assets, net
14,921,958
14,475,310
Noninterest-earning assets
1,012,700
1,522,337
Total assets
$
15,934,658
$
15,997,647
Liabilities and Stockholders' Equity
Interest-bearing liabilities
Interest-bearing deposits
$
8,186,423
$
60,051
2.97
%
$
7,748,633
$
69,144
3.58
%
Securities loaned
1,381,819
14,736
4.33
%
1,401,975
19,039
5.45
%
Notes payable and other borrowings
1,065,835
12,895
4.91
%
1,327,889
17,810
5.38
%
Total interest-bearing liabilities
10,634,077
87,682
3.34
%
10,478,497
105,993
4.06
%
Noninterest-bearing liabilities
Noninterest-bearing deposits
2,696,247
2,951,357
Other liabilities
391,617
420,355
Total liabilities
13,721,941
13,850,209
Stockholders’ equity
2,184,937
2,120,494
Noncontrolling interest
27,780
26,944
Total liabilities and stockholders' equity
$
15,934,658
$
15,997,647
Net interest income (2)
$
105,757
$
104,198
Net interest spread (2)
1.88
%
1.72
%
Net interest margin (2)
2.86
%
2.87
%
(1) Average balance includes non-accrual loans.
(2) Presented on a taxable equivalent basis with annualized taxable equivalent adjustments based on the applicable corporate federal income tax rate of 21% for the periods presented. The adjustment to interest income was $0.6 million and $0.6 million for the three months ended March 31, 2025 and 2024, respectively.
The banking segment’s net interest margin exceeds our consolidated net interest margin shown above. Our consolidated net interest margin includes certain items that are not reflected in the calculation of our net interest margin within our banking segment and reduces our consolidated net interest margin, such as the borrowing costs of Hilltop and the yields and costs associated with certain items within interest-earning assets and interest-bearing liabilities, such as securities borrowed in the broker-dealer segment and securities loaned in the broker-dealer segment, including items related to securities financing operations that particularly decrease net interest margin. In addition, yields and costs on certain interest-earning assets, such as lines of credit extended to other operating segments by the banking segment, are eliminated from the consolidated financial statements.
On a consolidated basis, the change in net interest income during the three months ended March 31, 2025, compared with the same period in 2024, was primarily due to decreased loans held for investment yield from rate decreases and decreased costs of deposits from rate decreases offset by increased cost of deposits from the continued shift from noninterest-bearing deposits into interest-bearing products during the quarter-over-quarter period. Refer to the discussion in the “Banking Segment” section that follows for more details on the changes in net interest income, including the component changes in the volume of average interest-earning assets and interest-bearing liabilities and changes in the rates earned or paid on those items.
The provision for (reversal of) credit losses is determined by management as the amount necessary to maintain the allowance for credit losses at the amount of expected credit losses inherent within the loans held for investment portfolio. The amount of expense and the corresponding level of allowance for credit losses for loans are based on our evaluation of the collectability of the loan portfolio based on historical loss experience, reasonable and supportable forecasts, and other significant qualitative and quantitative factors. Substantially all of our consolidated provision for (reversal of) credit losses is related to the banking segment. During the three months ended March 31, 2025, the provision for credit losses was primarily driven by a build in the allowance related to loan portfolio changes and specific reserves, including
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changes in loan mix and risk rating grade migration, partially offset by net charge-offs and changes in the U.S. economic outlook associated with collectively evaluated loans within the banking segment since the prior quarter. Refer to the discussion under the heading “Financial Condition – Allowance for Credit Losses on Loans” for more details regarding the significant assumptions and estimates involved in estimating credit losses.
Noninterest income increased during the three months ended March 31, 2025, compared with the same period in 2024, primarily due to a preliminary pre-tax gain of $30.5 million being recorded in the first quarter of 2025 associated with the sale of operations by a merchant bank equity investment, while other changes between periods included net decreases within the broker-dealer segment’s structured finance and fixed income services business lines, partially offset by net increases within the broker-dealer segment’s public finance and wealth management business lines, and increases in net gains from sale of loans and other mortgage production income within our mortgage loan origination segment, partially offset by a decrease of mortgage loan origination fees within our mortgage origination segment.
Noninterest expense increased during the three months ended March 31, 2025, compared with the same period in 2024, primarily due to an increase in employees’ compensation and benefits within corporate, a net increase within our broker-dealer segment associated with increases in other segment operating costs, partially offset by a decrease in variable compensation, a net decrease within our mortgage origination segment driven by decreases in non-variable compensation and other segment costs, partially offset by an increase in variable compensation associated with increased mortgage loan originations. We have experienced an increase in certain noninterest expenses during 2025 and 2024, compared with respective prior periods, including compensation, occupancy, and software costs, due to inflationary pressures. We expect such inflationary headwinds to continue and result in higher fixed costs during the remainder of 2025.
Effective income tax rates during the three months ended March 31, 2025 and 2024 were 22.7% and 22.5%, respectively. During the three months ended March 31, 2025, the effective tax rate was higher than the applicable statutory rate primarily due to the impact of nondeductible expenses, nondeductible compensation expense and other permanent adjustments, partially offset by investments in tax-exempt instruments. 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.
Segment Results
Banking Segment
The following table presents certain information about the operating results of our banking segment (in thousands).
Three Months Ended March 31,
Variance
2025
2024
2025 vs 2024
Net interest income
$
90,550
$
91,606
$
(1,056)
Provision for (reversal of) credit losses
9,372
(2,853)
12,225
Noninterest income
10,810
11,903
(1,093)
Noninterest expense
51,930
56,020
(4,090)
Income before income taxes
$
40,058
$
50,342
$
(10,284)
The decrease in income before income taxes during the three months ended March 31, 2025, compared with the same period in 2024, was primarily due to a significant increase in the provision for credit losses and declines in net interest income and noninterest income, partially offset by lower noninterest expenses. The decrease in noninterest expense was driven by the settlement and receipt of funds during the first quarter of 2025 that reimbursed the Bank for legal fees previously incurred. 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.
As discussed in more detail below, the banking segment’s cost of deposits decreased during the first three months of 2025. The rate paid on interest-bearing deposits decreased during the three months ended March 31, 2025, partially offset by continued competition for liquidity and customers seeking higher yields on deposits. We are actively managing our overall deposit costs. Future decisions on the costs of deposits will be determined based on factors including, but not limited to future changes in the target range for the federal funds rate, our customers’ appetite for higher yields on deposits, and our overall liquidity profile.
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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.
Three Months Ended March 31,
2025
2024
Efficiency ratio (1)
51.23
%
54.12
%
Return on average assets (2)
0.96
%
1.20
%
Net interest margin (3)
2.97
%
3.00
%
Net recoveries (charge-offs) to average loans outstanding (4)
(0.23)
%
(0.22)
%
(1) Efficiency ratio is defined as noninterest expenses divided by the sum of total noninterest income and net interest income for the period. We consider the efficiency ratio to be a measure of the banking segment’s profitability.
(2) Return on average assets is defined as net income before noncontrolling interest divided by average assets.
(3) Net interest margin is defined as net interest income divided by average interest-earning assets. We consider net interest margin as a key indicator of profitability, as it represents interest earned on interest-earning assets compared to interest incurred.
(4) Net recoveries (charge-offs) to average loans outstanding is defined as the greater of recoveries or charge-offs during the reported period minus charge-offs or recoveries divided by average loans outstanding. We use the ratio to measure the credit performance of our loan portfolio.
The banking segment presents net interest margin and net interest income in the following discussion and table below on a taxable equivalent basis. Net interest margin (taxable equivalent), a non-GAAP measure, is defined as taxable equivalent net interest income divided by average interest-earning assets. Taxable equivalent adjustments are based on the applicable corporate federal income tax rate of 21% for all periods presented. The banking segment performs periodic reviews of the classification and categorization of the components impacting the calculation of net interest margin. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest margins for all earning assets, we use net interest income on a taxable equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments.
During the three months ended March 31, 2025 and 2024, purchase accounting contributed 3 and 5 basis points, respectively, to the banking segment’s taxable equivalent net interest margin of 2.97% and 3.00%, respectively. These purchase accounting items are primarily related to accretion of discount of loans associated with the Bank Transactions presented in the Consolidated Operating Results section.
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The table below provides additional details regarding our banking segment’s net interest income (dollars in thousands).
Three Months Ended March 31,
2025
2024
Average
Interest
Annualized
Average
Interest
Annualized
Outstanding
Earned
Yield or
Outstanding
Earned
Yield or
Balance
or Paid
Rate
Balance
or Paid
Rate
Assets
Interest-earning assets
Loans held for sale
$
16,639
$
396
9.52
%
$
—
$
—
—
%
Loans held for investment, gross (1)
7,586,154
107,809
5.76
%
7,703,946
115,502
6.01
%
Subsidiary warehouse lines of credit
704,040
12,297
6.99
%
756,594
15,331
8.02
%
Investment securities - taxable
2,016,842
16,036
3.18
%
2,167,991
18,100
3.34
%
Investment securities - non-taxable (2)
107,232
921
3.44
%
111,581
936
3.36
%
Federal funds sold and securities purchased under agreements to resell
46,782
537
4.65
%
70,555
1,002
5.70
%
Interest-bearing deposits in other financial institutions
1,850,400
20,301
4.45
%
1,414,302
19,245
5.46
%
Other
39,100
399
4.14
%
37,415
425
4.56
%
Interest-earning assets, gross (2)
12,367,189
158,696
5.20
%
12,262,384
170,541
5.58
%
Allowance for credit losses
(100,640)
(110,489)
Interest-earning assets, net
12,266,549
12,151,895
Noninterest-earning assets
750,476
799,415
Total assets
$
13,017,025
$
12,951,310
Liabilities and Stockholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits
$
8,157,118
$
65,585
3.26
%
$
7,653,498
$
74,908
3.93
%
Notes payable and other borrowings
373,408
2,410
2.62
%
459,750
3,881
3.39
%
Total interest-bearing liabilities
8,530,526
67,995
3.23
%
8,113,248
78,789
3.90
%
Noninterest-bearing liabilities
Noninterest-bearing deposits
2,903,705
3,107,882
Other liabilities
96,281
159,315
Total liabilities
11,530,512
11,380,445
Stockholders’ equity
1,486,513
1,570,865
Total liabilities and stockholders’ equity
$
13,017,025
$
12,951,310
Net interest income (2)
$
90,701
$
91,752
Net interest spread (2)
1.97
%
1.68
%
Net interest margin (2)
2.97
%
3.00
%
(1) Average balance includes non-accrual loans.
(2) Presented on a taxable equivalent basis with annualized taxable equivalent adjustments based on the applicable corporate federal income tax rates of 21% for all the periods presented. The adjustment to interest income was $0.2 million and $0.1 million for the three months ended March 31, 2025 and 2024, respectively.
The banking segment’s net interest margin exceeds our consolidated net interest margin. Our consolidated net interest margin includes certain items that are not reflected in the calculation of our net interest margin within our banking segment and reduce our consolidated net interest margin, such as the borrowing costs of Hilltop and the yields and costs associated with certain items within interest-earning assets and interest-bearing liabilities, such as securities borrowed in the broker-dealer segment and securities loaned in the broker-dealer segment, including items related to securities financing operations that particularly decrease net interest margin. In addition, yields and costs on certain interest-earning assets, such as lines of credit extended to other operating segments by the banking segment, are eliminated from the consolidated financial statements.
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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).
Three Months Ended March 31,
2025 vs. 2024
Change Due To (1)
Volume
Yield/Rate
Change
Interest income
Loans held for sale
$
—
$
396
$
396
Loans held for investment, gross (2)
(1,746)
(5,947)
(7,693)
Subsidiary warehouse lines of credit (3)
(1,039)
(1,995)
(3,034)
Investment securities - taxable
(1,245)
(819)
(2,064)
Investment securities - non-taxable (4)
(36)
21
(15)
Federal funds sold and securities purchased under agreements to resell
(334)
(131)
(465)
Interest-bearing deposits in other financial institutions
5,869
(4,813)
1,056
Other
19
(45)
(26)
Total interest income (4)
1,488
(13,333)
(11,845)
Interest expense
Deposits
$
4,875
$
(14,198)
$
(9,323)
Notes payable and other borrowings
(721)
(750)
(1,471)
Total interest expense
4,154
(14,948)
(10,794)
Net interest income (4)
$
(2,666)
$
1,615
$
(1,051)
(1) Changes attributable to both volume and yield/rate are included in yield/rate column.
(2) Changes in the yields earned on loans held for investment, gross included a decline of $0.3 million in accretion of discount on loans during the three months ended March 31, 2025, compared with the same period in 2024. Accretion of discount on loans is expected to decrease in future periods as loans acquired in the Bank Transactions are repaid, refinanced or renewed.
(3) Subsidiary warehouse lines of credit extended to PrimeLending are eliminated from the consolidated financial statements.
(4) Annualized taxable equivalent.
With regard to net interest income, as of March 31, 2025, the banking segment maintained an asset sensitive rate risk position, meaning the amount of its interest-earning assets maturing or repricing within a given period exceeds the amount of its interest-bearing liabilities also maturing or repricing within that time period. During a period of declining interest rates, being asset sensitive tends to result in a decrease in net interest income, but during a period of rising interest rates, being asset sensitive tends to result in an increase in net interest income. Given projected impacts on net interest income associated with the expected transition into the next phase of the interest rate cycle, we continue to evaluate our current GAP position, which may result in a repositioning of the banking segment towards a more neutral or liability sensitive balance sheet.
The slight decrease in net interest income, as noted in the table above, was driven by decreased earnings on interest-earning assets, primarily loan yields and investment securities, significantly offset by the decreased funding costs on our deposit products from rate decreases. The average rate paid on interest-bearing liabilities decreased 67 basis points from 3.90% for the three months ended March 31, 2024 to 3.23% for the three months ended March 31, 2025, while the average yield on interest-earning assets decreased 38 basis points from 5.58% for the three months ended March 31, 2024 to 5.20% for the three months ended March 31, 2025.
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, 2025, approximately $675 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 49% 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 decreased during the three months ended March 31, 2025, compared to the same period of 2024. While we expect such costs during the remainder of 2025 to continue to be driven by various factors, including, but not limited to future changes in the target range for the federal funds rate, our customers’ appetite for higher yields on deposits, and our overall liquidity profile, we anticipate that our cost of deposits will continue 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 March 31, 2025, total estimated uninsured deposits were $5.6 billion, or approximately 52% of total deposits, while estimated uninsured deposits, excluding collateralized deposits of $371.5 million and internal accounts of $485.8 million, were $4.8 billion, or approximately 44% of total deposits.
Refer to the discussion in the “Liquidity and Capital Resources – Banking Segment” section that follows for more detail regarding the Bank’s activities regarding deposits, available liquidity and borrowing capacity.
To help mitigate net interest income spread volatility between our assets and liabilities, management maintains derivative trades, as either cash flow hedges or fair value hedges, that better align repricing characteristics. Despite having these hedges in place, changes in interest rates across the term structure may continue to impact net interest income and net interest margin. The impact of rate movements will change with the shape of the yield curve, including any changes in steepness or flatness and inversions at any points on the yield curve.
The banking segment retained approximately $62.5 million and $32.3 million in mortgage loans originated by the mortgage origination segment during the three months ended March 31, 2025 and 2024, respectively. These loans are purchased by the banking segment at par. For origination services provided, the banking segment reimburses the mortgage origination segment for direct origination costs associated with these mortgage loans, in addition to payment of a correspondent fee. The correspondent fees are eliminated in consolidation. The determination of mortgage loan retention levels by the banking segment will be impacted by, among other things, an ongoing review of the prevailing mortgage rates, balance sheet positioning at Hilltop and the banking segment’s outlook for commercial loan growth.
The banking segment’s provision for (reversal of) credit losses has been subject to significant year-over-year and quarterly changes primarily attributable to the effects of changes in economic outlook, macroeconomic forecast assumptions and the resulting impact on reserves. During the three months ended March 31, 2025, the increase in the provision for credit losses was primarily driven by a build in the allowance related to loan portfolio changes and specific reserves, including changes in loan mix and risk rating grade migration, partially offset by net charge-offs and changes in the U.S. economic outlook associated with collectively evaluated loans within the banking segment since the prior quarter. The net impact to the allowance of changes associated with collectively and individually evaluated loans during the three months ended March 31, 2025 included a provision for credit losses of $7.7 million and $1.7 million, respectively. The change in the allowance for credit losses during the three months ended March 31, 2025 was also impacted by net charge-offs of $4.3 million. 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. The changes in the allowance for credit losses during the noted periods also reflected other factors including, but not limited to, loan growth, loan mix and changes in risk grades and qualitative factors from the prior quarter. Refer to the discussion in the “Financial Condition – Allowance for Credit Losses on Loans” section that follows for more details regarding the significant assumptions and estimates involved in estimating credit losses.
The banking segment’s noninterest income decreased during the three months ended March 31, 2025, compared to the same period in 2024, primarily due to a decrease in oil and gas management fees.
The banking segment’s noninterest expense decreased during the three months ended March 31, 2025, compared to the same period in 2024, primarily due to decreases in professional fees and occupancy and equipment expenses, partially offset by an increase in employees’ compensation and benefits. The decrease in professional fees was driven by the settlement and receipt of $6.5 million during the first quarter of 2025 that reimbursed the Bank for legal fees previously incurred.
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Broker-Dealer Segment
The following table provides additional details regarding our broker-dealer segment operating results (in thousands).
Three Months Ended March 31,
Variance
2025
2024
2025 vs 2024
Net interest income:
Wealth management:
Securities lending
$
1,073
$
1,522
$
(449)
Clearing services
2,545
2,650
(105)
Structured finance (1)
2,662
1,769
893
Fixed income services (1)
(168)
(656)
488
Other (1)
5,456
6,984
(1,528)
Total net interest income
11,568
12,269
(701)
Noninterest income:
Securities commissions and fees by business line (2) (7) :
Fixed income services (1)
3,890
5,440
(1,550)
Wealth management:
Retail (1)
19,861
18,738
1,123
Clearing services
9,043
9,370
(327)
Structured finance (1)
4,886
2,871
2,015
Other (1)
913
708
205
38,593
37,127
1,466
Investment and securities advisory fees and commissions by business line (3) :
Public finance services (1)
25,389
18,851
6,538
Fixed income services (1)
96
2,069
(1,973)
Wealth management:
Retail
9,998
8,544
1,454
Clearing services
538
436
102
Structured finance (1)
603
247
356
Other
97
79
18
36,721
30,226
6,495
Other (7) :
Structured finance (1)
14,000
26,998
(12,998)
Fixed income services (1)
5,064
6,733
(1,669)
Other (1)
2,559
3,494
(935)
21,623
37,225
(15,602)
Total noninterest income
96,937
104,578
(7,641)
Net revenue (4)
108,505
116,847
(8,342)
Noninterest expense:
Variable compensation (5)
33,283
35,274
(1,991)
Non-variable compensation and benefits
34,781
34,183
598
Segment operating costs (6)
31,225
28,472
2,753
Total noninterest expense
99,289
97,929
1,360
Income before income taxes
$
9,216
$
18,918
$
(9,702)
(1) Noted balances during the prior period include certain reclassifications due to the restructuring of certain business lines to conform to current period presentation
(2) Securities commissions and fees includes income from FDIC sweep investments with the banking segment of $4.9 million and $6.8 million during the three months ended March 31, 2025 and 2024, respectively, that is eliminated in consolidation.
(3) Investment and securities advisory fees and commissions includes $0.1 million of income from the securitization of Small Business Administration, or SBA, loans originated with the banking segment during the three months ended March 31, 2025, that is eliminated in consolidation.
(4) Net revenue is defined as the sum of total net interest income and total noninterest income. We consider net revenue to be a key performance measure in the evaluation of the broker-dealer segment’s financial position and operating performance as we believe it is the primary revenue performance measure used by investors and analysts. Net revenue provides for some level of comparability of trends across the financial services industry as it reflects both noninterest income, including investment and securities advisory fees and commissions, as well as net interest income. Internally, we assess the broker-dealer segment’s performance on a net revenue basis for comparability with our banking segment.
(5) Variable compensation represents performance-based commissions and incentives.
(6) Segment operating costs include provision for (reversal of) credit losses associated with the broker-dealer segment within other noninterest expenses.
(7) During the second quarter of 2024, the Company identified an immaterial error related to the classification within noninterest income associated with the allocation of earned revenue between commission and principal gains on certain principal trades of fixed income securities. As a result, certain prior period amounts within securities commissions and fees noninterest income and other noninterest income have been corrected for consistency with the current period presentation.
The decreases in net revenue and income before income taxes for the three months ended March 31, 2025, compared with the same period in 2024, were primarily due to declines in period-over-period results within our structured finance and fixed income services business lines, partially offset by improved results within our public finance services and wealth management business lines. The decrease in the structured finance business line’s net revenues was primarily due to a decrease in unrealized gains from the U.S. Agency to-be-announced (“TBA”) business partially offset by commissions earned on commodities transactions. The decrease in fixed income services business line’s net revenues
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was primarily due to market conditions resulting in the decrease in earnings from fixed income sales and trading activities, in particular, from municipal and credit products. 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 increase in the wealth management business line’s net revenue was driven by an increase in advisory fees revenues generated from customer assets under management, partially offset by fees earned from our FDIC sweep program on lower balances period-over-period. Income before income taxes was impacted by the decreases in net revenue as described above and a net increase in noninterest expenses.
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. The broker-dealer segment also receives administrative fees for providing money market and FDIC investment alternatives to clients, which tend to be sensitive to short-term interest rates. In addition, the profitability of the broker-dealer segment depends, to an extent, on the spread between revenues earned on customer loans and excess customer cash balances, and the interest expense paid on customer cash balances, as well as the interest revenue earned on trading securities, net of financing costs. The broker-dealer segment is also exposed to interest rate risk through its structured finance business line, which is dependent on mortgage loan production that tends to be adversely impacted by increasing interest rates and resulting in valuation-related adjustments.
In the broker-dealer segment, interest is earned from securities lending activities, interest charged on customer margin loan balances and interest earned on investment securities used to support sales, underwriting and other customer activities. The decrease in net interest income during the three months ended March 31, 2025, compared with the same period in 2024, was primarily due to the decrease in net interest income from the wealth management business line from margin loan and stock borrowing activities, partially offset by an increase in net interest earned on inventory positions within the fixed income services business line.
Noninterest income decreased during the three months ended March 31, 2025, compared with the same period in 2024, due to a decrease in other income, partially offset by increases in securities commissions and fees and investment and securities advisory fees.
Securities commissions and fees increased during the three months ended March 31, 2025, compared with the same period in 2024, primarily due to an increase in commodities product sales commissions and brokerage services fees.
Investment and securities advisory fees and commissions increased during the three months ended March 31, 2025, compared with the same period in 2024, primarily due to increases in fees earned from managed assets and municipal advisory transactions.
The decrease in other noninterest income during the three months ended March 31, 2025, compared with the same period in 2024, was primarily due to decreases in trading gains earned from structured finance and fixed income services trading activities due to less favorable market conditions.
The increase in noninterest expense during the three months ended March 31, 2025, compared with the same period in 2024, was primarily due to an increase in other segment operating costs, primarily quotation expenses and professional services, partially offset by a decrease in variable compensation associated with the decrease in net revenue.
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Selected information concerning the broker-dealer segment, including key performance indicators, follows (dollars in thousands).
Three Months Ended March 31,
2025
2024
Total compensation as a % of net revenue (1)
62.7
%
59.4
%
Pre-tax margin (2)
8.5
%
16.2
%
FDIC insured program balances at the Bank (end of period)
$
571,730
$
754,268
Other FDIC insured program balances (end of period)
$
1,270,734
$
1,208,696
Customer funds on deposit, including short credits (end of period)
$
221,519
$
220,932
Public finance services:
Number of issues (3)
190
175
Aggregate amount of offerings (3)
$
14,038,568
$
12,656,837
Structured finance:
Lock production/TBA volume
$
811,901
$
614,182
Fixed income services:
Total volumes
$
47,450,311
$
88,056,791
Net inventory (end of period)
$
583,275
$
597,075
Wealth management (Retail and Clearing services groups):
Retail employee representatives (end of period)
91
91
Independent registered representatives (end of period)
164
185
Correspondents (end of period)
96
100
Correspondent receivables (end of period)
$
103,515
$
139,391
Customer margin balances (end of period)
$
219,965
$
190,461
Wealth management (Securities lending group):
Interest-earning assets - stock borrowed (end of period)
$
1,419,089
$
1,398,644
Interest-bearing liabilities - stock loaned (end of period)
$
1,401,595
$
1,366,956
(1) Total compensation includes the sum of non-variable compensation and benefits and variable compensation. We consider total compensation as a percentage of net revenue to be a key performance measure and indicator of segment profitability.
(2) Pre-tax margin is defined as income before income taxes divided by net revenue. We consider pre-tax margin to be a key performance measure given its use as a profitability metric representing the percentage of net revenue earned that results in a profit.
(3) Noted balances during all prior periods include certain reclassifications to conform to current period presentation.
Mortgage Origination Segment
The following table presents certain information regarding the operating results of our mortgage origination segment (in thousands).
Three Months Ended March 31,
Variance
2025
2024
2025 vs 2024
Net interest expense
$
(1,397)
$
(4,252)
$
2,855
Noninterest income
67,775
66,700
1,075
Noninterest expense
74,660
78,898
(4,238)
Loss before income taxes
$
(8,282)
$
(16,450)
$
8,168
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 home purchases during the spring and summer months, when more people tend to move and sell or buy 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 have continued to negatively impact both purchase and refinance loan origination volumes through the first quarter of 2025. A modest decline in mortgage rates experienced during the second half of 2024 had a slight impact on loan origination volume in the first quarter of 2025, with a minor increase in refinancings as a percentage of total loan origination volume when compared to the first quarter of 2024. During the first quarter of 2025, average mortgage interest rates increased slightly approximating average mortgage rates during the first quarter of 2024. See details regarding loan origination volume in the table below.
Recent trends, as well as typical historical patterns in loan origination volume from home purchases and refinancings because of movements in mortgage interest rates, may not be indicative of future loan origination volumes. During 2024 and through the first three months of 2025, certain events initially triggered as early as 2022 have continued to challenge
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total mortgage market origination volumes because of their effect on the economy, including an increase in average interest rates during this period when compared to the average of the three years prior to 2023, the Federal Reserve’s actions and communications, and geopolitical events. More recently, the Unites States government’s position on increasing tariffs on foreign imports and reciprocal tariffs imposed by numerous United States foreign trading partners on United States exports have added to uncertainties associated with the economy. 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, which have recently shown a slight improvement, and affordability challenges are impacting customers’ abilities to purchase homes. Between September 2024 and December 2024, the Federal Reserve cut the target range for the federal funds rate by 100 basis points to 4.25% - 4.5%. These were the first reductions since March 2022 when the target range was 0.25% - 0.50%. No Federal Reserve cuts were made during the first quarter of 2025. Despite the reduction in the federal fund rate since September 2024, average mortgage interest rates increased during the first quarter of 2025, which hampered mortgage production. We expect loan production during the second quarter of 2025 to improve primarily due to seasonally higher home purchase activity.
PrimeLending continues to evaluate its cost structure to address the current mortgage environment and we believe that ongoing initiatives are critical to improving PrimeLending’s short- and long-term financial condition and operating results. The mortgage origination segment experienced operating losses during 2024 which continued into the first quarter of 2025 due to conditions and challenges discussed in detail within this discussion of segment results. In light of these current 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.
As a Government National Mortgage Association (“GNMA”) approved lender, we are subject to minimum capital, leverage, net worth and liquidity requirements established by the Department of Housing and Urban Development (“HUD”) and GNMA, 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 leverage ratio is below 6% (the “GNMA leverage ratio”). If this occurs, certain additional financial reporting submissions are required. 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 the first quarter of 2025, the HUD operating loss ratio remained below the 20% threshold at 12.9%. During the first and second quarters of 2024, the GNMA leverage 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 leverage ratio increased to 6.38% and 6.36% during the third and fourth quarters of 2024, respectively. During March of 2025, PrimeLending received an additional $10 million capital infusion from PlainsCapital Bank and the GNMA leverage ratio remained above the required 6% at 7.12%. Any of these trends requiring notification to GNMA and HUD have been reported to those entities, respectively. Such capital infusions are likely in future periods, including those in the near-term, based on various factors including PrimeLending’s financial performance.
In addition, as a Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) approved lender, we are subject to certain minimum capital, net worth and liquidity requirements established by FNMA and FHLMC, including maintaining a minimum capital ratio of 6% (the “FNMA/FHLMC capital ratio”). During 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 and the first quarter of 2025, 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 first, second, third and fourth quarters of 2024, PrimeLending experienced four consecutive quarterly losses; the loss ratio during these periods were 37.5%, 28.9%, 23.9% and 13.7%, respectively. PrimeLending also recognized four consecutive quarterly losses during the first quarter of 2025; the loss ratio during this period, including the $10 million capital infusion in March 2025, was 10.5%. Any of these trends requiring notification to FNMA and FHLMC have been reported to those entities, respectively.
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The loss before income taxes decreased during the three months ended March 31, 2025, compared with the same period in 2024. The decrease was primarily the result of decreases in noninterest expense and net interest expense.
During 2022 and continuing through the fourth quarter of 2023, the average quarterly U.S. 10-Year Treasury Rate and mortgage interest rates increased significantly. During the first quarter of 2024 both average quarterly rates decreased slightly and then continued to fluctuate modestly through the first quarter of 2025. More specifically average interest rates during the three months ended March 31, 2025 were relatively flat compared to average interest rates during the same period in 2024. Refinancing volume as a percentage of total origination volume was higher during the three months ended March 31, 2025 at 12.3%, as compared to 7.6% during the same period in 2024. 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.
The mortgage origination segment primarily originates its mortgage loans through a retail channel, with limited lending through its affiliated business arrangements (“ABAs”). For the three months ended March 31, 2025, funded volume through ABAs was approximately 13% of the mortgage origination segment’s total loan volume. Currently, PrimeLending owns a greater than 50% membership interest in two ABAs. We expect total production within the ABA channel to continue to approximate 13% of loan volume of the mortgage origination segment during the remainder of 2025.
The following table provides further details regarding our mortgage loan originations and sales for the periods indicated below (dollars in thousands). Loan volumes associated with mortgage loan transactions facilitated between PrimeLending and third-party mortgage lenders when requested products are not offered by PrimeLending are included in mortgage loan origination units and volume and are not included in mortgage loan sales volume below.
Three Months Ended March 31,
2025
2024
% of
% of
Variance
Amount
Total
Amount
Total
2025 vs 2024
Mortgage Loan Originations - units
5,373
5,411
(38)
Mortgage Loan Originations - volume:
Conventional
$
965,203
55.40
%
$
1,016,197
60.62
%
$
(50,994)
Government
401,187
23.03
%
400,360
23.88
%
827
Jumbo
118,092
6.78
%
64,918
3.87
%
53,174
Other
257,859
14.79
%
195,011
11.63
%
62,848
$
1,742,341
100.00
%
$
1,676,486
100.00
%
$
65,855
Home purchases
$
1,528,560
87.73
%
$
1,548,941
92.39
%
$
(20,381)
Refinancings
213,781
12.27
%
127,545
7.61
%
86,236
$
1,742,341
100.00
%
$
1,676,486
100.00
%
$
65,855
Texas
$
548,610
31.49
%
$
577,293
34.43
%
$
(28,683)
California
136,394
7.83
%
119,208
7.11
%
17,186
South Carolina
96,877
5.56
%
81,610
4.87
%
15,267
Florida
73,348
4.21
%
71,376
4.26
%
1,972
New York
66,602
3.82
%
68,064
4.06
%
(1,462)
Missouri
65,180
3.74
%
68,434
4.08
%
(3,254)
Arizona
59,758
3.43
%
59,190
3.53
%
568
Ohio
56,050
3.22
%
45,502
2.71
%
10,548
Washington
47,147
2.71
%
44,592
2.66
%
2,555
Colorado
38,303
2.20
%
27,189
1.62
%
11,114
All other states
554,072
31.79
%
514,028
30.67
%
40,044
$
1,742,341
100.00
%
$
1,676,486
100.00
%
$
65,855
Mortgage Loan Sales - volume:
Third parties
$
1,682,048
96.42
%
$
1,717,529
98.15
%
$
(35,481)
Banking segment
62,507
3.58
%
32,328
1.85
%
30,179
$
1,744,555
100.00
%
$
1,749,857
100.00
%
$
(5,302)
We consider the mortgage origination segment’s total loan origination volume to be a key performance measure. Loan origination volume is central to the segment’s ability to generate income by originating and selling mortgage loans, resulting in net gains from the sale of loans, mortgage loan origination fees, and other mortgage production income.
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Total loan origination volume is a measure utilized by management, our investors, and analysts in assessing market share and growth of the mortgage origination segment.
The mortgage origination segment’s total loan origination volume increased 3.9% during the three months ended March 31, 2025, compared to the same period in 2024, while the loss before taxes decreased 49.7% during the same period. The decrease in loss before income taxes during the three months ended March 31, 2025, when compared to the same period in 2024, was primarily due to decreases in the loss on the change in the net fair value and related derivative activity related to mortgage servicing rights assets, servicing fee expense, net interest expense and segment operating costs, partially offset by a decrease in mortgage loan origination fees and other related income, a decrease in services fees and an increase in variable compensation.
The information shown in the table below includes certain additional key performance indicators for the mortgage origination segment.
Three Months Ended March 31,
2025
2024
Net gains from mortgage loan sales (basis points):
Loans sold to third parties
222
216
Broker fee income (1)
10
5
Impact of loans retained by banking segment
(8)
(5)
As reported
224
216
Variable compensation as a percentage of total compensation
46.6
%
42.1
%
Mortgage servicing rights asset ($000's) (end of period) (2)
$
6,903
$
95,591
(1) Broker fee income is earned by the mortgage origination segment for facilitating mortgage loan transactions between PrimeLending customers and third-party mortgage lenders when the requested loan products are not offered by PrimeLending.
(2) Reported on a consolidated basis and therefore does not include mortgage servicing rights assets related to loans serviced for the banking segment, which are eliminated in consolidation.
Net interest expense was comprised of interest income earned on loans held for sale offset by interest incurred on warehouse lines of credit with the Bank, and related intercompany financing costs. Net interest expense decreased during the three months ended March 31, 2025, as compared to the same period in 2024, primarily due to a decrease in the negative net interest margin.
Noninterest income was comprised of the items set forth in the table below (in thousands).
Three Months Ended March 31,
Variance
2025
2024
2025 vs 2024
Net gains from sale of loans
$
38,996
$
37,881
$
1,115
Mortgage loan origination fees and other related income
22,451
26,438
(3,987)
Other mortgage production income:
Change in net fair value and related derivative activity:
IRLCs and loans held for sale
5,616
4,177
1,439
Mortgage servicing rights asset
(258)
(10,045)
9,787
Servicing fees
970
8,249
(7,279)
Total noninterest income
$
67,775
$
66,700
$
1,075
Net gains from sale of loans increased 2.9%, while total loans sales volume was flat during the three months ended March 31, 2025, compared with the same period in 2024. The increase in net gains from sales of loans was primarily the result of a slight increase in average loan sale margin.
The 15.1% decrease in mortgage loan origination fees during the three months ended March 31, 2025, compared with the same period in 2024, was primarily the result of a decrease in average mortgage loan origination fees, partially offset by a slight increase in loan origination volume.
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.
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
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include loans sold to third parties and loans sold to and retained by the banking segment. For origination services provided, the mortgage origination segment was reimbursed direct origination costs associated with loans retained by the banking segment, in addition to payment of a correspondent fee. The reimbursed origination costs and correspondent fees are included in the mortgage origination segment operating results, and the correspondent fees are eliminated in consolidation. Loan volumes to be originated on behalf of and retained by the banking segment are evaluated each quarter. Loans sold to and retained by the banking segment during the three months ended March 31, 2025 and 2024 were $62.5 million and $32.3 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.
Noninterest income included changes in the net fair value of the mortgage origination segment’s interest rate lock commitments (“IRLCs”) and loans held for sale and the related activity associated with forward commitments used by the mortgage origination segment to mitigate interest rate risk associated with its IRLCs and mortgage loans held for sale (“net fair value of IRLCs and loans held for sale”). The increase in net fair value of IRLCs and loans held for sale during the three months ended March 31, 2025, was the result of an increase in the total volume of individual IRLCs and loans held for sale, and to a lesser extent, an increase in the average value of individual IRLCs and loans held for sale during the current quarter.
The mortgage origination segment sells substantially all mortgage loans it originates to various investors in the secondary market. In addition, the mortgage origination segment originates loans on behalf of the Bank. The mortgage origination segment’s determination of whether to retain or release servicing on mortgage loans it sells is impacted by, among other things, changes in mortgage interest rates, refinancing and market activity, and balance sheet positioning at Hilltop. During the three months ended March 31, 2025, PrimeLending retained servicing on approximately 6% of loans sold, compared with approximately 10% of loans sold during the same period in 2024. A reduction in third-party mortgage servicers purchasing mortgage servicing rights, even if modest, may result in PrimeLending increasing the rate of retained servicing on mortgage loans sold at any time. The mortgage origination segment may, from time to time, manage its MSR asset through different strategies, including varying the percentage of mortgage loans sold, servicing released and opportunistically selling MSR assets. The mortgage origination segment has also retained servicing on certain loans sold to and retained by the banking segment. Gains and losses associated with such sales to the banking segment and the related MSR asset are eliminated in consolidation.
The mortgage origination segment uses derivative financial instruments, including U.S. Treasury bond futures and options and MBS commitments, to mitigate interest rate risk associated with its MSR asset. Changes in the net fair value of the MSR asset and the related derivatives are associated with normal customer payments, changes in discount rates, prepayment speed assumptions and customer payoffs. During the three months ended March 31, 2025, changes in the net fair value of the MSR asset and the related derivatives resulted in net losses of $0.1 million.
During the three months ended March 31, 2024, the operating results of the mortgage origination segment were negatively impacted by a decrease of $7.3 million related to a change in the prepayment rates used as inputs to value the MSR asset and to reflect the difference between the MSR carrying value and the sales price reflected in a signed letter of intent, as well as losses of $5.7 million generated by the derivatives used to hedge the MSR. The remaining fluctuations in the net fair value of the MSR asset during the period was primarily due to net gains of $2.9 million driven by net changes in long-term U.S. Treasury bond rates and customer payoffs. During 2024, the mortgage origination segment sold aggregate MSR assets of $87.3 million, which represented $5.2 billion of its serviced loan volume at the time. During the fourth quarter of 2024 and the first quarter of 2025, the mortgage origination segment expensed $1.1 million and $0.8 million, respectively, for amounts paid to the purchasers of these MSR assets for loans included in the sale which prepaid within a defined period of time outlined in the sale agreements. As of March 31, 2025, the mortgage origination segment serviced approximately $477 million of loan volume, valued at $6.9 million. PrimeLending does not currently expect the level of MSR assets to be significant in the short-term.
Noninterest expenses were comprised of the items set forth in the table below (in thousands).
Three Months Ended March 31,
Variance
2025
2024
2025 vs 2024
Variable compensation
$
24,832
$
22,188
$
2,644
Non-variable compensation and benefits
28,507
30,506
(1,999)
Segment operating costs
17,868
20,284
(2,416)
Lender paid closing costs
2,500
1,258
1,242
Servicing expense
953
4,662
(3,709)
Total noninterest expense
$
74,660
$
78,898
$
(4,238)
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Total employees’ compensation and benefits accounted for the majority of noninterest expenses incurred during all periods presented. Historically, variable compensation comprises the majority of total employees’ compensation and benefits expenses. Variable compensation, which is primarily driven by loan origination volume, tends to fluctuate to a greater degree than loan origination volume, because mortgage loan originator and fulfillment staff incentive compensation plans are structured to pay at increasing rates as higher monthly volume tiers are achieved. However, certain other incentive compensation plans driven by non-mortgage production criteria may alter this trend.
While total loan origination volume increased 3.9% during the three months ended March 31, 2025, compared to the same period in 2024, the aggregate non-variable compensation and benefits of the mortgage origination segment decreased by 6.6% during the same period. This decrease during the three months ended March 31, 2025, compared to the same period in 2024, was primarily due to a decrease in salaries associated with reductions in underwriting and loan fulfillment, operations and corporate staff as PrimeLending continued to evaluate its cost structure to address the current mortgage environment. Segment operating costs decreased during the three months ended March 31, 2025, compared to the same period in 2024, primarily due to decreases in external legal and occupancy expense.
In exchange for a higher interest rate, customers may opt to have PrimeLending pay certain costs associated with the origination of their mortgage loans (“lender paid closing costs”). Fluctuations in lender paid closing costs are not always aligned with fluctuations in loan origination volume. Other loan pricing conditions, including the mortgage loan interest rate, loan origination fees paid by the customer, and a customer’s willingness to pay closing costs, may influence fluctuations in lender paid closing costs.
Between January 1, 2016 and March 31, 2025, the mortgage origination segment sold mortgage loans totaling $133.0 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 2016, it does not anticipate experiencing significant losses in the future on loans originated prior to 2016 as a result of investor claims under these provisions of its sales contracts.
When a claim for indemnification of a loan sold is made by an agency, investor, or other party, the mortgage origination segment evaluates the claim and determines if the claim can be satisfied through additional documentation or other deliverables. If the claim is valid and cannot be satisfied in that manner, the mortgage origination segment negotiates with the claimant to reach a settlement of the claim. Settlements typically result in either the repurchase of a loan or reimbursement to the claimant for losses incurred on the loan.
The following is a summary of the mortgage origination segment’s claims resolution activity relating to loans sold between January 1, 2016 and March 31, 2025 (dollars in thousands).
Original Loan Balance
Loss Recognized
% of
% of
Amount
Loans Sold
Amount
Loans Sold
Claims resolved with no payment
$
250,729
0.19
%
$
—
-
%
Claims resolved because of a loan repurchase or payment to an investor for losses incurred (1)
205,494
0.15
%
24,533
0.02
%
$
456,223
0.34
%
$
24,533
0.02
%
(1) Losses incurred include refunded purchased servicing rights.
For each loan, when the mortgage origination segment concludes its obligation to a claimant is both probable and reasonably estimable, the mortgage origination segment has established a specific claims indemnification liability reserve.
An additional indemnification liability reserve has been established for probable agency, investor or other party losses that may have been incurred, but not yet reported to the mortgage origination segment based upon a reasonable estimate of such losses. Factors considered in the calculation of this reserve include, but are not limited to, the total volume of loans sold exclusive of specific claimant requests, actual claim inquiries, claim settlements and the severity of estimated losses resulting from future claims, and the mortgage origination segment’s history of successfully curing defects identified in claim requests.
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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 first quarter of 2025, there was no adjustment made to the indemnification liability reserve. PrimeLending will continue to monitor agency claim inquiry trends and assess its potential impact on the indemnification liability reserve.
At March 31, 2025 and December 31, 2024, the mortgage origination segment’s total indemnification liability reserve totaled $8.0 million and $8.1 million, respectively. The related provision for indemnification losses was $0.7 million and $0.3 million during the three months ended March 31, 2025 and 2024, respectively.
Corporate
The following table presents certain financial information regarding the operating results of corporate (in thousands).
Three Months Ended March 31,
Variance
2025
2024
2025 vs 2024
Net interest income (expense)
$
(869)
$
(3,103)
$
2,234
Noninterest income
43,379
5,785
37,594
Noninterest expense
25,891
17,384
8,507
Income (loss) before income taxes
$
16,619
$
(14,702)
$
31,321
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 $69 million at March 31, 2025.
As a holding company, Hilltop’s primary investment objectives are to support capital deployment for organic growth and to preserve capital to be deployed through acquisitions, dividend payments and potential stock repurchases. Investment and interest income earned during the three months ended March 31, 2025 was primarily comprised of dividend income from merchant banking investment activities, in addition to interest income earned on intercompany notes.
Interest expense during each of the three months ended March 31, 2025 and 2024 included recurring quarterly interest expense of $3.1 million incurred on our $50 million aggregate principal amount of subordinated notes due 2030 (“2030 Subordinated Notes”) and on our $150 million aggregate principal amount of subordinated notes due 2035 (“2035 Subordinated Notes,” the 2030 Subordinated Notes and the 2035 Subordinated Notes, collectively, the “Subordinated Notes”). Interest expense during the three months ended March 31, 2025 and 2024 also included interest expense of $0.6 million and $1.9 million on our outstanding Senior Notes that were redeemed on January 15, 2025.
Noninterest income during each period included activity related to our investment in a real estate development in Dallas’ University Park, which also serves as headquarters for both Hilltop and the Bank, and net noninterest income associated with activity within our merchant bank subsidiary. During the three months ended March 31, 2025, noninterest income included a preliminary pre-tax gain of $30.5 million ($23.6 million net of tax) related to the sale of operations associated with our aggregate interest in Moser Holdings, LLC, while during the three months ended March 31, 2024, noninterest income included a pre-tax gain of $2.8 million associated with the sale of a merchant bank equity investment.
Noninterest expenses were primarily comprised of employees’ compensation and benefits, occupancy expenses and professional fees, including corporate governance, legal and transaction costs. During the three months ended March 31, 2025, noninterest expenses increased, compared to the same period in 2024, primarily due to increases associated with employees’ compensation and benefits driven by variable compensation associated with the sale of our aggregate interest in Moser Holdings, LLC.
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Financial Condition
The following discussion contains a more detailed analysis of our financial condition at March 31, 2025, as compared with December 31, 2024.
Securities Portfolio
At March 31, 2025, investment securities consisted of securities of the U.S. Treasury, U.S. government and its agencies, obligations of municipalities and other political subdivisions, primarily in the State of Texas, as well as mortgage-backed, corporate debt, and equity securities. We may categorize investments as trading, available for sale, held to maturity and equity securities.
Trading securities are bought and held principally for the purpose of selling them in the near term and are carried at fair value, marked to market through operations and held at the Bank and the Hilltop Broker-Dealers. Securities classified as available for sale may, from time to time, be bought and sold in response to changes in market interest rates, changes in securities’ prepayment risk, increases in loan demand, general liquidity needs and to take advantage of market conditions that create more economically attractive returns. Such securities are carried at estimated fair value, with unrealized gains and losses recorded in accumulated other comprehensive income (loss). Equity investments are carried at fair value, with all changes in fair value recognized in net income. Securities are classified as held to maturity based on the intent and ability of our management, at the time of purchase, to hold such securities to maturity. These securities are carried at amortized cost.
The table below summarizes our securities portfolio (in thousands).
March 31,
December 31,
2025
2024
Trading securities, at fair value
U.S. Treasury securities
$
—
$
2,553
U.S. government agencies:
Bonds
20,735
9,984
Residential mortgage-backed securities
149,393
35,440
Collateralized mortgage obligations
115,415
125,515
Other
1,468
19,877
Corporate debt securities
43,821
60,594
States and political subdivisions
289,923
244,076
Private-label securitized product
14,202
16,208
Other
12,201
10,669
647,158
524,916
Securities available for sale, at fair value
U.S. Treasury securities
4,815
4,762
U.S. government agencies:
Bonds
103,513
111,868
Residential mortgage-backed securities
360,249
341,186
Commercial mortgage-backed securities
217,398
220,327
Collateralized mortgage obligations
658,639
657,600
Corporate debt securities
30,554
29,816
States and political subdivisions
30,002
30,990
1,405,170
1,396,549
Securities held to maturity, at amortized cost
U.S. government agencies:
Residential mortgage-backed securities
250,486
255,880
Commercial mortgage-backed securities
156,646
147,696
Collateralized mortgage obligations
278,144
257,230
States and political subdivisions
77,093
77,093
762,369
737,899
Equity securities, at fair value
286
297
Total securities portfolio
$
2,814,983
$
2,659,661
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We had net unrealized losses of $87.4 million and $101.9 million at March 31, 2025 and December 31, 2024, respectively, related to the available for sale investment portfolio, and net unrealized losses of $74.9 million and $88.0 million at March 31, 2025 and December 31, 2024, respectively, associated with the securities held to maturity portfolio. Equity securities included net unrealized gains of $0.2 million and $0.2 million at March 31, 2025 and December 31, 2024, respectively. In future periods, we expect changes in prevailing market interest rates, coupled with changes in the aggregate size of the investment portfolio, to be significant drivers of changes in the unrealized losses or gains in these portfolios, and therefore accumulated other comprehensive income (loss).
Banking Segment
The banking segment’s securities portfolio plays a role in the management of our interest rate sensitivity and generates additional interest income. In addition, the securities portfolio is used to meet collateral requirements for public and trust deposits, securities sold under agreements to repurchase and other purposes. The available for sale and equity securities portfolios serve as a source of liquidity. Historically, the Bank’s policy has been to invest primarily in securities of the U.S. government and its agencies, obligations of municipalities in the State of Texas and other high grade fixed income securities to minimize credit risk. At March 31, 2025, the banking segment’s securities portfolio of $2.1 billion was comprised of trading securities of $0.7 million, available for sale securities of $1.4 billion, held to maturity securities of $762.4 million and equity securities of $0.3 million, in addition to $10.5 million of other investments included in other assets within the consolidated balance sheets.
Broker-Dealer Segment
The broker-dealer segment holds securities to support sales, underwriting and other customer activities. The interest rate risk inherent in holding these securities is managed by setting and monitoring limits on the size and duration of positions and on the length of time the securities can be held. The Hilltop Broker-Dealers are required to carry their securities at fair value and record changes in the fair value of the portfolio to the statement of operations. Accordingly, the securities portfolio of the Hilltop Broker-Dealers included trading securities of $646.4 million at March 31, 2025. In addition, the Hilltop Broker-Dealers enter into transactions that represent commitments to purchase and deliver securities at prevailing future market prices to facilitate customer transactions and satisfy such commitments. Accordingly, the Hilltop Broker-Dealers’ ultimate obligation may exceed the amount recognized in the financial statements. These securities, which are carried at fair value and reported as securities sold, not yet purchased in the consolidated balance sheets, had a value of $63.2 million at March 31, 2025.
Corporate
At March 31, 2025, the corporate portfolio included other investments, including those associated with merchant banking, of available for sale securities of $30.6 million and other assets of $39.1 million within the consolidated balance sheet.
Allowance for Credit Losses for Available for Sale Securities and Held to Maturity Securities
We have evaluated available for sale debt securities that are in an unrealized loss position and have determined that any declines in value are unrelated to credit loss and related to changes in market interest rates since purchase. None of the available for sale debt securities held were past due at March 31, 2025. In addition, as of March 31, 2025, we evaluated our held to maturity debt securities, considering the current credit ratings and recognized losses, and determined the potential credit loss to be minimal. With respect to these securities, we considered the risk of credit loss to be negligible, and therefore, no allowance was recognized on the debt securities portfolio at March 31, 2025.
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Loan Portfolio
Consolidated loans held for investment are detailed in the table below, classified by portfolio segment (in thousands).
March 31,
December 31,
2025
2024
Commercial real estate:
Non-owner occupied
$
1,938,960
$
1,921,691
Owner occupied
1,446,177
1,435,945
Commercial and industrial
1,499,982
1,541,940
Construction and land development
889,941
866,245
1-4 family residential
1,840,008
1,792,602
Consumer
27,486
28,410
Broker-dealer
324,223
363,718
Loans held for investment, gross
7,966,777
7,950,551
Allowance for credit losses
(106,197)
(101,116)
Loans held for investment, net of allowance
$
7,860,580
$
7,849,435
Banking Segment
The loan portfolio constitutes the primary earning asset of the banking segment and typically offers the best alternative for obtaining the maximum interest spread above the banking segment’s cost of funds. The overall economic strength of the banking segment generally parallels the quality and yield of its loan portfolio.
As discussed in more detail within the section captioned “Financial Condition – Allowance for Credit Losses on Loans” set forth in Part II, Item 7 of our 2024 Form 10-K and further within the section captioned “Financial Condition – Allowance for Credit Losses on Loans” below, the banking segment’s credit policies emphasize strong underwriting and governance standards and early detection of potential problem credits in order to develop and implement action plans on a timely basis to mitigate potential losses.
To manage the credit risks associated with its loan portfolio, management may, depending upon current or anticipated economic conditions and related exposures, apply enhanced risk management measures to loans through analysis of a specific borrower’s financial condition, including cash flow, collateral values, and guarantees, among other credit factors.
The banking segment’s total loans held for investment, net of the allowance for credit losses, were $8.3 billion and $8.3 billion at March 31, 2025 and December 31, 2024, respectively. At March 31, 2025, the banking segment’s loan portfolio included warehouse lines of credit extended to PrimeLending and its ABAs of $1.3 billion, of which $739.1 million was drawn. At December 31, 2024, amounts drawn on the available warehouse lines of credit was $0.8 billion. Amounts advanced against the warehouse lines of credit are eliminated from net loans held for investment on our consolidated balance sheets. The banking segment does not generally participate in syndicated loan transactions and has no foreign loans in its portfolio.
A significant portion of the banking segment’s loan portfolio at March 31, 2025, consisted of commercial real estate loans secured by properties. Such loans can involve high principal loan amounts, and the repayment of these loans is dependent, in large part, on a borrower’s ongoing business operations or on income generated from the properties that are leased to third parties.
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The table below sets forth the banking segment’s commercial real estate loan portfolio, by portfolio industry sector and collateral location as of March 31, 2025 (in thousands). There have not been significant changes in the real estate loan portfolio since December 31, 2024.
Brownsville-
Other
Dallas-
Harlingen-
San
Outside
Commercial Real Estate
Fort Worth
Austin
Houston
McAllen
Antonio
Lubbock
Texas
Texas
Total
Non-owner occupied:
Office
$
146,908
$
222,703
$
28,423
$
14,374
$
22,792
$
2,339
$
55,033
$
309
$
492,881
Retail
149,547
75,849
26,814
26,007
19,722
6,754
27,301
8,606
340,600
Hotel/Motel
32,097
24,012
33,719
16,991
94
16,256
34,856
13,602
171,627
Multifamily
52,748
53,122
38,134
49,377
47,377
33,799
53,979
16,380
344,916
Industrial
111,319
57,576
8,924
4,480
2,444
677
22,628
6,930
214,978
All other
107,026
61,943
27,486
7,261
25,010
47,249
80,496
17,487
373,958
$
599,645
$
495,205
$
163,500
$
118,490
$
117,439
$
107,074
$
274,293
$
63,314
$
1,938,960
Owner occupied:
Office
$
142,683
$
95,229
$
25,914
$
16,643
$
32,702
$
7,288
$
10,384
$
2,716
$
333,559
Retail
9,065
15,931
3,011
955
1,187
140
3,797
941
35,027
Industrial
193,205
38,153
30,458
8,663
20,790
6,522
29,190
19,979
346,960
All other
325,250
75,042
74,694
24,104
48,630
13,345
146,740
22,826
730,631
$
670,203
$
224,355
$
134,077
$
50,365
$
103,309
$
27,295
$
190,111
$
46,462
$
1,446,177
Total commercial real estate loans
$
1,269,848
$
719,560
$
297,577
$
168,855
$
220,748
$
134,369
$
464,404
$
109,776
$
3,385,137
At March 31, 2025, the banking segment had loan concentrations (loans to borrowers engaged in similar activities) that exceeded 10% of total loans in its real estate portfolio. The areas of concentration within our real estate portfolio were non-construction commercial real estate loans, non-construction residential real estate loans, and construction and land development loans, which represented 44.3%, 24.1% and 11.6%, respectively, of the banking segment’s total loans held for investment at March 31, 2025. The banking segment’s loan concentrations were within regulatory guidelines at March 31, 2025.
In addition, the Bank’s loan portfolio includes collateralized loans extended to businesses that depend on the energy industry, including those within the exploration and production, field services, pipeline construction and transportation sectors. Crude oil prices remain uncertain given future supply and demand for oil are influenced by international armed conflicts, return to business travel, new energy policies and government regulation, and the pace of transition towards renewable energy resources. At March 31, 2025, the Bank’s energy loan exposure was approximately $60 million of loans held for investment with unfunded commitment balances of approximately $22 million. The allowance for credit losses on the Bank’s energy portfolio was $0.4 million, or 0.7% of loans held for investment at March 31, 2025.
The following table provides information regarding the maturities of the banking segment’s gross loans held for investment, net of unearned income (in thousands). The commercial and industrial portfolio segment includes amounts advanced against the warehouse lines of credit extended to PrimeLending.
March 31, 2025
Due Within
Due From One
Due from Five
Due After
One Year
To Five Years
To Fifteen Years
Fifteen Years
Total
Commercial real estate:
Non-owner occupied
$
818,847
$
878,247
$
241,866
$
—
$
1,938,960
Owner occupied
430,648
557,016
446,519
11,994
1,446,177
Commercial and industrial
1,871,317
312,760
59,626
—
2,243,703
Construction and land development
764,576
111,631
12,899
835
889,941
1-4 family residential
226,812
715,718
203,572
693,906
1,840,008
Consumer
15,925
11,444
109
8
27,486
Total
$
4,128,125
$
2,586,816
$
964,591
$
706,743
$
8,386,275
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The following table provides information regarding the interest rate composition, based on contractual terms, of the banking segment's loans held for investment, net of unearned income (in thousands).
Loans maturing after one year
Fixed Interest
Floating Interest
March 31, 2025
Rate
Rate
Total
Commercial real estate:
Non-owner occupied
$
667,553
$
452,560
$
1,120,113
Owner occupied
680,534
334,994
1,015,528
Commercial and industrial
267,595
104,792
372,387
Construction and land development
51,669
73,696
125,365
1-4 family residential
904,424
708,772
1,613,196
Consumer
11,560
1
11,561
Total
$
2,583,335
$
1,674,815
$
4,258,150
In the table above, floating interest rate loans totaling $334.0 million as of March 31, 2025 had reached their applicable rate floor and are expected to reprice, subject to their scheduled repricing timing and frequency terms. The majority of floating rate loans carry an interest rate tied to a SOFR rate or The Wall Street Journal Prime Rate, as published in The Wall Street Journal.
Broker-Dealer Segment
The loan portfolio of the broker-dealer segment consists primarily of margin loans to customers and correspondents that are due within one year. The interest rate on margin accounts is computed on the settled margin balance at a fixed rate established by management. These loans are collateralized by the securities purchased or by other securities owned by the clients and, because of collateral coverage ratios, are believed to present minimal collectability exposure. Additionally, these loans are subject to a number of regulatory requirements as well as the Hilltop Broker-Dealers’ internal policies. The broker-dealer segment’s total loans held for investment, net of the allowance for credit losses, were $324.2 million and $363.7 million at March 31, 2025 and December 31, 2024, respectively. This decrease from December 31, 2024 to March 31, 2025 was primarily attributable to a decrease of $46.5 million, or 31%, in receivables from correspondents, partially offset by an increase of $7.9 million, or 4%, in customer margin accounts.
Mortgage Origination Segment
The loan portfolio of the mortgage origination segment consists of loans held for sale, primarily single-family residential mortgages funded through PrimeLending, and IRLCs with customers pursuant to which we agree to originate a mortgage loan on a future date at an agreed-upon interest rate. The components of the mortgage origination segment’s loans held for sale and IRLCs are as follows (in thousands).
March 31,
December 31,
2025
2024
Loans held for sale:
Unpaid principal balance
$
708,777
$
802,987
Fair value adjustment
13,833
6,795
$
722,610
$
809,782
IRLCs:
Unpaid principal balance
$
740,393
$
384,528
Fair value adjustment
12,897
2,942
$
753,290
$
387,470
The mortgage origination segment uses forward commitments to mitigate interest rate risk associated with its loans held for sale and IRLCs. The notional amounts of these forward commitments at March 31, 2025 and December 31, 2024 were $1.1 billion and $932.6 million, respectively, while the related estimated fair values were ($2.5) million and $6.4 million, respectively.
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Allowance for Credit Losses on Loans
For additional information regarding the allowance for credit losses, refer to the section captioned “Critical Accounting Estimates” set forth in Part II, Item 7 of our 2024 Form 10-K.
Loans Held for Investment
The Bank has lending policies in place with the goal of establishing an asset portfolio that will provide a return on stockholders’ equity sufficient to maintain capital to assets ratios that meet or exceed established regulations. Loans are underwritten with careful consideration of the borrower’s financial condition, the specific purpose of the loan, the primary sources of repayment and any collateral pledged to secure the loan. As discussed in more detail within the section captioned “Financial Condition – Allowance for Credit Losses on Loans” set forth in Part II, Item 7 of our 2024 Form 10-K, the Bank’s underwriting procedures address financial components based on the size and complexity of the credit, while the Bank’s loan policy provides specific underwriting guidelines by portfolio segment, including commercial and industrial, real estate, construction and land development, and consumer loans.
The allowance for credit losses for loans held for investment represents management’s best estimate of all expected credit losses over the expected contractual life of our existing portfolio. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the then-existing loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for credit losses in those future periods. Such future changes in the allowance for credit losses are expected to be volatile given dependence upon, among other things, the portfolio composition and quality, as well as the impact of significant drivers, including prepayment assumptions and macroeconomic conditions and forecasts.
Significant judgment is required to estimate the severity and duration of the current economic uncertainties, as well as its potential impact on borrower defaults and loss severity. In particular, macroeconomic conditions and forecasts are rapidly changing and remain highly uncertain.
One of the most significant judgments involved in estimating our allowance for credit losses relates to the macroeconomic forecasts used to estimate credit losses over the reasonable and supportable forecast period. To determine the allowance for credit losses as of March 31, 2025, we utilized a single macroeconomic alternative scenario, or S5, published by Moody’s Analytics in March 2025. During our previous quarterly macroeconomic assessment as of December 31, 2024, we utilized the same single macroeconomic alternative scenario, or S5, published by Moody’s Analytics in December 2024. Management determined it appropriate to utilize the S5 macroeconomic alternative scenario as of March 31, 2025 given the combination of the ongoing resilience of the U.S. economy, continued moderation of inflation, and the potential impact of tariffs and reciprocal tariffs best align with our internal economic outlook.
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The following table and paragraphs summarize the U.S. Real Gross Domestic Product (“GDP”) growth rates and unemployment rate assumptions used in our economic forecast, and based on the single macroeconomic alternative scenario selected for respective period, to determine our best estimate of expected credit losses.
As of
March 31,
December 31,
September 30,
June 30,
March 31,
2025
2024
2024
2024
2024
GDP growth rates:
Q1 2024
2.4%
Q2 2024
2.1%
0.7%
Q3 2024
2.0%
1.2%
0.4%
Q4 2024
2.6%
1.3%
0.6%
0.0%
Q1 2025
1.2%
1.2%
1.2%
1.0%
(1.8)%
Q2 2025
1.1%
1.0%
1.5%
(2.0)%
(2.8)%
Q3 2025
1.1%
0.3%
1.5%
(2.5)%
(1.7)%
Q4 2025
0.8%
0.6%
1.5%
(1.3)%
Q1 2026
0.8%
0.9%
1.5%
Q2 2026
1.4%
0.9%
Q3 2026
1.9%
Unemployment rates:
Q1 2024
3.8%
Q2 2024
4.0%
4.0%
Q3 2024
4.3%
4.1%
4.0%
Q4 2024
4.2%
4.4%
4.1%
4.0%
Q1 2025
4.1%
4.4%
4.7%
4.1%
4.8%
Q2 2025
4.2%
4.6%
4.9%
4.8%
5.6%
Q3 2025
4.6%
4.9%
5.2%
5.6%
6.0%
Q4 2025
5.0%
5.1%
5.2%
6.0%
Q1 2026
5.3%
5.2%
5.1%
Q2 2026
5.5%
5.1%
Q3 2026
5.4%
As of March 31, 2025, our U.S. economic forecast assumes elevated borrowing costs reduce credit-sensitive spending, tariffs and immigration policy weaken the economy, and concerns grow about broader international conflicts. As a result, the economy underperforms in the long run. The changes in real GDP on an annual average basis are 1.7% in 2025 and 1.2% in 2026. The unemployment rate increases in the second half of 2025 and reaches a peak of 5.5% in the first half of 2026 before slowly receding. Our forecast considers the potential for monetary policy to ease from the Federal Reserve with the federal funds rate at 3.7% by year end 2025 and 2.9% by year end 2026. Vacancy rates for certain commercial real estate sectors remain elevated, and the interest rate outlook challenges the recovery.
Since December 31, 2024, we updated our U.S. economic outlook to reflect our expectations of a period of below trend economic growth beginning in 2025. For the fourth quarter of 2024, real GDP growth was 2.4% annualized, which is higher than the long-term trend, but a deceleration from the third quarter of 2024. The Federal Reserve has paused rate cuts as they balance above-target inflation and labor market health. Trade policy changes add uncertainty to the outlook.
During the three months ended March 31, 2025, the provision for credit losses was primarily driven by a build in the allowance related to loan portfolio changes and specific reserves, including changes in loan mix and risk rating grade migration, partially offset by net charge-offs and changes in the U.S. economic outlook associated with collectively evaluated loans within the banking segment since the prior quarter. Specific to the Bank, the net impact to the allowance of changes associated with individually and collectively evaluated loans during the three months ended March 31, 2025 included a provision for credit losses of $1.7 million and $7.7 million, respectively. The changes in the allowance for credit losses during the noted periods were primarily attributable to the Bank and also reflected other factors including, but not limited to, loan mix, and changes in loan balances and qualitative factors from the prior quarter. The changes in the allowance during the three months ended March 31, 2025 were also impacted by net charge-offs of $4.3 million.
As noted above, the combined impacts of loan portfolio changes and specific reserves within the banking segment and net charge-offs and changes in the U.S. economic outlook since December 31, 2024 have resulted in a net increase in the allowance at March 31, 2025, compared to December 31, 2024. The resulting allowance for credit losses as a percentage of our total loan portfolio, excluding margin loans in the broker-dealer segment and banking segment mortgage
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warehouse lending programs, was 1.43% and 1.37% as of March 31, 2025 and December 31, 2024, respectively. While changes in the U.S. economic outlook have been reflected in our current allowance at March 31, 2025, uncertainties that include, among others, the uncertain timing, duration and significance of further changes in market interest rates and an uncertain macroeconomic forecast could adversely impact borrower cash flows and result in increases in the allowance during future periods. While all industries could experience adverse impacts, certain of our loan portfolio industry sectors and subsectors, including real estate collateralized by office buildings and auto note financing, have an increased level of risk.
The respective distribution of the allowance for credit losses as a percentage of our total loan portfolio, excluding margin loans in the broker-dealer segment and banking segment mortgage warehouse lending programs, are presented in the following table (dollars in thousands).
cv
Allowance For
Credit Losses
Total
as a % of
Total
Allowance
Total Loans
Loans Held
for Credit
Held For
March 31, 2025
For Investment
Losses
Investment
Commercial real estate:
Non-owner occupied (1)
$
1,938,960
$
34,703
1.79
%
Owner occupied (2)
1,446,177
35,370
2.45
%
Commercial and industrial (3)
1,266,835
23,233
1.83
%
Construction and land development (4)
889,941
7,291
0.82
%
Total commercial loans
5,541,913
100,597
1.82
%
1-4 family residential
1,840,008
4,988
0.27
%
Consumer
27,486
479
1.74
%
Total retail loans
1,867,494
5,467
0.29
%
Total commercial and retail loans
7,409,407
106,064
1.43
%
Broker-dealer
324,223
16
0.00
%
Mortgage warehouse lending
233,147
117
0.05
%
Total loans held for investment
$
7,966,777
$
106,197
1.33
%
(1) Included within commercial real estate non-owner occupied portfolio are loans within the office, retail and hotel/motel portfolio industry subsectors. At March 31, 2025, the office, retail and hotel/motel loans held for investment balances of approximately $493 million, $341 million and $172 million, respectively, had an allowance for credit losses of approximately $18 million, $3 million and $2 million, respectively, and an allowance for credit losses as a percentage of total loans held for investment of 3.6%, 0.8% and 1.5%, respectively.
(2) Included within commercial real estate owner occupied portfolio are loans within the industrial and office portfolio industry subsectors. At March 31, 2025, the industrial and office loans held for investment balances of approximately $347 million and $334 million, respectively, had an allowance for credit losses of approximately $8 million and $8 million, respectively, and an allowance for credit losses as a percentage of total loans held for investment of 2.4% and 2.3%, respectively.
(3) Commercial and industrial portfolio amounts reflect balances excluding banking segment mortgage warehouse lending. Included within commercial and industrial portfolio are loans within the auto note financing industry subsector. At March 31, 2025, the auto note financing loans held for investment balance of approximately $85 million had an allowance for credit losses of approximately $4 million, and an allowance for credit losses as a percentage of total loans held for investment of 4.3%.
(4) Included within construction and land development portfolio are loans within the retail and office portfolio industry subsectors. At March 31, 2025, the retail and office loans held for investment balances of approximately $39 million and $30 million, respectively, had an allowance for credit losses of approximately $0.5 million and $0.4 million, respectively, and an allowance for credit losses as a percentage of total loans held for investment of 1.2% and 1.4%, respectively.
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Allowance Model Sensitivity
Our allowance model was designed to capture the historical relationship between economic and portfolio changes. As such, evaluating shifts in individual portfolio attributes or macroeconomic variables in isolation may not be indicative of past or future performance. It is difficult to estimate how potential changes in any one factor or input might affect the overall allowance for credit losses because we consider a wide variety of factors and inputs in the allowance for credit losses estimate. Changes in the factors and inputs considered may not occur at the same rate and may not be consistent across all geographies or product types, and changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others.
However, to consider the sensitivity of credit loss estimates to alternative macroeconomic forecasts, we compared the Company’s allowance for credit loss estimates as of March 31, 2025, excluding margin loans in the broker-dealer segment, and the banking segment mortgage warehouse programs, with modeled results using both upside (“S1”) and downside (“S3”) economic scenario forecasts published by Moody’s Analytics.
Compared to our economic forecast, the upside scenario assumes the economic impacts from international armed conflicts recede faster than expected and the impact of tariffs on the economy will be less than expected. Business sentiment and consumer confidence rise significantly. Real GDP is expected to grow 3.5% in the second quarter of 2025, 3.1% in the third quarter of 2025, 2.9% in the fourth quarter of 2025, and 2.7% in the first quarter of 2026. Average unemployment rates are expected to decline to 3.5% by the second quarter of 2025 and to 3.2% by the fourth quarter of 2025 before reverting to historical data. Inflation is expected to trend back toward the Federal Reserve’s target sooner than expected, and we expect the federal funds rate to peak at 4.4% during 2025.
Compared to our economic forecast, the downside scenario assumes the combination of tariffs, reciprocal tariffs, and rising inflation causes the economy to fall into recession in the second quarter of 2025. Real GDP is expected to decrease 3.2% in the second quarter of 2025, 3.4% in the third quarter of 2025, and 3.7% in the fourth quarter of 2025. Average unemployment rates are expected to increase to 5.9% by the second quarter of 2025 and to 8.3% by the second quarter of 2026, and then revert back to historical average rates over time. The Federal Reserve increases the federal funds rate to control rising inflation to a 5.1% target by the third quarter of 2025 and then reduces it to support the economy to a 3.1% target by the first quarter of 2026.
The impact of applying all of the assumptions of the upside economic scenario during the reasonable and supportable forecast period would have resulted in a decrease in the allowance for credit losses of approximately $20 million or a weighted average expected loss rate of 1.1% as a percentage of our total loan portfolio, excluding margin loans in the broker-dealer segment and the banking segment mortgage warehouse lending programs.
The impact of applying all of the assumptions of the downside economic scenario during the reasonable and supportable forecast period would have resulted in an increase in the allowance for credit losses of approximately $52 million or a weighted average expected loss rate of 2.1% as a percentage of our total loan portfolio, excluding margin loans in the broker-dealer segment and the banking segment mortgage warehouse lending programs.
This analysis relates only to the modeled credit loss estimates and is not intended to estimate changes in the overall allowance for credit losses as they do not reflect any potential changes in the adjustment to the quantitative calculation, which would also be influenced by the judgment management applies to the modeled lifetime loss estimates to reflect the uncertainty and imprecision of these modeled lifetime loss estimates based on then-current circumstances and conditions.
Our allowance for credit losses reflects our best estimate of current expected credit losses, which is highly dependent on several assumptions, including the macroeconomic outlook, inflationary pressures and labor market conditions, the impact of tariffs, and international armed conflicts and their impact on supply chains, the U.S elections and other various fiscal and monetary policy decisions. The sensitivities of many of these assumptions are often correlated and nonlinear so these results should not be simply extrapolated to estimate the allowance for credit losses accurately for more severe changes in economic scenarios. Future allowance for credit losses may vary considerably for these reasons.
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Allowance Activity
The following table presents the activity in our allowance for credit losses and selected credit metrics within our loan portfolio for the periods presented (in thousands). Substantially all of the activity shown within the allowance for credit losses below occurred within the banking segment.
Three Months Ended March 31,
2025
2024
Loans Held for Investment:
Balance, beginning of period
$
101,116
$
111,413
Provision for (reversal of) credit losses
9,338
(2,871)
Recoveries of loans previously charged off:
Commercial real estate:
Non-owner occupied
—
—
Owner occupied
8
9
Commercial and industrial
121
342
Construction and land development
—
1
1-4 family residential
8
11
Consumer
23
37
Broker-dealer
—
—
Total recoveries
160
400
Loans charged off:
Commercial real estate:
Non-owner occupied
918
1,647
Owner occupied
—
—
Commercial and industrial
3,432
2,983
Construction and land development
—
—
1-4 family residential
—
—
Consumer
67
81
Broker-dealer
—
—
Total charge-offs
4,417
4,711
Net recoveries (charge-offs)
(4,257)
(4,311)
Balance, end of period
$
106,197
$
104,231
Average loans held for investment for the period
$
7,890,745
$
7,835,647
Total loans held for investment (end of period)
$
7,966,777
$
8,062,693
Loans Held for Sale:
Average loans held for sale for the period
$
709,094
$
802,098
Total loans held for sale (end of period)
$
818,328
$
842,324
Selected Credit Metrics:
Net recoveries (charge-offs) to average total loans held for investment (1)
(0.22)
%
(0.22)
%
Non-accrual loans:
Loans held for investment (end of period)
$
77,014
$
28,655
Loans held for sale (end of period)
$
4,463
$
36,081
Non-accrual loans to total loans (end of period)
0.93
%
0.73
%
Allowance for credit losses on loans held for investment to:
Total loans (end of period)
1.21
%
1.17
%
Total loans held for investment (end of period)
1.33
%
1.29
%
Total non-accrual loans (end of period)
130.34
%
161.01
%
Non-accrual loans held for investment (end of period)
137.89
%
363.74
%
(1) Net recoveries (charge-offs) to average total loans held for investment ratio presented on a consolidated basis for all periods. Refer to following table for details by loan portfolio segment.
Total non-accrual loans classified as loans held for investment decreased by $7.4 million from December 31, 2024 to March 31, 2025. This decrease was primarily due to decreases in commercial and industrial loans and commercial real estate non-owner occupied loans, partially offset by an increase in 1-4 family residential loans.
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The following tables present additional details regarding our net charge-offs to average total loans held for investment ratios by loan portfolio segment for the periods presented (in thousands). Substantially all of the activity shown below occurred within the banking segment.
Net
Total
Recoveries
Allowance
Net
Average
(Charge-Offs)
for Credit
Recoveries
Loans Held
as a % of
Three Months Ended March 31, 2025
Losses
(Charge-Offs)
for Investment
Average Loans
Commercial real estate:
Non-owner occupied
$
34,703
$
(918)
$
1,944,242
(0.19)
%
Owner occupied
35,370
8
1,443,166
—
%
Commercial and industrial
23,350
(3,311)
1,465,173
(0.91)
%
Construction and land development
7,291
—
884,952
—
%
1-4 Family Residential
4,988
8
1,824,180
—
%
Consumer
479
(44)
24,194
(0.73)
%
Broker-Dealer
16
—
304,838
—
%
Total
$
106,197
$
(4,257)
$
7,890,745
(0.22)
%
Net
Total
Recoveries
Allowance
Net
Average
(Charge-Offs)
for Credit
Recoveries
Loans Held
as a % of
Three Months Ended March 31, 2024
Losses
(Charge-Offs)
for Investment
Average Loans
Commercial real estate:
Non-owner occupied
$
39,563
$
(1,647)
$
1,924,815
(0.34)
%
Owner occupied
28,737
9
1,454,536
—
%
Commercial and industrial
16,552
(2,641)
1,558,940
(0.68)
%
Construction and land development
10,008
1
986,800
—
%
1-4 Family Residential
8,744
11
1,763,233
—
%
Consumer
544
(44)
25,923
(0.68)
%
Broker-Dealer
83
—
121,400
—
%
Total
$
104,231
$
(4,311)
$
7,835,647
(0.22)
%
As previously discussed in detail within this section, the allowance for credit losses has fluctuated from period to period, which impacted the resulting ratios noted in the table above. For the periods presented, the changes in the allowance for credit losses primarily reflected loan portfolio changes, net charge-offs activity, and changes in the U.S. economic outlook. The distribution of the allowance for credit losses among loan types and the percentage of the loans for that type to gross loans, excluding unearned income, within our loan portfolio are presented in the table below (dollars in thousands).
March 31, 2025
December 31, 2024
% of
% of
Allocation of the Allowance for Credit Losses
Reserve
Gross Loans
Reserve
Gross Loans
Commercial real estate:
Non-owner occupied
$
34,703
24.34
%
$
29,310
24.17
%
Owner occupied
35,370
18.15
%
33,112
18.06
%
Commercial and industrial
23,350
18.83
%
25,609
19.39
%
Construction and land development
7,291
11.17
%
7,161
10.90
%
1-4 family residential
4,988
23.09
%
5,327
22.55
%
Consumer
479
0.35
%
547
0.36
%
Broker-dealer
16
4.07
%
50
4.57
%
Total
$
106,197
100.00
%
$
101,116
100.00
%
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The following table summarizes historical levels of the allowance for credit losses on loans held for investment, distributed by portfolio segment (in thousands).
March 31,
December 31,
September 30,
June 30,
March 31,
2025
2024
2024
2024
2024
Commercial real estate:
Non-owner occupied
$
34,703
$
29,310
$
32,330
$
37,321
$
39,563
Owner occupied
35,370
33,112
34,378
32,772
28,737
Commercial and industrial
23,350
25,609
28,308
28,869
16,552
Construction and land development
7,291
7,161
7,924
7,594
10,008
1-4 family residential
4,988
5,327
7,161
7,912
8,744
Consumer
479
547
580
547
544
Broker-dealer
16
50
237
67
83
$
106,197
$
101,116
$
110,918
$
115,082
$
104,231
Unfunded Loan Commitments
In order to estimate the allowance for credit losses on unfunded loan commitments, the Bank uses a process similar to that used in estimating the allowance for credit losses on the funded portion. The allowance is based on the estimated exposure at default, multiplied by the lifetime probability of default grade and loss given default grade for that particular loan segment. The Bank estimates expected losses by calculating a commitment usage factor based on industry usage factors. The commitment usage factor is applied over the relevant contractual period. Loss factors from the underlying loans to which commitments are related are applied to the results of the usage calculation to estimate any liability for credit losses related for each loan type. Letters of credit are not currently reserved because they are issued primarily as credit enhancements and the likelihood of funding is low.
Changes in the allowance for credit losses for loans with off-balance sheet credit exposures are shown below (in thousands).
Three Months Ended March 31,
2025
2024
Balance, beginning of period
$
7,918
$
8,876
Other noninterest expense
35
(580)
Balance, end of period
$
7,953
$
8,296
During the three months ended March 31, 2025, the increase in the reserve for unfunded commitments was primarily due to increases in commitment balances. The decrease in the reserve for unfunded commitments during the three months ended March 31, 2024 was primarily due to decreases in both commitment balances and expected loss rates.
Potential Problem Loans
Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor’s potential operating or financial difficulties or whether repayment may depend on collateral or other risk mitigation. Management monitors these loans and reviews their performance on a regular basis. Potential problem loans contain potential weaknesses that could improve, persist or further deteriorate. If such potential weaknesses persist without improving, the loan is subject to downgrade, typically to substandard, in three to six months. Potential problem loans include those loans assigned a grade of special mention and substandard accrual within our risk grading matrix. Potential problem loans do not include purchased credit deteriorated (“PCD”) loans because PCD loans exhibited evidence of more than insignificant credit deterioration at acquisition that made it probable that all contractually required principal payments would not be collected.
At March 31, 2025, we had $207.0 million of potential problem loans, compared to $166.9 million at December 31, 2024. Our potential problem loans designated as substandard accrual at March 31, 2025 and December 31, 2024, totaled $133.2 million and $152.6 million, respectively. The decrease from December 31, 2024 to March 31, 2025 was primarily attributable to decreases in commercial and industrial loans, 1-4 family residential loans and construction and land development loans, partially offset by an increase in commercial real estate owner occupied loans. Of the $133.2 million of potential problem loans designated as substandard accrual at March 31, 2025, $47.7 million, $38.6 million and $22.2 million were associated with commercial real estate non-owner occupied loans, commercial real estate owner occupied
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loans and commercial and industrial loans, respectively, compared to $48.4 million, $37.3 million and $35.2 million, respectively, at December 31, 2024.
Potential problem loans designated as special mention were comprised of ten credit relationships totaling $73.8 million at March 31, 2025, compared with four credit relationships totaling $14.2 million at December 31, 2024 . Of the $73.8 million of potential problem loans at March 31, 2025, $71.0 million was associated with five credit relationships included in our commercial and industrial loan portfolio, commercial real estate owner occupied loan portfolio, and commercial real estate non-owner occupied loan portfolio within the office industry subsector.
Non-Performing Assets
The following table presents components of our non-performing assets (dollars in thousands).
March 31,
December 31,
2025
2024
Variance
Loans accounted for on a non-accrual basis:
Commercial real estate:
Non-owner occupied
$
4,241
$
7,166
$
(2,925)
Owner occupied
6,535
6,092
443
Commercial and industrial
51,987
59,025
(7,038)
Construction and land development
3,256
3,003
253
1-4 family residential
15,458
12,863
2,595
Consumer
—
—
—
Broker-dealer
—
—
—
Non-accrual loans
$
81,477
$
88,149
$
(6,672)
Non-accrual loans as a percentage of total loans
0.93
%
1.00
%
(0.07)
%
Other real estate owned
$
7,682
$
2,848
$
4,834
Other repossessed assets
$
—
$
98
$
(98)
Non-performing assets
$
89,159
$
91,095
$
(1,936)
Non-performing assets as a percentage of total assets
0.56
%
0.56
%
—
%
Loans past due 90 days or more and still accruing
$
24,145
$
22,090
$
2,055
At March 31, 2025, non-accrual loans included 26 commercial and industrial relationships with loans secured by finance company notes receivable, accounts receivable, inventory and equipment. Commercial and industrial non-accrual loans decreased by $7.0 million from December 31, 2024 to March 31, 2025 primarily due to principal paydowns and the reclassification of a single non-accrual loan from commercial and industrial loans to commercial real estate non-owner occupied loans. Non-accrual loans at March 31, 2025 also included $4.5 million of loans secured by residential and commercial real estate which were classified as loans held for sale. At December 31, 2024, non-accrual loans included 27 commercial and industrial relationships with loans secured primarily by notes receivable, accounts receivable and equipment. Non-accrual loans at December 31, 2024 also included $3.7 million of loans secured by residential real estate which were classified as loans held for sale.
Other real estate owned (“OREO”) increased from December 31, 2024 to March 31, 2025, primarily due to additions totaling $4.9 million, partially offset by disposals and valuation adjustments totaling $0.1 million. At both March 31, 2025 and December 31, 2024, OREO was primarily comprised of commercial properties.
Deposits
The banking segment’s major source of funds and liquidity is its deposit base. Deposits provide funding for its investments in loans and securities. Interest paid for deposits must be managed carefully to control the level of interest expense and overall net interest margin. The composition of the deposit base (time deposits versus interest-bearing demand deposits and savings), as discussed in more detail within the section titled “Liquidity and Capital Resources — Banking Segment” below, is constantly changing due to the banking segment’s needs and market conditions. Currently,
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the banking segment is facing intense competition for its deposit base as customers seek higher yields on deposits. Consistent with the consolidated trend in average rates paid on interest-bearing deposits noted in the table below, the banking segment’s average rate paid on interest-bearing deposits during the three months ended March 31, 2025 was 3.26%, compared to 3.51% during the three months ended December 31, 2024 and 3.93% during the three months ended March 31, 2024.
Given the cumulative 100-basis point decrease in interest rates since September 2024 and current deposit levels, the Bank’s cumulative interest-bearing deposit pricing beta, excluding deposits from the Hilltop Securities FDIC-insured sweep program and brokered deposits, has approximated 64%. The deposit pricing beta represents the change in interest-bearing deposit pricing in response to a change in market interest rates. The historical interest-bearing deposit pricing beta for the Bank, excluding deposits from our Hilltop Securities FDIC-insured sweep program and brokered deposits, has approximated 53% . We expect that the Bank’s cost related to interest-bearing deposits during 2025 to continue to be driven by various factors, including competition as well as economic and market area factors.
The table below presents the average balance of, and rate paid on, consolidated deposits (dollars in thousands).
Three Months Ended March 31,
2025
2024
Average
Average
Average
Average
Balance
Rate Paid
Balance
Rate Paid
Noninterest-bearing demand deposits
$
2,696,247
0.00
%
$
2,951,357
0.00
%
Interest-bearing deposits:
Demand
6,717,906
2.86
%
6,279,614
3.55
%
Savings
229,378
1.00
%
253,493
1.19
%
Time
1,239,139
3.94
%
1,215,526
4.24
%
8,186,423
2.97
%
7,748,633
3.58
%
Total deposits
$
10,882,670
2.24
%
$
10,699,990
2.59
%
The table above includes interest-bearing brokered deposits with balances of approximately $15.2 million at March 31, 2025, compared with approximately $15 million at December 31, 2024. The variability in the level of brokered deposits has been, and will continue to be, managed through asset/liability strategy and policies that address diversification of funding sources and market conditions, including demand by customers and other investors for those deposits, and the cost of funds available from alternative sources at the time.
At March 31, 2025, total estimated uninsured deposits were $5.6 billion, or approximately 52% of total deposits, while estimated uninsured deposits, excluding collateralized deposits of $371.5 million and internal accounts of $485.8 million, were $4.8 billion, or approximately 44% of total deposits. Total estimated uninsured deposits were $5.7 billion, or approximately 52% of total deposits, as of December 31, 2024.
The following table presents the scheduled maturities of the portion of our time deposits that are in excess of the FDIC insurance limit of $250,000 as of March 31, 2025 (in thousands).
Months to maturity:
3 months or less
$
139,968
3 months to 6 months
49,032
6 months to 12 months
47,572
Over 12 months
95,873
$
332,445
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Borrowings
Our consolidated borrowings are shown in the table below (dollars in thousands).
March 31, 2025
December 31, 2024
Average
Average
Balance
Rate Paid
Balance
Rate Paid
Short-term borrowings
$
705,008
4.13
%
$
834,023
4.64
%
Notes payable
198,043
6.75
%
347,667
4.22
%
$
903,051
4.69
%
$
1,181,690
4.52
%
Short-term borrowings consisted of federal funds purchased, securities sold under agreements to repurchase, borrowings at the FHLB, short-term bank loans and commercial paper. The decrease in short-term borrowings at March 31, 2025, compared with December 31, 2024, primarily reflected decreases in federal funds purchased by the banking segment and securities sold under agreements to repurchase by the broker-dealer segment, partially offset by an increase in commercial paper by the broker-dealer segment. Notes payable at March 31, 2025 was comprised of Subordinated Notes, net of origination fees, of $198.0 million, while notes payable at December 31, 2024 included Subordinated Notes, net of origination fees, of $198.0 million and Senior Notes, net of origination fees, of $149.7 million that were redeemed on January 15, 2025.
Liquidity and Capital Resources
Hilltop is a financial holding company whose assets primarily consist of the stock of its subsidiaries and invested assets. Hilltop’s primary investment objectives, as a holding company, are to support capital deployment for organic growth and to preserve capital to be deployed through acquisitions, dividend payments and stock repurchases. At March 31, 2025, Hilltop had $268.1 million in cash and cash equivalents, a decrease of $152.4 million from $420.5 million at December 31, 2024. This decrease in cash and cash equivalents was primarily due to cash outflows from the redemption of our senior notes, $33.3 million in stock repurchases, $11.6 million in cash dividends declared and other general corporate expenses, partially offset by the receipt of $50.0 million of dividends from subsidiaries. Subject to regulatory restrictions, Hilltop has received, and may also continue to receive, dividends from its subsidiaries. If necessary or appropriate, we may also finance acquisitions with the proceeds from equity or debt issuances. We believe that Hilltop’s liquidity is sufficient for the foreseeable future, with current short-term liquidity needs including operating expenses, redemption of debt obligations, interest on debt obligations, dividend payments to stockholders and potential stock repurchases.
As discussed in more detail below, we have the ability to redeem the 2030 Subordinated Notes, in whole or in part, beginning in May 2025, while all of our outstanding Senior Notes previously scheduled to mature in April 2025 were redeemed on January 15, 2025 using cash on hand.
Economic Environment
As previously discussed, operational and financial headwinds during 2024 have had, and are expected to continue to have, an adverse impact on our operating results during the remainder of 2025. The extent of the impact of uncertain economic conditions on our financial performance during the remainder of 2025, 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, the impact of tariffs and reciprocal tariffs, and international armed conflicts and their impact on supply chains. As demonstrated during the extreme volatility and disruptions in the capital and credit markets beginning in March 2020 resulting from the pandemic and banking sector-related uncertainty and concerns associated with liquidity primarily due to bank failures during early 2023 and their respective negative impacts on the economy, we will continue to monitor the economic environment and evaluate appropriate actions to enhance our financial flexibility, protect capital, minimize losses and ensure target liquidity levels.
Dividend Declaration
On April 24, 2025, our board of directors declared a quarterly cash dividend of $0.18 per common share, payable on May 22, 2025 to all common stockholders of record as of the close of business on May 8, 2025.
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Future dividends on our common stock are subject to the determination by the board of directors based on an evaluation of our earnings and financial condition, liquidity and capital resources, the general economic and regulatory climate, our ability to service any equity or debt obligations senior to our common stock and other factors.
Stock Repurchases
In January 2025, 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, inclusive of repurchases to offset dilution related to grants of stock-based compensation. During the three months ended March 31, 2025, Hilltop paid $33.3 million to repurchase an aggregate of 1,046,540 shares of our common stock at an average price of $31.80 per share pursuant to the stock repurchase program.
Senior Notes due 2025
On January 15, 2025 (three months prior to the maturity date of the Senior Notes) we redeemed, at our election, all of our outstanding Senior Notes at a redemption price equal to 100% of the principal amount of $150 million, plus accrued and unpaid interest to, but excluding, the Redemption Date using cash on hand, which also satisfied and discharged our obligations under the Senior Notes and the Senior Notes Indenture.
Subordinated Notes due 2030 and 2035
On May 7, 2020, we completed a public offering of $50 million aggregate principal amount of 2030 Subordinated Notes and $150 million aggregate principal amount of 2035 Subordinated Notes that mature on May 15, 2030 and May 15, 2035, respectively. The price to the public for the Subordinated Notes was 100% of the principal amount of the Subordinated Notes. The net proceeds from the offering, after deducting underwriting discounts and fees and expenses of $3.4 million, were $196.6 million.
We may redeem the Subordinated Notes, in whole or in part, from time to time, subject to obtaining Federal Reserve approval, beginning with the interest payment date of May 15, 2025 for the 2030 Subordinated Notes and beginning with the interest payment date of May 15, 2030 for the 2035 Subordinated Notes at a redemption price equal to 100% of the principal amount of the Subordinated Notes being redeemed plus accrued and unpaid interest to but excluding the date of redemption.
The 2030 Subordinated Notes bear interest at a rate of 5.75% per year, payable semi-annually in arrears commencing on November 15, 2020. The interest rate for the 2030 Subordinated Notes will reset quarterly beginning May 15, 2025 to an interest rate, per year, equal to the then-current benchmark rate, which is expected to be three-month term SOFR rate, plus 5.68%, payable quarterly in arrears. The 2035 Subordinated Notes bear interest at a rate of 6.125% per year, payable semi-annually in arrears commencing on November 15, 2020. The interest rate for the 2035 Subordinated Notes will reset quarterly beginning May 15, 2030 to an interest rate, per year, equal to the then-current benchmark rate, which is expected to be three-month term SOFR rate plus 5.80%, payable quarterly in arrears. At March 31, 2025, $200.0 million of our Subordinated Notes was outstanding.
Regulatory Capital
We are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material adverse effect on our financial condition and results of operations. Under capital adequacy and regulatory requirements, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
In order to avoid limitations on capital distributions, including dividend payments, stock repurchases and certain discretionary bonus payments to executive officers, Basel III requires banking organizations to maintain a capital conservation buffer above minimum risk-based capital requirements measured relative to risk-weighted assets.
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The following table shows PlainsCapital’s and Hilltop’s actual capital amounts and ratios in accordance with Basel III compared to the regulatory minimum capital requirements including the conservation buffer ratio in effect at March 31, 2025 (dollars in thousands). Based on actual capital amounts and ratios shown in the following table, PlainsCapital’s ratios place it in the “well capitalized” (as defined) capital category under regulatory requirements.
Minimum Capital
Requirements Including
To Be Well
March 31, 2025
Conservation Buffer
Capitalized
Amount
Ratio
Ratio
Ratio
Tier 1 capital (to average assets):
PlainsCapital
$
1,306,947
10.22
%
4.0
%
5.0
%
Hilltop
2,027,974
12.86
%
4.0
%
N/A
Common equity Tier 1 capital
(to risk-weighted assets):
PlainsCapital
1,306,947
15.14
%
7.0
%
6.5
%
Hilltop
2,027,974
21.29
%
7.0
%
N/A
Tier 1 capital (to risk-weighted assets):
PlainsCapital
1,306,947
15.14
%
8.5
%
8.0
%
Hilltop
2,027,974
21.29
%
8.5
%
N/A
Total capital (to risk-weighted assets):
PlainsCapital
1,414,868
16.39
%
10.5
%
10.0
%
Hilltop
2,342,124
24.59
%
10.5
%
N/A
We discuss regulatory capital requirements in more detail in Note 16 to our consolidated financial statements, as well as under the caption “Government Supervision and Regulation — Corporate — Capital Adequacy Requirements and BASEL III” set forth in Part I, Item 1, of our 2024 Form 10-K.
Banking Segment
Within our banking segment, our primary uses of cash are for customer withdrawals and extensions of credit as well as our borrowing costs and other operating expenses. Historically, high-profile bank failures periodically increase market uncertainty and concerns associated with banking sector liquidity positions, increase regulatory scrutiny and underscore the importance of maintaining access to diverse sources of funding. Our corporate treasury group is responsible for continuously monitoring our deposit flows and balance sheet trends to ensure that our assets and liabilities are managed in a manner that will meet our short-term and long-term cash requirements. Our goal is to manage our liquidity position in a manner such that we can meet our customers’ short-term and long-term deposit withdrawals and anticipated and unanticipated increases in loan demand without penalizing earnings. Funds invested in short-term marketable instruments, the continuous maturing of other interest-earning assets, cash flows from self-liquidating investments such as mortgage-backed securities and collateralized mortgage obligations, the possible sale of available for sale securities and the ability to securitize certain types of loans provide sources of liquidity from an asset perspective. The liability base provides sources of liquidity through deposits and the maturity structure of short-term borrowed funds. For short-term liquidity needs, we utilize federal fund lines of credit with correspondent banks, securities sold under agreements to repurchase, borrowings from the Federal Reserve and borrowings under lines of credit with other financial institutions. For intermediate liquidity needs, we utilize advances from the FHLB. To supply liquidity over the longer term, we have access to brokered time deposits, term loans at the FHLB and borrowings under lines of credit with other financial institutions.
The above sources of liquidity allow the banking segment to meet increased liquidity demands without adversely affecting daily operations. The Bank’s borrowing capacity through access to secured funding sources is summarized in the following table (in millions). Available liquidity noted below does not include borrowing capacity available through the discount window at the Federal Reserve.
March 31,
December 31,
2025
2024
FHLB capacity
$
4,106
$
4,284
Investment portfolio (available)
1,394
1,397
Fed deposits (excess daily requirements)
1,536
2,053
$
7,036
$
7,734
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During the first quarter of 2025, our deposit funding costs declined due to the decrease in the rate paid on interest-bearing deposits, partially offset by continued competition for liquidity to combat deposit outflows. We are actively managing our overall deposit funding costs. Future decisions on the cost of deposits will be determined based on various factors including, but not limited to future changes in the target range for the federal funds rate, our customers’ appetite for higher yields on deposits, and our overall liquidity profile, we anticipate that our cost of deposits will continue to trend modestly downward. At March 31, 2025, the Bank also accessed and included approximately $570 million of core deposits on its balance sheet from our Hilltop Securities FDIC-insured sweep program, while the Bank is not utilizing any of its FHLB borrowing capacity noted above through the use of short-term borrowings.
Within our banking segment, deposit flows are affected by the level of market interest rates, the interest rates and products offered by competitors, the volatility of equity markets and other factors. An economic recovery and improved commercial real estate investment outlook may result in an outflow of deposits at an accelerated pace as customers utilize such available funds for expanded operations and investment opportunities. The Bank regularly evaluates its deposit products and pricing structures relative to the market to maintain competitiveness over time. Currently, the Bank is facing continued competition from bank and non-bank competitors for its deposit base and expects that its interest expense on certain deposits will continue to be driven by various factors, including competition as well as economic and market area factors.
The Bank’s 15 largest depositors, excluding Hilltop and Hilltop Securities, collectively accounted for 13.45% of the Bank’s total deposits, and the Bank’s five largest depositors, excluding Hilltop and Hilltop Securities, collectively accounted for 7.28% of the Bank’s total deposits at March 31, 2025. The loss of one or more of our largest Bank customers, or a significant decline in our deposit balances due to ordinary course fluctuations related to these customers’ businesses, could adversely affect our liquidity and might require us to raise deposit rates to attract new deposits, purchase federal funds or borrow funds on a short-term basis to replace such deposits.
Broker-Dealer Segment
The Hilltop Broker-Dealers rely on their equity capital, short-term bank borrowings, interest-bearing and noninterest-bearing client credit balances, correspondent deposits, securities lending arrangements, repurchase agreement financing, commercial paper issuances and other payables to finance their assets and operations, subject to their respective compliance with broker-dealer net capital and customer protection rules. At March 31, 2025, Hilltop Securities had credit arrangements with two unaffiliated banks, with maximum aggregate commitments of up to $425.0 million. These credit arrangements are used to finance securities owned, securities held for correspondent accounts, receivables in customer margin accounts and underwriting activities. These credit arrangements are provided on an “as offered” basis and are not committed lines of credit. In addition, Hilltop Securities has committed revolving credit facilities with two unaffiliated banks, with aggregate availability of up to $125.0 million. At March 31, 2025, Hilltop Securities had no borrowings under its credit arrangements or under its credit facilities.
Hilltop Securities uses the net proceeds (after deducting related issuance expenses) from the sale of two commercial paper programs for general corporate purposes, including working capital and the funding of a portion of its securities inventories. The commercial paper notes (“CP Notes”) may be issued with maturities of 14 days to 270 days from the date of issuance. The CP Notes are issued under two separate programs. The Series 2019-2 CP Notes are issued in maximum aggregate amounts of $200 million. The CP Series 2024-1 CP Notes were initiated in December 2024 with the first issuances under this new program occurring in the first quarter of 2025. With these first issuances, there were no future issuances allowed under the Series 2019-1 CP Notes program. Until the final maturity of the Series 2019-1 CP Notes, expected in October 2025, the Series 2019-1 and Series 2024-1 CP notes are managed as a single program with a maximum aggregate amount of $300 million. The CP Notes are not redeemable prior to maturity or subject to voluntary prepayment and do not bear interest, but are sold at a discount to par. The CP Notes are secured by a pledge of collateral owned by Hilltop Securities.
As of March 31, 2025, the weighted average maturity of the CP Notes was 129 days at a rate of 5.02% with a weighted average remaining life of 65 days. At March 31, 2025, the aggregate amount outstanding under these secured arrangements was $240.0 million, which was collateralized by securities held for Hilltop Securities accounts valued at $264.2 million.
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Mortgage Origination Segment
PrimeLending funds the mortgage loans it originates through a warehouse line of credit maintained with the Bank, which had a total commitment of $1.2 billion, of which $704.0 million was drawn at March 31, 2025. PrimeLending sells substantially all mortgage loans it originates to various investors in the secondary market, historically with the majority with servicing released. As these mortgage loans are sold in the secondary market, PrimeLending pays down its warehouse line of credit with the Bank. In addition, PrimeLending has an available line of credit with an unaffiliated bank of up to $1.0 million, of which no borrowings were drawn at March 31, 2025.
PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC (“Ventures Management”), which holds a controlling ownership interest in and is the managing member of certain ABAs. At March 31, 2025, these ABAs had combined available lines of credit totaling $65.0 million, all of which was with the Bank, with outstanding borrowings of $35.1 million.
Other Material Contractual Obligations, Off-Balance Sheet Arrangements, Commitments and Guarantees
Since December 31, 2024, there have been no material changes in other material contractual obligations disclosed within the section captioned “Other Material Contractual Obligations, Off-Balance Sheet Arrangements, Commitments and Guarantees” set forth in Part II, Item 7 of our 2024 Form 10-K.
Additionally, in the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets.
Banking Segment
We enter into contractual loan commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon customers maintaining specific credit standards until the time of loan funding. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. We assess the credit risk associated with certain commitments to extend credit and have recorded a liability related to such credit risk in our consolidated financial statements.
Standby letters of credit are written conditional commitments issued by us to guarantee the performance of a customer to a third-party. In the event the customer does not perform in accordance with the terms of the agreement with the third-party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek recovery from the customer. Our policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.
In the aggregate, the Bank had outstanding unused commitments to extend credit of $2.1 billion at March 31, 2025 and outstanding financial and performance standby letters of credit of $53.5 million at March 31, 2025.
Broker-Dealer Segment
The Hilltop Broker-Dealers execute, settle and finance various securities transactions that may expose the Hilltop Broker-Dealers to off-balance sheet risk in the event that a customer or counterparty does not fulfill its contractual obligations. Examples of such transactions include the sale of securities not yet purchased by customers or for the account of the Hilltop Broker-Dealers, use of derivatives to support certain non-profit housing organization clients, clearing agreements between the Hilltop Broker-Dealers and various clearinghouses and broker-dealers, secured financing arrangements that involve pledged securities, and when-issued underwriting and purchase commitments.
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Impact of Inflation and Changing Prices
Our consolidated financial statements included herein have been prepared in accordance with GAAP, which presently require us to measure financial position and operating results primarily in terms of historic dollars. Changes in the relative value of money due to inflation or recession are generally not considered. The primary effect of inflation on our operations is reflected in increased operating costs. Historically, changes in interest rates affect the financial condition of a financial institution to a far greater degree than changes in the inflation rate. Inflationary pressures have moderated in recent periods with the inflation rate coming down from its peak with the expectation that there will be continued moderation of inflation during the remainder of 2025. Furthermore, a prolonged period of inflation has, and could continue to cause our costs, including compensation, occupancy and software costs, to increase, which could adversely affect our results of operations and financial condition.
While interest rates are greatly influenced by changes in the inflation rate, they do not necessarily change at the same rate or in the same magnitude as the inflation rate. Interest rates are highly sensitive to many factors that are beyond our control, including changes in the expected rate of inflation, the influence of general and local economic conditions and the monetary and fiscal policies of the U.S. government, its agencies and various other governmental regulatory authorities.
Critical Accounting Estimates
We have identified certain accounting estimates which involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. Our accounting policies are more fully described in Note 1 to the consolidated financial statements. Actual amounts and values as of the balance sheet dates may be materially different than the amounts and values reported due to the inherent uncertainty in the estimation process. Also, future amounts and values could differ materially from those estimates due to changes in values and circumstances after the balance sheet date. The critical accounting estimates, as summarized below, which we believe to be the most critical in preparing our consolidated financial statements relate to allowance for credit losses and goodwill and identifiable intangible assets. Since December 31, 2024, there have been no changes in critical accounting estimates as further described under “Critical Accounting Estimates” in our 2024 Form 10-K.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.