HILLTOP HOLDINGS INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.

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

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, references to "NLC"
refer to National Lloyds Corporation (formerly a wholly owned subsidiary of
Hilltop) and its wholly owned subsidiaries.

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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 Annual Report (dollars in thousands, except per share data and weighted
average shares outstanding).

                                                                    2022            2021            2020
Statement of Operations Data:
Net interest income                                             $    458,975    $    422,982    $    424,166
Provision for (reversal of) credit losses                              8,309        (58,213)          96,491
Total noninterest income                                             832,460       1,410,275       1,690,480
Total noninterest expense                                          1,126,999       1,387,398       1,453,803
Income from continuing operations before income taxes                156,127         504,072         564,352
Income tax expense                                                    36,833         117,976         133,071
Income from continuing operations before income taxes                119,294         386,096         431,281
Income from discontinued operations, net of income taxes                   -               -          38,396
Net income                                                           119,294         386,096         469,677
Less: Net income attributable to noncontrolling interest               6,160          11,601          21,841
Income attributable to Hilltop                                  $    

113,134 $ 374,495 $ 447,836

Per Share Data:
Diluted earnings per common share from continuing operations    $       1.60    $       4.61    $       4.58
Diluted weighted average shares outstanding                     $     70,626    $     81,173    $     89,304
Cash dividends declared per common share                        $       0.60    $       0.48    $       0.36
Dividend payout ratio (1)                                              37.36 %         10.34 %          7.18 %
Book value per common share (end of year)                       $      31.49    $      31.95    $      28.28
Tangible book value per common share (2) (end of year)          $      27.18    $      28.37    $      24.77

Balance Sheet Data:
Total assets                                                    $ 16,259,282    $ 18,689,080    $ 16,944,264
Cash and due from banks                                            1,579,512       2,823,138       1,062,560
Securities                                                         3,289,530       3,046,500       2,468,544
Loans held for sale                                                  982,616       1,878,190       2,788,386
Loans held for investment, net of unearned income                  8,092,673       7,879,904       7,693,141
Allowance for credit losses                                         (95,442)        (91,352)       (149,044)
Total deposits                                                    11,315,749      12,818,077      11,242,319
Notes payable                                                        346,654         387,904         381,987
Total stockholders' equity                                         2,063,529       2,549,203       2,350,647

Capital Ratios (3):
Common equity to assets ratio                                          12.53 %         13.50 %         13.72 %
Tangible common equity to tangible assets (2)                          

11.00 % 12.17 % 12.22 %

(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."

(3) Ratios and financial data presented on a consolidated basis and includes

    discontinued operations for 2020 period.


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Income from continuing operations before income taxes during 2022 included the
following contributions from our reportable business segments.

? The banking segment contributed $219.5 million of income before income taxes

during 2022;

? The broker-dealer segment contributed $37.8 million of income before income

taxes during 2022; and

? The mortgage origination segment incurred $36.5 million of losses before income

taxes during 2022.

During 2022, we paid an aggregate of $442.3 million to repurchase shares of our
common stock, and declared and paid total common dividends of $43.0 million.

On May 2, 2022, we announced the commencement of a modified "Dutch auction"
tender offer to purchase shares of our common stock for an aggregate cash
purchase price of up to $400 million, inclusive of our $100.0 million stock
repurchase program authorized in January 2022. On May 27, 2022, including the
exercise of our right to purchase up to an additional 2% of our outstanding
shares, we completed our tender offer, repurchasing 14,868,469 shares of
outstanding common stock at a price of $29.75 per share for a total of $442.3
million. We funded the tender offer with cash on hand. As a result of the share
repurchases during 2022, we had no further available share repurchase capacity
associated with our previously authorized stock repurchase program.

On January 26, 2023, our board of directors declared a quarterly cash dividend
of $0.16 per common share, a 7% increase from the prior quarter, payable on
February 24, 2023 to all common stockholders of record as of the close of
business on February 10, 2023. Additionally, our board of directors authorized a
new stock repurchase program through January 2024, pursuant to which we are
authorized to repurchase, in the aggregate, up to $75.0 million of our
outstanding common stock.

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 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).

                                                            December 31,
                                                2022            2021            2020

Book value per common share                 $      31.49    $      31.95    $      28.28
Effect of goodwill and intangible assets
per share                                         (4.31)          (3.58)   

(3.51)

Tangible book value per common share $ 27.18 $ 28.37 $ 24.77

Hilltop stockholders' equity                $  2,036,924    $  2,522,668    $  2,323,939
Less: goodwill and intangible assets,
net                                              278,764         282,731         287,811
Tangible common equity                      $  1,758,160    $  2,239,937    $  2,036,128

Total assets                                $ 16,259,282    $ 18,689,080    $ 16,944,264
Less: goodwill and intangible assets,
net                                              278,764         282,731         287,811
Tangible assets                             $ 15,980,518    $ 18,406,349    $ 16,656,453

Equity to assets                                   12.53 %         13.50 %         13.72 %
Tangible common equity to tangible
assets                                             11.00 %         12.17 %         12.22 %


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Recent Developments

Economic Environment

Since March 2020, our operational and financial results have been volatile
resulting initially from the COVID-19 crisis and then, beginning in 2022,
headwinds including tight housing inventories on mortgage volumes, declining
deposit balances, rapid increases in market interest rates and a declining
economic forecast. The impacts of such headwinds in 2023 remain uncertain and
will depend on several developments outside of our control including, among
others, the timing and significance of further changes in U.S. treasury yields
and mortgage interest rates, exposure to increasing funding costs, inflationary
pressures associated with compensation, occupancy and software costs and labor
market conditions, the Russian-Ukraine conflict and its impact on supply chains,
as well as the impact of the pandemic continuing to recede.

The COVID-19 pandemic and related governmental control measures severely
disrupted financial markets and overall economic conditions throughout 2020.
While the impact of the pandemic and the uncertainties have remained into 2022,
significant progress associated with COVID-19 vaccination levels in the United
States has resulted in easing of restrictive measures even as additional
variants have emerged. Starting in 2020, the U.S. federal government enacted
policies to provide fiscal stimulus to the economy and relief to those affected
by the pandemic, with the stimulus intended to bolster household finances as
well as those of small businesses, states and municipalities. Throughout the
pandemic, we have taken a number of precautionary steps to safeguard our
business and our employees from COVID-19, including, but not limited to, banking
by appointment, implementing employee travel restrictions and telecommuting
arrangements, while maintaining business continuity so that we can continue to
deliver service to and meet the demands of our clients. Beginning in the second
quarter of 2021, we returned a majority of our employees to their respective
office locations based initially on a rotational team schedule and, with limited
exceptions due to the emergence of new variants of the virus, have since
generally returned to pre-pandemic work arrangements with available hybrid
options for designated roles. We are continuing to monitor and assess the impact
of the COVID-19 pandemic on our employees and customers on a regular basis.

In light of the extreme volatility and disruptions in the capital and credit
markets beginning in March 2020 resulting from the COVID-19 crisis and its
negative impact on the economy, we took a number of precautionary actions
beginning in March 2020 to enhance our financial flexibility, protect capital,
minimize losses and ensure target liquidity levels. Such actions, including
increasing overall cash balances by raising brokered money market and brokered
time deposits and raising capital through the issuance of subordinated debt,
were taken out of an abundance of caution in light of extreme volatility and
disruptions in the capital and credit markets beginning in March 2020 resulting
from the COVID-19 crisis and its negative impact on the economy.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic
Security Act ("CARES Act") and the Paycheck Protection Program and Health Care
Enhancement Act (the "PPP/HCE Act") were passed in March 2020, which were
intended to provide emergency relief to several groups and individuals impacted
by the COVID-19 pandemic. Among the numerous provisions contained in the CARES
Act was the creation of a Paycheck Protection Program ("PPP") that provides
federal government loan forgiveness for Small Business Administration ("SBA")
Section 7(a) loans for small businesses, which may include our customers, to pay
up to eight weeks of employee compensation and other basic expenses. PPP loans
have: (a) an interest rate of 1.0%; (b) a two-year loan term to maturity; and
(c) principal and interest payments deferred for six months from the date of
disbursement. Further, the CARES Act and subsequent legislation allowed the Bank
to suspend the troubled debt restructuring ("TDR") requirements for certain loan
modifications to be categorized as a TDR through January 1, 2022.

Starting in March 2020, the Bank implemented several actions to better support
our impacted banking clients and allow for loan modifications such as principal
and/or interest payment deferrals, participation in both the initial and second
round PPP efforts as an SBA preferred lender and personal banking assistance
including waived fees, increased daily spending limits and suspension of
residential foreclosure activities. The COVID-19 payment deferment programs
allowed for a deferral of principal and/or interest payments with such deferred
principal payments due and payable on the maturity date of the existing loan. At
December 31, 2022, the Bank had no loans remaining under the COVID-19

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payment deferral program. The Bank's PPP efforts included approval and funding
of over 4,100 PPP loans guaranteed by the SBA and, if used by the borrower for
authorized purposes, able to be fully forgiven. On October 2, 2020, the SBA
began approving PPP forgiveness applications and remitting forgiveness payments
to PPP lenders for PPP borrowers. The SBA approved approximately 4,100
forgiveness applications totaling approximately $896 million as a part of the
Bank's PPP efforts.

Asset Valuation

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.

Specifically, our mortgage origination and broker-dealer segments have each
experienced lower-than-forecasted operating results during 2022 due to
conditions discussed in detail within the respective discussions of segment
results that follow. Given the potential impacts as a result of the operating
performance of these reporting segments and overall economic conditions, actual
results may differ materially from our current estimates as the scope of such
impacts evolves or if the duration of business disruptions is longer than
currently anticipated. The mortgage origination and broker-dealer segments have
been assigned goodwill of $13.1 million and $7.0 million, respectively. Further,
as a part of the most recent quantitative analysis performed as of October 1,
2022, management's evaluation considered the sensitivities performed and the
fact that the resulting estimated fair values of our mortgage origination and
broker-dealer segments exceeded their respective book values by approximately
35% and 12%, respectively. Accordingly, at the conclusion of the annual
assessment, the Company determined that as of October 1, 2022 it was more likely
than not that the fair value of goodwill and other intangible assets exceeded
their respective carrying values. We continue to monitor developments regarding
overall economic conditions, market capitalization, and any other triggering
events or circumstances that may indicate an impairment in the future.

To the extent future operating performance of the mortgage origination and
broker-dealer segments remain challenged and below forecasted projections,
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

As previously discussed, during 2022, we experienced economic headwinds
including tight housing inventories on mortgage volumes, declining deposit
balances, rapid increases in U.S. treasury yields and mortgage interest rates,
and a declining economic forecast. These headwinds, coupled with exposure to
increasing funding costs, inflationary pressures associated with compensation,
occupancy and software costs and labor market conditions, the Russian-Ukraine
conflict and its impact on supply chains within our business segments during
2022 have had, and are expected to continue to have, an adverse impact on our
operating results during 2023.

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

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Factors Affecting Results of Operations

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 includes 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.

Factors Affecting Comparability of Results of Operations

NLC Sale

On June 30, 2020, we completed the sale of all of the outstanding capital stock
of NLC, which comprised the operations of our former insurance segment, for cash
proceeds of $154.1 million. During 2020, Hilltop recognized an aggregate gain
associated with this transaction of $36.8 million, net of $5.1 million in
transaction costs and was subject to post-closing adjustments. The resulting
book gain from this sale transaction was not recognized for tax purposes due to
the excess tax basis over book basis being greater than the recorded book gain.
Any tax loss related to this transaction is deemed disallowed pursuant to the
rules under the Internal Revenue Code. We also entered into an agreement at
closing to refrain for a specified period from certain activities that compete
with the business of NLC. As a result, NLC's results through June 30, 2020 have
been presented as discontinued operations in the consolidated financial
statements, and we no longer have an insurance segment. Unless otherwise noted,
for purposes of this Management's Discussion and Analysis of Financial Condition
and Results of Operations, "consolidated" refers to our consolidated financial
position and consolidated results of operations, including discontinued
operations and assets and liabilities of the discontinued operations.

LIBOR

In July 2017, the Financial Conduct Authority ("FCA") announced that it intends
to cease compelling banks to submit rates for the calculation of the London
Interbank Offered Rate ("LIBOR") after 2021. In March 2021, the FCA and the
Intercontinental Exchange ("ICE") Benchmark Administration concurrently
confirmed their original intention to stop requesting banks to submit the rates
required to calculate LIBOR after the 2021 calendar year and additionally
announced firm target dates for the phase out of various LIBOR tenors. Pursuant
to the announcement, one week and two-month LIBOR ceased to be published on
December 31, 2021, and all remaining USD LIBOR tenors will cease to be published
or lose representativeness immediately after June 30, 2023.

The Financial Accounting Standards Board ("FASB") issued guidance in March 2020
intended to provide temporary optional expedients and exceptions to the GAAP
guidance on contract modifications and hedge accounting to ease the financial
reporting burdens related to the expected market transition from LIBOR and other
interbank offered rates to alternative reference rates. Additionally, the FASB
issued specific accounting guidance that permits the use of the Overnight Index
Swap rate based on the Secured Overnight Financing Rate ("SOFR") to be
designated as a benchmark interest rate for hedge accounting purposes.

Certain loans we originated bear interest at a floating rate based on LIBOR. We
also pay interest on certain borrowings and are counterparty to derivative
agreements that are based on LIBOR and have existing contracts with payment
calculations that use LIBOR as the reference rate. The cessation of publication
of LIBOR will create various risks surrounding the financial, operational,
compliance and legal aspects associated with changing certain elements of
existing contracts.

The Alternative Reference rates Committee ("ARRC") has proposed a paced market
transition plan to the SOFR from LIBOR, and organizations are currently working
on industry-wide and company-specific transition plans as it relates to

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derivatives and cash markets exposed to LIBOR. The ARRC has formally recommended
SOFR as its preferred alternative rate for LIBOR. However, at this time, no
consensus exists as to what rate or rates may become acceptable alternatives to
LIBOR and it is impossible to predict the effect of any such alternatives on the
value of LIBOR-based securities and variable rate loans, or other securities or
financial arrangements, given LIBOR's role in determining market interest rates
globally.

We have completed our targeted assessment of exposures across the organization
associated with the migration away from LIBOR and have transitioned to the
impact assessment and implementation stages. In light of the above described
changes to the LIBOR phase out dates being pushed out to 2023, we have taken
necessary actions, including the negotiation of certain of our agreements based
on established alternative benchmark rates. Since the third quarter of 2020,
PrimeLending has been originating conventional adjustable-rate mortgage, or ARM,
loan products utilizing a SOFR rate with terms consistent with
government-sponsored enterprise, or GSE, guidelines. In addition, the Bank's
management team has significantly completed its efforts to amend LIBOR-based
contractual terms and establish an alternative benchmark rate. We also continue
to evaluate the impacts of the LIBOR phase-out and transition requirements as it
pertains to contracts, models and systems. To date, an immaterial amount of
expenses have been incurred as a result of our efforts related to the transition
of our systems and processes away from LIBOR.

Brokered Deposits

In December 2020, the Federal Deposit Insurance Corporation ("FDIC") finalized
revisions to its rules and prior guidance regarding brokered deposits (the
"Revisions"). The Revisions are intended to modernize the FDIC's framework for
regulating brokered deposits and ensure that the classification of a deposit as
brokered appropriately reflects changes in the banking landscape. In addition,
the Revisions are intended to modify the interest rate restrictions applicable
to certain depository institutions and clarify the application of the brokered
deposit requirements to non-maturity deposits. The Revisions became effective on
April 1, 2021, but full compliance was not required during a transitionary
period ended January 1, 2022. We evaluated the Revisions and published FDIC
guidance and effective January 1, 2022, after consulting with the FDIC, continue
to treat deposits swept to the banking segment from the broker-dealer segment as
non-brokered, while the cost of these sweep deposits will be based on a current
market rate of interest rather than a per account fee.

Company Background

From January 2007 until November 2012, our primary operations were limited to
providing fire and homeowners insurance to low value dwellings and manufactured
homes primarily in Texas and other areas of the southern United States through
NLC's wholly owned insurance subsidiaries. As previously discussed, on June 30,
2020, we completed the sale of all of the outstanding capital stock of NLC.

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

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

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

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

PlainsCapital Bank platform.

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Segment Information

As previously discussed, on June 30, 2020, we completed the sale of all of the
outstanding capital stock of NLC, which comprised the operations of the former
insurance segment. As a result, insurance segment results through June 30, 2020
have been presented as discontinued operations in the consolidated financial
statements, and we no longer have an insurance segment. Additional details are
presented in Note 3, Discontinued Operations, in the notes to our consolidated
financial statements.

Following the above-noted sale of NLC, we have two primary business units within
continuing operations, PCC (banking and mortgage origination) and Securities
Holdings (broker-dealer). Under accounting principles generally accepted in the
United States ("GAAP"), our continuing operations business units are comprised
of three reportable business segments organized primarily by the core products
offered to the segments' respective customers: banking, broker-dealer and
mortgage origination. 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 segments is
presented in Note 28, Segment and Related Information, in the notes to our
consolidated financial statements.

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The following table presents certain information about the continuing operating
results of our reportable segments (in thousands). This table serves as a basis
for the discussion and analysis in the segment operating results sections that
follow.

                                                      Year Ended December 31,                Variance 2022 vs 2021         Variance 2021 vs 2020
                                                 2022            2021           2020           Amount         Percent        Amount        Percent
Net interest income (expense):
Banking                                      $    413,603    $    406,524   $   390,871    $         7,079          2    $        15,653         4
Broker-Dealer                                      51,597          43,296        39,912              8,301         19              3,384         8
Mortgage Origination                             (10,529)        (20,400)      (10,489)              9,871         48            (9,911)      (94)
Corporate                                        (13,135)        (17,239)      (14,192)              4,104         24            (3,047)      (21)

All Other and Eliminations                         17,439          10,801        18,064              6,638         61            (7,263)      (40)
Hilltop Continuing Operations                $    458,975    $    422,982  

$ 424,166 $ 35,993 9 $ (1,184) (0)

Provision for (reversal of) credit losses:
Banking                                      $      8,250    $   (58,175)   $    96,326    $        66,425         NM    $     (154,501)        NM
Broker-Dealer                                          59            (38)           165                 97         NM              (203)        NM
Mortgage Origination                                    -               -             -                  -          -                  -         -
Corporate                                               -               -             -                  -          -                  -         -
All Other and Eliminations                              -               -             -                  -          -                  -         -

Hilltop Continuing Operations                $      8,309    $   (58,213)  

$    96,491    $        66,522         NM    $     (154,704)        NM

Noninterest income:
Banking                                      $     49,307    $     45,113   $    41,376    $         4,194          9    $         3,737         9
Broker-Dealer                                     341,943         381,125  

    491,355           (39,182)       (10)          (110,230)      (22)
Mortgage Origination                              452,915         986,990  

1,172,450 (534,075) (54) (185,460) (16)
Corporate

                                           7,525           9,133         3,945            (1,608)       (18)              5,188       132
All Other and Eliminations                       (19,230)        (12,086)      (18,646)            (7,144)       (59)              6,560        35
Hilltop Continuing Operations                $    832,460    $  1,410,275  

$ 1,690,480 $ (577,815) (41) $ (280,205) (17)

Noninterest expense:
Banking                                      $    235,190    $    226,915  

$ 232,447 $ 8,275 4 $ (5,532) (2)
Broker-Dealer

                                     355,713         380,798       415,463           (25,085)        (7)           (34,665)       (8)
Mortgage Origination                              478,904         731,056       753,917          (252,152)       (34)           (22,861)       (3)
Corporate                                          59,030          50,507        53,040              8,523         17            (2,533)       (5)
All Other and Eliminations                        (1,838)         (1,878)       (1,064)                 40          2              (814)      (77)
Hilltop Continuing Operations                $  1,126,999    $  1,387,398  

$ 1,453,803 $ (260,399) (19) $ (66,405) (5)

Income (loss) from continuing operations
before taxes:
Banking                                      $    219,470    $    282,897   $   103,474    $      (63,427)       (22)    $       179,423       173
Broker-Dealer                                      37,768          43,661       115,639            (5,893)       (13)           (71,978)      (62)

Mortgage Origination                             (36,518)         235,534  

408,044 (272,052) (116) (172,510) (42)
Corporate

                                        (64,640)        (58,613)      (63,287)            (6,027)       (10)              4,674         7
All Other and Eliminations                             47             593           482              (546)       (92)                111        23
Hilltop Continuing Operations                $    156,127    $    504,072  

$   564,352    $     (347,945)       (69)    $      (60,280)      (11)


NMNot 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.

Specifically, performance ratios and asset quality ratios are typically used for
measuring the performance of banking and financial institutions. We consider
return on average stockholders' equity, return on average assets and net
interest margin to be important supplemental measures of operating performance
that are commonly used by securities analysts, investors and other parties
interested in the banking and financial industry. The net recoveries
(charge-offs) to average loans outstanding ratio is also considered a key
measure for our banking segment as it indicates the performance of our loan
portfolio.

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

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based on capital requirements administered by the federal banking agencies. The
risk-based capital ratios are minimum supervisory ratios generally applicable to
banking organizations, but banking organizations are widely expected to operate
with capital positions well above the minimum ratios. Failure to meet minimum
capital requirements can initiate certain mandatory actions by regulators that,
if undertaken, could have a material effect on our financial condition or
results of operations.

How We Generate Revenue

We generate revenue from net interest income and from noninterest income. Net
interest income represents the difference between the income earned on our
assets, including our loans and investment securities, and our cost of funds,
including the interest paid on the deposits and borrowings that are used to
support our assets. Net interest income is a significant contributor to our
operating results. Fluctuations in interest rates, as well as the amounts and
types of interest-earning assets and interest-bearing liabilities we hold,
affect net interest income. We generated $459.0 million in net interest income
during 2022, compared with net interest income of $423.0 million and $424.2
million during 2021 and 2020, respectively. The increase in net interest income
during 2022, compared with 2021, was primarily due to increases within each of
our mortgage origination, broker-dealer and banking segments.

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

Income from broker-dealer operations. Through Securities Holdings, we provide

investment banking and other related financial services that generated $266.5

million, $296.3 million and $274.0 million in securities commissions and fees

(i) and investment and securities advisory fees and commissions, and $61.1

million, $75.2 million and $203.1 million in gains from derivative and

trading portfolio activities (included within other noninterest income)

     during 2022, 2021 and 2020, respectively.


      Income from mortgage operations. Through PrimeLending, we generate

noninterest income by originating and selling mortgage loans. During 2022,

(ii) 2021 and 2020, we generated $452.0 million, $986.0 million and $1.2 billion,

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 generated $0.8 billion, $1.4 billion and $1.7 billion in
noninterest income during 2022, 2021 and 2020, respectively. The decrease in
noninterest income from continuing operations during 2022, compared with 2021,
was predominantly attributable to a decrease of $534.0 million in net gains from
sale of loans, other mortgage production income and mortgage loan origination
fees within our mortgage origination segment and a decrease of $14.1 million in
gains from derivative and trading portfolio 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.

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Consolidated Operating Results

Income from continuing operations applicable to common stockholders during 2022
was $113.1 million, or $1.60 per diluted share, compared with $374.5 million, or
$4.61 per diluted share, during 2021, and $409.4 million, or $4.58 per diluted
share, during 2020. Hilltop's financial results from continuing operations
during 2022 included a significant decrease in year-over-year mortgage
origination segment net gains from sales of loans and other mortgage production
income, while the banking segment recorded a provision for credit losses as
opposed to a reversal of credit losses in the prior year.

Hilltop's financial results from continuing operations during 2021 reflected a
significant decrease in year-over-year mortgage origination segment net gains
from sales of loans and other mortgage production income as well as declines in
net revenues within the broker-dealer segment's structured finance business and
fixed income services lines, while the banking segment reflected positive
changes in macroeconomic and loan expected loss rates during 2021 as opposed to
a significant build in the allowance for credit losses given the market
disruption and economic uncertainties caused by COVID-19 during 2020. Including
income from discontinued operations, net of income taxes, income applicable to
common stockholders was $447.8 million, or $5.01 per diluted share, during 2020.

Certain items included in net income during 2022, 2021 and 2020 resulted from
purchase accounting associated with the PlainsCapital Merger, the FNB
Transaction, the SWS Merger and the BORO Acquisition (collectively, the "Bank
Transactions"). Income before income taxes during 2022, 2021 and 2020 included
net accretion on earning assets and liabilities of $10.8 million, $19.2 million
and $18.9 million, respectively, and amortization of identifiable intangibles of
$4.5 million, $5.2 million and $6.3 million, respectively, related to the Bank
Transactions.

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

                                                       Year Ended December 

31,

                                                    2022             2021   

2020

Return on average stockholders' equity (1)            5.11 %         15.38

%  20.03 %
Return on average assets (2)                          0.69 %          2.17 %   2.88 %
Net interest margin (3) (4)                           2.87 %          2.57 %   2.85 %

Leverage ratio (5) (end of year)                     11.47 %         12.58 %  12.64 %
Common equity Tier 1 risk-based capital ratio (6)
(end of year)                                        18.23 %         21.22

% 18.97 %

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

equity.

(2) Return on average assets is defined as consolidated net income divided by

average assets.

Net interest margin is defined as net interest income divided by average
(3) 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.

The securities financing operations within our broker-dealer segment had the
(4) effect of lowering both net interest margin and taxable equivalent net

interest margin by 21 basis points, 16 basis points and 25 basis points

during 2022, 2021 and 2020, respectively.

(5) The leverage ratio is a regulatory capital ratio and is defined as Tier 1

    risk-based capital divided by average consolidated assets.

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
(6) (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 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.

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During 2022, 2021 and 2020, purchase accounting contributed 7, 12 and 14 basis
points, respectively, to our consolidated taxable equivalent net interest margin
of 2.88%, 2.58% and 2.85%, respectively. The purchase accounting activity is
primarily related to the accretion of discount of loans which totaled $10.5
million, $18.8 million and $18.8 million during 2022, 2021 and 2020,
respectively, associated with the Bank Transactions.

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

                                                                                 Year Ended December 31,
                                               2022                                       2021                                       2020
                                Average       Interest     Annualized      Average       Interest     Annualized      Average       Interest     Annualized
                              Outstanding      Earned       Yield or     Outstanding      Earned       Yield or     Outstanding      Earned       Yield or
                                Balance        or Paid        Rate         Balance        or Paid        Rate         Balance        or Paid        Rate
Assets
Interest-earning assets
Loans held for sale           $  1,221,235    $  52,315          4.28 %  $  2,293,543    $  64,767          2.82 %  $  2,306,203    $  74,467          3.23 %
Loans held for investment,
gross (1)                        7,840,848      363,892          4.71 %     7,645,292      339,548          4.44 %     7,618,723      358,844          4.71 %
Investment securities -
taxable                          2,819,282       75,805          2.69 %     2,493,848       47,582          1.91 %     1,897,859       49,936          2.63 %
Investment securities -
non-taxable (2)                    310,315       11,608          3.74 %       313,703       11,448          3.65 %       231,824        7,918          3.42 %
Federal funds sold and
securities purchased under
agreements to resell               162,575        4,098          2.52 %       152,273          372          0.24 %        90,961          138          0.15 %
Interest-bearing deposits
in other financial
institutions                     2,306,960       31,705          1.37 %     2,078,666        2,942          0.14 %     1,257,902        3,165          0.25 %
Securities borrowed              1,298,276       44,414          3.37 %     1,445,464       61,667          4.21 %     1,435,572       51,360          3.58 %
Other                               55,280        8,873         16.05 %        50,929        3,332          6.54 %        59,412        3,687          6.21 %
Interest-earning assets,
gross (2)                       16,014,771      592,710          3.70 %    16,473,718      531,658          3.23 %    14,898,456      549,515          3.69 %
Allowance for credit
losses                            (92,828)                                  (129,689)                                  (122,148)
Interest-earning assets,
net                             15,921,943                                 16,344,029                                 14,776,308
Noninterest-earning assets       1,488,970                                 

1,451,928                                  1,537,269
Total assets                  $ 17,410,913                               $ 17,795,957                               $ 16,313,577

Liabilities and
Stockholders' Equity
Interest-bearing
liabilities

Interest-bearing deposits     $  7,561,501    $  50,412          0.67 %  $ 

7,722,584    $  23,624          0.31 %  $  7,397,121    $  47,040          0.64 %
Securities loaned                1,184,498       38,570          3.26 %     1,374,142       50,974          3.71 %     1,336,873       42,817          3.20 %
Notes payable and other
borrowings                       1,293,133       43,158          3.34 %     1,216,381       32,393          2.66 %     1,222,044       33,249          2.72 %
Total interest-bearing
liabilities                     10,039,132      132,140          1.32 %    10,313,107      106,991          1.04 %     9,956,038      123,106          1.24 %
Noninterest-bearing
liabilities
Noninterest-bearing
deposits                         4,455,779                                  4,157,962                                  3,304,475
Other liabilities                  675,628                                    863,976                                    791,002
Total liabilities               15,170,539                                 15,335,045                                 14,051,515
Stockholders' equity             2,213,733                                  2,435,185                                  2,235,690
Noncontrolling interest             26,641                                     25,727                                     26,372
Total liabilities and
stockholders' equity          $ 17,410,913                               $ 17,795,957                               $ 16,313,577

Net interest income (2)                       $ 460,570                                  $ 424,667                                  $ 426,409
Net interest spread (2)                                          2.38 %                                     2.19 %                                     2.45 %
Net interest margin (2)                                          2.88 %                                     2.58 %                                     2.85 %

(1) Average balance includes non-accrual loans.

Presented on a taxable equivalent basis with taxable equivalent adjustments
(2) based on the applicable corporate federal income tax rate of 21% for the

periods presented. The adjustment to interest income was $1.6 million, $1.7

million and $1.2 million during 2022, 2021 and 2020, 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 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. Our consolidated net interest margins during
2020 and, to a lesser

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extent, 2021 were also negatively impacted by certain actions taken by
management during 2020 to strengthen our available liquidity position. Such
actions, including increasing overall cash balances by raising brokered money
market and brokered time deposits and raising capital through the issuance of
subordinated debt, were taken out of an abundance of caution in light of extreme
volatility and disruptions in the capital and credit markets beginning in March
2020 resulting from the COVID-19 crisis and its negative impact on the economy.

On a consolidated basis, the changes in net interest income from continuing
operations during 2022, compared with 2021, were primarily due to the effects of
volume and rate changes within the mortgage warehouse lending, securities and
deposits portfolios within the banking segment, increased net yields on mortgage
loans held for sale and decreases in average warehouse line balance with an
unaffiliate bank within the mortgage origination segment and changes within the
broker-dealer segment related to its structured finance and fixed income
services business lines. 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 2022, the provision for
credit losses was driven by a deteriorating U.S. economic outlook since December
31, 2021. During 2021, the reversal of credit losses was primarily impacted by
the banking segment's reduction in reserves associated with collectively
evaluated loans within the portfolio attributable to improvements in both
macroeconomic forecast assumptions and credit quality metrics on COVID-19
impacted industry sector exposures primarily related to the economic
uncertainties during the prior year. 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.

Noninterest income from continuing operations decreased during 2022, compared
with 2021, primarily due to decreases in total mortgage loan sales volume and
average loan sales margin within our mortgage origination segment, and net
declines in investment advisory fees and trading gains primarily within the
broker-dealer segment's public finance services and structured finance business
lines. The decrease in noninterest income from continuing operations during
2021, compared with 2020, was primarily due to changes in net fair value and
related derivative activity and a decrease in average loan sales margin,
partially offset by a slight increase in total mortgage loan sales volume within
our mortgage origination segment, as well as decreases in structured finance and
fixed income services net revenues within our broker-dealer segment.

Noninterest expense from continuing operations decreased during 2022, compared
with 2021, primarily due to decreases in both variable and non-variable
compensation within our mortgage origination segment associated with the
decreased mortgage loan originations, and a decline in variable compensation
within our broker-dealer segment, partially offset by increases within our
banking segment. We have experienced an increase in certain noninterest expenses
during 2022, including compensation, occupancy, and software costs, due to
inflationary pressures. We expect such inflationary headwinds to continue and
result in higher fixed costs into 2023. The decrease in noninterest expense from
continuing operations during 2021, compared with 2020, was primarily due to
decreases in both variable and non-variable compensation within our mortgage
origination segment associated with the decreased mortgage loan originations,
and a decline in variable compensation within our broker-dealer segment.

Effective income tax rates from continuing operations were 23.6%, 23.4% and
23.6% for 2022, 2021 and 2020, respectively, and approximated statutory rates
including the effect of investments in tax-exempt instruments, offset by
nondeductible expenses.

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Segment Results from Continuing Operations

Banking Segment

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

                                       Year Ended December 31,              

Variance

                                    2022         2021        2020       2022 vs 2021     2021 vs 2020
Net interest income               $ 413,603   $  406,524   $ 390,871   $        7,079   $       15,653
Provision for (reversal of)
credit losses                         8,250     (58,175)      96,326           66,425        (154,501)
Noninterest income                   49,307       45,113      41,376            4,194            3,737
Noninterest expense                 235,190      226,915     232,447            8,275          (5,532)
Income before income taxes        $ 219,470   $  282,897   $ 103,474   $     (63,427)   $      179,423

The decrease in income before income taxes during 2022, compared with 2021, was
primarily due to the impact of reversals of credit losses throughout 2021 and
the combined impact of net interest income volume and rate changes within the
loans held for investment and mortgage warehouse lending portfolios. 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.

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

                                                  Year Ended December 31,
                                                    2022            2021         2020
Efficiency ratio (1)                                   50.81 %        50.25 %     53.78 %

Return on average assets (2)                            1.19 %         1.55 %      0.63 %
Net interest margin (3)                                 3.11 %         3.07 %      3.31 %
Net recoveries (charge-offs) to average loans
outstanding (4)                                       (0.06) %         0.01

% (0.30) %

Efficiency ratio is defined as noninterest expenses divided by the sum of
(1) 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 divided by average assets.

Net interest margin is defined as net interest income divided by average
(3) 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.

Net recoveries (charge-offs) to average loans outstanding is defined as the
(4) 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 rates of 21% for all periods presented. 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 2022, 2021 and 2020, purchase accounting contributed 9, 16 and 18 basis
points, respectively, to the banking segment's taxable equivalent net interest
margin of 3.11%, 3.08% and 3.31%, respectively. These purchase accounting items
are primarily related to accretion of discount of loans associated with the Bank
Transactions as discussed 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).

                                                                                  Year Ended December 31,
                                                2022                                       2021                                       2020
                                 Average       Interest     Annualized      Average       Interest     Annualized      Average       Interest     Annualized
                               Outstanding      Earned       Yield or     Outstanding      Earned       Yield or     Outstanding      Earned       Yield or
                                 Balance        or Paid        Rate         Balance        or Paid        Rate         Balance        or Paid        Rate
Assets
Interest-earning assets
Loans held for investment,
gross (1)                      $  7,371,397    $ 339,356          4.60 %  $  7,069,485    $ 323,136          4.57 %  $  7,152,783    $ 341,383          4.77 %
Subsidiary warehouse lines
of credit                         1,128,576       58,153          5.08 %     2,124,700       80,761          3.75 %     2,073,087       79,488          3.83 %
Investment securities -
taxable                           2,377,483       45,282          1.90 %     2,026,189       29,215          1.44 %     1,377,578       27,651          2.01 %
Investment securities -
non-taxable (2)                     109,911        3,871          3.52 %       114,118        3,905          3.42 %       111,471        3,789          3.40 %
Federal funds sold and
securities purchased under
agreements to resell                118,686        2,190          1.87 %        30,395           89          0.30 %           460            1          0.18 %
Interest-bearing deposits
in other financial
institutions                      2,174,529       31,705          1.46 %     1,837,196        2,459          0.13 %     1,038,647        1,888          0.18 %
Other                                36,843        3,876         10.52 %        36,813          460          1.25 %        42,977          377          0.88 %
Interest-earning assets,
gross (2)                        13,317,425      484,433          3.64 %   

13,238,896 440,025 3.32 % 11,797,003 454,577 3.85 %
Allowance for credit losses (92,377)

                                  (129,303)                                  (121,770)
Interest-earning assets,
net                              13,225,048                                 13,109,593                                 11,675,233
Noninterest-earning assets          919,618                                

   966,296                                    967,690
Total assets                   $ 14,144,666                               $ 14,075,889                               $ 12,642,923

Liabilities and
Stockholders' Equity
Interest-bearing
liabilities

Interest-bearing deposits      $  7,379,265    $  63,148          0.86 %  $

 7,578,963    $  30,988          0.41 %  $  7,306,143    $  60,297          0.83 %
Notes payable and other
borrowings                          311,735        6,864          2.20 %       142,705        1,586          1.11 %       205,448        2,642          1.29 %
Total interest-bearing
liabilities                       7,691,000       70,012          0.91 %     7,721,668       32,574          0.42 %     7,511,591       62,939          0.84 %
Noninterest-bearing
liabilities
Noninterest-bearing
deposits                          4,695,265                                  4,512,227                                  3,412,212
Other liabilities                   145,272                                    155,979                                    128,795
Total liabilities                12,531,537                                 12,389,874                                 11,052,598
Stockholders' equity              1,613,129                                  1,686,015                                  1,590,325
Total liabilities and
stockholders' equity           $ 14,144,666                               $ 14,075,889                               $ 12,642,923

Net interest income (2)                        $ 414,421                                  $ 407,451                                  $ 391,638
Net interest spread (2)                                           2.73 %                                     2.90 %                                     3.01 %
Net interest margin (2)                                           3.11 %                                     3.08 %                                     3.31 %

(1) Average balance includes non-accrual loans.

Presented on a taxable equivalent basis with taxable equivalent adjustments
(2) based on the applicable corporate federal income tax rates of 21% for all

periods presented. The adjustment to interest income was $0.8 million, $0.8

million and $0.8 million during 2022, 2021 and 2020, 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. The banking segment's net interest margins during 2021 and
2020 were negatively impacted by certain actions taken by management during 2020
to strengthen the Bank's available liquidity position. Such actions, including
increasing overall cash balances by raising brokered money market and brokered
time deposits were taken out of an abundance of caution in light of the extreme
volatility and disruptions in the capital and credit markets beginning in March
2020 resulting from the COVID-19 crisis and its negative impact on the economy.

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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).

                                                                  Year 

Ended December 31,

                                                  2022 vs. 2021                              2021 vs. 2020
                                         Change Due To (1)                          Change Due To (1)
                                       Volume       Yield/Rate       Change       Volume      Yield/Rate       Change
Interest income
Loans held for investment, gross
(2)                                  $   13,797    $      2,423    $   16,220    $ (3,973)    $  (14,274)    $ (18,247)
Subsidiary warehouse lines of
credit (3)                             (37,355)          14,747      

(22,608) 1,979 (706) 1,273
Investment securities - taxable

           5,059          11,008        16,067       13,019       (11,455)         1,564
Investment securities -
non-taxable (4)                           (144)             110          (34)           90             26           116
Federal funds sold and securities
purchased under agreements to
resell                                      265           1,836         2,101           55             33            88
Interest-bearing deposits in
other financial institutions                439          28,807        29,246        1,451          (880)           571
Other                                         -           3,416         3,416         (54)            137            83
Total interest income (4)              (17,939)          62,347        44,408       12,567       (27,119)      (14,552)

Interest expense
Deposits                             $    (819)    $     32,979    $   32,160    $   2,252    $  (31,561)    $ (29,309)
Notes payable and other
borrowings                                1,876           3,402         5,278        (807)          (249)       (1,056)
Total interest expense                    1,057          36,381        

37,438 1,445 (31,810) (30,365)

Net interest income (4)              $ (18,996)    $     25,966    $    

6,970 $ 11,122 $ 4,691 $ 15,813

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

column.

Changes in the yields earned on loans held for investment, gross included a

decline during 2022, compared with 2021, of $16.6 million, compared with an

increase of $11.5 million during 2021, compared with 2020, in PPP

loan-related fee income, while changes in accretion of discount on loans
(2) during 2022, compared with 2021, included a decline of $8.3 million. The

change in accretion of discount on loans during 2021, compared with 2020, was

de minimis. Accretion of discount on loans is expected to decrease in future

periods as loans acquired in the Bank Transaction 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 December 31, 2022, the banking segment
maintained an asset sensitive rate risk position, meaning the amount of its
interest-earning assets maturing or repricing within a given period exceeds the
amount of its interest-bearing liabilities also maturing or repricing within
that time period. During a period of rising interest rates, being asset
sensitive tends to result in an increase in net interest income, but during a
period of declining interest rates, tends to result in a decrease in net
interest income.

Our portfolio includes loans that periodically reprice or mature prior to the
end of an amortized term. The extent and timing of this impact on interest
income will ultimately be driven by the timing, magnitude and frequency of
interest rate and yield curve movements, as well as changes in market conditions
and timing of management strategies. At December 31, 2022, approximately $734
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 80% are not scheduled to reprice for more than
one year based upon agreed-upon terms. If interest rates rise further, yields on
the portion of our loan portfolio that remain at applicable rate floors would
rise more slowly than increases in market interest rates, unless such loans are
refinanced or repaid. Competition for loan growth could also continue to put
pressure on new loan origination rates. If interest rates were to fall, the
impact on our interest income for certain variable-rate loans would be limited
by these rate floors.

Additionally, within our banking segment, the composition of the deposit base
and ultimate cost of funds on deposits and net interest income are affected by
the level of market interest rates, the interest rates and products offered by
competitors, the volatility of equity markets and other factors. Deposit
products and pricing structures relative to the market are regularly evaluated
to maintain competitiveness over time. During a period of rising interest rates,
the cost of

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funds on deposits, and therefore, interest expense, tends to increase.
Currently, given the ongoing competition for liquidity by some participants in
our markets, we expect that the Bank's interest expense related to certain
deposits will continue to increase during 2023 as customers seek higher yields
on deposits.

To help mitigate net interest income spread compression between our assets and
liabilities as the Federal Reserve increases interest rates, management
continues to execute certain derivative trades, as either cash flow hedges or
fair value hedges, that benefit the banking segment as interest rates rise. Any
changes in interest rates across the term structure will continue to impact net
interest income and net interest margin. The impact of rate movements will
change with the shape of the yield curve, including any changes in steepness or
flatness and inversions at any points on the yield curve.

During 2022, 2021 and 2020, the banking segment retained approximately $532
million, $778 million and $193 million, respectively, in mortgage loans
originated by the mortgage origination segment. These loans are purchased by the
banking segment at par. For origination services provided, the banking segment
reimburses the mortgage origination segment for direct origination costs
associated with these mortgage loans, in addition to payment of a correspondent
fee. The correspondent fees are eliminated in consolidation. The determination
of mortgage loan retention levels by the banking segment will be impacted by,
among other things, an ongoing review of the prevailing mortgage rates, balance
sheet positioning at Hilltop and the banking segment's outlook for commercial
loan growth.

The banking segment's provision for (reversal of) credit losses has been subject
to significant year-over-year and quarterly changes primarily attributable to
the effects of the changing economic outlook, macroeconomic forecast assumptions
and resulting impact on reserves. Specifically, during 2022, the banking
segment's provision for credit losses was driven by a deteriorating U.S.
economic outlook since December 31, 2021. The change in the allowance during
2022 was also impacted by net charge-offs of $4.2 million. During 2021, the
banking segment had net reversals of credit losses on expected losses of
collectively evaluated loans of $58.3 million, primarily due to improvements in
both macroeconomic forecast assumptions and credit quality metrics on COVID-19
impacted industry sector exposures. The change in the allowance during 2021 was
also impacted by net recoveries of $0.5 million. During 2020, the significant
build in the allowance included provision for credit losses on individually
evaluated loans of $20.1 million, while the provision for credit losses on
expected losses of collectively evaluated loans accounted for $76.1 million of
the total provision primarily due to the increase in the expected lifetime
credit losses under CECL attributable to the deteriorating economic outlook
associated with the impact of the market disruption caused by the COVID-19
pandemic. The change in the allowance during 2020 was also impacted by net
charge-offs of $21.1 million, primarily associated with loans specifically
reserved for during the first quarter of 2020. 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. 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 increased during 2022, compared to
2021, primarily due to increased wealth management fees. Noninterest income
during 2021, compared to 2020, increased primarily due to increased service
charges on depositor accounts and wealth management fees.

The banking segment's noninterest expenses increased during 2022, compared to
2021, primarily due to increases in expenses associated with employees'
compensation and benefits and professional fees. The noninterest expenses
decreased during 2021, compared to 2020, primarily due to the decrease in the
allowance for unfunded commitments attributable to year-over-year improvements
in loan expected loss rates as well as reductions in legal and other real estate
owned ("OREO") expenses, partially offset by increases in FDIC assessment and
software related expense.

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Broker-Dealer Segment

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

                                       Year Ended December 31,              

Variance

                                    2022         2021        2020        2022 vs 2021     2021 vs 2020
Net interest income:
Wealth management:
Securities lending                $   5,844    $  10,693   $   8,544    $      (4,849)   $        2,149
Clearing services                     7,598        7,314       6,916               284              398
Structured finance                    6,680        2,857       5,430             3,823          (2,573)
Fixed income services                19,096       19,249      12,173             (153)            7,076
Other                                12,379        3,183       6,849             9,196          (3,666)
Total net interest income            51,597       43,296      39,912             8,301            3,384
Noninterest income:
Securities commissions and
fees by business line (1):
Fixed income services                32,893       47,844      49,573          (14,951)          (1,729)
Wealth management:
Retail                               76,213       73,149      69,718             3,064            3,431
Clearing services                    28,749       22,478      30,018             6,271          (7,540)
Structured finance                   11,216        3,275       1,824             7,941            1,451
Other                                 3,684        4,016       4,761             (332)            (745)
                                    152,755      150,762     155,894             1,993          (5,132)
Investment and securities
advisory fees and commissions
by business line:
Public finance services              86,573      108,372      96,186          (21,799)           12,186
Fixed income services                 7,143        8,442       6,395           (1,299)            2,047
Wealth management:
Retail                               30,744       31,453      24,023             (709)            7,430
Clearing services                     1,741        1,945       1,649             (204)              296
Structured finance                      863        1,850       2,732             (987)            (882)
Other                                   335          381         342              (46)               39
                                    127,399      152,443     131,327          (25,044)           21,116
Other:
Structured finance                   47,192       77,424     157,465          (30,232)         (80,041)
Fixed income services                13,698      (2,197)      45,365            15,895         (47,562)
Other                                   899        2,693       1,304           (1,794)            1,389
                                     61,789       77,920     204,134          (16,131)        (126,214)
Total noninterest income            341,943      381,125     491,355          (39,182)        (110,230)
Net revenue (2)                     393,540      424,421     531,267          (30,881)        (106,846)
Noninterest expense:
Variable compensation (3)           138,705      161,264     205,464          (22,559)         (44,200)
Non-variable compensation and
benefits                            112,440      114,912     106,932           (2,472)            7,980
Segment operating costs (4)         104,627      104,584     103,232                43            1,352
Total noninterest expense           355,772      380,760     415,628          (24,988)         (34,868)

Income before income taxes        $  37,768    $  43,661   $ 115,639    $      (5,893)   $     (71,978)

Securities commissions and fees includes income of $13.6 million, $6.9
(1) million, and $13.2 million during 2022, 2021, and 2020, respectively, that is

eliminated in consolidation.

Net revenue is defined as the sum of total net interest income and total
(2) 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 a primary revenue performance measure used by
investors and analysts. Net revenue provides for some level of comparability of
trends across the financial services industry as it reflects both noninterest
income, including

investment and securities advisory fees and commissions, as well as net interest
income. Internally, we assess the broker-dealer segment's performance on a
revenue

basis for comparability with our banking segment.

(3) Variable compensation represents performance-based commissions and

incentives.

(4) Segment operating costs include provision for credit losses associated with

the broker-dealer segment within other noninterest expenses.

During 2022, the change in net revenue and income before income taxes was
primarily related to the combined impacts of the rising interest rate
environment and market turbulence, which impacted period-over-period customer
demand and volumes within our various business lines. Specifically, the
broker-dealer segment's structured finance business line experienced a decline
in year-over-year net revenues due to lower production volumes and continued
rate volatility. The decrease in net revenues in the broker-dealer segment's
public finance business line was due to the unfavorable issuance trends both
nationally and in Texas in 2022, compared to 2021. The wealth management
business line's net revenue increased in 2022, compared to 2021, as customer
balance revenues increased despite weaker retail division production due to
higher rates and an overall decline in the equity markets. The decrease in the
fixed income services business line's net revenues primarily resulted from
declines within the taxable fixed income division as a result of lower customer
demand and a less favorable trading environment given higher interest rates.

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In addition, the revenue declines previously noted during 2022, compared to
2021, within our public finance and structured finance business lines and
commission revenue declines within our wealth management business line were the
primary drivers of the significant decrease in variable compensation.

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

As noted under the section titled "Asset Valuation" earlier in this Item 7, the
broker-dealer segment has experienced lower-than-forecasted operating results
during 2022 given trends related to the combination of rapid or significant
changes in interest rates, the sharp decline in mortgage loan origination
volumes, customer sensitivity to interest rates and resulting demand for certain
products. Such trends have resulted in a challenging environment associated with
the broker-dealer segment's short- and long-term financial condition and
operating results. In the event future operating performance remains challenged
and below our forecasted projections, there are negative changes to long-term
growth rates or discount rates increase, the fair value of the broker-dealer
segment reporting unit may decline and we may be required to record a goodwill
impairment charge. These conditions will continue to be considered during future
impairment evaluations of reporting unit goodwill.

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 improvement in net interest income during 2022,
compared to 2021, was primarily due to the increases in net interest income from
our structured finance business line and other divisions within our public
finance and wealth management business lines, partially offset by the decline in
net interest income within the securities lending division of our wealth
management business line. With the 37-basis point decrease in the weighted
average interest rate spread during 2022, net interest earned within the
broker-dealer segment's stock lending business decreased $4.8 million during
2022, compared to 2021. The increase in net interest income during 2021,
compared to 2020, was primarily due to increases in net interest income from our
fixed income business line and securities lending division of our wealth
management business line partially offset by intercompany interest expense.

Noninterest income decreased during 2022, compared to 2021, primarily due to
declines in investment banking and advisory fees as well as other noninterest
income. Noninterest income decreased during 2021, compared to 2020, primarily
due to decreases in other noninterest income and securities commissions and
fees, partially offset by the increase in investment banking and advisory fees.

Securities commissions and fees increased during 2022, compared to 2021,
primarily due to an increase in money market and FDIC sweep revenues and
commission and fees earned on commodities sales transactions, partially offset
by a decrease in customer demand for fixed income services as previously
discussed. As money market and FDIC sweep revenues are closely correlated to
short-term interest rates, any additional increases in short-term interest rates
may cause these revenues to rise. In addition, securities commissions and fees
during 2022, compared to 2021, were impacted by decreases in commissions earned
in insurance product sales transactions, commissions earned on fixed income
products, and net clearing revenues due to the decrease in clearing fees.
Securities commissions and fees decreased during 2021, compared to 2020,
primarily due to a decrease in commissions earned in our wealth management line
of business given a $10.6 million decline in our money market and FDIC sweep
revenues as a result of the lower interest rate environment and decreases in
commissions earned from our wind-down of the equity capital markets division.
These decreases were

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partially offset by increases in commissions earned on mutual fund, insurance
product and commodities contract sales transactions.

Investment and securities advisory fees and commissions decreased during 2022,
compared to 2021, primarily due to decreases in fees earned from our municipal
advisory and underwriting transactions. Public finance national issuance volume
declined approximately 21% during 2022 compared to 2021. Investment and
securities advisory fees and commissions increased during 2021, compared with
2020, primarily due to increases in fees earned from our public finance
municipal transactions and from improved wealth management advisory services
fees.

The decreases in other noninterest income during 2022, compared to 2021, were
primarily due to decreases in trading gains earned from our structured finance
business line's derivative activities, given decreased volumes and interest rate
volatility as previously discussed. Specifically, the decreased volumes were due
to lower mortgage originations, with loan lock volumes totaling $3.8 billion in
2022, a 46% decline when compared with 2021. The decrease in other noninterest
income during 2022, compared with the same period in 2021, also reflected a
decline within our broker-dealer segment's deferred compensation plan of $2.8
million. With the expected rise in interest rates continuing into 2023, we
anticipate continued volatility and generally lower levels of other noninterest
income related to our structured finance and fixed income services business
lines. Other noninterest income decreased during 2021, compared to 2020,
primarily due to decreases in trading gains earned from our structured finance
business line's derivative activities resulting from decreased volumes and
interest rate volatility. The year-over-year decrease in other noninterest
income was heightened by decreases within our fixed income services business
line within our taxable and municipal securities trading portfolios.

The declines in noninterest expenses during 2022, compared to 2021, were
primarily due to the impact of changes in variable compensation as previously
discussed. Noninterest expenses decreased during 2021, compared to 2020,
primarily due to decreases in variable compensation, partially offset by
increased non-variable compensation and benefits and expenses associated with
the deployment of the new back-office and accounting systems.

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

                                                                     Year 

Ended December 31,

                                                              2022              2021             2020
Total compensation as a % of net revenue (1)                       63.8 %           65.1 %           58.8 %
Pre-tax margin (2)                                                  9.6 %           10.3 %           21.8 %
FDIC insured program balances at the Bank (end of year)  $    1,122,091    $     803,941    $     700,006
Other FDIC insured program balances (end of year)        $      695,873    $   1,503,277    $   1,892,974
Customer funds on deposit, including short credits (end
of year)                                                 $      278,670   

$ 499,476 $ 480,200

Public finance services:
Number of issues (3)                                                894            1,143            1,252
Aggregate amount of offerings (3)                        $   38,952,431   

$ 59,929,698 $ 57,105,263

Structured finance:
Lock production/TBA volume                               $    3,763,743   

$ 7,007,564 $ 9,075,232

Fixed income services:
Total volumes                                            $  219,791,737    $ 244,643,358    $ 169,559,201
Net inventory (end of year)                              $      701,923   

$ 551,289 $ 613,413

Wealth management (Retail and Clearing services groups):
Retail employee representatives (end of year) (3)

                    99              106              118
Independent registered representatives (end of year)                163              177              189
Correspondents (end of year)                                        111              122              129
Correspondent receivables (end of year)                  $      156,859    $     306,064    $     180,173
Customer margin balances (end of year)                   $      274,339   

$ 426,584 $ 256,682

Wealth management (Securities lending group):
Interest-earning assets - stock borrowed (end of year)   $    1,012,573    $   1,518,372    $   1,338,855
Interest-bearing liabilities - stock loaned (end of
year)                                                    $      916,570   

$ 1,432,196 $ 1,245,066

Total compensation includes the sum of non-variable compensation and benefits
(1) and variable compensation. We consider total compensation as a percentage of

    net revenue to be a key performance measure and indicator of segment
    profitability.

Pre-tax margin is defined as income before income taxes divided by net
(2) 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.


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Mortgage Origination Segment

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

                                           Year Ended December 31,                     Variance
                                       2022         2021         2020        2022 vs 2021     2021 vs 2020
Net interest income (expense)       $ (10,529)   $ (20,400)   $  (10,489)   $        9,871   $      (9,911)
Noninterest income                     452,915      986,990     1,172,450        (534,075)        (185,460)
Noninterest expense                    478,904      731,056       753,917  

(252,152) (22,861)
Income (loss) before income taxes $ (36,518) $ 235,534 $ 408,044 $ (272,052) $ (172,510)

The mortgage lending business is subject to variables that can impact loan
origination volume, including seasonal transaction volumes and interest rate
fluctuations. Historically, the mortgage origination segment has experienced
increased loan origination volume from purchases of homes during the spring and
summer months, when more people tend to move and buy or sell homes. An increase
in mortgage interest rates tends to result in decreased loan origination volume
from refinancings, while a decrease in mortgage interest rates tends to result
in increased loan origination volume from refinancings. While changes in
mortgage interest rates have historically had a lesser impact on home purchases
volume than on refinancing volume, increases in mortgage interest rates during
2022 have also negatively impacted home purchase volume. See details regarding
loan origination volume in the table below.

Recent trends, as well as typical historical patterns in loan origination volume
from purchases of homes or from refinancings because of movements in mortgage
interest rates, may not be indicative of future loan origination volumes. During
2022, certain events adversely impacted origination volumes because of their
effect on the economy, including inflation and rising interest rates, the
negative residual impact of the COVID-19 pandemic, the Federal Reserve's actions
and communications, and geopolitical threats. These events have also adversely
impacted the willingness and ability of the mortgage origination segment's
customers to conduct mortgage transactions. Specifically, current home inventory
shortages and affordability challenges, in addition to supply chain problems,
are impacting customers' abilities to purchase homes. The increase in interest
rates during 2022, which has led to a sharp reduction in national refinancing
volume and the reduction of willing and eligible home buyers, has resulted in
competitive mortgage pricing pressure, leading to a decline in average loans
sales margin. In addition to decreased loan volumes, the negative trend in sales
margin has contributed to a decrease in combined net gains from mortgage loan
sales and mortgage loan origination fees. Currently, we anticipate that lower
seasonal transaction volumes and the continuation of the mortgage loan
production and operating results trends experienced by the mortgage origination
segment during 2022 will continue into 2023. Given these expectations, the
mortgage origination segment continues to evaluate its cost structure to address
the current mortgage environment.

We believe that current initiatives are critical to improving the mortgage
origination segment's short- and long-term financial condition and operating
results. As noted under the section titled "Asset Valuation" earlier in this
Item 7, the mortgage origination segment has experienced lower-than-forecasted
operating results during 2022, due to conditions discussed in detail within this
discussion of segment results. In the event future operating performance remains
challenged and below our forecasted projections, there are negative changes to
long-term growth rates or discount rates increase, the fair value of the
mortgage origination reporting unit may decline and we may be required to record
a goodwill impairment charge. These conditions will continue to be considered
during future impairment evaluations of reporting unit goodwill.

Income before income taxes decreased significantly in 2022, compared with 2021.
This decrease was primarily the result of a decrease in interest rate lock
commitments ("IRLCs") related to a decrease in mortgage loan applications, in
addition to a decrease in the average value of individual IRLCs. The impact of
these trends was partially offset by an increase in average mortgage loan
origination fees and a decrease in noninterest expense as discussed in more

detail below.

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Since March 2020, the CARES Act has provided borrowers the ability to request
forbearance of residential mortgage loan payments. A significant increase in
nationwide forbearance requests that began at that time resulted in the
reduction of third-party mortgage servicers willing to purchase mortgage
servicing rights, which resulted in the mortgage origination segment beginning
to reduce the amount of servicing it retained as the willingness of third-party
mortgage servicers to purchase mortgage servicing rights improved. Beginning in
the fourth quarter of 2020, the mortgage origination segment was able to reduce
the amount of servicing it retained compared to the retention rates in the
second and third quarters of 2020, as the willingness of third-party mortgage
servicers to purchase mortgage servicing rights has improved. Since the first
quarter of 2021, the mortgage origination segment's quarterly retention rates
ranged between 11% and 50%. The mortgage origination segment utilizes a
third-party to manage its servicing portfolio. Therefore, barring third-party
servicers increasing their pricing, we do not expect significant fluctuations in
infrastructure costs to manage changes in the mortgage origination segment's
servicing portfolio if we experience a significant increase in the amount of
retained servicing.

During 2022, the U.S. 10-Year Treasury Rate and mortgage interest rates
significantly increased. This compares to declines in these rates during 2020 in
response to the COVID-19 pandemic, followed in 2021 by an increase in mortgage
interest rates that remained lower on average during 2021, compared to 2020.
Average interest rates during 2022 exceeded average interest rates during 2021,
and refinancing volume as a percentage of total origination volume decreased
during 2022, as compared to 2021. Refinancing volume as a percentage of total
origination volume during 2022 decreased to 14.5% from 36.3% during 2021. During
the second half of 2022, refinancing volume as a percentage of total origination
volume was 7.0%. Although we anticipate the percentage of refinancing volume
relative to total loan origination volume during 2023 to approximate the
percentage experienced during the second half of 2022, a 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, affordability challenges, and supply chain problems 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 2022, funded volume through ABAs was approximately
10% of the mortgage origination segment's total loan volume. During the majority
of 2022, PrimeLending owned a greater than 50% interest in five ABAs. During the
fourth quarter of 2022, interest in one of the five ABAs was dissolved. We
expect total production within the ABA channel to again approximate 10% of loan
volume of the mortgage origination segment during 2023.

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

                                                          Year Ended December 31,
                                        2022                       2021                       2020
                                                 % of                       % of                       % of                 Variance
                                  Amount        Total        Amount        Total        Amount        Total       2022 vs 2021     2021 vs 2020
Mortgage Loan Originations
- units                               41,121                     77,263                     84,209                    (36,142)          (6,946)

Mortgage Loan Originations
- volume:
Conventional                   $   8,276,434     65.37 %  $  15,787,942    

69.65 % $ 16,519,498 71.92 % $ (7,511,508) $ (731,556)
Government

                         2,572,257     20.32 %      3,387,270     14.94 %      4,473,763     19.48 %       (815,013)      (1,086,493)
Jumbo                              1,052,508      8.31 %      2,511,442     11.08 %      1,219,492      5.31 %     (1,458,934)        1,291,950
Other                                758,957      6.00 %        981,629      4.33 %        757,441      3.29 %       (222,672)          224,188
                               $  12,660,156    100.00 %  $  22,668,283    100.00 %  $  22,970,194    100.00 %  $ (10,008,127)   $    (301,911)

Home purchases                 $  10,823,002     85.49 %  $  14,429,190    

63.65 % $ 13,413,545 58.40 % $ (3,606,188) $ 1,015,645
Refinancings

                       1,837,154     14.51 %      8,239,093     

36.35 % 9,556,649 41.60 % (6,401,939) (1,317,556)

                               $  12,660,156    100.00 %  $  22,668,283    

100.00 % $ 22,970,194 100.00 % $ (10,008,127) $ (301,911)

Texas                          $   2,910,754     22.99 %  $   4,224,691    

18.64 % $ 4,280,831 18.64 % $ (1,313,937) $ (56,140)
California

                         1,077,906      8.51 %      2,692,198     11.88 %      2,497,066     10.87 %     (1,614,292)          195,132
Florida                              613,896      4.85 %      1,013,206    

4.47 % 1,403,196 6.11 % (399,310) (389,990)
South Carolina

                       569,206      4.50 %        950,028      4.19 %        929,710      4.05 %       (380,822)           20,318
Arizona                              562,590      4.44 %      1,045,218      4.61 %      1,045,298      4.55 %       (482,628)             (80)
New York                             546,043      4.31 %        705,601      3.11 %        641,387      2.79 %       (159,558)           64,214
Ohio                                 529,939      4.19 %        868,378      3.83 %        869,393      3.78 %       (338,439)          (1,015)
Missouri                             398,826      3.15 %        742,220    

3.27 % 777,389 3.38 % (343,394) (35,169)
North Carolina

                       391,224      3.09 %        740,169      3.27 %        719,936      3.13 %       (348,945)           20,233
Washington                           333,191      2.63 %        703,239    

3.10 % 736,135 3.20 % (370,048) (32,896)
All other states

                   4,726,581     37.34 %      8,983,335     

39.63 % 9,069,853 39.50 % (4,256,754) (86,518)

                               $  12,660,156    100.00 %  $  22,668,283    

100.00 % $ 22,970,194 100.00 % $ (10,008,127) $ (301,911)

Mortgage Loan Sales -
volume:
Third parties                  $  12,668,252     95.97 %  $  22,280,872    

96.62 % $ 22,321,599 99.14 % $ (9,612,620) $ (40,727)
Banking segment

                      532,219      4.03 %        778,288      3.38 %        192,571      0.86 %       (246,069)          585,717
                               $  13,200,471    100.00 %  $  23,059,160    100.00 %  $  22,514,170    100.00 %  $  (9,858,689)   $      544,990


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, other mortgage production income
and other mortgage loan origination fees. 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 during 2022
decreased 44.2%, compared with 2021, while income before income taxes during
2022 decreased 115.5%, compared with 2021. The decrease in income before income
taxes during 2022 was primarily due to decreases in net gains from sale of
loans. Mortgage loan origination fees decreased slightly during 2022 compared
with 2021, as average mortgage loan origination fees increased. The decrease in
net gains from sale of loans was partially offset by decreases in variable
compensation, and to a lesser extent, decreases in non-variable compensation and
benefits expense, segment operating costs, and net interest expense. During
2021, the mortgage origination segment's total loan origination volume decreased
1.3% compared with 2020, while income before income taxes during 2021 decreased
42.3%, compared with 2020. The decrease in income before income taxes during
2021 was primarily due to a decrease in the net fair value and related
derivative activity of IRLCs. This decrease was primarily the result of a
decrease in IRLCs related to a decrease in mortgage loan applications, in
addition to a decrease in the average value of individual IRLCs. Also
contributing to the decrease to a lesser extent was a decrease in net gain

on
sale of loans.

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

                                                                 Year Ended 

December 31,

                                                               2022        

2021 2020
Net gains from mortgage loan sales (basis points):
Loans sold to third parties

                                        263        375         409
Impact of loans retained by banking segment                       (11)       (13)         (3)
As reported                                                        252        362         406
Variable compensation as a percentage of total compensation       51.9 %   

65.8 % 69.0 %
Mortgage servicing rights asset ($000's) (end of year) (1) $ 100,825 $ 86,990 $ 143,742

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

which are eliminated in consolidation.

Net interest expense was comprised of interest income earned on loans held for
sale offset by interest incurred on warehouse lines of credit primarily held
with the Bank, and related intercompany financing costs. The changes in net
interest expense during 2022, compared with 2021, included the effects of
increased net yields on mortgage loans held for sale between the two periods,
and during 2021, compared with 2020, included the effects of decreased net
yields on mortgage loans held for sale between the two periods.

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

                                                                          Year Ended December 31,                              Variance
                                                                 2022              2021               2020          2022 vs 2021      2021 vs 2020

Net gains from sale of loans                                 $     332,732 

$ 834,580 $ 913,474 $ (501,848) $ (78,894)
Mortgage loan origination fees and other related income

            149,598           160,011            172,096          (10,413)           (12,085)

Other mortgage production income:
Change in net fair value and related derivative activity:
IRLCs and loans held for sale

                                     (69,668)          (67,714)             81,560           (1,954)          (149,274)
Mortgage servicing rights asset                                      2,733             2,446           (30,119)               287             32,565
Servicing fees                                                      37,520            57,667             35,439          (20,147)             22,228
Total noninterest income                                     $     452,915    $      986,990     $    1,172,450    $    (534,075)    $     (185,460)


The decrease in net gains from sale of loans during 2022, compared to 2021, was
primarily the result of decreases in total loan sales volume, in addition to a
decrease in average loan sales margin. Since PrimeLending sells substantially
all mortgage loans it originates to various investors in the secondary market,
the decrease in loan sales volume during 2022 was consistent with the decrease
in loan origination volume during the period. The decrease in average loan sales
margins during 2022 was primarily attributable to competitive pricing pressure
resulting from home inventory shortages and a reduction in national refinancing
volume.

The decrease in mortgage loan origination fees during 2022, compared to 2021,
was primarily the result of a decrease in loan origination volume, partially
offset by an increase in average mortgage loan origination fees. Fluctuations in
mortgage loan origination fees are not always aligned with fluctuations in loan
origination volume since customers may opt to pay PrimeLending discount fees on
their mortgage loans in exchange for a lower interest rate.

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 sale of
loans margin is defined as net gains from sale of loans divided by loan sales
volume. The net gains from sale of loans is central to the segment's generation
of income and may include loans sold to third parties and loans sold to and
retained by the banking segment. For origination services provided, the mortgage
origination segment was reimbursed direct origination costs associated with
loans retained by the banking segment, in addition to payment of a correspondent
fee. The reimbursed origination costs and correspondent fee 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 2022, 2021 and 2020 were $532 million,
$778 million and $193 million, respectively. Loan volumes to be originated on
behalf of and retained by the banking segment are expected to be impacted by,
among other things, an ongoing review of the prevailing mortgage rates, balance
sheet positioning at Hilltop and the banking segment's outlook for commercial
loan growth.

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Noninterest income included changes in the net fair value of the mortgage
origination segment's IRLCs and loans held for sale and the related activity
associated with forward commitments used by the mortgage origination segment to
mitigate interest rate risk associated with its IRLCs and mortgage loans held
for sale. The decrease in fair value of IRLCs and loans held for sale during
2022, compared to 2021, was the result of a decrease in the average value of
individual IRLCs and loans held for sale and the total volume of individual
IRLCs and loans held for sale.

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, and refinancing and market activity. During 2022,
2021 and 2020, the mortgage origination segment retained servicing on
approximately 25%, 29% and 67% of loans sold, respectively. A reduction in
third-party mortgage servicers purchasing mortgage servicing rights, while
modest, may result in PrimeLending increasing the rate of retained servicing on
mortgage loans sold during 2023. 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, to mitigate interest rate risk
associated with its MSR asset. Changes in the net fair value of the MSR asset
and the related derivatives associated with normal customer payments, changes in
discount rates, prepayment speed assumptions and customer payoffs resulted in
net gains (losses) as noted in the table above. During 2022, the operating
results of the mortgage origination segment were positively impacted by the
noted increase of $21.9 million in the net fair value of the MSR asset. This
increase was primarily driven by changes in the prepayment and discount rates
used as inputs to value the MSR asset to address the impact of increased
mortgage rates reducing consumer refinancing activity and recent market trends
related to MSR sales. During 2022, the mortgage origination segment sold MSR
assets of approximately $65 million with a serviced loan volume totaling $3.7
billion. During 2021 and 2020, the mortgage origination segment sold MSR assets
of approximately $143 million and $37 million, respectively, with a serviced
loan volume totaling $12.4 billion and $3.8 billion, respectively.

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

                                         Year Ended December 31,                        Variance
                                     2022          2021          2020        2022 vs 2021      2021 vs 2020
Variable compensation             $  183,804    $  373,929    $  405,116    $    (190,125)    $     (31,187)
Non-variable compensation and
benefits                             170,169       194,292       181,597          (24,123)            12,695
Segment operating costs               92,631       113,020       125,104          (20,389)          (12,084)
Lender paid closing costs             13,371        20,458        21,696           (7,087)           (1,238)
Servicing expense                     18,929        29,357        20,404          (10,428)             8,953

Total noninterest expense $ 478,904 $ 731,056 $ 753,917 $ (252,152) $ (22,861)

Total employees' compensation and benefits accounted for the majority of the
noninterest expenses incurred during all periods presented. Specifically,
variable compensation comprised the majority of total employees' compensation
and benefits expenses during 2022, 2021 and 2020. 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 volumes decreased 44.2% during 2022, compared to
2021, the aggregate non-variable compensation and benefits of the mortgage
origination segment decreased by 12.4%. This decrease was primarily due to a
decrease in salaries associated with a reduction in underwriting and loan
fulfillment, operations and corporate support staff in response to the decreases
in loan origination volume that started in the fourth quarter of 2021, and
continued through 2022. Severance costs, included in non-variable compensation
above, incurred because of this initiative was

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$2.7 million during 2022. PrimeLending remains committed to evaluating its
staffing levels and maintaining an appropriate cost structure to address the
dynamic mortgage loan origination trends. Segment operating costs decreased
during 2022, compared to 2021, primarily due to decreases in business
development, professional fees, occupancy and loan-related costs. During 2021,
compared to 2020, segment operating costs decreased primarily due to declines in
loan related costs, software amortization expense and software license
maintenance costs.

In exchange for a higher interest rate, customers may opt to have PrimeLending
pay certain costs associated with the origination of their mortgage loan
("lender paid closing costs"). Fluctuations in lender paid closing costs are not
always aligned with fluctuations in loan origination volume. Other loan pricing
conditions, including the mortgage loan interest rate, loan origination fees
paid by the customer, and a customer's willingness to pay closing costs, may
influence fluctuations in lender paid closing costs.

Between January 1, 2013 and December 31, 2022, the mortgage origination segment
sold mortgage loans totaling $152.1 billion. These loans were sold under sales
contracts that generally include provisions that hold the mortgage origination
segment responsible for errors or omissions relating to its representations and
warranties that loans sold meet certain requirements, including representations
as to underwriting standards and the validity of certain borrower
representations in connection with the loan. In addition, the sales contracts
typically require the refund of purchased servicing rights plus certain investor
servicing costs if a loan experiences an early payment default. While the
mortgage origination segment sold loans prior to 2013, it does not anticipate
experiencing significant losses in the future on loans originated prior to 2013
because 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.

Following is a summary of the mortgage origination segment's claims resolution
activity relating to loans sold between January 1, 2013 and December 31, 2022
(dollars in thousands).

                                         Original Loan Balance              Loss Recognized
                                                           % of                           % of
                                         Amount         Loans Sold       Amount        Loans Sold

Claims resolved with no payment       $     231,644           0.15 %  $           -             - %
Claims resolved because of a loan
repurchase or payment to an
investor for losses incurred (1)            262,970           0.18 %       

 15,189          0.01 %
                                      $     494,614           0.33 %  $      15,189          0.01 %

(1) Losses incurred include refunded purchased servicing rights.

For each loan 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. In addition to other factors, the mortgage origination segment has
considered that GNMA, FNMA and FHLMC have imposed certain restrictions on loans
the agencies will accept under a forbearance agreement resulting from the
COVID-19 pandemic, which could increase the magnitude of indemnification losses
on these loans.

At December 31, 2022 and 2021, the mortgage origination segment's total
indemnification liability reserve totaled $20.5 million and $27.4 million,
respectively. The related provision for indemnification losses was $1.5 million,
$10.0 million, and $11.2 million during 2022, 2021 and 2020, respectively.

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Corporate

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

                                        Year Ended December 31,             

Variance

                                     2022         2021         2020        2022 vs 2021     2021 vs 2020
Net interest income (expense)     $ (13,135)   $ (17,239)   $ (14,192)    $

       4,104   $      (3,047)
Noninterest income                     7,525        9,133        3,945           (1,608)            5,188
Noninterest expense                   59,030       50,507       53,040             8,523          (2,533)
Income (loss) from continuing
operations before income taxes    $ (64,640)   $ (58,613)   $ (63,287)    $

(6,027) $ 4,674

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, consumer
services, industrial equipment manufacturing and animal health, with an
aggregate carrying value of approximately $47 million at December 31, 2022.

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 2022 was primarily comprised of
dividend income from merchant banking investment activities, in addition to
interest income earned on intercompany notes.

Interest expense from continuing operations during 2022, 2021 and 2020 included
recurring annual interest expense of $7.7 million incurred on our $150.0 million
aggregate principal amount of 5% senior notes due 2025 ("Senior Notes"). During
2022, 2021 and 2020, we incurred interest expense of $12.3 million, $12.3
million and $7.9 million, respectively, on our $200 million aggregate principal
amount of Subordinated Notes (defined hereafter), which were issued in May 2020.
Additionally, we incurred interest expense of $1.6 million and $2.8 million
during 2021 and 2020, respectively, on junior subordinated debentures of $67.0
million issued by PCC (the "Debentures"). As discussed in more detail in the
section titled "Liquidity and Capital Resources - Junior Subordinated
Debentures" below, during the third quarter of 2021, PCC fully redeemed all
outstanding Debentures.

Noninterest income from continuing operations 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 2021, noninterest income included an aggregate of $6.5
million in pre-tax gains associated with observable transactions related to two
merchant bank equity investments.

Noninterest expenses from continuing operations were primarily comprised of
employees' compensation and benefits, occupancy expenses and professional fees,
including corporate governance, legal and transaction costs. During 2022,
compared with 2021, the increase in noninterest expenses was primarily due to
inflationary increases associated with software and occupancy costs, as well as
increases in professional fees. During 2021, compared with 2020, the decrease in
noninterest expenses was primarily due to decreases in expenses associated with
employees' incentive compensation and professional fees.

Results from Discontinued Operations

Insurance Segment

As previously discussed, on June 30, 2020, we completed the sale of NLC.
Accordingly, insurance segment results for 2020 have been presented as
discontinued operations in the consolidated financial statements. Additional
details are presented in Note 3, Discontinued Operations, in the notes to our
consolidated financial statements. All activity associated with the insurance
segment was recognized in 2020, therefore, there was no income from discontinued

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operations before taxes during 2022 and 2021, while income from discontinued
operations before income taxes was $2.1 million during 2020.

Corporate

As a result of the previously noted sale of NLC on June 30, 2020 for cash
proceeds of $154.1 million, during 2020, Hilltop recognized an aggregate pre-tax
gain on sale within discontinued operations of corporate of $36.8 million, net
of customary transaction costs of $5.1 million. The resulting book gain from
this sale transaction was not recognized for tax purposes pursuant to the rules
under the Internal Revenue Code.

Financial Condition

The following discussion contains a more detailed analysis of our financial
condition at December 31, 2022 as compared to December 31, 2021 and December 31,
2020.

Securities Portfolio

At December 31, 2022, investment securities consisted of securities of the U.S.
Treasury, U.S. government and its agencies, obligations of municipalities and
other political subdivisions, primarily in the State of Texas, as well as
mortgage-backed, corporate debt, and equity securities. We may categorize
investments as trading, available for sale, held to maturity and equity
securities.

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

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

                                                             December 31,
                                                  2022           2021           2020
Trading securities, at fair value
U.S. Treasury securities                       $    10,466    $     3,728    $    40,491
U.S. government agencies:
Bonds                                               20,878          3,410             40

Residential mortgage-backed securities             214,100        152,093  

336,081

Commercial mortgage-backed securities                    -              -  

876

Collateralized mortgage obligations                182,717        126,389  

69,172

Corporate debt securities                           42,685         60,671  

62,481

States and political subdivisions                  260,271        285,376  

171,573

Private-label securitized product                    9,265         11,377  

       8,571
Other                                               14,650          4,954          4,970
                                                   755,032        647,998        694,255
Securities available for sale, at fair value
U.S. Treasury securities                            19,144         14,862              -
U.S. government agencies:
Bonds                                              202,257         44,133         82,806

Residential mortgage-backed securities             406,358        898,446  

641,611

Commercial mortgage-backed securities              175,499        210,699  

124,538

Collateralized mortgage obligations                818,894        916,866  

565,908

States and political subdivisions                   36,614         45,562  

47,342

                                                 1,658,766      2,130,568   

1,462,205

Securities held to maturity, at amortized cost
U.S. government agencies:
Residential mortgage-backed securities             301,583          9,892  

13,547

Commercial mortgage-backed securities              180,942        145,742  

152,820

Collateralized mortgage obligations                314,705         43,990  

74,932

States and political subdivisions                   78,302         68,060  

70,645

                                                   875,532        267,684   

311,944

Equity securities, at fair value                       200            250  

         140

Total securities portfolio                     $ 3,289,530    $ 3,046,500    $ 2,468,544


We had net unrealized losses of $129.8 million and $18.1 million at December 31,
2022 and 2021, respectively, compared with net unrealized gains of $26.3 million
at December 31, 2020 related to the available for sale investment portfolio.
Within the held to maturity portfolio, we had net unrealized losses of $90.2
million at December 31, 2022, compared with net unrealized gains of $8.6 million
and $14.7 million at December 31, 2022, 2021 and 2020, respectively. Equity
securities included net unrealized gains of $0.1 million, $0.2 million and $0.1
million at December 31, 2022, 2021 and 2020, respectively. The noted significant
change in net unrealized gains (losses) within our available for sale investment
portfolio from December 31, 2021 to December 31, 2022 was related to increases
in market interest rates since purchase and the resulting decline in associated
estimated fair values of such portfolio investments. In future periods, changes
in prevailing market interest rates, coupled with changes in the aggregate size
of the investment portfolio, are expected to be significant drivers to changes
in the unrealized losses or gains in these portfolios.

We transferred certain agency-issued securities from the available-for-sale to
held-to-maturity portfolio on March 31, 2022 having a book value of
approximately $782 million and a market value of approximately $708 million. As
of the date of transfer, the related pre-tax net unrecognized losses of
approximately $74 million within the accumulated other comprehensive loss
balance are being amortized over the remaining term of the securities using the
effective interest method. This transfer was completed after careful
consideration of our intent and ability to hold these securities to maturity.
Factors used in assessing the ability to hold these securities to maturity were
future liquidity needs and sources of funding.

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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 December 31, 2022, the banking segment's
securities portfolio of $2.5 billion was comprised of trading securities of $0.1
million, available for sale securities of $1.7 billion, held to maturity
securities of $876 million and equity securities of $0.2 million, in addition to
$12.1 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 statements of operations.
Accordingly, the securities portfolio of the Hilltop Broker-Dealers included
trading securities of $754.9 million at December 31, 2022. 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 $53.0 million at December 31, 2022.

Corporate

At December 31, 2022, the corporate portfolio included other investments,
including those associated with merchant banking, of $39.8 million in other
assets within the consolidated balance sheets.

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

We have evaluated available for sale debt securities that are in an unrealized
loss position and have determined that any declines in value are unrelated to
credit loss and related to changes in market interest rates since purchase. None
of the available for sale debt securities held were past due at December 31,
2022. In addition, as of December 31, 2022, we had 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

December 31, 2022.

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The following table sets forth the estimated maturities of our debt securities,
excluding trading securities, at December 31, 2022. Contractual maturities may
be different (dollars in thousands, yields are tax-equivalent).

                                One Year      One Year to      Five Years 

to Greater Than

                                 Or Less      Five Years         Ten Years         Ten Years          Total
U.S. Treasury securities:
Amortized cost                  $  14,676    $       4,979                  -                 -    $     19,655
Fair value                      $  14,679    $       4,465                  -                 -    $     19,144
Weighted average yield (1)           4.66 %           0.87 %                -                 -            3.70 %
U.S. government agencies:
Bonds:
Amortized cost                  $  17,943    $      67,225    $        50,302    $       67,364    $    202,834
Fair value                      $  17,719    $      67,030    $        50,132    $       67,376    $    202,257
Weighted average yield (1)           2.64 %           4.94 %             4.69 %            4.80 %          4.63 %
Residential mortgage-backed
securities:
Amortized cost                          -    $       2,142    $        85,671    $      668,891    $    756,704
Fair value                              -    $       2,093    $        80,699    $      595,422    $    678,214
Weighted average yield (1)              -             2.89 %             2.39 %            2.34 %          2.34 %
Commercial mortgage-backed
securities:
Amortized cost                          -    $      99,660    $       239,335    $       25,213    $    364,208
Fair value                              -    $      95,574    $       223,655    $       22,277    $    341,506
Weighted average yield (1)              -             3.10 %             3.59 %            3.44 %          3.44 %
Collateralized mortgage
obligations:
Amortized cost                  $       8    $      16,995    $       222,079    $      963,144    $  1,202,226
Fair value                      $       8    $      16,580    $       215,039    $      863,629    $  1,095,256
Weighted average yield (1)           2.29 %           3.58 %             3.95 %            2.98 %          3.16 %
States and political
subdivisions:
Amortized cost                  $   1,695    $       9,622    $        37,353    $       69,792    $    118,462
Fair value                      $   1,690    $       9,452    $        35,720    $       60,862    $    107,724
Weighted average yield (1)           3.06 %           3.37 %             3.66 %            3.46 %          3.51 %
Total securities portfolio:
Amortized cost                  $  34,322    $     200,623    $       634,740    $    1,794,404    $  2,664,089
Fair value                      $  34,096    $     195,194    $       605,245    $    1,609,566    $  2,444,101
Weighted average yield (1)           3.52 %           3.71 %             3.65 %            2.83 %          3.10 %

(1) Weighted average yield is defined as interest earned by average

interest-earning assets.

Loan Portfolio

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

                                                           December 31,
Loan Held for Investment                          2022         2021         2020
Commercial real estate                         $ 3,245,873  $ 3,042,729  $ 3,133,903
Commercial and industrial                        1,639,980    1,875,420    2,627,774

Construction and land development                  980,896      892,783    

 828,852
1-4 family residential                           1,767,099    1,303,430      629,938
Consumer                                            27,602       32,349       35,667
Broker-dealer                                      431,223      733,193      437,007

Loans held for investment, gross                 8,092,673    7,879,904   

7,693,141

Allowance for credit losses                       (95,442)     (91,352)   

(149,044)

Loans held for investment, net of allowance    $ 7,997,231  $ 7,788,552  $ 7,544,097


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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.

The banking segment's total loans held for investment, net of the allowance for
credit losses, were $8.5 billion, $8.8 billion and $9.6 billion at December 31,
2022, 2021 and 2020, respectively. At December 31, 2022, the banking segment's
loan portfolio included warehouse lines of credit extended to PrimeLending and
its ABAs of $2.1 billion, of which $0.9 billion was drawn. At December 31, 2021
and 2020, amounts drawn on the available warehouse lines of credit were $1.7
billion and $2.5 billion, respectively. 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.

At December 31, 2022, 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 42.4%, 23.2% and 12.8%, respectively, of the banking segment's
total loans held for investment at December 31, 2022. The banking segment's loan
concentrations were within regulatory guidelines at December 31, 2022.

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 have increased since historical lows
observed in 2020, but uncertainty remains given future supply and demand for oil
are influenced by the Russia-Ukraine conflict, return to business travel, new
energy policies and government regulation, and the pace of transition towards
renewable energy resources. At December 31, 2022, the Bank's energy loan
exposure was approximately $58 million of loans held for investment with
unfunded commitment balances of approximately $20 million. The allowance for
credit losses on the Bank's energy portfolio was $0.1 million, or 0.3% of loans
held for investment at December 31, 2022.

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The following table provides information regarding the maturities of the banking
segment's gross loans held for investment, net of unearned income (in
thousands).

                                                                       December 31, 2022
                                     Due Within      Due From One       Due from Five          Due After
                                      One Year      To Five Years      To Fifteen Years      Fifteen Years        Total

Commercial real estate               $   756,952    $    1,383,170    $        1,003,180    $       102,571    $  3,245,873
Commercial and industrial              2,022,266           326,031               173,419                  -       2,521,716
Construction and land development        763,366           167,754         

      44,170              5,606         980,896
1-4 family residential                   151,939           278,432               495,968            840,760       1,767,099
Consumer                                  12,819            14,441                   325                 17          27,602
Total                                $ 3,707,342    $    2,169,828    $        1,717,062    $       948,954    $  8,543,186

Fixed rate loans                     $ 1,633,262    $    1,794,746    $        1,426,440    $       944,570    $  5,799,018
Floating rate loans                    2,074,080           375,082               290,622              4,384       2,744,168
Total                                $ 3,707,342    $    2,169,828    $        1,717,062    $       948,954    $  8,543,186


In the table above, commercial and industrial includes amounts advanced against
the warehouse lines of credit extended to PrimeLending. Floating rate loans that
have reached their applicable rate floor or ceiling are classified as fixed rate
loans rather than floating rate loans. As of December 31, 2022, floating rate
loans totaling $733.8 million had reached their applicable rate floor and were
expected to reprice, subject to their scheduled repricing timing and frequency
terms. An additional $1.6 million of floating rate loans would be adjustable if
published rates increase by a sufficient amount to move past their floored
levels. The majority of floating rate loans carry an interest rate tied to 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 $431.0 million, $733.0 million and $436.8 million at December 31,
2022, 2021 and 2020, respectively. The decrease from December 31, 2021 to
December 31, 2022, was primarily attributable to a decrease of $152.2 million,
or 35.7%, in customer margin accounts and a decrease of $149.2 million, or
48.8%, in receivables from correspondents. The increase from December 31, 2020
to December 31, 2021, was primarily attributable to an increase of $169.9
million or 66.2%, in customer margin accounts and an increase of $125.9 million,
or 69.9%, in receivables from correspondents.

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Mortgage Origination Segment

The loan portfolio of the mortgage origination segment consists of loans held
for sale, primarily single-family residential mortgages funded through
PrimeLending, and IRLCs with customers pursuant to which we agree to originate a
mortgage loan on a future date at an agreed-upon interest rate. The components
of the mortgage origination segment's loans held for sale and IRLCs are as

follows (in thousands).

                                        December 31,
                              2022          2021          2020
Loans held for sale:
Unpaid principal balance    $ 850,277    $ 1,728,255   $ 2,411,626
Fair value adjustment           5,420         54,336       109,778
                            $ 855,697    $ 1,782,591   $ 2,521,404
IRLCs:
Unpaid principal balance    $ 506,278    $ 1,283,152   $ 2,470,013
Fair value adjustment           1,767         25,489        76,048
                            $ 508,045    $ 1,308,641   $ 2,546,061


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 December 31, 2022, 2021 and 2020 were
$1.2 billion, $2.4 billion and $4.0 billion, respectively, while the related
estimated fair values were $3.3 million, $0.4 million and ($28.0) million,
respectively.

Allowance for Credit Losses on Loans

For additional information regarding the allowance for credit losses, refer to
the section captioned "Critical Accounting Estimates" included in this 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.

Underwriting procedures address financial components based on the size and
complexity of the credit. The financial components include, but are not limited
to, current and projected cash flows, shock analysis and/or stress testing, and
trends in appropriate balance sheet and statement of operations ratios. 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 guidelines for each individual portfolio
segment set forth permissible and impermissible loan types. With respect to each
loan type, the guidelines within the Bank's loan policy provide minimum
requirements for the underwriting factors listed above. The Bank's underwriting
procedures also include an analysis of any collateral and guarantor. Collateral
analysis includes a complete description of the collateral, as well as
determined values, monitoring requirements, loan to value ratios, concentration
risk, appraisal requirements and other information relevant to the collateral
being pledged. Guarantor analysis includes liquidity and cash flow evaluation
based on the significance with which the guarantors are expected to serve as
secondary repayment sources.

The Bank maintains a loan review department that reviews credit risk in response
to both external and internal factors that potentially impact the performance of
either individual loans or the overall loan portfolio. The loan review process
reviews the creditworthiness of borrowers and determines compliance with the
loan policy. The loan review process complements and reinforces the risk
identification and assessment decisions made by lenders and credit personnel.
Results of these reviews are presented to management, the Bank's board of
directors and the Risk Committee of the board of directors of the Company.

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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
default 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 December 31, 2022, we utilized a single
macroeconomic alternative scenario, or S7, published by Moody's Analytics in
December 2022.

During our previous quarterly macroeconomic assessment as of September 30, 2022,
we utilized the same single macroeconomic alternative scenario published by
Moody's Analytics in September 2022.

The following table summarizes the U.S. Real Gross Domestic Product ("GDP")
growth rates and unemployment rate assumptions used in our economic forecast to
determine our best estimate of expected credit losses.

                                                         As of
                             December 31,  September 30,  June 30,  March 31,  December 31,
                                 2022          2022         2022      2022         2021
GDP growth rates:
                    Q4 2021                                                            6.7%
                    Q1 2022                                              0.7%          3.6%
                    Q2 2022                                   2.6%       4.7%          3.5%
                    Q3 2022                         1.3%      2.0%       2.4%          2.3%
                    Q4 2022          0.8%           0.4%      0.6%       2.6%          2.7%
                    Q1 2023          0.1%           0.3%      0.9%       2.9%          3.0%
                    Q2 2023        (1.4)%         (1.8)%      1.0%       3.0%          2.4%
                    Q3 2023        (2.5)%         (2.2)%    (1.0)%       3.1%
                    Q4 2023        (2.4)%         (2.2)%    (3.0)%
                    Q1 2024          0.4%           0.7%
                    Q2 2024          1.1%

Unemployment rates:
                    Q4 2021                                                            4.3%
                    Q1 2022                                              3.9%          4.3%
                    Q2 2022                                   3.6%       3.7%          4.0%
                    Q3 2022                         3.7%      3.5%       3.5%          3.8%
                    Q4 2022          3.7%           3.9%      3.6%       3.4%          3.6%
                    Q1 2023          4.0%           4.0%      3.6%       3.4%          3.7%
                    Q2 2023          4.6%           4.6%      3.6%       3.3%          3.7%
                    Q3 2023          5.3%           5.5%      5.0%       3.2%
                    Q4 2023          6.0%           6.2%      6.4%
                    Q1 2024          5.9%           6.0%
                    Q2 2024          5.6%


As of December 31, 2022, our economic forecast was updated from September 30,
2022 to reflect higher interest rate expectations and slower real GDP growth
during the reasonable and supportable period. The Federal Reserve increased the
federal funds rate target twice during the quarter to 4.25% to 4.50% and the
current quarter's economic forecast now assumes an average federal funds rate of
5.3% by the second quarter of 2023. As interest rates increased, inflation rates
have decreased from historical highs as the goods sector improves; however, we
still observe supply chain disruptions

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especially in the services sector. Unemployment rate forecasts were updated
based on recent economic data as tight labor market conditions continued.

During 2022, our economic outlook was updated to reflect our expectations of a
period of below trend economic growth beginning this year and a mild U.S.
recession in 2023. COVID cases receded in the United States but continued to
disrupt global supply chains and tight labor market conditions. The Russian
invasion of Ukraine contributed to global oil prices increasing to near $120 per
barrel and further disrupted supply chains due to economic sanctions imposed by
the United States and other trade partners. Inflation rates initially expected
to be transitory proved to trend persistently higher as the consumer price index
rose to 9.1% on an annual basis in June. In response, the Federal Reserve
adjusted monetary policy by increasing its federal funds rate target from 0.0% -
0.25% in March 2022 to 4.25% - 4.50% by December 2022. With lower government
spending/stimulus and net exports, U.S. real GDP growth rates declined to (1.6%)
and (0.6%) during the first and second quarters of 2022. While the Company and
most economists downgraded their economic outlooks, the U.S. did not enter a
recession. Real GDP growth improved to 3.2% during the third quarter of 2022 and
U.S. labor markets proved resilient as unemployment rates decreased during the
year from 4.0% to 3.5%.

During 2021, our economic forecast improved year-over-year due to a third round
of $1.9 trillion in government stimulus enacted in March 2021 through the
American Rescue Plan Act. As a result of additional stimulus checks, enhanced
unemployment benefits, extended lending from the PPP program, and expanded tax
credits, consumer and business spending accelerated the U.S. real GDP growth
rate in the second quarter of 2021 to 6.3% and in the third quarter of 2021 to
6.7%. Also, in March 2021, President Biden implemented new programs to extend
COVID-19 testing and vaccine eligibility for most adults in the United States by
May 2021. Most states also ended their participation in federal pandemic
unemployment benefit programs in early summer 2021. The U.S. unemployment rate
decreased from 6.7% in December 2020 to 5.9% in June 2021 and decreased further
to 4.2% by November 2021. In August 2021, a second wave of COVID-19 cases
progressed within the United States and Texas due to the delta variant, which
slowed U.S. economic growth and real GDP growth rates to 2.3% in the third
quarter of 2021. Then, in November 2021, Congress passed a fourth round of $0.6
trillion in government stimulus through the Infrastructure Investment and Jobs
Act, and during December 2021, a third wave of COVID-19 cases progressed in the
United States and Texas due to the omicron variant.

During 2020, our baseline economic forecast changed significantly year-over-year
in response to weak economic conditions caused by the COVID-19 pandemic as
developments occurred rapidly in February and March 2020 associated with fiscal
and monetary stimulus measures and the expected beneficial impacts of the CARES
Act and certain regulatory interagency guidance. As of December 31, 2019, we
assumed the U.S. economy was in the late stages of the economic cycle with
unemployment rates near historical lows of 3.6% increasing to 3.8% in the fourth
quarter of 2020 and reverting to historical data in the fourth quarter of 2022.
Downside risks to the economy were concerns over international trade war between
the U.S. and its trading partners and potential fallout from a Brexit in 2020.
Interest rate expectations assumed one rate cut in 2020 with the Federal Reserve
target range of the federal funds rate at 1.25% to 1.50% before reverting to
historical data in 2023. In response to the COVID-19 pandemic, the Federal
Reserve twice cut federal funds rate targets in March 2020 to 0% to 0.25% with
interest rate expectations as of December 31, 2020 unchanged until late 2023.
Several U.S. fiscal and monetary policy changes during early 2020 were enacted
to counter a severe, but short U.S. recession during the first half of 2020 and
support a strong economic recovery during the second half of 2020 with U.S.
budget deficits increasing to more than $3 trillion during the year. U.S.
unemployment rates reached 14.8% in April 2020 before declining to 6.7% as of
December 31, 2020, which was 3.1% higher than the unemployment rate as of
December 31, 2019. Annualized real GDP growth rates declined 31.4% in the second
quarter of 2020 and increased 33.4% in the third quarter of 2020. The U.S.
presidential election later in 2020 resulted in several changes, as Presidential
Candidate Joe Biden won the electoral vote to replace President Donald Trump in
2021 and majority control of the U.S. Congress moved from Republican to
Democratic parties. As economic growth slowed during the fourth quarter of 2020,
additional government stimulus of approximately $900 billion was approved.

Effective January 1, 2020, we adopted the new CECL standard and recorded
transition adjustment entries that resulted in an allowance for credit losses
for loans held for investment of $73.7 million, an increase of $12.6 million.
This increase reflected credit losses of $18.9 million from the expansion of the
loss horizon to life of loan and also takes into account forecasts of expected
future macroeconomic conditions, partially offset by the elimination of the
non-credit component within the historical allowance related to previously
categorized PCI loans of $6.3 million. This increase, net of tax, was

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largely reflected within the banking segment and included a decrease of $5.7
million to opening retained earnings at January 1, 2020.

During 2022, the increase in the allowance for credit losses was driven by a
deteriorating U.S. economic outlook since December 31, 2021. The net impact to
the allowance of changes associated with collectively evaluated loans included a
provision of credit losses of $10.0 million, while individually evaluated loans
during 2022 included reversals of credit losses of $1.7 million. The change in
the allowance for credit losses during 2022 was 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 period. The
change in the allowance during 2022 was also impacted by net charge-offs of $4.2
million.

As discussed under the section titled "Loan Portfolio" earlier in this Item 7,
the Bank's actions beginning in 2020 included supporting our impacted banking
clients experiencing an increased level of risk due to the COVID-19 pandemic
through loan modifications. This deteriorating economic outlook resulted in a
significant build in the allowance and included provision for credit losses
through the second quarter of 2020. During 2021, improvement in both economic
results and the macroeconomic outlook, coupled with government stimulus and
positive risk rating grade migration within the Bank, resulted in aggregate
reversals of a significant portion of previously recorded credit losses. During
2022, the impact of changes in the U.S. economic outlook and resulting impact on
collectively evaluated loans has resulted in a build in the allowance since
December 31, 2021. As a result, 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, was 1.27% as of
December 31, 2022, down from 1.37% as of December 31, 2021, and a high of 2.63%
as of September 30, 2020, following the initial impacts of the COVID-19
pandemic.

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).

                                                                  Allowance For
                                                                  Credit Losses
                                                        Total       as a % of
                                        Total         Allowance    Total Loans
                                      Loans Held     for Credit     Held For
December 31, 2022                   For Investment     Losses      Investment
Commercial real estate             $      3,245,873  $    63,255           1.95 %
Commercial and industrial (1)             1,439,111       15,933           1.11 %

Construction and land development           980,896        6,051          

0.62 %
1-4 family residential                    1,767,099        9,313           0.53 %
Consumer                                     27,602          554           2.01 %
                                          7,460,581       95,106           1.27 %

Broker-dealer                               431,223          234           0.05 %
Mortgage warehouse lending                  200,869          102           0.05 %
                                   $      8,092,673  $    95,442           1.18 %

(1) Commercial and industrial portfolio amounts reflect balances excluding

banking segment mortgage warehouse lending programs.

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 input 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 December 31, 2022, excluding margin loans in the broker-dealer

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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 military conflicts between Russia and Ukraine and global supply
chain concerns recede faster than expected. Real GDP is expected to grow 3.3% in
the first quarter of 2023, 3.5% in the second quarter of 2023, 3.4% in the third
quarter of 2023, and 3.7% in the fourth quarter of 2023. Average unemployment
rates are expected to remain low in 2023 and decline slightly to 3.4% by the
first quarter of 2024. Inflation is expected to trend back toward the Federal
Reserve's target sooner than expected and we expect the federal funds rate to
increase to 4.7% during 2023, but return to 3.7% by the end of 2024.

Compared to our economic forecast, the downside scenario assumes consumer and
business confidence declines as the military conflict between Russia and Ukraine
worsens significantly and persists longer than anticipated and global supply
chain issues intensify, thereby increasing inflation rates substantially.
Consumer confidence and spending erode causing the economy to fall back into
recession during the first quarter of 2023. Real GDP is expected to decrease
2.9% in the first quarter of 2023, 3.6% in the second quarter of 2023, and 3.0%
in the third quarter of 2023. Average unemployment rates are expected to
increase to 7.8% by the first quarter of 2024, but improve to 6.7% by year-end
2024 and revert back to historical average rates over time. The Federal Reserve
increases the federal funds rate to 5.2% by the second quarter of 2023 to slow
inflation, but proceeds to reduce it to a 1.3% target by the first quarter of
2025 to support the economy. Disagreements in Congress prevent any additional
stimulus from being enacted beyond the American Rescue Plan and Infrastructure
Investment and Jobs Acts passed in 2021.

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 $28 million or a
weighted average expected loss rate of 0.8% 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 $32 million or a
weighted average expected loss rate of 1.7% 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
Russian-Ukraine conflict and its impact on supply chains, and the impact of the
pandemic continuing to recede. 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
within our loan portfolio for the periods presented (in
thousands). Substantially all of the activity shown below occurred within the
banking segment.

                                                                                        Year Ended December 31,
Loans Held for Investment                                                         2022           2021           2020
Balance, beginning of year                                                     $    91,352    $   149,044    $    61,136
Transition adjustment for adoption of CECL accounting standard                           -              -         12,562
Provision for (reversal of) credit losses                                            8,309       (58,213)         96,491
Recoveries of loans previously charged off:
Commercial real estate                                                                 128            266            613
Commercial and industrial                                                            2,746          2,656          1,834
Construction and land development                                          

             -              -              2
1-4 family residential                                                                 133            546             54
Consumer                                                                               289            281            392
Broker-dealer                                                                            -              -              -
Total recoveries                                                                     3,296          3,749          2,895
Loans charged off:
Commercial real estate                                                                   -            310          4,517
Commercial and industrial                                                            6,945          2,249         18,158

Construction and land development                                          

             -              -              2
1-4 family residential                                                                 138            312            748
Consumer                                                                               432            357            615
Broker-dealer                                                                            -              -              -
Total charge-offs                                                                    7,515          3,228         24,040
Net recoveries (charge-offs)                                                       (4,219)            521       (21,145)
Balance, end of year                                                           $    95,442    $    91,352    $   149,044

Average total loans for the year                                               $ 7,840,848    $ 7,645,292    $ 7,618,723
Total loans held for investment (end of year)                                  $ 8,092,673    $ 7,879,904    $ 7,693,141
Ratios:
Net recoveries (charge-offs) to average total loans held for investment (1)         (0.05) %         0.01 %       (0.28) %
Non-accrual loans to total loans held for investment (end of year)         

0.30 % 0.60 % 0.87 %
Allowance for credit losses on loans held for investment to:
Total loans held for investment (end of year)

                                         1.18 %         1.16 %         1.94 %
Non-accrual loans held for investment (end of year)                        

386.81 % 193.08 % 222.14 %

Net recoveries (charge-offs) to average total loans held for investment ratio
(1) presented on a consolidated basis for all periods given relative

immateriality of resulting measure by loan portfolio segment.

Total non-accrual loans decreased by $20.7 million from December 31, 2021 to
December 31, 2022, compared to a decrease of $27.8 million from December 31,
2020 to December 31, 2021. These changes in non-accrual loans were impacted by
loans secured by residential real estate within our mortgage origination
segment, which were classified as loans held for sale, of $4.8 million, $2.9
million and $10.9 million at December 31, 2022, 2021 and 2020, respectively.

In addition to changes in non-accrual loans classified as loans held for sale,
the decrease in non-accrual loans during 2022 was primarily due to principal
paydowns, settlements and charge-offs associated with several commercial and
industrial, single family residential loan and commercial real estate owner
occupied loan relationships, while the decrease in non-accrual loans during 2021
was primarily due to principal paydowns associated with several commercial and
industrial and commercial real estate owner occupied relationships.

As previously discussed in detail within this section, the allowance for credit
losses has fluctuated significantly from period to period, which impacted the
resulting ratios noted in the table above. During 2020, the significant build in
the allowance was primarily due to the adoption of the new CECL standard and
recorded transition adjustment entries as well as the deteriorating economic
outlook due to the COVID-19 pandemic, while during 2021 the significant decline
in the allowance for credit losses reflected improvement in both realized
economic results and the macroeconomic outlook due to

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improvements in both macroeconomic forecast assumptions and credit quality
metrics on COVID-19 impacted industry sector exposures.

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 is presented in the table below (dollars in
thousands).

                                                          December 31,
                                      2022                   2021                    2020
                                             % of                   % of                    % of
                                            Gross                  Gross                   Gross
Allocation of the Allowance
for Credit Losses               Reserve     Loans      Reserve     Loans      Reserve      Loans
Commercial real estate         $  63,255     40.11 %  $  59,354     38.61 %  $  109,629     40.74 %
Commercial and industrial         16,035     20.26 %     21,982     23.80 %      27,703     34.16 %
Construction and land
development                        6,051     12.12 %      4,674     11.33 %       6,677     10.77 %
1-4 family residential             9,313     21.84 %      4,589     16.54 %       3,946      8.19 %
Consumer                             554      0.34 %        578      0.41 %         876      0.46 %
Broker-dealer                        234      5.33 %        175      9.31 %         213      5.68 %
Total                          $  95,442    100.00 %  $  91,352    100.00 %  $  149,044    100.00 %


The following table summarizes historical levels of the allowance for credit
losses on loans held for investment, distributed by portfolio segment (in
thousands).

                                      December 31,      September 30,     June 30,      March 31,      December 31,
                                          2022              2022            2022          2022             2021
Commercial real estate               $       63,255    $        63,200   $   63,719    $    60,361    $       59,354
Commercial and industrial                    16,035             16,108       19,836         20,130            21,982

Construction and land development             6,051              4,768     

  4,996          5,515             4,674
1-4 family residential                        9,313              6,612        5,554          4,340             4,589
Consumer                                        554                574          542            499               578
Broker-dealer                                   234                521          651            340               175
                                     $       95,442    $        91,783   $   95,298    $    91,185    $       91,352


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).

                                                      Year Ended December 31,
                                                   2022        2021        2020
Balance, beginning of year                        $ 5,880    $   8,388    $ 2,075

Transition adjustment CECL accounting standard          -            -     

3,837
Other noninterest expense                           1,904      (2,508)      2,476
Balance, end of year                              $ 7,784    $   5,880    $ 8,388


As previously discussed, we adopted the new CECL standard and recorded a
transition adjustment entry that resulted in an allowance for credit losses for
unfunded commitments of $5.9 million as of January 1, 2020. During 2021, the
decrease in the allowance for unfunded commitments was primarily due to
improvements in loan expected loss rates.

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During 2022, the increase in the allowance for unfunded commitments was due to
increases in both loan expected loss rates and available commitment balances.

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. 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 are assigned a grade of special mention 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. Additionally, potential
problem loans do not include loans that have been modified in connection with
our COVID-19 payment deferment programs which allow for a deferral of principal
and/or interest payments. Within our loan portfolio, we had four credit
relationships totaling $4.0 million of potential problem loans at December 31,
2022, compared with two credit relationships totaling $3.1 million of potential
problem loans at December 31, 2021 and seven credit relationships totaling $11.3
million of potential problem loans at December 31, 2020.

Non-Performing Assets

In response to the COVID-19 pandemic, the CARES Act was passed in March 2020,
which among other things, allowed the Bank to suspend the TDR requirements for
certain loan modifications to be categorized as a TDR. Subsequent legislation
extended such provisions through January 1, 2022. Starting in March 2020, the
Bank implemented several actions to better support our impacted banking clients
and allow for loan modifications such as principal and/or interest payment
deferrals, participation in the PPP as an SBA preferred lender and personal
banking assistance including waived fees, increased daily spending limits and
suspension of residential foreclosure activities. The COVID-19 payment deferment
programs allowed for a deferral of principal and/or interest payments with such
deferred principal payments due and payable on the maturity date of the existing
loan.

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

                                                    December 31,                            Variance
                                          2022         2021          2020        2022 vs 2021      2021 vs 2020
Loans accounted for on a non-accrual
basis:
Commercial real estate                  $   4,269    $   6,601    $   11,133    $      (2,332)    $      (4,532)
Commercial and industrial                   9,095       22,478        34,049          (13,383)          (11,571)
Construction and land development             198            2           507               196             (505)
1-4 family residential                     15,941       21,123        32,263           (5,182)          (11,140)
Consumer                                       14           23            28               (9)               (5)
Broker-dealer                                   -            -             -                 -                 -
                                        $  29,517    $  50,227    $   77,980    $     (20,710)    $     (27,753)
Troubled debt restructurings
included in accruing loans held for
investment                                    803          922         1,954             (119)           (1,032)
Non-performing loans                    $  30,320    $  51,149    $   79,934    $     (20,829)    $     (28,785)

Non-performing loans as a percentage
of total loans                               0.33 %       0.52 %        0.76 %          (0.19) %          (0.24) %

Other real estate owned                 $   2,325    $   2,833    $   21,289    $        (508)    $     (18,456)

Other repossessed assets                $       -    $       -    $      101    $            -    $        (101)

Non-performing assets                   $  32,645    $  53,982    $  101,324    $     (21,337)    $     (47,342)

Non-performing assets as a
percentage of total assets                   0.20 %       0.29 %        0.60 %          (0.09) %          (0.31) %

Loans past due 90 days or more and
still accruing                          $  92,099    $  60,775    $  

243,630 $ 31,324 $ (182,855)

At December 31, 2022, non-accrual loans included 40 commercial and industrial
relationships with loans secured by accounts receivable, automobiles, equipment
and notes receivable. Non-accrual loans at December 31, 2022 also

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included $4.8 million of loans secured by residential real estate which were
classified as loans held for sale. At December 31, 2021, non-accrual loans
included 45 commercial and industrial relationships with loans secured by
accounts receivable, life insurance, oil and gas, livestock and equipment.
Non-accrual loans at December 31, 2021 also included $2.9 million of loans
secured by residential real estate which were classified as loans held for sale.
At December 31, 2020, non-accrual loans included 60 commercial and industrial
relationships with loans secured by accounts receivable, life insurance,
livestock, oil and gas, and equipment. Non-accrual loans at December 31, 2020
also included $10.9 million of loans secured by residential real estate which
were classified as loans held for sale.

At December 31, 2022, TDRs were comprised of $0.8 million of loans that are
considered to be performing and accruing, and $5.8 million of loans considered
to be non-performing reported in non-accrual loans. At December 31, 2021, TDRs
were comprised of $0.9 million of loans that were considered to be performing
and accruing, and $5.9 million of loans that were considered to be
non-performing reported in non-accrual loans. At December 31, 2020, TDRs were
comprised of $2.0 million of loans that were considered to be performing and
accruing, and $16.0 million of loans considered to be non-performing reported in
non-accrual loans. In March 2020, the CARES Act was passed, which, among other
things, allowed the Bank to suspend the requirements for certain loan
modifications to be categorized as a TDR. Therefore, the Bank has not reported
COVID-19 related modifications as TDRs through January 1, 2022 when the
provisions expired. At December 31, 2022, the Bank had no loans remaining under
the COVID-19 related modifications program.

OREO decreased from December 31, 2021 to December 31, 2022, primarily due to
disposals and valuation adjustments totaling $1.8 million, partially offset by
additions totaling $1.3 million. OREO decreased from December 31, 2020 to
December 31, 2021, primarily due to disposals and valuation adjustments totaling
$22.0 million, partially offset by additions totaling of $3.6 million.

Loans past due 90 days or more and still accruing at December 31, 2022, 2021 and
2020 were primarily comprised of loans held for sale and guaranteed by U.S.
government agencies, including GNMA related loans subject to repurchase within
our mortgage origination segment. The significant decrease in loans past due 90
days or more and still accruing at December 31, 2021, compared to December 31,
2020, was due to the sale of mortgage loans previously included within this
non-performing assets category. As of December 31, 2022, $43.8 million of loans
subject to repurchase were under a forbearance agreement resulting from the
COVID-19 pandemic. During May 2020, GNMA announced it will temporarily exclude
any new GNMA lender delinquencies, occurring on or after April 2020, when
calculating the delinquency ratios for the purposes of enforcing compliance with
its delinquency rate thresholds. This exclusion is extended automatically to
GNMA lenders that were compliant with GNMA's delinquency rate thresholds as
reflected by their April 2020 investor accounting report. The mortgage
origination segment qualified for this exclusion as of December 31, 2022. As of
December 31, 2022, $43.8 million of loans subject to repurchase under a
forbearance agreement had delinquencies on or after April 2020.

Deposits

The banking segment's major source of funds and liquidity is its deposit base.
Deposits provide funding for its investments in loans and securities. Interest
paid for deposits must be managed carefully to control the level of interest
expense and overall net interest margin. The composition of the deposit base
(time deposits versus interest-bearing demand deposits and savings), as
discussed in more detail within the section titled "Liquidity and Capital
Resources - Banking Segment" below, is constantly changing due to the banking
segment's needs and market conditions. Currently, the banking segment is facing
significant competition for its deposit base as customers seek higher yields on
deposits. Separately, in an effort to assist its customers in avoiding
overdraft-related fees, our banking segment implemented certain fee enhancements
beginning October 1, 2022. Such fee enhancements are not expected to have a
material impact on its overall operating results.

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

                                                               Year Ended December 31,
                                           2022                         2021                         2020
                                   Average        Average       Average        Average       Average        Average
                                   Balance       Rate Paid      Balance       Rate Paid      Balance       Rate Paid
Noninterest-bearing demand
deposits                         $  4,455,779         0.00 %  $  4,157,962         0.00 %  $  3,304,475         0.00 %
Interest-bearing demand
deposits                            6,320,654         0.68 %     6,077,660         0.19 %     5,284,582         0.31 %
Savings deposits                      330,743         0.22 %       295,075         0.06 %       231,996         0.07 %
Time deposits                         910,104         0.73 %     1,349,849         0.86 %     1,880,543         1.11 %
                                 $ 12,017,280         0.42 %  $ 11,880,546         0.20 %  $ 10,701,596         0.35 %

The following table presents the scheduled maturities of uninsured deposits
greater than $250,000 as of December 31, 2022 (in thousands).

Months to maturity:
3 months or less         $  45,058
3 months to 6 months        32,812
6 months to 12 months      128,392
Over 12 months             161,094
                         $ 367,356


Borrowings

Our consolidated borrowings associated with continuing operations are shown in
the table below (dollars in thousands).

                                                                   December 31,
                                           2022                         2021                         2020
                                                  Average                      Average                      Average
                                   Balance       Rate Paid      Balance       Rate Paid      Balance       Rate Paid
Short-term borrowings            $    970,056         2.27 %  $    859,444         1.22 %  $    695,798         1.46 %
Notes payable                         346,654         4.33 %       387,904         5.79 %       381,987         4.54 %
Junior subordinated debentures              -            - %             - 

       3.45 %        67,012         4.13 %
                                 $  1,316,710         2.86 %  $  1,247,348         1.32 %  $  1,144,797         2.51 %

Short-term borrowings consisted of federal funds purchased, securities sold
under agreements to repurchase, borrowings at the Federal Home Loan Bank
("FHLB"), short-term bank loans and commercial paper. The increase in short-term
borrowings at December 31, 2022, compared with December 31, 2021, primarily
reflected increases in federal funds purchased by the banking segment and
securities sold under agreements to repurchase by the broker-dealer segment,
partially offset by decreases in commercial paper and short-term bank loans
within the broker-dealer segment. The decrease in short-term borrowings at
December 31, 2021 compared with December 31, 2020 included increases in
short-term bank loans and commercial paper used by the Hilltop Broker-Dealers to
finance their activities, partially offset by a decrease in securities sold
under agreements to repurchase by the Hilltop Broker-Dealers given increased
utilization of internal funds.

Notes payable at December 31, 2022 was comprised of $149.3 million related to
the Senior Notes, net of loan origination fees, Subordinated Notes (defined
hereafter), net of origination fees, of $197.4 million and mortgage origination
segment borrowings of $0 million. Notes payable at December 31, 2021 was
comprised of $149.1 million related to Senior Notes, net of loan origination
fees, Subordinated Notes, net of origination fees, of $197.1 million and
mortgage origination segment borrowings of $41.7 million. Notes payable at
December 31, 2020 was comprised of $148.9 million related to Senior Notes, net
of loan origination fees, Subordinated Notes, net of origination fees, of $196.8
million and mortgage origination segment borrowings of $36.2 million. As
discussed in more detail within the section titled "Liquidity and Capital
Resources - Junior Subordinated Debentures" below, during the third quarter of
2021, PCC fully redeemed all outstanding Debentures.

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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 December 31, 2022, Hilltop had $172.5 million
in cash and cash equivalents, a decrease of $195.4 million from $367.9 million
at December 31, 2021. This decrease in cash and cash equivalents was primarily
due to cash outflows of $442.3 million in stock repurchases related to the
tender offer, $43.0 million in cash dividends declared, and other general
corporate expenses, partially offset by the receipt of $328.2 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, interest on debt obligations, dividend payments to
stockholders and potential stock repurchases.

Economic Environment

As previously discussed, operational and financial headwinds during 2022 have
had, and are expected to continue to have, an adverse impact on our operating
results during 2023. The impacts of noted headwinds in 2023 are highly uncertain
and will depend on several developments outside of our control, including, among
others, timing and significance of changes in U.S. treasury yields and mortgage
interest rates, exposure to increasing funding costs, inflationary pressures
associated with compensation, occupancy and software costs and labor market
conditions, the Russian-Ukraine conflict and its impact on supply chains, as
well as the impact of the pandemic continuing to recede. As demonstrated
during the extreme volatility and disruptions in the capital and credit markets
beginning in March 2020 resulting from the COVID-19 crisis and its negative
impact 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 Program and Declaration

In October 2016, we announced that our board of directors authorized a dividend
program under which we intend to pay quarterly dividends on our common stock,
subject to quarterly declarations by our board of directors. During 2022, we
declared and paid cash dividends of $0.60 per common share, or $43.0 million.

On January 26, 2023, our board of directors declared a quarterly cash dividend
of $0.16 per common share, payable on February 24, 2023 to all common
stockholders of record as of the close of business on February 10, 2023.

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 2022, our board of directors authorized a new stock repurchase
program through January 2023, pursuant to which we were originally 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. As a result of share repurchases during 2022,
including the tender offer described below, we had no further available share
repurchase capacity associated with our previously authorized stock repurchase
program.

In January 2023, our board of directors authorized a new stock repurchase
program through January 2024, pursuant to which we are authorized to repurchase,
in the aggregate, up to $75.0 million of our outstanding common stock, inclusive
of repurchases to offset dilution related to grants of stock-based compensation.
Under the stock repurchase program authorized, we may repurchase shares in the
open market or through privately negotiated transactions as permitted under Rule
10b-18 promulgated under the Exchange Act. The extent to which we repurchase our
shares and the timing of such

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repurchases depends upon market conditions and other corporate considerations,
as determined by Hilltop's management team. Repurchased shares will be returned
to our pool of authorized but unissued shares of common stock.

The Inflation Reduction Act of 2022, signed into law during August 2022,
introduced a nondeductible excise tax equal to 1% of the fair market value of
certain shares repurchased beginning in 2023, subject to certain limitations.
While we may complete transactions subject to the new excise tax, we do not
expect the tax to have a material impact to our financial condition or results
of operations.

Tender Offer

On May 2, 2022, we announced the commencement of a modified "Dutch auction"
tender offer to purchase shares of our common stock for an aggregate cash
purchase price of up to $400 million, inclusive of the aforementioned stock
repurchase program. On May 27, 2022 including the exercise of our right to
purchase up to an additional 2% of our outstanding shares, we completed our
tender offer, repurchasing 14,868,469 shares of outstanding common stock at a
price of $29.75 per share for a total of $442.3 million. We funded the tender
offer with cash on hand.

Senior Notes due 2025

On April 9, 2015, we completed an offering of $150.0 million aggregate principal
amount of our 5% senior notes due 2025 ("Senior Unregistered Notes") in a
private offering that was exempt from the registration requirements of the
Securities Act. The Senior Unregistered Notes were offered within the United
States only to qualified institutional buyers pursuant to Rule 144A under the
Securities Act, and to persons outside of the United States under Regulation S
under the Securities Act. The Senior Unregistered Notes were issued pursuant to
an indenture, dated as of April 9, 2015 (the "indenture"), by and between
Hilltop and U.S. Bank National Association, as trustee. The net proceeds from
the offering, after deducting estimated fees and expenses and the initial
purchasers' discounts, were approximately $148 million. We used the net proceeds
of the offering to redeem all of our outstanding Series B Preferred Stock at an
aggregate liquidation value of $114.1 million, plus accrued but unpaid dividends
of $0.4 million, and Hilltop utilized the remainder for general corporate
purposes.

In connection with the issuance of the Senior Unregistered Notes, on April 9,
2015, we entered into a registration rights agreement with the initial
purchasers of the Senior Unregistered Notes. Under the terms of the registration
rights agreement, we agreed to offer to exchange the Senior Unregistered Notes
for notes registered under the Securities Act (the "Senior Registered Notes").
The terms of the Senior Registered Notes are substantially identical to the
Senior Unregistered Notes for which they were exchanged (including principal
amount, interest rate, maturity and redemption rights), except that the Senior
Registered Notes generally are not subject to transfer restrictions. On May 22,
2015, and subject to the terms and conditions set forth in the Senior Registered
Notes prospectus, we commenced an offer to exchange the outstanding Senior
Unregistered Notes for Senior Registered Notes. Substantially all of the Senior
Unregistered Notes were tendered for exchange, and on June 22, 2015, we
fulfilled all of the requirements of the registration rights agreement for the
Senior Unregistered Notes by issuing Senior Registered Notes in exchange for the
tendered Senior Unregistered Notes. We refer to the Senior Registered Notes and
the Senior Unregistered Notes that remain outstanding collectively as the
"Senior Notes."

The Senior Notes bear interest at a rate of 5% per year, payable semi-annually
in arrears in cash on April 15 and October 15 of each year, commencing on
October 15, 2015. The Senior Notes will mature on April 15, 2025, unless we
redeem the Senior Notes, in whole at any time or in part from time to time, on
or after January 15, 2025 (three months prior to the maturity date of the Senior
Notes) at our election at a redemption price equal to 100% of the principal
amount of the Senior Notes to be redeemed plus accrued and unpaid interest to,
but excluding, the redemption date. At December 31, 2022, $150.0 million of our
Senior Notes was outstanding.

The indenture contains covenants that limit our ability to, among other things
and subject to certain significant exceptions: (i) dispose of or issue voting
stock of certain of our bank subsidiaries or subsidiaries that own voting stock
of our bank subsidiaries, (ii) incur or permit to exist any mortgage, pledge,
encumbrance or lien or charge on the capital stock of certain of our bank
subsidiaries or subsidiaries that own capital stock of our bank subsidiaries and
(iii) sell all or substantially all of our assets or merge or consolidate with
or into other companies. The indenture also provides for

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certain events of default, which, if any of them occurs, would permit or require
the principal amount, premium, if any, and accrued and unpaid interest on the
then outstanding Senior Notes to be declared immediately due and payable.

Subordinated Notes due 2030 and 2035

On May 7, 2020, we completed a public offering of $50 million aggregate
principal amount of 5.75% fixed-to-floating rate subordinated notes due May 15,
2030 (the "2030 Subordinated Notes") and $150 million aggregate principal amount
of 6.125% fixed-to-floating subordinated notes due May 15, 2035 (the "2035
Subordinated Notes"). We collectively refer to the 2030 Subordinated Notes and
the 2035 Subordinated Notes as the "Subordinated Notes". 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 December 31, 2022, $200.0 million of our Subordinated Notes was
outstanding.

Junior Subordinated Debentures

Following receipt of regulatory approval, during June, July and August 2021, PCC
submitted to the trustees of each of the statutory trusts a notice to redeem in
full outstanding Debentures of $67.0 million issued by PCC, which resulted in
the full redemption to the holders of the associated preferred securities and
common securities during the third quarter of 2021.

The Debentures, which were held by four statutory trusts created for the sole
purpose of issuing and selling preferred securities and common securities used
to acquire the Debentures, had an original stated term of 30 years with original
maturities ranging from July 2031 to February 2038. The Debentures were callable
at PCC's discretion with a minimum of a 45- to 60- day notice. At December 31,
2022, PCC had no remaining borrowings associated with the Debentures. The
redemptions noted above were funded from available cash balances held at PCC.

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 conservation buffer ratio in effect at December
31, 2022 (dollars in thousands). Based on actual capital amounts and ratios
shown in the following table, PlainsCapital's ratios place it in the "well
capitalized" (as defined) capital category under regulatory requirements. Actual
capital amounts and ratios as of December 31, 2022 reflect PlainsCapital's and
Hilltop's decision to elect the transition option as issued by the federal
banking regulatory agencies in March 2020 that permits banking institutions to
mitigate the estimated cumulative regulatory capital effects from CECL over a
five-year transitionary period.

                                                                         Minimum
                                                                         Capital
                                                                       Requirements
                                                                        Including
                                                                       Conservation    To Be Well
                                              December 31, 2022           Buffer       Capitalized
                                               Amount       Ratio         Ratio           Ratio
Tier 1 capital (to average assets):
PlainsCapital                                $ 1,405,164    10.26 %             4.0 %          5.0 %
Hilltop                                        1,900,701    11.47 %             4.0 %          N/A
Common equity Tier 1 capital
(to risk-weighted assets):
PlainsCapital                                  1,405,164    14.98 %             7.0 %          6.5 %
Hilltop                                        1,900,701    18.23 %             7.0 %          N/A
Tier 1 capital (to risk-weighted assets):
PlainsCapital                                  1,405,164    14.98 %             8.5 %          8.0 %
Hilltop                                        1,900,701    18.23 %             8.5 %          N/A
Total capital (to risk-weighted assets):
PlainsCapital                                  1,492,576    15.91 %            10.5 %         10.0 %
Hilltop                                        2,187,652    20.98 %            10.5 %          N/A

We discuss regulatory capital requirements in more detail in Note 22 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 I. of this Annual Report.

Banking Segment

Within our banking segment, our primary uses of cash are for customer
withdrawals and extensions of credit as well as our borrowing costs and other
operating expenses. Our corporate treasury group is responsible for continuously
monitoring our liquidity position to ensure that our assets and liabilities are
managed in a manner that will meet our short-term and long-term cash
requirements. Our goal is to manage our liquidity position in a manner such that
we can meet our customers' short-term and long-term deposit withdrawals and
anticipated and unanticipated increases in loan demand without penalizing
earnings. Funds invested in short-term marketable instruments, the continuous
maturing of other interest-earning assets, cash flows from self-liquidating
investments such as mortgage-backed securities and 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.

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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).

                                            December 31,
                                           2022     2021
FHLB capacity                             $ 4,139  $ 4,221
Investment portfolio (available)            1,606    1,478

Fed deposits (excess daily requirements) 1,332 2,686

                                          $ 7,077  $ 8,385


As noted in the table above, the Bank's available liquidity position and
borrowing capacity at December 31, 2022 and 2021 continued to be at a heightened
level. The Bank targets available liquidity from collateralized sources of
between approximately $5 billion and $6 billion. Available liquidity does not
include borrowing capacity available through the discount window at the Federal
Reserve.

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 significant competition
from bank and non-bank competitors for its deposit base and expects that its
interest expense on certain deposits will continue to increase during 2023 as
customers seek higher yields on deposits.

The Bank's 15 largest depositors, excluding Hilltop and Hilltop Securities,
collectively accounted for 8.93% of the Bank's total deposits, and the Bank's
five largest depositors, excluding Hilltop and Hilltop Securities, collectively
accounted for 4.63% of the Bank's total deposits at December 31, 2022. 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 December 31, 2022, Hilltop Securities
had credit arrangements with three unaffiliated banks, with maximum aggregate
commitments of up to $500.0 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 three unaffiliated banks, with aggregate availability of up to
$250.0 million. At December 31, 2022, Hilltop Securities had $57.5 million in
borrowings under its credit arrangements and had no borrowings under its credit
facilities.

Hilltop Securities uses the net proceeds (after deducting related issuance
expenses) from the sale of two commercial paper programs for general corporate
purposes, including working capital and the funding of a portion of its
securities inventories. The commercial paper notes ("CP Notes") may be issued
with maturities of 14 days to 270 days from the date of issuance. The CP Notes
are issued under two separate programs, Series 2019-1 CP Notes and Series 2019-2
CP Notes, in maximum aggregate amounts of $300 million and $200 million,
respectively. As of December 31, 2022, the weighted average maturity of the CP
Notes was 138 days at a rate of 4.96%, with a weighted average remaining life of
65 days. At December 31, 2022, the aggregate amount outstanding under these
secured arrangements was $217.6 million, which was collateralized by securities
held for Hilltop Securities accounts valued at $239.4 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 $2.0 billion, of
which $859 million was drawn at December 31, 2022. 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 December 31, 2022.

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 December 31, 2022,
these ABAs had combined available lines of credit totaling $115 million, $40
million of which was with a single unaffiliated bank, and the remaining $75.0
million of which was with the Bank. At December 31, 2022, Ventures Management
had outstanding borrowings of $29.0 million, all of which was with the Bank.

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

The following table presents information regarding other material contractual
obligations at December 31, 2022 not previously discussed (in thousands).
Payments related to leases are based on actual payments specified in the
underlying contracts, and the table below includes all leases that had commenced
as of December 31, 2022.

                                                         Payments Due by Period
                                              More than 1        3 Years or
                                 1 year      Year but Less      More but Less      5 Years
                                 or Less      than 3 Years      than 5 Years       or More       Total
Finance lease obligations       $   1,280    $        2,049    $         1,261    $     149    $    4,739
Operating lease obligations        35,123            47,672             29,446       28,765       141,006
Total                           $  36,403    $       49,721    $        30,707    $  28,914    $  145,745

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 $2.5 billion at December 31, 2022 and outstanding financial and performance
standby letters of credit of $75.8 million at December 31, 2022.

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Broker-Dealer Segment

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

Impact of Inflation and Changing Prices

Our consolidated financial statements included herein have been prepared in
accordance with GAAP, which presently require us to measure financial position
and operating results primarily in terms of historic dollars. Changes in the
relative value of money due to inflation or recession are generally not
considered. The primary effect of inflation on our operations is reflected in
increased operating costs. Historically, changes in interest rates affect the
financial condition of a financial institution to a far greater degree than
changes in the inflation rate. However, inflation rose sharply at the end of
2021 and has continued rising in 2022 at levels not seen for over 40 years.
Inflationary pressures are currently expected to remain elevated throughout
2023. Furthermore, a prolonged period of inflation could cause our costs,
including compensation, occupancy and software costs, to increase, which could
adversely affect our results of operations and financial condition.

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

Critical Accounting Estimates

We have identified certain accounting estimates which involve a significant
level of estimation uncertainty and have had or are reasonably likely to have a
material impact on our financial condition or results of operations. Our
accounting policies are more fully described in Note 1 to the consolidated
financial statements. Actual amounts and values as of the balance sheet dates
may be materially different than the amounts and values reported due to the
inherent uncertainty in the estimation process. Also, future amounts and values
could differ materially from those estimates due to changes in values and
circumstances after the balance sheet date. The critical accounting estimates,
as summarized below, which we believe to be the most critical in preparing our
consolidated financial statements relate to allowance for credit losses,
mortgage servicing rights asset, goodwill and identifiable intangible assets and
mortgage loan indemnification liability.

Allowance for Credit Losses

The allowance for credit losses for loans represents management's estimate of
all expected credit losses over the expected contractual life of our existing
loan 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.

We employ a disciplined process and methodology to establish our allowance for
credit losses that has two basic components: first, an asset-specific component
involving individual loans that do not share risk characteristics with other
loans and the measurement of expected credit losses for such individual loans;
and second, a pooled component for estimated expected credit losses for pools of
loans that share similar risk characteristics.

The credit loss estimation process for both on and off-balance sheet exposures
involves procedures to appropriately consider the unique characteristics of our
loan portfolio segments, which are further disaggregated into loan classes, the
level at which credit risk is monitored. When computing allowance levels, credit
loss assumptions are estimated using

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models that analyze loans according to credit risk ratings, loss history,
delinquency status and other credit trends and risk characteristics, including
current conditions and reasonable and supportable forecasts about the future.
Significant variables that impact the modeled losses across our loan portfolios
are the U.S. Real Gross Domestic Product, or GDP, growth rates and unemployment
rate assumptions. Future factors and forecasts may result in significant changes
in the allowance and provision for (reversal of) credit losses in those future
periods.

Credit quality is assessed and monitored by evaluating various attributes, such
as credit risk ratings, historic loss experience, past due status and other
credit trends and risk characteristics, including current conditions and
reasonable and supportable forecasts about the future. The results of these
continuous credit quality evaluations help form our underwriting criteria for
new loans and also factor into the process for estimation of the allowance for
credit losses. The allowance level is influenced by loan volumes, loan asset
quality, delinquency status, historic loss experience and other conditions
influencing loss expectations, such as reasonable and supportable forecasts of
economic conditions. The allowance for credit losses will primarily reflect
estimated losses for pools of loans that share similar risk characteristics, but
will also consider individual loans that do not share risk characteristics with
other loans.

In estimating the component of the allowance for credit losses for loans that
share similar risk characteristics with other loans, such loans are segregated
into loan classes. Loans are designated into loan classes based on loans pooled
by product types and similar risk characteristics or areas of risk
concentration. In determining the allowance for credit losses, we derive an
estimated credit loss assumption from a model that categorizes loan pools based
on loan type and internal risk rating or delinquency bucket.

When a loan moves to a substandard non-accrual or worse risk rating grade, it is
removed from the collective evaluation allowance methodology and is subject to
individual evaluation. A problem asset report is prepared for each loan in
excess of a predetermined threshold and the net realizable value of the loan is
determined. This value is compared to the appropriate loan basis (depending on
whether the loan is a PCD loan or a non-PCD loan) to determine the required
allowance for credit loss reserve amount.

Estimating the timing and amounts of future losses is subject to significant
management judgment as these loss cash flows rely upon estimates such as default
rates, loss severities, collateral valuations, the amounts and timing of
principal payments (including any expected prepayments) or other factors that
are reflective of current or future expected conditions. These estimates, in
turn, depend on the duration of current overall economic conditions, industry,
borrower, or portfolio specific conditions, the expected outcome of bankruptcy
or insolvency proceedings, as well as, in certain circumstances, other economic
factors, including the level of current and future real estate prices. All of
these estimates and assumptions require significant management judgment and
certain assumptions that are highly subjective. Model imprecision also exists in
the allowance for credit losses estimation process due to the inherent time lag
of available industry information and differences between expected and actual
outcomes.

The provision for (reversal of) credit losses recorded through earnings, and
reduced by the charge-off of loan amounts, net of recoveries, is 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. Refer to "Financial
Condition - Allowance for Credit Losses on Loans" and Notes 1 and 7 to the
consolidated financial statements for further discussion of the methodology used
in establishing the allowance and changes during the relevant period in the
provision for (reversal of) credit losses.

Mortgage Servicing Rights Asset

The Company measures its residential mortgage servicing rights asset using the
fair value method. Under the fair value method, the retained MSR assets are
carried in the balance sheet at fair value and the changes in fair value are
reported in earnings within other noninterest income in the period in which the
change occurs. Retained MSR assets are measured at fair value as of the date of
sale of the related mortgage loan. Subsequent fair value measurements are
determined using a discounted cash flow model. In order to determine the fair
value of the MSR asset, the present value of expected future

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cash flows is estimated. Assumptions used include market discount rates,
anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary
fee income.

The model assumptions and the MSR asset fair value estimates are compared to
observable trades of similar portfolios as well as to MSR asset broker
valuations and industry surveys, as available. The expected life of the loan can
vary from management's estimates due to prepayments by borrowers, especially
when rates fall. Prepayments in excess of management's estimates would adversely
impact the recorded value of the MSR asset. The value of the MSR asset is also
dependent upon the discount rate used in the model, which is based on current
market rates and is reviewed by management on an ongoing basis. An increase in
the discount rate would result in a decrease in the value of the MSR asset.
Refer to Notes 1, 4 and 11 to the consolidated financial statements for further
discussion of the methodology used in establishing the MSR asset and changes
during the relevant period thereof.

Goodwill and Identifiable Intangible Assets

Goodwill and other identifiable intangible assets are initially recorded at
their estimated fair values at the date of acquisition. Goodwill and other
intangible assets having an indefinite useful life are not amortized for
financial statement purposes. In the event that facts and circumstances indicate
that the goodwill or other identifiable intangible assets may be impaired, an
interim impairment test would be required. Intangible assets with finite lives
are amortized over their useful lives. We perform required annual impairment
tests of our goodwill and other intangible assets as of October 1st for our
reporting units.

The goodwill impairment test requires us to make judgments and assumptions. The
test consists of estimating the fair value of each reporting unit based on
valuation techniques, including a discounted cash flow model using revenue and
profit forecasts and recent industry transaction and trading multiples of our
peers, and comparing those estimated fair values with the carrying values of the
assets and liabilities of each reporting unit, which includes the allocated
goodwill. If the estimated fair value is less than the carrying value, we will
recognize an impairment charge for the amount by which the carrying amount
exceeds the reporting unit's fair value; however, any loss recognized will not
exceed the total amount of goodwill allocated to that reporting unit.

This evaluation includes multiple assumptions, including estimated discounted
cash flows and other estimates that may change over time. If future discounted
cash flows become less than those projected by us, future impairment charges may
become necessary that could have a materially adverse impact on our results of
operations and financial condition in the period in which the write-off occurs.

Mortgage Loan Indemnification Liability

The mortgage origination segment may be responsible for errors or omissions
relating to its representations and warranties that the mortgage loans sold meet
certain requirements, including representations as to underwriting standards and
the validity of certain borrower representations in connection with a mortgage
loan. If determined to be at fault, the mortgage origination segment either
repurchases the mortgage loans from the investors or reimburses the investors'
losses (a "make-whole" payment). The mortgage origination segment has
established an indemnification liability for such probable losses based upon,
among other things, the level of current unresolved repurchase requests, the
volume of estimated probable future repurchase requests, our ability to cure the
defects identified in the repurchase requests, and the severity of an estimated
loss upon repurchase. Although we consider this reserve to be appropriate, there
can be no assurance that the reserve will prove to be appropriate over time to
cover ultimate losses due to conditions outside of our control such as
unanticipated adverse changes in the economy and historical loss patterns,
discrete events adversely affecting specific borrowers or industries, or actions
taken by institutions or investors. The impact of such matters will be
considered in the reserving process when known. Refer to "Segment Results from
Continuing Operations-Mortgage Origination Segment" and Notes 1 and 20 to the
consolidated financial statements for further discussion of the methodology used
in establishing the mortgage loan indemnification liability and changes during
the relevant period thereof.

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