Fair Value Measurements

12 Months Ended

Dec. 31, 2024

Fair Value Measurements

Fair Value Measurements

3. Fair Value Measurements

Fair Value Measurements and Disclosures

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

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

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

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

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

Fair Value Option

The Company has elected to measure substantially all of PrimeLending’s mortgage loans held for sale and the retained MSR asset at fair value, under the provisions of the Fair Value Option. The Company elected to apply the provisions of the Fair Value Option to these items so that it would have the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. At December 31, 2024 and 2023, the aggregate fair value of PrimeLending’s mortgage loans held for sale accounted for under the Fair Value Option was $809.8 million and $822.2 million, respectively, and the unpaid principal balance of those loans was $803.0 million and $802.3 million, respectively. The interest component of fair value is reported as interest income on loans in the accompanying consolidated statements of operations.

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

Trading Securities — Trading securities are reported at fair value primarily using either Level 1 or Level 2 inputs in the same manner as discussed below for available for sale securities. Periodically, the Bank acquires certain government guaranteed loans under Small Business Administration (“SBA”) lending programs which are later securitized into separate securities (“SBA Loans”), including SBA pools and interest only (“IO”) strips. The SBA pools are reported at fair value using Level 2 inputs, while the IO strips are reported at fair value using Level 3 inputs. The fair value of the IO strips is impacted primarily by prepayment rates.

Available For Sale Securities — Most securities available for sale are reported at fair value using Level 2 inputs. The Company obtains fair value measurements from independent pricing services. As the Company is responsible for the determination of fair value, control processes are designed to ensure that the fair values received from independent pricing services are reasonable and the valuation techniques and assumptions used appear reasonable and consistent with prevailing market conditions. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the financial instruments’ terms and conditions, among other things. The fair value of certain available for sale securities prior to the sale of such instruments during the second quarter of 2024, by the Company’s merchant bank subsidiary were measured using the income approach with Level 3 inputs. The fair value of such financial instruments are based upon estimates of expected cash flows using unobservable inputs, including credit spreads derived from comparable securities and benchmark credit curves, and management’s knowledge of underlying collateral.

Equity Securities - For public common and preferred equity stocks, the determination of fair value uses Level 1 inputs based on observable market transactions.

Loans Held for Sale — Loans held for sale primarily consists of PrimeLending’s mortgage loans. As noted above, the Bank periodically acquires SBA Loans that are reported at fair value using Level 2 inputs, including the underlying characteristics of the SBA Loans. Mortgage loans held for sale are reported at fair value, as discussed above, using Level 2 inputs that consist of commitments on hand from investors or prevailing market prices. These instruments are held for relatively short periods, typically no more than 30 to 45 days. As a result, changes in instrument-specific credit risk are not a significant component of the change in fair value. The fair value of certain loans held for sale that cannot be sold through normal sale channels or are non-performing is measured using Level 3 inputs. The fair value of such loans is generally based upon estimates of expected cash flows using unobservable inputs, including listing prices of comparable assets, uncorroborated expert opinions, and/or management’s knowledge of underlying collateral. Certain mortgage loans held for sale that are guaranteed by U.S. government agencies that are subject to repurchase, or have been repurchased by PrimeLending and certain mortgage loans originated by PrimeLending on behalf of the Bank are reported at amortized cost and are not recorded at fair value on either a recurring or non-recurring basis.

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

Derivatives — Derivatives, which are included in other assets and liabilities within the Company’s consolidated balance sheets, are reported at fair value using either Level 2 or Level 3 inputs. The Bank uses dealer quotes to value interest rate swaps, forward purchase commitments and forward sale commitments executed for both hedging and non-hedging purposes. PrimeLending and the Hilltop Broker-Dealers use dealer quotes to value forward purchase commitments and forward sale commitments, respectively, executed for both hedging and non-hedging purposes. PrimeLending also issues IRLCs to its customers and the Hilltop Broker-Dealers issue forward purchase commitments to its clients that are valued based on the change in the fair value of the underlying mortgage loan from inception of the IRLC or purchase commitment to the balance sheet date, adjusted for projected loan closing rates. PrimeLending determines the value of the underlying mortgage loan as discussed in “Loans Held for Sale,” above. The Hilltop Broker-Dealers determine the value of the underlying mortgage loan from prices of comparable securities used to value forward sale commitments. Additionally, PrimeLending also uses dealer quotes to value futures contracts and U.S. Treasury bond futures and options used to hedge interest rate risk, and the Hilltop Broker-Dealers use dealer quotes to value U.S. Treasury bond futures and options, futures contracts, credit default swaps and MMD rate locks, used to hedge changes in the fair value of its securities. The fair value of certain derivatives by the Company’s merchant bank subsidiary were measured using Level 3 inputs based upon estimates of expected cash flows using unobservable inputs, including management’s knowledge of underlying collateral prior to the sale of such instruments during the second quarter of 2024.

MSR Asset — The MSR asset is reported at fair value, under the provisions of the Fair Value Option, using Level 3 inputs. The MSR asset is valued by projecting net servicing cash flows, which are then discounted to estimate the fair value. The fair value of the MSR asset is impacted by a variety of factors. Prepayment rates and discount rates, the most significant unobservable inputs, are discussed further in Note 10 to the consolidated financial statements.

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

Securities Sold, Not Yet Purchased — Securities sold, not yet purchased are reported at fair value primarily using either Level 1 or Level 2 inputs in the same manner as discussed above for trading and available for sale securities.

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

	Level 1		Level 2		Level 3		Total
December 31, 2024	Inputs		Inputs		Inputs		Fair Value
Trading securities	$	11,001	$	510,585	$	3,330	$	524,916
Available for sale securities		—		1,366,733		29,816		1,396,549
Equity securities		297		—		—		297
Loans held for sale		—		761,125		48,657		809,782
Derivative assets		—		67,821		—		67,821
MSR asset		—		—		5,723		5,723
Equity investments		—		—		22,015		22,015
Securities sold, not yet purchased		52,637		4,597		—		57,234
Derivative liabilities		—		11,290		—		11,290

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

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

									Total Gains or Losses
									(Realized or Unrealized)
											Included in
	Balance,						Transfers				Other
	Beginning of		Purchases/		Sales/		to (from)		Included in		Comprehensive		Balance,
	Year		Additions		Reductions		Level 3		Net Income		Income (Loss)		End of Year
Year ended December 31, 2024
Trading securities	$	—	$	3,515	$	—	$	—	$	(185)	$	—	$	3,330
Available for sale securities		24,418		6,250		(4,702)		—		2,672		1,178		29,816
Loans held for sale		38,036		85,844		(60,326)		—		(14,897)		—		48,657
Loans held for investment		10,858		—		(11,352)		—		494		—		—
Derivative assets		820		—		(2,598)		—		1,778		—		—
MSR asset		96,662		11,412		(87,268)		—		(15,083)		—		5,723
Equity investment		19,540		2,475		—		—		—		—		22,015
Total	$	190,334	$	109,496	$	(166,246)	$	—	$	(25,221)	$	1,178	$	109,541
Year ended December 31, 2023
Available for sale securities	$	—	$	25,919	$	—	$	—	$	—	$	(1,501)	$	24,418
Loans held for sale		40,707		80,417		(61,522)		(1,008)		(20,558)		—		38,036
Loans held for investment		9,181		—		—		—		1,677		—		10,858
Derivative assets		—		782		—		—		38		—		820
MSR asset		100,825		27,359		(19,055)		—		(12,467)		—		96,662
Equity investment		—		19,540		—		—		—		—		19,540
Total	$	150,713	$	154,017	$	(80,577)	$	(1,008)	$	(31,310)	$	(1,501)	$	190,334
Year ended December 31, 2022
Loans held for sale	$	47,716	$	52,058	$	(48,900)	$	5,587	$	(15,754)	$	—	$	40,707
Loans held for investment		—		9,611		(562)		—		132		—		9,181
MSR asset		86,990		56,974		(65,108)		—		21,969		—		100,825
Total	$	134,706	$	118,643	$	(114,570)	$	5,587	$	6,347	$	—	$	150,713

All net realized and unrealized gains (losses) in the table above are reflected in the accompanying consolidated financial statements. The unrealized gains (losses) relate to financial instruments still held at December 31, 2024.

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

					Range (Weighted-Average)
Financial Instrument	Fair Value		Valuation Technique	Unobservable Inputs	December 31, 2024							December 31, 2023
Trading securities	$	3,330	Discounted cash flow	Prepayment rate	10	-	12	%	(	11	%)
Available for sale securities		23,519	Discounted cash flow	Discount rate	12.75	-	14.00	%				14.25	-	15.50	%
		6,297	Recent transaction	Recent transaction
Loans held for sale		48,657	Market comparable	Projected price	78	-	95	%	(	93	%)	78	-	92	%	(	90	%)
Loans held for investment		-	Discounted cash flow	Discount rate											10.00		%
Derivative assets		-	Discounted cash flow	Discount rate											15.00		%
MSR asset		5,723	Discounted cash flow	Constant prepayment rate				10.10		%					8.65		%
				Discount rate				14.89		%					11.67		%
Equity investments		19,540	Market comparable	Market multiple				12.5x
		1,000	Market comparable	Market multiple	2.0x	-	5.4x
		1,475	Recent transaction	Recent transaction

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

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

	Year Ended December 31, 2024						Year Ended December 31, 2023						Year Ended December 31, 2022
	Net		Other		Total		Net		Other		Total		Net		Other		Total
	Gains		Noninterest		Changes in		Gains		Noninterest		Changes in		Gains		Noninterest		Changes in
	(Losses)		Income		Fair Value		(Losses)		Income		Fair Value		(Losses)		Income		Fair Value
Loans held for sale	$	(15,023)	$	—	$	(15,023)	$	14,426	$	—	$	14,426	$	(48,916)	$	—	$	(48,916)
Loans held for investment		94		—		94		565		—		565		(660)		—		(660)
MSR asset		(15,083)		—		(15,083)		(12,467)		—		(12,467)		21,969		—		21,969

The Company determines the fair value of OREO on a non-recurring basis. In particular, the fair value of properties are determined at their respective acquisition date fair values. In addition, facts and circumstances may dictate a fair value measurement when there is evidence of impairment. The Company determines fair value primarily using independent appraisals of OREO properties. The resulting fair value measurements are classified as Level 2 inputs. At December 31, 2024 and 2023, the estimated fair value of OREO was $2.8 million and $5.1 million, respectively, and the underlying fair value measurements utilized Level 2 inputs. The amounts are included in other assets within the consolidated balance sheets. During the reported periods, all fair value measurements for OREO subsequent to initial recognition utilized Level 2 inputs. The Company recorded a total gain of $0.4 million during 2024, compared with total losses of $0.1 million and $0.1 million during 2023 and 2022, respectively, which represent a change in fair value subsequent to initial recognition of the asset.

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

The Fair Value of Financial Instruments Subsection of the ASC requires disclosure of the fair value of financial assets and liabilities, including the financial assets and liabilities previously discussed. The methods for determining estimated fair value for financial assets and liabilities measured at fair value on a recurring or non-recurring basis are discussed above. For other financial assets and liabilities, the Company utilizes quoted market prices, if available, to estimate the fair value of financial instruments. Because no quoted market prices exist for a significant portion of the Company’s financial instruments, the fair value of such instruments has been derived based on management’s assumptions with respect to future economic conditions, the amount and timing of future cash flows, and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the estimates provided herein do not necessarily indicate amounts which could be realized in a current transaction. Further, as it is management’s intent to hold a significant portion of its financial instruments to maturity, it is not probable that the fair values shown below will be realized in a current transaction.

Because of the wide range of permissible valuation techniques and the numerous estimates which must be made, it may be difficult to make reasonable comparisons of the Company’s fair value information to that of other financial institutions. The aggregate estimated fair value amount should in no way be construed as representative of the underlying value of Hilltop and its subsidiaries. The following methods and assumptions are typically used in estimating the fair value disclosures for financial instruments:

Cash and Cash Equivalents — For cash and due from banks and federal funds sold, the carrying amount is a reasonable estimate of fair value.

Assets Segregated for Regulatory Purposes — Assets segregated for regulatory purposes may consist of cash and securities with carrying amounts that approximate fair value.

Securities Purchased Under Agreements to Resell — Securities purchased under agreements to resell are carried at the amounts at which the securities will subsequently be resold as specified in the agreements. The carrying amounts approximate fair value due to their short-term nature.

Held to Maturity Securities — For securities held to maturity, estimated fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Loans Held for Sale — Loans held for sale includes mortgage loans held for sale that are guaranteed by U.S. government agencies that are subject to repurchase, or have been repurchased, by PrimeLending with carrying amounts that approximate fair value. The fair value of certain mortgage loans originated by PrimeLending on behalf of the Bank are measured using Level 3 inputs. Such loans are reported at fair value using an exit price method.

Loans Held for Investment — The estimated fair values of loans held for investment are measured using an exit price method.

Broker-Dealer and Clearing Organization Receivables and Payables — The carrying amount approximates their fair value.

Deposits — The estimated fair value of demand deposits, savings accounts and NOW accounts is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. The carrying amount for variable-rate certificates of deposit approximates their fair values.

Short-Term Borrowings — The carrying amounts of federal funds purchased, borrowings under repurchase agreements, Federal Home Loan Bank (“FHLB”) and other short-term borrowings approximate their fair values.

Debt — The fair values are estimated using discounted cash flow analysis based on current incremental borrowing rates for similar types of borrowing arrangements.

Other Assets and Liabilities — Other assets and liabilities primarily consists of cash surrender value of life insurance policies and accrued interest receivable and payable with carrying amounts that approximate their fair values using Level 2 inputs.

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

			Estimated Fair Value
	Carrying		Level 1		Level 2		Level 3
December 31, 2024	Amount		Inputs		Inputs		Inputs		Total
Financial assets:
Cash and cash equivalents	$	2,299,627	$	2,299,627	$	—	$	—	$	2,299,627
Assets segregated for regulatory purposes		70,963		70,963		—		—		70,963
Securities purchased under agreements to resell		88,728		—		88,728		—		88,728
Held to maturity securities		737,899		—		649,872		—		649,872
Loans held for sale		48,883		—		1,436		49,435		50,871
Loans held for investment, net		7,849,435		—		363,718		7,572,849		7,936,567
Broker-dealer and clearing organization receivables		1,452,366		—		1,452,366		—		1,452,366
Other assets		69,545		—		69,545		—		69,545
Financial liabilities:
Deposits		11,065,322		—		11,058,234		—		11,058,234
Broker-dealer and clearing organization payables		1,331,902		—		1,331,902		—		1,331,902
Short-term borrowings		834,023		—		834,023		—		834,023
Debt		347,667		—		331,965		—		331,965
Other liabilities		16,779		—		16,779		—		16,779

			Estimated Fair Value
	Carrying		Level 1		Level 2		Level 3
December 31, 2023	Amount		Inputs		Inputs		Inputs		Total
Financial assets:
Cash and cash equivalents	$	1,859,350	$	1,859,350	$	—	$	—	$	1,859,350
Assets segregated for regulatory purposes		57,395		57,395		—		—		57,395
Securities purchased under agreements to resell		80,011		—		80,011		—		80,011
Held to maturity securities		812,677		—		731,858		—		731,858
Loans held for sale		121,652		—		99,358		22,882		122,240
Loans held for investment, net		7,957,474		—		344,172		7,696,393		8,040,565
Broker-dealer and clearing organization receivables		1,573,931		—		1,573,931		—		1,573,931
Other assets		74,613		—		74,613		—		74,613
Financial liabilities:
Deposits		11,063,192		—		11,045,957		—		11,045,957
Broker-dealer and clearing organization payables		1,430,734		—		1,430,734		—		1,430,734
Short-term borrowings		900,038		—		900,038		—		900,038
Debt		347,145		—		319,505		—		319,505
Other liabilities		24,280		—		24,280		—		24,280

The Company held equity investments other than securities of $32.9 million and $59.2 million at December 31, 2024 and 2023, respectively, which are included within other assets in the consolidated balance sheets. Of the $32.9 million of such equity investments held at December 31, 2024, $2.0 million do not have readily determinable fair values and each is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The following table presents the adjustments to the carrying value of these investments (in thousands).

	Year Ended December 31,
	2024		2023
Balance, beginning of year	$	6,607	$	27,264
Additional investments		—		374
Upward adjustments		—		611
Impairments and downward adjustments		(2,305)		(5,056)
Dispositions		(2,323)		—
Other		—		(16,586)
Balance, end of year	$	1,979	$	6,607