HOW

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2022~~March 31, 2023

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 1-31987

Hilltop Holdings Inc.

(Exact name of registrant as specified in its charter)


Maryland		84-1477939
(State or other jurisdiction of incorporation or		(I.R.S. Employer Identification No.)
organization)

6565 Hillcrest Avenue
Dallas, TX		75205
(Address of principal executive offices)		(Zip Code)

(214) 855-2177

(Registrant’s telephone number, including area code)

Securities registered pursuant to section 12(b) of the Act:


Title of each class	Trading symbol	Name of each exchange on which registered
Common Stock, par value $0.01 per share	HTH	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ⌧		Accelerated filer ◻

Non-accelerated filer ◻		Smaller reporting company ☐
		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ⌧

The number of shares of the registrant's common stock outstanding at ~~October~~April 21, ~~2022~~2023 was ~~64,591,491.~~65,023,881.

Table of Contents

HILLTOP HOLDINGS INC.

FORM 10-Q

FOR THE QUARTER ENDED ~~SEPTEMBER 30, 2022~~MARCH 31, 2023

TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Comprehensive Income (Loss)	5
	Consolidated Statements of Stockholders’ Equity	6
	Consolidated Statements of Cash Flows	87
	Notes to Consolidated Financial Statements	98

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4241

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	8481

Item 4.	Controls and Procedures	8885


PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	8986

Item 1A.	Risk Factors	8986

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	8986

Item 6.	Exhibits	8987

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(Unaudited)


	September 30,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Assets
Cash and due from banks	$	1,777,584	$	2,823,138	$	1,764,081	$	1,579,512
Federal funds sold		663		385		743		650
Assets segregated for regulatory purposes		109,358		221,740		36,199		67,737
Securities purchased under agreements to resell		145,365		118,262		144,201		118,070
Securities:
Trading, at fair value		641,864		647,998		692,908		755,032
Available for sale, at fair value, net (amortized cost of $1,753,205 and $2,148,635, respectively)		1,584,724		2,130,568
Held to maturity, at amortized cost, net (fair value of $792,559 and $276,296, respectively)		889,452		267,684
Available for sale, at fair value, net (amortized cost of $1,758,339 and $1,788,557, respectively)						1,641,571		1,658,766
Held to maturity, at amortized cost, net (fair value of $785,380 and $785,335, respectively)						862,280		875,532
Equity, at fair value		209		250		231		200
		3,116,249		3,046,500		3,196,990		3,289,530

Loans held for sale		1,003,605		1,878,190		1,040,138		982,616
Loans held for investment, net of unearned income		7,944,246		7,879,904		8,192,846		8,092,673
Allowance for credit losses		(91,783)		(91,352)		(97,354)		(95,442)
Loans held for investment, net		7,852,463		7,788,552		8,095,492		7,997,231

Broker-dealer and clearing organization receivables		1,255,052		1,672,946		1,560,246		1,038,055
Premises and equipment, net		191,423		204,438		180,132		184,950
Operating lease right-of-use assets		103,099		112,328		100,122		102,443
Mortgage servicing rights		156,539		86,990		103,314		100,825
Other assets		624,235		452,880		529,438		518,899
Goodwill		267,447		267,447		267,447		267,447
Other intangible assets, net		12,209		15,284		10,544		11,317
Total assets	$	16,615,291	$	18,689,080	$	17,029,087	$	16,259,282

Liabilities and Stockholders' Equity
Deposits:
Noninterest-bearing	$	4,546,816	$	4,577,183	$	3,807,878	$	3,968,862
Interest-bearing		6,805,198		8,240,894		7,289,269		7,346,887
Total deposits		11,352,014		12,818,077		11,097,147		11,315,749

Broker-dealer and clearing organization payables		1,176,156		1,477,300		1,383,317		966,470
Short-term borrowings		942,309		859,444		1,572,794		970,056
Securities sold, not yet purchased, at fair value		99,515		96,586		51,497		53,023
Notes payable		390,354		387,904		376,410		346,654
Operating lease liabilities		120,635		130,960		122,878		126,759
Other liabilities		475,425		369,606		341,246		417,042
Total liabilities		14,556,408		16,139,877		14,945,289		14,195,753
Commitments and contingencies (see Notes 13 and 14)
Stockholders' equity:
Hilltop stockholders' equity:
Common stock, $0.01 par value, 125,000,000 shares authorized; 64,591,491 and 78,964,978 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively		646		790
Common stock, $0.01 par value, 125,000,000 shares authorized; 65,022,932 and 64,684,625 shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively						650		647
Additional paid-in capital		1,043,605		1,274,446		1,044,774		1,046,331
Accumulated other comprehensive income (loss)		(119,864)		(10,219)
Accumulated other comprehensive loss						(125,461)		(133,531)
Retained earnings		1,107,586		1,257,014		1,136,901		1,123,636
Deferred compensation employee stock trust, net		479		752		446		481
Employee stock trust (22,606 and 5,749 shares, at cost, at September 30, 2022 and December 31, 2021, respectively)		(641)		(115)
Employee stock trust (21,126 and 22,566 shares, at cost, at March 31, 2023 and December 31, 2022, respectively)						(599)		(640)
Total Hilltop stockholders' equity		2,031,811		2,522,668		2,056,711		2,036,924
Noncontrolling interests		27,072		26,535		27,087		26,605
Total stockholders' equity		2,058,883		2,549,203		2,083,798		2,063,529
Total liabilities and stockholders' equity	$	16,615,291	$	18,689,080	$	17,029,087	$	16,259,282

See accompanying notes.

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2022		2021		2022		2021		2023		2022
Interest income:
Loans, including fees	$	109,165	$	99,769	$	298,301	$	308,208	$	123,379	$	90,408
Securities borrowed		10,938		8,585		30,252		53,143		17,068		8,817
Securities:
Taxable		19,642		12,341		52,512		33,717		25,602		15,581
Tax-exempt		2,451		2,687		7,011		7,127		3,188		2,419
Other		14,276		1,796		23,066		4,723		22,190		2,312
Total interest income		156,472		125,178		411,142		406,918		191,427		119,537

Interest expense:
Deposits		12,525		5,303		22,174		19,220		35,824		4,193
Securities loaned		9,407		6,519		25,390		44,350		15,346		7,472
Short-term borrowings		5,550		2,400		10,615		6,786		12,444		2,045
Notes payable		3,907		5,465		12,154		15,515		3,853		4,437
Junior subordinated debentures		—		419		—		1,558
Other		1,597		(18)		5,276		801		2,255		1,399
Total interest expense		32,986		20,088		75,609		88,230		69,722		19,546

Net interest income		123,486		105,090		335,533		318,688		121,705		99,991
Provision for (reversal of) credit losses		(780)		(5,819)		4,671		(39,648)
Net interest income after provision for (reversal of) credit losses		124,266		110,909		330,862		358,336
Provision for credit losses										2,331		115
Net interest income after provision for credit losses										119,374		99,876

Noninterest income:
Net gains from sale of loans and other mortgage production income		57,998		203,152		266,435		669,857		39,966		110,894
Mortgage loan origination fees		39,960		38,780		114,400		124,081		28,777		32,062
Securities commissions and fees		34,076		34,412		105,979		111,026		31,223		37,146
Investment and securities advisory fees and commissions		35,031		49,646		96,738		109,609		26,848		29,705
Other		39,910		41,955		79,124		110,856		35,680		6,621
Total noninterest income		206,975		367,945		662,676		1,125,429		162,494		216,428

Noninterest expense:
Employees' compensation and benefits		200,450		258,679		605,796		777,518		167,817		200,019
Occupancy and equipment, net		25,041		25,428		74,038		74,861		22,865		24,766
Professional services		10,631		14,542		36,939		44,366		10,697		10,063
Other		52,616		56,525		156,858		168,459		49,091		51,502
Total noninterest expense		288,738		355,174		873,631		1,065,204		250,470		286,350

Income before income taxes		42,503		123,680		119,907		418,561		31,398		29,954
Income tax expense		9,249		28,257		27,191		97,261		3,630		5,815
Net income		33,254		95,423		92,716		321,300		27,768		24,139
Less: Net income attributable to noncontrolling interest		1,186		2,517		5,138		8,990		1,968		1,889
Income attributable to Hilltop	$	32,068	$	92,906	$	87,578	$	312,310	$	25,800	$	22,250


Earnings per common share:
Basic	$	0.50	$	1.16	$	1.21	$	3.84	$	0.40	$	0.28
Diluted	$	0.50	$	1.15	$	1.21	$	3.82	$	0.40	$	0.28


Weighted average share information:
Basic		64,552		80,109		72,400		81,306		64,901		79,114
Diluted		64,669		80,542		72,557		81,763		64,954		79,356

See accompanying notes.

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2022		2021		2022		2021		2023		2022
Net income	$	33,254	$	95,423	$	92,716	$	321,300	$	27,768	$	24,139
Other comprehensive income (loss):
Change in fair value of cash flow and fair value hedges, net of tax of $2,188, $88, $5,099 and $522, respectively		21,749		1,417		58,158		5,061
Net unrealized gains (losses) on securities available for sale, net of tax of $(14,506), $0, $(34,747) and $(6,619), respectively		(48,361)		(8,143)		(115,679)		(22,385)
Reclassification adjustment for gains (losses) included in net income, net of tax of $0, $0, $3 and $(21), respectively		—		—		10		(72)
Adjustment for unrealized losses on securities transferred from available-for sale to held-to-maturity, net of tax of $0, $0, $(17,033) and $0, respectively		—		—		(56,690)		—
Amortization of unrealized losses on securities transferred from available-for-sale to held-maturity, net of tax $609, $0, $1,369 and $0, respectively		2,027		—		4,556		—
Change in fair value of cash flow hedges, net taxes of $(1,006) and $2,103, respectively										(3,249)		21,877
Net unrealized gains (losses) on securities available for sale, net taxes of $3,160 and $(10,677), respectively										9,863		(35,543)
Reclassification adjustment for gains (losses) included in net income, net taxes of $0 and $3, respectively										—		10
Adjustment for unrealized losses on securities transferred from available-for sale to held-to-maturity, net taxes of $0 and $(17,033), respectively										—		(56,690)
Amortization of unrealized losses on securities transferred from available-for-sale to held-to-maturity, net taxes of $438 and $0, respectively										1,457		—
Comprehensive income (loss)		8,669		88,697		(16,929)		303,904		35,839		(46,207)
Less: comprehensive income attributable to noncontrolling interest		1,186		2,517		5,138		8,990		1,968		1,889

Comprehensive income (loss) applicable to Hilltop	$	7,483	$	86,180	$	(22,067)	$	294,914	$	33,871	$	(48,096)

See accompanying notes.

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

(Unaudited)

Accumulated



Deferred





Total




Additional

Other

Compensation

Employee

Hilltop

Total

Common Stock

Paid-in

Comprehensive

Retained

Employee Stock

Stock Trust

Stockholders’

Noncontrolling

Stockholders’

Shares

Amount

Capital

Income (Loss)

Earnings

Trust, Net

Shares

Amount

Equity

Interest

Equity
Balance, June 30, 2021
81,153

$
812

$
1,302,439

$
7,093

$
1,159,304

$
754

6

$
(121)

$
2,470,281

$
26,095

$
2,496,376
Net income
—

—

—

—

92,906

—

—

—

92,906

2,517

95,423
Other comprehensive loss
—

—

—

(6,726)

—

—

—

—

(6,726)

—

(6,726)
Stock-based compensation expense
—

—

4,103

—

—

—

—

—

4,103

—

4,103
Common stock issued to board members
5

—

152

—

—

—

—

—

152

—

152
Issuance of common stock related to share-based awards, net
43

—

(441)

—

—

—

—

—

(441)

—

(441)
Repurchases of common stock
(2,242)

(22)

(35,981)

—

(38,157)

—

—

—

(74,160)

—

(74,160)
Dividends on common stock ($0.12 per share)
—

—

—

—

(9,746)

—

—

—

(9,746)

—

(9,746)
Deferred compensation plan
—

—

—

—

—

(3)

—

5

2

—

2
Net cash distributed to noncontrolling interest
—

—

—

—

—

—

—

—

—

(2,641)

(2,641)
Balance, September 30, 2021
78,959

$
790

$
1,270,272

$
367

$
1,204,307

$
751

6

$
(116)

$
2,476,371

$
25,971

$
2,502,342

Balance, June 30, 2022
64,576

$
646

$
1,039,261

$
(95,279)

$
1,085,208

$
695

34

$
(954)

$
2,029,577

$
27,826

$
2,057,403
Net income
—

—

—

—

32,068

—

—

—

32,068

1,186

33,254
Other comprehensive loss
—

—

—

(24,585)

—

—

—

—

(24,585)

—

(24,585)
Stock-based compensation expense
—

—

4,334

—

—

—

—

—

4,334

—

4,334
Common stock issued to board members
6

—

146

—

—

—

—

—

146

—

146
Issuance of common stock related to share-based awards, net
9

—

(136)

—

—

—

—

—

(136)

—

(136)
Repurchases of common stock
—

—

—

—

—

—

—

—

—

—

—
Dividends on common stock ($0.15 per share)
—

—

—

—

(9,690)

—

—

—

(9,690)

—

(9,690)
Deferred compensation plan
—

—

—

—

—

(216)

(11)

313

97

—

97
Net cash distributed to noncontrolling interest
—

—

—

—

—

—

—

—

—

(1,940)

(1,940)
Balance, September 30, 2022
64,591

$
646

$
1,043,605

$
(119,864)

$
1,107,586

$
479

23

$
(641)

$
2,031,811

$
27,072

$
2,058,883

~~Table of Contents~~

~~HILLTOP HOLDINGS INC. AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)~~

~~(in thousands)~~

~~(Unaudited)~~


						Accumulated				Deferred					Total											Accumulated				Deferred					Total
				Additional		Other				Compensation		Employee			Hilltop				Total					Additional		Other				Compensation		Employee			Hilltop				Total
	Common Stock			Paid-in		Comprehensive		Retained		Employee Stock		Stock Trust			Stockholders’		Noncontrolling		Stockholders’		Common Stock			Paid-in		Comprehensive		Retained		Employee Stock		Stock Trust			Stockholders’		Noncontrolling		Stockholders’
	Shares	Amount		Capital		Income (Loss)		Earnings		Trust, Net		Shares	Amount		Equity		Interest		Equity
Balance, December 31, 2020	82,185	$	822	$	1,317,929	$	17,763	$	986,792	$	771	7	$	(138)	$	2,323,939	$	26,708	$	2,350,647
Net income	—		—		—		—		312,310		—	—		—		312,310		8,990		321,300
Other comprehensive loss	—		—		—		(17,396)		—		—	—		—		(17,396)		—		(17,396)
Stock-based compensation expense	—		—		12,889		—		—		—	—		—		12,889		—		12,889
Common stock issued to board members	13		—		449		—		—		—	—		—		449		—		449
Issuance of common stock related to share-based awards, net	394		3		(2,694)		—		—		—	—		—		(2,691)		—		(2,691)
Repurchases of common stock	(3,633)		(35)		(58,301)		—		(65,295)		—	—		—		(123,631)		—		(123,631)
Dividends on common stock ($0.36 per share)	—		—		—		—		(29,500)		—	—		—		(29,500)		—		(29,500)
Deferred compensation plan	—		—		—		—		—		(20)	(1)		22		2		—		2
Net cash distributed to noncontrolling interest	—		—		—		—		—		—	—		—		—		(9,727)		(9,727)
Balance, September 30, 2021	78,959	$	790	$	1,270,272	$	367	$	1,204,307	$	751	6	$	(116)	$	2,476,371	$	25,971	$	2,502,342
																					Shares	Amount		Capital		Loss		Earnings		Trust, Net		Shares	Amount		Equity		Interest		Equity
Balance, December 31, 2021	78,965	$	790	$	1,274,446	$	(10,219)	$	1,257,014	$	752	6	$	(115)	$	2,522,668	$	26,535	$	2,549,203	78,965	$	790	$	1,274,446	$	(10,219)	$	1,257,014	$	752	6	$	(115)	$	2,522,668	$	26,535	$	2,549,203
Net income	—		—		—		—		87,578		—	—		—		87,578		5,138		92,716	—		—		—		—		22,250		—	—		—		22,250		1,889		24,139
Other comprehensive loss	—		—		—		(109,645)		—		—	—		—		(109,645)		—		(109,645)	—		—		—		(70,346)		—		—	—		—		(70,346)		—		(70,346)
Stock-based compensation expense	—		—		11,553		—		—		—	—		—		11,553		—		11,553	—		—		5,114		—		—		—	—		—		5,114		—		5,114
Common stock issued to board members	17		—		451		—		—		—	—		—		451		—		451	5		—		152		—		—		—	—		—		152		—		152
Issuance of common stock related to share-based awards, net	478		4		(4,206)		—		—		—	—		—		(4,202)		—		(4,202)	469		4		(4,063)		—		—		—	—		—		(4,059)		—		(4,059)
Repurchases of common stock	(14,869)		(148)		(238,639)		—		(203,549)		—	—		—		(442,336)		—		(442,336)
Dividends on common stock ($0.45 per share)	—		—		—		—		(33,457)		—	—		—		(33,457)		—		(33,457)
Dividends on common stock ($0.15 per share)																					—		—		—		—		(11,849)		—	—		—		(11,849)		—		(11,849)
Deferred compensation plan	—		—		—		—		—		(273)	17		(526)		(799)		—		(799)	—		—		—		—		—		(8)	(1)		11		3		—		3
Net cash distributed to noncontrolling interest	—		—		—		—		—		—	—		—		—		(4,601)		(4,601)	—		—		—		—		—		—	—		—		—		(1,762)		(1,762)
Balance, September 30, 2022	64,591	$	646	$	1,043,605	$	(119,864)	$	1,107,586	$	479	23	$	(641)	$	2,031,811	$	27,072	$	2,058,883
Balance, March 31, 2022																					79,439	$	794	$	1,275,649	$	(80,565)	$	1,267,415	$	744	5	$	(104)	$	2,463,933	$	26,662	$	2,490,595

Balance, December 31, 2022																					64,685	$	647	$	1,046,331	$	(133,531)	$	1,123,636	$	481	23	$	(640)	$	2,036,924	$	26,605	$	2,063,529
Net income																					—		—		—		—		25,800		—	—		—		25,800		1,968		27,768
Other comprehensive income																					—		—		—		8,070		—		—	—		—		8,070		—		8,070
Stock-based compensation expense																					—		—		4,047		—		—		—	—		—		4,047		—		4,047
Common stock issued to board members																					5		—		150		—		—		—	—		—		150		—		150
Issuance of common stock related to share-based awards, net																					478		5		(3,437)		—		—		—	—		—		(3,432)		—		(3,432)
Repurchases of common stock																					(145)		(2)		(2,317)		—		(2,184)		—	—		—		(4,503)		—		(4,503)
Dividends on common stock ($0.16 per share)																					—		—		—		—		(10,351)		—	—		—		(10,351)		—		(10,351)
Deferred compensation plan																					—		—		—		—		—		(35)	(2)		41		6		—		6
Net cash distributed to noncontrolling interest																					—		—		—		—		—		—	—		—		—		(1,486)		(1,486)
Balance, March 31, 2023																					65,023	$	650	$	1,044,774	$	(125,461)	$	1,136,901	$	446	21	$	(599)	$	2,056,711	$	27,087	$	2,083,798

See accompanying notes.

Table of Contents

HILLTOP HOLDINGS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Nine Months Ended September 30,				Three Months Ended March 31,
	2022		2021		2023		2022
Operating Activities
Net income	$	92,716	$	321,300	$	27,768	$	24,139
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (reversal of) credit losses		4,671		(39,648)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for credit losses						2,331		115
Depreciation, amortization and accretion, net		20,207		18,393		5,843		7,709
Deferred income taxes		2,258		(382)		2,923		2,664
Other, net		11,814		14,049		4,150		5,231
Net change in securities purchased under agreements to resell		(27,103)		(75,589)		(26,131)		(138,729)
Net change in trading securities		6,134		84,442		62,124		176,235
Net change in broker-dealer and clearing organization receivables		748,584		(223,819)		(452,555)		289,274
Net change in other assets		(52,021)		(50,625)		30,650		(53,745)
Net change in broker-dealer and clearing organization payables		(470,426)		152,755		406,392		(129,753)
Net change in other liabilities		66,479		(105,402)		(98,945)		(20,854)
Net change in securities sold, not yet purchased		2,929		33,275		(1,526)		1,043
Proceeds from sale of mortgage servicing rights asset		1,876		116,000		—		1,876
Change in valuation of mortgage servicing rights asset		(23,575)		(12,821)		10,721		(8,060)
Net gains from sales of loans		(266,435)		(669,857)		(39,966)		(110,894)
Loans originated for sale		(11,706,056)		(21,563,008)		(2,051,075)		(3,968,559)
Proceeds from loans sold		12,823,759		22,874,493		2,008,839		4,310,942
Net cash provided by operating activities		1,235,811		873,556
Net cash provided by (used in) operating activities						(108,457)		388,634
Investing Activities
Proceeds from maturities and principal reductions of securities held to maturity		78,144		34,082		14,729		22,851
Proceeds from sales, maturities and principal reductions of securities available for sale		259,774		507,365		56,549		94,687
Purchases of securities held to maturity		(11,432)		—
Purchases of securities available for sale		(625,522)		(1,075,154)		(19,997)		(256,887)
Purchases of equity securities		(30)		—
Net change in loans held for investment		(391,040)		360,518		(170,546)		(142,451)
Purchases of premises and equipment and other assets		(7,335)		(22,079)		(1,139)		(1,380)
Proceeds from sales of premises and equipment and other real estate owned		1,808		4,252		1,450		843
Net cash paid to Federal Home Loan Bank and Federal Reserve Bank stock		(175)		(82)		(23,310)		(143)
Net cash used in investing activities		(695,808)		(191,098)		(142,264)		(282,480)
Financing Activities
Net change in deposits		(1,296,781)		865,638		(208,147)		(101,086)
Net change in short-term borrowings		82,178		51,203		602,328		(24,334)
Proceeds from notes payable		638,498		739,372		146,110		200,416
Payments on notes payable and junior subordinated debentures		(636,394)		(792,893)
Payments on notes payable						(116,474)		(192,955)
Payments to repurchase common stock		(442,336)		(123,631)		(4,503)		—
Dividends paid on common stock		(33,457)		(29,500)		(10,351)		(11,849)
Net cash distributed to noncontrolling interest		(4,601)		(9,727)		(1,486)		(1,762)
Other, net		(4,768)		(3,200)		(3,632)		(4,244)
Net cash provided by (used in) financing activities		(1,697,661)		697,262		403,845		(135,814)

Net change in cash, cash equivalents and restricted cash		(1,157,658)		1,379,720		153,124		(29,660)
Cash, cash equivalents and restricted cash, beginning of period		3,045,263		1,353,303		1,647,899		3,045,263
Cash, cash equivalents and restricted cash, end of period	$	1,887,605	$	2,733,023	$	1,801,023	$	3,015,603

Reconciliation of Cash, Cash Equivalents and Restricted Cash to Consolidated Balance Sheets
Cash and due from banks	$	1,777,584	$	2,463,111	$	1,764,081	$	2,886,812
Federal funds sold		663		406		743		383
Assets segregated for regulatory purposes		109,358		269,506		36,199		128,408
Total cash, cash equivalents and restricted cash	$	1,887,605	$	2,733,023	$	1,801,023	$	3,015,603
Supplemental Disclosures of Cash Flow Information
Cash paid for interest	$	69,681	$	85,069	$	63,682	$	14,862
Cash paid for income taxes, net of refunds	$	14,956	$	83,129
Cash paid (received) for income taxes, net of refunds					$	(49)	$	1,322
Supplemental Schedule of Non-Cash Activities
Conversion of loans to other real estate owned	$	326	$	2,924	$	2,391	$	53
Additions to mortgage servicing rights	$	47,850	$	70,368	$	13,210	$	7,301
Carrying amount of AFS securities transferred to HTM, net of $67,798 unrealized loss	$	689,477	$	—
Carrying amount of AFS securities transferred to HTM, net of $63,664 and $73,722 unrealized loss, respectively					$	646,901	$	708,701

See accompanying notes.

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

1. Summary of Significant Accounting and Reporting Policies

Nature of Operations

Hilltop Holdings Inc. (“Hilltop” and, collectively with its subsidiaries, the “Company”) is a financial holding company registered under the Bank Holding Company Act of 1956. The Company’s primary line of business is to provide business and consumer banking services from offices located throughout Texas through PlainsCapital Bank (the “Bank”). In addition, the Company provides an array of financial products and services through its broker-dealer and mortgage origination subsidiaries.

The Company, headquartered in Dallas, Texas, provides its products and services through two primary business units, PlainsCapital Corporation (“PCC”) and Hilltop Securities Holdings LLC (“Securities Holdings”). PCC is a financial holding company that provides, through its subsidiaries, traditional banking, wealth and investment management and treasury management services primarily in Texas and residential mortgage lending throughout the United States. 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.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”), and in conformity with the rules and regulations of the Securities and Exchange Commission ~~(the “SEC”~~(“SEC”). In the opinion of management, these financial statements contain all adjustments necessary for a fair statement of the results of the interim periods presented. Accordingly, the financial statements do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 (“~~2021~~2022 Form 10-K”). Results for interim periods are not necessarily indicative of results to be expected for a full year or any future period.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates regarding the allowance for credit losses, the fair values of financial instruments, the mortgage loan indemnification liability, and the potential impairment of goodwill and identifiable intangible assets are particularly subject to change. The Company has applied its critical accounting policies and estimation methods consistently in all periods presented in these 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.

Hilltop owns 100% of the outstanding stock of PCC. PCC owns 100% of the outstanding stock of the Bank and 100% of the membership interest in Hilltop Opportunity Partners LLC, a merchant bank utilized to facilitate investments in companies engaged in non-financial activities. The Bank owns 100% of the outstanding stock of PrimeLending, a PlainsCapital Company (“PrimeLending”).

PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC (“Ventures Management”), which holds ana controlling ownership interest in and is the managing member of certain affiliated business arrangements (“ABAs”).

PCC also owned 100% of the outstanding common securities of PCC Statutory Trusts I, II, III and IV (the “Trusts”), which were not included in the consolidated financial statements under the requirements of the Variable Interest Entities (“VIE”) Subsections of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) because the primary beneficiaries of the Trusts are not within the consolidated group. Following receipt of regulatory approval, during June, July and August 2021, PCC submitted to the trustees of each of the Trusts notices to redeem in full outstanding junior subordinated debentures of $67.0 million issued by PCC, which resulted in the full

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

redemption to the holders of the associated preferred securities and common securities during the third quarter of 2021. For further details, see Note 16 to the consolidated financial statements included in the Company’s 2021 Form 10-K.

Hilltop has a 100% membership interest in Securities Holdings, which operates through its wholly owned subsidiaries, Hilltop Securities Inc. (“Hilltop Securities”), Momentum Independent Network Inc. (“Momentum Independent Network” and collectively with Hilltop Securities, the “Hilltop Broker-Dealers”) and Hilltop Securities Asset Management, LLC. Hilltop Securities is a broker-dealer registered with the SEC and 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.

In addition, Hilltop owns 100% of the membership interest in each of HTH Hillcrest Project LLC (“HTH Project LLC”) and Hilltop Investments I, LLC. Hilltop Investments I, LLC owns 50% of the membership interest in HTH Diamond Hillcrest Land LLC (“Hillcrest Land LLC”) which is consolidated under the aforementioned VIE Subsections of the ASC. These entities are related to the Hilltop Plaza investment discussed in detail in Note 1918 to the consolidated financial statements included in the Company’s ~~2021~~2022 Form 10-K and are collectively referred to as the “Hilltop Plaza Entities.”

The consolidated financial statements include the accounts of the above-named entities. Intercompany transactions and balances have been eliminated. Noncontrolling interests have been recorded for minority ownership in entities that are not wholly owned and are presented in compliance with the provisions of Noncontrolling Interest in Subsidiary Subsections of the ASC.

Certain reclassifications have been made to the prior period consolidated financial statements to conform with the current period presentation. In preparing these consolidated financial statements, subsequent events were evaluated through the time the financial statements were issued. Financial statements are considered issued when they are widely distributed to all stockholders and other financial statement users, or filed with the SEC.

Significant accounting policies are detailed in Note 1 to the consolidated financial statements included in the Company’s ~~2021~~2022 Form 10-K.

2. Recently Issued Accounting Standards

Accounting Standards Adopted During ~~2022~~2023

In March 2022, the FASB issued ~~ASU 2022-01~~Accounting Standards Update (“ASU”) 2022-02 to ~~expand~~eliminate the recognition and ~~clarify the~~measurement guidance on ~~fair value hedge accounting of interest rate risk~~troubled debt restructurings (“TDRs”) for ~~portfolios of~~creditors, and require enhanced disclosures about loan modifications for borrowers experiencing financial ~~assets. ASU 2022-01 amends the guidance~~difficulty. The amendments are effective in ~~ASU 2017-12 that, among other things, established the “last-of-layer” method for making the fair value hedge accounting for these portfolios more accessible.~~periods beginning after December 15, 2022 using either a prospective or modified retrospective transition. The amendment further improves the last-of-layer (renamed the “portfolio layer”) concepts to expand to nonprepayable financial assets and allows more flexibility in the derivative structures used to hedge the interest rate risk. For entities that have alreadyCompany adopted ~~ASU 2017-12 this update is available for immediate adoption. As permitted within the amendment, the Company elected to early adopt~~ the provisions of ASU 2022-02 as of ~~April~~January 1, ~~2022~~2023 on a prospective basis. The adoption of this amendment did not have a material impact on the Company’s future consolidated financial statements.

In ~~June~~September 2022, the FASB issued ASU ~~2022-03~~2022-04 to ~~clarify~~require entities that use supplier finance programs in connection with the purchase of goods and services to disclose the key terms of such programs and information about obligations outstanding at the end of the reporting period, including a rollforward of those obligations and a description of where in the financial statements outstanding amounts are present. The guidance ondoes not affect the ~~fair value~~recognition, measurement or financial statement presentation of ~~an equity security that is subject to a contractual sale restriction, and require specific disclosures for equity securities that are subject to such restrictions.~~supplier finance program obligations. The amendments are effective in periods beginning after December 15, ~~2023, with early adoption permitted. As permitted within~~2022, except that the ~~amendment, the~~amendments to disclose a rollforward of obligations outstanding will be effective beginning after December 15, 2023. The Company ~~elected to early adopt~~adopted the provisions as of ~~July~~January 1, ~~2022 on a prospective basis.~~2023. The adoption of this amendment did not have a material impact on the Company’s future consolidated financial statements.

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

Accounting Standards Issued But Not Yet Adopted

In March ~~2022,~~2023, the FASB issued ASU ~~2022-02~~2023-01 to ~~eliminate~~require entities to classify and account for leases with related parties on the ~~recognition~~basis of legally enforceable terms and ~~measurement guidance on troubled debt restructurings for creditors, and require enhanced disclosures about loan modifications for borrowers experiencing financial difficulty.~~conditions of the arrangement. The amendments are effective in periods beginning after December 15, ~~2022 using either a prospective or modified retrospective transition. Early adoption of certain or all of the amendments is permitted.~~2023, including interim periods within those fiscal years. The Company is currently evaluating the provisions of the amendments and the impact on its future consolidated financial statements.

Table of Contents

~~In September 2022, the FASB issued ASU 2022-04~~Hilltop Holdings Inc. and Subsidiaries

Notes to require entities that use supplier finance programs in connection with the purchase of goods and services to disclose the key terms of such programs and information about obligations outstanding at the end of the reporting period, including a rollforward of those obligations and a description of where in the financial statements outstanding amounts are present. The guidance does not affect the recognition, measurement or financial statement presentation of supplier finance program obligations. The amendments are effective in periods beginning after December 15, 2022, except that the amendments to disclose a rollforward of obligations outstanding will be effective beginning after December 15, 2023. Early adoption is permitted. The Company is currently evaluating the provisions of the amendments and the impact on its future consolidated financial statements.Consolidated Financial Statements (continued)

(Unaudited)

3. Fair Value Measurements

Fair Value Measurements and Disclosures

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

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

●

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

●

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

●

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

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

Fair Value Option

The Company has elected to measure substantially all of PrimeLending’s mortgage loans held for sale and the retained mortgage servicing rights (“MSR”) asset at fair value, under the provisions of the Fair Value Option. The Company elected to apply the provisions of the Fair Value Option to these items so that it would have the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the aggregate fair value of PrimeLending’s mortgage loans held for sale accounted for under the Fair Value Option was ~~$863.4~~$885.5 million and ~~$1.78 billion,~~$855.7 million, respectively, and the unpaid principal balance of those loans was ~~$882.6~~$869.9 million and ~~$1.73 billion,~~$850.3 million, respectively. The interest component of fair value is reported as interest income on loans in the accompanying consolidated statements of operations.

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

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

Level 1

Level 2

Level 3

Total

September 30, 2022

Inputs

Inputs

Inputs

Fair Value

Trading securities

$
5,259

$
636,605

$
—

$
641,864

Available for sale securities

—

1,584,724

—

1,584,724

Equity securities

209

—

—

209

Loans held for sale

—

826,013

37,414

863,427

Loans held for investment

—

—

8,912

8,912

Derivative assets

—

141,536

—

141,536

MSR asset

—

—

156,539

156,539

Securities sold, not yet purchased

65,370

34,145

—

99,515

Derivative liabilities

—

45,032

—

45,032

Level 1

Level 2

Level 3


Total

December 31, 2021

Inputs

Inputs

Inputs

Fair Value

Trading securities

$
8,628

$
639,370

$
—

$
647,998

Available for sale securities

—

2,130,568

—

2,130,568

Equity securities

250

—

—

250

Loans held for sale

—

1,734,875

47,716

1,782,591

Derivative assets

—

48,122

—

48,122

MSR asset

—

—

86,990

86,990

Securities sold, not yet purchased

45,973

50,613

—

96,586

Derivative liabilities

—

21,816

—

21,816

1210

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

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


	Level 1		Level 2		Level 3		Total
March 31, 2023	Inputs		Inputs		Inputs		Fair Value
Trading securities	$	15,516	$	677,392	$	—	$	692,908
Available for sale securities		—		1,641,571		—		1,641,571
Equity securities		231		—		—		231
Loans held for sale		—		851,508		33,993		885,501
Loans held for investment		—		—		9,437		9,437
Derivative assets		—		82,020		—		82,020
MSR asset		—		—		103,314		103,314
Securities sold, not yet purchased		16,736		34,761		—		51,497
Derivative liabilities		—		31,291		—		31,291


	Level 1		Level 2		Level 3			Total
December 31, 2022	Inputs		Inputs		Inputs			Fair Value
Trading securities	$	15,456	$	739,576	$	—	$	755,032
Available for sale securities		—		1,658,766		—		1,658,766
Equity securities		200		—		—		200
Loans held for sale		—		814,990		40,707		855,697
Loans held for investment		—		—		9,181		9,181
Derivative assets		—		88,977		—		88,977
MSR asset		—		—		100,825		100,825
Securities sold, not yet purchased		25,506		27,517		—		53,023
Derivative liabilities		—		11,405		—		11,405

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


									Total Gains or Losses														Total Gains or Losses
									(Realized or Unrealized)														(Realized or Unrealized)
	Balance,						Transfers				Included in Other				Balance,						Transfers				Included in Other
	Beginning of		Purchases/		Sales/		to (from)		Included in		Comprehensive		Balance,		Beginning of		Purchases/		Sales/		to (from)		Included in		Comprehensive		Balance,
	Period		Additions		Reductions		Level 3		Net Income		Income (Loss)		End of Period		Period		Additions		Reductions		Level 3		Net Income		Income (Loss)		End of Period
Three months ended September 30, 2022
Three months ended March 31, 2023
Loans held for sale	$	41,732	$	18,012	$	(19,594)	$	(251)	$	(2,485)	$	—	$	37,414	$	40,707	$	16,796	$	(23,454)	$	(446)	$	390	$	—	$	33,993
Loans held for investment		9,027		—		—		—		(115)		—		8,912		9,181		—		—		—		256		—		9,437
MSR asset		121,688		29,340		—		—		5,511		—		156,539		100,825		13,210		—		—		(10,721)		—		103,314
Total	$	172,447	$	47,352	$	(19,594)	$	(251)	$	2,911	$	—	$	202,865	$	150,713	$	30,006	$	(23,454)	$	(446)	$	(10,075)	$	—	$	146,744

Nine months ended September 30, 2022
Three months ended March 31, 2022
Loans held for sale	$	47,716	$	38,454	$	(44,342)	$	5,587	$	(10,001)	$	—	$	37,414	$	47,716	$	6,986	$	(12,658)	$	4,744	$	(811)	$	—	$	45,977
Loans held for investment		—		9,611		(562)		—		(137)		—		8,912		—		9,611		—		—		—		—		9,611
MSR asset		86,990		47,850		(1,876)		—		23,575		—		156,539		86,990		7,301		(1,876)		—		8,060		—		100,475
Total	$	134,706	$	95,915	$	(46,780)	$	5,587	$	13,437	$	—	$	202,865	$	134,706	$	23,898	$	(14,534)	$	4,744	$	7,249	$	—	$	156,063

Three months ended September 30, 2021
Loans held for sale	$	71,433	$	18,817	$	(22,207)	$	(2,291)	$	6,767	$	—	$	72,519
MSR asset		124,497		20,252		(31,366)		—		(2,452)		—		110,931
Total	$	195,930	$	39,069	$	(53,573)	$	(2,291)	$	4,315	$	—	$	183,450

Nine months ended September 30, 2021
Loans held for sale	$	71,816	$	50,273	$	(51,718)	$	(4,099)	$	6,247	$	—	$	72,519
MSR asset		143,742		70,368		(116,000)		—		12,821		—		110,931
Total	$	215,558	$	120,641	$	(167,718)	$	(4,099)	$	19,068	$	—	$	183,450

All net realized and unrealized gains (losses) in the tables above are reflected in the accompanying consolidated financial statements. The unrealized gains (losses) relate to financial instruments still held at ~~September 30, 2022.~~March 31, 2023.

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

For material Level 3 financial instruments measured at fair value on a recurring basis at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the significant unobservable inputs used in the fair value measurements were as follows.


			Range (Weighted-Average)																Range (Weighted-Average)
Financial instrument	Valuation Technique	Unobservable Inputs	September 30, 2022							December 31, 2021							Valuation Technique	Unobservable Inputs	March 31, 2023							December 31, 2022
Loans held for sale	Market comparable	Projected price	90	-	92	%	(	91	%)	94	-	95	%	(	95	%)	Market comparable	Projected price	86	-	94	%	(	88	%)	88	-	95	%	(	89	%)

Loans held for investment	Discounted cash flow	Discount rate				12.00		%					—				Discounted cash flow	Discount rate				11.50		%					11.88		%

MSR asset	Discounted cash flow	Constant prepayment rate				8.06		%					10.02		%		Discounted cash flow	Constant prepayment rate				9.08		%					8.14		%
		Discount rate				12.09		%					14.32		%			Discount rate				12.08		%					12.10		%

The fair value of certain loans held for sale that cannot be sold through normal sale channels or are non-performing is measured using Level 3 inputs. The fair value of such loans is generally based upon estimates of expected cash flows using unobservable inputs, including listing prices of comparable assets, uncorroborated expert opinions, and/or management’s knowledge of underlying collateral.

The fair value of certain loans held for investment by the Company’s merchant bank subsidiary is measured using the income approach with Level 3 inputs. The fair value of such loans is based upon estimates of expected cash flows using unobservable inputs, including credit spreads derived from comparable securities and benchmark credit curves, and management’s knowledge of underlying collateral.

The MSR asset is reported at fair value using Level 3 inputs. The MSR asset is valued by projecting net servicing cash flows, which are then discounted to estimate the fair value. The fair value of the MSR asset is impacted by a variety of factors. Prepayment and discount rates, the most significant unobservable inputs, are discussed further in Note 7 to the consolidated financial statements.

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

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


	Three Months Ended March 31, 2023						Three Months Ended March 31, 2022
			Other		Total				Other		Total
	Net		Noninterest		Changes in		Net		Noninterest		Changes in
	Gains (Losses)		Income		Fair Value		Gains (Losses)		Income		Fair Value
Loans held for sale	$	10,134	$	—	$	10,134	$	(50,855)	$	—	$	(50,855)
Loans held for investment		—		—		—		—		—		—
MSR asset		(10,721)		—		(10,721)		8,060		—		8,060

Financial Assets and Liabilities Not Measured at ~~September 30,~~Fair Value on Recurring or Non-Recurring Basis

The Fair Value of Financial Instruments Subsection of the ASC requires disclosure of the fair value of financial assets and liabilities, including the financial assets and liabilities previously discussed. There have been no changes to the methods for determining estimated fair value for financial assets and liabilities as described in detail in Note 4 to the consolidated financial statements included in the Company’s 2022 Form 10-K.

1312

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

2022, compared to December 31, 2021, reflects the effect of increased mortgage rates reducing consumer refinancing activity, while the decrease in the discount rate addresses recent market trends related to MSR sales during the same period.

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

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

Three Months Ended September 30, 2022

Three Months Ended September 30, 2021




Other

Total



Other

Total

Net

Noninterest

Changes in

Net

Noninterest

Changes in

Gains (Losses)

Income

Fair Value

Gains (Losses)

Income

Fair Value
Loans held for sale

$
(37,526)

$
—

$
(37,526)

$
(32,694)

$
—

$
(32,694)
Loans held for investment

(377)

—

(377)

—

—

—
MSR asset

5,511

—

5,511

(2,452)

—

(2,452)

Nine Months Ended September 30, 2022

Nine Months Ended September 30, 2021




Other

Total



Other

Total

Net

Noninterest

Changes in

Net

Noninterest

Changes in

Gains (Losses)

Income

Fair Value

Gains (Losses)

Income

Fair Value
Loans held for sale

$
(73,520)

$
—

$
(73,520)

$
(55,211)

$
—

$
(55,211)
Loans held for investment

(660)

—

(660)

—

—

—
MSR asset

23,575

—

23,575

12,821

—

12,821

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


			Estimated Fair Value										Estimated Fair Value
	Carrying		Level 1		Level 2		Level 3				Carrying		Level 1		Level 2		Level 3
September 30, 2022	Amount		Inputs		Inputs		Inputs		Total
March 31, 2023											Amount		Inputs		Inputs		Inputs		Total
Financial assets:
Cash and cash equivalents	$	1,778,247	$	1,778,247	$	—	$	—	$	1,778,247	$	1,764,824	$	1,764,824	$	—	$	—	$	1,764,824
Assets segregated for regulatory purposes		109,358		109,358		—		—		109,358		36,199		36,199		—		—		36,199
Securities purchased under agreements to resell		145,365		—		145,365		—		145,365		144,201		—		144,201		—		144,201
Held to maturity securities		889,452		—		792,559		—		792,559		862,280		—		785,380		—		785,380
Loans held for sale		140,178		—		85,137		57,188		142,325		154,637		—		104,811		59,791		164,602
Loans held for investment, net		7,843,551		—		402,502		7,281,532		7,684,034		8,086,055		—		361,587		7,709,254		8,070,841
Broker-dealer and clearing organization receivables		1,255,052		—		1,255,052		—		1,255,052		1,560,246		—		1,560,246		—		1,560,246
Other assets		71,365		—		69,699		1,666		71,365		79,197		—		77,531		1,666		79,197

Financial liabilities:
Deposits		11,352,014		—		11,333,099		—		11,333,099		11,097,147		—		11,080,699		—		11,080,699
Broker-dealer and clearing organization payables		1,176,156		—		1,176,156		—		1,176,156		1,383,317		—		1,383,317		—		1,383,317
Short-term borrowings		942,309		—		942,309		—		942,309		1,572,794		—		1,572,794		—		1,572,794
Debt		390,354		—		389,632		—		389,632		376,410		—		363,111		—		363,111
Other liabilities		9,198		—		9,198		—		9,198		11,593		—		11,593		—		11,593


			Estimated Fair Value
	Carrying		Level 1		Level 2		Level 3
December 31, 2022	Amount		Inputs		Inputs		Inputs		Total
Financial assets:
Cash and cash equivalents	$	1,580,162	$	1,580,162	$	—	$	—	$	1,580,162
Assets segregated for regulatory purposes		67,737		67,737		—		—		67,737
Securities purchased under agreements to resell		118,070		—		118,070		—		118,070
Held to maturity securities		875,532		—		785,335		—		785,335
Loans held for sale		126,919		—		82,684		42,908		125,592
Loans held for investment, net		7,988,050		—		431,223		7,434,038		7,865,261
Broker-dealer and clearing organization receivables		1,038,055		—		1,038,055		—		1,038,055
Other assets		77,052		—		75,386		1,666		77,052

Financial liabilities:
Deposits		11,315,749		—		11,295,153		—		11,295,153
Broker-dealer and clearing organization payables		966,470		—		966,470		—		966,470
Short-term borrowings		970,056		—		970,056		—		970,056
Debt		346,654		—		350,104		—		350,104
Other liabilities		5,410		—		5,410		—		5,410

The Company held equity investments other than securities of $51.6 million and $57.6 million at March 31, 2023 and December 31, 2022, respectively, which are included within other assets in the consolidated balance sheets. Of the $51.6 million of such equity investments held at March 31, 2023, $22.5 million do not have readily determinable fair values and each is measured at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.

The following table presents the adjustments to the carrying value of these investments during the periods presented (in thousands).


	Three Months Ended March 31,
	2023		2022
Balance, beginning of period	$	27,264	$	16,817
Additional investments		—		11,000
Upward adjustments		243		214
Impairments and downward adjustments		(5,000)		(45)
Balance, end of period	$	22,507	$	27,986

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

4. Securities

The fair value of trading securities is summarized as follows (in thousands).


	March 31,		December 31,
	2023		2022
U.S. Treasury securities	$	15,512	$	10,466
U.S. government agencies:
Bonds		10,002		20,878
Residential mortgage-backed securities		226,542		214,100
Collateralized mortgage obligations		133,454		182,717
Corporate debt securities		55,172		42,685
States and political subdivisions		227,876		260,271
Private-label securitized product		21,008		9,265
Other		3,342		14,650
Totals	$	692,908	$	755,032

In addition to the securities shown above, 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 obligations 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 $51.5 million and $53.0 million at March 31, 2023 and December 31, 2022, respectively.

The amortized cost and fair value of available for sale and held to maturity securities are summarized as follows (in thousands).


	Available for Sale
	Amortized		Unrealized		Unrealized
March 31, 2023	Cost		Gains		Losses		Fair Value
U.S. Treasury securities	$	19,824	$	3	$	(436)	$	19,391
U.S. government agencies:
Bonds		206,681		252		(1,027)		205,906
Residential mortgage-backed securities		438,858		9		(43,486)		395,381
Commercial mortgage-backed securities		187,869		177		(9,260)		178,786
Collateralized mortgage obligations		865,642		106		(60,322)		805,426
States and political subdivisions		39,465		72		(2,856)		36,681
Totals	$	1,758,339	$	619	$	(117,387)	$	1,641,571


	Available for Sale
	Amortized		Unrealized		Unrealized
December 31, 2022	Cost		Gains		Losses		Fair Value
U.S. Treasury securities	$	19,655	$	3	$	(514)	$	19,144
U.S. government agencies:
Bonds		202,834		323		(900)		202,257
Residential mortgage-backed securities		455,121		12		(48,775)		406,358
Commercial mortgage-backed securities		183,266		65		(7,832)		175,499
Collateralized mortgage obligations		887,521		—		(68,627)		818,894
States and political subdivisions		40,160		57		(3,603)		36,614
Totals	$	1,788,557	$	460	$	(130,251)	$	1,658,766

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)


	Held to Maturity
	Amortized		Unrealized		Unrealized
March 31, 2023	Cost		Gains		Losses		Fair Value
U.S. government agencies:
Residential mortgage-backed securities	$	295,889	$	—	$	(25,852)	$	270,037
Commercial mortgage-backed securities		180,598		—		(12,673)		167,925
Collateralized mortgage obligations		307,778		—		(33,815)		273,963
States and political subdivisions		78,015		138		(4,698)		73,455
Totals	$	862,280	$	138	$	(77,038)	$	785,380


	Held to Maturity
	Amortized		Unrealized		Unrealized
December 31, 2022	Cost		Gains		Losses		Fair Value
U.S. government agencies:
Residential mortgage-backed securities	$	301,583	$	—	$	(29,727)	$	271,856
Commercial mortgage-backed securities		180,942		—		(14,935)		166,007
Collateralized mortgage obligations		314,705		—		(38,343)		276,362
States and political subdivisions		78,302		26		(7,218)		71,110
Totals	$	875,532	$	26	$	(90,223)	$	785,335

Additionally, the Company had unrealized net gains of $0.2 million and $0.1 million at March 31, 2023 and December 31, 2022, respectively, from equity securities with fair values of $0.2 million and $0.2 million held at March 31, 2023 and December 31, 2022, respectively. The Company recognized nominal net gains and losses during the three months ended March 31, 2023 and 2022, respectively, due to changes in the fair value of equity securities still held at the balance sheet date. During the three months ended March 31, 2023 and 2022, net gains and losses recognized from equity securities sold were nominal.

The Company 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 the Company’s 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.

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Estimated Fair Value


Carrying

Level 1

Level 2

Level 3


December 31, 2021

Amount

Inputs

Inputs

Inputs

Total
Financial assets:

Cash and cash equivalents

$
2,823,523

$
2,823,523

$
—

$
—

$
2,823,523
Assets segregated for regulatory purposes

221,740

221,740

—

—

221,740
Securities purchased under agreements to resell

118,262

—

118,262

—

118,262
Held to maturity securities

267,684

—

276,296

—

276,296
Loans held for sale

95,599

—

95,599

—

95,599
Loans held for investment, net

7,788,552

—

733,193

7,266,732

7,999,925
Broker-dealer and clearing organization receivables

1,672,946

—

1,672,946

—

1,672,946
Other assets

73,041

—

71,290

1,751

73,041

Financial liabilities:

Deposits

12,818,077

—

12,821,138

—

12,821,138
Broker-dealer and clearing organization payables

1,477,300

—

1,477,300

—

1,477,300
Short-term borrowings

859,444

—

859,444

—

859,444
Debt

387,904

—

387,904

—

387,904
Other liabilities

3,944

—

3,944

—

3,944

~~The Company~~Information regarding available for sale and held ~~equity investments other than~~to maturity securities ~~of $59.2 million and $54.0 million at September 30, 2022 and December 31, 2021, respectively, which are included within other assets~~that were in an unrealized loss position is shown in the consolidated balance sheets. Of the $59.2 million of such equity investments held at September 30, 2022, $27.4 million do not have readily determinable fair values and each is measured at cost, less any impairment, plus or minus changes resulting from observable price changesfollowing tables (dollars in orderly transactions for the identical or a similar investment of the same issuer. The following table presents the adjustments to the carrying value of these investments during the periods presented (in thousands).

Three Months Ended September 30,

Nine Months Ended September 30,

2022

2021

2022

2021
Balance, beginning of period
$
28,183

$
26,988

$
16,817

$
22,844
Additional investments

—

—

11,000

—
Upward adjustments

234

122

679

6,006
Impairments and downward adjustments

(1,013)

(253)

(1,092)

(1,017)
Dispositions

—

(10,390)

—

(11,366)
Balance, end of period
$
27,404

$
16,467

$
27,404

$
16,467


	March 31, 2023					December 31, 2022
	Number of			Unrealized		Number of			Unrealized
	Securities	Fair Value		Losses		Securities	Fair Value		Losses
Available for Sale
U.S. treasury securities:
Unrealized loss for less than twelve months	—	$	—	$	—	—	$	—	$	—
Unrealized loss for twelve months or longer	1		4,545		436	1		4,465		514
	1		4,545		436	1		4,465		514
U.S. government agencies:
Bonds:
Unrealized loss for less than twelve months	24		154,851		630	15		98,246		388
Unrealized loss for twelve months or longer	3		14,399		397	3		15,263		512
	27		169,250		1,027	18		113,509		900
Residential mortgage-backed securities:
Unrealized loss for less than twelve months	45		72,808		2,500	95		168,351		10,036
Unrealized loss for twelve months or longer	79		320,641		40,986	30		236,739		38,739
	124		393,449		43,486	125		405,090		48,775
Commercial mortgage-backed securities:
Unrealized loss for less than twelve months	7		38,978		1,274	11		79,337		2,047
Unrealized loss for twelve months or longer	12		130,372		7,986	8		86,923		5,785
	19		169,350		9,260	19		166,260		7,832
Collateralized mortgage obligations:
Unrealized loss for less than twelve months	38		213,056		7,030	97		563,872		30,980
Unrealized loss for twelve months or longer	104		566,274		53,292	48		244,917		37,647
	142		779,330		60,322	145		808,789		68,627
States and political subdivisions:
Unrealized loss for less than twelve months	26		11,251		84	34		20,555		964
Unrealized loss for twelve months or longer	33		16,226		2,772	29		7,892		2,639
	59		27,477		2,856	63		28,447		3,603
Total available for sale:
Unrealized loss for less than twelve months	140		490,944		11,518	252		930,361		44,415
Unrealized loss for twelve months or longer	232		1,052,457		105,869	119		596,199		85,836
	372	$	1,543,401	$	117,387	371	$	1,526,560	$	130,251


	March 31, 2023					December 31, 2022
	Number of			Unrealized		Number of			Unrealized
	Securities	Fair Value		Losses		Securities	Fair Value		Losses
Held to Maturity
Residential mortgage-backed securities:
Unrealized loss for less than twelve months	—	$	—	$	—	14	$	59,089	$	5,928
Unrealized loss for twelve months or longer	45		270,038		25,852	31		212,768		23,799
	45		270,038		25,852	45		271,857		29,727
Commercial mortgage-backed securities:
Unrealized loss for less than twelve months	3		10,788		311	30		163,172		14,483
Unrealized loss for twelve months or longer	28		157,137		12,362	1		2,834		452
	31		167,925		12,673	31		166,006		14,935
Collateralized mortgage obligations:
Unrealized loss for less than twelve months	—		—		—	18		33,836		3,225
Unrealized loss for twelve months or longer	54		273,963		33,815	38		242,527		35,118
	54		273,963		33,815	56		276,363		38,343
States and political subdivisions:
Unrealized loss for less than twelve months	46		19,083		172	150		59,459		5,362
Unrealized loss for twelve months or longer	116		40,756		4,526	27		8,093		1,856
	162		59,839		4,698	177		67,552		7,218
Total held to maturity:
Unrealized loss for less than twelve months	49		29,871		483	212		315,556		28,998
Unrealized loss for twelve months or longer	243		741,894		76,555	97		466,222		61,225
	292	$	771,765	$	77,038	309	$	781,778	$	90,223

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Expected maturities may differ from contractual maturities because certain borrowers may have the right to call or prepay obligations with or without penalties. The amortized cost and fair value of securities, excluding trading and equity securities, at March 31, 2023 are shown by contractual maturity below (in thousands).


	Available for Sale				Held to Maturity
	Amortized				Amortized
	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	34,370	$	34,227	$	575	$	573
Due after one year through five years		91,716		90,795		1,120		1,094
Due after five years through ten years		63,298		62,971		27,491		26,753
Due after ten years		76,586		73,985		48,829		45,035
		265,970		261,978		78,015		73,455

Residential mortgage-backed securities		438,858		395,381		295,889		270,037
Commercial mortgage-backed securities		187,869		178,786		180,598		167,925
Collateralized mortgage obligations		865,642		805,426		307,778		273,963
	$	1,758,339	$	1,641,571	$	862,280	$	785,380

The Company recognized net gains of $10.5 million and net losses of $11.5 million from its trading portfolio during the three months ended March 31, 2023 and 2022, respectively. In addition, the Hilltop Broker-Dealers realized net gains from structured product trading activities of $32.6 million and $6.7 million during the three months ended March 31, 2023 and 2022, respectively. The Company had nominal other realized gains on securities during the three months ended March 31, 2022. All such realized gains and losses are recorded as a component of other noninterest income within the consolidated statements of operations.

Securities with a carrying amount of $710.6 million and $778.6 million (with a fair value of $666.5 million and $717.6 million, respectively) at March 31, 2023 and December 31, 2022, respectively, were pledged by the Bank to secure public and trust deposits, federal funds purchased and securities sold under agreements to repurchase, and for other purposes as required or permitted by law. Substantially all of these pledged securities were included in the available for sale and held to maturity securities portfolios at March 31, 2023 and December 31, 2022.

Mortgage-backed securities and collateralized mortgage obligations consist primarily of Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) pass-through and participation certificates. GNMA securities are guaranteed by the full faith and credit of the United States, while FNMA and FHLMC securities are fully guaranteed by those respective United States government-sponsored enterprises, and conditionally guaranteed by the full faith and credit of the United States.

~~4. Securities~~5. Loans Held for Investment

The ~~fair value~~Bank originates loans to customers primarily in Texas. Although the Bank has diversified loan and leasing portfolios and, generally, holds collateral against amounts advanced to customers, its debtors’ ability to honor their contracts is substantially dependent upon the general economic conditions of ~~trading securities is~~the region and of the industries in which its debtors operate, which consist primarily of real estate (including construction and land development), wholesale/retail trade, agribusiness and energy. The Hilltop Broker-Dealers make loans to customers and correspondents through transactions originated by both employees and independent retail representatives throughout the United States. The Hilltop Broker-Dealers control risk by requiring customers to maintain collateral in compliance with various regulatory and internal guidelines, which may vary based upon market conditions. Securities owned by customers and held as collateral for loans are not included in the consolidated financial statements.

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Loans held for investment summarized by portfolio segment are as follows (in thousands).

September 30,

December 31,

2022

2021
U.S. Treasury securities

$
309

$
3,728
U.S. government agencies:

Bonds

14,255

3,410
Residential mortgage-backed securities

152,513

152,093
Collateralized mortgage obligations

171,241

126,389
Corporate debt securities

63,626

60,671
States and political subdivisions

200,945

285,376
Private-label securitized product

13,690

11,377
Other

25,285

4,954
Totals

$
641,864

$
647,998


	March 31,		December 31,
	2023		2022
Commercial real estate	$	3,209,879	$	3,245,873
Commercial and industrial		1,709,314		1,639,980
Construction and land development		1,084,951		980,896
1-4 family residential		1,800,313		1,767,099
Consumer		26,802		27,602
Broker-dealer ⁽¹⁾		361,587		431,223
		8,192,846		8,092,673
Allowance for credit losses		(97,354)		(95,442)
Total loans held for investment, net of allowance	$	8,095,492	$	7,997,231

(1)

Primarily represents margin loans to customers and correspondents associated with broker-dealer segment operations.

Past Due Loans and Nonaccrual Loans

An analysis of the aging of the Company’s loan portfolio is shown in the following tables (in thousands).


													Accruing Loans
	Loans Past Due						Total Past		Current		Total		Past Due
March 31, 2023	30-59 Days		60-89 Days		90 Days or More		Due Loans		Loans		Loans		90 Days or More
Commercial real estate:
Non-owner occupied	$	511	$	—	$	36	$	547	$	1,832,126	$	1,832,673	$	—
Owner occupied		49		179		—		228		1,376,978		1,377,206		—
Commercial and industrial		9,261		103		5,404		14,768		1,694,546		1,709,314		49
Construction and land development		2,033		—		—		2,033		1,082,918		1,084,951		—
1-4 family residential		7,958		1,273		3,052		12,283		1,788,030		1,800,313		1
Consumer		88		5		12		105		26,697		26,802		1
Broker-dealer		—		—		—		—		361,587		361,587		—
	$	19,900	$	1,560	$	8,504	$	29,964	$	8,162,882	$	8,192,846	$	51


													Accruing Loans
	Loans Past Due						Total Past		Current		Total		Past Due
December 31, 2022	30-59 Days		60-89 Days		90 Days or More		Due Loans		Loans		Loans		90 Days or More
Commercial real estate:
Non-owner occupied	$	567	$	—	$	235	$	802	$	1,869,750	$	1,870,552	$	—
Owner occupied		1,037		2,880		—		3,917		1,371,404		1,375,321		—
Commercial and industrial		609		82		5,598		6,289		1,633,691		1,639,980		49
Construction and land development		3,665		—		—		3,665		977,231		980,896		—
1-4 family residential		9,733		773		4,467		14,973		1,752,126		1,767,099		1
Consumer		177		7		14		198		27,404		27,602		1
Broker-dealer		—		—		—		—		431,223		431,223		—
	$	15,788	$	3,742	$	10,314	$	29,844	$	8,062,829	$	8,092,673	$	51

In addition to the ~~securities~~loans shown above, 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 obligations may exceed the amount recognized in the tables above, PrimeLending had $114.5 million and $92.0 million of loans included in loans held for sale (with an aggregate unpaid principal balance of $114.8 million and $92.4 million, respectively) that were 90 days past due and accruing interest at March 31, 2023 and December 31, 2022, respectively. These loans are guaranteed by U.S. government agencies and include loans that are subject to repurchase, or have been repurchased, by PrimeLending.

1518

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

~~financial statements. These securities, which are carried at fair value and reported as securities sold, not yet purchased~~An analysis of the aging of the Company’s loan portfolio that have been modified during the three months ended March 31, 2023 is shown in the ~~consolidated balance sheets, had a value of $99.5 million and $96.6 million at September 30, 2022 and December 31, 2021, respectively.~~

~~The amortized cost and fair value of available for sale and held to maturity securities are summarized as follows~~following table (in thousands).

Available for Sale

Amortized

Unrealized

Unrealized

September 30, 2022

Cost

Gains

Losses

Fair Value
U.S. Treasury securities

$
24,958

$
—

$
(696)

$
24,262
U.S. government agencies:

Bonds

115,633

315

(814)

115,134
Residential mortgage-backed securities

474,451

20

(55,751)

418,720
Commercial mortgage-backed securities

199,537

—

(34,699)

164,838
Collateralized mortgage obligations

898,449

—

(72,099)

826,350
States and political subdivisions

40,177

71

(4,828)

35,420
Totals

$
1,753,205

$
406

$
(168,887)

$
1,584,724

Available for Sale

Amortized

Unrealized

Unrealized

December 31, 2021

Cost

Gains

Losses

Fair Value
U.S. Treasury securities

$
14,937

$
—

$
(75)

$
14,862
U.S. government agencies:

Bonds

43,448

838

(153)

44,133
Residential mortgage-backed securities

900,084

7,979

(9,617)

898,446
Commercial mortgage-backed securities

219,460

367

(9,128)

210,699
Collateralized mortgage obligations

926,783

2,547

(12,464)

916,866
States and political subdivisions

43,923

1,839

(200)

45,562
Totals

$
2,148,635

$
13,570

$
(31,637)

$
2,130,568

Held to Maturity

Amortized

Unrealized

Unrealized

September 30, 2022

Cost

Gains

Losses

Fair Value
U.S. government agencies:

Residential mortgage-backed securities

$
308,102

$
—

$
(34,442)

$
273,660
Commercial mortgage-backed securities

181,259

—

(15,197)

166,062
Collateralized mortgage obligations

323,526

—

(36,664)

286,862
States and political subdivisions

76,565

1

(10,591)

65,975
Totals

$
889,452

$
1

$
(96,894)

$
792,559

Held to Maturity

Amortized

Unrealized

Unrealized

December 31, 2021

Cost

Gains

Losses

Fair Value
U.S. government agencies:

Residential mortgage-backed securities

$
9,892

$
400

$
—

$
10,292
Commercial mortgage-backed securities

145,742

5,311

—

151,053
Collateralized mortgage obligations

43,990

476

—

44,466
States and political subdivisions

68,060

2,428

(3)

70,485
Totals

$
267,684

$
8,615

$
(3)

$
276,296


	Modified Loans Past Due						Total Modified
March 31, 2023	30-59 Days		60-89 Days		90 Days or More		Past Due Loans
Commercial real estate:
Non-owner occupied	$	—	$	—	$	—	$	—
Owner occupied		—		—		—		—
Commercial and industrial		941		—		—		941
Construction and land development		—		—		—		—
1-4 family residential		—		—		—		—
Consumer		—		—		—		—
Broker-dealer		—		—		—		—
Total	$	941	$	—	$	—	$	941

~~Additionally, the Company had unrealized net gains of $0.1 million and $0.2 million at September 30, 2022~~The following table provides details associated with non-accrual loans, excluding those classified as held for sale (in thousands).


	Non-accrual Loans
	March 31, 2023						December 31, 2022						Interest Income Recognized
	With		With No				With		With No				Three Months Ended March 31,
	Allowance		Allowance		Total		Allowance		Allowance		Total		2023		2022
Commercial real estate:
Non-owner occupied	$	481	$	557	$	1,038	$	688	$	562	$	1,250	$	123	$	97
Owner occupied		778		157		935		2,862		157		3,019		63		83
Commercial and industrial		3,217		7,590		10,807		3,727		5,368		9,095		131		188
Construction and land development		1		—		1		1		—		1		7		7
1-4 family residential		256		10,049		10,305		433		10,862		11,295		456		421
Consumer		12		—		12		14		—		14		—		—
Broker-dealer		—		—		—		—		—		—		—		—
	$	4,745	$	18,353	$	23,098	$	7,725	$	16,949	$	24,674	$	780	$	796

At March 31, 2023 and December 31, ~~2021, respectively, from equity securities with fair values of $0.2~~2022, $4.3 million and ~~$0.2~~$4.8 million, respectively, of real estate loans secured by residential properties and classified as held ~~at September 30, 2022 and~~for sale were in non-accrual status.

Loans accounted for on a non-accrual basis decreased from December 31, ~~2021, respectively.~~2022 to March 31, 2023 by $1.6 million. The ~~Company recognized nominal net gains during the three months ended September 30, 2022 and 2021, respectively,~~change in nonaccrual loans was primarily due to ~~changes~~decreases in ~~the fair value~~commercial real estate owner occupied loans of ~~equity securities still held at the balance sheet date. During the nine months ended September 30, 2022 and 2021, net losses of $0.1~~$2.1 million and ~~net~~

~~Table~~1-4 family residential loans of ~~Contents~~

~~Hilltop Holdings Inc.~~$1.0 million, partially offset by an increase in commercial and ~~Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

~~gains~~industrial loans of ~~$0.1 million, respectively, were recognized~~$1.7 million. The decrease in commercial real estate non-owner occupied loans in non-accrual status since December 31, 2022 was primarily due to ~~changes~~the foreclosure of one office property in Texas. The increase in commercial and industrial loans was primarily due to the ~~fair value~~addition of ~~equity securities still held at the~~one relationship with a loan balance ~~sheet date. During the three and nine months ended September 30,~~of $2.7 million to non-accrual status since December 31, 2022, ~~and 2021, net losses and gains recognized from equity securities sold were nominal.~~partially offset by principal paydowns.

The Company ~~transferred certain agency-issued securities from~~considers non-accrual loans to be collateral-dependent unless there are underlying mitigating circumstances, such as expected cash flow recovery. The practical expedient to measure the ~~available-for-sale to held-to-maturity portfolio on March 31, 2022 having a book~~allowance using the fair 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 the Company’s 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.collateral has been implemented.

~~Information regarding available for sale and held to maturity securities that were in an unrealized loss position is shown in the following tables (dollars in thousands).~~Loan Modifications

September 30, 2022

December 31, 2021


Number of



Unrealized

Number of



Unrealized

Securities

Fair Value

Losses

Securities

Fair Value

Losses
Available for Sale

U.S. treasury securities:

Unrealized loss for less than twelve months

2

$
19,845

$
136

2

$
14,862

$
75
Unrealized loss for twelve months or longer

1

4,417

560

—

—

—

3

24,262

696

2

14,862

75
U.S. government agencies:

Bonds:

Unrealized loss for less than twelve months

8

51,594

247

2

9,904

94
Unrealized loss for twelve months or longer

3

15,493

567

1

6,184

59

11

67,087

814

3

16,088

153
Residential mortgage-backed securities:

Unrealized loss for less than twelve months

98

204,950

17,715

52

548,392

6,915
Unrealized loss for twelve months or longer

26

211,828

38,036

17

104,378

2,702

124

416,778

55,751

69

652,770

9,617
Commercial mortgage-backed securities:

Unrealized loss for less than twelve months

12

90,402

12,637

5

65,636

1,776
Unrealized loss for twelve months or longer

7

74,435

22,062

14

138,619

7,352

19

164,837

34,699

19

204,255

9,128
Collateralized mortgage obligations:

Unrealized loss for less than twelve months

112

669,347

45,405

72

618,464

11,316
Unrealized loss for twelve months or longer

28

141,868

26,694

10

62,647

1,148

140

811,215

72,099

82

681,111

12,464
States and political subdivisions:

Unrealized loss for less than twelve months

51

23,421

3,119

14

5,576

200
Unrealized loss for twelve months or longer

13

3,819

1,709

—

—

—

64

27,240

4,828

14

5,576

200
Total available for sale:

Unrealized loss for less than twelve months

283

1,059,559

79,259

147

1,262,834

20,376
Unrealized loss for twelve months or longer

78

451,860

89,628

42

311,828

11,261

361

$
1,511,419

$
168,887

189

$
1,574,662

$
31,637

As previously discussed, as of January 1, 2023, the Company adopted the new guidance which eliminated the recognition and measurement guidance on TDRs for creditors, and requires enhanced disclosures about loan modifications for borrowers experiencing financial difficulty. Loan modifications are typically structured to create affordable payments for the debtor and can be achieved in a variety of ways. The Bank modifies loans by reducing interest rates and/or lengthening loan amortization schedules. The Bank may also reconfigure a single loan into two or more loans (“A/B Note”). The typical A/B Note restructure results in a “bad” loan which is charged off and a “good” loan or loans, the terms of which comply with the Bank’s customary underwriting policies. The debt charged off on the “bad” loan is not forgiven to the debtor.

1719

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

September 30, 2022

December 31, 2021


Number of



Unrealized

Number of



Unrealized

Securities

Fair Value

Losses

Securities

Fair Value

Losses
Held to Maturity

Residential mortgage-backed securities:

Unrealized loss for less than twelve months

16

$
78,772

$
9,167

—

$
—

$
—
Unrealized loss for twelve months or longer

29

194,888

25,275

—

—

—

45

273,660

34,442

—

—

—
Commercial mortgage-backed securities:

Unrealized loss for less than twelve months

30

163,245

14,736

—

—

—
Unrealized loss for twelve months or longer

1

2,817

461

—

—

—

31

166,062

15,197

—

—

—
Collateralized mortgage obligations:

Unrealized loss for less than twelve months

28

92,710

9,004

—

—

—
Unrealized loss for twelve months or longer

28

194,152

27,660

—

—

—

56

286,862

36,664

—

—

—
States and political subdivisions:

Unrealized loss for less than twelve months

173

62,949

10,360

2

558

1
Unrealized loss for twelve months or longer

3

595

231

1

266

2

176

63,544

10,591

3

824

3
Total held to maturity:

Unrealized loss for less than twelve months

247

397,676

43,267

2

558

1
Unrealized loss for twelve months or longer

61

392,452

53,627

1

266

2

308

$
790,128

$
96,894

3

$
824

$
3

~~Expected maturities may differ from contractual maturities because certain borrowers may have~~The following table presents the ~~right to call or prepay obligations with or without penalties. The~~ amortized cost basis of the loans held for investment modified for borrowers experiencing financial difficulty grouped by portfolio segment and ~~fair value~~type of ~~securities, excluding trading and equity securities, at September 30, 2022 are shown by contractual maturity below~~modification granted (in thousands).

Available for Sale

Held to Maturity


Amortized



Amortized


Cost

Fair Value

Cost

Fair Value
Due in one year or less

$
35,135

$
34,938

$
856

$
849
Due after one year through five years

23,053

21,705

801

750
Due after five years through ten years

50,701

50,043

23,232

20,884
Due after ten years

71,879

68,130

51,676

43,492

180,768

174,816

76,565

65,975

Residential mortgage-backed securities

474,451

418,720

308,102

273,660
Commercial mortgage-backed securities

199,537

164,838

181,259

166,062
Collateralized mortgage obligations

898,449

826,350

323,526

286,862

$
1,753,205

$
1,584,724

$
889,452

$
792,559

The Company recognized net losses of $3.2 million and net gains of $2.0 million from its trading portfolio during the three months ended September 30, 2022 and 2021, respectively, and net losses of $7.9 million and net gains of $21.8 million during the nine months ended September 30, 2022 and 2021, respectively. In addition, the Hilltop Broker-Dealers realized net gains from structured product trading activities of $16.6 million and $17.0 million during the three months ended September 30, 2022 and 2021, respectively, and net gains from structured product trading activities of $25.6 million and $52.1 million during the nine months ended September 30, 2022 and 2021, respectively. The Company had nominal other realized gains on securities during the three months ended September 30, 2022 and 2021. Other realized gains on securities during the nine months ended September 30, 2022 were nominal, compared with other realized losses on securities of $0.1 million during the nine months ended September 30, 2021. All such realized gains and losses are recorded as a component of other noninterest income within the consolidated statements of operations.

Securities with a carrying amount of $617.1 million and $809.9 million (with a fair value of $556.2 million and $817.7 million, respectively) at September 30, 2022 and December 31, 2021, respectively, were pledged by the Bank to secure public and trust deposits, federal funds purchased and securities sold under agreements to repurchase, and for other

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

purposes as required or permitted by law. Substantially all of these pledged securities were included in the available for sale and held to maturity securities portfolios at September 30, 2022 and December 31, 2021.

~~5. Loans Held for Investment~~

The Bank originates loans to customers primarily in Texas. Although the Bank has diversified loan and leasing portfolios and, generally, holds collateral against amounts advanced to customers, its debtors’ ability to honor their contracts is substantially dependent upon the general economic conditions of the region and of the industries in which its debtors operate, which consist primarily of agribusiness, construction, energy, real estate and wholesale/retail trade. The Hilltop Broker-Dealers make loans to customers and correspondents through transactions originated by both employees and independent retail representatives throughout the United States. The Hilltop Broker-Dealers control risk by requiring customers to maintain collateral in compliance with various regulatory and internal guidelines, which may vary based upon market conditions. Securities owned by customers and held as collateral for loans are not included in the consolidated financial statements.

~~Loans held for investment summarized by portfolio segment are as follows (in thousands).~~

September 30,

December 31,

2022

2021
Commercial real estate

$
3,313,911

$
3,042,729
Commercial and industrial ⁽¹⁾

1,668,209

1,875,420
Construction and land development

934,915

892,783
1-4 family residential

1,595,270

1,303,430
Consumer

29,439

32,349
Broker-dealer ⁽²⁾

402,502

733,193

7,944,246

7,879,904
Allowance for credit losses

(91,783)

(91,352)
Total loans held for investment, net of allowance

$
7,852,463

$
7,788,552

~~(1)~~

~~Included loans totaling $1.1 million and $77.7 million at September 30, 2022 and December 31, 2021, respectively, funded through the Paycheck Protection Program.~~

~~(2)~~

~~Primarily represents margin loans to customers and correspondents associated with broker-dealer segment operations.~~


									Total
									Modifications as a
	Interest Rate		Term		Principal		Payment		% of Portfolio
March 31, 2023	Reduction		Extension		Forgiveness		Delay		Segment
Commercial real estate:
Non-owner occupied	$	—	$	37,972	$	—	$	—	2.1	%
Owner occupied		—		2,235		—		—	0.2	%
Commercial and industrial		—		1,364		—		3,000	0.3	%
Construction and land development		—		—		—		—	—	%
1-4 family residential		—		—		—		—	—	%
Consumer		—		—		—		—	—	%
Broker-Dealer		—		—		—		—	—	%
Total	$	—	$	41,571	$	—	$	3,000	0.5	%

The following table ~~provides details associated with non-accrual~~presents the financial effects of the loans ~~excluding those classified as~~ held for ~~sale~~investment modified for borrowers experiencing financial difficulty (in thousands).

Non-accrual Loans

September 30, 2022

December 31, 2021

Interest Income Recognized

With

With No

With

With No

Three Months Ended September 30,

Nine Months Ended September 30,

Allowance

Allowance

Total

Allowance

Allowance

Total

2022

2021

2022

2021
Commercial real estate:

Non-owner occupied

$
1,171

$
95

$
1,266

$
413

$
1,853

$
2,266

$
265

$
76

$
422

$
204
Owner occupied

3,469

—

3,469

3,058

1,277

4,335

88

345

505

574
Commercial and industrial

10,745

1,333

12,078

16,536

5,942

22,478

303

179

930

653
Construction and land development

1

—

1

2

—

2

7

13

22

48
1-4 family residential

724

12,124

12,848

902

17,306

18,208

561

796

2,286

2,837
Consumer

16

—

16

23

—

23

—

1

—

(120)
Broker-dealer

—

—

—

—

—

—

—

—

—

—

$
16,126

$
13,552

$
29,678

$
20,934

$
26,378

$
47,312

$
1,224

$
1,410

$
4,165

$
4,196

At September 30, 2022 and December 31, 2021, $4.1 million and $2.9 million, respectively, of real estate loans secured by residential properties and classified as held for sale were in non-accrual status.

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

Loans accounted for on a non-accrual basis decreased from December 31, 2021 to September 30, 2022, by $17.6 million. The change in nonaccrual loans was primarily due to decreases in commercial and industrial loans of $10.4 million, 1-4 family residential loans of $5.4 million, and commercial real estate non-owner occupied loans of $1.0 million. The decrease in commercial and industrial loans in non-accrual status since December 31, 2021 was primarily due to principal paydowns, settlements and charge-offs associated with three relationships, partially offset by the addition of one relationship with a loan balance of $2.7 million to non-accrual status.

The Company considers non-accrual loans to be collateral-dependent unless there are underlying mitigating circumstances, such as expected cash flow recovery. The practical expedient to measure the allowance using the fair value of the collateral has been implemented.

The Bank classifies loan modifications as troubled debt restructurings (“TDRs”) when it concludes that it has both granted a concession to a debtor and that the debtor is experiencing financial difficulties. Loan modifications are typically structured to create affordable payments for the debtor and can be achieved in a variety of ways. The Bank modifies loans by reducing interest rates and/or lengthening loan amortization schedules. The Bank may also reconfigure a single loan into two or more loans (“A/B Note”). The typical A/B Note restructure results in a “bad” loan which is charged off and a “good” loan or loans, the terms of which comply with the Bank’s customary underwriting policies. The debt charged off on the “bad” loan is not forgiven to the debtor.

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, including the related impairment for accounting purposes. On December 27, 2020, the Consolidated Appropriations Act 2021 was signed into law. Section 541 of this legislation, “Extension of Temporary Relief From Troubled Debt Restructurings and Insurer Clarification,” extended certain relief provisions from the CARES Act to January 1, 2022. The Bank’s novel coronavirus (“COVID-19”) payment deferment programs allowed for a deferral of principal and/or interest payments with such deferred principal payments due and payable on maturity date of the existing loan.

There were no TDRs granted during the three months ended September 30, 2022 and 2021. There were three TDRs granted during the nine months ended September 30, 2022 with an aggregate balance at date of extension of $3.6 million and an aggregate balance at September 30, 2022 of $2.9 million. There was one TDR granted during the nine months ended September 30, 2021 with a balance at date of extension and at September 30, 2021 of $0.7 million. The Bank had no unadvanced commitments to borrowers whose loans had been restructured in TDRs at September 30, 2022 and nominal unadvanced commitments to such borrowers at December 31, 2021. There were no TDRs granted during the twelve months preceding September 30, 2022, while there were $0.1 million TDRs granted during the twelve months preceding September 30, 2021 for which a payment was at least 30 days past due.

~~An analysis of the aging of the Company’s loan portfolio is shown in the following tables (in thousands).~~

Accruing Loans

Loans Past Due

Total Past

Current

Total

Past Due
September 30, 2022

30-59 Days

60-89 Days

90 Days or More

Due Loans

Loans

Loans
��
90 Days or More
Commercial real estate:

Non-owner occupied

$
—

$
—

$
234

$
234

$
1,953,997

$
1,954,231

$
—
Owner occupied

329

—

—

329

1,359,351

1,359,680

—
Commercial and industrial

3,597

8

8,329

11,934

1,656,275

1,668,209

—
Construction and land development

1

—

—

1

934,914

934,915

—
1-4 family residential

3,687

1,431

5,046

10,164

1,585,106

1,595,270

102
Consumer

147

7

16

170

29,269

29,439

—
Broker-dealer

—

—

—

—

402,502

402,502

—

$
7,761

$
1,446

$
13,625

$
22,832

$
7,921,414

$
7,944,246

$
102

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

Accruing Loans

Loans Past Due

Total Past

Current

Total

Past Due
December 31, 2021

30-59 Days

60-89 Days

90 Days or More

Due Loans

Loans

Loans

90 Days or More
Commercial real estate:

Non-owner occupied

$
117

$
—

$
1,173

$
1,290

$
1,728,409

$
1,729,699

$
—
Owner occupied

590

688

2,273

3,551

1,309,479

1,313,030

—
Commercial and industrial

1,059

277

13,640

14,976

1,860,444

1,875,420

1
Construction and land development

946

—

—

946

891,837

892,783

—
1-4 family residential

7,642

2,738

4,842

15,222

1,288,208

1,303,430

100
Consumer

123

22

22

167

32,182

32,349

—
Broker-dealer

—

—

—

—

733,193

733,193

—

$
10,477

$
3,725

$
21,950

$
36,152

$
7,843,752

$
7,879,904

$
101

In addition to the loans shown in the tables above, PrimeLending had $96.4 million and $60.7 million of loans included in loans held for sale (with an aggregate unpaid principal balance of $96.9 million and $61.7 million, respectively) that were 90 days past due and accruing interest at September 30, 2022 and December 31, 2021, respectively. These loans are guaranteed by U.S. government agencies and include loans that are subject to repurchase, or have been repurchased, by PrimeLending.

In response to the COVID-19 pandemic, the Company allowed modifications, such as payment deferrals for up to 90 days and temporary forbearance, to credit-worthy borrowers who are experiencing temporary hardship due to the effects of COVID-19. These short-term modifications generally meet the criteria of the CARES Act and, therefore, they are not reported as past due or placed on non-accrual status (provided the loans were not past due or on non-accrual status prior to the deferral). The Company elected to accrue and recognize interest income on these modifications during the payment deferral period.

Weighted-Average

Term Extension

March 31, 2023

(in months)

Commercial real estate:

Non-owner occupied

Owner occupied

Commercial and industrial

Construction and land development

—

1-4 family residential

—

Consumer

—

Broker-Dealer

—

Total

Additionally, the Company granted temporary forbearance to borrowers of a federally backed mortgage loan experiencing financial hardship due, directly or indirectly, to the ~~COVID-19~~recent pandemic. The CARES Act, which among other things, established the ability for financial institutions to grant a forbearance for up to 180 days, which can be extended for an additional 180-day period upon the request of the borrower. During that time, no fees, penalties or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the mortgage contract will accrue on the borrower’s account. As of ~~September 30, 2022,~~March 31, 2023, PrimeLending had ~~$49.0~~$64.6 million of loans subject to repurchase under a forbearance agreement related to delinquencies on or after April 1, 2020.

Troubled Debt Restructurings

During the three months ended March 31, 2022 there was one TDR granted with a balance at date of extension of $0.6 million and a balance at March 31, 2022 of $0.6 million. The Bank had no unadvanced commitments to borrowers whose loans had been restructured in TDRs at March 31, 2022. There were no TDRs granted during the twelve months preceding March 31, 2022 for which a payment was at least 30 days past due.

Credit Risk Profile

Management tracks credit quality trends on a quarterly basis related to: (i) past due levels, (ii) non-performing asset levels, (iii) classified loan levels, and (iv) general economic conditions in state and local markets. The Company defines classified loans as loans with a risk rating of substandard, doubtful or loss. There have been no changes to the risk rating internal grades utilized for commercial loans as described in detail in Note 6 to the consolidated financial statements in the Company’s ~~2021~~2022 Form 10-K.

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

The following table presents loans held for investment grouped by asset class and credit quality indicator, segregated by year of origination or renewal (in thousands).


	Amortized Cost Basis by Origination Year																Amortized Cost Basis by Origination Year														Loans
												2017 and																2018 and			Converted to
September 30, 2022	2022		2021		2020		2019		2018			Prior	Revolving		Total
March 31, 2023																	2023		2022		2021		2020		2019			Prior	Revolving		Term Loans		Total
Commercial real estate: non-owner occupied
Internal Grade 1-3 (Pass low risk)	$	47,140	$	76,592	$	20,521	$	8,044	$	4,779	$	8,142	$	1	$	165,219	$	—	$	47,642	$	75,314	$	10,093	$	7,890	$	10,963	$	1	$	200	$	152,103
Internal Grade 4-7 (Pass normal risk)		341,269		339,862		121,299		80,514		46,457		56,121		47,443		1,032,965		25,972		336,202		339,596		111,670		84,880		77,875		48,790		—		1,024,985
Internal Grade 8-11 (Pass high risk and watch)		82,184		138,346		182,165		82,786		67,328		83,882		11,821		648,512		41,444		99,995		128,434		119,618		49,829		113,843		13,604		—		566,767
Internal Grade 12 (Special mention)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Internal Grade 13 (Substandard accrual)		78,037		14,543		1,637		8,133		—		3,546		373		106,269		41,518		19,129		14,670		1,614		10,137		712		—		—		87,780
Internal Grade 14 (Substandard non-accrual)		—		399		—		—		—		867		—		1,266		—		—		389		—		—		649		—		—		1,038
Current period gross charge-offs																		—		—		—		—		—		—		—		—		—

Commercial real estate: owner occupied
Internal Grade 1-3 (Pass low risk)	$	21,049	$	113,747	$	65,252	$	22,938	$	12,294	$	64,781	$	5,977	$	306,038	$	10,678	$	20,488	$	83,177	$	57,631	$	15,774	$	70,007	$	4,354	$	—	$	262,109
Internal Grade 4-7 (Pass normal risk)		162,232		189,775		87,189		81,957		88,019		61,081		15,966		686,219		36,478		175,809		197,176		80,169		75,569		130,435		15,836		—		711,472
Internal Grade 8-11 (Pass high risk and watch)		56,849		66,290		87,346		29,326		64,755		27,447		3,200		335,213		13,992		91,490		66,280		90,680		24,731		74,694		7,160		—		369,027
Internal Grade 12 (Special mention)		—		—		—		—		—		—		—		—		—		—		—		—		1,783		—		—		—		1,783
Internal Grade 13 (Substandard accrual)		4,143		430		6,042		2,847		3,425		11,854		—		28,741		2,235		5,867		2,810		6,394		1,073		13,501		—		—		31,880
Internal Grade 14 (Substandard non-accrual)		14		868		—		(4)		330		2,261		—		3,469		—		173		672		—		—		90		—		—		935
Current period gross charge-offs																		—		—		—		—		—		977		—		—		977

Commercial and industrial
Internal Grade 1-3 (Pass low risk)	$	29,353	$	27,282	$	26,549	$	6,945	$	1,994	$	2,313	$	50,244	$	144,680	$	4,723	$	35,177	$	34,665	$	22,229	$	5,280	$	2,982	$	41,278	$	—	$	146,334
Internal Grade 4-7 (Pass normal risk)		135,610		142,831		51,782		29,790		10,412		16,103		349,402		735,930		30,825		109,777		141,241		43,917		25,449		15,788		323,388		265		690,650
Internal Grade 8-11 (Pass high risk and watch)		88,284		67,652		53,440		18,638		3,141		7,918		274,261		513,334		31,697		138,837		47,164		30,107		12,490		9,159		278,502		1,518		549,474
Internal Grade 12 (Special mention)		86		—		—		453		—		—		2,654		3,193		—		—		—		—		—		—		—		—		—
Internal Grade 13 (Substandard accrual)		671		2,972		7,150		3,839		3,917		3,160		4,248		25,957		—		5,730		3,410		6,203		4,006		6,246		15,968		26,705		68,268
Internal Grade 14 (Substandard non-accrual)		308		85		7,882		—		3,500		303		—		12,078		—		209		171		5,314		—		2,446		2,667		—		10,807
Current period gross charge-offs																		—		34		—		—		25		—		—		—		59

Construction and land development
Internal Grade 1-3 (Pass low risk)	$	12,673	$	15,535	$	1,341	$	889	$	1,047	$	2,984	$	1	$	34,470	$	512	$	21,714	$	7,725	$	408	$	850	$	2,956	$	—	$	—	$	34,165
Internal Grade 4-7 (Pass normal risk)		272,658		210,391		63,325		13,191		3,252		1,947		48,263		613,027		75,718		338,646		171,342		32,119		909		3,477		40,251		—		662,462
Internal Grade 8-11 (Pass high risk and watch)		148,054		74,383		16,404		325		—		1,479		15,352		255,997		55,352		233,869		38,942		14,303		2,426		1,238		15,546		—		361,676
Internal Grade 12 (Special mention)		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Internal Grade 13 (Substandard accrual)		1,019		—		—		—		—		5,262		—		6,281		—		2,059		—		—		—		—		—		—		2,059
Internal Grade 14 (Substandard non-accrual)		—		—		—		—		—		1		—		1		—		—		—		—		—		—		—		—		—
Current period gross charge-offs																		—		—		—		—		—		—		—		—		—

Construction and land development - individuals
FICO less than 620	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
FICO between 620 and 720		781		223		—		—		981		—		—		1,985		1,263		2,466		—		—		—		957		—		—		4,686
FICO greater than 720		14,969		3,933		54		—		—		—		—		18,956		5,306		14,048		122		53		—		—		—		—		19,529
Substandard non-accrual		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—		—
Other ⁽¹⁾		4,198		—		—		—		—		—		—		4,198		(1)		375		—		—		—		—		—		—		374
Current period gross charge-offs																		—		—		—		—		—		—		—		—		—

1-4 family residential
FICO less than 620	$	1,184	$	733	$	779	$	541	$	3,538	$	21,699	$	266	$	28,740	$	—	$	1,475	$	710	$	768	$	408	$	24,602	$	251	$	—	$	28,214
FICO between 620 and 720		6,077		13,805		8,530		5,265		6,013		26,482		3,705		69,877		1,006		20,158		13,144		8,313		4,959		30,446		1,214		—		79,240
FICO greater than 720		334,135		806,223		109,048		46,361		29,057		48,786		3,171		1,376,781		59,086		576,614		776,329		103,300		43,510		70,756		3,876		59		1,633,530
Substandard non-accrual		—		—		(1)		—		260		12,589		—		12,848		—		542		—		—		—		9,763		—		—		10,305
Other ⁽¹⁾		78,521		18,571		1,616		2,403		577		4,082		1,254		107,024		1,955		24,279		15,595		1,405		2,317		3,469		4		—		49,024
Current period gross charge-offs																		—		—		—		—		—		73		—		—		73

Consumer
FICO less than 620	$	1,349	$	332	$	123	$	48	$	7	$	15	$	351	$	2,225	$	148	$	1,101	$	199	$	100	$	23	$	6	$	357	$	—	$	1,934
FICO between 620 and 720		3,226		1,736		575		453		35		378		1,923		8,326		1,836		2,868		778		451		287		52		1,940		6		8,218
FICO greater than 720		5,843		1,705		1,283		413		85		1		3,201		12,531		849		4,250		1,304		1,001		276		47		2,277		—		10,004
Substandard non-accrual		—		—		—		—		—		16		—		16		—		—		—		—		—		12		—		—		12
Other ⁽¹⁾		4,296		1,326		464		89		5		18		143		6,341		1,508		3,949		560		350		77		17		173		—		6,634
Current period gross charge-offs																		—		54		—		4		2		9		—		—		69

Total loans with credit quality measures	$	1,936,212	$	2,330,570	$	921,795	$	446,184	$	355,208	$	475,518	$	843,220	$	7,308,707	$	444,100	$	2,334,938	$	2,161,919	$	748,210	$	374,933	$	677,188	$	817,437	$	28,753	$	7,587,478
Commercial and industrial (mortgage warehouse lending)															$	223,028																	$	234,344
Commercial and industrial (Paycheck Protection Program loans)															$	1,097
Commercial and industrial (loans accounted for at fair value)															$	8,912																	$	9,437
Broker-Dealer (margin loans and correspondent receivables)															$	402,502																	$	361,587
Total loans held for investment															$	7,944,246																	$	8,192,846

(1) Loans classified in this category were assigned a FICO score for credit modeling purposes.

2221

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

6. Allowance for Credit Losses

Available for Sale Securities and Held to Maturity Securities

The Company has evaluated available for sale debt securities that are in an unrealized loss position and has determined that any decline in value is 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 ~~September 30, 2022.~~March 31, 2023. In addition, as of ~~September 30, 2022,~~March 31, 2023, the Company had not made a decision to sell any of its debt securities held, nor did the Company consider it more likely than not that it would be required to sell such securities before recovery of their amortized cost basis. The Company does not expect to have credit losses associated with the debt securities and no allowance was recognized on the debt securities portfolio.

Loans Held for Investment

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. Management’s methodology for determining the allowance for credit losses uses the current expected credit losses (“CECL”) standard. Management considers the level of allowance for credit losses to be a reasonable and supportable estimate of expected credit losses inherent within the loans held for investment portfolio as of ~~September 30, 2022.~~March 31, 2023. While the Company believes it has an appropriate allowance for the existing loan portfolio at ~~September 30, 2022,~~March 31, 2023, additional provision for losses on existing loans may be necessary in the future. 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~~changes in macroeconomic forecasts and ~~macroeconomic conditions and forecasts.~~loan cash flow assumptions. In addition to the allowance for credit losses, the Company maintains a separate allowance for credit losses related to off-balance sheet credit exposures, including unfunded loan commitments, and this amount is included in other liabilities within the consolidated balance sheets. For further information on the policies that govern the estimation of the allowances for credit losses levels, see Note 1 to the consolidated financial statements in the Company’s ~~2021~~2022 Form 10-K.

One of the most significant judgments involved in estimating the Company’s allowance for credit losses relates to the macroeconomic forecasts used to estimate credit losses over the reasonable and supportable forecast period. To determine our best estimate of expected credit losses as of ~~September 30, 2022,~~March 31, 2023, the Company utilized a single macroeconomic alternative scenario, or S7, published by Moody’s Analytics in ~~September 2022~~March 2023 that was updated to reflect the U.S. economic outlook. This alternative economic scenario expects inflation ~~to rise more~~persistently higher than the baseline scenario as uneven supply chain and labor market conditions continue from the ~~military~~ conflict between Russia and Ukraine, ~~persists longer than anticipated. Inflation continues~~consumer and business confidence declines due to ~~trend higher than expectation as supply-chain issues~~recent bank failures and ~~reductions in disposable income persist~~tighter lending standards, and still elevated interest rates contribute to a mild U.S recession during the ~~reasonable and supportable period.~~fourth quarter of 2023 continuing into 2024. Federal Reserve monetary policy raises interest rates ~~faster and higher than the baseline scenario where the~~to a federal funds rate ~~increases~~target of 5% to ~~3.9%~~5.25% by the third quarter of 2023. ~~Other significant~~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. Changes in these assumptions and forecasts of economic conditions could significantly affect the estimate of expected credit losses at the balance sheet date or between reporting periods.

The COVID-19 pandemic has adversely impacted financial markets and overall economic conditions, and may continue to have implications on borrowers across our lending portfolios. Significant judgment is required to estimate the severity and duration of the current economic uncertainties, as well as its potential impact on borrower defaults and loss severity. In particular, macroeconomic conditions and forecasts are rapidly changing and remain highly uncertain.

During the three ~~and nine~~ months ended ~~September 30, 2021,~~March 31, 2022, the ~~decreases~~increase in the allowance ~~reflect improvement~~reflected a slower U.S economic outlook since the prior quarter, significantly offset by decreases in ~~both realized economic results~~specific reserve and the macroeconomic outlook and were significantly comprised of net reversals of credit losses on expected losses of collectively evaluated loans of $11.0 million and $45.2 million, respectively. Such reversals were primarily due to improvements in both macroeconomic forecast assumptions and credit quality metrics on COVID-19 impacted industry sector exposures.positive risk rating grade migration. The net impact to the allowance ~~from~~of changes associated with individually evaluated loans during the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 included a provision for credit losses of ~~$5.2~~$0.3 million, ~~and $5.6 million, respectively.~~while collectively evaluated loans included a reversal of credit losses of $0.2 million. The changes in the allowance for credit losses during the noted ~~periods~~period were primarily attributable to the Bank and also reflected other factors including, but not limited to, loan mix, and changes in loan balances and qualitative factors from the prior quarter. The changes in the allowance during the three months ended March 31, 2022 was also impacted by net charge-offs of $0.3 million.

During the three months ended March 31, 2023, the provision for credit losses reflected a build in the allowance related to loan portfolio changes since the prior quarter, offset by an updated economic outlook with a mild U.S. recession from fourth quarter of 2023 and recovery from the third quarter of 2024 compared to prior quarter’s U.S. recession assumption during the last three quarters of 2023. The net impact to the allowance of changes associated with

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

~~loan balances~~individually and ~~qualitative factors from the prior quarter. The changes in the allowance during both the three and nine months ended September 30, 2021 were also impacted by net recoveries of $0.1 million.~~

During the three months ended September 30, 2022, the reversal of credit losses reflected modest improvements in the U.S. economic outlook compared to assumptions in the prior quarter outlook, and in specific reserves and credit metrics since the prior quarter, while the increase in provision for credit losses during the nine months ended September 30, 2022 was driven by a deteriorating U.S. economic outlook since December 31, 2021. The net impact to the allowance of changes associated with individuallycollectively evaluated loans during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 included ~~reversals of credit losses of $0.2 million and $1.2 million, respectively, while collectively evaluated loans included a reversal of credit losses of $0.5 million, compared to~~ a provision for credit losses on individually evaluated loans of ~~$5.9~~$0.7 million ~~respectively. The changes in~~attributable to the ~~allowance~~broker-dealer loan portfolio and a provision for credit losses ~~during the noted periods were primarily attributable to~~on collectively evaluated loans at the Bank ~~and also reflected other factors including, but not limited~~of $1.5 million due to ~~loan mix, and changes~~recent updates in internal risk ratings, growth in funded loan balances and ~~qualitative factors from~~renewals during the ~~prior~~ quarter. The changes in the allowance during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 were also impacted by net charge-offs of ~~$2.7 million and $4.2 million, respectively.~~$0.4 million.

Changes in the allowance for credit losses for loans held for investment, distributed by portfolio segment, are shown below (in thousands).


	Balance,		Provision for				Recoveries on		Balance,
	Beginning of		(Reversal of)		Loans		Charged Off		End of
Three Months Ended March 31, 2023	Period		Credit Losses		Charged Off		Loans		Period
Commercial real estate	$	63,255	$	(768)	$	(977)	$	11	$	61,521
Commercial and industrial		16,035		(53)		(59)		692		16,615
Construction and land development		6,051		(52)		—		—		5,999
1-4 family residential		9,313		2,434		(73)		17		11,691
Consumer		554		39		(69)		39		563
Broker-dealer		234		731		—		—		965
Total	$	95,442	$	2,331	$	(1,178)	$	759	$	97,354


	Balance,		Provision for				Recoveries on		Balance,		Balance,		Provision for				Recoveries on		Balance,
	Beginning of		(Reversal of)		Loans		Charged Off		End of		Beginning of		(Reversal of)		Loans		Charged Off		End of
Three Months Ended September 30, 2022	Period		Credit Losses		Charged Off		Loans		Period
Three Months Ended March 31, 2022											Period		Credit Losses		Charged Off		Loans		Period
Commercial real estate	$	63,719	$	(560)	$	—	$	41	$	63,200	$	59,354	$	975	$	—	$	32	$	60,361
Commercial and industrial		19,836		(1,002)		(3,096)		370		16,108		21,982		(1,550)		(1,209)		907		20,130
Construction and land development		4,996		(228)		—		—		4,768		4,674		841		—		—		5,515
1-4 family residential		5,554		1,049		(14)		23		6,612		4,589		(247)		(15)		13		4,340
Consumer		542		91		(149)		90		574		578		(69)		(113)		103		499
Broker-dealer		651		(130)		—		—		521		175		165		—		—		340
Total	$	95,298	$	(780)	$	(3,259)	$	524	$	91,783	$	91,352	$	115	$	(1,337)	$	1,055	$	91,185

Balance,

Provision for



Recoveries on

Balance,

Beginning of

(Reversal of)

Loans

Charged Off

End of
Nine Months Ended September 30, 2022

Period

Credit Losses

Charged Off

Loans

Period
Commercial real estate

$
59,354

$
3,762

$
—

$
84

$
63,200
Commercial and industrial

21,982

(1,681)

(6,197)

2,004

16,108
Construction and land development

4,674

94

—

—

4,768
1-4 family residential

4,589

2,014

(62)

71

6,612
Consumer

578

136

(361)

221

574
Broker-dealer

175

346

—

—

521
Total

$
91,352

$
4,671

$
(6,620)

$
2,380

$
91,783

Balance,

Provision for



Recoveries on

Balance,

Beginning of

(Reversal of)

Loans

Charged Off

End of
Three Months Ended September 30, 2021

Period

Credit Losses

Charged Off

Loans

Period
Commercial real estate

$
77,633

$
(8,993)

$
(124)

$
19

$
68,535
Commercial and industrial

27,866

2,398

(317)

598

30,545
Construction and land development

5,185

(85)

—

—

5,100
1-4 family residential

3,659

946

(87)

20

4,538
Consumer

592

(41)

(73)

26

504
Broker-dealer

334

(44)

—

—

290
Total

$
115,269

$
(5,819)

$
(601)

$
663

$
109,512

Balance,

Provision for



Recoveries on

Balance,

Beginning of

(Reversal of)

Loans

Charged Off

End of
Nine Months Ended September 30, 2021

Period

Credit Losses

Charged Off

Loans

Period
Commercial real estate

$
109,629

$
(41,037)

$
(310)

$
253

$
68,535
Commercial and industrial

27,703

2,848

(1,738)

1,732

30,545
Construction and land development

6,677

(1,577)

—

—

5,100
1-4 family residential

3,946

358

(248)

482

4,538
Consumer

876

(317)

(226)

171

504
Broker-dealer

213

77

—

—

290
Total

$
149,044

$
(39,648)

$
(2,522)

$
2,638

$
109,512

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

Unfunded Loan Commitments

The Bank uses a process similar to that used in estimating the allowance for credit losses on the funded portion to estimate the allowance for credit loss on unfunded loan commitments. 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. The expected losses on unfunded commitments align with statistically calculated parameters used to calculate the allowance for credit losses on the funded portion. There is no reserve calculated for letters of credit as they are issued primarily as credit enhancements and the likelihood of funding is low.

Changes in the allowance for credit losses for loans with off-balance sheet credit exposures are shown below (in thousands).


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2022		2021		2022		2021		2023		2022
Balance, beginning of period	$	6,931	$	7,981	$	5,880	$	8,388	$	7,784	$	5,880
Other noninterest expense		87		(1,183)		1,138		(1,590)		(979)		607
Balance, end of period	$	7,018	$	6,798	$	7,018	$	6,798	$	6,805	$	6,487

During the three ~~and nine~~ months ended ~~September 30, 2021, the decreases in the reserve for unfunded commitments were primarily due to improvements in loan expected loss rates. During the three months ended September 30,~~March 31, 2022, the increase in the reserve for unfunded commitments was primarily due to ~~an increase in available commitment balances, while the increase in the reserve for unfunded commitments during the nine months ended September 30, 2022 was due to~~ increases in both loan expected loss rates and available commitment balances. During the three months ended March 31, 2023, the decrease in the reserve for unfunded commitments was primarily due to decreases in both available commitment balances and expected loss rates.

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

7. Mortgage Servicing Rights

The following tables present the changes in fair value of the Company’s MSR asset and other information related to the serviced portfolio (dollars in thousands).


	Three Months Ended September 30,				Nine Months Ended September 30,						Three Months Ended March 31,
	2022		2021		2022			2021			2023			2022
Balance, beginning of period	$	121,688	$	124,497	$	86,990		$	143,742		$	100,825		$	86,990
Additions		29,340		20,252		47,850			70,368			13,210			7,301
Sales		—		(31,366)		(1,876)			(116,000)			—			(1,876)
Changes in fair value:
Due to changes in model inputs or assumptions ⁽¹⁾		7,942		3,525		32,035			32,199			(9,865)			10,856
Due to customer payoffs		(2,431)		(5,977)		(8,460)			(19,378)			(856)			(2,796)
Balance, end of period	$	156,539	$	110,931	$	156,539		$	110,931		$	103,314		$	100,475

					September 30,			December 31,			March 31,			December 31,
					2022			2021			2023			2022
Mortgage loans serviced for others ⁽²⁾					$	8,277,325		$	6,355,927		$	5,739,393		$	5,144,558
MSR asset as a percentage of serviced mortgage loans						1.89	%		1.37	%		1.80	%		1.96	%

(1)

Primarily represents normal customer payments, the impact of changes in interest rates, changes in discount rates and prepayment speed assumptions, and the refinement of other MSR model assumptions. Included in the three and nine months ended September 30, 2021 are MSR asset fair value adjustments totaling $3.3 million and $22.2 million, respectively, which reflect the difference between the MSR carrying value and the sales price reflected in the letter of intent to sell the applicable MSR assets.

(2)

Represents unpaid principal balance of mortgage loans serviced for others.

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

The key assumptions used in measuring the fair value of the Company’s MSR asset were as follows.


	September 30,			December 31,			March 31,		December 31,
	2022			2021			2023		2022
Weighted average constant prepayment rate		8.06	%		10.02	%	9.08	%	8.14	%
Weighted average discount rate		12.09	%		14.32	%	12.08	%	12.10	%
Weighted average life (in years)		8.4			7.1		7.9		8.4

A sensitivity analysis of the fair value of the Company’s MSR asset to certain key assumptions is presented in the following table (in thousands).


	September 30,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Constant prepayment rate:
Impact of 10% adverse change	$	(3,027)	$	(2,603)	$	(3,738)	$	(3,288)
Impact of 20% adverse change		(5,869)		(5,315)		(7,228)		(6,375)
Discount rate:
Impact of 10% adverse change		(4,439)		(4,070)		(4,680)		(4,797)
Impact of 20% adverse change		(8,466)		(7,753)		(8,938)		(9,147)

This sensitivity analysis presents the effect of hypothetical changes in key assumptions on the fair value of the MSR asset. The effect of such hypothetical change in assumptions generally cannot be extrapolated because the relationship of the change in one key assumption to the change in the fair value of the MSR asset is not linear. In addition, in the analysis, the impact of an adverse change in one key assumption is calculated independent of any impact on other assumptions. In reality, changes in one assumption may change another assumption.

Contractually specified servicing fees, late fees and ancillary fees earned of ~~$9.9~~$7.4 million and ~~$15.6~~$8.5 million during the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $27.3 million and $47.9 million during the nine months ended September 30, 2022 and 2021,~~ respectively, were included in net gains from sale of loans and other mortgage production income within the consolidated statements of operations.

~~8. Deposits~~

~~Deposits are summarized as follows (in thousands).~~

September 30,

December 31,

2022

2021
Noninterest-bearing demand

$
4,546,816

$
4,577,183
Interest-bearing:

Demand accounts

3,456,342

3,270,522
Brokered - demand

5,631

114,393
Money market

2,149,812

3,433,341
Brokered - money market

8,717

98,614
Savings

316,788

345,795
Time

852,431

962,752
Brokered - time

15,477

15,477

$
11,352,014

$
12,818,077

~~At September 30, 2022, remaining maturities of uninsured time deposits greater than $250,000 were $358.2 million.~~

2624

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

8. Deposits

Deposits are summarized as follows (in thousands).


	March 31,		December 31,
	2023		2022
Noninterest-bearing demand	$	3,807,878	$	3,968,862
Interest-bearing:
Demand accounts		4,549,867		4,110,418
Brokered - demand		4,979		5,336
Money market		1,517,513		2,045,554
Brokered - money market		9,416		9,031
Savings		298,797		312,140
Time		908,697		864,408
	$	11,097,147	$	11,315,749

At March 31, 2023, remaining maturities of estimated uninsured time deposits greater than $250,000 were $408.4 million.

9. Short-term Borrowings

Short-term borrowings are summarized as follows (in thousands).


	September 30,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Federal funds purchased	$	439,200	$	171,925	$	448,158	$	397,108
Securities sold under agreements to repurchase		302,299		191,547		363,478		297,856
Federal Home Loan Bank		—		—		450,000		—
Short-term bank loans		7,000		142,000		84,000		57,500
Commercial paper		193,810		353,972		227,158		217,592
	$	942,309	$	859,444	$	1,572,794	$	970,056

Federal Funds Purchased and Securities Sold under Agreements to Repurchase

Federal funds purchased and securities sold under agreements to repurchase generally mature one to ninety days from the transaction date, on demand, or on some other short-term basis. The Bank and the Hilltop Broker-Dealers execute transactions to sell securities under agreements to repurchase with both customers and other broker-dealers. Securities involved in these transactions are held by the Bank, the Hilltop Broker-Dealers or a third-party dealer.

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Information concerning federal funds purchased and securities sold under agreements to repurchase is shown in the following tables (dollars in thousands).


	Nine Months Ended September 30,						Three Months Ended March 31,
	2022			2021			2023			2022
Average balance during the period	$	530,180		$	328,853		$	706,400		$	429,000
Average interest rate during the period		1.36	%		0.37	%		4.81	%		0.34	%

	September 30,			December 31,			March 31,			December 31,
	2022			2021			2023			2022
Average interest rate at end of period		2.91	%		0.31	%		4.99	%		4.37	%
Securities underlying the agreements at end of period:
Carrying value	$	343,655		$	191,483		$	363,580		$	296,075
Estimated fair value	$	362,237		$	205,734		$	391,040		$	318,409

Federal Home Loan Bank (“FHLB”)

FHLB short-term borrowings mature over terms not exceeding 365 days and are collateralized by FHLB Dallas stock, nonspecified real estate loans and certain specific commercial real estate loans. ~~The Company had no~~Other information regarding FHLB short-term borrowings ~~during~~is shown in the ~~three and nine months ended September 30, 2022 and 2021.~~following table (dollars in thousands).


	Three Months Ended March 31,
	2023			2022
Average balance during the period	$	146,667		$	—
Average interest rate during the period		5.02	%		—	%

Short-Term Bank Loans

The Hilltop Broker-Dealers use short-term bank loans periodically to finance securities owned, margin loans to customers and correspondents and underwriting activities. Interest on the borrowings varies with the federal funds rate. The weighted average interest rate on borrowings at ~~September 30, 2022~~March 31, 2023 was ~~4.25%~~6.00%.

Commercial Paper

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

redeemable prior to maturity or subject to voluntary prepayment and do not bear interest, but are sold at a discount to par. The CP Notes are secured by a pledge of collateral owned by Hilltop Securities. As of ~~September 30, 2022,~~March 31, 2023, the weighted average maturity of the CP Notes was ~~145~~137 days at a rate of ~~3.16%~~5.57%, with a weighted average remaining life of 5973 days. At ~~September 30, 2022,~~March 31, 2023, the aggregate amount outstanding under these secured arrangements was ~~$193.8~~$227.2 million, which was collateralized by securities held for ~~firm~~Hilltop Securities accounts valued at ~~$213.1~~$249.1 million.

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

10. Notes Payable

Notes payable consisted of the following (in thousands).


	September 30,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Senior Notes due April 2025, net of discount of $746 and $886, respectively	$	149,253	$	149,114
Subordinated Notes due May 2030, net of discount of $634 and $704, respectively		49,366		49,296
Subordinated Notes due May 2035, net of discount of $2,084 and $2,220, respectively		147,916		147,780
Senior Notes due April 2025, net of discount of $651 and $699, respectively					$	149,349	$	149,301
Subordinated Notes due May 2030, net of discount of $586 and $610, respectively						49,414		49,390
Subordinated Notes due May 2035, net of discount of $1,990 and $2,037, respectively						148,011		147,963
Ventures Management lines of credit		43,819		41,714		29,636		—
	$	390,354	$	387,904	$	376,410	$	346,654

11. Leases

Supplemental balance sheet information related to finance leases is as follows (in thousands).


	September 30,			December 31,	March 31,		December 31,
	2022			2021	2023			2022
Finance leases:
Premises and equipment	$	7,780	$	7,780	$	7,780	$	7,780
Accumulated depreciation		(5,800)		(5,358)		(6,095)		(5,948)
Premises and equipment, net	$	1,980	$	2,422	$	1,685	$	1,832

The components of lease costs, including short-term lease costs, are as follows (in thousands).


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2022		2021		2022		2021		2023		2022
Operating lease cost	$	9,121	$	9,727	$	28,078	$	29,130	$	8,729	$	9,606
Less operating lease and sublease income		(633)		(343)		(1,762)		(1,024)		(633)		(569)
Net operating lease cost	$	8,488	$	9,384	$	26,316	$	28,106	$	8,096	$	9,037

Finance lease cost:
Amortization of ROU assets	$	147	$	147	$	442	$	442	$	147	$	147
Interest on lease liabilities		118		129		363		396		112		124
Total finance lease cost	$	265	$	276	$	805	$	838	$	259	$	271

Supplemental cash flow information related to leases is as follows (in thousands).


	Nine Months Ended September 30,				Three Months Ended March 31,
	2022		2021		2023		2022
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	27,387	$	28,160	$	10,024	$	9,767
Operating cash flows from finance leases		366		396		113		125
Financing cash flows from finance leases		563		509		199		184
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	$	12,336	$	37,086	$	4,924	$	1,276
Finance leases		—		—		—		—

2827

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Information regarding the lease terms and discount rates of the Company’s leases is as follows.


	September 30, 2022			December 31, 2021			March 31, 2023			December 31, 2022
	Weighted Average			Weighted Average			Weighted Average			Weighted Average
	Remaining Lease	Weighted Average		Remaining Lease	Weighted Average		Remaining Lease	Weighted Average		Remaining Lease	Weighted Average
Lease Classification	Term (Years)	Discount Rate		Term (Years)	Discount Rate		Term (Years)	Discount Rate		Term (Years)	Discount Rate
Operating	5.6	3.85	%	5.9	3.89	%	5.5	4.05	%	5.7	3.89	%
Finance	4.1	4.88	%	4.8	4.84	%	3.8	4.91	%	4.0	4.89	%

Future minimum lease payments under lease agreements as of ~~September 30, 2022,~~March 31, 2023, are presented below (in thousands).


	Operating Leases		Finance Leases		Operating Leases		Finance Leases
2022	$	1,462	$	312
2023		33,554		1,280	$	26,160	$	968
2024		25,309		1,163		28,588		1,163
2025		18,642		886		21,979		886
2026		15,050		813		17,116		813
2027						13,593		448
Thereafter		40,636		598		29,336		149
Total minimum lease payments		134,653		5,052		136,772		4,427
Less amount representing interest		(14,018)		(1,448)		(13,894)		(1,222)
Lease liabilities	$	120,635	$	3,604	$	122,878	$	3,205

As of ~~September 30, 2022,~~March 31, 2023, the Company had an additional operating ~~leases~~lease that ~~have~~has not yet commenced with aggregate future minimum lease payments of approximately $0.1 million. ~~These~~This operating ~~leases~~lease commenced in ~~October 2022~~April 2023 with a lease ~~terms~~term of ~~five~~three years.

12. Income Taxes

The Company applies an estimated annual effective rate to interim period pre-tax income to calculate the income tax provision for the quarter in accordance with the principal method prescribed by the accounting guidance established for computing income taxes in interim periods. The Company’s effective tax rates were ~~21.8%~~11.6% and ~~22.8%~~19.4% for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and 22.7% and 23.2%~~respectively. The effective tax rate for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 was lower than the applicable statutory rate primarily due to the discrete impact of restricted stock vesting during the quarter. During the three months ended March 31, 2023, the effective tax rate was lower than the applicable statutory rate primarily due to the impacts of excess tax benefits on share-based payment awards, investments in tax-exempt instruments and ~~2021, respectively.~~changes in accumulated tax reserves, partially offset by nondeductible expenses.

13. Commitments and Contingencies

Legal Matters

The Company is subject to loss contingencies related to litigation, claims, investigations and legal and administrative cases and proceedings arising in the ordinary course of business. The Company evaluates these contingencies based on information currently available, including advice of counsel. The Company establishes accruals for those matters when a loss contingency is considered probable and the related amount is reasonably estimable. Any accruals are periodically reviewed and may be adjusted as circumstances change. A portion of the Company’s exposure with respect to loss contingencies may be offset by applicable insurance coverage. In determining the amounts of any accruals or estimates of possible loss contingencies, the Company does not take into account the availability of insurance coverage. When it is practicable, the Company estimates loss contingencies for possible litigation and claims, whether or not there is an accrued probable loss. When the Company is able to estimate such probable losses, and when it estimates that it is reasonably possible it could incur losses in excess of amounts accrued, the Company is required to make a disclosure of the aggregate estimation. As available information changes, however, the matters for which the Company is able to estimate, as well as the estimates themselves, will be adjusted accordingly.

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

Assessments of litigation and claims exposures are difficult due to many factors that involve inherent unpredictability. Those factors include the following: the varying stages of the proceedings, particularly in the early stages; unspecified, unsupported, or uncertain damages; damages other than compensatory, such as punitive damages; a matter presenting meaningful legal uncertainties, including novel issues of law; multiple defendants and jurisdictions; whether discovery

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

has begun or is complete; whether meaningful settlement discussions have commenced; and whether the claim involves a class action and if so, how the class is defined. As a result of some of these factors, the Company may be unable to estimate reasonably possible losses with respect to some or all of the pending and threatened litigation and claims asserted against the Company.

The Company is involved in information-gathering requests and investigations (both formal and informal), as well as reviews, examinations and proceedings (collectively, “Inquiries”) by various governmental regulatory agencies, law enforcement authorities and self-regulatory bodies regarding certain of its businesses, business practices and policies, as well as the conduct of persons with whom it does business. Additional Inquiries will arise from time to time. In connection with those Inquiries, the Company receives document requests, subpoenas and other requests for information. The Inquiries could develop into administrative, civil or criminal proceedings or enforcement actions that could result in consequences that have a material effect on the Company’s consolidated financial position, results of operations or cash flows as a whole. Such consequences could include adverse judgments, findings, settlements, penalties, fines, orders, injunctions, restitution, or alterations in the Company’s business practices, and could result in additional expenses and collateral costs, including reputational damage.

On June 8, 2022, WR Investments, LP (“WR”) filed claims against Hilltop Securities, et al. through FINRA Dispute Resolution, Midwest Region. WR alleges it suffered a $13.0 million loss in its sale of subordinated bonds related to a portfolio of senior living facilities sold by an affiliate of WR. Hilltop Securities believes the claims are without merit and intends to vigorously defend against such claims. There can be no assurance, however, that Hilltop Securities will be successful. At present, Hilltop Securities is unable to estimate the probability or amount of potential losses, if any, related to these claims.

In September 2020, PrimeLending received an investigative inquiry from the United States Attorney for the Western District of Virginia regarding PrimeLending’s float down option. The United States Attorney has issued grand jury subpoenas to PrimeLending and PlainsCapital Bank for additional materials regarding this matter. PrimeLending has, and PrimeLending and PlainsCapital Bank will, cooperate with requests for information with respect to this matter.

While the final outcome of litigation and claims exposures or of any Inquiries is inherently unpredictable, management is currently of the opinion that the outcome of pending and threatened litigation and inquiries will not, except related to specific matters disclosed above, have a material effect on the Company’s business, consolidated financial position, results of operations or cash flows as a whole. However, in the event of unexpected future developments, it is reasonably possible that an adverse outcome in any matter, including the matters discussed above, could be material to the Company’s business, consolidated financial position, results of operations or cash flows for any particular reporting period of occurrence.

Indemnification Liability Reserve

The mortgage origination segment may be responsible to agencies, investors, or other parties for errors or omissions relating to its representations and warranties that each loan sold meets certain requirements, including representations as to underwriting standards and the validity of certain borrower representations in connection with the loan. If determined to be at fault, the mortgage origination segment either repurchases the affected loan from or indemnifies the claimant against loss. The mortgage origination segment has established an indemnification liability reserve for such probable losses.

Generally, the mortgage origination segment first becomes aware that an agency, investor, or other party believes a loss has been incurred on a sold loan when it receives a written request from the claimant to repurchase the loan or reimburse the claimant’s losses. Upon completing its review of the claimant’s request, the mortgage origination segment ~~establishes a specific claims reserve for the loan if it concludes its obligation to the claimant is both probable and reasonably estimable.~~

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establishes a specific claims reserve for the loan if it concludes its obligation to the claimant is both probable and reasonably estimable.

An additional reserve has been established for probable agency, investor or other party losses that may have been incurred, but not yet reported to the mortgage origination segment based upon a reasonable estimate of such losses. Factors considered in the calculation of this reserve include, but are not limited to, the total volume of loans sold exclusive of specific claimant requests, actual claim settlements and the severity of estimated losses resulting from future claims, and the mortgage origination segment’s history of successfully curing defects identified in claim requests. In addition, 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.

While the mortgage origination segment’s sales contracts typically include borrower early payment default repurchase provisions, these provisions have not been a primary driver of claims to date, and therefore, are not a primary factor considered in the calculation of this reserve.

At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the mortgage origination segment’s indemnification liability reserve totaled ~~$22.1~~$18.3 million and ~~$27.4~~$20.5 million, respectively. The provision for indemnification losses was ~~$0.1~~$0.3 million and ~~$2.5~~$0.5 million during the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $1.3 million and $8.0 million during the nine months ended September 30, 2022 and 2021,~~ respectively.

The following tables provide for a rollforward of claims activity for loans put-back to the mortgage origination segment based upon an alleged breach of a representation or warranty with respect to a loan sold and related indemnification liability reserve activity (in thousands).


	Representation and Warranty Specific Claims								Representation and Warranty Specific Claims
	Activity - Origination Loan Balance								Activity - Origination Loan Balance
	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2022		2021		2022		2021		2023		2022
Balance, beginning of period	$	28,715	$	32,763	$	31,407	$	30,085	$	31,244	$	31,407
Claims made		14,247		5,412		42,305		19,100		14,415		9,842
Claims resolved with no payment		(4,378)		(4,217)		(12,352)		(9,088)		(5,548)		(4,521)
Repurchases		(11,320)		(3,981)		(34,096)		(9,238)		(9,908)		(6,457)
Indemnification payments		—		(267)		—		(1,149)		(3,006)		—
Balance, end of period	$	27,264	$	29,710	$	27,264	$	29,710	$	27,197	$	30,271

	Indemnification Liability Reserve Activity								Indemnification Liability Reserve Activity
	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2022		2021		2022		2021		2023		2022
Balance, beginning of period	$	23,750	$	26,372	$	27,424	$	21,531	$	20,528	$	27,424
Additions for new sales		608		2,702		2,123		8,568		347		753
Repurchases		(1,591)		(2,687)		(6,367)		(3,086)		(2,360)		(565)
Early payment defaults		(90)		(116)		(212)		(152)		(98)		(71)
Indemnification payments		—		(78)		—		(342)		(147)		—
Change in reserves for loans sold in prior years		(553)		(220)		(844)		(546)		—		(291)
Balance, end of period	$	22,124	$	25,973	$	22,124	$	25,973	$	18,270	$	27,250

	September 30,		December 31,						March 31,		December 31,
	2022		2021						2023		2022
Reserve for Indemnification Liability:
Specific claims	$	394	$	345					$	530	$	627
Incurred but not reported claims		21,730		27,079						17,740		19,901
Total	$	22,124	$	27,424					$	18,270	$	20,528

Although management considers the total indemnification liability reserve to be appropriate, there may be changes in the reserve over time to address incurred losses due to unanticipated adverse changes in the economy and historical loss patterns, discrete events adversely affecting specific borrowers or industries, and/or actions taken by institutions or investors. The impact of such matters is considered in the reserving process when probable and estimable.

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14. Financial Instruments with Off-Balance Sheet Risk

Banking

The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit that involve varying degrees of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. Such financial instruments are recorded in the consolidated financial statements when they are funded or related fees are incurred or received. The contract amounts of those instruments reflect the extent of involvement (and therefore the exposure to credit loss) the Bank has in particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer provided that the terms established in the contract are met. Commitments generally have fixed expiration dates and may require payment of fees. Because some commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third-party. These letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan commitments to customers.

In the aggregate, the Bank had outstanding unused commitments to extend credit of ~~$2.5~~$2.4 billion at ~~September 30, 2022~~March 31, 2023 and outstanding financial and performance standby letters of credit of ~~$100.3~~$72.0 million at ~~September 30, 2022.~~March 31, 2023.

The Bank uses the same credit policies in making commitments and standby letters of credit as it does for loans held for investment. The amount of collateral obtained, if deemed necessary, in these transactions is based on management’s credit evaluation of the borrower. Collateral held varies but may include real estate, accounts receivable, marketable securities, interest-bearing deposit accounts, inventory, and property, plant and equipment.

Broker-Dealer

In the normal course of business, 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 accounts of the Hilltop Broker-Dealers, use of derivatives to support certain non-profit housing organization clients and to hedge changes in the fair value of certain securities, 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.

15. Stock-Based Compensation

Since 2012, the Company has issued stock-based incentive awards pursuant to the Hilltop Holdings Inc. 2012 Equity Incentive Plan (the “2012 Plan”). In July 2020, pursuant to stockholders’ approval, the Company adopted the Hilltop Holdings Inc. 2020 Equity Incentive Plan (the “2020 Plan”). The 2020 Plan serves as successor to the 2012 Plan.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ Hilltop granted ~~16,501~~5,101 and ~~12,957~~5,064 shares of common stock, respectively, pursuant to the 2020 Equity Plan to certain non-employee members of the Company’s board of directors for services rendered to the Company.

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Restricted Stock Units

The following table summarizes information about nonvested restricted stock unit (“RSU”) activity for the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 (shares in thousands).


		RSUs				RSUs
			Weighted				Weighted
			Average				Average
			Grant Date				Grant Date
		Outstanding	Fair Value			Outstanding	Fair Value
Balance, December 31, 2021		1,869	$	23.16
Balance, December 31, 2022					Balance, December 31, 2022	1,548	$	28.09
	Granted	548	$	33.25	Granted	476	$	34.39
	Vested/Released	(614)	$	19.30	Vested/Released	(578)	$	21.72
	Forfeited	(136)	$	24.50	Forfeited	-	$	-
Balance, September 30, 2022		1,667	$	27.79
Balance, March 31, 2023					Balance, March 31, 2023	1,446	$	32.65

Vested/Released RSUs include an aggregate of ~~135,249~~99,176 shares withheld to satisfy employee statutory tax obligations during the ~~nine~~three months ended ~~September 30, 2022.~~March 31, 2023.

During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, the Compensation Committee of the board of directors of the Company awarded certain executives and key employees an aggregate of ~~474,985~~383,692 RSUs pursuant to the 2020 Equity Plan. Of the RSUs granted during the ~~nine~~three months ended ~~September 30, 2022, 327,377~~March 31, 2023, 295,619 that were outstanding at ~~September 30, 2022,~~March 31, 2023, are subject to time-based vesting conditions and generally cliff vest on the third anniversary of the grant date. Of the RSUs granted during the ~~nine~~three months ended ~~September 30, 2022, 135,558~~March 31, 2023, 88,073 that were outstanding at ~~September 30, 2022~~March 31, 2023, provide for cliff vesting based upon the achievement of certain performance goals over a three-year period.

At ~~September 30, 2022,~~March 31, 2023, in the aggregate, ~~1,259,181~~1,071,584 of the outstanding RSUs are subject to time-based vesting conditions and generally cliff vest on the third anniversary of the grant date, and ~~408,458~~374,299 outstanding RSUs cliff vest based upon the achievement of certain performance goals over a three-year period. At ~~September 30, 2022~~March 31, 2023, unrecognized compensation expense related to outstanding RSUs of ~~$22.0~~$25.9 million is expected to be recognized over a weighted average period of ~~1.22~~1.66 years.

16. Regulatory Matters

Banking and Hilltop

PlainsCapital, which includes the Bank and PrimeLending, and Hilltop are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct, material effect on the consolidated financial statements. The regulations require PlainsCapital and Hilltop to meet specific capital adequacy guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company performs reviews of the classification and calculation of risk-weighted assets to ensure accuracy and compliance with the Basel III regulatory capital requirements as implemented by the Board of Governors of the Federal Reserve System. The capital classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the companies to maintain minimum amounts and ratios (set forth in the following table) of Tier 1 capital (as defined in the regulations) to total average assets (as defined), and minimum ratios of common equity Tier 1, Tier 1 and total capital (as defined) to risk-weighted assets (as defined).

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 the end of the period (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 ~~September 30, 2022~~March 31, 2023 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												Minimum
									Capital												Capital
									Requirements												Requirements
									Including												Including
									Conservation		To Be Well										Conservation		To Be Well
	September 30, 2022				December 31, 2021				Buffer		Capitalized		March 31, 2023				December 31, 2022				Buffer		Capitalized
	Amount		Ratio		Amount		Ratio		Ratio		Ratio		Amount		Ratio		Amount		Ratio		Ratio		Ratio
Tier 1 capital (to average assets):
PlainsCapital	$	1,404,288	10.29	%	$	1,469,695	10.20	%	4.0	%	5.0	%	$	1,418,348	10.69	%	$	1,405,164	10.26	%	4.0	%	5.0	%
Hilltop		1,881,289	11.41	%		2,262,356	12.58	%	4.0	%	N/A			1,910,810	11.82	%		1,900,701	11.47	%	4.0	%	N/A
Common equity Tier 1 capital (to risk-weighted assets):
PlainsCapital		1,404,288	14.68	%		1,469,695	16.00	%	7.0	%	6.5	%		1,418,348	14.97	%		1,405,164	14.98	%	7.0	%	6.5	%
Hilltop		1,881,289	17.45	%		2,262,356	21.22	%	7.0	%	N/A			1,910,810	17.99	%		1,900,701	18.23	%	7.0	%	N/A
Tier 1 capital (to risk-weighted assets):
PlainsCapital		1,404,288	14.68	%		1,469,695	16.00	%	8.5	%	8.0	%		1,418,348	14.97	%		1,405,164	14.98	%	8.5	%	8.0	%
Hilltop		1,881,289	17.45	%		2,262,356	21.22	%	8.5	%	N/A			1,910,810	17.99	%		1,900,701	18.23	%	8.5	%	N/A
Total capital (to risk-weighted assets):
PlainsCapital		1,486,989	15.54	%		1,540,100	16.77	%	10.5	%	10.0	%		1,511,156	15.94	%		1,492,576	15.91	%	10.5	%	10.0	%
Hilltop		2,163,815	20.07	%		2,532,008	23.75	%	10.5	%	N/A			2,204,120	20.75	%		2,187,652	20.98	%	10.5	%	N/A

Broker-Dealer

Pursuant to the net capital requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Hilltop Securities has elected to determine its net capital requirements using the alternative method. Accordingly, Hilltop Securities is required to maintain minimum net capital, as defined in Rule 15c3-1 promulgated under the Exchange Act, equal to the greater of $1,000,000 or 2% of aggregate debit balances, as defined in Rule 15c3-3 promulgated under the Exchange Act. Additionally, the net capital rule of the NYSE provides that equity capital may not be withdrawn or cash dividends paid if resulting net capital would be less than 5% of the aggregate debit items. Momentum Independent Network follows the primary (aggregate indebtedness) method, as defined in Rule 15c3-1 promulgated under the Exchange Act, which requires the maintenance of the larger of $250,000 or 6-2/3% of aggregate indebtedness.

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(Unaudited)

At ~~September 30, 2022,~~March 31, 2023, the net capital position of each of the Hilltop Broker-Dealers was as follows (in thousands).


				Momentum					Momentum
	Hilltop			Independent		Hilltop			Independent
	Securities			Network		Securities			Network
Net capital	$	198,954		$	3,842	$	271,196		$	4,302
Less: required net capital		9,313			250		8,665			256
Excess net capital	$	189,641		$	3,592	$	262,531		$	4,046

Net capital as a percentage of aggregate debit items		42.7	%				62.6	%
Net capital in excess of 5% aggregate debit items	$	175,672				$	249,533

Under certain conditions, Hilltop Securities may be required to segregate cash and securities in a special reserve account for the benefit of customers under Rule 15c3-3 promulgated under the Exchange Act. Assets segregated for regulatory purposes under the provisions of the Exchange Act are restricted and not available for general corporate purposes. At ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, the Hilltop Broker-Dealers held cash of ~~$109.4~~$36.2 million and ~~$221.7~~$67.7 million,

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~~(Unaudited)~~

respectively, segregated in special reserve bank accounts for the benefit of customers. The Hilltop Broker-Dealers were not required to segregate cash and securities in special reserve accounts for the benefit of proprietary accounts of introducing broker-dealers at ~~September 30, 2022 or December~~March 31, ~~2021.~~2023.

Mortgage Origination

As a mortgage originator, PrimeLending and its subsidiaries are subject to minimum net worth and liquidity requirements established by HUD and GNMA, as applicable. On an annual basis, PrimeLending and its subsidiaries submit audited financial statements to HUD and GNMA, as applicable, documenting their respective compliance with minimum net worth and liquidity requirements. As of ~~September 30, 2022,~~March 31, 2023, PrimeLending and its subsidiaries’ net worth and liquidity exceeded the amounts required by both HUD and GNMA, as applicable.

17. Stockholders’ Equity

Dividends

During the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ the Company declared and paid cash dividends of ~~$0.45~~$0.16 and ~~$0.36~~$0.15 per common share, or an aggregate of ~~$33.5~~$10.4 million and ~~$29.5~~$11.8 million, respectively.

On ~~October~~April 20, ~~2022,~~2023, Hilltop’s board of directors declared a quarterly cash dividend of ~~$0.15~~$0.16 per common share, payable on ~~November~~May 25, ~~2022,~~2023, to all common stockholders of record as of the close of business on ~~November 11, 2022.~~May 10, 2023.

Stock Repurchases

In January ~~2022,~~2023, the Hilltop board of directors authorized a new stock repurchase program through January ~~2023,~~2024, pursuant to which the Company ~~was originally~~is authorized to repurchase, in the aggregate, up to ~~$100.0~~$75.0 million of ~~its~~our outstanding common stock, inclusive of repurchases to offset dilution related to grants of stock-based compensation. ~~As a result~~During the three months ended March 31, 2023, Hilltop paid $4.5 million to repurchase an aggregate of 144,403 shares of our common stock at an average price of $31.15 per share ~~repurchases during 2022, including~~pursuant to the ~~tender offer described below, Hilltop has no further available share repurchase capacity associated with its previously authorized~~ stock repurchase program.

The Company’s stock repurchase program, prior year repurchases and related accounting policy are discussed in detail in Note 1 and Note 2423 to the consolidated financial statements included in the Company’s ~~2021~~2022 Form 10-K.

~~Tender Offer~~34

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~~On May 2, 2022, the Company announced the commencement of a modified “Dutch auction” tender offer~~Notes to purchase shares of its common stock for an aggregate cash purchase price of up to $400 million. On May 27, 2022, including the exercise of its right to purchase up to an additional 2% of its outstanding shares, the Company completed its 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, excluding fees and expenses. The Company funded the tender offer with cash on hand.Consolidated Financial Statements (continued)

(Unaudited)

18. Derivative Financial Instruments

The Company uses various derivative financial instruments to mitigate interest rate risk. The Bank’s interest rate risk management strategy involves effectively managing the re-pricing characteristics of certain assets and liabilities to mitigate potential adverse impacts from changes in interest rates on the Bank’s net interest margin. Additionally, the Bank manages variability of cash flows associated with its variable rate debt in interest-related cash outflows with interest rate swap contracts. PrimeLending has interest rate risk relative to interest rate lock commitments (“IRLCs”) and its inventory of mortgage loans held for sale. PrimeLending is exposed to such interest rate risk from the time an IRLC is made to an applicant to the time the related mortgage loan is sold. To mitigate interest rate risk, PrimeLending executes forward commitments to sell mortgage-backed securities (“MBSs”) and ~~Eurodollar futures.~~futures contracts. Additionally, PrimeLending has interest rate risk relative to its MSR asset and uses derivative instruments, including interest rate swaps and U.S. Treasury bond futures and options to hedge this risk. The Hilltop Broker-Dealers use forward commitments to both purchase and sell MBSs to facilitate customer transactions and as a means to hedge related exposure to interest rate risk

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~~(Unaudited)~~

in certain inventory positions. Additionally, Hilltop Securities uses various derivative instruments, including U.S. Treasury bond futures and options, ~~Eurodollar~~ futures contracts, credit default swaps and municipal market data ~~or MMD,~~(“MMD”) rate locks, to hedge changes in the fair value of its securities.

Non-Hedging Derivative Instruments and the Fair Value Option

As discussed in Note 3 to the consolidated financial statements, the Company has elected to measure substantially all mortgage loans held for sale at fair value under the provisions of the Fair Value Option. The election provides the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without applying hedge accounting provisions. The fair values of PrimeLending’s IRLCs and forward commitments are recorded in other assets or other liabilities, as appropriate, and changes in the fair values of these derivative instruments are recorded as a component of net gains from sale of loans and other mortgage production income. These changes in fair value are attributable to changes in the volume of IRLCs, mortgage loans held for sale, commitments to purchase and sell MBSs and MSR assets, and changes in market interest rates. Changes in market interest rates also conversely affect the value of PrimeLending’s mortgage loans held for sale and its MSR asset, which are measured at fair value under the Fair Value Option. The effect of the change in market interest rates on PrimeLending’s loans held for sale and MSR asset is discussed in Note 7 to the consolidated financial statements. The fair values of the Hilltop Broker-Dealers’ and the Bank’s derivative instruments are recorded in other assets or other liabilities, as appropriate. Changes in the fair value of derivatives are presented in the following table (in thousands).


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2022		2021		2022		2021		2023		2022
Increase (decrease) in fair value of derivatives during period:
PrimeLending	$	2,276	$	780	$	(10,975)	$	555	$	4,897	$	22,052
Hilltop Broker-Dealers		14,240		11,427		23,819		(3,845)		(21,180)		(1,327)
Bank		7		7		53		26		(12)		29

Hedging Derivative Instruments

The Company has entered into interest rate swap contracts to manage the exposure to changes in fair value associated with certain available for sale fixed rate collateralized ~~mortgage backed~~mortgage-backed securities and fixed rate loans held for investment attributable to changes in the designated benchmark interest rate. Certain of these fair value hedges have been designated as a portfolio layer, which provides the Company the ability to execute a fair value hedge of the interest rate risk associated with a portfolio of similar prepayable assets whereby the last dollar amount estimated to remain in the portfolio of assets is identified as the hedged item. Additionally, the Company has outstanding interest rate swap contracts designated as cash flow hedges and utilized to manage the variability of cash flows associated with its variable rate borrowings.

Under each of its interest rate swap contracts designated as hedges, the Company receives a floating rate and pays a fixed rate on the outstanding notional amount. The Company assesses the hedge effectiveness both at the onset of the hedge and at regular intervals throughout the life of the derivative. To the extent that the derivative instruments are highly

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Notes to Consolidated Financial Statements (continued)

(Unaudited)

effective in offsetting the variability of the hedged cash flows or fair value, changes in the fair value of the derivative are included as a component of other comprehensive loss on our consolidated balance sheets. Although the Company has determined at the onset of the hedges that the derivative instruments will be highly effective hedges throughout the term of the contract, any portion of derivative instruments subsequently determined to be ineffective will be recognized in earnings.

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~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

Derivative positions are presented in the following table (in thousands).


	September 30, 2022				December 31, 2021				March 31, 2023				December 31, 2022
	Notional		Estimated		Notional		Estimated		Notional		Estimated		Notional		Estimated
	Amount		Fair Value		Amount		Fair Value		Amount		Fair Value		Amount		Fair Value
Derivative instruments (not designated as hedges):
IRLCs	$	1,131,664	$	(16,729)	$	1,283,152	$	25,489	$	772,675	$	12,481	$	506,278	$	1,767
Commitments to purchase MBSs		1,353,969		(27,946)		1,575,264		(674)		1,163,144		5,313		819,681		2,435
Commitments to sell MBSs		3,150,790		71,201		3,314,173		(355)		2,556,958		(22,272)		2,188,964		10,711
Interest rate swaps		36,317		2,976		68,413		(1,949)		39,251		(2,201)		35,784		(1,421)
U.S. Treasury bond futures and options ⁽¹⁾		274,000		—		247,800		—		334,200		5,205		395,500		(449)
Eurodollar and other futures ⁽¹⁾		2,964,000		—		2,061,800		—
Interest rate and other futures ⁽¹⁾										1,663,200		—		2,612,000		—
Credit default swaps		1,000		5		7,000		(15)		2,000		(9)		3,000		(2)

Derivative instruments (designated as hedges):
Interest rate swaps designated as cash flow hedges	$	415,000	$	22,675	$	190,000	$	603	$	430,000	$	17,448	$	430,000	$	21,703
Interest rate swaps designated as fair value hedges ⁽²⁾		340,323		44,322		221,232		3,207		325,323		34,764		365,323		42,828

(1)	~~Changes~~Noted derivative instruments include contracts between the Hilltop Broker-Dealers and counterparties with changes in ~~the~~ fair value of ~~these~~the contracts that are settled ~~daily with the respective counterparties of PrimeLending and the Hilltop Broker-Dealers.~~daily.

(2)

The Company designated ~~$340.3~~$325.3 million and ~~$221.2~~$365.3 million as the hedged amount (from a closed portfolio of prepayable available for sale securities and loans held for investment with a carrying value of ~~$296.0~~$290.6 million and ~~$218.0~~$322.5 million as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively), of which, a subset of these hedges are in portfolio layer hedging relationships. The cumulative basis adjustment included in the carrying value of the hedged items totaled ~~$44.3~~$34.8 million and ~~$3.2~~$42.8 million as of ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

The Bank and PrimeLending held cash collateral advances, in other liabilities within the consolidated balance sheets, of ~~$56.3~~$55.0 million and $65.0 million to offset net asset derivative positions on its commitments to sell MBSs and derivative instruments designated as hedges at ~~September 30, 2022.~~March 31, 2023 and December, 31, 2022, respectively. PrimeLending had advanced cash collateral totaling ~~$0.1~~$2.7 million and ~~$0.1~~$8.4 million to offset net liability positions on its commitments to sell MBSs at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. In addition, PrimeLending and the Hilltop Broker-Dealers had advanced cash collateral totaling ~~$11.7~~$5.6 million and ~~$4.2~~$10.6 million on various derivative instruments at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. The advanced cash collateral amounts are included in other assets within the consolidated balance sheets.

3736

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

19. Balance Sheet Offsetting

Certain financial instruments, including resale and repurchase agreements, securities lending arrangements and derivatives, may be eligible for offset in the consolidated balance sheets and/or subject to master netting arrangements or similar agreements. The following tables present the assets and liabilities subject to enforceable master netting arrangements, repurchase agreements, or similar agreements with offsetting rights (in thousands).

Gross Amounts Not Offset in

Net Amounts

the Balance Sheet


Gross Amounts

Gross Amounts

of Assets




Cash



of Recognized

Offset in the

Presented in the

Financial

Collateral

Net

Assets

Balance Sheet

Balance Sheet

Instruments

Pledged

Amount
September 30, 2022

Securities borrowed:

Institutional counterparties

$
1,182,934

$
—

$
1,182,934

$
(1,126,566)

$
—

$
56,368

Interest rate swaps:

Institutional counterparties

2,976

—

2,976

(2,953)

—

23

Credit default swaps:

Institutional counterparties

5

—

5

(5)

—

—

Reverse repurchase agreements:

Institutional counterparties

145,365

—

145,365

(139,187)

—

6,178

Forward MBS derivatives:

Institutional counterparties

72,204

(686)

71,518

(39,838)

—

31,680

$
1,403,484

$
(686)

$
1,402,798

$
(1,308,549)

$
—

$
94,249
December 31, 2021

Securities borrowed:

Institutional counterparties

$
1,518,372

$
—

$
1,518,372

$
(1,445,590)

$
—

$
72,782

Reverse repurchase agreements:

Institutional counterparties

118,262

—

118,262

(118,262)

—

—

Forward MBS derivatives:

Institutional counterparties

2,955

(1,773)

1,182

(744)

—

438

$
1,639,589

$
(1,773)

$
1,637,816

$
(1,564,596)

$
—

$
73,220


							Gross Amounts Not Offset in												Gross Amounts Not Offset in
					Net Amounts		the Balance Sheet										Net Amounts		the Balance Sheet
	Gross Amounts		Gross Amounts		of Liabilities				Cash				Gross Amounts		Gross Amounts		of Assets				Cash
	of Recognized		Offset in the		Presented in the		Financial		Collateral		Net		of Recognized		Offset in the		Presented in the		Financial		Collateral		Net
	Liabilities		Balance Sheet		Balance Sheet		Instruments		Pledged		Amount		Assets		Balance Sheet		Balance Sheet		Instruments		Pledged		Amount
September 30, 2022
Securities loaned:
March 31, 2023
Securities borrowed:
Institutional counterparties	$	1,072,408	$	—	$	1,072,408	$	(1,017,959)	$	—	$	54,449	$	1,416,426	$	—	$	1,416,426	$	(1,379,628)	$	—	$	36,798

Repurchase agreements:
Interest rate swaps:
Institutional counterparties														52,349		(133)		52,216		—		(54,970)		(2,754)

Reverse repurchase agreements:
Institutional counterparties		302,030		—		302,030		(319,453)		—		(17,423)		144,201		—		144,201		(143,687)		—		514

Forward MBS derivatives:
Institutional counterparties		28,264		—		28,264		(28,264)		—		—		5,315		—		5,315		(5,315)		—		—
	$	1,402,702	$	—	$	1,402,702	$	(1,365,676)	$	—	$	37,026
December 31, 2021
Securities loaned:
Treasury futures and options derivatives:
Institutional counterparties														5,474		(269)		5,205		—		115		5,320
													$	1,623,765	$	(402)	$	1,623,363	$	(1,528,630)	$	(54,855)	$	39,878
December 31, 2022
Securities borrowed:
Institutional counterparties	$	1,432,196	$	—	$	1,432,196	$	(1,359,850)	$	—	$	72,346	$	1,012,573	$	—	$	1,012,573	$	(964,517)	$	—	$	48,056

Interest rate swaps:
Institutional counterparties		1,949		—		1,949		(1,919)		—		30		64,729		—		64,729		—		(64,630)		99

Credit default swaps:
Institutional counterparties		15		—		15		(15)		—		—

Repurchase agreements:
Reverse repurchase agreements:
Institutional counterparties		191,483		—		191,483		(205,734)		—		(14,251)		118,070		—		118,070		(115,302)		—		2,768

Forward MBS derivatives:
Institutional counterparties		2,211		—		2,211		(2,211)		—		—		16,694		(3,410)		13,284		(9,957)		—		3,327
	$	1,627,854	$	—	$	1,627,854	$	(1,569,729)	$	—	$	58,125
Treasury futures and options derivatives:
Institutional counterparties														57		(506)		(449)		—		—		(449)
													$	1,212,123	$	(3,916)	$	1,208,207	$	(1,089,776)	$	(64,630)	$	53,801

3837

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Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)


							Gross Amounts Not Offset in
					Net Amounts		the Balance Sheet
	Gross Amounts		Gross Amounts		of Liabilities				Cash
	of Recognized		Offset in the		Presented in the		Financial		Collateral		Net
	Liabilities		Balance Sheet		Balance Sheet		Instruments		Pledged		Amount
March 31, 2023
Securities loaned:
Institutional counterparties	$	1,303,657	$	—	$	1,303,657	$	(1,269,221)	$	—	$	34,436

Interest rate swaps:
Institutional counterparties		2,205		—		2,205		(2,205)		—		—

Credit default swaps:
Institutional counterparties		9		—		9		(9)		—		—

Repurchase agreements:
Institutional counterparties		362,327		—		362,327		(362,327)		—		—

Forward MBS derivatives:
Institutional counterparties		23,146		(872)		22,274		(14,131)		(2,678)		5,465
	$	1,691,344	$	(872)	$	1,690,472	$	(1,647,893)	$	(2,678)	$	39,901
December 31, 2022
Securities loaned:
Institutional counterparties	$	916,570	$	—	$	916,570	$	(871,037)	$	—	$	45,533

Interest rate swaps:
Institutional counterparties		1,619		—		1,619		(1,438)		—		181

Credit default swaps:
Institutional counterparties		2		—		2		(2)		—		—

Repurchase agreements:
Institutional counterparties		296,978		—		296,978		(319,897)		—		(22,919)

Forward MBS derivatives:
Institutional counterparties		138		—		138		(138)		—		—
	$	1,215,307	$	—	$	1,215,307	$	(1,192,512)	$	—	$	22,795

Secured Borrowing Arrangements

Secured Borrowings (Repurchase Agreements) — The Company participates in transactions involving securities sold under repurchase agreements, which are secured borrowings and generally mature one to ninety days from the transaction date or involve arrangements with no definite termination date. Securities sold under repurchase agreements are reflected at the amount of cash received in connection with the transactions. The Company may be required to provide additional collateral based on the fair value of the underlying securities, which is monitored on a daily basis.

Securities Lending Activities — The Company’s securities lending activities include lending securities for other broker-dealers, lending institutions and its own clearing and retail operations. These activities involve lending securities to other broker-dealers to cover short sales, to complete transactions in which there has been a failure to deliver securities by the required settlement date and as a conduit for financing activities.

When lending securities, the Company receives cash or similar collateral and generally pays interest (based on the amount of cash deposited) to the other party to the transaction. Securities lending transactions are executed pursuant to written agreements with counterparties that generally require securities loaned to be marked-to-market on a daily basis. The Company receives collateral in the form of cash in an amount generally in excess of the fair value of securities loaned. The Company monitors the fair value of securities loaned on a daily basis, with additional collateral obtained or refunded, as necessary. Collateral adjustments are made on a daily basis through the facilities of various clearinghouses. The Company is a principal in these securities lending transactions and is liable for losses in the event of a failure of any other party to honor its contractual obligation. Management sets credit limits with each counterparty and reviews these limits regularly to monitor the risk level with each counterparty. The Company is subject to credit risk through its securities lending activities if securities prices decline rapidly because the value of the Company’s collateral could fall below the amount of the indebtedness it secures. In rapidly appreciating markets, credit risk increases due to short positions. The Company’s securities lending business subjects the Company to credit risk if a counterparty fails to

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

perform or if collateral securing its obligations is insufficient. In securities transactions, the Company is subject to credit risk during the period between the execution of a trade and the settlement by the customer.

The following tables present the remaining contractual maturities of repurchase agreement and securities lending transactions accounted for as secured borrowings (in thousands). The Company had no repurchase-to-maturity transactions outstanding at both ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021.~~2022.


		Remaining Contractual Maturities											Remaining Contractual Maturities
		Overnight and						Greater Than					Overnight and						Greater Than
September 30, 2022		Continuous		Up to 30 Days		30-90 Days		90 Days		Total
March 31, 2023													Continuous		Up to 30 Days		30-90 Days		90 Days		Total
Repurchase agreement transactions:
Asset-backed securities			182,041		53,624		61,715		4,650		302,030			249,330		—		112,997		—		362,327

Securities lending transactions:
Corporate securities			113		—		—		—		113			113		—		—		—		113
Equity securities			1,072,295		—		—		—		1,072,295			1,303,544		—		—		—		1,303,544
Total		$	1,254,449	$	53,624	$	61,715	$	4,650	$	1,374,438		$	1,552,987	$	—	$	112,997	$	—	$	1,665,984

Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above	Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above									$	1,374,438	Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above									$	1,665,984
Amount related to agreements not included in offsetting disclosure above										$	—										$	—

		Remaining Contractual Maturities											Remaining Contractual Maturities
		Overnight and						Greater Than					Overnight and						Greater Than
December 31, 2021		Continuous		Up to 30 Days		30-90 Days		90 Days		Total
December 31, 2022													Continuous		Up to 30 Days		30-90 Days		90 Days		Total
Repurchase agreement transactions:
Asset-backed securities		$	93,651	$	—	$	86,357	$	11,475	$	191,483		$	130,616	$	2,539	$	141,461	$	22,362	$	296,978

Securities lending transactions:
Corporate securities			113		—		—		—		113			113		—		—		—		113
Equity securities			1,432,083		—		—		—		1,432,083			916,457		—		—		—		916,457
Total		$	1,525,847	$	—	$	86,357	$	11,475	$	1,623,679		$	1,047,186	$	2,539	$	141,461	$	22,362	$	1,213,548

Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above	Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above									$	1,623,679	Gross amount of recognized liabilities for repurchase agreement and securities lending transactions in offsetting disclosure above									$	1,213,548
Amount related to agreements not included in offsetting disclosure above										$	—										$	—

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

20. Broker-Dealer and Clearing Organization Receivables and Payables

Broker-dealer and clearing organization receivables and payables consisted of the following (in thousands).


	September 30,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Receivables:
Securities borrowed	$	1,182,934	$	1,518,372	$	1,416,426	$	1,012,573
Securities failed to deliver		14,625		5,664		54,698		11,350
Trades in process of settlement		47,753		144,773		76,886		3,476
Other		9,740		4,137		12,236		10,656
	$	1,255,052	$	1,672,946	$	1,560,246	$	1,038,055
Payables:
Securities loaned	$	1,072,408	$	1,432,196	$	1,303,657	$	916,570
Correspondents		20,700		20,571		21,693		22,760
Securities failed to receive		78,316		18,808		51,284		20,167
Other		4,732		5,725		6,683		6,973
	$	1,176,156	$	1,477,300	$	1,383,317	$	966,470

21. Segment and Related Information

The Company has two primary business units, PCC (banking and mortgage origination) and Securities Holdings (broker-dealer). Under GAAP, the Company’s 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. These segments reflect the manner in which operations are managed and the criteria used by the chief

Table of Contents

Hilltop Holdings Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(Unaudited)

operating decision maker, the Company’s President and Chief Executive Officer, to evaluate segment performance, develop strategy and allocate resources.

The banking segment includes the operations of the Bank. The broker-dealer segment includes the operations of Securities Holdings and the mortgage origination segment is composed of PrimeLending.

Balance sheet amounts not discussed previously and the elimination of intercompany transactions are included in “All Other and Eliminations.” The following tables present certain information about reportable business segment revenues, operating results, goodwill and assets (in thousands).

Mortgage



All Other and

Hilltop
Three Months Ended September 30, 2022

Banking

Broker-Dealer

Origination

Corporate

Eliminations

Consolidated
Net interest income (expense)

$
110,939

$
13,386

$
(2,939)

$
(3,276)

$
5,376

$
123,486
Provision for (reversal of) credit losses

(650)

(130)

—

—

—

(780)
Noninterest income

12,200

100,798

98,200

1,809

(6,032)

206,975
Noninterest expense

60,160

96,843

118,345

14,034

(644)

288,738
Income (loss) before taxes

$
63,629

$
17,471

$
(23,084)

$
(15,501)

$
(12)

$
42,503

Mortgage

All Other and

Hilltop
Nine Months Ended September 30, 2022

Banking

Broker-Dealer

Origination

Corporate

Eliminations

Consolidated
Net interest income (expense)

$
304,269

$
37,481

$
(6,066)

$
(9,856)

$
9,705

$
335,533
Provision for (reversal of) credit losses

4,325

346

—

—

—

4,671
Noninterest income

37,438

249,139

381,477

5,655

(11,033)

662,676
Noninterest expense

175,921

268,307

386,372

44,388

(1,357)

873,631
Income (loss) before taxes

$
161,461

$
17,967

$
(10,961)

$
(48,589)

$
29

$
119,907

~~Table of Contents~~

~~Hilltop Holdings Inc. and Subsidiaries~~

~~Notes to Consolidated Financial Statements (continued)~~

~~(Unaudited)~~

					Mortgage				All Other and		Hilltop
Three Months Ended September 30, 2021	Banking		Broker-Dealer		Origination		Corporate		Eliminations		Consolidated
																	Mortgage				All Other and		Hilltop
Three Months Ended March 31, 2023													Banking		Broker-Dealer		Origination		Corporate		Eliminations		Consolidated
Net interest income (expense)	$	99,978	$	10,427	$	(3,503)	$	(4,341)	$	2,529	$	105,090	$	104,770	$	13,863	$	(4,208)	$	(3,322)	$	10,602	$	121,705
Provision for (reversal of) credit losses		(5,775)		(44)		—		—		—		(5,819)		1,600		731		—		—		—		2,331
Noninterest income		11,727		116,143		242,270		757		(2,952)		367,945		11,190		90,635		68,829		2,704		(10,864)		162,494
Noninterest expense		54,567		109,193		176,587		15,355		(528)		355,174		56,127		90,345		88,753		15,513		(268)		250,470
Income (loss) before taxes	$	62,913	$	17,421	$	62,180	$	(18,939)	$	105	$	123,680	$	58,233	$	13,422	$	(24,132)	$	(16,131)	$	6	$	31,398


					Mortgage				All Other and		Hilltop						Mortgage				All Other and		Hilltop
Nine Months Ended September 30, 2021	Banking		Broker-Dealer		Origination		Corporate		Eliminations		Consolidated
Three Months Ended March 31, 2022													Banking		Broker-Dealer		Origination		Corporate		Eliminations		Consolidated
Net interest income (expense)	$	309,330	$	31,623	$	(16,554)	$	(13,720)	$	8,009	$	318,688	$	92,070	$	11,518	$	(1,835)	$	(3,389)	$	1,627	$	99,991
Provision for (reversal of) credit losses		(39,725)		77		—		—		—		(39,648)		(50)		165		—		—		—		115
Noninterest income		33,293		298,229		794,679		8,140		(8,912)		1,125,429		12,771		60,691		143,195		1,766		(1,995)		216,428
Noninterest expense		167,869		287,831		573,884		37,015		(1,395)		1,065,204		58,430		80,647		134,859		12,793		(379)		286,350
Income (loss) before taxes	$	214,479	$	41,944	$	204,241	$	(42,595)	$	492	$	418,561	$	46,461	$	(8,603)	$	6,501	$	(14,416)	$	11	$	29,954


					Mortgage				All Other and		Hilltop						Mortgage				All Other and		Hilltop
	Banking		Broker-Dealer		Origination		Corporate		Eliminations		Consolidated		Banking		Broker-Dealer		Origination		Corporate		Eliminations		Consolidated
September 30, 2022
March 31, 2023
Goodwill	$	247,368	$	7,008	$	13,071	$	—	$	—	$	267,447	$	247,368	$	7,008	$	13,071	$	—	$	—	$	267,447

Total assets	$	13,455,679	$	2,866,990	$	1,405,712	$	2,453,933	$	(3,567,023)	$	16,615,291	$	13,694,346	$	3,067,104	$	1,304,450	$	2,476,627	$	(3,513,440)	$	17,029,087

December 31, 2021
December 31, 2022
Goodwill	$	247,368	$	7,008	$	13,071	$	—	$	—	$	267,447	$	247,368	$	7,008	$	13,071	$	—	$	—	$	267,447

Total assets	$	14,944,249	$	3,673,346	$	2,207,822	$	2,940,670	$	(5,077,007)	$	18,689,080	$	13,420,110	$	2,672,709	$	1,249,284	$	2,465,513	$	(3,548,334)	$	16,259,282

~~The Company performs required annual impairment tests of its goodwill as of October 1st. The goodwill impairment~~

tests require the Company to make judgments in determining what assumptions to use in the calculations. The process 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 peers, and comparing those estimated fair values with the carrying values of the assets and liabilities of the reporting unit, which includes the allocated goodwill.

~~Specifically, the mortgage origination and broker-dealer reporting units have each experienced lower-than-forecasted~~ operating results during the first nine months of 2022. Should future operating performance of these reporting units remain challenged and below forecasted projections, there may be a risk of impairment. These conditions will continue to be considered during future impairment evaluations of goodwill of each reporting unit. If the estimated fair value is less than the carrying value, the Company would be required to recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized would not exceed the total amount of goodwill allocated to that reporting unit.

22. Earnings per Common Share

The following table presents the computation of basic and diluted earnings per common share (in thousands, except per share data).

Three Months Ended September 30,

Nine Months Ended September 30,


2022

2021

2022

2021
Basic earnings per share:

Income attributable to Hilltop

$
32,068

$
92,906

$
87,578

$
312,310

Weighted average shares outstanding - basic

64,552

80,109

72,400

81,306

Basic earnings per common share:

$
0.50

$
1.16

$
1.21

$
3.84

Diluted earnings per share:

Income attributable to Hilltop

$
32,068

$
92,906

$
87,578

$
312,310

Weighted average shares outstanding - basic

64,552

80,109

72,400

81,306
Effect of potentially dilutive securities

117

433

157

457
Weighted average shares outstanding - diluted

64,669

80,542

72,557

81,763

Diluted earnings per common share

$
0.50

$
1.15

$
1.21

$
3.82


	Three Months Ended March 31,
	2023		2022
Basic earnings per share:
Income attributable to Hilltop	$	25,800	$	22,250

Weighted average shares outstanding - basic		64,901		79,114

Basic earnings per common share:	$	0.40	$	0.28

Diluted earnings per share:
Income attributable to Hilltop	$	25,800	$	22,250

Weighted average shares outstanding - basic		64,901		79,114
Effect of potentially dilutive securities		53		242
Weighted average shares outstanding - diluted		64,954		79,356

Diluted earnings per common share:	$	0.40	$	0.28

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the consolidated historical financial statements and notes appearing elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”) and the financial information set forth in the tables herein.

Unless the context otherwise indicates, all references in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, to the “Company,” “we,” “us,” “our” or “ours” or similar words are to Hilltop Holdings Inc. and its direct and indirect wholly owned subsidiaries, references to “Hilltop” refer solely to Hilltop Holdings Inc., references to “PCC” refer to PlainsCapital Corporation (a wholly owned subsidiary of Hilltop), references to “Securities Holdings” refer to Hilltop Securities Holdings LLC (a wholly owned subsidiary of Hilltop), references to “Hilltop Securities” refer to Hilltop Securities Inc. (a wholly owned subsidiary of Securities Holdings), references to “Momentum Independent Network” refer to Momentum Independent Network Inc. (a wholly owned subsidiary of Securities Holdings), Hilltop Securities and Momentum Independent Network are collectively referred to as the “Hilltop Broker-Dealers”, references to the “Bank” refer to PlainsCapital Bank (a wholly owned subsidiary of PCC), references to “FNB” refer to First National Bank, references to “SWS” refer to the former SWS Group, Inc., references to “PrimeLending” refer to PrimeLending, a PlainsCapital Company (a wholly owned subsidiary of the Bank) and its subsidiaries as a whole.

FORWARD-LOOKING STATEMENTS

This Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended by the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical fact, included in this Quarterly Report that address results or developments that we expect or anticipate will or may occur in the future, and statements that are preceded by, followed by or include, words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “goal,” “intends,” “may,” “might,” “plan,” “probable,” “projects,” “seeks,” “should,” “target,” “view” or “would” or the negative of these words and phrases or similar words or phrases, including such things as our business strategy, our financial condition, our revenue, our liquidity and sources of funding, market trends, operations and business, taxes, the impact of natural disasters or public health emergencies, ~~such as the current global outbreak of a novel strain of coronavirus (“COVID-19”),~~ information technology expenses, capital levels, mortgage servicing rights (“MSR”) assets, stock repurchases, dividend payments, expectations concerning mortgage loan origination volume, servicer advances and interest rate compression, expected levels of refinancing as a percentage of total loan origination volume, projected losses on mortgage loans originated, total expenses, the effects of government regulation applicable to our operations, the appropriateness of, and changes in, our allowance for credit losses and provision for (reversal of) credit losses, expected future benchmark rates, anticipated investment yields, our expectations regarding accretion of discount on loans in future periods, the collectability of loans, cybersecurity incidents and the outcome of litigation are forward-looking statements.

These forward-looking statements are based on our beliefs, assumptions and expectations of our future performance taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If an event occurs, our business, business plan, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. Certain factors that could cause actual results to differ include, among others:

●

the credit risks of lending activities, including our ability to estimate credit losses and the allowance for credit losses, as well as the effects of changes in the level of, and trends in, loan delinquencies and write-offs;

●

effectiveness of our data security controls in the face of cyber attacks;

●

changes in general economic, market and business conditions in areas or markets where we compete, including changes in the price of crude oil;

●

changes in the interest rate environment;

●

risks associated with concentration in real estate related loans;

●

the effects of our indebtedness on our ability to manage our business successfully, including the restrictions imposed by the indenture governing our indebtedness;

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●

disruptions to the economy and the U.S. banking system caused by recent bank failures, risks associated with uninsured deposits and responsive measures by federal or state governments or banking regulators, including increases in the cost of our deposit insurance assessments;

●

cost and availability of capital;

●

changes in state and federal laws, regulations or policies affecting one or more of our business segments, including changes in regulatory fees, deposit insurance premiums, capital requirements and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”);

●

~~cost and availability of capital;~~

●

~~transitions away from~~ ~~London Interbank Offered Rate (“LIBOR”)~~;

●

the COVID-19 pandemic and the response of governmental authorities to the pandemic, which have had, and may continue to have, an adverse impact on the global economy and our business operations and performance;

●

changes in key management;

●

competition in our banking, broker-dealer and mortgage origination segments from other banks and financial institutions as well as investment banking and financial advisory firms, mortgage bankers, asset-based non-bank lenders and government agencies;

●

legal and regulatory proceedings;

●

risks associated with merger and acquisition integration; and

●

our ability to use excess capital in an effective manner.

For a more detailed discussion of these and other factors that may affect our business and that could cause the actual results to differ materially from those anticipated in these forward-looking statements, see “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2021~~2022 (“~~2021~~2022 Form 10-K”), which was filed with the Securities and Exchange Commission ~~(the “SEC”~~(“SEC”) on February ~~15, 2022,~~17, 2023, this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and other filings we have made with the SEC. We caution that the foregoing list of factors is not exhaustive, and new factors may emerge, or changes to the foregoing factors may occur, that could impact our business. All subsequent written and oral forward-looking statements concerning our business attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements above. We do not undertake any obligation to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Quarterly Report except to the extent required by federal securities laws.

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OVERVIEW

We are a financial holding company registered under the Bank Holding Company Act of 1956. Our primary line of business is to provide business and consumer banking services from offices located throughout Texas through the Bank. We also provide an array of financial products and services through our broker-dealer and mortgage origination segments. The following includes additional details regarding the financial products and services provided by each of our primary business units.

PCC. PCC is a financial holding company that provides, through its subsidiaries, traditional banking and wealth, investment and treasury management services primarily in Texas and residential mortgage loans throughout the United States.

Securities Holdings. Securities Holdings is a holding company that provides, through its subsidiaries, investment banking and other related financial services, including municipal advisory, sales, trading and underwriting of taxable and tax-exempt fixed income securities, clearing, securities lending, structured finance and retail brokerage services throughout the United States.

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


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2022			2021			2022			2021			2023			2022
Statement of Operations Data:
Net interest income	$	123,486		$	105,090		$	335,533		$	318,688		$	121,705		$	99,991
Provision for (reversal of) credit losses		(780)			(5,819)			4,671			(39,648)
Provision for credit losses														2,331			115
Total noninterest income		206,975			367,945			662,676			1,125,429			162,494			216,428
Total noninterest expense		288,738			355,174			873,631			1,065,204			250,470			286,350
Income before income taxes		42,503			123,680			119,907			418,561			31,398			29,954
Income tax expense		9,249			28,257			27,191			97,261			3,630			5,815
Net income		33,254			95,423			92,716			321,300			27,768			24,139
Less: Net income attributable to noncontrolling interest		1,186			2,517			5,138			8,990			1,968			1,889
Income attributable to Hilltop	$	32,068		$	92,906		$	87,578		$	312,310		$	25,800		$	22,250

Per Share Data:
Diluted earnings per common share	$	0.50		$	1.15		$	1.21		$	3.82		$	0.40		$	0.28
Diluted weighted average shares outstanding		64,669			80,542			72,557			81,763			64,954			79,356
Cash dividends declared per common share	$	0.15		$	0.12		$	0.45		$	0.36		$	0.16		$	0.15
Dividend payout ratio ⁽²⁾⁽¹⁾		30.19	%		10.34	%		37.20	%		9.38	%		40.25	%		53.57	%
Book value per common share (end of period)							$	31.46		$	31.36		$	31.63		$	31.02
Tangible book value per common share ⁽¹⁾(end of period)							$	27.13		$	27.77
Tangible book value per common share ⁽²⁾(end of period)													$	27.36		$	27.47

							September 30,			December 31,			March 31,			December 31,
							2022			2021			2023			2022
Balance Sheet Data:
Total assets							$	16,615,291		$	18,689,080		$	17,029,087		$	16,259,282
Cash and due from banks								1,777,584			2,823,138			1,764,081			1,579,512
Securities								3,116,249			3,046,500			3,196,990			3,289,530
Loans held for sale								1,003,605			1,878,190			1,040,138			982,616
Loans held for investment, net of unearned income								7,944,246			7,879,904			8,192,846			8,092,673
Allowance for credit losses								(91,783)			(91,352)			(97,354)			(95,442)
Total deposits								11,352,014			12,818,077			11,097,147			11,315,749
Notes payable								390,354			387,904			376,410			346,654
Total stockholders' equity								2,058,883			2,549,203			2,083,798			2,063,529

Capital Ratios:
Common equity to assets ratio								12.23	%		13.50	%		12.08	%		12.53	%
Tangible common equity to tangible assets ⁽¹⁾⁽²⁾								10.73	%		12.17	%		10.62	%		11.00	%

(1) ~~For a reconciliation to the nearest GAAP measure, see “—Reconciliation and Management’s Explanation of Non-GAAP Financial Measures.”~~

~~(2)~~ Dividend payout ratio is defined as cash dividends declared per common share divided by basic earnings per common share.

(2) For a reconciliation to the nearest GAAP measure, see “—Reconciliation and Management’s Explanation of Non-GAAP Financial Measures.”

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Consolidated income before income taxes during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 included the following contributions from our reportable business segments.

●

The banking segment contributed ~~$63.6 million and $161.5~~$58.2 million of income before income taxes during the three ~~and nine~~ months ended ~~September 30, 2022;~~March 31, 2023;

●

The broker-dealer segment contributed ~~$17.5 million and $18.0~~$13.4 million of income before income taxes during the three ~~and nine~~ months ended ~~September 30, 2022;~~March 31, 2023; and

●

The mortgage origination segment incurred ~~$23.1 million and $11.0~~$24.1 million of losses before income taxes during the three ~~and nine~~ months ended ~~September 30, 2022.~~March 31, 2023.

During the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, we declared and paid total common dividends of ~~$33.5~~$10.4 million.

On ~~October~~April 20, ~~2022,~~2023, our board of directors declared a quarterly cash dividend of ~~$0.15~~$0.16 per common share, payable on ~~November~~May 25, ~~2022~~2023 to all common stockholders of record as of the close of business on ~~November 11, 2022.~~May 10, 2023.

~~On May 2, 2022,~~In January 2023, our board of directors authorized a new stock repurchase program through January 2024, pursuant to which we ~~announced~~are authorized to repurchase, in the ~~commencement~~aggregate, up to $75.0 million of ~~a modified “Dutch auction” tender offer~~our outstanding common stock, inclusive of repurchases to ~~purchase~~offset dilution related to grants of stock-based compensation. During the three months ended March 31, 2023, we paid $4.5 million to repurchase an aggregate of 144,403 shares of our common stock ~~for~~at an ~~aggregate cash purchase~~average 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$31.15 per share ~~for a total of $442.3 million, excluding fees and expenses. We funded~~pursuant to the ~~tender offer with cash on hand. As a result of share repurchases during 2022, we have no further available share repurchase capacity associated with our previously authorized~~ stock repurchase program.

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

We present certain measures in our selected financial data that are not measures of financial performance recognized by accounting principles generally accepted in the United States (“GAAP”). “Tangible book value per common share” is defined as our total stockholders’ equity reduced by goodwill and other intangible assets, divided by total common shares outstanding. “Tangible common equity to tangible assets” is defined as our total stockholders’ equity reduced by goodwill and other intangible assets, divided by total assets reduced by goodwill and other intangible assets. These measures are important to investors interested in changes from period to period in tangible common equity per share exclusive of changes in intangible assets. For companies such as ours that have engaged in business combinations, purchase accounting can result in the recording of significant amounts of goodwill and other intangible assets related to those transactions. You should not view this disclosure as a substitute for results determined in accordance with GAAP, and our disclosure is not necessarily comparable to that of other companies that use non-GAAP measures. The following table reconciles these non-GAAP financial measures to the most comparable GAAP financial measures, “book value per common share” and “equity to total assets” (dollars in thousands, except per share data).

September 30,

  ��
2022

2021

Book value per common share

$
31.46

$
31.36

Effect of goodwill and intangible assets per share

(4.33)

(3.59)

Tangible book value per common share

$
27.13

$
27.77

September 30,

December 31,

2022

2021

Hilltop stockholders’ equity

$
2,031,811

$
2,522,668

Less: goodwill and intangible assets, net

279,656

282,731

Tangible common equity

$
1,752,155

$
2,239,937

Total assets

$
16,615,291

$
18,689,080

Less: goodwill and intangible assets, net

279,656

282,731

Tangible assets

$
16,335,635

$
18,406,349

Equity to assets

12.23
%

13.50
%
Tangible common equity to tangible assets

10.73
%

12.17
%


	March 31,
	2023			2022
Book value per common share	$	31.63		$	31.02
Effect of goodwill and intangible assets per share		(4.27)			(3.55)
Tangible book value per common share	$	27.36		$	27.47

	March 31,			December 31,
	2023			2022
Hilltop stockholders’ equity	$	2,056,711		$	2,036,924
Less: goodwill and intangible assets, net		277,991			278,764
Tangible common equity	$	1,778,720		$	1,758,160

Total assets	$	17,029,087		$	16,259,282
Less: goodwill and intangible assets, net		277,991			278,764
Tangible assets	$	16,751,096		$	15,980,518

Equity to assets		12.08	%		12.53	%
Tangible common equity to tangible assets		10.62	%		11.00	%

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Recent Developments

~~COVID-19~~Economic Environment

Beginning in 2022, our operational and financial results have been volatile due to economic headwinds including tight housing inventories on mortgage volumes, declining deposit balances, rapid increases in market interest rates and a declining economic forecast. The ~~COVID-19 pandemic~~impacts of such headwinds in 2023 remain uncertain and ~~related governmental~~will depend on several developments outside of our control ~~measures severely disrupted financial markets~~including, among others, the timing and ~~overall economic~~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, ~~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 in the United States even as additional variants have emerged. Further, the U.S. federal government enacted policies to provide fiscal stimulus to the economyRussian-Ukraine conflict 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 initiallyits impact 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 impacts of the COVID-19 pandemic on our employees and customers on a regular basis.supply chains.

In ~~response~~addition, during March 2023, the banking sector experienced increased uncertainty and concerns associated with liquidity positions primarily due to recent bank failures as depositors sought to reduce risks associated with uninsured deposits and withdraw such deposits from existing bank relationships. These failures underscore 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 intendedimportance of maintaining access 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~~diverse sources of the Paycheck Protection Program (“PPP”) that provided federal government loan forgiveness for Small Business Administration (“SBA”) Section 7(a) loans for small businesses to pay up to eight weeks of employee compensation and other basic expenses such as electric and telephone bills. 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 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.funding.

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 dateIn light of the ~~existing loan.~~above events, we have continued our efforts to monitor deposit flows and balance sheet trends to ensure that our liquidity needs and financial flexibility are maintained. During the first quarter of 2023, we increased interest-bearing deposit rates to address rising market interest rates and competition for liquidity to combat deposit outflows. The ~~Bank’s PPP efforts included approval and funding of over 4,100 PPP loans, with~~Bank also accessed approximately $1.1 million remaining outstanding at September 30, 2022. The PPP loans made by the Bank are guaranteed by the SBA and, if used by the borrower for authorized purposes, may be fully forgiven. On October 2, 2020, the SBA began approving the Bank’s PPP forgiveness applications and remitting forgiveness payments to PPP lenders for PPP borrowers. Through October 14, 2022, the SBA had approved approximately 4,100 PPP forgiveness applications from the Bank totaling approximately $896 million, with PPP loans of approximately $0.1 million currently pending SBA review and approval.

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 September 30, 2022, the Bank’s energy loan exposure was approximately $59$650 million of ~~loans held for investment with unfunded commitment balances~~additional core deposits from our Hilltop Securities Federal Deposit Insurance Corporation (“FDIC”) insured sweep program and utilized $450.0 million of ~~approximately $40 million. The allowance for credit losses on~~its Federal Home Loan Bank (“FHLB”) borrowing capacity through the ~~Bank’s energy portfolio was $0.1 million, or 0.2%~~use of ~~loans held for investment at September 30, 2022.~~short-term borrowings.

Market conditions and external factors may unpredictably impact the competitive landscape for deposits such as those experienced during the first quarter of 2023. Additionally, the rising market interest rate environment has increased competition for liquidity and the premium at which liquidity is available to meet funding needs. An unexpected influx of withdrawals of deposits could adversely impact our ability to rely on organic deposits to primarily fund our operations, potentially requiring greater reliance on secondary sources of liquidity to meet withdrawal deposits or to fund continuing operations. These sources may include proceeds from FHLB advances, sales of investment securities and loans, federal fund lines of credit with correspondent banks, securities sold under agreements to repurchase, brokered time deposits, borrowings from the Federal Reserve and borrowings under lines of credit with other financial institutions. Refer to the ~~discussion~~discussions in the ~~“Financial Condition~~“Segment Results – ~~Allowance for Credit Losses on Loans” section~~Banking Segment" and “Liquidity and Capital Resources – Banking Segment” sections that ~~follows~~follow for more details regarding the ~~significant assumptions~~Bank’s deposits, available liquidity and ~~estimates involved~~borrowing capacity at March 31, 2023.

As a result of the March 2023 bank failures and in ~~estimating credit~~an effort to strengthen public confidence in the banking system and protect depositors, regulators announced that any losses ~~given~~to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law, which could increase the cost of our FDIC insurance assessments. Additionally, on March 12, 2023, the Treasury Department, Federal Reserve and FDIC jointly announced the Bank Term Funding Program (“BTFP”). The BTFP aims to enhance liquidity by allowing institutions to pledge certain securities at par value, and at a borrowing rate of ten basis points over the one-year overnight index swap rate. The BTFP is available to eligible U.S. federally insured depository institutions, with advances having a term of up to one year and no prepayment penalties. The future impact of these failures on the economy, financial institutions and their depositors, as well as a governmental regulatory response or actions resulting from the same, is uncertain at this time.

Further, since March 31, 2023, to bolster our liquidity position, we increased brokered deposits at the Bank by approximately $350 million and are evaluating the pledging of additional available, or unencumbered, securities to various Federal Reserve programs. To date, we have not leveraged the discount window at the Federal Reserve or the BTFP.

We expect uncertainties related to economic ~~uncertainties associated with COVID-19.~~headwinds discussed above, the impact of interest rate movements on the shape and inversions of the yield curve, the increasing cost and challenge for deposits, as well as disruptions to the economy and the U.S. banking system caused by recent bank failures, to persist through the remainder of 2023.

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Asset Valuation

As discussed in more detail within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our ~~2021~~2022 Form 10-K, at each reporting date between annual impairment tests, we consider potential indicators of impairment including the condition of the economy and financial services industry; government intervention and regulatory updates; the impact of recent events to financial performance and cost factors of the reporting unit; performance of our stock and other relevant events.

~~Specifically, our mortgage origination and broker-dealer segments have each experienced lower-than-forecasted operating results during~~Given the ~~first nine months~~potential impacts as a result of ~~2022 due to conditions discussed in detail within~~ the ~~respective discussions of segment results that follow. Should future~~ operating performance of these reporting ~~units remain challenged~~segments and ~~below forecasted projections, there~~overall economic conditions, actual results may ~~be a risk~~differ materially from our current estimates as the scope of ~~impairment. These conditions will continue to be considered during future impairment evaluations~~such impacts evolves or if the duration of ~~goodwill of each reporting unit.~~business disruptions is longer than currently anticipated. We continue to monitor developments regarding overall economic conditions, ~~the COVID-19 pandemic and measures implemented in response to the pandemic,~~ 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 during 2023, significant assumptions such as expected future cash flows or the risk-adjusted discount rate used to estimate fair value are adversely impacted, or upon the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform impairment tests on our

goodwill and other intangible assets, an impairment charge may be recorded for that period. In the event that we

conclude that all or a portion of our goodwill and other intangible assets are impaired, a non-cash charge for the

respective amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible

capital or regulatory capital.

Outlook

Our balance sheet, operating results and certain metrics during ~~2021~~2023 reflected ~~strong credit quality, significant reversals of credit losses, heightened capital and liquidity levels, and low mortgage interest rates. As noted within our 2021 Form 10-K, we identified expected~~economic headwinds ~~in 2022,~~ including tight housing inventories on mortgage volumes, declining deposit balances, and increases in market interest rates, while also noting that inflationary pressures associated with compensation, occupancy and software costs within our business segments were expected to be uncertain in 2022. These headwinds, coupled with a declining economic forecast, rapid increases in U.S. treasury yields and mortgage interest rates, and a declining economic forecast. As noted within our 2022 Form 10-K, these headwinds, coupled with exposure to increasing funding costs, ~~during~~inflationary pressures associated with compensation, occupancy and software costs and labor market conditions, the ~~first nine months of~~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 ~~the remainder of 2022 and into the first half of~~ 2023.

~~See “Item 1A. Risk Factors” of our 2021 Form 10-K for additional discussion of the potential adverse impact of COVID-19 on our business, results of operations and financial condition.~~

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~~is changes in the level of interest rates in addition to twists in the shape of the yield curve with the magnitude and direction of the impact varying across the different lines of business. Other factors impacting our results of operations include, but are not limited to, fluctuations in volume and price levels of securities, inflation, political events, investor confidence, investor participation levels, legal, regulatory, and compliance requirements and competition. All of these factors have the potential to impact our financial position, operating results and liquidity. In addition, the recent economic and political environment has led to legislative and regulatory initiatives, both enacted and proposed, that could substantially change the regulation of the financial services industry and may significantly impact us.

Factors Affecting Comparability of Results of Operations

LIBOR Cessation

As discussed in more detail within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our ~~2021~~2022 Form 10-K,, 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.

Certain loans we originated bear interest at a floating rate based on LIBOR. We also pay interest on certain borrowings based on LIBOR, 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

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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 Secured Overnight Financing Rate (“SOFR”) from LIBOR, and organizations are currently working on industry-wide and company-specific transition plans as it relates to derivatives and cash markets exposed to LIBOR. The ARRC has

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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 LIBOR phase out dates being pushed out to 2023, we have ~~begun taking~~taken necessary actions, including ~~negotiating~~the negotiation of certain of our agreements based on established alternative benchmark ~~rates that have been established.~~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 ~~substantially~~significantly completed its efforts to amend LIBOR-based contractual terms and establish an alternative benchmark rate. We have also evaluated, and will continue to evaluate, the impacts of the LIBOR phase-out and transition requirements as itpertains to contracts, models and systems. To date, an immaterial amount of expenses have been incurred as a result of our ~~efforts; however, in the future we may incur additional expenses as we finalize~~efforts related to the transition of our systems and processes away from LIBOR.

Segment Information

The Company has two primary business units, PCC (banking and mortgage origination) and Securities Holdings (broker-dealer). Under GAAP, the Company’s units are comprised of three reportable business segments organized primarily by the core products offered to the segments’ respective customers: banking, broker-dealer and mortgage origination. Consistent with our historical segment operating results, we anticipate that future revenues will be driven primarily from the banking segment, with the remainder being generated by our broker-dealer and mortgage origination segments. Operating results for the mortgage origination segment have historically been more volatile than operating results for the banking and broker-dealer segments.

The banking segment includes the operations of the Bank. The banking segment primarily provides business and consumer banking services from offices located throughout Texas and generates revenue from its portfolio of earning assets. The Bank’s results of operations are primarily dependent on net interest income. The Bank also derives revenue from other sources, including service charges on customer deposit accounts and trust fees.

The broker-dealer segment includes the operations of Securities Holdings, which operates through its wholly owned subsidiaries Hilltop Securities, Momentum Independent Network and Hilltop Securities Asset Management, LLC. The broker-dealer segment generates a majority of its revenues from fees and commissions earned from investment advisory and securities brokerage services. Hilltop Securities is a broker-dealer registered with the SEC and the Financial Industry Regulatory Authority (“FINRA”) and a member of the New York Stock Exchange (“NYSE”). Momentum Independent Network is an introducing broker-dealer that is also registered with the SEC and FINRA. Hilltop Securities, Momentum Independent Network and Hilltop Securities Asset Management, LLC are registered investment advisers under the Investment Advisers Act of 1940.

The mortgage origination segment includes the operations of PrimeLending, which offers a variety of loan products and generates revenue predominantly from fees charged on the origination and servicing of loans and from selling these loans in the secondary market.

The eliminations of intercompany transactions are included in “All Other and Eliminations.” Additional information concerning our reportable segments is presented in Note 21, Segment and Related Information, in the notes to our consolidated financial statements.

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


	Three Months Ended September 30,				Variance 2022 vs 2021			Nine Months Ended September 30,				Variance 2022 vs 2021			Three Months Ended March 31,				Variance 2023 vs 2022
	2022		2021		Amount		Percent	2022		2021		Amount		Percent	2023		2022		Amount		Percent
Net interest income (expense):
Banking	$	110,939	$	99,978	$	10,961	11	$	304,269	$	309,330	$	(5,061)	(2)	$	104,770	$	92,070	$	12,700	14
Broker-Dealer		13,386		10,427		2,959	28		37,481		31,623		5,858	19		13,863		11,518		2,345	20
Mortgage Origination		(2,939)		(3,503)		564	16		(6,066)		(16,554)		10,488	63		(4,208)		(1,835)		(2,373)	(129)
Corporate		(3,276)		(4,341)		1,065	25		(9,856)		(13,720)		3,864	28		(3,322)		(3,389)		67	2
All Other and Eliminations		5,376		2,529		2,847	113		9,705		8,009		1,696	21		10,602		1,627		8,975	552
Hilltop Consolidated	$	123,486	$	105,090	$	18,396	18	$	335,533	$	318,688	$	16,845	5	$	121,705	$	99,991	$	21,714	22

Provision for (reversal of) credit losses:
Banking	$	(650)	$	(5,775)	$	5,125	89	$	4,325	$	(39,725)	$	44,050	111	$	1,600	$	(50)	$	1,650	NM
Broker-Dealer		(130)		(44)		(86)	(195)		346		77		269	349		731		165		566	NM
Mortgage Origination		—		—		—	-		—		—		—	—		—		—		—	-
Corporate		—		—		—	-		—		—		—	—		—		—		—	-
All Other and Eliminations		—		—		—	-		—		—		—	—		—		—		—	-
Hilltop Consolidated	$	(780)	$	(5,819)	$	5,039	87	$	4,671	$	(39,648)	$	44,319	112	$	2,331	$	115	$	2,216	NM

Noninterest income:
Banking	$	12,200	$	11,727	$	473	4	$	37,438	$	33,293	$	4,145	12	$	11,190	$	12,771	$	(1,581)	(12)
Broker-Dealer		100,798		116,143		(15,345)	(13)		249,139		298,229		(49,090)	(16)		90,635		60,691		29,944	49
Mortgage Origination		98,200		242,270		(144,070)	(59)		381,477		794,679		(413,202)	(52)		68,829		143,195		(74,366)	(52)
Corporate		1,809		757		1,052	139		5,655		8,140		(2,485)	(31)		2,704		1,766		938	53
All Other and Eliminations		(6,032)		(2,952)		(3,080)	(104)		(11,033)		(8,912)		(2,121)	(24)		(10,864)		(1,995)		(8,869)	(445)
Hilltop Consolidated	$	206,975	$	367,945	$	(160,970)	(44)	$	662,676	$	1,125,429	$	(462,753)	(41)	$	162,494	$	216,428	$	(53,934)	(25)

Noninterest expense:
Banking	$	60,160	$	54,567	$	5,593	10	$	175,921	$	167,869	$	8,052	5	$	56,127	$	58,430	$	(2,303)	(4)
Broker-Dealer		96,843		109,193		(12,350)	(11)		268,307		287,831		(19,524)	(7)		90,345		80,647		9,698	12
Mortgage Origination		118,345		176,587		(58,242)	(33)		386,372		573,884		(187,512)	(33)		88,753		134,859		(46,106)	(34)
Corporate		14,034		15,355		(1,321)	(9)		44,388		37,015		7,373	20		15,513		12,793		2,720	21
All Other and Eliminations		(644)		(528)		(116)	(22)		(1,357)		(1,395)		38	3		(268)		(379)		111	29
Hilltop Consolidated	$	288,738	$	355,174	$	(66,436)	(19)	$	873,631	$	1,065,204	$	(191,573)	(18)	$	250,470	$	286,350	$	(35,880)	(13)

Income (loss) before taxes:
Banking	$	63,629	$	62,913	$	716	1	$	161,461	$	214,479	$	(53,018)	(25)	$	58,233	$	46,461	$	11,772	25
Broker-Dealer		17,471		17,421		50	0		17,967		41,944		(23,977)	(57)		13,422		(8,603)		22,025	256
Mortgage Origination		(23,084)		62,180		(85,264)	(137)		(10,961)		204,241		(215,202)	(105)		(24,132)		6,501		(30,633)	(471)
Corporate		(15,501)		(18,939)		3,438	18		(48,589)		(42,595)		(5,994)	(14)		(16,131)		(14,416)		(1,715)	(12)
All Other and Eliminations		(12)		105		(117)	(111)		29		492		(463)	(94)		6		11		(5)	(45)
Hilltop Consolidated	$	42,503	$	123,680	$	(81,177)	(66)	$	119,907	$	418,561	$	(298,654)	(71)	$	31,398	$	29,954	$	1,444	5

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 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

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expected to operate with capital positions well above the minimum ratios. Failure to meet minimum capital requirements can initiate certain mandatory actions by regulators that, if undertaken, could have a material effect on our financial condition or results of operations.

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How We Generate Revenue

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. Net interest income increased during the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, compared with the same period in ~~2021,~~2022, primarily due to increases within our ~~mortgage origination~~banking and broker-dealer segments, partially offset by a decrease within our ~~banking~~mortgage origination segment.

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

(i)

Income from broker-dealer operations. Through Securities Holdings, we provide investment banking and other related financial services that generated ~~$202.7~~$58.1 million and ~~$220.6~~$66.9 million in securities commissions and fees and investment and securities advisory fees and commissions, respectively, and ~~$41.5 million and $70.1~~$22.0 million in gains and $6.1 million in losses from derivative and trading portfolio activities (included within other noninterest income), respectively, during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 and ~~2021.~~2022.

(ii)

Income from mortgage operations. Through PrimeLending, we generate noninterest income by originating and selling mortgage loans. During the ~~nine~~three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ we generated ~~$380.8~~$68.7 million and ~~$793.9~~$143.0 million, respectively, in net gains from sale of loans, other mortgage production income (including income associated with retained mortgage servicing rights), and mortgage loan origination fees.

In the aggregate, we experienced a decrease in noninterest income during the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, compared to the same period in ~~2021,~~2022, as noted in the segment results table previously presented, primarily due to a decrease of ~~$413.1~~$74.2 million in net gains from sale of loans, other mortgage production income and mortgage loan origination fees within our mortgage origination segment, ~~and decreases~~partially offset by increases 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.

Consolidated Operating Results

Income applicable to common stockholders during the three months ended ~~September 30, 2022~~March 31, 2023 was ~~$32.1~~$25.8 million, or ~~$0.50~~$0.40 per diluted share, compared with ~~$92.9~~$22.3 million, or ~~$1.15~~$0.28 per diluted share, during the three months ended September 30, 2021. Income applicable to common stockholders during the nine months ended September 30, 2022 was $87.6 million, or $1.21 per diluted share, compared with $312.3 million, or $3.82 per diluted share, during the nine months ended September 30, 2021.March 31, 2022. Hilltop’s financial results for the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, compared with the same ~~periods~~period in ~~2021, reflect~~2022, included significant decreases in year-over-year mortgage origination segment net gains from sales of loans and other mortgage production income, ~~declines~~increases in net revenues within certain of the broker-dealer segment’s business lines, and ~~the year-over-year changes~~an increase in ~~provision for (reversal of) credit losses~~net interest income within the banking segment.

Certain items included in net income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ resulted from purchase accounting associated with the merger of PlainsCapital Corporation with and into a wholly owned subsidiary of Hilltop on November 30, 2012, the FDIC-assisted transaction whereby the Bank acquired certain assets and assumed certain liabilities of FNB, the acquisition of SWS Group, Inc. in a stock and cash transaction, and the acquisition of The Bank of River Oaks in an all-cash transaction (collectively, the “Bank Transactions”). Income before income taxes during the three months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ included net accretion on earning assets and liabilities of ~~$2.9~~$1.9 million and ~~$3.3~~$2.6 million, respectively, and amortization of identifiable intangibles of ~~$1.1~~$0.8 million and ~~$1.3~~$1.1 million, respectively, related to the Bank Transactions. During the nine months ended September 30, 2022 and 2021, income before income taxes included net accretion on earning assets and liabilities of $8.5 million and $14.4 million, respectively, and amortization of identifiable intangibles of $3.3 million and $4.0 million, respectively, related to the Bank Transactions.

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


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2022		2021		2022		2021		2023		2022
Return on average stockholders' equity⁽¹⁾	6.26	%	14.96	%	5.15	%	17.26	%	5.12	%	3.60	%
Return on average assets ⁽²⁾	0.79	%	2.13	%	0.70	%	2.43	%	0.69	%	0.53	%
Net interest margin^{(3) (4)}	3.19	%	2.53	%	2.75	%	2.61	%	3.28	%	2.36	%
Leverage ratio⁽⁵⁾ (end of period)					11.41	%	12.64	%	11.82	%	12.46	%
Common equity Tier 1 risk-based capital ratio ⁽⁶⁾ (end of period)					17.45	%	21.28	%	17.99	%	21.27	%

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

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

(3)	Net interest margin is defined as net interest income divided by average interest-earning assets. We consider net interest margin as a key indicator of profitability, as it represents interest earned on our interest-earning assets compared to interest incurred.

(4)

The securities financing operations within our broker-dealer segment had the effect of lowering both the net interest margin and taxable equivalent net interest margin by 2129 basis points and 1819 basis points during the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and 20 basis points and 18 basis points during the nine months ended September 30, 2022 and 2021,~~ respectively.

(5)	The leverage ratio is a regulatory capital ratio and is defined as Tier 1 risk-based capital divided by average consolidated assets.

(6)

The common equity Tier 1 risk-based capital ratio is a regulatory capital ratio and is defined as common equity Tier 1 risk-based capital divided by risk weighted assets. Common equity includes common equity Tier 1 capital (common stockholders’ equity and certain minority interests in the equity capital accounts of consolidated subsidiaries, but excluding goodwill and various intangible assets) and additional Tier 1 capital (certain qualifying minority interests not included in common equity Tier 1 capital, certain preferred stock and related surplus, and certain subordinated debt).

We present net interest margin and net interest income below on a taxable-equivalent basis. Net interest margin (taxable equivalent), a non-GAAP measure, is defined as taxable equivalent net interest income divided by average interest-earning assets. Taxable equivalent adjustments are based on the applicable corporate federal income tax rate of 21% for all periods presented. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest margins for all earning assets, we use net interest income on a taxable-equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments.

During the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ purchase accounting contributed 86 and 97 basis points, respectively, to our consolidated taxable equivalent net interest margin of ~~3.20%~~3.28% and 2.54%, respectively. During the nine months ended September 30, 2022 and 2021, purchase accounting contributed 8 and 13 basis points respectively, to our consolidated taxable equivalent net interest margin of 2.76% and 2.62%2.37%, respectively. The purchase accounting activity was primarily related to the accretion of discount of loans which totaled ~~$2.9~~$1.9 million and ~~$3.2~~$2.5 million during the three months ended ~~September 30,~~March 31, 2023 and 2022, and 2021, respectively, associated with the Bank Transactions. The purchase accounting activity was primarily related to the accretion of discount of loans which totaled $8.4 million and $14.1 million during the nine months ended September 30, 2022 and 2021, respectively, associated with the Bank Transactions.

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


	Three Months Ended September 30,												Three Months Ended March 31,
	2022						2021						2023						2022
	Average		Interest		Annualized		Average		Interest		Annualized		Average		Interest		Annualized		Average		Interest		Annualized
	Outstanding		Earned		Yield or		Outstanding		Earned		Yield or		Outstanding		Earned		Yield or		Outstanding		Earned		Yield or
	Balance		or Paid		Rate		Balance		or Paid		Rate		Balance		or Paid		Rate		Balance		or Paid		Rate
Assets
Interest-earning assets
Loans held for sale	$	1,166,265	$	14,414	4.94	%	$	2,300,939	$	17,696	3.08	%	$	815,393	$	10,724	5.26	%	$	1,467,998	$	11,966	3.26	%
Loans held for investment, gross ⁽¹⁾		7,911,833		94,751	4.75	%		7,514,392		82,073	4.33	%		7,894,668		112,655	5.79	%		7,839,047		78,442	4.06	%
Investment securities - taxable		2,883,412		19,642	2.72	%		2,585,362		12,328	1.91	%		2,813,734		25,602	3.64	%		2,768,849		15,581	2.25	%
Investment securities - non-taxable ⁽²⁾		312,312		2,817	3.61	%		318,408		3,252	4.09	%		412,543		3,286	3.19	%		324,084		2,888	3.56	%
Federal funds sold and securities purchased under agreements to resell		137,728		1,309	3.77	%		161,577		207	—	%		163,601		2,368	5.87	%		157,313		136	0.35	%
Interest-bearing deposits in other financial institutions		1,780,220		9,542	2.13	%		2,197,478		788	0.14	%		1,480,323		16,116	4.42	%		3,116,369		1,427	0.19	%
Securities borrowed		1,116,837		10,938	3.83	%		1,364,726		8,585	2.46	%		1,419,797		17,068	4.81	%		1,455,166		8,817	2.42	%
Other		56,331		3,425	24.12	%		51,350		813	6.28	%		63,219		3,706	23.77	%		54,602		750	5.57	%
Interest-earning assets, gross ⁽²⁾		15,364,938		156,838	4.05	%		16,494,232		125,742	3.02	%		15,063,278		191,525	5.16	%		17,183,428		120,007	2.83	%
Allowance for credit losses		(95,083)						(115,688)						(97,060)						(92,239)
Interest-earning assets, net		15,269,855						16,378,544						14,966,218						17,091,189
Noninterest-earning assets		1,399,228						1,371,207						1,336,908						1,401,584
Total assets	$	16,669,083					$	17,749,751					$	16,303,126					$	18,492,773

Liabilities and Stockholders' Equity
Interest-bearing liabilities
Interest-bearing deposits	$	7,136,779	$	12,525	0.70	%	$	7,622,748	$	5,303	0.28	%	$	7,239,556	$	35,824	2.01	%	$	8,201,824	$	4,193	0.21	%
Securities loaned		980,530		9,407	3.81	%		1,306,314		6,519	1.98	%		1,323,857		15,346	4.70	%		1,371,816		7,472	2.21	%
Notes payable and other borrowings		1,262,985		11,054	3.47	%		1,231,545		8,266	2.66	%		1,490,075		18,552	5.05	%		1,249,222		7,881	2.56	%
Total interest-bearing liabilities		9,380,294		32,986	1.40	%		10,160,607		20,088	0.78	%		10,053,488		69,722	2.81	%		10,822,862		19,546	0.73	%
Noninterest-bearing liabilities
Noninterest-bearing deposits		4,543,067						4,299,987						3,789,757						4,507,661
Other liabilities		685,843						800,225						390,107						631,790
Total liabilities		14,609,204						15,260,819						14,233,352						15,962,313
Stockholders’ equity		2,032,717						2,463,821						2,043,157						2,504,383
Noncontrolling interest		27,162						25,111						26,617						26,077
Total liabilities and stockholders' equity	$	16,669,083					$	17,749,751					$	16,303,126					$	18,492,773

Net interest income ⁽²⁾			$	123,852					$	105,654					$	121,803					$	100,461
Net interest spread ⁽²⁾					2.65	%					2.24	%					2.35	%					2.10	%
Net interest margin ⁽²⁾					3.20	%					2.54	%					3.28	%					2.37	%

Nine Months Ended September 30,

2022

2021


Average

Interest

Annualized

Average

Interest

Annualized

Outstanding

Earned

Yield or

Outstanding

Earned

Yield or

Balance

or Paid

Rate

Balance

or Paid

Rate

Assets

Interest-earning assets

Loans held for sale

$
1,335,447

$
40,680

4.06
%
$
2,440,668

$
51,059

2.79
%
Loans held for investment, gross ⁽¹⁾

7,863,257

257,621

4.43
%

7,628,599

257,149

4.50
%
Investment securities - taxable

2,810,993

52,512

2.49
%

2,432,268

33,666

1.85
%
Investment securities - non-taxable ⁽²⁾

295,523

8,270

3.73
%

307,718

8,261

3.58
%
Federal funds sold and securities purchased under agreements to resell

162,893

1,925

1.58
%

138,191

208

—
%
Interest-bearing deposits in other financial institutions

2,494,687

15,953

0.85
%

1,876,943

1,998

0.14
%
Securities borrowed

1,280,551

30,252

3.12
%

1,435,862

53,143

4.88
%
Other

54,971

5,187

12.62
%

50,281

2,568

6.83
%
Interest-earning assets, gross ⁽²⁾

16,298,322

412,400

3.38
%

16,310,530

408,052

3.34
%
Allowance for credit losses

(92,991)

(136,400)

Interest-earning assets, net

16,205,331

16,174,130

Noninterest-earning assets

1,439,017

1,468,459

Total assets

$
17,644,348

$
17,642,589

Liabilities and Stockholders' Equity

Interest-bearing liabilities

Interest-bearing deposits

$
7,698,557

$
22,174

0.39
%
$
7,662,951

$
19,220

0.34
%
Securities loaned

1,154,323

25,390

2.94
%

1,358,104

44,350

4.37
%
Notes payable and other borrowings

1,272,012

28,045

2.95
%

1,210,578

24,660

2.72
%
Total interest-bearing liabilities

10,124,892

75,609

1.00
%

10,231,633

88,230

1.15
%
Noninterest-bearing liabilities

Noninterest-bearing deposits

4,534,513

4,040,649

Other liabilities

683,288

925,689

Total liabilities

15,342,693

15,197,971

Stockholders’ equity

2,274,911

2,418,804

Noncontrolling interest

26,744

25,814

Total liabilities and stockholders' equity

$
17,644,348

$
17,642,589

Net interest income ⁽²⁾

$
336,791

$
319,822

Net interest spread ⁽²⁾

2.38
%

2.19
%
Net interest margin ⁽²⁾

2.76
%

2.62
%

~~Table of Contents~~

(1)	Average balance includes non-accrual loans.

(2)

Presented on a taxable equivalent basis with annualized taxable equivalent adjustments based on the applicable corporate federal income tax rate of 21% for the periods presented. The adjustment to interest income was ~~$0.4~~$0.1 million and ~~$0.6~~$0.5 million for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $1.3 million and $1.2 million for the nine months ended September 30, 2022 and 2021,~~ 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 ~~warehouse~~ lines of credit extended to ~~subsidiaries (operating segments)~~other operating segments by the banking segment, are eliminated from the consolidated financial statements.

On a consolidated basis, the changes in net interest income during the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, compared with the same ~~periods~~period in ~~2021,~~2022, 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 the three months ended September 30, 2022, the reversal of credit losses reflected modest improvements in the U.S. economic outlook compared to assumptions in the prior quarter outlook, and in specific reserves and credit metrics since the prior quarter, whileMarch 31, 2023, the provision for credit losses reflected a build in the allowance related to loan portfolio changes since the prior quarter, offset by an updated economic outlook with a mild U.S. recession from the fourth quarter of 2023 and recovery from the

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third quarter of 2024 compared to the prior quarter’s U.S. recession assumption during the ~~nine months ended September 30, 2022 was driven by a deteriorating U.S. economic outlook since December 31, 2021.~~last three quarters of 2023. Refer to the discussion inunder the heading “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 decreased during the three months ended ~~September 30, 2022,~~March 31, 2023, compared with the same period in ~~2021,~~2022, primarily due to decreases in total mortgage loan sales volume and average loan sales margin within our mortgage origination ~~segment. The decrease in noninterest income during the nine months ended September 30, 2022, compared with the same period in 2021, was~~segment, partially offset by net increases primarily due to decreases in total mortgage loan sales volume and average loan sales margin, and changes in net fair value and related derivative activity within our mortgage origination segment, as well as declines in net revenues within the broker-dealer segment’s ~~public finance services,~~ fixed income services and structured finance business lines.

Noninterest expense decreased during the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, compared with the same ~~periods~~period in ~~2021,~~2022, primarily due to decreases in both variable and non-variable compensation within our mortgage origination segment associated with the decreased mortgage loan originations, partially offset by increases in both variable and ~~a decline in variable~~non-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 ~~the first nine months of~~2023 and 2022, compared with respective prior periods, including compensation, occupancy, and software costs, due to inflationary pressures. We expect such inflationary headwinds to continue and result in higher fixed costs ~~during the remainder of 2022 and into the first half of~~throughout 2023.

Effective income tax rates during the three months ended ~~September 30,~~March 31, 2023 and 2022 were 11.6% and ~~2021 were 21.8% and 22.8%~~19.4%, ~~respectively, and~~respectively. The effective tax rate for the ~~nine~~three months ended ~~September 30,~~March 31, 2022 was lower than the applicable statutory rate primarily due to the discrete impact of restricted stock vesting during the quarter. During the three months ended March 31, 2023, the effective tax rate was lower than the applicable statutory rate primarily due to the impacts of excess tax benefits on share-based payment awards, investments in tax-exempt instruments and ~~2021, were 22.7% and 23.2%, respectively.~~changes in accumulated tax reserves, partially offset by nondeductible expenses.

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Segment Results

Banking Segment

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


	Three Months Ended September 30,				Variance		Nine Months Ended September 30,				Variance		Three Months Ended March 31,				Variance
	2022		2021		2022 vs 2021		2022		2021		2022 vs 2021		2023		2022		2023 vs 2022
Net interest income	$	110,939	$	99,978	$	10,961	$	304,269	$	309,330	$	(5,061)	$	104,770	$	92,070	$	12,700
Provision for (reversal of) credit losses		(650)		(5,775)		5,125		4,325		(39,725)		44,050		1,600		(50)		1,650
Noninterest income		12,200		11,727		473		37,438		33,293		4,145		11,190		12,771		(1,581)
Noninterest expense		60,160		54,567		5,593		175,921		167,869		8,052		56,127		58,430		(2,303)
Income (loss) before income taxes	$	63,629	$	62,913	$	716	$	161,461	$	214,479	$	(53,018)
Income before income taxes													$	58,233	$	46,461	$	11,772

The ~~changes~~increase in income before income taxes during the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, compared with the same ~~periods~~period in ~~2021, were~~2022, was primarily due to ~~declines in the respective year-over-year changes in provision for (reversal of) credit losses and~~ the combined impact of net interest income volume and rate changes within the loans held for investment, ~~and~~ mortgage warehouse lending, ~~portfolios.~~investment securities and deposit portfolios, partially offset by an increase in the changes in provision for (reversal of) credit losses. Changes to net interest income related to the component changes in the volume of average interest-earning assets and interest-bearing liabilities and changes in the rates earned or paid on those items are discussed in more detail below.

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


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2022		2021		2022		2021		2023		2022
Efficiency ratio ⁽¹⁾	48.85	%	48.85	%	51.48	%	49.00	%	48.40	%	55.73	%
Return on average assets ⁽²⁾	1.41	%	1.36	%	1.16	%	1.58	%	1.44	%	0.98	%
Net interest margin ⁽³⁾	3.42	%	2.99	%	3.01	%	3.16	%	3.40	%	2.65	%
Net recoveries (charge-offs) to average loans outstanding⁽⁴⁾	(0.15)	%	0.00	%	(0.08)	%	0.00	%
Net charge-offs to average loans outstanding ⁽⁴⁾									(0.01)	%	(0.02)	%

(1)	Efficiency ratio is defined as noninterest expenses divided by the sum of total noninterest income and net interest income for the period. We consider the efficiency ratio to be a measure of the banking segment’s profitability.

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

(3)	Net interest margin is defined as net interest income divided by average interest-earning assets. We consider net interest margin as a key indicator of profitability, as it represents interest earned on interest-earning assets compared to interest incurred.

(4)

Net ~~recoveries (charge-offs)~~charge-offs to average loans outstanding is defined as the greater of ~~recoveries or~~ charge-offs during the reported period minus ~~charge-offs or~~ recoveries divided by average loans outstanding. We use the ratio to measure the credit performance of our loan portfolio.

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The banking segment presents net interest margin and net interest income in the following discussion and ~~tables~~table below on a taxable equivalent basis. Net interest margin (taxable equivalent), a non-GAAP measure, is defined as taxable equivalent net interest income divided by average interest-earning assets. Taxable equivalent adjustments are based on the applicable corporate federal income tax rate of 21% for all periods presented. The interest income earned on certain earning assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments. To provide more meaningful comparisons of net interest margins for all earning assets, we use net interest income on a taxable equivalent basis in calculating net interest margin by increasing the interest income earned on tax-exempt assets to make it fully equivalent to interest income earned on taxable investments.

During the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021,~~ purchase accounting contributed 107 and 118 basis points, respectively, to the banking segment’s taxable equivalent net interest margin of ~~3.43%~~3.41% and 3.00%, respectively. During the nine months ended September 30, 2022 and 2021, purchase accounting contributed 9 and 16 basis points, respectively, to the banking segment’s taxable equivalent net interest margin of 3.01% and 3.17%2.65%, respectively. These purchase accounting items are primarily related to accretion of discount of loans associated with the Bank Transactions presented in the Consolidated Operating Results section.

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


	Three Months Ended September 30,												Three Months Ended March 31,
	2022						2021						2023						2022
	Average		Interest		Annualized		Average		Interest		Annualized		Average		Interest		Annualized		Average		Interest		Annualized
	Outstanding		Earned		Yield or		Outstanding		Earned		Yield or		Outstanding		Earned		Yield or		Outstanding		Earned		Yield or
	Balance		or Paid		Rate		Balance		or Paid		Rate		Balance		or Paid		Rate		Balance		or Paid		Rate
Assets
Interest-earning assets
Loans held for investment, gross ⁽¹⁾	$	7,460,437	$	88,054	4.68	%	$	6,906,305	$	77,825	4.47	%	$	7,693,626	$	104,632	5.52	%	$	7,156,313	$	73,811	4.18	%
Subsidiary warehouse lines of credit		1,078,422		16,012	5.81	%		2,113,964		20,239	3.75	%		726,470		13,481	7.42	%		1,343,757		12,717	3.79	%
Investment securities - taxable		2,426,451		12,203	2.01	%		2,110,509		7,772	1.47	%		2,414,077		18,034	2.99	%		2,341,460		8,841	1.51	%
Investment securities - non-taxable ⁽²⁾		111,775		989	3.54	%		113,474		966	3.41	%		113,894		1,010	3.55	%		108,853		933	3.43	%
Federal funds sold and securities purchased under agreements to resell		80,811		541	—	%		744		—	—	%		100,806		1,203	4.84	%		165,008		174	0.43	%
Interest-bearing deposits in other financial institutions		1,662,342		9,542	2.28	%		1,971,325		788	0.16	%		1,406,128		16,116	4.65	%		2,947,713		1,427	0.20	%
Other		36,849		2,154	23.19	%		36,754		130	1.40	%		43,482		443	4.13	%		36,798		(77)	(0.85)	%
Interest-earning assets, gross ⁽²⁾		12,857,087		129,495	4.00	%		13,253,075		107,720	3.22	%		12,498,483		154,919	5.03	%		14,099,902		97,826	2.81	%
Allowance for credit losses		(94,690)						(115,001)						(95,621)						(91,810)
Interest-earning assets, net		12,762,397						13,138,074						12,402,862						14,008,092
Noninterest-earning assets		937,190						962,472						872,528						891,783
Total assets	$	13,699,587					$	14,100,546					$	13,275,390					$	14,899,875

Liabilities and Stockholders’ Equity
Interest-bearing liabilities
Interest-bearing deposits	$	6,871,441	$	16,409	0.95	%	$	7,467,386	$	7,144	0.38	%	$	7,045,714	$	44,440	2.56	%	$	8,098,046	$	4,989	0.25	%
Notes payable and other borrowings		352,299		1,938	2.18	%		140,016		391	1.11	%		585,360		5,511	3.82	%		190,039		564	1.20	%
Total interest-bearing liabilities		7,223,740		18,347	1.01	%		7,607,402		7,535	0.39	%		7,631,074		49,951	2.65	%		8,288,085		5,553	0.27	%
Noninterest-bearing liabilities
Noninterest-bearing deposits		4,741,624						4,632,213						3,934,399						4,801,571
Other liabilities		151,313						156,358						153,350						113,769
Total liabilities		12,116,677						12,395,973						11,718,823						13,203,425
Stockholders’ equity		1,582,910						1,704,573						1,556,567						1,696,450
Total liabilities and stockholders’ equity	$	13,699,587					$	14,100,546					$	13,275,390					$	14,899,875

Net interest income ⁽²⁾			$	111,148					$	100,185					$	104,968					$	92,273
Net interest spread ⁽²⁾					2.99	%					2.83	%					2.38	%					2.54	%
Net interest margin ⁽²⁾					3.43	%					3.00	%					3.41	%					2.65	%

Nine Months Ended September 30,

2022

2021


Average

Interest

Annualized

Average

Interest

Annualized

Outstanding

Earned

Yield or

Outstanding

Earned

Yield or

Balance

or Paid

Rate

Balance

or Paid

Rate

Assets

Interest-earning assets

Loans held for investment, gross ⁽¹⁾

$
7,307,478

$
241,170

4.41
%
$
7,083,355

$
245,332

4.63
%
Subsidiary warehouse lines of credit

1,239,312

43,211

4.60
%

2,265,504

64,441

3.75
%
Investment securities - taxable

2,374,314

30,886

1.73
%

1,952,961

21,289

1.45
%
Investment securities - non-taxable ⁽²⁾

108,946

2,852

3.49
%

114,965

2,951

3.42
%
Federal funds sold and securities purchased under agreements to resell

120,790

1,025

1.15
%

514

—

—
%
Interest-bearing deposits in other financial institutions

2,349,273

15,953

0.91
%

1,626,918

1,515

0.12
%
Other

36,824

2,176

7.90
%

36,825

358

1.30
%
Interest-earning assets, gross ⁽²⁾

13,536,937

337,273

3.33
%

13,081,042

335,886

3.43
%
Allowance for credit losses

(92,562)

(135,979)

Interest-earning assets, net

13,444,375

12,945,063

Noninterest-earning assets

920,984

975,701

Total assets

$
14,365,359

$
13,920,764

Liabilities and Stockholders’ Equity

Interest-bearing liabilities

Interest-bearing deposits

$
7,523,367

$
28,684

0.51
%
$
7,523,106

$
24,738

0.44
%
Notes payable and other borrowings

277,152

3,711

1.79
%

139,698

1,191

1.14
%
Total interest-bearing liabilities

7,800,519

32,395

0.56
%

7,662,804

25,929

0.45
%
Noninterest-bearing liabilities

Noninterest-bearing deposits

4,797,683

4,411,823

Other liabilities

135,825

160,643

Total liabilities

12,734,027

12,235,270

Stockholders’ equity

1,631,332

1,685,494

Total liabilities and stockholders’ equity

$
14,365,359

$
13,920,764

Net interest income ⁽²⁾

$
304,878

$
309,957

Net interest spread ⁽²⁾

2.77
%

2.98
%
Net interest margin ⁽²⁾

3.01
%

3.17
%

(1)	Average balance includes non-accrual loans.

(2)

Presented on a taxable equivalent basis with annualized taxable equivalent adjustments based on the applicable corporate federal income tax rates of 21% for all the periods presented. The adjustment to interest income was $0.2 million and $0.2 million for the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $0.6 million and $0.6 million for the nine months ended September 30, 2022 and 2021,~~ respectively.

~~Table of Contents~~

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, ~~the banking segment’s~~yields and costs on certain interest-earning assets, ~~include warehouse~~such as lines of credit extended to other ~~subsidiaries, which~~operating segments by the banking segment, are eliminated from the consolidated financial statements.

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The following table summarizes the changes in the banking segment’s net interest income for the periods indicated below, including the component changes in the volume of average interest-earning assets and interest-bearing liabilities and changes in the rates earned or paid on those items (in thousands).


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2022 vs. 2021						2022 vs. 2021						2023 vs. 2022
	Change Due To ⁽¹⁾						Change Due To ⁽¹⁾						Change Due To ⁽¹⁾
	Volume		Yield/Rate		Change		Volume		Yield/Rate		Change		Volume		Yield/Rate		Change
Interest income
Loans held for investment, gross ⁽²⁾	$	6,243	$	3,986	$	10,229	$	7,761	$	(11,923)	$	(4,162)	$	5,538	$	25,283	$	30,821
Subsidiary warehouse lines of credit ⁽³⁾		(9,788)		5,561		(4,227)		(28,783)		7,553		(21,230)		(5,762)		6,526		764
Investment securities - taxable		1,171		3,260		4,431		4,570		5,027		9,597		270		8,923		9,193
Investment securities - non-taxable ⁽⁴⁾		(15)		38		23		(154)		55		(99)		43		34		77
Federal funds sold and securities purchased under agreements to resell		—		541		541		—		1,025		1,025		(68)		1,097		1,029
Interest-bearing deposits in other financial institutions		(125)		8,879		8,754		648		13,790		14,438		(746)		15,435		14,689
Other		—		2,024		2,024		—		1,818		1,818		(14)		534		520
Total interest income ⁽⁴⁾		(2,514)		24,289		21,775		(15,958)		17,345		1,387		(739)		57,832		57,093

Interest expense
Deposits	$	(571)	$	9,836	$	9,265	$	1	$	3,945	$	3,946	$	(648)	$	40,099	$	39,451
Notes payable and other borrowings		594		953		1,547		1,172		1,348		2,520		1,173		3,774		4,947
Total interest expense		23		10,789		10,812		1,173		5,293		6,466		525		43,873		44,398

Net interest income ⁽⁴⁾	$	(2,537)	$	13,500	$	10,963	$	(17,131)	$	12,052	$	(5,079)	$	(1,264)	$	13,959	$	12,695

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

(2)

Changes in the yields earned on loans held for investment, gross included ~~declines during the three and nine months ended September 30, 2022, compared to the same periods in 2021,~~a decline of ~~$4.4~~$0.6 million ~~and $14.4 million, respectively, in PPP loan-related fee income and $0.4 million and $5.7 million, respectively,~~ in accretion of discount on ~~loans.~~loans during three months ended March 31, 2023, compared with the same period in 2022. Accretion of discount on loans is expected to decrease in future periods as loans acquired in the Bank Transactions are repaid, refinanced or renewed.

(3)	Subsidiary warehouse lines of credit extended to PrimeLending are eliminated from the consolidated financial statements.

(4)	Annualized taxable equivalent.

With regard to ~~the~~ net interest income, as of March 31, 2023, the banking segment ~~maintains~~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 ~~September 30, 2022,~~March 31, 2023, approximately ~~$723~~$739 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

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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. ~~Consistent with our loan portfolio,~~During a period of rising interest rates, ~~may increase our~~the cost of funds on ~~deposit,~~deposits, and therefore, ~~negatively impact net~~ interest ~~income.~~expense, tends to increase. Currently, given the ongoing competition for liquidity by some participants in our markets and the recent banking industry disruption, 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. The Bank’s deposit base primarily includes a combination of commercial, wealth and public funds deposits, without a high level of industry concentration. At March 31, 2023, total estimated uninsured deposits were $3.1 billion, or approximately 28% of total deposits, while estimated uninsured deposits, excluding collateralized deposits of $0.4 billion, were $2.7 billion, or approximately 24% of total deposits.

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Refer to the discussion in the “Liquidity and Capital Resources – Banking Segment” section that follows for more detail regarding the Bank’s activities regarding deposits, available liquidity and borrowing capacity.

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.

We will continue to monitor developments regarding the COVID-19 pandemic and measures implemented in response to the pandemic, market capitalization, overall economic conditions, effectiveness of vaccinations, the emergence of new variants, government stimulus, payment deferment programs and any other triggering events or circumstances that may indicate an impairment of goodwill or core deposit intangible assets in the future. See further discussion in the “Recent Developments” section above.

The banking segment retained approximately ~~$130.1~~$66 million and ~~$227.7~~$109 million ~~during the three months ended September 30, 2022 and 2021, respectively, and $343.1 million and $567.5 million during the nine months ended September 30, 2022 and 2021, respectively,~~ in mortgage loans originated by the mortgage origination ~~segment.~~segment during the three months ended March 31, 2023 and 2022, respectively. These loans are purchased by the banking segment at par. For origination services provided, the banking segment reimburses the mortgage origination segment for direct origination costs associated with these mortgage loans, in addition to payment of a correspondent fee. The correspondent fees are eliminated in consolidation. The determination of mortgage loan retention levels by the banking segment will be impacted by, among other things, an ongoing review of the prevailing mortgage rates, balance sheet positioning at Hilltop and the banking segment’s outlook for commercial loan growth.

The banking segment’s provision for (reversal of) credit losses has been subject to significant year-over-year and quarterly changes primarily attributable to the effects of changes in ~~the~~ economic outlook, macroeconomic forecast assumptions and the resulting impact on reserves. Specifically, during the three months ended September 30, 2022, the reversal of credit losses reflected modest improvements in the U.S. economic outlook compared to assumptions in the prior quarter outlook, and in specific reserves and credit metrics since the prior quarter, whileMarch 31, 2023, the provision for credit losses reflected a build in the allowance related to loan portfolio changes since the prior quarter, offset by an updated economic outlook with a mild U.S. recession from the fourth quarter of 2023 and recovery from the third quarter of 2024 compared to the prior quarter’s U.S. recession assumption during the ~~nine months ended September 30, 2022 was driven by a deteriorating U.S. economic outlook since December 31, 2021.~~last three quarters of 2023. The net impact to the allowance of changes associated with individually and collectively evaluated loans during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 included ~~reversals of~~a provision for credit losses of $0.1 million and ~~$1.6 million, respectively, while collectively evaluated loans included a reversal of credit losses of $0.5 million, compared to a provision for credit losses of $5.9~~$1.5 million, respectively. The ~~changes~~change in the allowance for credit losses during the three ~~and nine~~ months ended ~~September 30, 2022 were~~March 31, 2023 was also impacted by net charge-offs of ~~$2.7 million and $4.2 million, respectively. The~~$0.4 million. During the three months ended March 31, 2022, the banking segment’s ~~reversals of credit losses during the three and nine months ended September 30, 2021 of $11.0 million and $45.2 million, respectively, were primarily due to improvements~~slight decrease in the ~~macroeconomic forecast assumptions~~allowance reflected decreases in specific reserves and ~~credit quality metrics on COVID-19 impacted industry sector exposures.~~positive risk rating grade migration, significantly offset by a slower U.S. economic outlook since the prior quarter. The net impact to the allowance of changes associated with ~~individually~~collectively evaluated loans during the three ~~and nine~~ months ended ~~September 30, 2021~~March 31, 2022 included ~~provisions~~a reversal of credit losses of $0.2 million, while individually evaluated loans included a provision for credit losses ~~of $5.2 million and $5.5 million, respectively. The changes in the allowance for credit losses during the three and nine months ended September 30, 2021 were also impacted by net recoveries~~ of $0.1 million. The changes in the allowance for credit losses during the noted periods also reflected other factors including, but not limited to, loan growth, loan mix and changes in risk grades and qualitative factors from the prior quarter. Refer to the discussion in the “Financial Condition – Allowance for Credit Losses on Loans” section that follows for more details regarding the significant assumptions and estimates involved in estimating credit losses.

The banking segment’s noninterest income ~~increased~~decreased during the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, compared to the same ~~periods~~period in ~~2021,~~2022, primarily due to ~~increased wealth management fee income as well as~~a decline in service charges on depositor accounts.

The banking segment’s noninterest expense ~~increased~~decreased during the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, compared to the same ~~periods~~period in ~~2021,~~2022, primarily due to ~~increases~~the decrease in ~~expenses associated with employees’ compensation~~the allowance for unfunded commitments attributable to changes in both available commitment balances and ~~benefits~~expected loss rates as well as reductions in legal and professional ~~fees.~~expenses.

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Broker-Dealer Segment

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


	Three Months Ended September 30,				Variance		Nine Months Ended September 30,				Variance		Three Months Ended March 31,				Variance
	2022		2021		2022 vs 2021		2022		2021		2022 vs 2021		2023		2022		2023 vs 2022
Net interest income:
Wealth management:
Securities lending	$	1,531	$	2,066	$	(535)	$	4,862	$	8,793	$	(3,931)	$	1,722	$	1,345	$	377
Clearing services		1,888		1,922		(34)		5,998		5,155		843		1,481		2,121		(640)
Structured finance		1,544		469		1,075		4,995		1,342		3,653		2,625		1,811		814
Fixed income services		4,550		5,354		(804)		15,163		13,667		1,496		2,018		5,113		(3,095)
Other		3,873		616		3,257		6,463		2,666		3,797		6,017		1,128		4,889
Total net interest income		13,386		10,427		2,959		37,481		31,623		5,858		13,863		11,518		2,345
Noninterest income:
Securities commissions and fees by business line ⁽¹⁾:
Fixed income services		6,984		9,807		(2,823)		25,658		38,720		(13,062)		6,620		11,198		(4,578)
Wealth management:
Retail		19,341		18,954		387		56,964		55,743		1,221		21,004		18,612		2,392
Clearing services		7,440		5,215		2,225		18,922		17,037		1,885		10,774		5,120		5,654
Structured finance		3,652		1,206		2,446		8,237		1,877		6,360		1,906		1,945		(39)
Other		958		964		(6)		2,917		2,851		66		668		950		(282)
		38,375		36,146		2,229		112,698		116,228		(3,530)		40,972		37,825		3,147
Investment and securities advisory fees and commissions by business line:
Public finance services		25,399		37,087		(11,688)		65,549		77,737		(12,188)		17,950		18,596		(646)
Fixed income services		1,677		3,234		(1,557)		5,055		5,350		(295)		946		1,825		(879)
Wealth management:
Retail		7,313		8,299		(986)		23,793		23,330		463		7,361		8,339		(978)
Clearing services		406		472		(66)		1,354		1,480		(126)		393		486		(93)
Structured finance		153		429		(276)		719		1,431		(712)		138		365		(227)
Other		83		125		(42)		268		281		(13)		60		94		(34)
		35,031		49,646		(14,615)		96,738		109,609		(12,871)		26,848		29,705		(2,857)
Other:
Structured finance		23,966		33,337		(9,371)		40,357		68,136		(27,779)		15,009		634		14,375
Fixed income services		3,626		(3,015)		6,641		1,008		1,931		(923)		6,848		(6,958)		13,806
Other		(200)		29		(229)		(1,662)		2,325		(3,987)		958		(515)		1,473
		27,392		30,351		(2,959)		39,703		72,392		(32,689)		22,815		(6,839)		29,654
Total noninterest income		100,798		116,143		(15,345)		249,139		298,229		(49,090)		90,635		60,691		29,944
Net revenue ⁽²⁾		114,184		126,570		(12,386)		286,620		329,852		(43,232)		104,498		72,209		32,289
Noninterest expense:
Variable compensation ⁽³⁾		42,567		53,505		(10,938)		106,663		125,325		(18,662)		30,821		26,625		4,196
Non-variable compensation and benefits		27,707		28,924		(1,217)		83,930		85,550		(1,620)		31,608		29,200		2,408
Segment operating costs ⁽⁴⁾		26,439		26,720		(281)		78,060		77,033		1,027		28,647		24,987		3,660
Total noninterest expense		96,713		109,149		(12,436)		268,653		287,908		(19,255)		91,076		80,812		10,264

Income before income taxes	$	17,471	$	17,421	$	50	$	17,967	$	41,944	$	(23,977)
Income (loss) before income taxes													$	13,422	$	(8,603)	$	22,025

(1)

Securities commissions and fees includes income of ~~$4.3~~$9.8 million and ~~$1.7~~$0.7 million during the three months ended ~~September 30,~~March 31, 2023 and 2022, ~~and 2021, respectively, and $6.7 million and $5.2 million during the nine months ended September 30, 2022 and 2021,~~ respectively, that is eliminated in consolidation.

(2)

Net revenue is defined as the sum of total net interest income and total noninterest income. We consider net revenue to be a key performance measure in the evaluation of the broker-dealer segment’s financial position and operating performance as we believe it is the primary revenue performance measure used by investors and analysts. Net revenue provides for some level of comparability of trends across the financial services industry as it reflects both noninterest income, including investment and securities advisory fees and commissions, as well as net interest income. Internally, we assess the broker-dealer segment’s performance on a 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.

The ~~changes~~increase in net revenue and income before income taxes ~~between the noted periods were~~was primarily related to the combined impacts of the rising interest rate environment and ~~market turbulence,~~a more favorable trading environment, which ~~impacted period-over-period~~was evidenced by improved customer demand ~~and volumes~~period-over-period within our various business lines. ~~Specifically, during~~All the ~~third~~broker-dealer business lines experienced an increase in net revenues when compared to the first quarter of 2022, except the public finance business line. Specifically, the broker-dealer segment’s structured finance business line experienced ~~a decrease~~an increase in net revenues due to increased production volumes and improved buy-side demand. The wealth management business line’s net revenue improvement was driven by improved customer balance revenues, despite weaker retail division transactional production. The increase in net revenues in the broker-dealer segment’s fixed income services business line during the first quarter of 2023, compared to the ~~third~~first quarter of ~~2021~~2022, was primarily due to ~~lower production volumes~~improved trading revenues in both taxable and ~~continued rate volatility.~~municipal products. 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 the ~~third~~first quarter of ~~2022~~2023 compared to the ~~third~~first quarter of 2021. The increase in net revenues in the broker-dealer segment’s fixed income services business line during the third quarter of 2022, compared to third quarter of 2021, was primarily due to increases in the business line’s net trading gains, partially offset by decreases in commissions and fees earned on sales transactions. The wealth management business line’s net revenue increased for the third quarter of 2022 when compared to the third quarter of 2021, as customer balance revenues increased despite weaker retail division production due to higher rates and an overall decline in the equity markets.2022.

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The changes in the broker-dealer segment’s income before income taxes during the three and nine months ended September 30, 2022 compared with the same periods in 2021, were primarily as a result of the following:

●

decreases in the broker-dealer segment’s structured finance business line’s net revenues for the three and nine months ended September 30, 2022 as a result of lower volumes and market turbulence beginning in the second quarter of 2022, resulting in decreases in the business line’s other noninterest income. Specifically, for the nine months ended September 30, 2022, the decreases were due to lower mortgage originations, with mortgage loan lock volumes totaling $3.1 billion during the nine months ended September 30, 2022, a 44% decline compared with the same period in 2021.

●

a decrease in the broker-dealer segment’s fixed income services net revenues for the nine months ended September 30, 2022 primarily resulted from declines within the taxable fixed income and municipal divisions as a result of lower customer demand and a less favorable trading environment given higher interest rates. Specifically, in the first quarter of 2022, all product areas experienced declines in customer demand and volumes as compared to the same period in 2021 given higher inflation and the expectation of higher interest rates.

●

a decrease in compensation expense for the nine months ended September 30, 2022, of which $18.7 million was due to the decreases in variable compensation associated with revenue declines in our business lines. Compensation expense for the three months ended September 30, 2022 decreased $12.2 million compared to the same period in 2021 primarily due to a decrease of $10.9 million in variable compensation associated with revenue declines within our public finance business line and commission revenue declines within our wealth management business line.

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.

The broker-dealer segment 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 ~~increases~~increase in net interest income during the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, compared with the same ~~periods~~period in ~~2021, were~~2022, was primarily due to the ~~changes~~increase in net interest income from ~~the~~structured finance and securities lending ~~division of our wealth management, our structured finance business line and our~~divisions, partially offset by the decline in net interest income within the fixed income services business ~~line. With~~line due to the 41-basis point decrease in the weighted average interest rate spread for the three months ended September 30, 2022 and 38-basis point decrease in the weighted average interest rate spread for the nine months ended September 30, 2022, net interest earned within the broker-dealer segment’s stock lending business decreased $0.5 million and $3.9 million for the three and nine months ended September 30, 2022, respectively, when compared with the same periods in 2021.increased cost to carry those inventories.

Noninterest income ~~decreased~~increased during the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, compared with the same ~~periods~~period in ~~2021,~~2022, primarily due to ~~changes~~increases in securities commissions and fees and other noninterest income, partially offset by the decrease in investment ~~banking~~ and securities advisory fees ~~as well as other noninterest income.~~and commissions.

Securities commissions and fees increased during the three months ended ~~September 30, 2022,~~March 31, 2023, compared with the same period in ~~2021,~~2022, primarily due to ~~increases~~an increase in ~~our~~ money market and FDIC sweep revenue ~~and commissions and fees earned on commodities sales transactions,~~given higher short-term interest rates, partially offset by ~~the~~a decrease in ~~customer demand for~~ fixed income ~~services as previously discussed. Securities commissions~~ and fees decreased during the nine months ended September 30, 2022, compared with the same period in 2021, primarily due to the decrease in customer demand for fixed income services as previously discussed, partially offset by increases in money market and FDIC sweep revenues and commission and fees

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~~earned on commodities sales transactions.~~retail commissions. As money market and FDIC sweep revenues are closely correlated to short-term interest rates, ~~we expect that any additional increases~~changes in short-term interest rates ~~will cause~~may affect these ~~revenues to rise.~~

In addition, securities commissions and fees during the three and nine months ended September 30, 2022, compared with the same periods in 2021, were impacted by decreases in commissions earned in insurance product sales transactions, commissions earned on mutual funds, and net clearing revenues due to the decrease in clearing fees.revenues.

Investment and securities advisory fees and commissions decreased during the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, compared with the same ~~periods~~period in ~~2021,~~2022, primarily due to decreases in fees earned from ~~our~~managed assets and municipal advisory and underwriting transactions. Public finance national issuance volume declined ~~26%~~approximately 27% in the ~~third~~first quarter of ~~2022,~~2023, compared with the same period in ~~2021, and declined 15% for the nine months ended September 30, 2022, compared with the same period in 2021.~~2022.

The ~~decreases~~increase in other noninterest income during the three ~~and nine~~ months ended September 30, 2022, compared with the same periods in 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. The decreases in the structured finance business line’s noninterest income during the third quarter of 2022,March 31, 2023, compared with the same period in ~~2021,~~2022, was ~~partially offset~~primarily due to increases in trading gains earned from structured finance and fixed income trading activities. Specifically, mortgage originations increased 7% and customer demand improved when compared with the same period in 2022. Increased fixed income trading gains were driven by municipal and credit trading. Also contributing to the overall increase in noninterest income was an increase in the ~~fixed income services business line’s other noninterest income. The decrease in other noninterest income during~~value of the ~~nine months ended September 30, 2022, compared with same period in 2021, also reflected a decline within our~~ broker-dealer segment’s deferred compensation ~~plan~~plan’s assets of ~~$2.5 million.~~$1.0 million when compared with the same period in 2022. With the expected rise in interest rates ~~through the end of 2022,~~continuing throughout 2023, we anticipate continued volatility ~~and generally lower levels of other noninterest income related to our structured finance and fixed income services business lines.~~in trading revenues.

The ~~changes~~increase in noninterest expenses during the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, compared with the same ~~periods~~period in ~~2021, were~~2022, was primarily due to the impact of ~~respective~~ changes in variable compensation ~~as previously noted.~~on improved results. The remaining increase in noninterest expenses during the three months ended March 31, 2023, compared with the same period in 2022 was attributable to an increase in software expenses, travel expenses, quotation costs and legal fees.

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


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2022				2021		2022				2021		2023				2022
Total compensation as a % of net revenue ⁽¹⁾		61.5	%		65.1	%		66.5	%		63.9	%		59.7	%		77.3	%
Pre-tax margin ⁽²⁾		15.3	%		13.8	%		6.3	%		12.7	%		12.8	%		(11.9)	%
FDIC insured program balances at the Bank (end of period)							$	663,730		$	794,446		$	1,601,823		$	784,462
Other FDIC insured program balances (end of period)							$	1,376,741		$	1,594,069		$	848,235		$	1,603,168
Customer funds on deposit, including short credits (end of period)							$	329,948		$	506,582		$	245,588		$	445,455

Public finance services:
Number of issues ⁽³⁾		245			286			759			905			144			231
Aggregate amount of offerings ⁽³⁾	$	15,560,951		$	14,837,900		$	33,753,891		$	45,142,567		$	9,720,046		$	7,022,280

Structured finance:
Lock production/TBA volume	$	1,300,944		$	1,774,501		$	3,088,340		$	5,491,809		$	1,187,826		$	1,109,908

Fixed income services:
Total volumes(3)	$	50,276,258		$	53,254,804		$	175,487,156		$	184,280,307		$	47,497,874		$	62,659,853
Net inventory (end of period)							$	542,257		$	496,615		$	641,328		$	374,021

Wealth management (Retail and Clearing services groups):
Retail employee representatives (end of period) ⁽³⁾								96			109			99			100
Independent registered representatives (end of period)								171			188			188			177
Correspondents (end of period)								110			122			110			114
Correspondent receivables (end of period)							$	115,810		$	271,664		$	90,449		$	170,168
Customer margin balances (end of period)							$	286,691		$	374,002		$	271,032		$	336,247

Wealth management (Securities lending group):
Interest-earning assets - stock borrowed (end of period)							$	1,182,934		$	1,377,261		$	1,416,426		$	1,453,614
Interest-bearing liabilities - stock loaned (end of period)							$	1,072,408		$	1,350,722		$	1,303,657		$	1,314,279

(1)	Total compensation includes the sum of non-variable compensation and benefits and variable compensation. We consider total compensation as a percentage of net revenue to be a key performance measure and indicator of segment profitability.

(2)	Pre-tax margin is defined as income before income taxes divided by net revenue. We consider pre-tax margin to be a key performance measure given its use as a profitability metric representing the percentage of net revenue earned that results in a profit.

(3)	Noted balances during all prior periods include certain reclassifications to conform to current period presentation.

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Mortgage Origination Segment

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


	Three Months Ended September 30,				Variance		Nine Months Ended September 30,				Variance		Three Months Ended March 31,				Variance
	2022		2021		2022 vs 2021		2022		2021		2022 vs 2021		2023		2022		2023 vs 2022
Net interest income (expense)	$	(2,939)	$	(3,503)	$	564	$	(6,066)	$	(16,554)	$	10,488	$	(4,208)	$	(1,835)	$	(2,373)
Noninterest income		98,200		242,270		(144,070)		381,477		794,679		(413,202)		68,829		143,195		(74,366)
Noninterest expense		118,345		176,587		(58,242)		386,372		573,884		(187,512)		88,753		134,859		(46,106)
Income (loss) before income taxes	$	(23,084)	$	62,180	$	(85,264)	$	(10,961)	$	204,241	$	(215,202)	$	(24,132)	$	6,501	$	(30,633)

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, ~~recent~~ increases in mortgage interest rates that began in 2022 have also ~~have~~continued to negatively ~~impacted~~impact home purchase ~~volume.~~volume into 2023. 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 and continuing into 2023, certain events have 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. More recently, risks highlighted in the U.S. banking sector during the first quarter of 2023 have added additional uncertainty to the economy. These events have also adversely impacted the willingness and ability of the mortgage origination segment’s customers to conduct mortgage transactions. Specifically, current home inventory shortages and affordability challenges, in addition to supply chain problems, are impacting customers’ abilities to

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purchase homes. The increase in interest rates that began during ~~the first nine months of~~ 2022, which has led to a sharp reduction in national refinancing volume and ~~the~~a reduction of willing and eligible home buyers, has resulted in competitive mortgage pricing pressure, leading to a decline in average loans sales ~~margin.~~margin since the first quarter of 2022. In addition to decreased loan volumes, ~~the~~this 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 ~~the third quarter of~~ 2022 will continue ~~into the fourth quarter of 2022, as well as into the first half of~~through 2023. Given these expectations, PrimeLending continues to evaluate its cost structure to address the current mortgage environment.

We believe that current initiatives are critical to improving PrimeLending’s short- and long-term financial condition and operating results. As noted under the section titled “Asset Valuation” earlier in this Item 2, the mortgage origination segment ~~has~~ experienced ~~lower-than-forecasted~~ operating ~~results~~losses during the ~~first nine months~~second half of 2022 which have continued as expected into the first quarter of 2023 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.

As a GNMA approved lender, the Company is subject to certain HUD reporting requirements, including timely reporting if a quarter’s operating loss exceeds more than 20% of its previous quarter or year-end net worth (“the operating loss ratio”). If this occurs, certain additional financial reporting submissions are required. During the first quarter of 2023, the operating loss ratio was 21.2%, which has been reported to HUD.

Income (loss) before income taxes decreased significantly during the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, compared with the same ~~periods~~period in ~~2021.~~2022. The ~~decreases during both periods were~~decrease was primarily the result of a decrease in interest rate lock commitments (“IRLCs”) related to a decrease in mortgage loan applications and a decrease in the average value of individual IRLCs. The impact of these trends was partially offset by an increase in average loan origination fees and a decrease in noninterest expense ~~during both periods.~~

Asas discussed in more detail within “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2021 Form 10-K, 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 PrimeLending beginning to reduce the amount of servicing it retained as the willingness of third-party mortgage servicers to purchase mortgage servicing rights improved. Since the fourth quarter of 2020, PrimeLending has reduced the amount of servicing it retained compared to the retention rates in the second and third quarters of 2020, as

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the willingness of third-party mortgage servicers to purchase mortgage servicing rights has improved. PrimeLending 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 PrimeLending’s servicing portfolio if we experience a significant increase in the amount of retained servicing.below.

During 2022, the ~~three~~U.S. 10-Year Treasury Rate and ~~nine months ended September 30, 2022,~~ mortgage interest rates increased ~~while during the three and nine months ended September 30, 2021, mortgage interest rates remained relatively flat.~~significantly. Average interest rates during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023, exceeded average interest rates during the same ~~periods~~period in ~~2021,~~2022, and refinancing volume as a percentage of total origination volume decreased during the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, as compared to the same ~~periods in 2021. Refinancing volume as a percentage of total origination volume during the three months ended September 30, 2022 decreased to 6.9% from 29.4% during the same~~ period in ~~2021, while refinancing volume during the nine months ended September 30, 2022 decreased to 15.9% from 38.5% during the same period in 2021.~~2022. Although we anticipate a lower percentage of refinancing volume relative to total loan origination volume during ~~2022,~~2023, as compared to ~~2021,~~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 the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, funded volume through ABAs was approximately 8%13% of the mortgage origination segment’s total loan volume. As of ~~September 30, 2022,~~March 31, 2023, PrimeLending owned a greater than 50% membership interest in ~~five~~four ABAs. During ~~the third quarter~~March 2023, all members of ~~2022, the decision was made~~one ABA mutually agreed to dissolve ~~one of~~ the ~~five ABAs. We anticipate the dissolution will be completed during the fourth quarter of 2022. We~~entity, effective June 2023. Considering this change, we expect total production within the ABA channel to ~~increase slightly to approximately~~approximate 10% of loan volume of the mortgage origination segment during the remainder of ~~2022.~~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).


	Three Months Ended September 30,								Nine Months Ended September 30,								Three Months Ended March 31,
	2022			2021					2022			2021					2023				2022
			% of			% of		Variance			% of			% of		Variance			% of				% of			Variance
	Amount		Total	Amount		Total		2022 vs 2021	Amount		Total	Amount		Total		2022 vs 2021	Amount		Total		Amount		Total			2023 vs 2022
Mortgage Loan Originations - units		10,098			18,919			(8,821)		34,407			60,651			(26,244)		5,783				12,219				(6,436)

Mortgage Loan Originations - volume:
Conventional	$	1,934,614	63.57	$	3,871,765	69.20	$	(1,937,151)	$	6,971,138	65.66	$	12,410,492	70.20	$	(5,439,354)	$	1,091,835	63.01	%	$	2,513,099	66.76	%	$	(1,421,264)
Government		736,895	24.21		894,869	16.00		(157,974)		2,085,949	19.65		2,571,494	14.54		(485,545)		434,549	25.08	%		643,314	17.09	%		(208,765)
Jumbo		198,846	6.53		547,131	9.78		(348,285)		949,498	8.94		1,986,473	11.24		(1,036,975)		63,485	3.66	%		387,842	10.30	%		(324,357)
Other		172,856	5.69		280,863	5.02		(108,007)		610,329	5.75		710,318	4.02		(99,989)		142,884	8.25	%		220,228	5.85	%		(77,344)
	$	3,043,211	100.00	$	5,594,628	100.00	$	(2,551,417)	$	10,616,914	100.00	$	17,678,777	100.00	$	(7,061,863)	$	1,732,753	100.00	%	$	3,764,483	100.00	%	$	(2,031,730)

Home purchases	$	2,832,136	93.06	$	3,948,420	70.58	$	(1,116,284)	$	8,927,270	84.09	$	10,870,052	61.49	$	(1,942,782)	$	1,607,330	92.76	%	$	2,753,031	73.13	%	$	(1,145,701)
Refinancings		211,075	6.94		1,646,208	29.42		(1,435,133)		1,689,644	15.91		6,808,725	38.51		(5,119,081)		125,423	7.24	%		1,011,452	26.87	%		(886,029)
	$	3,043,211	100.00	$	5,594,628	100.00	$	(2,551,417)	$	10,616,914	100.00	$	17,678,777	100.00	$	(7,061,863)	$	1,732,753	100.00	%	$	3,764,483	100.00	%	$	(2,031,730)

Texas	$	716,764	23.55	$	1,066,264	19.06	$	(349,500)	$	2,311,567	21.77	$	3,237,241	18.31	$	(925,674)	$	496,843	28.67	%	$	789,035	20.96	%	$	(292,192)
California		196,502	6.46		625,715	11.18		(429,213)		921,194	8.68		2,151,196	12.17		(1,230,002)		144,602	8.35	%		403,769	10.73	%		(259,167)
Florida		139,698	4.59		240,413	4.30		(100,715)		523,442	4.93		793,293	4.49		(269,851)		90,239	5.21	%		197,424	5.24	%		(107,185)
Arizona																		87,470	5.05	%		189,405	5.03	%		(101,935)
South Carolina		137,628	4.52		219,394	3.92		(81,766)		480,444	4.53		744,834	4.21		(264,390)		87,283	5.04	%		162,922	4.33	%		(75,639)
Arizona		116,535	3.83		249,471	4.46		(132,936)		473,870	4.46		806,722	4.56		(332,852)
New York																		70,190	4.05	%		141,753	3.77	%		(71,563)
North Carolina																		55,408	3.20	%		107,960	2.87	%		(52,552)
Missouri																		55,114	3.18	%		120,160	3.19	%		(65,046)
Ohio		155,904	5.12		226,164	4.04		(70,260)		469,165	4.42		676,395	3.83		(207,230)		52,458	3.03	%		140,943	3.74	%		(88,485)
New York		139,381	4.58		185,549	3.32		(46,168)		432,543	4.07		521,003	2.95		(88,460)
Missouri		104,914	3.45		205,897	3.68		(100,983)		346,173	3.26		574,878	3.25		(228,705)
North Carolina		90,287	2.97		159,894	2.86		(69,607)		325,931	3.07		578,796	3.27		(252,865)
Maryland																		44,509	2.57	%		96,332	2.56	%		(51,823)
Washington		81,962	2.69		177,118	3.17		(95,156)		283,127	2.67		568,911	3.22		(285,784)		41,084	2.37	%		92,652	2.46	%		(51,568)
All other states		1,163,636	38.24		2,238,749	40.01		(1,075,113)		4,049,458	38.14		7,025,508	39.74		(2,976,050)		507,553	29.28	%		1,322,128	35.12	%		(814,575)
	$	3,043,211	100.00	$	5,594,628	100.00	$	(2,551,417)	$	10,616,914	100.00	$	17,678,777	100.00	$	(7,061,863)	$	1,732,753	100.00	%	$	3,764,483	100.00	%	$	(2,031,730)
													.
Mortgage Loan Sales - volume:
Third parties	$	3,289,846	96.20	$	5,967,850	96.32	$	(2,678,004)	$	10,818,341	96.93	$	17,503,092	96.86	$	(6,684,751)	$	1,595,535	96.03	%	$	3,759,906	97.19	%	$	(2,164,371)
Banking segment		130,104	3.80		227,709	3.68		(97,605)		343,140	3.07		567,530	3.14		(224,390)		65,986	3.97	%		108,690	2.81	%		(42,704)
	$	3,419,950	100.00	$	6,195,559	100.00	$	(2,775,609)	$	11,161,481	100.00	$	18,070,622	100.00	$	(6,909,141)	$	1,661,521	100.00	%	$	3,868,596	100.00	%	$	(2,207,075)

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,

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resulting in net gains from the sale of loans, mortgage loan origination fees, and other mortgage production income. Total loan origination volume is a measure utilized by management, our investors, and analysts in assessing market share and growth of the mortgage origination segment.

The mortgage origination segment’s total loan origination volume decreased ~~45.6% and 39.9%~~54.0% during the three ~~and nine~~ months ended ~~September 30, 2022, respectively,~~March 31, 2023, compared to the same ~~periods~~period in ~~2021,~~2022, while income before income taxes decreased ~~137.1% and 105.4%, respectively,~~471.2% during ~~those same periods.~~that time. The ~~decreases~~decrease in income before income taxes during the three ~~and nine~~ months ended ~~September 30, 2022 were~~March 31, 2023 was primarily due to ~~decreases~~a decrease in net gains from sale of mortgage loans. Mortgage loan origination fees also decreased, but at a much lesser rate than net gains from sale of mortgage loans, during the first quarter of 2023 compared with the first quarter of 2022, while 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.

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


	Three Months Ended September 30,					Nine Months Ended September 30,						Three Months Ended March 31,
		2022		2021		2022			2021			2023			2022
Net gains from mortgage loan sales (basis points):
Loans sold to third parties		227		359			271			378			193			321
Impact of loans retained by banking segment		(9)		(13)			(8)			(12)			(7)			(9)
As reported		218		346			263			366			186			312
Variable compensation as a percentage of total compensation		51.5	%	65.4	%		54.3	%		67.4	%		41.0	%		54.7	%
Mortgage servicing rights asset ($000's) (end of period) ⁽¹⁾						$	156,539		$	110,931		$	103,314		$	100,475

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

Net interest expense was comprised of interest income earned on loans held for sale offset by interest incurred on warehouse lines of credit primarily held with the Bank, and related intercompany financing ~~costs offset by interest income earned on loans held for sale.~~costs. The year-over-year ~~improvement~~change in net interest expense between ~~both~~ the three ~~and nine~~ months ended ~~September 30,~~March 31, 2023 and 2022 ~~and 2021~~ reflected the effects of ~~increased~~decreased net yields on mortgage loans held for sale, ~~and~~partially offset by a decrease in the average warehouse line balance between each of the periods compared.

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


	Three Months Ended September 30,				Variance		Nine Months Ended September 30,				Variance		Three Months Ended March 31,				Variance
	2022		2021		2022 vs 2021		2022		2021		2022 vs 2021		2023		2022		2023 vs 2022
Net gains from sale of loans	$	74,696	$	214,093	$	(139,397)	$	293,630	$	661,563	$	(367,933)	$	30,876	$	120,825	$	(89,949)
Mortgage loan origination fees and other related income		39,960		38,780		1,180		114,400		124,082		(9,682)		28,777		32,062		(3,285)
Other mortgage production income:
Change in net fair value and related derivative activity:
IRLCs and loans held for sale		(22,163)		(22,902)		739		(59,353)		(47,274)		(12,079)		9,690		(20,421)		30,111
Mortgage servicing rights asset		(4,146)		(3,306)		(840)		5,490		8,379		(2,889)		(7,868)		2,193		(10,061)
Servicing fees		9,853		15,605		(5,752)		27,310		47,929		(20,619)		7,354		8,536		(1,182)
Total noninterest income	$	98,200	$	242,270	$	(144,070)	$	381,477	$	794,679	$	(413,202)	$	68,829	$	143,195	$	(74,366)

The decrease in net gains from sale of loans during the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, compared with the same ~~periods~~period in ~~2021,~~2022, was primarily the result of ~~decreases of 44.8% and 38.2%~~a 57.1% decrease in total loan sales volume, ~~during those periods, respectively,~~ in addition to a decrease in average loan sales ~~margin during both periods.~~margin. Since PrimeLending sells substantially all mortgage loans it originates to various investors in the secondary market, the decrease in loan sales volume during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 was consistent with the decrease in loan origination volume during the period. The decrease in average loan sales margins during the ~~nine~~three months ended ~~September 30, 2022~~March 31, 2023 was primarily attributable to competitive pricing pressure resulting from home inventory shortages, ~~and~~ a reduction in national refinancing ~~volume.~~volume and continued mortgage industry excess capacity.

The decrease in mortgage loan origination fees during the ~~nine~~three months ended ~~September 30, 2022,~~March 31, 2023, compared with the same period in ~~2021,~~2022, 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

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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 the ~~first~~three months ended March 31, 2023 and ~~second quarters of~~ 2022 were $66 million and $109 million, ~~and $104 million,~~ respectively. ~~Third quarter 2022 sales increased approximately 25% to $130 million. We anticipate fourth quarter 2022 sales will continue to increase as much as 50% compared to the third quarter.~~ 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 the ~~nine~~three months ended ~~September 30,~~March 31, 2023, compared with the same period in 2022, was the result of decreases 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, historically with the majority servicing released.~~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 the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, PrimeLending retained servicing on approximately ~~45% and 25%, respectively,~~41% of loans sold, compared with approximately ~~24% and 34%~~12% of loans sold during the ~~same periods in 2021, respectively.~~first quarter of 2022. 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 the remainder of ~~2022 to as much as 50%.~~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 the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, the operating results of the mortgage origination segment were ~~positively~~negatively impacted by ~~the noted increases~~a decrease of ~~$5.5~~$10.7 million ~~and $23.6 million, respectively, in the net fair value of the MSR asset. These increases~~ in the net fair value of the MSR asset, ~~during the respective periods were~~of which $5.5 million was primarily driven by ~~changes~~recent market sales trends. The remaining change in the ~~prepayment and discount rates used as inputs to~~net fair value of the MSR ~~asset~~was primarily due to ~~address~~ the ~~impact~~net decrease in long-term U.S. Treasury bond rates and customer payoffs during the first quarter of ~~increased mortgage rates reducing consumer refinancing activity~~2023, partially offset by a gain of $2.8 million generated by the derivatives used to hedge the MSR and ~~recent market trends related to MSR sales. On July 20, 2022,~~net servicing income of $3.9 million during the ~~mortgage origination segment executed a letter of intent for a pending sale of~~three months ended March 31, 2023. There were no MSR assets with a serviced loan volume totaling $1.8 billion. The sale of these MSR assets is expected to be completed in October 2022 at a total price of approximately $36 million. In addition, on September 22, 2022, the mortgage origination segment executed a letter of intent for a pending sale of MSR assets with a serviced loan volume totaling $1.8 billion. The sale of these MSR assets is also expected to be completedsold during the ~~fourth quarter of 2022 at a total price of approximately $26 million.~~three months ended March 31, 2023 and 2022.

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

						��
	Three Months Ended September 30,				Variance		Nine Months Ended September 30,				Variance		Three Months Ended March 31,				Variance
	2022		2021		2022 vs 2021		2022		2021		2022 vs 2021		2023		2022		2023 vs 2022
Variable compensation	$	44,312	$	88,153	$	(43,841)	$	157,079	$	300,720	$	(143,641)	$	25,573	$	56,243	$	(30,670)
Non-variable compensation and benefits		41,767		46,661		(4,894)		131,954		145,743		(13,789)		36,782		46,505		(9,723)
Segment operating costs		23,479		28,869		(5,390)		72,506		88,657		(16,151)		20,878		23,975		(3,097)
Lender paid closing costs		3,541		4,940		(1,399)		11,002		15,321		(4,319)		1,175		3,652		(2,477)
Servicing expense		5,246		7,964		(2,718)		13,831		23,443		(9,612)		4,345		4,484		(139)
Total noninterest expense	$	118,345	$	176,587	$	(58,242)	$	386,372	$	573,884	$	(187,512)	$	88,753	$	134,859	$	(46,106)

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Total employees’ compensation and benefits accounted for the majority of noninterest expenses incurred during all periods presented. ~~Specifically,~~Historically, variable compensation ~~comprised~~comprises the majority of total employees’ compensation and benefits expenses, but during the three ~~and nine~~ months ended ~~September 30, 2022 and 2021.~~March 31, 2023, non-variable compensation was greater than variable compensation. Variable compensation, which is primarily driven by loan origination volume, tends to fluctuate to a greater degree than loan origination volume, because mortgage loan originator and fulfillment staff incentive compensation plans are structured to pay at increasing rates as higher monthly volume tiers are achieved. However, certain other incentive compensation plans driven by non-mortgage production criteria may alter this trend.

While total loan origination volume decreased ~~45.6% and 39.9%~~54.0% during the three ~~and nine~~ months ended ~~September 30, 2022, respectively,~~March 31, 2023, compared to the same ~~periods~~period in ~~2021,~~2022, the aggregate non-variable compensation and benefits of the mortgage origination segment decreased by ~~10.5% and 9.5% during the same periods, respectively. These decreases~~20.9%. This decrease during the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, compared to the same ~~periods~~period in ~~2021, were~~2022, was primarily due to ~~decreases~~a decrease in salaries associated with a reduction in underwriting and loan fulfillment, operations and ~~operations~~corporate staff in response to the decreases in loan origination volume that started inat the ~~fourth quarter~~end of 2021, and ~~has continued into 2022. During 2022, PrimeLending committed to~~ continue ~~reducing this type~~through the first quarter of ~~staff in addition to reducing corporate staff to better align resources and lower PrimeLending’s cost structure to address the negative mortgage loan origination trend.~~2023. Severance costs, included in non-variable compensation above, incurred because of this continued initiative ~~were $1.3 million and $1.6~~was $0.8 million during the three ~~and nine~~ months ended ~~September 30, 2022, respectively.~~March 31, 2023. These actions are expected to favorably impact annualized pre-tax expenses by approximately $7 million. PrimeLending ~~is continuing~~remains

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committed to ~~evaluate~~evaluating staffing levels and maintaining an appropriate cost structure to address ~~current~~the dynamic mortgage loan origination trends. Segment operating costs decreased slightly during the three ~~and nine~~ months ended ~~September 30, 2022,~~March 31, 2023, compared to the same ~~periods~~period in ~~2021,~~2022, primarily due to decreases in ~~business development,~~occupancy and equipment expense, professional fees, ~~occupancy~~ and ~~loan-related costs.~~software expense.

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

Between January 1, ~~2013~~2014 and ~~September 30, 2022,~~March 31, 2023, the mortgage origination segment sold mortgage loans totaling ~~$150.0~~$141.7 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,~~2014, it does not anticipate experiencing significant losses in the future on loans originated prior to ~~2013~~2014 as a result of investor claims under these provisions of its sales contracts.

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

Following is a summary of the mortgage origination segment’s claims resolution activity relating to loans sold between January 1, ~~2013~~2014 and ~~September 30, 2022~~March 31, 2023 (dollars in thousands).


	Original Loan Balance				Loss Recognized				Original Loan Balance				Loss Recognized
			% of				% of				% of				% of
	Amount		Loans Sold		Amount		Loans Sold		Amount		Loans Sold		Amount		Loans Sold
Claims resolved with no payment	$	223,072	0.15	%	$	—	-	%	$	207,384	0.15	%	$	—	-	%
Claims resolved because of a loan repurchase or payment to an investor for losses incurred ⁽¹⁾		242,778	0.16	%		13,559	0.01	%		257,615	0.18	%		16,394	0.01	%
	$	465,850	0.31	%	$	13,559	0.01	%	$	464,999	0.33	%	$	16,394	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.

At March 31, 2023 and December 31, 2022, the mortgage origination segment’s total indemnification liability reserve totaled $18.3 million and $20.5 million, respectively. The related provision for indemnification losses was $0.3 million and $0.5 million during the three months ended March 31, 2023 and 2022, respectively.

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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 September 30, 2022 and December 31, 2021, the mortgage origination segment’s total indemnification liability reserve totaled $22.1 million and $27.4 million, respectively. The related provision for indemnification losses was $0.1 million and $2.5 million during the three months ended September 30, 2022 and 2021, respectively, and $1.3 million and $8.0 million during the nine months ended September 30, 2022 and 2021, respectively.

Corporate

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


	Three Months Ended September 30,				Variance		Nine Months Ended September 30,				Variance		Three Months Ended March 31,				Variance
	2022		2021		2022 vs 2021		2022		2021		2022 vs 2021		2023		2022		2023 vs 2022
Net interest income (expense)	$	(3,276)	$	(4,341)	$	1,065	$	(9,856)	$	(13,720)	$	3,864	$	(3,322)	$	(3,389)	$	67
Noninterest income		1,809		757		1,052		5,655		8,140		(2,485)		2,704		1,766		938
Noninterest expense		14,034		15,355		(1,321)		44,388		37,015		7,373		15,513		12,793		2,720
Income (loss) before income taxes	$	(15,501)	$	(18,939)	$	3,438	$	(48,589)	$	(42,595)	$	(5,994)
Loss before income taxes													$	(16,131)	$	(14,416)	$	(1,715)

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 ~~$48~~$42 million at ~~September 30, 2022.~~March 31, 2023.

As a holding company, Hilltop’s primary investment objectives are to support capital deployment for organic growth and to preserve capital to be deployed through acquisitions, dividend payments and potential stock repurchases. Investment and interest income earned during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 was primarily comprised of dividend income from merchant banking investment activities, in addition to interest income earned on intercompany notes.

Interest expense during each ~~period~~of the three months ended March 31, 2023 and 2022 included recurring quarterly interest expense of $5.0 million incurred on our $150.0 million aggregate principal amount of 5% senior notes due 2025 (“Senior Notes”) ~~and~~, on our ~~$200~~$50 million aggregate principal amount of subordinated notes due 2030 (“2030 Subordinated Notes”) and on our $150 million aggregate principal amount of subordinated notes due 2035 (“2035 Subordinated Notes,” the 2030 Subordinated Notes ~~(defined hereafter). Additionally, during~~and the three and nine months ended September 30, 2021, we incurred interest expense of $3.1 million and $9.3 million, respectively, on junior subordinated debentures of $67.0 million issued by PCC (the “Debentures”2035 Subordinated Notes, collectively, the “Subordinated Notes”). 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.

Noninterest income during each period included activity related to our investment in a real estate development in Dallas’ University Park, which also serves as headquarters for both Hilltop and the Bank, and net noninterest income associated with activity within our merchant bank subsidiary.

Noninterest expenses were primarily comprised of employees’ compensation and benefits, occupancy expenses and professional fees, including corporate governance, legal and transaction costs. ~~Noninterest expenses decreased during~~During the three months ended ~~September 30, 2022,~~March 31, 2023, compared towith the same period in ~~2021, primarily due to decreases~~2022, the increase in noninterest expenses associated with employees’ incentive compensation and professional fees, partially offset by inflationary increases associated with compensation, software and occupancy costs. Noninterest expenses increased during the nine months ended September 30, 2022, compared to the same period in 2021,was primarily due to inflationary increases associated with ~~software~~employees’ compensation and ~~occupancy costs,~~benefits as well as increases in professional ~~fees, which included $4.4 million related to the recently completed tender offer in May 2022.~~fees.

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Financial Condition

The following discussion contains a more detailed analysis of our financial condition at ~~September 30, 2022,~~March 31, 2023, as compared with December 31, ~~2021.~~2022.

Securities Portfolio

At ~~September 30, 2022,~~March 31, 2023, 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 (in thousands).


	September 30,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Trading securities, at fair value
U.S. Treasury securities	$	309	$	3,728	$	15,512	$	10,466
U.S. government agencies:
Bonds		14,255		3,410		10,002		20,878
Residential mortgage-backed securities		152,513		152,093		226,542		214,100
Collateralized mortgage obligations		171,241		126,389		133,454		182,717
Corporate debt securities		63,626		60,671		55,172		42,685
States and political subdivisions		200,945		285,376		227,876		260,271
Private-label securitized product		13,690		11,377		21,008		9,265
Other		25,285		4,954		3,342		14,650
		641,864		647,998		692,908		755,032
Securities available for sale, at fair value
U.S. Treasury securities		24,262		14,862		19,391		19,144
U.S. government agencies:
Bonds		115,134		44,133		205,906		202,257
Residential mortgage-backed securities		418,720		898,446		395,381		406,358
Commercial mortgage-backed securities		164,838		210,699		178,786		175,499
Collateralized mortgage obligations		826,350		916,866		805,426		818,894
States and political subdivisions		35,420		45,562		36,681		36,614
		1,584,724		2,130,568		1,641,571		1,658,766
Securities held to maturity, at amortized cost
U.S. government agencies:
Residential mortgage-backed securities		308,102		9,892		295,889		301,583
Commercial mortgage-backed securities		181,259		145,742		180,598		180,942
Collateralized mortgage obligations		323,526		43,990		307,778		314,705
States and political subdivisions		76,565		68,060		78,015		78,302
		889,452		267,684		862,280		875,532

Equity securities, at fair value		209		250		231		200

Total securities portfolio	$	3,116,249	$	3,046,500	$	3,196,990	$	3,289,530

We had net unrealized losses of ~~$168.5~~$116.8 million and ~~$18.1~~$129.8 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively, related to the available for sale investment portfolio, and net unrealized losses of ~~$96.9~~$76.9 million and $90.2 million at ~~September 30,~~March 31, 2023 and December 31, 2022, ~~compared with net unrealized gains of $8.6 million~~respectively, associated with the securities held to maturity ~~portfolio at December 31, 2021.~~portfolio. Equity securities included net unrealized gains of $0.2 million and $0.1 million ~~and $0.2 million~~ at

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~~September 30, 2022~~ March 31, 2023 and December 31, ~~2021,~~2022, respectively. The noted significant change in net unrealized gains (losses) within our available for sale investment portfolio, and recorded in accumulated other comprehensive income (loss), from December 31, 2021 to September 30, 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, we expect changes in prevailing market interest rates, coupled with changes in the aggregate size of the investment portfolio, to be significant drivers of changes in the unrealized losses or gains in these portfolios, and therefore accumulated other comprehensive income (loss).

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.

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 ~~September 30, 2022,~~March 31, 2023, the banking segment’s securities portfolio of $2.5 billion was comprised of trading securities of $0.1 million, available for sale securities of $1.6 billion, held to maturity securities of

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$862.3 million and equity securities of $0.2 million, ~~and held to maturity securities of $889.5 million,~~ in addition to ~~$12.4~~$11.7 million of other investments included in other assets within the consolidated balance sheets.

Broker-Dealer Segment

The broker-dealer segment holds securities to support sales, underwriting and other customer activities. The interest rate risk inherent in holding these securities is managed by setting and monitoring limits on the size and duration of positions and on the length of time the securities can be held. The Hilltop Broker-Dealers are required to carry their securities at fair value and record changes in the fair value of the portfolio to the statement of operations. Accordingly, the securities portfolio of the Hilltop Broker-Dealers included trading securities of ~~$641.8~~$692.8 million at ~~September 30, 2022.~~March 31, 2023. 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 ~~$99.5~~$51.5 million at ~~September 30, 2022.~~March 31, 2023.

Corporate

At ~~September 30, 2022,~~March 31, 2023, the corporate portfolio included other investments, including those associated with merchant banking, of ~~$41.3~~$34.0 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 ~~September 30, 2022.~~March 31, 2023. In addition, as of ~~September 30, 2022,~~March 31, 2023, 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 ~~September 30, 2022.~~March 31, 2023.

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Loan Portfolio

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


	September 30,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Commercial real estate	$	3,313,911	$	3,042,729	$	3,209,879	$	3,245,873
Commercial and industrial		1,668,209		1,875,420		1,709,314		1,639,980
Construction and land development		934,915		892,783		1,084,951		980,896
1-4 family residential		1,595,270		1,303,430		1,800,313		1,767,099
Consumer		29,439		32,349		26,802		27,602
Broker-dealer		402,502		733,193		361,587		431,223
Loans held for investment, gross		7,944,246		7,879,904		8,192,846		8,092,673
Allowance for credit losses		(91,783)		(91,352)		(97,354)		(95,442)
Loans held for investment, net of allowance	$	7,852,463	$	7,788,552	$	8,095,492	$	7,997,231

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 ~~$8.4~~$8.7 billion and ~~$8.8~~$8.5 billion at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. ~~The~~At March 31, 2023, the banking segment’s loan portfolio included warehouse lines of credit extended to PrimeLending and its ABAs of ~~$2.7~~$2.1 billion, of which $0.9 billion ~~and $1.7 billion~~ was ~~drawn at September 30, 2022 and~~drawn. At December 31, ~~2021, respectively. As~~2022, amounts drawn on the available warehouse lines of ~~October 1, 2022, the total commitment~~credit was ~~reduced to $2.0~~$0.9 billion. Amounts advanced against the warehouse lines of credit are eliminated from net loans held for investment on our consolidated balance sheets. The banking segment does not generally participate in syndicated loan transactions and has no foreign loans in its portfolio.

~~The banking segment’s loan portfolio included approximately $1.1 million related to both initial and second round PPP loans at September 30, 2022. While these loans have terms~~Table of up to 60 months, borrowers can apply for forgiveness of these loans with the SBA. Through October 14, 2022, the SBA had approved approximately 4,100 PPP forgiveness applications from the Bank totaling approximately $896 million, with PPP loans of approximately $0.1 million pending SBA review and approval.Contents

At ~~September 30, 2022,~~March 31, 2023, the banking segment had loan concentrations (loans to borrowers engaged in similar activities) that exceeded 10% of total loans in its real estate portfolio. The areas of concentration within our real estate portfolio were non-construction commercial real estate loans, non-construction residential real estate loans, and construction and land development loans, which represented ~~44.0%~~41.0%, ~~21.2%~~23.0% and ~~12.4%~~13.9%, respectively, of the banking segment’s total loans held for investment at ~~September 30, 2022.~~March 31, 2023. The banking segment’s loan concentrations were within regulatory guidelines at ~~September 30, 2022.~~March 31, 2023.

In addition, the Bank’s loan portfolio includes collateralized loans extended to businesses that depend on the energy industry, including those within the exploration and production, field services, pipeline construction and transportation sectors. Crude oil prices remain uncertain given future supply and demand for oil are influenced by the Russia-Ukraine conflict, return to business travel, new energy policies and government regulation, and the pace of transition towards renewable energy resources. At March 31, 2023, the Bank’s energy loan exposure was approximately $61 million of loans held for investment with unfunded commitment balances of approximately $34 million. The allowance for credit losses on the Bank’s energy portfolio was $0.2 million, or 0.3% of loans held for investment at March 31, 2023.

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


	September 30, 2022										March 31, 2023
	Due Within		Due From One		Due from Five		Due After				Due Within		Due From One		Due from Five		Due After
	One Year		To Five Years		To Fifteen Years		Fifteen Years		Total		One Year		To Five Years		To Fifteen Years		Fifteen Years		Total
Commercial real estate	$	852,144	$	1,338,871	$	1,016,279	$	106,617	$	3,313,911	$	743,555	$	1,385,928	$	980,243	$	100,153	$	3,209,879
Commercial and industrial		2,107,333		305,531		164,261		—		2,577,125		2,123,876		340,217		169,961		—		2,634,054
Construction and land development		724,591		139,571		66,674		4,079		934,915		850,978		182,141		44,609		7,223		1,084,951
1-4 family residential		159,768		193,537		389,164		852,801		1,595,270		134,526		344,409		492,740		828,638		1,800,313
Consumer		15,478		13,714		228		19		29,439		13,353		13,061		372		16		26,802
Total	$	3,859,314	$	1,991,224	$	1,636,606	$	963,516	$	8,450,660	$	3,866,288	$	2,265,756	$	1,687,925	$	936,030	$	8,755,999

Fixed rate loans	$	1,656,913	$	1,726,138	$	1,453,216	$	963,516	$	5,799,783	$	1,645,322	$	1,797,742	$	1,395,543	$	936,030	$	5,774,637
Floating rate loans		2,202,401		265,086		183,390		—		2,650,877		2,220,966		468,014		292,382		—		2,981,362
Total	$	3,859,314	$	1,991,224	$	1,636,606	$	963,516	$	8,450,660	$	3,866,288	$	2,265,756	$	1,687,925	$	936,030	$	8,755,999

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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 ~~September 30, 2022,~~March 31, 2023, floating rate loans totaling ~~$718.4~~$739.4 million had reached their applicable rate floor and were expected to reprice, subject to their scheduled repricing timing and frequency terms. An additional ~~$4.4~~$8.3 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 a SOFR rate or The Wall Street Journal Prime Rate, as published in The Wall Street Journal.

Broker-Dealer Segment

The loan portfolio of the broker-dealer segment consists primarily of margin loans to customers and correspondents that are due within one year. The interest rate on margin accounts is computed on the settled margin balance at a fixed rate established by management. These loans are collateralized by the securities purchased or by other securities owned by the clients and, because of collateral coverage ratios, are believed to present minimal collectability exposure. Additionally, these loans are subject to a number of regulatory requirements as well as the Hilltop Broker-Dealers’ internal policies. The broker-dealer segment’s total loans held for investment, net of the allowance for credit losses, were ~~$402.0~~$360.6 million and ~~$733.0~~$431.0 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively. This decrease from December 31, ~~2021~~2022 to ~~September 30, 2022~~March 31, 2023 was primarily attributable to a decrease of ~~$190.3~~$66.4 million, or ~~62%~~42%, in receivables from correspondents, and a decrease of ~~$139.9~~$3.3 million, or ~~33%~~1%, in customer margin accounts.

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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).


	September 30,		December 31,		March 31,		December 31,
	2022		2021		2023		2022
Loans held for sale:
Unpaid principal balance	$	882,611	$	1,728,255	$	869,947	$	850,277
Fair value adjustment		(19,184)		54,336		15,554		5,420
	$	863,427	$	1,782,591	$	885,501	$	855,697
IRLCs:
Unpaid principal balance	$	1,131,664	$	1,283,152	$	772,675	$	506,278
Fair value adjustment		(16,729)		25,489		12,481		1,767
	$	1,114,935	$	1,308,641	$	785,156	$	508,045

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 ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021~~2022 were ~~$1.6~~$1.4 billion and ~~$2.4~~$1.2 billion, respectively, while the related estimated fair values were ~~$31.7~~($8.1) million and ~~$0.4~~$3.3 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” set forth in Part II, Item 7 of our ~~2021~~2022 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~~ As discussed in more detail within the section captioned “Financial Condition – Allowance for Credit Losses on Loans” set forth in Part II, Item 7 of our 2022 Form 10-K, the Bank’s 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. Thecredit, while the Bank’s loan policy provides specific underwriting guidelines by portfolio segment, including commercial and industrial, real estate, construction and land

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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.

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.

~~The COVID-19 pandemic has adversely impacted financial markets and overall economic conditions, and may continue to have implications on borrowers across our lending portfolios.~~ Significant judgment is required to estimate the severity and duration of the current economic uncertainties, as well as its potential impact on borrower defaults and loss severity. In particular, macroeconomic conditions and forecasts are rapidly changing and remain highly uncertain.

One of the most significant judgments involved in estimating our allowance for credit losses relates to the macroeconomic forecasts used to estimate credit losses over the reasonable and supportable forecast period. To determine the allowance for credit losses as of ~~September 30, 2022,~~March 31, 2023, we utilized a single macroeconomic alternative scenario, or S7, published by Moody’s Analytics in ~~September 2022.~~

March 2023. During our previous quarterly macroeconomic assessment as of ~~June 30,~~December 31, 2022, we also utilized a single macroeconomic alternative scenario, or S7, published by Moody’s Analytics in ~~June~~December 2022.

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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						As of
		September 30,	June 30,	March 31,	December 31,	September 30,		March 31,	December 31,	September 30,	June 30,	March 31,
		2022	2022	2022	2021	2021		2023	2022	2022	2022	2022
GDP growth rates:
	Q3 2021					5.0%	Q1 2022					0.7%
	Q4 2021				6.7%	7.5%	Q2 2022				2.6%	4.7%
	Q1 2022			0.7%	3.6%	4.6%	Q3 2022			1.3%	2.0%	2.4%
	Q2 2022		2.6%	4.7%	3.5%	2.8%	Q4 2022		0.8%	0.4%	0.6%	2.6%
	Q3 2022	1.3%	2.0%	2.4%	2.3%	1.3%	Q1 2023	2.5%	0.1%	0.3%	0.9%	2.9%
	Q4 2022	0.4%	0.6%	2.6%	2.7%	1.5%	Q2 2023	0.4%	(1.4)%	(1.8)%	1.0%	3.0%
	Q1 2023	0.3%	0.9%	2.9%	3.0%	2.4%	Q3 2023	0.4%	(2.5)%	(2.2)%	(1.0)%	3.1%
	Q2 2023	(1.8)%	1.0%	3.0%	2.4%		Q4 2023	(3.1)%	(2.4)%	(2.2)%	(3.0)%
	Q3 2023	(2.2)%	(1.0)%	3.1%			Q1 2024	(2.2)%	0.4%	0.7%
	Q4 2023	(2.2)%	(3.0)%				Q2 2024	(1.1)%	1.1%
	Q1 2024	0.7%					Q3 2024	2.1%

Unemployment rates:
	Q3 2021					5.2%	Q1 2022					3.9%
	Q4 2021				4.3%	4.5%	Q2 2022				3.6%	3.7%
	Q1 2022			3.9%	4.3%	3.9%	Q3 2022			3.7%	3.5%	3.5%
	Q2 2022		3.6%	3.7%	4.0%	3.5%	Q4 2022		3.7%	3.9%	3.6%	3.4%
	Q3 2022	3.7%	3.5%	3.5%	3.8%	3.4%	Q1 2023	3.5%	4.0%	4.0%	3.6%	3.4%
	Q4 2022	3.9%	3.6%	3.4%	3.6%	3.3%	Q2 2023	3.7%	4.6%	4.6%	3.6%	3.3%
	Q1 2023	4.0%	3.6%	3.4%	3.7%	3.3%	Q3 2023	4.0%	5.3%	5.5%	5.0%	3.2%
	Q2 2023	4.6%	3.6%	3.3%	3.7%		Q4 2023	4.7%	6.0%	6.2%	6.4%
	Q3 2023	5.5%	5.0%	3.2%			Q1 2024	5.6%	5.9%	6.0%
	Q4 2023	6.2%	6.4%				Q2 2024	6.0%	5.6%
	Q1 2024	6.0%					Q3 2024	5.7%

As of ~~September 30, 2022,~~March 31, 2023, our economic forecast ~~improved modestly~~was updated since ~~June 30, 2022.~~December 31, 2022 based on recent updates to broader economic, fiscal, and monetary policy data. Real GDP growth ~~continued to decline~~ during the ~~second~~fourth quarter of 2022 increased more than the prior quarter’s outlook at an annualized rate of ~~0.6%; however,~~2.6% due to consumer spending, inventory investment, and net exports. Labor market conditions also proved resilient as the unemployment rate ~~remains near~~remained at historical lows ~~as tight labor market conditions persist. As persistently high inflation rates continue to disrupt supply chains from goods into new service sectors, we expect higher interest rates and a period~~ of ~~below trend, but positive economic growth into 2023. The current quarter’s economic forecast was updated as we now expect~~3.5% at quarter end. However, the U.S. ~~economy~~debt limit was breached in January 2023 and the U.S treasury implemented extraordinary accounting measures to ~~migrate into a mild recession during~~manage cash flow for government obligations while staying under the ~~second quarter of 2023 with real GDP expected to decline 1.6% through the fourth quarter of 2023 with peak unemployment rates increasing to 6.2%.~~statutory limit. Our ~~prior economic~~updated forecast ~~reflected a mild recession beginning~~estimates those measures will be exhausted during the third quarter of ~~2023 with real GDP expected to decline 2.2% through~~2023. The Federal Reserve also implemented the ~~second quarter of 2024 with peak unemployment rates increasing to over 7%.~~BTFP after the FDIC closed Silicon Valley Bank and Signature Bank in March 2023. ~~The~~Despite these recent bank failures, the Federal Reserve increased the federal funds rate target from 4.75% to ~~3.0% to 3.25%~~5.00% in ~~September 2022~~March 2023 and the current quarter’s economic forecast assumes the federal funds rate target increases to 5.25% by September 2023. We now expect a mild U.S. recession to begin during the fourth quarter of 2023 and recovery from the third quarter of 2024 compared to the prior quarter’s U.S. recession outlook during the last three quarters of 2023.

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 quarter’s economic forecast assumed an average federal funds rate of ~~3.9%~~5.3% by the ~~first~~second quarter of 2023.

As ~~of December 31, 2021, our economic forecast improved~~interest rates increased, inflation rates have decreased from ~~September 30, 2021~~historical highs as the goods sector improves; however, we still observed supply chain disruptions especially in the services sector. Unemployment rate forecasts were updated based on ~~updated~~then recent economic data ~~including November 2021 unemployment rates improving faster than the prior quarter’s forecast despite~~as tight labor market conditions and accelerated rates of the Federal Reserve’s taper of monthly asset purchases. We assumed the Federal Reserve would continue to support a target range of the federal funds rate near 0% through monetary policy support and assumed interest rates would begin to rise as early as the second quarter of 2022. Real GDP growth rates were revised lower due to persistently higher inflation data and observed supply-chain impacts on business and consumer spending due to the delta variant. Given the timing of the Moody’s economic forecast release in early December 2021, the forecast utilized also assumed that COVID-19 cases had peaked in January 2021, but did not assume a third wave of COVID-19 cases due to the omicron variant into the winter months. The forecast also did not consider uncertainty related to additional fiscal support from the Build Back Better proposal, so our model results were qualitatively adjusted to consider these recent developments as of December 31, 2021.continued.

During the three months ended September 30, 2022, the reversal of credit losses primarily reflected modest improvements in the U.S. economic outlook compared to assumptions in the prior quarter outlook, and in specific reserves and credit metrics since the prior quarter, whileMarch 31, 2023, the provision for credit losses reflected a build in the allowance related to loan portfolio changes since the prior quarter, offset by an updated economic outlook with a mild U.S. recession from the fourth quarter of 2023 and recovery from the third quarter of 2024 compared to prior quarter’s U.S. recession assumption during the ~~nine months ended September 30, 2022 was driven by a deteriorating U.S. economic outlook since December 31, 2021.~~last three quarters of 2023. The net impact to the allowance of changes associated with individually and collectively evaluated loans during the three ~~and nine~~ months ended March 31, 2023 included a provision for credit losses on individually evaluated loans of $0.7 million attributable to the broker-dealer loan portfolio and a provision for credit losses on collectively evaluated loans at the Bank of $1.5 million due to recent updates in internal

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September 30, 2022 included reversals of credit losses of $0.2 million and $1.2 million, respectively, while collectively evaluated loans included a reversal of credit losses of $0.5 million, compared to a provision for credit losses of $5.9 million, respectively. The changesrisk ratings, growth in ~~the allowance for credit losses during the noted periods were primarily attributable to the Bank and also reflected other factors including, but not limited to, loan mix, and changes in~~funded loan balances and ~~qualitative factors from~~renewals during the ~~prior~~ quarter. The changes in the allowance during the three ~~and nine~~ months ended ~~September 30, 2022~~March 31, 2023 were also impacted by net charge-offs of ~~$2.7 million and $4.2 million, respectively.~~$0.4 million.

As discussed under the section titled “Loan Portfolio” earlier in this Item 2, 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 allowanceDuring 2022, 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 the first nine months of 2022,continuing into 2023, the impact of changes in the U.S. economic outlook and resulting impact on collectively evaluated loans has resulted in a net build in the allowance ~~since~~at March 31, 2023, compared to both December 31, 2022 and December 31, 2021. ~~As a result, the~~The resulting allowance for credit losses as a percentage of our total loan portfolio, excluding margin loans in the broker-dealer segment and banking segment mortgage warehouse lending ~~and PPP lending~~ programs, was ~~1.25%~~1.27% as of ~~September 30, 2022, down from 1.37% as of~~both March 31, 2023 and December 31, ~~2021 and a high of 2.63% as of September 30, 2020, following the initial impacts of the COVID-19 pandemic.~~2022.

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 ~~and PPP lending~~ programs, are presented in the following table (dollars in thousands).


					Allowance For						Allowance For
					Credit Losses						Credit Losses
			Total		as a % of				Total		as a % of
	Total		Allowance		Total Loans		Total		Allowance		Total Loans
	Loans Held		for Credit		Held For		Loans Held		for Credit		Held For
September 30, 2022	For Investment		Losses		Investment
March 31, 2023							For Investment		Losses		Investment
Commercial real estate(1)	$	3,313,911	$	63,200	1.91	%	$	3,209,879	$	61,521	1.92	%
Commercial and industrial ⁽¹⁾⁽²⁾		1,444,084		15,996	1.11	%		1,474,970		16,497	1.12	%
Construction and land development(3)		934,915		4,768	0.51	%		1,084,951		5,999	0.55	%
Total commercial loans								5,769,800		84,017	1.46	%

1-4 family residential		1,595,270		6,612	0.41	%		1,800,313		11,691	0.65	%
Consumer		29,439		574	1.95	%		26,802		563	2.10	%
Total retail loans								1,827,115		12,254	0.67	%
		7,317,619		91,150	1.25	%
Total commercial and retail loans								7,596,915		96,271	1.27	%

Broker-dealer		402,502		521	0.13	%		361,587		965	0.27	%
Mortgage warehouse lending		223,028		112	0.05	%		234,344		118	0.05	%
Paycheck Protection Program		1,097		—	—	%
	$	7,944,246	$	91,783	1.16	%
Total loans held for investment							$	8,192,846	$	97,354	1.19	%

(1)

Included within commercial real estate portfolio are loans within the office and retail portfolio industry subsectors. At March 31, 2023, the office and retail loans held for investment balances of approximately $834 million and $367 million, respectively, had an allowance for credit losses of approximately $27 million and $6 million, respectively, and an allowance for credit losses as a % of total loans held for investment of 3.23% and 1.69%, respectively.

(2)

Commercial and industrial portfolio amounts reflect balances excluding banking segment mortgage warehouse ~~lending~~lending.

(3)

Included within construction and ~~PPP loans.~~land development portfolio are loans within the office and retail portfolio industry subsectors. At March 31, 2023, the office and retail loans held for investment balances of approximately $37 million and $46 million, respectively, had an allowance for credit losses of approximately $300 thousand and $400 thousand, respectively, and an allowance for credit losses as a % of total loans held for investment of 0.93% and 0.94%, respectively.

Allowance Model Sensitivity

Our allowance model was designed to capture the historical relationship between economic and portfolio changes. As such, evaluating shifts in individual portfolio attributes or macroeconomic variables in isolation may not be indicative of past or future performance. It is difficult to estimate how potential changes in any one factor or input might affect the overall allowance for credit losses because we consider a wide variety of factors and inputs in the allowance for credit losses estimate. Changes in the factors and inputs considered may not occur at the same rate and may not be consistent across all geographies or product types, and changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others.

However, to consider the sensitivity of credit loss estimates to alternative macroeconomic forecasts, we compared the Company’s allowance for credit loss estimates as of ~~September 30, 2022,~~March 31, 2023, excluding margin loans in the broker-dealer segment, and the banking segment mortgage warehouse ~~and PPP lending~~ 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 ~~5.3% in the fourth quarter of 2022, 4.9% in the first quarter of 2023, 4.9%~~3.7% in the second quarter of 2023, ~~and 5.8%~~3.6% in the third quarter of ~~2023.~~2023, 3.6% in the fourth quarter of 2023, and 3.3% in the first quarter of 2024. Average unemployment rates are expected to decline to ~~3.3%~~3.0% by the ~~fourth~~third quarter of ~~2022~~2023 and increase

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~~modestly~~ to ~~3.4%~~3.5% by the ~~end~~first quarter of ~~2023.~~2025 before reverting to historical data. Inflation is expected to trend back toward the Federal Reserve’s target sooner than expected and we expect the federal funds rate to be raised to ~~3.5%~~5.2% during 2023.

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Compared to our economic forecast, the downside scenario assumes the Federal Reserve’s efforts to resolve recent bank failures are not successful at restoring consumer and business confidence, ~~declines as~~causing banks to tighten lending standards while the Fed keeps the federal funds rate elevated due to inflation concerns. 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~~worsen causing weaker manufacturing, increased good shortages, and ~~spending erode causing~~ the economy to fall back into ~~recession during 2022.~~recession. Real GDP is expected to decrease ~~0.9%~~3.1% in the ~~fourth~~second quarter of ~~2022, 6.7%~~2023, 3.0% in the ~~first~~third quarter of 2023, and ~~1.9%~~2.9% in the ~~second~~fourth quarter of 2023. Average unemployment rates are expected to increase to 7.8% by the ~~fourth~~second quarter of ~~2023,~~2024, but improve to ~~6.2%~~6.8% by year-end 2024 and revert back to historical average rates over time. The Federal Reserve increases the federal funds rate to ~~4.0%~~5.0% by the ~~second~~third quarter of 2023 to slow inflation, but ~~proceeds to reduce~~then reduces it to a ~~1.4%~~1.1% target by the ~~third~~second quarter of ~~2024~~2025 where it is maintained until ~~mid~~year end 2025 to support the economy. Disagreements in Congress prevent any additional ~~stimulus from being enacted beyond~~fiscal measures to stem the ~~American Rescue Plan and Infrastructure Investment and Jobs Acts passed in 2021.~~recession.

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 ~~$23~~$29 million or a weighted average expected loss rate of ~~0.9%~~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 and PPP~~ 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 ~~$29~~$38 million or a weighted average expected loss rate of ~~1.6%~~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 and PPP~~ 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 ~~COVID-19 pandemic continuing to recede,~~macroeconomic outlook, inflationary pressures and labor market conditions, the Russia-Ukraine conflict and its impact on supply chains, ~~inflation~~ and ~~labor market conditions.~~uncertain impacts from recent bank failures. 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.


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
Loans Held for Investment	2022			2021			2022			2021			2023			2022
Balance, beginning of period	$	95,298		$	115,269		$	91,352		$	149,044		$	95,442		$	91,352
Provision for (reversal of) credit losses		(780)			(5,819)			4,671			(39,648)
Provision for credit losses														2,331			115
Recoveries of loans previously charged off:
Commercial real estate		41			19			84			253			11			32
Commercial and industrial		370			598			2,004			1,732			692			907
Construction and land development		—			—			—			—			—			—
1-4 family residential		23			20			71			482			17			13
Consumer		90			26			221			171			39			103
Broker-dealer		—			—			—			—			—			—
Total recoveries		524			663			2,380			2,638			759			1,055
Loans charged off:
Commercial real estate		—			124			—			310			977			—
Commercial and industrial		3,096			317			6,197			1,738			59			1,209
Construction and land development		—			—			—			—			—			—
1-4 family residential		14			87			62			248			73			15
Consumer		149			73			361			226			69			113
Broker-dealer		—			—			—			—			—			—
Total charge-offs		3,259			601			6,620			2,522			1,178			1,337
Net recoveries (charge-offs)		(2,735)			62			(4,240)			116
Net charge-offs														(419)			(282)
Balance, end of period	$	91,783		$	109,512		$	91,783		$	109,512		$	97,354		$	91,185

Average total loans for the period	$	7,911,833		$	7,514,392		$	7,863,257		$	7,628,599		$	7,894,668		$	7,839,047
Total loans held for investment (end of period)							$	7,944,246		$	7,552,926		$	8,192,846		$	7,797,903
Ratios:
Net recoveries (charge-offs) to average total loans held for investment⁽¹⁾		(0.14)	%		0.00	%		(0.07)	%		0.00	%
Net charge-offs to average total loans held for investment⁽¹⁾														(0.02)	%		(0.01)	%
Non-accrual loans to total loans held for investment (end of period)								0.37	%		0.74	%		1.13	%		2.13	%
Allowance for credit losses on loans held for investment to:
Total loans held for investment (end of period)								1.16	%		1.45	%		1.19	%		1.17	%
Non-accrual loans held for investment (end of period)								309.26	%		196.22	%		421.48	%		219.63	%

(1)	Net ~~recoveries (charge-offs)~~charge-offs to average total loans held for investment ratio presented on a consolidated basis for all periods given relative immateriality of resulting measure by loan portfolio segment.

Total non-accrual loans decreased by ~~$16.4~~$2.1 million from December 31, ~~2021~~2022 to ~~September 30, 2022.~~March 31, 2023. This change in non-accrual loans was impacted by loans secured by residential real estate within our mortgage origination segment, which were classified as loans held for sale, of ~~$4.1~~$4.3 million and ~~$2.9~~$4.8 million at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, respectively.

In addition to changes in non-accrual loans classified as loans held for sale, the decrease in non-accrual loans during ~~2022~~2023 was primarily due to ~~principal paydowns associated with several~~a decrease in commercial real estate owner occupied loans from a foreclosure of an office property in Texas, partially offset by an addition of one commercial and industrial ~~and single family residential~~ loan ~~relationships.~~classified as non-accrual.

As previously discussed in detail within this section, the allowance for credit losses has fluctuated from period to period, which impacted the resulting ratios noted in the table above.

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The distribution of the allowance for credit losses among loan types and the percentage of the loans for that type to gross loans, excluding unearned income, within our loan portfolio are presented in the table below (dollars in thousands).


	September 30, 2022				December 31, 2021				March 31, 2023				December 31, 2022
			% of				% of				% of				% of
			Gross				Gross				Gross				Gross
Allocation of the Allowance for Credit Losses	Reserve		Loans		Reserve		Loans		Reserve		Loans		Reserve		Loans
Commercial real estate	$	63,200	41.71	%	$	59,354	38.61	%	$	61,521	39.18	%	$	63,255	40.11	%
Commercial and industrial		16,108	21.00	%		21,982	23.80	%		16,615	20.87	%		16,035	20.26	%
Construction and land development		4,768	11.77	%		4,674	11.33	%		5,999	13.24	%		6,051	12.12	%
1-4 family residential		6,612	20.08	%		4,589	16.54	%		11,691	21.97	%		9,313	21.84	%
Consumer		574	0.37	%		578	0.41	%		563	0.33	%		554	0.34	%
Broker-dealer		521	5.07	%		175	9.31	%		965	4.41	%		234	5.33	%
Total	$	91,783	100.00	%	$	91,352	100.00	%	$	97,354	100.00	%	$	95,442	100.00	%

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


	September 30,		June 30,		March 31,		December 31,		September 30,		March 31,		December 31,		September 30,		June 30,		March 31,
	2022		2022		2022		2021		2021		2023		2022		2022		2022		2022
Commercial real estate	$	63,200	$	63,719	$	60,361	$	59,354	$	68,535	$	61,521	$	63,255	$	63,200	$	63,719	$	60,361
Commercial and industrial		16,108		19,836		20,130		21,982		30,545		16,615		16,035		16,108		19,836		20,130
Construction and land development		4,768		4,996		5,515		4,674		5,100		5,999		6,051		4,768		4,996		5,515
1-4 family residential		6,612		5,554		4,340		4,589		4,538		11,691		9,313		6,612		5,554		4,340
Consumer		574		542		499		578		504		563		554		574		542		499
Broker-dealer		521		651		340		175		290		965		234		521		651		340
	$	91,783	$	95,298	$	91,185	$	91,352	$	109,512	$	97,354	$	95,442	$	91,783	$	95,298	$	91,185

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. ~~The expected losses on unfunded commitments align with statistically calculated parameters used to calculate the allowance for credit losses on the funded portion.~~ Letters of credit are not currently reserved because they are issued primarily as credit enhancements and the likelihood of funding is low.

Changes in the allowance for credit losses for loans with off-balance sheet credit exposures are shown below (in thousands).


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2022		2021		2022		2021		2023		2022
Balance, beginning of period	$	6,931	$	7,981	$	5,880	$	8,388	$	7,784	$	5,880
Other noninterest expense		87		(1,183)		1,138		(1,590)		(979)		607
Balance, end of period	$	7,018	$	6,798	$	7,018	$	6,798	$	6,805	$	6,487

During the three months ended ~~September 30,~~March 31, 2022, the increase in the reserve for unfunded commitments was primarily due to an increase in available commitment ~~balances, while~~balances. During the ~~increase~~three months ended March 31, 2023, the decrease in the reserve for unfunded commitments ~~during the nine months ended September 30, 2022~~ was primarily due to ~~increases~~decreases in both ~~loan~~available commitment balances and expected loss ~~rates and available commitment balances.~~rates.

Potential Problem Loans

Potential problem loans consist of loans that are performing in accordance with contractual terms but for which management has concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor’s potential operating or financial difficulties. 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

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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 ~~two~~one credit ~~relationships~~relationship totaling ~~$3.2~~$1.8 million of potential problem loans at ~~September 30, 2022,~~March 31, 2023, compared with ~~two~~four credit relationships totaling ~~$3.1~~$4.0 million of potential problem loans at December 31, ~~2021.~~2022.

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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).

		��
	September 30,			December 31,						March 31,			December 31,
	2022			2021			Variance			2023			2022			Variance
Loans accounted for on a non-accrual basis:
Commercial real estate	$	4,735		$	6,601		$	(1,866)		$	1,973		$	4,269		$	(2,296)
Commercial and industrial		12,078			22,478			(10,400)			10,807			9,095			1,712
Construction and land development		1			2			(1)			199			198			1
1-4 family residential		16,968			21,123			(4,155)			14,387			15,941			(1,554)
Consumer		16			23			(7)			12			14			(2)
Broker-dealer		—			—			—			—			—			—
	$	33,798		$	50,227		$	(16,429)		$	27,378		$	29,517		$	(2,139)
Troubled debt restructurings included in accruing loans held for investment(1)		825			922			(97)			—			803			(803)
Non-performing loans(1)	$	34,623		$	51,149		$	(16,526)		$	27,378		$	30,320		$	(2,942)

Non-performing loans as a percentage of total loans(1)		0.39	%		0.52	%		(0.13)	%		0.30	%		0.33	%		(0.03)	%

Other real estate owned	$	1,637		$	2,833		$	(1,196)		$	3,202		$	2,325		$	877

Other repossessed assets	$	—		$	—		$	—		$	—		$	—		$	—

Non-performing assets(1)	$	36,260		$	53,982		$	(17,722)		$	30,580		$	32,645		$	(2,065)

Non-performing assets as a percentage of total assets(1)		0.22	%		0.29	%		(0.07)	%		0.18	%		0.20	%		(0.02)	%

Loans past due 90 days or more and still accruing	$	96,532		$	60,775		$	35,757		$	114,523		$	92,099		$	22,424

(1)	Effective January 1, 2023, we adopted Accounting Standards Update (“ASU”) 2022-02 which eliminated the recognition and measurement guidance on troubled debt restructurings for creditors. Therefore, we no longer present troubled debt restructurings as a component of non-performing loans and assets.

At ~~September 30, 2022,~~March 31, 2023, non-accrual loans included 3931 commercial and industrial relationships with loans secured by accounts receivable, ~~automobiles, equipment~~recreational vehicles, and ~~notes receivable.~~equipment. Non-accrual loans at ~~September 30, 2022~~March 31, 2023 also included ~~$4.1~~$4.3 million of loans secured by residential real estate which were classified as loans held for sale. At December 31, ~~2021,~~2022, non-accrual loans included 4540 commercial and industrial relationships with loans secured by accounts receivable, ~~life insurance, oil~~automobiles, equipment and ~~gas, livestock and equipment.~~notes receivable. Non-accrual loans at December 31, ~~2021~~2022 also included ~~$2.9~~$4.8 million of loans secured by residential real estate which were classified as loans held for sale.

At September 30, 2022, TDRs were comprised of $0.8 million of loans that are considered to be performing and accruing, and $6.0 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 are considered to be performing and accruing, and $5.9 million of loans that were considered to be non-performing reported in non-accrual loans.

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OREO ~~decreased~~increased from December 31, ~~2021~~2022 to ~~September 30, 2022,~~March 31, 2023, primarily due to disposals and valuation adjustments totaling $1.5 million, partially offset by additions totaling ~~$0.3~~$2.3 million. At both ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, OREO was primarily comprised of commercial properties.

Loans past due 90 days or more and still accruing at ~~September 30, 2022~~March 31, 2023 and December 31, ~~2021,~~2022, 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. As of ~~September 30, 2022, $49.0~~March 31, 2023, $104.7 million of loans subject to repurchase were under a forbearance agreement resulting from the ~~COVID-19~~recent pandemic. During May 2020, GNMA announced that it would 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 September 30, 2022. As of ~~September 30, 2022, $49.0~~March 31, 2023, $64.6 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. ~~In an effort to assist its customers avoid overdraft-related fees, our~~Currently, the banking segment ~~implemented certain fee enhancements beginning October 1, 2022. Such fee enhancements are not expected to have a material impact~~is facing intense competition for its deposit base as customers seek higher yields on ~~its overall operating results.~~deposits.

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


	Nine Months Ended September 30,								Three Months Ended March 31,
	2022				2021				2023				2022
	Average		Average		Average		Average		Average		Average		Average		Average
	Balance		Rate Paid		Balance		Rate Paid		Balance		Rate Paid		Balance		Rate Paid
Noninterest-bearing demand deposits	$	4,534,513	0.00	%	$	4,040,649	0.00	%	$	3,789,757	0.00	%	$	4,507,661	0.00	%
Interest-bearing demand deposits		6,436,557	0.38	%		5,921,329	0.31	%		6,049,484	2.07	%		6,894,289	0.18	%
Savings deposits		336,617	0.12	%		287,282	0.10	%		305,873	0.82	%		348,018	0.05	%
Time deposits		925,383	0.54	%		1,454,340	1.40	%		884,199	1.99	%		959,517	0.47	%
	$	12,233,070	0.24	%	$	11,703,600	0.34	%	$	11,029,313	1.32	%	$	12,709,485	0.13	%

At March 31, 2023, total estimated uninsured deposits were $4.6 billion, or approximately 42% of total deposits, while estimated uninsured deposits, excluding collateralized deposits of $0.4 billion, were $4.2 billion, or approximately 38% of total deposits. Total estimated uninsured deposits were $4.1 billion, or approximately 36%, of total deposits as of December 31, 2022.

The following table presents the scheduled maturities of ~~uninsured~~the portion of our time deposits ~~greater than~~that are in excess of the FDIC insurance limit of $250,000 as of ~~September 30, 2022~~March 31, 2023 (in thousands).


Months to maturity:
3 months or less	$	101,943	$	33,783
3 months to 6 months		44,408		57,125
6 months to 12 months		101,807		200,384
Over 12 months		110,019		117,154
	$	358,177	$	408,446

Borrowings

Our consolidated borrowings are shown in the table below (dollars in thousands).


	September 30, 2022				December 31, 2021						March 31, 2023				December 31, 2022
			Average				Average						Average				Average
	Balance		Rate Paid		Balance		Rate Paid		Variance		Balance		Rate Paid		Balance		Rate Paid		Variance
Short-term borrowings	$	942,309	1.58	%	$	859,444	1.22	%	$	82,865	$	1,572,794	4.48	%	$	970,056	2.27	%	$	602,738
Notes payable		390,354	4.35	%		387,904	5.79	%		2,450		376,410	4.30	%		346,654	4.33	%		29,756
Junior subordinated debentures		—	—	%		—	3.45	%		—
	$	1,332,663	2.39	%	$	1,247,348	1.32	%	$	85,315	$	1,949,204	4.44	%	$	1,316,710	2.86	%	$	632,494

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Short-term borrowings consisted of federal funds purchased, securities sold under agreements to repurchase, borrowings at the ~~Federal Home Loan Bank (“FHLB”),~~FHLB, short-term bank loans and commercial paper. The increase in short-term borrowings at ~~September 30, 2022,~~March 31, 2023, compared with December 31, ~~2021,~~2022, primarily reflected increases in FHLB borrowings and federal funds purchased by the banking segment and securities sold under agreements to repurchase ~~by the broker-dealer segment, partially offset by decreases in~~and short-term bank loans ~~and commercial paper within~~by the broker-dealer segment. Notes payable at ~~September 30, 2022~~March 31, 2023 was comprised of $149.3 million related to the Senior Notes, net of loan origination fees, Subordinated Notes, net of origination fees, of ~~$197.3~~$197.4 million and mortgage origination segment borrowings of ~~$43.8~~$29.6 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.

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 ~~September 30, 2022,~~March 31, 2023, Hilltop had ~~$162.2~~$179.9 million in cash and cash equivalents, ~~a decrease~~an increase of ~~$205.7~~$7.4 million from ~~$367.9~~$172.5 million at December 31, ~~2021.~~2022. This ~~decrease~~increase in cash and cash equivalents was primarily due to the receipt of $27.8 million of dividends from subsidiaries, partially offset by cash outflows of ~~$442.3 million in stock repurchases related to the tender offer, $33.5~~$10.4 million in cash dividends declared, $4.5 million in stock repurchases and other general corporate ~~expenses, partially offset by the receipt of $299.0 million of dividends from subsidiaries.~~expenses. 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.

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~~COVID-19~~Economic Environment

~~The COVID-19 pandemic has adversely impacted~~As previously discussed, operational and financial ~~markets~~headwinds during 2022 have had, and ~~overall economic conditions, and may~~are expected to continue to have, ~~implications~~an adverse impact on our ~~business and operations.~~operating results during 2023. The ~~extent~~impacts of ~~the impact of the pandemic on our operational and financial performance for the remainder of 2022 is currently~~noted headwinds in 2023 are highly uncertain and will depend on ~~certain~~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 ~~ongoing distribution~~Russian-Ukraine conflict and ~~effectiveness of vaccines, emergence of new variants of~~its impact on supply chains. In addition, during March 2023, the ~~virus, government stimulus,~~banking sector experienced increased uncertainty and concerns associated with its liquidity positions primarily due to recent bank failures as depositors sought to reduce risks associated with uninsured deposits and withdraw such deposits from existing bank relationships. As demonstrated during the ~~ultimate~~extreme volatility and disruptions in the capital and credit markets beginning in March 2020 resulting from the recent pandemic crisis and its negative impact ofon the ~~pandemic on~~economy, we will continue to monitor the economic environment and evaluate appropriate actions to enhance our ~~customers~~financial flexibility, protect capital, minimize losses and ~~clients, and additional, or extended, federal, state and local government orders and regulations that might be imposed in response to the pandemic.~~ensure target liquidity levels.

Dividend Declaration

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,~~2023, our board of directors authorized a new stock repurchase program through January ~~2023,~~2024, pursuant to which we ~~were originally~~are authorized to repurchase, in the aggregate, up to ~~$100.0~~$75.0 million of our outstanding common stock, inclusive of repurchases to offset dilution related to grants of stock-based compensation. ~~As a result~~During the three months ended March 31, 2023, Hilltop paid $4.5 million to repurchase an aggregate of 144,403 shares of our common stock at an average price of $31.15 per share ~~repurchases during 2022, including~~pursuant to the ~~tender offer described below, we have no further available share repurchase capacity associated with our previously authorized~~ stock repurchase program.

~~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, excluding fees and expenses. We funded the tender offer with cash on hand.

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Senior Notes due 2025

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 ~~September 30, 2022,~~March 31, 2023, $150.0 million of our Senior Notes was outstanding.

Subordinated Notes due 2030 and 2035

On May 7, 2020, we completed a public offering of $50 million aggregate principal amount of 2030 Subordinated Notes and $150 million aggregate principal amount of 2035 Subordinated Notes. 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.

The 2030 Subordinated Notes and the 2035 Subordinated Notes will mature on May 15, 2030 and May 15, 2035, respectively. 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,

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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 ~~September 30, 2022,~~March 31, 2023, $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 September 30, 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.

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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 ~~September 30, 2022~~March 31, 2023 (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 ~~September 30, 2022~~March 31, 2023 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								Minimum
					Capital								Capital
					Requirements								Requirements
					Including								Including
					Conservation		To Be Well						Conservation		To Be Well
	September 30, 2022				Buffer		Capitalized		March 31, 2023				Buffer		Capitalized
	Amount		Ratio		Ratio		Ratio		Amount		Ratio		Ratio		Ratio
Tier 1 capital (to average assets):
PlainsCapital	$	1,404,288	10.29	%	4.0	%	5.0	%	$	1,418,348	10.69	%	4.0	%	5.0	%
Hilltop		1,881,289	11.41	%	4.0	%	N/A			1,910,810	11.82	%	4.0	%	N/A
Common equity Tier 1 capital (to risk-weighted assets):
PlainsCapital		1,404,288	14.68	%	7.0	%	6.5	%		1,418,348	14.97	%	7.0	%	6.5	%
Hilltop		1,881,289	17.45	%	7.0	%	N/A			1,910,810	17.99	%	7.0	%	N/A
Tier 1 capital (to risk-weighted assets):
PlainsCapital		1,404,288	14.68	%	8.5	%	8.0	%		1,418,348	14.97	%	8.5	%	8.0	%
Hilltop		1,881,289	17.45	%	8.5	%	N/A			1,910,810	17.99	%	8.5	%	N/A
Total capital (to risk-weighted assets):
PlainsCapital		1,486,989	15.54	%	10.5	%	10.0	%		1,511,156	15.94	%	10.5	%	10.0	%
Hilltop		2,163,815	20.07	%	10.5	%	N/A			2,204,120	20.75	%	10.5	%	N/A

We discuss regulatory capital requirements in more detail in Note 16 to our consolidated financial statements, as well as under the caption “Government Supervision and Regulation — Corporate — Capital Adequacy Requirements and BASEL III” set forth in Part I, Item 1, of our ~~2021~~2022 Form 10-K.

Banking Segment

Within our banking segment, our primary uses of cash are for customer withdrawals and extensions of credit as well as our borrowing costs and other operating expenses. 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

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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.

~~Given~~The above sources of liquidity allow the ~~continued strong cash and~~banking segment to meet increased liquidity ~~levels at the Bank, the~~demands without adversely affecting daily operations. The Bank’s borrowing capacity ~~available liquidity position and~~through access to secured funding sources ~~continues to be at a heightened level as~~is summarized in the following table (in millions).

September 30,

December 31,

2022

2021
FHLB capacity

$
4,339

$
4,221
Investment portfolio (available)

1,694

1,478
Fed deposits (excess daily requirements)

1,626

2,686

$
7,659

$
8,385

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As noted in the table above, the Bank’s available liquidity position and borrowing capacity at September 30, 2022 continues to be at a heightened level. The Bank is targeting available liquidity of between approximately $5 billion and $6 billion during the remainder of 2022 given general economic uncertainties. Available liquidity does not include borrowing capacity available through the discount window at the Federal Reserve.


	March 31,		December 31,
	2023		2022
FHLB capacity	$	3,714	$	4,139
Investment portfolio (available)		1,637		1,606
Fed deposits (excess daily requirements)		1,601		1,332
	$	6,952	$	7,077

As previously discussed, during March 2023, the banking sector experienced increased uncertainty and concerns associated with its liquidity positions primarily due to recent bank failures as depositors sought to reduce risks associated with uninsured deposits and withdraw such deposits from existing bank relationships. These failures underscore the importance of maintaining access to diverse sources of funding. In light of these events, we have continued our efforts to monitor deposit flows and balance sheet trends to ensure that our liquidity needs are maintained. During the first quarter of 2023, we increased interest-bearing deposit rates to address rising market interest rates and intense competition for liquidity to combat deposit outflows. In addition, during March 2023, the Bank accessed and included additional core deposits on its balance sheet of approximately $650 million from our Hilltop Securities FDIC-insured sweep program. The Bank also utilized $450.0 million of its FHLB borrowing capacity noted above through the use of short-term borrowings.

Within our banking segment, deposit flows are affected by the level of market interest rates, the interest rates and products offered by competitors, the volatility of equity markets and other factors. An economic recovery and improved commercial real estate investment outlook may result in an outflow of deposits at an accelerated pace as customers utilize such available funds for expanded operations and investment opportunities. The Bank regularly evaluates its deposit products and pricing structures relative to the market to maintain competitiveness over time. Currently, the Bank is facing 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 ~~11.41%~~7.68% of the Bank’s total deposits, and the Bank’s five largest depositors, excluding Hilltop and Hilltop Securities, collectively accounted for ~~6.31%~~3.59% of the Bank’s total deposits at ~~September 30, 2022.~~March 31, 2023. 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 ~~September 30, 2022,~~March 31, 2023, Hilltop Securities had credit arrangements with ~~four~~three unaffiliated banks, with maximum aggregate commitments of up to ~~$600.0~~$425.0 million. These credit arrangements are used to finance securities owned, securities held for correspondent accounts, receivables in

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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~~two unaffiliated banks, with aggregate availability of up to ~~$250.0~~$200.0 million. At ~~September 30, 2022,~~March 31, 2023, Hilltop Securities had ~~$7.0~~$84.0 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 ~~September 30, 2022,~~March 31, 2023, the weighted average maturity of the CP Notes was ~~145~~137 days at a rate of ~~3.16%~~5.57% with a weighted average remaining life of 5973 days. At ~~September 30, 2022,~~March 31, 2023, the aggregate amount outstanding under these secured arrangements was ~~$193.8~~$227.2 million, which was collateralized by securities held for ~~firm~~Hilltop Securities accounts valued at ~~$213.1~~$249.1 million.

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 ~~$2.7~~$2.0 billion, of which ~~$0.9 billion~~$914 million was drawn at ~~September 30, 2022. As of October 1, 2022, the total commitment was reduced to $2.0 billion.~~March 31, 2023. 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 ~~September 30, 2022.~~March 31, 2023.

PrimeLending owns a 100% membership interest in PrimeLending Ventures Management, LLC (“Ventures Management”) which holds ana controlling ownership interest in and is the managing member of certain ABAs. At ~~September 30, 2022,~~March 31, 2023, these ABAs had combined available lines of credit totaling ~~$190.0~~$105.0 million, ~~$55.0~~$30.0 million of which was with a single unaffiliated bank, and the remaining ~~$135.0~~$75.0 million of which was with the Bank. At ~~September 30, 2022,~~March 31, 2023, Ventures Management had outstanding borrowings of ~~$67.4~~$46.3 million, ~~$23.6~~$16.6 million of which was with the Bank. ~~As of October 1, 2022, the ABA combined available lines of credit with the Bank were reduced to $105.0 million.~~

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

Since December 31, ~~2021,~~2022, there have been no material changes in other material contractual obligations disclosed within the section captioned “Other Material Contractual Obligations, Off-Balance Sheet Arrangements, Commitments and Guarantees” set forth in Part II, Item 7 of our ~~2021~~2022 Form 10-K.

Additionally, in the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets.

Banking Segment

We enter into contractual loan commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of our commitments to extend credit are contingent upon customers maintaining specific credit standards until the time of loan funding. We minimize our exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. We assess the credit risk associated with certain commitments to extend credit and have recorded a liability related to such credit risk in our consolidated financial statements.

Standby letters of credit are written conditional commitments issued by us to guarantee the performance of a customer to a third-party. In the event the customer does not perform in accordance with the terms of the agreement with the third-party, we would be required to fund the commitment. The maximum potential amount of future payments we could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, we would be entitled to seek recovery from the customer. Our policies generally require that standby letter of credit arrangements contain security and debt covenants similar to those contained in loan agreements.

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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 have continued to rise into 2023 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

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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, mortgage loan indemnification liability and acquisition accounting. Since December 31, ~~2021,~~2022, there have been no changes in critical accounting estimates as further described under “Critical Accounting Estimates” in our ~~2021~~2022 Form 10-K.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Our assessment of market risk as of ~~September 30, 2022~~March 31, 2023 indicates there are no material changes in the quantitative and qualitative disclosures from those previously reported in our ~~2021~~2022 Form 10-K, except as discussed below.

The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. Market risk represents the risk of loss that may result from changes in value of a financial instrument as a result of changes in interest rates, market prices and the credit perception of an issuer. The disclosure is not meant to be a precise indicator of expected future losses, but rather an indicator of reasonably possible losses, and therefore our actual results may differ from any of the following projections. This forward-looking information provides an indicator of how we view and manage our ongoing market risk exposures.

Banking Segment

The banking segment is engaged primarily in the business of investing funds obtained from deposits and borrowings in interest-earning loans and investments, and our primary component of market risk is sensitivity to changes in interest rates. Consequently, our earnings depend to a significant extent on our net interest income, which is the difference between interest income on loans and investments and our interest expense on deposits and borrowings. To the extent that our interest-bearing liabilities do not reprice or mature at the same time as our interest-bearing assets, we are subject to interest rate risk and corresponding fluctuations in net interest income.

There are several common sources of interest rate risk that must be effectively managed if there is to be minimal impact on our earnings and capital. Repricing risk arises largely from timing differences in the pricing of assets and liabilities. Reinvestment risk refers to the reinvestment of cash flows from interest payments and maturing assets at lower or higher rates. Basis risk exists when different yield curves or pricing indices do not change at precisely the same time or in the same magnitude such that assets and liabilities with the same maturity are not all affected equally. Yield curve risk refers to unequal movements in interest rates across a full range of maturities.

We have employed asset/liability management policies that attempt to manage our interest-earning assets and interest-bearing liabilities, thereby attempting to control the volatility of net interest income, without having to incur unacceptable levels of risk. We employ procedures which include interest rate shock analysis, repricing gap analysis and balance sheet decomposition techniques to help mitigate interest rate risk in the ordinary course of business. In addition, the asset/liability management policies permit the use of various derivative instruments to manage interest rate risk or hedge specified assets and liabilities. 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.

An interest rate sensitive asset or liability is one that, within a defined time period, either matures or experiences an interest rate change in line with general market interest rates. The management of interest rate risk is performed by analyzing the maturity and repricing relationships between interest-earning assets and interest-bearing liabilities at specific points in time (“GAP”) and by analyzing the effects of interest rate changes on net interest income over specific periods of time by projecting the performance of the mix of assets and liabilities in varied interest rate environments. Interest rate sensitivity reflects the potential effect on net interest income resulting from a movement in interest rates. A company is considered to be asset sensitive, or have a positive GAP, when 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. Conversely, a company is considered to be liability sensitive, or have a negative GAP, when the amount of its interest-bearing liabilities maturing or repricing within a given period exceeds the amount of its interest-earning assets also maturing or repricing within that time period. During a period of rising interest rates, a negative GAP would tend to affect net interest income adversely, while a positive GAP would tend to result in an increase in net interest income. During a period of falling interest rates, a negative GAP would tend to result in an increase in net interest income, while a positive GAP would tend to affect net interest income adversely.

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As illustrated in the table below, the banking segment is currently asset sensitive overall. Loans that adjust daily or monthly to the Wall Street Journal Prime rate comprise a large percentage of interest sensitive assets and are the primary cause of the banking segment’s asset sensitivity. To help neutralize interest rate sensitivity, the banking segment has kept the terms of most of its borrowings under one year as shown in the following table (dollars in thousands).


	September 30, 2022																	March 31, 2023
	3 Months or			> 3 Months to			> 1 Year to			> 3 Years to								3 Months or			> 3 Months to			> 1 Year to			> 3 Years to
	Less			1 Year			3 Years			5 Years			> 5 Years			Total		Less			1 Year			3 Years			5 Years			> 5 Years			Total
Interest sensitive assets:
Loans	$	4,066,267		$	1,288,993		$	1,890,178		$	765,183		$	440,441		$	8,451,062	$	4,118,197		$	1,241,740		$	1,843,294		$	879,232		$	673,901		$	8,756,364
Securities		571,861			203,143			441,220			344,279			1,125,485			2,685,988		584,790			224,039			500,690			360,029			1,023,346			2,692,894
Federal funds sold and securities purchased under agreements to resell		42,288			—			—			—			—			42,288		1,618,750			—			—			—			—			1,618,750
Other interest sensitive assets		1,637,732			—			—			—			29,590			1,667,322		1,633,793			—			—			—			29,649			1,663,442
Total interest sensitive assets		6,318,148			1,492,136			2,331,398			1,109,462			1,595,516			12,846,660		7,955,530			1,465,779			2,343,984			1,239,261			1,726,896			14,731,450

Interest sensitive liabilities:
Interest bearing checking	$	5,401,726		$	—		$	—		$	—		$	—		$	5,401,726	$	5,958,044		$	—		$	—		$	—		$	—		$	5,958,044
Savings		316,788			—			—			—			—			316,788		298,797			—			—			—			—			298,797
Time deposits		240,805			420,652			184,528			21,863			60			867,908		107,586			575,014			210,759			15,338			—			908,697
Notes payable and other borrowings		439,284			145			462			596			2,356			442,843		898,330			124			399			522			2,123			901,498
Total interest sensitive liabilities		6,398,603			420,797			184,990			22,459			2,416			7,029,265		7,262,757			575,138			211,158			15,860			2,123			8,067,036

Interest sensitivity gap	$	(80,455)		$	1,071,339		$	2,146,408		$	1,087,003		$	1,593,100		$	5,817,395	$	692,773		$	890,641		$	2,132,826		$	1,223,401		$	1,724,773		$	6,664,414

Cumulative interest sensitivity gap	$	(80,455)		$	990,884		$	3,137,292		$	4,224,295		$	5,817,395				$	692,773		$	1,583,414		$	3,716,240		$	4,939,641		$	6,664,414

Percentage of cumulative gap to total interest sensitive assets		(0.63)	%		7.71	%		24.42	%		32.88	%		45.28	%				4.70	%		10.75	%		25.23	%		33.53	%		45.24	%

The positive GAP in the interest rate analysis indicates that banking segment net interest income would generally rise if rates increase. Because of inherent limitations in interest rate GAP analysis, the banking segment uses multiple interest rate risk measurement techniques. Simulation analysis is used to subject the current repricing conditions to rising and falling interest rates in increments and decrements of 50 to 100 basis points to determine the effect on net interest income changes for the next twelve months. The banking segment also measures the effects of changes in interest rates on economic value of equity by discounting projected cash flows of deposits and loans. Economic value changes in the investment portfolio are estimated by discounting future cash flows and using duration analysis. Investment security prepayments are estimated using current market information. We believe the simulation analysis presents a more accurate picture than the GAP analysis. Simulation analysis recognizes that deposit products may not react to changes in interest rates as quickly or with the same magnitude as earning assets contractually tied to a market rate index. The sensitivity to changes in market rates varies across deposit products. Also, unlike GAP analysis, simulation analysis takes into account the effect of embedded options in the securities and loan portfolios as well as any off-balance sheet derivatives.

The table below shows the estimated impact of a range of changes in interest rates on net interest income and on economic value of equity for the banking segment at ~~September 30, 2022~~March 31, 2023 (dollars in thousands).


Change in	Changes in				Changes in				Changes in				Changes in
Interest Rates	Net Interest Income				Economic Value of Equity				Net Interest Income				Economic Value of Equity
(basis points)	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
+300	$	89,860	18.25	%	$	268,726	12.12	%
+200	$	58,210	11.82	%	$	172,494	7.78	%	$	33,478	7.39	%	$	154,192	8.32	%
+100	$	29,731	6.04	%	$	111,370	5.02	%	$	17,610	3.89	%	$	102,253	5.52	%
-50	$	(14,693)	(2.98)	%	$	(64,536)	(2.91)	%	$	(9,038)	(2.00)	%	$	(76,613)	(4.13)	%
-100	$	(30,510)	(6.20)	%	$	(146,183)	(6.59)	%	$	(18,481)	(4.08)	%	$	(166,275)	(8.97)	%
-200	$	(84,732)	(17.21)	%	$	(378,278)	(17.05)	%	$	(40,741)	(9.00)	%	$	(387,923)	(20.93)	%

The projected changes in net interest income and economic value of equity to changes in interest rates at ~~September 30, 2022~~March 31, 2023 were in compliance with established internal policy guidelines. These projected changes are based on numerous assumptions of growth and changes in the mix of assets or liabilities. The projected changes in net interest income are being impacted by the heightened level of cash balances, which represent a significant portion of the Bank’s sensitivity given simulation analysis assumptions/limitations. As a result, the timing and magnitude of future changes in interest rates and any runoff of deposits, and related decline in cash, may impact projected changes in net interest income as noted in the table above. Given projected impacts on net interest income associated with the expected transition into the next phase of the interest rate cycle in 2023, we are evaluating our current GAP position, which may result in a repositioning of the banking segment towards a more neutral or liability sensitive balance sheet.

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Our portfolio includes loans that periodically reprice or mature prior to the end of an amortized term. Some of our variable-rate loans remain at applicable rate floors, which may delay and/or limit changes in interest income during a period of changing rates. If interest rates were to fall, the impact on our interest income would be limited by these rate floors. In addition, declining interest rates may negatively affect our cost of funds on deposits. The extent of this impact 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. If interest rates were to rise, yields on the portion of our portfolio that remain at applicable rate floors would rise more slowly than increases in market interest rates. 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.

Broker-Dealer Segment

Our broker-dealer segment is exposed to market risk primarily due to its role as a financial intermediary in customer transactions, which may include purchases and sales of securities, use of derivatives and securities lending activities, and in our trading activities, which are used to support sales, underwriting and other customer activities. We are subject to the risk of loss that may result from the potential change in value of a financial instrument as a result of fluctuations in interest rates, market prices, investor expectations and changes in credit ratings of the issuer.

Our broker-dealer segment is exposed to interest rate risk as a result of maintaining inventories of interest rate sensitive financial instruments and other interest-earning assets including customer and correspondent margin loans and receivables and securities borrowing activities. Our funding sources, which include customer and correspondent cash balances, bank borrowings, repurchase agreements and securities lending activities, also expose the broker-dealer to interest rate risk. Movement in short-term interest rates could reduce the positive spread between the broker-dealer segment’s interest income and interest expense.

With respect to securities held, our interest rate risk is managed by setting and monitoring limits on the size and duration of positions and on the length of time securities can be held. Much of the interest rates on customer and correspondent margin loans and receivables are indexed and can vary daily. Our funding sources are generally short term with interest rates that can vary daily.

The following table categorizes the broker-dealer segment’s net trading securities which are subject to interest rate and market price risk (dollars in thousands).


	September 30, 2022															March 31, 2023
	1 Year			> 1 Year			> 5 Years									1 Year			> 1 Year			> 5 Years
	or Less			to 5 Years			to 10 Years			> 10 Years			Total			or Less			to 5 Years			to 10 Years			> 10 Years			Total
Trading securities, at fair value
Municipal obligations	$	157		$	18,945		$	64,609		$	117,234		$	200,945		$	218		$	31,627		$	46,570		$	149,461		$	227,876
U.S. government and government agency obligations		(116)			(3,871)			(8,460)			298,107			285,660			14,979			(7,748)			12,247			349,212			368,690
Corporate obligations		10,630			15,325			477			16,741			43,173			7,422			20,276			275			13,453			41,426
Total debt securities		10,671			30,399			56,626			432,082			529,778			22,619			44,155			59,092			512,126			637,992
Corporate equity securities		(12,783)			—			—			—			(12,783)			2			—			—			—			2
Other		25,262			—			—			—			25,262			3,334			—			—			—			3,334
	$	23,150		$	30,399		$	56,626		$	432,082		$	542,257		$	25,955		$	44,155		$	59,092		$	512,126		$	641,328

Weighted average yield
Municipal obligations		0.00	%		4.47	%		4.04	%		5.20	%		4.75	%		0.02	%		2.42	%		3.27	%		4.50	%		3.96	%
U.S. government and government agency obligations		4.23	%		4.31	%		3.70	%		5.62	%		5.33	%		4.40	%		1.81	%		3.20	%		5.97	%		5.59	%
Corporate obligations		5.25	%		5.39	%		6.09	%		4.52	%		5.27	%		5.87	%		4.07	%		3.06	%		3.07	%		3.85	%

Derivatives are used to support certain customer programs and hedge our related exposure to interest rate risks.

Our broker-dealer segment is engaged in various brokerage and trading activities that expose us to credit risk arising from potential non-performance from counterparties, customers or issuers of securities. This risk is managed by setting and monitoring position limits for each counterparty, conducting periodic credit reviews of counterparties, reviewing concentrations of securities and conducting business through central clearing organizations.

Collateral underlying margin loans to customers and correspondents and with respect to securities lending activities is marked to market daily and additional collateral is required as necessary.

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Mortgage Origination Segment

Within our mortgage origination segment, our principal market exposure is to interest rate risk due to the impact on our mortgage-related assets and commitments, including mortgage loans held for sale, IRLCs and MSR. Changes in interest rates could also materially and adversely affect our volume of mortgage loan originations.

IRLCs represent an agreement to extend credit to a mortgage loan applicant, whereby the interest rate on the loan is set prior to funding. Our mortgage loans held for sale, which we hold in inventory while awaiting sale into the secondary market, and our IRLCs are subject to the effects of changes in mortgage interest rates from the date of the commitment through the sale of the loan into the secondary market. As a result, we are exposed to interest rate risk and related price risk during the period from the date of the lock commitment until (i) the lock commitment cancellation or expiration date or (ii) the date of sale into the secondary mortgage market. Loan commitments generally range from 20 to 60 days, and our average holding period of the mortgage loan from funding to sale is approximately 30 days. An integral component of our interest rate risk management strategy is our execution of forward commitments to sell MBSs to minimize the impact on earnings resulting from significant fluctuations in the fair value of mortgage loans held for sale and IRLCs caused by changes in interest rates.

We have expanded, and may continue to expand, our residential mortgage servicing operations within our mortgage origination segment. As a result of our mortgage servicing business, we have a portfolio of retained MSR. One of the principal risks associated with MSR is that in a declining interest rate environment, they will likely lose a substantial portion of their value as a result of higher than anticipated prepayments. Moreover, if prepayments are greater than expected, the cash we receive over the life of the mortgage loans would be reduced. The mortgage origination segment uses derivative financial instruments, including U.S. Treasury bond futures and options, ~~Eurodollar~~ futures contracts and forward MBS commitments, as a means to mitigate market risk associated with MSR assets. No hedging strategy can protect us completely, and hedging strategies may fail because they are improperly designed, improperly executed and documented or based on inaccurate assumptions and, as a result, could actually increase our risks and losses. The increasing size of our MSR portfolio may increase our interest rate risk and, correspondingly, the volatility of our earnings, especially if we cannot adequately hedge the interest rate risk relating to our MSR.

The goal of our interest rate risk management strategy within our mortgage origination segment is not to eliminate interest rate risk, but to manage it within appropriate limits. To mitigate the risk of loss, we have established policies and procedures, which include guidelines on the amount of exposure to interest rate changes we are willing to accept.

Consolidated

At ~~September 30, 2022,~~March 31, 2023, total debt obligations on our consolidated balance sheet, excluding short-term borrowings and unamortized debt issuance costs and premiums, were ~~$393.8~~$380 million, and included ~~$350.0~~$350 million in debt obligations subject to fixed interest rates, with the remainder of indebtedness subject to variable interest rates. If interest rates were to increase by one eighth of one percent (0.125%), the increase in interest expense on the variable rate debt would not have a significant impact on our future consolidated earnings or cash flows.

As noted above within the discussion for each business segment, on a consolidated basis, our primary component of market risk is sensitivity to changes in interest rates. Consequently, and in large part due to the significance of our banking segment, our consolidated earnings depend to a significant extent on our net interest income. Refer to the discussion in the “Banking Segment” section above that provides more details regarding sources of interest rate risk and asset/liability management policies and procedures employed to manage our interest-earning assets and interest-bearing liabilities, and potential future repositioning of our GAP position, thereby attempting to control the volatility of net interest income, without having to incur unacceptable levels of risk.

The table below shows the estimated impact of a range of changes in interest rates on net interest income on a consolidated basis at ~~September 30, 2022~~March 31, 2023 (dollars in thousands).


Change in	Changes in				Changes in
Interest Rates	Net Interest Income				Net Interest Income
(basis points)	Amount		Percent		Amount		Percent
+300	$	112,995	21.78	%
+200	$	74,325	14.33	%	$	66,557	11.69	%
+100	$	38,053	7.33	%	$	34,122	5.99	%
-50	$	(20,371)	(3.93)	%	$	(17,274)	(3.03)	%
-100	$	(46,375)	(8.94)	%	$	(34,964)	(6.14)	%
-200	$	(110,540)	(21.31)	%	$	(73,628)	(12.93)	%

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The projected changes in net interest income to changes in interest rates at ~~September 30, 2022~~March 31, 2023 were in compliance with established internal policy guidelines. These projected changes are based on numerous assumptions of growth and changes in the mix of assets or liabilities. The projected changes in net interest income are being impacted by the heightened level of cash balances, which represent a significant portion of our asset sensitivity given simulation analysis assumptions/limitations. As a result, the timing and magnitude of future changes in interest rates including runoff of deposits, and related decline in cash, may impact projected changes in net interest income as noted in the table above.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the supervision and participation of our Principal Executive Officer and Principal Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report.

Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to the Company’s management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the ~~third~~first fiscal quarter covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

For a description of material pending legal proceedings, see the discussion set forth under the heading “Legal Matters” in Note 13 to our Consolidated Financial Statements, which is incorporated by reference herein.

Item 1A. Risk Factors.

~~There have been no~~The following risk factor represents a material ~~changes~~change to the risk factors disclosed under “Item 1A. Risk Factors” of our ~~2021~~2022 Form 10-K. For additional information concerning our risk factors, please refer to “Item 1A. Risk Factors” of our ~~2021~~2022 Form 10-K.

Adverse developments affecting the financial services industry, such as recent bank failures or concerns involving liquidity, may have a material effect on the Company’s operations.

Recent events relating to the failures of certain banking entities in March 2023, i.e. Silicon Valley Bank and Signature Bank, have caused general uncertainty and concern regarding the liquidity adequacy of the banking sector as a whole. Although we were not directly affected by these bank failures, the resulting speed and ease in which news, including social media commentary, led depositors to withdraw or attempt to withdraw their funds from these and other financial institutions as well as caused the stock prices of many financial institutions to become volatile. In the future, events such as these bank failures could have an adverse effect on our financial condition and results of operations, either directly or through an adverse impact on certain of our customers.

In response to these failures and the resulting market reaction, the Secretary of the Treasury approved actions enabling the FDIC to complete its resolutions of the failed banks in a manner that fully protects depositors by utilizing the Deposit Insurance Fund, including the use of Bridge Banks to assume all of the deposit obligations of the failed banks, while leaving unsecured lenders and equity holders of such institutions exposed to losses. In addition, the Federal Reserve Bank announced it would make available additional funding to eligible depository institutions under a Bank Term Funding Program to help assure banks have the ability to meet the needs of all their depositors. In an effort to strengthen public confidence in the banking system and protect depositors, regulators announced that any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law, which could increase the cost of our FDIC insurance assessments. However, it is uncertain whether these steps by the government will be sufficient to calm the financial markets, reduce the risk of significant depositor withdrawals at other institutions and thereby reduce the risk of additional bank failures. As a result of this uncertainty, we face the potential for reputational risk, deposit outflows, increased costs and competition for liquidity, and increased credit risk which, individually or in the aggregate, could have a material adverse effect on our business, financial condition and results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

~~None.~~The following table details our repurchases of shares of common stock during the three months ended March 31, 2023.


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (1)
January 1 - January 31, 2023	—	$	—	—	$	75,000,000
February 1 - February 28, 2023	—		—	—		75,000,000
March 1 - March 31, 2023	144,403		31.15	144,403		70,501,138
Total	144,403	$	31.15	144,403

(1)

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.

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Item 6. Exhibits.


Exhibit Number		Description of Exhibit


~~10.1~~		First Amendment to Hilltop Holdings Inc. Employee Stock Purchase Plan (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed July 22, 2022 (File No. 001-31987) and incorporated herein by reference).

~~10.2~~		Second Amendment to Employment Agreement by and between Hilltop Holdings Inc. and William B. Furr, dated as of August 30, 2022 (filed as Exhibit 10.7.3 to the Registrant’s Current Report on Form 8-K filed August 31, 2022 (File No. 001-31987) and incorporated herein by reference).

31.1*		Certification of Principal Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2*		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1**		Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH*		Inline XBRL Taxonomy Extension Schema

101.CAL*		Inline XBRL Taxonomy Extension Calculation Linkbase

101.DEF*		Inline XBRL Taxonomy Extension Definition Linkbase

101.LAB*		Inline XBRL Taxonomy Extension Label Linkbase

101.PRE*		Inline XBRL Taxonomy Extension Presentation Linkbase

104		Cover Page Interactive File (formatted as Inline XBRL and contained in Exhibit 101)

*	Filed herewith.

** Furnished herewith.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	HILLTOP HOLDINGS INC.

Date: ~~October~~April 24, ~~2022~~2023	By:	/s/ William B. Furr
		William B. Furr
		Chief Financial Officer (Principal Financial Officer and duly authorized officer)

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