HILLTOP HOLDINGS INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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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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 ("2021 Form 10-K"), which was filed with the Securities and Exchange
Commission (the "SEC") on February 15, 2022, 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 in thousands, except per share data).

                                        Three Months Ended September 30,    

Nine Months Ended September 30,

                                           2022                  2021                2022                 2021
Statement of Operations Data:
Net interest income                  $        123,486      $        105,090    $        335,533     $        318,688
Provision for (reversal of)
credit losses                                   (780)               (5,819)               4,671             (39,648)
Total noninterest income                      206,975               367,945             662,676            1,125,429
Total noninterest expense                     288,738               355,174             873,631            1,065,204
Income before income taxes                     42,503               123,680             119,907              418,561
Income tax expense                              9,249                28,257              27,191               97,261
Net income                                     33,254                95,423              92,716              321,300
Less: Net income attributable to
noncontrolling interest                         1,186                 2,517               5,138                8,990

Income attributable to Hilltop $ 32,068 $ 92,906

$ 87,578 $ 312,310


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

                                                                                September 30,         December 31,
                                                                                     2022                 2021
Balance Sheet Data:
Total assets                                                                   $     16,615,291     $     18,689,080
Cash and due from banks                                                               1,777,584            2,823,138
Securities                                                                            3,116,249            3,046,500
Loans held for sale                                                                   1,003,605            1,878,190
Loans held for investment, net of
unearned income                                                                       7,944,246            7,879,904
Allowance for credit losses                                                            (91,783)             (91,352)
Total deposits                                                                       11,352,014           12,818,077
Notes payable                                                                           390,354              387,904
Total stockholders' equity                                                            2,058,883            2,549,203

Capital Ratios:
Common equity to assets ratio                                              
              12.23 %              13.50 %
Tangible common equity to
tangible assets (1)                                                                       10.73 %              12.17 %

(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.


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

? The banking segment contributed $63.6 million and $161.5 million of income

before income taxes during the three and nine months ended September 30, 2022;

The broker-dealer segment contributed $17.5 million and $18.0 million of income

? before income taxes during the three and nine months ended September 30, 2022;

and

The mortgage origination segment incurred $23.1 million and $11.0 million of

? losses before income taxes during the three and nine months ended September 30,

2022.

During the nine months ended September 30, 2022, we declared and paid total
common dividends of $33.5 million.

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

On May 2, 2022, we announced the commencement of a modified "Dutch auction"
tender offer to purchase shares of our common stock for an aggregate cash
purchase price of up to $400 million, inclusive of our $100.0 million stock
repurchase program authorized in January 2022. On May 27, 2022, including the
exercise of our right to purchase up to an additional 2% of our outstanding
shares, we completed our tender offer, repurchasing 14,868,469 shares of
outstanding common stock at a price of $29.75 per share for a total of $442.3
million, excluding fees and expenses. We funded 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 %


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Recent Developments

COVID-19

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

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic
Security Act ("CARES Act") and the Paycheck Protection Program and Health Care
Enhancement Act (the "PPP/HCE Act") were passed in March 2020, which were
intended to provide emergency relief to several groups and individuals impacted
by the COVID-19 pandemic. Among the numerous provisions contained in the CARES
Act was the creation of 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.

Starting in March 2020, the Bank implemented several actions to better support
our impacted banking clients and allow for loan modifications such as principal
and/or interest payment deferrals, participation in both the initial and second
round PPP efforts as an SBA preferred lender and personal banking assistance
including waived fees, increased daily spending limits and suspension of
residential foreclosure activities. The COVID-19 payment deferment programs
allowed for a deferral of principal and/or interest payments with such deferred
principal payments due and payable on the maturity date of the existing loan.
The Bank's PPP efforts included approval and funding of over 4,100 PPP loans,
with 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 million of loans held for investment with
unfunded commitment balances of approximately $40 million. The allowance for
credit losses on the Bank's energy portfolio was $0.1 million, or 0.2% of loans
held for investment at September 30, 2022.

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 given the
economic uncertainties associated with COVID-19.

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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 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 the first nine months
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 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. 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.

Outlook


Our balance sheet, operating results and certain metrics during 2021 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 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 exposure to increasing funding costs
during the first nine months of 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 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


As 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, 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, are counterparty to derivative
agreements that are based on LIBOR and have existing contracts with payment
calculations that use LIBOR as the reference rate. The cessation of publication
of LIBOR will create various risks surrounding the financial, operational,
compliance and legal aspects associated with changing certain elements of
existing contracts.

The Alternative Reference Rates Committee ("ARRC") has proposed a paced market
transition plan to the 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 necessary actions,
including negotiating certain of our agreements based on alternative benchmark
rates that have been established. 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 completed its efforts to amend LIBOR-based contractual terms and
establish an alternative benchmark rate. We also continue to evaluate the
impacts of the LIBOR phase-out and transition requirements as it pertains to
contracts, models and systems. To date, an immaterial amount of expenses have
been incurred as a result of our efforts; however, in the future we may incur
additional expenses as we finalize 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.

Corporate includes certain activities not allocated to specific business
segments. These activities include holding company financing and investing
activities, merchant banking investment opportunities, and management and
administrative services to support the overall operations of the Company.

The eliminations of intercompany transactions are included in “All Other and
Eliminations.” Additional information concerning our reportable segments is
presented in Note 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                                       Nine Months Ended
                           September 30,            Variance 2022 vs 2021           September 30,           Variance 2022 vs 2021
                        2022           2021           Amount        Percent      2022          2021           Amount        Percent
Net interest
income (expense):
Banking              $   110,939    $    99,978   $        10,961        11   $   304,269   $   309,330   $       (5,061)       (2)
Broker-Dealer             13,386         10,427             2,959        28        37,481        31,623             5,858        19

Mortgage

Origination              (2,939)        (3,503)               564        16       (6,066)      (16,554)            10,488        63
Corporate                (3,276)        (4,341)             1,065        25       (9,856)      (13,720)             3,864        28
All Other and
Eliminations               5,376          2,529             2,847       113         9,705         8,009             1,696        21

Hilltop

Consolidated $ 123,486 $ 105,090 $ 18,396 18

  $   335,533   $   318,688   $        16,845         5

Provision for
(reversal of)
credit losses:
Banking              $     (650)    $   (5,775)   $         5,125        89   $     4,325   $  (39,725)   $        44,050       111
Broker-Dealer              (130)           (44)              (86)     (195)           346            77               269       349
Mortgage
Origination                    -              -                 -         -             -             -                 -         -
Corporate                      -              -                 -         -             -             -                 -         -
All Other and
Eliminations                   -              -                 -         -             -             -                 -         -
Hilltop
Consolidated         $     (780)    $   (5,819)   $         5,039        87

$ 4,671 $ (39,648) $ 44,319 112

Noninterest

income:

Banking              $    12,200    $    11,727   $           473         4   $    37,438   $    33,293   $         4,145        12
Broker-Dealer            100,798        116,143          (15,345)      (13)

249,139 298,229 (49,090) (16)
Mortgage
Origination

               98,200        242,270         (144,070)      (59)       381,477       794,679         (413,202)      (52)
Corporate                  1,809            757             1,052       139         5,655         8,140           (2,485)      (31)
All Other and
Eliminations             (6,032)        (2,952)           (3,080)     (104)      (11,033)       (8,912)           (2,121)      (24)

Hilltop

Consolidated $ 206,975 $ 367,945 $ (160,970) (44)

$ 662,676 $ 1,125,429 $ (462,753) (41)

Noninterest
expense:
Banking              $    60,160    $    54,567   $         5,593        10   $   175,921   $   167,869   $         8,052         5
Broker-Dealer             96,843        109,193          (12,350)      (11)       268,307       287,831          (19,524)       (7)
Mortgage
Origination              118,345        176,587          (58,242)      (33)       386,372       573,884         (187,512)      (33)
Corporate                 14,034         15,355           (1,321)       (9)        44,388        37,015             7,373        20
All Other and
Eliminations               (644)          (528)             (116)      (22)       (1,357)       (1,395)                38         3
Hilltop
Consolidated         $   288,738    $   355,174   $      (66,436)      (19)

$ 873,631 $ 1,065,204 $ (191,573) (18)


Income (loss)
before taxes:
Banking              $    63,629    $    62,913   $           716         1   $   161,461   $   214,479   $      (53,018)      (25)
Broker-Dealer             17,471         17,421                50         0

17,967 41,944 (23,977) (57)
Mortgage
Origination

             (23,084)         62,180          (85,264)     (137)      (10,961)       204,241         (215,202)     (105)
Corporate               (15,501)       (18,939)             3,438        18      (48,589)      (42,595)           (5,994)      (14)
All Other and
Eliminations                (12)            105             (117)     (111)            29           492             (463)      (94)
Hilltop
Consolidated         $    42,503    $   123,680   $      (81,177)      (66)
  $   119,907   $   418,561   $     (298,654)      (71)


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 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 months
ended September 30, 2022, compared with the same period in 2021, primarily due
to increases within our mortgage origination and broker-dealer segments,
partially offset by a decrease within our banking segment.

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

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

investment banking and other related financial services that generated $202.7

million and $220.6 million in securities commissions and fees and investment

(i) and securities advisory fees and commissions, and $41.5 million and $70.1

million in gains from derivative and trading portfolio activities (included

within other noninterest income), respectively, during the nine months ended

     September 30, 2022 and 2021.


      Income from mortgage operations. Through PrimeLending, we generate
      noninterest income by originating and selling mortgage loans. During the

(ii) nine months ended September 30, 2022 and 2021, we generated $380.8 million

and $793.9 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 months ended September 30, 2022, compared to the same period in 2021, as
noted in the segment results table previously presented, primarily due to a
decrease of $413.1 million in net gains from sale of loans, other mortgage
production income and mortgage loan origination fees within our mortgage
origination segment and decreases 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 was $32.1 million, or $0.50 per diluted share, compared with $92.9
million, or $1.15 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. Hilltop's financial results for the three and nine months
ended September 30, 2022, compared with the same periods in 2021, reflect
significant decreases in year-over-year mortgage origination segment net gains
from sales of loans and other mortgage production income, declines in net
revenues within certain of the broker-dealer segment's business lines, and the
year-over-year changes in provision for (reversal of) credit losses within the
banking segment.

Certain items included in net income for the three and nine months ended
September 30, 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, 2022 and 2021 included net accretion on earning assets and
liabilities of $2.9 million and $3.3 million, respectively, and amortization of
identifiable intangibles of $1.1 million and $1.3 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,
                                                2022                 2021                2022                                   2021
Return on average stockholders' equity
(1)                                                 6.26 %                14.96 %             5.15 %                              17.26 %
Return on average assets (2)                        0.79 %                 2.13 %             0.70 %                               2.43 %
Net interest margin (3) (4)                         3.19 %                 2.53 %             2.75 %                               2.61 %
Leverage ratio (5) (end of period)                                                           11.41 %                              12.64 %
Common equity Tier 1 risk-based capital
ratio (6)
(end of period)                                                                              17.45 %                              21.28 %

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

equity.

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

average assets.

Net interest margin is defined as net interest income divided by average
(3) interest-earning assets. We consider net interest margin as a key indicator

of profitability, as it represents interest earned on our interest-earning

assets compared to interest incurred.

The securities financing operations within our broker-dealer segment had the

effect of lowering both the net interest margin and taxable equivalent net
(4) interest margin by 21 basis points and 18 basis points during the three

months ended September 30, 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.


The common equity Tier 1 risk-based capital ratio is a regulatory capital

ratio and is defined as common equity Tier 1 risk-based capital divided by

risk weighted assets. Common equity includes common equity Tier 1 capital
(6) (common stockholders’ equity and certain minority interests in the equity

capital accounts of consolidated subsidiaries, but excluding goodwill and

various intangible assets) and additional Tier 1 capital (certain qualifying

minority interests not included in common equity Tier 1 capital, certain

preferred stock and related surplus, and certain subordinated debt).



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

During the three months ended September 30, 2022 and 2021, purchase accounting
contributed 8 and 9 basis points, respectively, to our consolidated taxable
equivalent net interest margin of 3.20% 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%, respectively. The purchase accounting
activity was primarily related to the accretion of discount of loans which
totaled $2.9 million and $3.2 million during the three months ended September
30, 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,
                                                      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                  $  1,166,265    $  14,414          4.94 %  $  2,300,939    $  17,696          3.08 %
Loans held for investment, gross
(1)                                     7,911,833       94,751          4.75 %     7,514,392       82,073          4.33 %
Investment securities - taxable         2,883,412       19,642          2.72 %     2,585,362       12,328          1.91 %
Investment securities -
non-taxable (2)                           312,312        2,817          3.61 %       318,408        3,252          4.09 %
Federal funds sold and securities
purchased under agreements to
resell                                    137,728        1,309          3.77 %       161,577          207             - %
Interest-bearing deposits in
other financial institutions            1,780,220        9,542          2.13 %     2,197,478          788          0.14 %
Securities borrowed                     1,116,837       10,938          3.83 %     1,364,726        8,585          2.46 %
Other                                      56,331        3,425        

24.12 % 51,350 813 6.28 %
Interest-earning assets, gross
(2)

                                    15,364,938      156,838          4.05 %    16,494,232      125,742          3.02 %
Allowance for credit losses              (95,083)                                  (115,688)
Interest-earning assets, net           15,269,855                                 16,378,544
Noninterest-earning assets              1,399,228                                  1,371,207
Total assets                         $ 16,669,083                               $ 17,749,751

Liabilities and Stockholders'
Equity
Interest-bearing liabilities
Interest-bearing deposits            $  7,136,779    $  12,525          0.70 %  $  7,622,748    $   5,303          0.28 %
Securities loaned                         980,530        9,407          3.81 %     1,306,314        6,519          1.98 %
Notes payable and other
borrowings                              1,262,985       11,054          3.47 %     1,231,545        8,266          2.66 %
Total interest-bearing
liabilities                             9,380,294       32,986          1.40 %    10,160,607       20,088          0.78 %
Noninterest-bearing liabilities
Noninterest-bearing deposits            4,543,067                          
       4,299,987
Other liabilities                         685,843                                    800,225
Total liabilities                      14,609,204                                 15,260,819
Stockholders' equity                    2,032,717                                  2,463,821
Noncontrolling interest                    27,162                                     25,111
Total liabilities and
stockholders' equity                 $ 16,669,083                               $ 17,749,751

Net interest income (2)                              $ 123,852                                  $ 105,654
Net interest spread (2)                                                 2.65 %                                     2.24 %
Net interest margin (2)                                                 3.20 %                                     2.54 %


                                                              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 %


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(1) Average balance includes non-accrual loans.

Presented on a taxable equivalent basis with annualized taxable equivalent

adjustments based on the applicable corporate federal income tax rate of 21%
(2) for the periods presented. The adjustment to interest income was $0.4 million

and $0.6 million for the three months ended September 30, 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) 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, compared with the same periods in 2021,
were primarily due to the effects of volume and rate changes within the mortgage
warehouse lending, securities and deposits portfolios within the banking
segment, increased net yields on mortgage loans held for sale and decreases in
average warehouse line balance 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,
while the 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. Refer to the discussion in the "Financial Condition - Allowance for Credit
Losses on Loans" section that follows for more details regarding the significant
assumptions and estimates involved in estimating credit losses.

Noninterest income decreased during the three months ended September 30, 2022,
compared with the same period in 2021, 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 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, compared with the same periods in 2021, primarily due to decreases in
both variable and non-variable compensation within our mortgage origination
segment associated with the decreased mortgage loan originations, and a decline
in variable compensation within our broker-dealer segment, partially offset by
increases within our banking segment. We have experienced an increase in certain
noninterest expenses during the first nine months of 2022, 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 2023.

Effective income tax rates during the three months ended September 30, 2022 and
2021 were 21.8% and 22.8%, respectively, and for the nine months ended September
30, 2022 and 2021, were 22.7% and 23.2%, respectively.

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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                         Nine Months Ended
                                  September 30,           Variance           September 30,            Variance
                                 2022        2021       2022 vs 2021       2022         2021        2022 vs 2021
Net interest income           $  110,939   $  99,978    $      10,961   $  304,269   $  309,330    $      (5,061)
Provision for (reversal of)
credit losses                      (650)     (5,775)            5,125        4,325     (39,725)            44,050
Noninterest income                12,200      11,727              473       37,438       33,293             4,145
Noninterest expense               60,160      54,567            5,593      175,921      167,869             8,052
Income (loss) before income
taxes                         $   63,629   $  62,913    $         716   $ 

161,461 $ 214,479 $ (53,018)

The changes in income before income taxes during the three and nine months ended
September 30, 2022, compared with the same periods in 2021, were 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. 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       

Nine Months Ended September

                                                   30,                               30,
                                        2022              2021             2022             2021
Efficiency ratio (1)                      48.85 %             48.85 %       51.48 %            49.00 %
Return on average assets (2)               1.41 %              1.36 %        1.16 %             1.58 %
Net interest margin (3)                    3.42 %              2.99 %        3.01 %             3.16 %
Net recoveries (charge-offs) to
average loans outstanding (4)            (0.15) %              0.00 %      (0.08) %             0.00 %


Efficiency ratio is defined as noninterest expenses divided by the sum of
(1) total noninterest income and net interest income for the period. We consider

the efficiency ratio to be a measure of the banking segment’s profitability.

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

Net interest margin is defined as net interest income divided by average
(3) interest-earning assets. We consider net interest margin as a key indicator

of profitability, as it represents interest earned on interest-earning assets

compared to interest incurred.

Net recoveries (charge-offs) to average loans outstanding is defined as the
(4) greater of recoveries or charge-offs during the reported period minus

charge-offs or recoveries divided by average loans outstanding. We use the

ratio to measure the credit performance of our loan portfolio.

The banking segment presents net interest margin and net interest income in the
following discussion and tables 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, 2022 and 2021, purchase accounting
contributed 10 and 11 basis points, respectively, to the banking segment's
taxable equivalent net interest margin of 3.43% 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%, 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,
                                                        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)                                    $  7,460,437    $  88,054          4.68 %  $  6,906,305    $  77,825          4.47 %
Subsidiary warehouse lines of
credit                                    1,078,422       16,012          5.81 %     2,113,964       20,239          3.75 %
Investment securities - taxable           2,426,451       12,203          2.01 %     2,110,509        7,772          1.47 %
Investment securities - non-taxable
(2)                                         111,775          989          3.54 %       113,474          966          3.41 %
Federal funds sold and securities
purchased under agreements to
resell                                       80,811          541             - %           744            -             - %
Interest-bearing deposits in other
financial institutions                    1,662,342        9,542          2.28 %     1,971,325          788          0.16 %
Other                                        36,849        2,154         23.19 %        36,754          130          1.40 %
Interest-earning assets, gross (2)       12,857,087      129,495          4.00 %    13,253,075      107,720          3.22 %
Allowance for credit losses                (94,690)                                  (115,001)
Interest-earning assets, net             12,762,397                                 13,138,074
Noninterest-earning assets                  937,190                                    962,472
Total assets                           $ 13,699,587                               $ 14,100,546

Liabilities and Stockholders'
Equity
Interest-bearing liabilities
Interest-bearing deposits              $  6,871,441    $  16,409          0.95 %  $  7,467,386    $   7,144          0.38 %
Notes payable and other borrowings          352,299        1,938          2.18 %       140,016          391          1.11 %
Total interest-bearing liabilities        7,223,740       18,347          1.01 %     7,607,402        7,535          0.39 %
Noninterest-bearing liabilities
Noninterest-bearing deposits              4,741,624                                  4,632,213
Other liabilities                           151,313                                    156,358
Total liabilities                        12,116,677                                 12,395,973
Stockholders' equity                      1,582,910                                  1,704,573
Total liabilities and stockholders'
equity                                 $ 13,699,587                        

$ 14,100,546

Net interest income (2)                                $ 111,148                                  $ 100,185
Net interest spread (2)                                                   2.99 %                                     2.83 %
Net interest margin (2)                                                   3.43 %                                     3.00 %


                                                                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.

Presented on a taxable equivalent basis with annualized taxable equivalent

adjustments based on the applicable corporate federal income tax rates of 21%
(2) 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, 2022 and

2021, respectively, and $0.6 million and $0.6 million for the nine months

    ended September 30, 2022 and 2021, respectively.


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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 in the broker-dealer
segment, including items related to securities financing operations that
particularly decrease net interest margin. In addition, the banking segment's
interest-earning assets include warehouse lines of credit extended to other
subsidiaries, which are eliminated from the consolidated financial statements.

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,
                                                   2022 vs. 2021                                2022 vs. 2021
                                          Change Due To (1)                            Change Due To (1)
                                       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)
Subsidiary warehouse lines of
credit (3)                               (9,788)             5,561      

(4,227) (28,783) 7,553 (21,230)
Investment securities – taxable

            1,171             3,260        4,431         4,570          5,027         9,597
Investment securities -
non-taxable (4)                             (15)                38           23         (154)             55          (99)
Federal funds sold and
securities purchased under
agreements to resell                           -               541          541             -          1,025         1,025
Interest-bearing deposits in
other financial institutions               (125)             8,879        8,754           648         13,790        14,438
Other                                          -             2,024        2,024             -          1,818         1,818
Total interest income (4)                (2,514)            24,289       21,775      (15,958)         17,345         1,387

Interest expense
Deposits                            $      (571)     $       9,836    $   9,265    $        1    $     3,945    $    3,946
Notes payable and other
borrowings                                   594               953        1,547         1,172          1,348         2,520
Total interest expense                        23            10,789       10,812         1,173          5,293         6,466

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

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

column.

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

declines during the three and nine months ended September 30, 2022, compared

to the same periods in 2021, of $4.4 million and $14.4 million, respectively,
(2) in PPP loan-related fee income and $0.4 million and $5.7 million,

respectively, in accretion of discount on loans. 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, the banking segment maintains 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.

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, approximately $723
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,
rising interest rates may increase our cost of funds on deposit, and therefore,
negatively impact net interest income.

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 million and $227.7 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. 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 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, while the 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
individually evaluated loans during the three and nine months ended September
30, 2022 included reversals of 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
million, respectively. The changes in the allowance for credit losses during the
three and nine months ended September 30, 2022 were also impacted by net
charge-offs of $2.7 million and $4.2 million, respectively. 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 in the macroeconomic forecast assumptions and
credit quality metrics on COVID-19 impacted industry sector exposures. The net
impact to the allowance of changes associated with individually evaluated loans
during the three and nine months ended September 30, 2021 included provisions
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 during the three and nine
months ended September 30, 2022, compared to the same periods in 2021, primarily
due to increased wealth management fee income as well as service charges on
depositor accounts.

The banking segment's noninterest expense increased during the three and nine
months ended September 30, 2022, compared to the same periods in 2021, primarily
due to increases in expenses associated with employees' compensation and
benefits and professional fees.

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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                             Nine Months Ended
                                    September 30,              Variance            September 30,             Variance
                                 2022            2021        2022 vs 2021       2022            2021       2022 vs 2021
Net interest income:
Wealth management:
Securities lending            $    1,531      $    2,066    $        (535)   $    4,862      $    8,793   $      (3,931)
Clearing services                  1,888           1,922              (34)        5,998           5,155              843
Structured finance                 1,544             469             1,075        4,995           1,342            3,653
Fixed income services              4,550           5,354             (804)       15,163          13,667            1,496
Other                              3,873             616             3,257        6,463           2,666            3,797
Total net interest income         13,386          10,427             2,959       37,481          31,623            5,858
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)
Wealth management:
Retail                            19,341          18,954               387       56,964          55,743            1,221
Clearing services                  7,440           5,215             2,225       18,922          17,037            1,885
Structured finance                 3,652           1,206             2,446        8,237           1,877            6,360
Other                                958             964               (6)        2,917           2,851               66
                                  38,375          36,146             2,229      112,698         116,228          (3,530)
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)
Fixed income services              1,677           3,234           (1,557)        5,055           5,350            (295)
Wealth management:
Retail                             7,313           8,299             (986)       23,793          23,330              463
Clearing services                    406             472              (66)        1,354           1,480            (126)
Structured finance                   153             429             (276)          719           1,431            (712)
Other                                 83             125              (42)          268             281             (13)
                                  35,031          49,646          (14,615)       96,738         109,609         (12,871)
Other:
Structured finance                23,966          33,337           (9,371)       40,357          68,136         (27,779)
Fixed income services              3,626         (3,015)             6,641        1,008           1,931            (923)
Other                              (200)              29             (229)      (1,662)           2,325          (3,987)
                                  27,392          30,351           (2,959)       39,703          72,392         (32,689)
Total noninterest income         100,798         116,143          (15,345)      249,139         298,229         (49,090)
Net revenue (2)                  114,184         126,570          (12,386)      286,620         329,852         (43,232)
Noninterest expense:
Variable compensation (3)         42,567          53,505          (10,938)      106,663         125,325         (18,662)
Non-variable compensation
and benefits                      27,707          28,924           (1,217)       83,930          85,550          (1,620)
Segment operating costs
(4)                               26,439          26,720             (281)       78,060          77,033            1,027
Total noninterest expense         96,713         109,149          (12,436)      268,653         287,908         (19,255)

Income before income taxes    $   17,471      $   17,421    $           50   $   17,967      $   41,944   $     (23,977)

Securities commissions and fees includes income of $4.3 million and $1.7

million during the three months ended September 30, 2022 and 2021,
(1) 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.

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
(2) 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 in net revenue and income before income taxes between the noted
periods were primarily related to the combined impacts of the rising interest
rate environment and market turbulence, which impacted period-over-period
customer demand and volumes within our various business lines. Specifically,
during the third quarter of 2022, the broker-dealer segment's structured finance
business line experienced a decrease in net revenues compared to the third
quarter of 2021 due to lower production volumes and continued rate volatility.
The decrease in net revenues in the broker-dealer segment's public finance
business line was due to the unfavorable issuance trends both nationally and in
Texas in the third quarter of 2022 compared to the third 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.

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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.

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 in net interest income during the three and
nine months ended September 30, 2022, compared with the same periods in 2021,
were primarily due to the changes in net interest income from the securities
lending division of our wealth management, our structured finance business line
and our fixed income services business line. With 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.

Noninterest income decreased during the three and nine months ended September
30, 2022, compared with the same periods in 2021, primarily due to changes in
investment banking and advisory fees as well as other noninterest income.

Securities commissions and fees increased during the three months ended
September 30, 2022, compared with the same period in 2021, primarily due to
increases in our money market and FDIC sweep revenue and commissions and fees
earned on commodities sales transactions, partially offset by the 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. As money market and FDIC sweep
revenues are closely correlated to short-term interest rates, we expect that any
additional increases in short-term interest rates will cause 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.

Investment and securities advisory fees and commissions decreased during the
three and nine months ended September 30, 2022, compared with the same periods
in 2021, primarily due to decreases in fees earned from our municipal advisory
and underwriting transactions. Public finance national issuance volume declined
26% in the third quarter of 2022, 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.

The decreases 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, compared with the same
period in 2021, was partially offset by an increase in the fixed income services
business line's other noninterest income. The decrease in other noninterest
income during 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 of $2.5 million. With the expected rise in interest
rates through the end of 2022, we anticipate continued volatility and generally
lower levels of other noninterest income related to our structured finance and
fixed income services business lines.

The changes in noninterest expenses during the three and nine months ended
September 30, 2022, compared with the same periods in 2021, were primarily due
to the impact of respective changes in variable compensation as previously
noted.

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,

                                            2022                    2021                 2022                 2021
Total compensation as a % of net
revenue (1)                                        61.5 %                65.1 %                 66.5 %            63.9 %
Pre-tax margin (2)                                 15.3 %                13.8 %                  6.3 %            12.7 %
FDIC insured program balances at the
Bank (end of period)                                                               $         663,730     $     794,446
Other FDIC insured program balances
(end of period)                                                                    $       1,376,741     $   1,594,069
Customer funds on deposit, including
short credits (end of period)                                              
       $         329,948     $     506,582

Public finance services:
Number of issues (3)                                245                   286                    759               905

Aggregate amount of offerings (3) $ 15,560,951 $ 14,837,900 $ 33,753,891 $ 45,142,567


Structured finance:
Lock production/TBA volume            $       1,300,944     $       

1,774,501 $ 3,088,340 $ 5,491,809


Fixed income services:
Total volumes                         $      50,276,258     $      

53,254,804 $ 175,487,156 $ 184,280,307
Net inventory (end of period)

$ 542,257 $ 496,615


Wealth management (Retail and
Clearing services groups):
Retail employee representatives (end
of period) (3)                                                                                    96               109
Independent registered
representatives (end of period)                                                                  171               188
Correspondents (end of period)                                                                   110               122
Correspondent receivables (end of
period)                                                                            $         115,810     $     271,664
Customer margin balances (end of
period)                                                                    

$ 286,691 $ 374,002


Wealth management (Securities lending
group):
Interest-earning assets - stock
borrowed (end of period)                                                           $       1,182,934     $   1,377,261
Interest-bearing liabilities - stock
loaned (end of period)                                                     

$ 1,072,408 $ 1,350,722

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

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

Pre-tax margin is defined as income before income taxes divided by net
(2) revenue. We consider pre-tax margin to be a key performance measure given its

use as a profitability metric representing the percentage of net revenue

earned that results in a profit.

(3) Noted balances during all prior periods include certain reclassifications to

    conform to current period presentation.


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Mortgage Origination Segment

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

                               Three Months Ended                           Nine Months Ended
                                  September 30,            Variance           September 30,             Variance
                                2022         2021        2022 vs 2021       2022          2021        2022 vs 2021
Net interest income
(expense)                    $   (2,939)   $ (3,503)    $          564   $   (6,066)   $ (16,554)    $       10,488
Noninterest income                98,200     242,270         (144,070)       381,477      794,679         (413,202)
Noninterest expense              118,345     176,587          (58,242)       386,372      573,884         (187,512)
Income (loss) before
income taxes                 $  (23,084)   $  62,180    $     (85,264)   $  (10,961)   $  204,241    $    (215,202)

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
also have negatively impacted home purchase volume. See details regarding loan
origination volume in the table below.

Recent trends, as well as typical historical patterns in loan origination volume
from purchases of homes or from refinancings because of movements in mortgage
interest rates, may not be indicative of future loan origination volumes. During
2022, certain events 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. These events have also adversely
impacted the willingness and ability of the mortgage origination segment's
customers to conduct mortgage transactions. Specifically, current home inventory
shortages and affordability challenges, in addition to supply chain problems,
are impacting customers' abilities to purchase homes. The increase in interest
rates during the first nine months of 2022, which has led to a sharp reduction
in national refinancing volume and the reduction of willing and eligible home
buyers, has resulted in competitive mortgage pricing pressure, leading to a
decline in average loans sales margin. In addition to decreased loan volumes,
the negative trend in sales margin has contributed to a decrease in combined net
gains from mortgage loan sales and mortgage loan origination fees. Currently, we
anticipate that lower seasonal transaction volumes and the continuation of the
mortgage loan production and operating results trends experienced by the
mortgage origination segment during the third quarter of 2022 will continue into
the fourth quarter of 2022, as well as into the first half of 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
during the first nine months of 2022 due to conditions discussed in detail
within this discussion of segment results. In the event future operating
performance remains challenged and below our forecasted projections, there are
negative changes to long-term growth rates or discount rates increase, the fair
value of the mortgage origination reporting unit may decline and we may be
required to record a goodwill impairment charge. These conditions will continue
to be considered during future impairment evaluations of reporting unit
goodwill.

Income before income taxes decreased significantly during the three and nine
months ended September 30, 2022, compared with the same periods in 2021. The
decreases during both periods were 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 a decrease in noninterest expense during
both periods.

As 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.

During the three 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. Average interest rates
during the three and nine months ended September 30, 2022 exceeded average
interest rates during the same periods in 2021, and refinancing volume as a
percentage of total origination volume decreased during the three and nine
months ended September 30, 2022, 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. Although
we anticipate a lower percentage of refinancing volume relative to total loan
origination volume during 2022, as compared to 2021, 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 months ended September 30, 2022, funded
volume through ABAs was approximately 8% of the mortgage origination segment's
total loan volume. As of September 30, 2022, PrimeLending owned a greater than
50% membership interest in five ABAs. During the third quarter of 2022, the
decision was made to dissolve one of the five ABAs. We anticipate the
dissolution will be completed during the fourth quarter of 2022. We expect total
production within the ABA channel to increase slightly to approximately 10% of
loan volume of the mortgage origination segment during the remainder of 2022.

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,
                                   2022                      2021                                       2022                       2021
                                           % of                      % of        Variance                        % of                       % of        Variance
                             Amount       Total        Amount       Total      2022 vs 2021       Amount        Total        Amount        Total      2022 vs 2021
Mortgage Loan
Originations - units            10,098                    18,919                    (8,821)           34,407                     60,651                   (26,244)

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)
Government                     736,895     24.21         894,869     16.00        (157,974)        2,085,949     19.65        2,571,494     14.54        (485,545)
Jumbo                          198,846      6.53         547,131      9.78        (348,285)          949,498      8.94        1,986,473     11.24      (1,036,975)
Other                          172,856      5.69         280,863      5.02        (108,007)          610,329      5.75          710,318      4.02         (99,989)
                          $  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)

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)
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)
                          $  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)

Texas                     $    716,764     23.55    $  1,066,264     19.06   $    (349,500)    $   2,311,567     21.77    $   3,237,241     18.31   $    (925,674)
California                     196,502      6.46         625,715     11.18        (429,213)          921,194      8.68        2,151,196     12.17      (1,230,002)
Florida                        139,698      4.59         240,413      4.30        (100,715)          523,442      4.93          793,293      4.49        (269,851)
South Carolina                 137,628      4.52         219,394      3.92         (81,766)          480,444      4.53          744,834      4.21        (264,390)
Arizona                        116,535      3.83         249,471      4.46        (132,936)          473,870      4.46          806,722      4.56        (332,852)
Ohio                           155,904      5.12         226,164      4.04         (70,260)          469,165      4.42          676,395      3.83        (207,230)
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)
Washington                      81,962      2.69         177,118      3.17         (95,156)          283,127      2.67          568,911      3.22        (285,784)
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)
                          $  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)
                                                                                                                                      .
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)
Banking segment                130,104      3.80         227,709      3.68         (97,605)          343,140      3.07          567,530      3.14        (224,390)
                          $  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)

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% during the three and nine months ended September 30, 2022,
respectively, compared to the same periods in 2021, while income before income
taxes decreased 137.1% and 105.4%, respectively, during those same periods. The
decreases in income before income taxes during the three and nine months ended
September 30, 2022 were primarily due to decreases in net gains from sale of
loans, 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.

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,

                                           2022         2021           2022                2021
Net gains from mortgage loan sales
(basis points):
Loans sold to third parties                   227          359                271                 378
Impact of loans retained by banking
segment                                       (9)         (13)                (8)                (12)
As reported                                   218          346                263                 366
Variable compensation as a
percentage of total compensation             51.5 %       65.4 %             54.3 %              67.4 %
Mortgage servicing rights asset
($000's) (end of period) (1)                                      $       

156,539 $ 110,931

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

which are eliminated in consolidation.

Net interest expense was comprised of interest 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. The year-over-year
improvement in net interest expense between both the three and nine months ended
September 30, 2022 and 2021 reflected the effects of increased net yields on
mortgage loans held for sale and 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
                                                                2022                  2021            2022 vs 2021            2022                  2021           2022 vs 2021
Net gains from sale of loans                              $         74,696 

$ 214,093 $ (139,397) $ 293,630 $ 661,563 $ (367,933)
Mortgage loan origination fees and other related income

             39,960                38,780               1,180             114,400               124,082            (9,682)

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)
Mortgage servicing rights asset                                    (4,146) 
             (3,306)               (840)               5,490                 8,379            (2,889)
Servicing fees                                                       9,853                15,605             (5,752)              27,310                47,929           (20,619)
Total noninterest income                                  $         98,200      $        242,270    $      (144,070)    $        381,477      $        794,679    $     (413,202)


The decrease in net gains from sale of loans during the three and nine months
ended September 30, 2022, compared with the same periods in 2021, was primarily
the result of decreases of 44.8% and 38.2% in total loan sales volume during
those periods, respectively, in addition to a decrease in average loan sales
margin during both periods. 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 months ended September 30, 2022 was
consistent with the decrease in loan origination volume during the period. The
decrease in average loan sales margins during the nine months ended September
30, 2022 was primarily attributable to competitive pricing pressure resulting
from home inventory shortages and a reduction in national refinancing volume.

The decrease in mortgage loan origination fees during the nine months ended
September 30, 2022, compared with the same period in 2021, was primarily the
result of a decrease in loan origination volume, partially offset by an increase
in average mortgage loan origination fees. Fluctuations in mortgage loan
origination fees are not always aligned with fluctuations in loan origination
volume since customers may opt to pay PrimeLending discount fees on their
mortgage loans in exchange for a lower interest rate.

We consider the mortgage origination segment's net gains from sale of loans
margin, in basis points, to be a key performance measure. Net gains from sale of
loans margin is defined as net gains from sale of loans divided by loan sales
volume. The net gains from sale of loans is central to the segment's generation
of income and may include loans

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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 and second quarters of 2022 were $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.

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 months ended September 30, 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. 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, PrimeLending retained servicing on approximately 45% and
25%, respectively, of loans sold, compared with approximately 24% and 34% of
loans sold during the same periods in 2021, respectively. A reduction in
third-party mortgage servicers purchasing mortgage servicing rights, while
modest, may result in PrimeLending increasing the rate of retained servicing on
mortgage loans sold during the remainder of 2022 to as much as 50%. 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, the operating results of the mortgage origination
segment were positively impacted by the noted increases of $5.5 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 primarily driven by changes in the prepayment and discount rates used as
inputs to value the MSR asset to address the impact of increased mortgage rates
reducing consumer refinancing activity and recent market trends related to MSR
sales. On July 20, 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 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 completed during
the fourth quarter of 2022 at a total price of approximately $26 million.

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
                            2022                  2021           2022 vs 2021           2022                  2021           2022 vs 2021
Variable compensation $         44,312      $         88,153    $     (43,841)    $        157,079      $        300,720    $    (143,641)
Non-variable
compensation and
benefits                        41,767                46,661           (4,894)             131,954               145,743          (13,789)
Segment operating
costs                           23,479                28,869           (5,390)              72,506                88,657          (16,151)
Lender paid closing
costs                            3,541                 4,940           (1,399)              11,002                15,321           (4,319)
Servicing expense                5,246                 7,964           (2,718)              13,831                23,443           (9,612)
Total noninterest
expense               $        118,345      $        176,587    $     (58,242)    $        386,372      $        573,884    $    (187,512)


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Total employees' compensation and benefits accounted for the majority of
noninterest expenses incurred during all periods presented. Specifically,
variable compensation comprised the majority of total employees' compensation
and benefits expenses during the three and nine months ended September 30, 2022
and 2021. 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% during the three
and nine months ended September 30, 2022, respectively, compared to the same
periods in 2021, 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 during the three and nine months ended
September 30, 2022, compared to the same periods in 2021, were primarily due to
decreases in salaries associated with a reduction in underwriting and loan
fulfillment and operations staff in response to the decreases in loan
origination volume that started in the fourth quarter of 2021, and has continued
into 2022. During 2022, PrimeLending committed to continue reducing this type 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. Severance costs, included in non-variable compensation above,
incurred because of this initiative were $1.3 million and $1.6 million during
the three and nine months ended September 30, 2022, respectively. PrimeLending
is continuing to evaluate staffing levels to address current mortgage loan
origination trends. Segment operating costs decreased during the three and nine
months ended September 30, 2022, compared to the same periods in 2021, primarily
due to decreases in business development, professional fees, occupancy and
loan-related costs.

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 and September 30, 2022, the mortgage origination segment
sold mortgage loans totaling $150.0 billion. These loans were sold under sales
contracts that generally include provisions that hold the mortgage origination
segment responsible for errors or omissions relating to its representations and
warranties that loans sold meet certain requirements, including representations
as to underwriting standards and the validity of certain borrower
representations in connection with the loan. In addition, the sales contracts
typically require the refund of purchased servicing rights plus certain investor
servicing costs if a loan experiences an early payment default. While the
mortgage origination segment sold loans prior to 2013, it does not anticipate
experiencing significant losses in the future on loans originated prior to 2013
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 and September 30, 2022
(dollars in thousands).

                                         Original Loan Balance              Loss Recognized
                                                           % of                           % of
                                         Amount         Loans Sold       Amount        Loans Sold
Claims resolved with no payment       $     223,072           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 %
                                      $     465,850           0.31 %  $      13,559          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

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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                           Nine Months Ended
                                   September 30,             Variance           September 30,             Variance
                                 2022          2021        2022 vs 2021       2022          2021        2022 vs 2021
Net interest income
(expense)                     $   (3,276)   $  (4,341)    $        1,065   $   (9,856)   $ (13,720)    $        3,864
Noninterest income                  1,809          757             1,052         5,655        8,140           (2,485)
Noninterest expense                14,034       15,355           (1,321)        44,388       37,015             7,373
Income (loss) before income
taxes                         $  (15,501)   $ (18,939)    $        3,438  

$ (48,589) $ (42,595) $ (5,994)



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 million at September 30, 2022.

As a holding company, Hilltop's primary investment objectives are to support
capital deployment for organic growth and to preserve capital to be deployed
through acquisitions, dividend payments and potential stock repurchases.
Investment and interest income earned during the three and nine months ended
September 30, 2022 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 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 million
aggregate principal amount of Subordinated Notes (defined hereafter).
Additionally, during 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"). 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
the three months ended September 30, 2022, compared to the same period in 2021,
primarily due to decreases in 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, primarily due to inflationary increases associated with software
and occupancy costs, as well as increases in professional fees, which included
$4.4 million related to the recently completed tender offer in May 2022.

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Financial Condition

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

Securities Portfolio

At September 30, 2022, investment securities consisted of securities of the U.S.
Treasury, U.S. government and its agencies, obligations of municipalities and
other political subdivisions, primarily in the State of Texas, as well as
mortgage-backed, corporate debt, and equity securities. We may categorize
investments as trading, available for sale, held to maturity and equity
securities.

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

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


                                                   September 30,      

December 31,

                                                       2022               

2021

Trading securities, at fair value
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
                                                          641,864           647,998
Securities available for sale, at fair value
U.S. Treasury securities                                   24,262            14,862
U.S. government agencies:
Bonds                                                     115,134            44,133
Residential mortgage-backed securities                    418,720          

898,446

Commercial mortgage-backed securities                     164,838          

210,699

Collateralized mortgage obligations                       826,350          

916,866

States and political subdivisions                          35,420          

45,562

                                                        1,584,724         

2,130,568

Securities held to maturity, at amortized cost
U.S. government agencies:
Residential mortgage-backed securities                    308,102          

9,892

Commercial mortgage-backed securities                     181,259          

145,742

Collateralized mortgage obligations                       323,526          

43,990

States and political subdivisions                          76,565          

68,060

                                                          889,452           

267,684

Equity securities, at fair value                              209          
    250

Total securities portfolio                        $     3,116,249    $    3,046,500


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

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September 30, 2022 and December 31, 2021, 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, 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, equity securities of
$0.2 million and held to maturity securities of $889.5 million, in addition to
$12.4 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 million at September 30, 2022. In addition, the
Hilltop Broker-Dealers enter into transactions that represent commitments to
purchase and deliver securities at prevailing future market prices to facilitate
customer transactions and satisfy such commitments. Accordingly, the Hilltop
Broker-Dealers' ultimate obligation may exceed the amount recognized in the
financial statements. These securities, which are carried at fair value and
reported as securities sold, not yet purchased in the consolidated balance
sheets, had a value of $99.5 million at September 30, 2022.

Corporate

At September 30, 2022, the corporate portfolio included other investments,
including those associated with merchant banking, of $41.3 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. In addition, as of September 30, 2022, we had evaluated our held to
maturity debt securities, considering the current credit ratings and recognized
losses, and determined the potential credit loss to be minimal. With respect to
these securities, we considered the risk of credit loss to be negligible, and
therefore, no allowance was recognized on the debt securities portfolio at
September 30, 2022.

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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,
                                                    2022               2021
Commercial real estate                         $     3,313,911    $    3,042,729
Commercial and industrial                            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                                          402,502           733,193
Loans held for investment, gross                     7,944,246         

7,879,904

Allowance for credit losses                           (91,783)          

(91,352)

Loans held for investment, net of allowance $ 7,852,463 $ 7,788,552



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 billion and $8.8 billion at September 30, 2022 and
December 31, 2021, respectively. The banking segment's loan portfolio included
warehouse lines of credit extended to PrimeLending of $2.7 billion, of which
$0.9 billion and $1.7 billion was drawn at September 30, 2022 and December 31,
2021, respectively. As of October 1, 2022, the total commitment was reduced to
$2.0 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 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.

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

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
                                     Due Within      Due From One       Due from Five          Due After
                                      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
Commercial and industrial              2,107,333           305,531               164,261                  -       2,577,125
Construction and land development        724,591           139,571         
      66,674              4,079         934,915
1-4 family residential                   159,768           193,537               389,164            852,801       1,595,270
Consumer                                  15,478            13,714                   228                 19          29,439
Total                                $ 3,859,314    $    1,991,224    $        1,636,606    $       963,516    $  8,450,660

Fixed rate loans                     $ 1,656,913    $    1,726,138    $        1,453,216    $       963,516    $  5,799,783
Floating rate loans                    2,202,401           265,086               183,390                  -       2,650,877
Total                                $ 3,859,314    $    1,991,224    $        1,636,606    $       963,516    $  8,450,660


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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, floating rate
loans totaling $718.4 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 million of floating rate loans would be adjustable if
published rates increase by a sufficient amount to move past their floored
levels. The majority of floating rate loans carry an interest rate tied to The
Wall Street Journal Prime Rate, as published in The Wall Street Journal.

Broker-Dealer Segment


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

Mortgage Origination Segment


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

                             September 30,      December 31,
                                 2022               2021
Loans held for sale:
Unpaid principal balance    $       882,611    $     1,728,255
Fair value adjustment              (19,184)             54,336
                            $       863,427    $     1,782,591
IRLCs:
Unpaid principal balance    $     1,131,664    $     1,283,152
Fair value adjustment              (16,729)             25,489
                            $     1,114,935    $     1,308,641


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 and December 31, 2021
were $1.6 billion and $2.4 billion, respectively, while the related estimated
fair values were $31.7 million and $0.4 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 Form 10-K.

Loans Held for Investment

The Bank has lending policies in place with the goal of establishing an asset
portfolio that will provide a return on stockholders' equity sufficient to
maintain capital to assets ratios that meet or exceed established regulations.
Loans are underwritten with careful consideration of the borrower's financial
condition, the specific purpose of the loan, the primary sources of repayment
and any collateral pledged to secure the loan.

Underwriting procedures address financial components based on the size and
complexity of the credit. The financial components include, but are not limited
to, current and projected cash flows, shock analysis and/or stress testing, and
trends in appropriate balance sheet and statement of operations ratios. The
Bank's loan policy provides specific underwriting guidelines by portfolio
segment, including commercial and industrial, real estate, construction and
land

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

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

December 31, September 30,

                             2022           2022          2022           2021           2021
GDP growth
rates:
             Q3 2021                                                                         5.0%
             Q4 2021                                                         6.7%            7.5%
             Q1 2022                                          0.7%           3.6%            4.6%
             Q2 2022                           2.6%           4.7%           3.5%            2.8%
             Q3 2022              1.3%         2.0%           2.4%           2.3%            1.3%
             Q4 2022              0.4%         0.6%           2.6%           2.7%            1.5%
             Q1 2023              0.3%         0.9%           2.9%           3.0%            2.4%
             Q2 2023            (1.8)%         1.0%           3.0%           2.4%
             Q3 2023            (2.2)%       (1.0)%           3.1%
             Q4 2023            (2.2)%       (3.0)%
             Q1 2024              0.7%

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


As of September 30, 2022, our economic forecast improved modestly since June 30,
2022. Real GDP growth continued to decline during the second quarter of 2022 at
an annualized rate of 0.6%; however, the unemployment rate remains near
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 the U.S. economy to migrate into a mild recession
during 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%. Our
prior economic forecast reflected a mild recession beginning during the third
quarter of 2023 with real GDP expected to decline 2.2% through the second
quarter of 2024 with peak unemployment rates increasing to over 7%. The Federal
Reserve increased the federal funds rate target to 3.0% to 3.25% in September
2022 and the current quarter's economic forecast assumes an average federal
funds rate of 3.9% by the first quarter of 2023.

As of December 31, 2021, our economic forecast improved from September 30, 2021
based on updated economic data, including November 2021 unemployment rates
improving faster than the prior quarter's forecast despite 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.

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, while the 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 individually evaluated loans during the three and nine
months ended

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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 changes in the allowance for credit losses during the
noted periods were primarily attributable to the Bank and also reflected other
factors including, but not limited to, loan mix, and changes in loan balances
and qualitative factors from the prior quarter. The changes in the allowance
during the three and nine months ended September 30, 2022 were also impacted by
net charge-offs of $2.7 million and $4.2 million, respectively.

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 allowance and included provision for credit losses
through the second quarter of 2020. During 2021, improvement in both economic
results and the macroeconomic outlook, coupled with government stimulus and
positive risk rating grade migration within the Bank, resulted in aggregate
reversals of a significant portion of previously recorded credit losses. During
the first nine months of 2022, the impact of changes in the U.S. economic
outlook and resulting impact on collectively evaluated loans has resulted in a
build in the allowance since December 31, 2021. As a result, the allowance for
credit losses as a percentage of our total loan portfolio, excluding margin
loans in the broker-dealer segment and banking segment mortgage warehouse
lending and PPP lending programs, was 1.25% as of September 30, 2022, down from
1.37% as of December 31, 2021 and a high of 2.63% as of September 30, 2020,
following the initial impacts of the COVID-19 pandemic.

The respective distribution of the allowance for credit losses as a percentage
of our total loan portfolio, excluding margin loans in the broker-dealer segment
and banking segment mortgage warehouse lending and PPP lending programs, are
presented in the following table (dollars in thousands).

                                                                  Allowance For
                                                                  Credit Losses
                                                        Total       as a % of
                                        Total         Allowance    Total Loans
                                      Loans Held     for Credit     Held For
September 30, 2022                  For Investment     Losses      Investment
Commercial real estate             $      3,313,911  $    63,200           1.91 %
Commercial and industrial (1)             1,444,084       15,996           1.11 %
Construction and land development           934,915        4,768          
0.51 %
1-4 family residential                    1,595,270        6,612           0.41 %
Consumer                                     29,439          574           1.95 %
                                          7,317,619       91,150           1.25 %

Broker-dealer                               402,502          521           0.13 %
Mortgage warehouse lending                  223,028          112           0.05 %
Paycheck Protection Program                   1,097            -              - %
                                   $      7,944,246  $    91,783           1.16 %

(1) Commercial and industrial portfolio amounts reflect balances excluding

banking segment mortgage warehouse lending and PPP loans.

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, excluding margin loans in the broker-dealer
segment, 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% in the
second quarter of 2023, and 5.8% in the third quarter of 2023. Average
unemployment rates are expected to decline to 3.3% by the fourth quarter of
2022
and increase

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modestly to 3.4% by the end of 2023. 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% during 2023.


Compared to our economic forecast, the downside scenario assumes consumer and
business confidence declines as the military conflict between Russia and Ukraine
worsens significantly and persists longer than anticipated and global supply
chain issues intensify, thereby increasing inflation rates substantially.
Consumer confidence and spending erode causing the economy to fall back into
recession during 2022. Real GDP is expected to decrease 0.9% in the fourth
quarter of 2022, 6.7% in the first quarter of 2023, and 1.9% in the second
quarter of 2023. Average unemployment rates are expected to increase to 7.8% by
the fourth quarter of 2023, but improve to 6.2% by year-end 2024 and revert back
to historical average rates over time. The Federal Reserve increases the federal
funds rate to 4.0% by the second quarter of 2023 to slow inflation, but proceeds
to reduce it to a 1.4% target by the third quarter of 2024 where it is
maintained until mid 2025 to support the economy. Disagreements in Congress
prevent any additional stimulus from being enacted beyond the American Rescue
Plan and Infrastructure Investment and Jobs Acts passed in 2021.

The impact of applying all of the assumptions of the upside economic scenario
during the reasonable and supportable forecast period would have resulted in a
decrease in the allowance for credit losses of approximately $23 million or a
weighted average expected loss rate of 0.9% 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 million or a
weighted average expected loss rate of 1.6% 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, the Russia-Ukraine conflict and its
impact on supply chains, inflation and labor market conditions. 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,
Loans Held for Investment                    2022                  2021                 2022                 2021
Balance, beginning of period           $          95,298     $         115,269    $         91,352     $        149,044
Provision for (reversal of) credit
losses                                             (780)               (5,819)               4,671             (39,648)
Recoveries of loans previously
charged off:
Commercial real estate                                41                    19                  84                  253
Commercial and industrial                            370                   598               2,004                1,732
Construction and land development                      -                   
 -                   -                    -
1-4 family residential                                23                    20                  71                  482
Consumer                                              90                    26                 221                  171
Broker-dealer                                          -                     -                   -                    -
Total recoveries                                     524                   663               2,380                2,638
Loans charged off:
Commercial real estate                                 -                   124                   -                  310
Commercial and industrial                          3,096                   317               6,197                1,738
Construction and land development                      -                   
 -                   -                    -
1-4 family residential                                14                    87                  62                  248
Consumer                                             149                    73                 361                  226
Broker-dealer                                          -                     -                   -                    -
Total charge-offs                                  3,259                   601               6,620                2,522
Net recoveries (charge-offs)                     (2,735)                    62             (4,240)                  116
Balance, end of period                 $          91,783     $         109,512    $         91,783     $        109,512

Average total loans for the period $ 7,911,833 $ 7,514,392 $ 7,863,257 $ 7,628,599
Total loans held for investment
(end of period)

                                                                   $      7,944,246     $      7,552,926
Ratios:
Net recoveries (charge-offs) to
average total loans held for
investment (1)                                    (0.14) %                0.00 %            (0.07) %               0.00 %
Non-accrual loans to total loans
held for investment (end of period)                                                           0.37 %               0.74 %
Allowance for credit losses on
loans held for investment to:
Total loans held for investment
(end of period)                                                                               1.16 %               1.45 %
Non-accrual loans held for
investment (end of period)                                                                  309.26 %             196.22 %

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

immateriality of resulting measure by loan portfolio segment.



Total non-accrual loans decreased by $16.4 million from December 31, 2021 to
September 30, 2022. 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 million and $2.9 million
at September 30, 2022 and December 31, 2021, respectively.

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

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
                                                       % of                       % of
                                                       Gross                     Gross
Allocation of the Allowance for
Credit Losses                            Reserve       Loans       Reserve       Loans
Commercial real estate                 $    63,200      41.71 %  $    59,354       38.61 %
Commercial and industrial                   16,108      21.00 %       21,982       23.80 %
Construction and land development            4,768      11.77 %        4,674       11.33 %
1-4 family residential                       6,612      20.08 %        4,589       16.54 %
Consumer                                       574       0.37 %          578        0.41 %
Broker-dealer                                  521       5.07 %          175        9.31 %
Total                                  $    91,783     100.00 %  $    91,352      100.00 %


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

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


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,

                                    2022                 2021              2022                 2021
Balance, beginning of period    $       6,931      $           7,981   $       5,880      $           8,388
Other noninterest expense                  87                (1,183)           1,138                (1,590)
Balance, end of period          $       7,018      $           6,798   $       7,018      $           6,798


During the three months ended September 30, 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.

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 credit relationships totaling $3.2 million of potential problem loans at
September 30, 2022, compared with two credit relationships totaling $3.1 million
of potential problem loans at December 31, 2021.

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,
                                                    2022              2021            Variance
Loans accounted for on a non-accrual basis:
Commercial real estate                         $         4,735    $       6,601      $   (1,866)
Commercial and industrial                               12,078           22,478         (10,400)
Construction and land development                            1             
  2              (1)
1-4 family residential                                  16,968           21,123          (4,155)
Consumer                                                    16               23              (7)
Broker-dealer                                                -                -                -
                                               $        33,798    $      50,227      $  (16,429)
Troubled debt restructurings included in
accruing loans held for investment                         825              922             (97)
Non-performing loans                           $        34,623    $      

51,149 $ (16,526)


Non-performing loans as a percentage of
total loans                                               0.39 %           0.52 %         (0.13) %

Other real estate owned                        $         1,637    $       2,833      $   (1,196)

Other repossessed assets                       $             -    $           -      $         -

Non-performing assets                          $        36,260    $      53,982      $  (17,722)

Non-performing assets as a percentage of
total assets                                              0.22 %          

0.29 % (0.07) %


Loans past due 90 days or more and still
accruing                                       $        96,532    $      

60,775 $ 35,757



At September 30, 2022, non-accrual loans included 39 commercial and industrial
relationships with loans secured by accounts receivable, automobiles, equipment
and notes receivable. Non-accrual loans at September 30, 2022 also included $4.1
million of loans secured by residential real estate which were classified as
loans held for sale. At December 31, 2021, non-accrual loans included 45
commercial and industrial relationships with loans secured by accounts
receivable, life insurance, oil and gas, livestock and equipment. Non-accrual
loans at December 31, 2021 also included $2.9 million of loans secured by
residential real estate which were classified as loans held for sale.

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

Loans past due 90 days or more and still accruing at September 30, 2022 and
December 31, 2021, 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 million of loans subject to repurchase were under a forbearance agreement
resulting from the COVID-19 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 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 banking segment implemented certain fee
enhancements beginning October 1, 2022. Such fee enhancements are not expected
to have a material impact on its overall operating results.

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

                                                   Nine Months Ended September 30,
                                                 2022                          2021
                                         Average        Average        Average        Average
                                         Balance       Rate Paid       Balance       Rate Paid
Noninterest-bearing demand deposits    $  4,534,513         0.00 %   $  4,040,649         0.00 %
Interest-bearing demand deposits          6,436,557         0.38 %      5,921,329         0.31 %
Savings deposits                            336,617         0.12 %        287,282         0.10 %
Time deposits                               925,383         0.54 %      1,454,340         1.40 %
                                       $ 12,233,070         0.24 %   $ 11,703,600         0.34 %

The following table presents the scheduled maturities of uninsured deposits
greater than $250,000 as of September 30, 2022 (in thousands).

Months to maturity:
3 months or less         $ 101,943
3 months to 6 months        44,408
6 months to 12 months      101,807
Over 12 months             110,019
                         $ 358,177


Borrowings

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

                                     September 30, 2022             December 31, 2021
                                                   Average                       Average
                                    Balance       Rate Paid       Balance       Rate Paid       Variance
Short-term borrowings             $    942,309         1.58 %   $    859,444         1.22 %     $  82,865
Notes payable                          390,354         4.35 %        387,904         5.79 %         2,450
Junior subordinated debentures               -            - %             
-         3.45 %             -
                                  $  1,332,663         2.39 %   $  1,247,348         1.32 %     $  85,315


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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"), short-term bank loans and commercial paper. The increase in short-term
borrowings at September 30, 2022, compared with December 31, 2021, primarily
reflected increases in federal funds purchased by the banking segment and
securities sold under agreements to repurchase by the broker-dealer segment,
partially offset by decreases in short-term bank loans and commercial paper
within the broker-dealer segment. Notes payable at September 30, 2022 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 million and
mortgage origination segment borrowings of $43.8 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, Hilltop had $162.2
million in cash and cash equivalents, a decrease of $205.7 million from $367.9
million at December 31, 2021. This decrease in cash and cash equivalents was
primarily due to cash outflows of $442.3 million in stock repurchases related to
the tender offer, $33.5 million in cash dividends declared and other general
corporate expenses, partially offset by the receipt of $299.0 million of
dividends from subsidiaries. Subject to regulatory restrictions, Hilltop has
received, and may also continue to receive, dividends from its subsidiaries. If
necessary or appropriate, we may also finance acquisitions with the proceeds
from equity or debt issuances. We believe that Hilltop's liquidity is sufficient
for the foreseeable future, with current short-term liquidity needs including
operating expenses, interest on debt obligations, dividend payments to
stockholders and potential stock repurchases.

COVID-19

The COVID-19 pandemic has adversely impacted financial markets and overall
economic conditions, and may continue to have implications on our business and
operations. The extent of the impact of the pandemic on our operational and
financial performance for the remainder of 2022 is currently uncertain and will
depend on certain developments outside of our control, including, among others,
the ongoing distribution and effectiveness of vaccines, emergence of new
variants of the virus, government stimulus, the ultimate impact of the pandemic
on our customers and clients, and additional, or extended, federal, state and
local government orders and regulations that might be imposed in response to the
pandemic.

Dividend Declaration

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


Future dividends on our common stock are subject to the determination by the
board of directors based on an evaluation of our earnings and financial
condition, liquidity and capital resources, the general economic and regulatory
climate, our ability to service any equity or debt obligations senior to our
common stock and other factors.

Stock Repurchases


In January 2022, our board of directors authorized a new stock repurchase
program through January 2023, pursuant to which we were originally authorized to
repurchase, in the aggregate, up to $100.0 million of our outstanding common
stock, inclusive of repurchases to offset dilution related to grants of
stock-based compensation. As a result of share repurchases during 2022,
including the tender offer described below, we 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, $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, 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, $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.

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 September
30, 2022 (dollars in thousands). Based on actual capital amounts and ratios
shown in the following table, PlainsCapital's ratios place it in the "well
capitalized" (as defined) capital category under regulatory requirements. Actual
capital amounts and ratios as of September 30, 2022 reflect PlainsCapital's and
Hilltop's decision to elect the transition option as issued by the federal
banking regulatory agencies in March 2020 that permits banking institutions to
mitigate the estimated cumulative regulatory capital effects from CECL over a
five-year transitionary period.

                                                                          Minimum
                                                                          Capital
                                                                        Requirements
                                                                         Including
                                                                        Conservation    To Be Well
                                              September 30, 2022           Buffer       Capitalized
                                                Amount       Ratio         Ratio           Ratio
Tier 1 capital (to average assets):
PlainsCapital                                $  1,404,288    10.29 %             4.0 %          5.0 %
Hilltop                                         1,881,289    11.41 %             4.0 %          N/A
Common equity Tier 1 capital
(to risk-weighted assets):
PlainsCapital                                   1,404,288    14.68 %             7.0 %          6.5 %
Hilltop                                         1,881,289    17.45 %             7.0 %          N/A
Tier 1 capital (to risk-weighted assets):
PlainsCapital                                   1,404,288    14.68 %             8.5 %          8.0 %
Hilltop                                         1,881,289    17.45 %             8.5 %          N/A
Total capital (to risk-weighted assets):
PlainsCapital                                   1,486,989    15.54 %            10.5 %         10.0 %
Hilltop                                         2,163,815    20.07 %            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 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 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 continued strong cash and liquidity levels at the Bank, the Bank's
borrowing capacity available liquidity position and access to secured funding
sources continues to be at a heightened level as 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.

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.

The Bank's 15 largest depositors, excluding Hilltop and Hilltop Securities,
collectively accounted for 11.41% of the Bank's total deposits, and the Bank's
five largest depositors, excluding Hilltop and Hilltop Securities, collectively
accounted for 6.31% of the Bank's total deposits at September 30, 2022. The loss
of one or more of our largest Bank customers, or a significant decline in our
deposit balances due to ordinary course fluctuations related to these customers'
businesses, could adversely affect our liquidity and might require us to raise
deposit rates to attract new deposits, purchase federal funds or borrow funds on
a short-term basis to replace such deposits.

Broker-Dealer Segment


The Hilltop Broker-Dealers rely on their equity capital, short-term bank
borrowings, interest-bearing and noninterest-bearing client credit balances,
correspondent deposits, securities lending arrangements, repurchase agreement
financing, commercial paper issuances and other payables to finance their assets
and operations, subject to their respective compliance with broker-dealer net
capital and customer protection rules. At September 30, 2022, Hilltop Securities
had credit arrangements with four unaffiliated banks, with maximum aggregate
commitments of up to $600.0 million. These credit arrangements are used to
finance securities owned, securities held for correspondent accounts,
receivables in customer margin accounts and underwriting activities. These
credit arrangements are provided on an "as offered" basis and are not committed
lines of credit. In addition, Hilltop Securities has committed revolving credit
facilities with three unaffiliated banks, with aggregate availability of up to
$250.0 million. At September 30, 2022, Hilltop Securities had $7.0 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, the weighted average maturity of the CP
Notes was 145 days at a rate of 3.16% with a weighted average remaining life of
59 days. At September 30, 2022, the aggregate amount outstanding under these
secured arrangements was $193.8 million, which was collateralized by securities
held for firm accounts valued at $213.1 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 billion,
of which $0.9 billion was drawn at September 30, 2022. As of October 1, 2022,
the total commitment was reduced to $2.0 billion. 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.

PrimeLending owns a 100% membership interest in PrimeLending Ventures
Management, LLC ("Ventures Management") which holds an ownership interest in and
is the managing member of certain ABAs. At September 30, 2022, these ABAs had
combined available lines of credit totaling $190.0 million, $55.0 million of
which was with a single unaffiliated bank, and the remaining $135.0 million of
which was with the Bank. At September 30, 2022, Ventures Management had
outstanding borrowings of $67.4 million, $23.6 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, 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 Form 10-K.

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

Banking Segment

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

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

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

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. 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,
there have been no changes in critical accounting estimates as further described
under "Critical Accounting Estimates" in our 2021 Form 10-K.

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