Hilltop Holdings Inc. (HTH) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

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

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OVERVIEW

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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.

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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.

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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.

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

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

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

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

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

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

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We present certain measures in our selected financial data that are not measures of financial performance recognized by GAAP. “Tangible book value per common share” is defined as our total stockholders’ equity reduced by goodwill and other intangible assets, divided by total common shares outstanding. “Tangible common equity to tangible assets” is defined as our total stockholders’ equity reduced by goodwill and other intangible assets, divided by total assets reduced by goodwill and other intangible assets. These measures are important to investors interested in changes from period to period in tangible common equity per share exclusive of changes in intangible assets. For companies such as ours that have engaged in business combinations, purchase accounting can result in the recording of significant amounts of goodwill and other intangible assets related to those transactions.

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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.

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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).

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Recent Developments

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Economic Environment

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

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

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

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

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

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

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Asset Valuation

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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.

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

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To the extent future operating performance of the mortgage origination and broker-dealer segments remain challenged and below forecasted projections, significant assumptions such as expected future cash flows or the risk-adjusted discount rate used to estimate fair value are adversely impacted, or upon the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform impairment tests on our goodwill and other intangible assets, an impairment charge may be recorded for that period. In the event that we conclude that all or a portion of our goodwill and other intangible assets are impaired, a non-cash charge for the respective amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.

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Outlook

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

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

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Factors Affecting Results of Operations

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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.

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Factors Affecting Comparability of Results of Operations

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NLC Sale

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

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LIBOR

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

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

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

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

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

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

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Brokered Deposits

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

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Company Background

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

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

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

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

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

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Segment Information

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

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Following the above-noted sale of NLC, we have two primary business units within continuing operations, PCC (banking and mortgage origination) and Securities Holdings (broker-dealer). Under accounting principles generally accepted in the United States (“GAAP”), our continuing operations business units are comprised of three reportable business segments organized primarily by the core products offered to the segments’ respective customers: banking, broker-dealer and mortgage origination. Consistent with our historical segment operating results, we anticipate that future revenues will be driven primarily from the banking segment, with the remainder being generated by our broker-dealer and mortgage origination segments. Operating results for the mortgage origination segment have historically been more volatile than operating results for the banking and broker-dealer segments.

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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.

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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.

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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.

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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.

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The eliminations of intercompany transactions are included in “All Other and Eliminations.” Additional information concerning our reportable segments is presented in Note 28, Segment and Related Information, in the notes to our consolidated financial statements.

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

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NMNot meaningful

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Key Performance Indicators

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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.

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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.

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In addition, we consider regulatory capital ratios to be key measures that are used by us, as well as banking regulators, investors and analysts, to assess our regulatory capital position and to compare our regulatory capital to that of other financial services companies. We monitor our capital strength in terms of both leverage ratio and risk-based capital ratios

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

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How We Generate Revenue

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

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

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

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We also incur noninterest expenses in the operation of our businesses. Our businesses engage in labor intensive activities and, consequently, employees’ compensation and benefits represent the majority of our noninterest expenses.

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Consolidated Operating Results

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

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

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

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

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

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

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

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The banking segment’s net interest margin exceeds our consolidated net interest margin shown above. Our consolidated net interest margin includes certain items that are not reflected in the calculation of our net interest margin within our banking segment and reduce our consolidated net interest margin, such as the borrowing costs of Hilltop and the yields and costs associated with certain items within interest-earning assets and interest-bearing liabilities, such as securities borrowed in the broker-dealer segment and securities loaned in the broker-dealer segment, including items related to securities financing operations that particularly decrease net interest margin. In addition, yields and costs on certain interest-earning assets, such as lines of credit extended to other operating segments by the banking segment, are eliminated from the consolidated financial statements. Our consolidated net interest margins during 2020 and, to a lesser

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

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On a consolidated basis, the changes in net interest income from continuing operations during 2022, compared with 2021, were primarily due to the effects of volume and rate changes within the mortgage warehouse lending, securities and deposits portfolios within the banking segment, increased net yields on mortgage loans held for sale and decreases in average warehouse line balance with an unaffiliate bank within the mortgage origination segment and changes within the broker-dealer segment related to its structured finance and fixed income services business lines. Refer to the discussion in the “Banking Segment” section that follows for more details on the changes in net interest income, including the component changes in the volume of average interest-earning assets and interest-bearing liabilities and changes in the rates earned or paid on those items.

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The provision for (reversal of) credit losses is determined by management as the amount necessary to maintain the allowance for credit losses at the amount of expected credit losses inherent within the loans held for investment portfolio. The amount of expense and the corresponding level of allowance for credit losses for loans are based on our evaluation of the collectability of the loan portfolio based on historical loss experience, reasonable and supportable forecasts, and other significant qualitative and quantitative factors. Substantially all of our consolidated provision for (reversal of) credit losses is related to the banking segment. During 2022, the provision for credit losses was driven by a deteriorating U.S. economic outlook since December 31, 2021. During 2021, the reversal of credit losses was primarily impacted by the banking segment’s reduction in reserves associated with collectively evaluated loans within the portfolio attributable to improvements in both macroeconomic forecast assumptions and credit quality metrics on COVID-19 impacted industry sector exposures primarily related to the economic uncertainties during the prior year. Refer to the discussion in the “Financial Condition – Allowance for Credit Losses on Loans” section that follows for more details regarding the significant assumptions and estimates involved in estimating credit losses.

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

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

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

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Segment Results from Continuing Operations

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Banking Segment

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

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The decrease in income before income taxes during 2022, compared with 2021, was primarily due to the impact of reversals of credit losses throughout 2021 and the combined impact of net interest income volume and rate changes within the loans held for investment and mortgage warehouse lending portfolios. Changes to net interest income related to the component changes in the volume of average interest-earning assets and interest-bearing liabilities and changes in the rates earned or paid on those items are discussed in more detail below.

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

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

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During 2022, 2021 and 2020, purchase accounting contributed 9, 16 and 18 basis points, respectively, to the banking segment’s taxable equivalent net interest margin of 3.11%, 3.08% and 3.31%, respectively. These purchase accounting items are primarily related to accretion of discount of loans associated with the Bank Transactions as discussed in the Consolidated Operating Results section.

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

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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, such as securities borrowed in the broker-dealer segment and securities loaned in the broker-dealer segment, including items related to securities financing operations that particularly decrease net interest margin. In addition, yields and costs on certain interest-earning assets, such as lines of credit extended to other operating segments by the banking segment, are eliminated from the consolidated financial statements. The banking segment’s net interest margins during 2021 and 2020 were negatively impacted by certain actions taken by management during 2020 to strengthen the Bank’s available liquidity position. Such actions, including increasing overall cash balances by raising brokered money market and brokered time deposits were taken out of an abundance of caution in light of the extreme volatility and disruptions in the capital and credit markets beginning in March 2020 resulting from the COVID-19 crisis and its negative impact on the economy.

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

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

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

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

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

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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.

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

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The banking segment’s provision for (reversal of) credit losses has been subject to significant year-over-year and quarterly changes primarily attributable to the effects of the changing economic outlook, macroeconomic forecast assumptions and resulting impact on reserves. Specifically, during 2022, the banking segment’s provision for credit losses was driven by a deteriorating U.S. economic outlook since December 31, 2021. The change in the allowance during 2022 was also impacted by net charge-offs of $4.2 million. During 2021, the banking segment had net reversals of credit losses on expected losses of collectively evaluated loans of $58.3 million, primarily due to improvements in both macroeconomic forecast assumptions and credit quality metrics on COVID-19 impacted industry sector exposures. The change in the allowance during 2021 was also impacted by net recoveries of $0.5 million. During 2020, the significant build in the allowance included provision for credit losses on individually evaluated loans of $20.1 million, while the provision for credit losses on expected losses of collectively evaluated loans accounted for $76.1 million of the total provision primarily due to the increase in the expected lifetime credit losses under CECL attributable to the deteriorating economic outlook associated with the impact of the market disruption caused by the COVID-19 pandemic. The change in the allowance during 2020 was also impacted by net charge-offs of $21.1 million, primarily associated with loans specifically reserved for during the first quarter of 2020. The changes in the allowance for credit losses during the noted periods also reflected other factors including, but not limited to, loan growth, loan mix, and changes in risk grades. Refer to the discussion in the “Financial Condition – Allowance for Credit Losses on Loans” section that follows for more details regarding the significant assumptions and estimates involved in estimating credit losses.

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The banking segment’s noninterest income increased during 2022, compared to 2021, primarily due to increased wealth management fees. Noninterest income during 2021, compared to 2020, increased primarily due to increased service charges on depositor accounts and wealth management fees.

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

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Broker-Dealer Segment

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

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evaluation of the broker-dealer segment’s financial position and operating performance as we believe it is a primary revenue performance measure used by investors and analysts. Net revenue provides for some level of comparability of trends across the financial services industry as it reflects both noninterest income, including

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

basis for comparability with our banking segment.

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

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

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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.

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

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

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

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

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

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

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

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

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

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Mortgage Origination Segment

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

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

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

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

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

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

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During 2022, the U.S. 10-Year Treasury Rate and mortgage interest rates significantly increased. This compares to declines in these rates during 2020 in response to the COVID-19 pandemic, followed in 2021 by an increase in mortgage interest rates that remained lower on average during 2021, compared to 2020. Average interest rates during 2022 exceeded average interest rates during 2021, and refinancing volume as a percentage of total origination volume decreased during 2022, as compared to 2021. Refinancing volume as a percentage of total origination volume during 2022 decreased to 14.5% from 36.3% during 2021. During the second half of 2022, refinancing volume as a percentage of total origination volume was 7.0%. Although we anticipate the percentage of refinancing volume relative to total loan origination volume during 2023 to approximate the percentage experienced during the second half of 2022, a higher refinance percentage could be driven by a slowing of purchase volume due to the negative impact on new and existing home sales resulting from existing home inventory shortages, affordability challenges, and supply chain problems related to new home construction, and/or an increase in all-cash buyers.

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The mortgage origination segment primarily originates its mortgage loans through a retail channel, with limited lending through its affiliated business arrangements (“ABAs”). For 2022, funded volume through ABAs was approximately 10% of the mortgage origination segment’s total loan volume. During the majority of 2022, PrimeLending owned a greater than 50% interest in five ABAs. During the fourth quarter of 2022, interest in one of the five ABAs was dissolved. We expect total production within the ABA channel to again approximate 10% of loan volume of the mortgage origination segment during 2023.

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

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We consider the mortgage origination segment’s total loan origination volume to be a key performance measure. Loan origination volume is central to the segment’s ability to generate income by originating and selling mortgage loans, resulting in net gains from the sale of loans, other mortgage production income and other mortgage loan origination fees. Total loan origination volume is a measure utilized by management, our investors, and analysts in assessing market share and growth of the mortgage origination segment.

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

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

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

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

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

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

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

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

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The mortgage origination segment sells substantially all mortgage loans it originates to various investors in the secondary market. In addition, the mortgage origination segment originates loans on behalf of the Bank. The mortgage origination segment’s determination of whether to retain or release servicing on mortgage loans it sells is impacted by, among other things, changes in mortgage interest rates, and refinancing and market activity. During 2022, 2021 and 2020, the mortgage origination segment retained servicing on approximately 25%, 29% and 67% of loans sold, respectively. A reduction in third-party mortgage servicers purchasing mortgage servicing rights, while modest, may result in PrimeLending increasing the rate of retained servicing on mortgage loans sold during 2023. The mortgage origination segment may, from time to time, manage its MSR asset through different strategies, including varying the percentage of mortgage loans sold servicing released and opportunistically selling MSR assets. The mortgage origination segment has also retained servicing on certain loans sold to and retained by the banking segment. Gains and losses associated with such sales to the banking segment and the related MSR asset are eliminated in consolidation.

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The mortgage origination segment uses derivative financial instruments, including U.S. Treasury bond futures and options, to mitigate interest rate risk associated with its MSR asset. Changes in the net fair value of the MSR asset and the related derivatives associated with normal customer payments, changes in discount rates, prepayment speed assumptions and customer payoffs resulted in net gains (losses) as noted in the table above. During 2022, the operating results of the mortgage origination segment were positively impacted by the noted increase of $21.9 million in the net fair value of the MSR asset. This increase was primarily driven by changes in the prepayment and discount rates used as inputs to value the MSR asset to address the impact of increased mortgage rates reducing consumer refinancing activity and recent market trends related to MSR sales. During 2022, the mortgage origination segment sold MSR assets of approximately $65 million with a serviced loan volume totaling $3.7 billion. During 2021 and 2020, the mortgage origination segment sold MSR assets of approximately $143 million and $37 million, respectively, with a serviced loan volume totaling $12.4 billion and $3.8 billion, respectively.

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

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Total employees’ compensation and benefits accounted for the majority of the noninterest expenses incurred during all periods presented. Specifically, variable compensation comprised the majority of total employees’ compensation and benefits expenses during 2022, 2021 and 2020. Variable compensation, which is primarily driven by loan origination volume, tends to fluctuate to a greater degree than loan origination volume, because mortgage loan originator and fulfillment staff incentive compensation plans are structured to pay at increasing rates as higher monthly volume tiers are achieved. However, certain other incentive compensation plans driven by non-mortgage production criteria may alter this trend.

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

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

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

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

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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.

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

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For each loan the mortgage origination segment concludes its obligation to a claimant is both probable and reasonably estimable, the mortgage origination segment has established a specific claims indemnification liability reserve. An additional indemnification liability reserve has been established for probable agency, investor or other party losses that may have been incurred, but not yet reported to the mortgage origination segment based upon a reasonable estimate of such losses. In addition to other factors, the mortgage origination segment has considered that GNMA, FNMA and FHLMC have imposed certain restrictions on loans the agencies will accept under a forbearance agreement resulting from the COVID-19 pandemic, which could increase the magnitude of indemnification losses on these loans.

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

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Corporate

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

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Corporate includes certain activities not allocated to specific business segments. These activities include holding company financing and investing activities, merchant banking investment opportunities and management and administrative services to support the overall operations of the Company. Hilltop’s merchant banking investment activities include the identification of attractive opportunities for capital deployment in companies engaged in non-financial activities through its merchant bank subsidiary, Hilltop Opportunity Partners LLC. These merchant banking activities currently include investments within various industries, including power generation, consumer services, industrial equipment manufacturing and animal health, with an aggregate carrying value of approximately $47 million at December 31, 2022.

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

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

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Noninterest income from continuing operations during each period included activity related to our investment in a real estate development in Dallas’ University Park, which also serves as headquarters for both Hilltop and the Bank, and net noninterest income associated with activity within our merchant bank subsidiary. During 2021, noninterest income included an aggregate of $6.5 million in pre-tax gains associated with observable transactions related to two merchant bank equity investments.

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

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Results from Discontinued Operations

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Insurance Segment

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

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

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Corporate

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

Financial Condition

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

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Securities Portfolio

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

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

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

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