Q4 2021 Hilltop Holdings Inc Earnings Call
Good morning, My name is Candice and I will be your conference operator today at this time I would like to welcome everyone to the Hilltops Holdings fourth quarter 2021 earnings Conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be question and answer if you would like to ask a question. During this time simply press star followed by one on your telephone keypad.
If you would like to withdraw your question. Please press star followed by two.
Thank you I would now like to hand, the conference I thought to Erik Yohe, Iraq, you may begin.
Thank you.
Where we get started please note that certain statements. During today's presentation that are not statements of historical fact, including statements concerning such items as our outlook business strategy future plans financial condition allowance for credit losses, the impact and potential impacts of COVID-19, or disruptions in the global or national supply.
And stock repurchases and dividends and impacts of interest rate changes as well as such other items referenced in the preface of our presentation are forward looking statements.
These statements are based on management's current expectations concerning future events that by their nature are subject to risks and uncertainties.
Our actual results capital liquidity and financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our presentation and those included in our most recent annual and quarterly reports filed with the SEC.
Please note that the information presented his preliminary and based upon data available at this time, except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.
<unk>. This presentation includes certain non-GAAP measures, including tangible common equity and tangible book value per share.
A reconciliation of these measures to the nearest GAAP measure maybe found in the appendix to this presentation, which is posted on our website at IR Dot Hilltop holdings Dot com.
With that I will now turn the presentation over to president and CEO Jeremy.
Thank you Eric and good morning.
For the fourth quarter Hilltop reported net income of $62 million or <unk> 78 per diluted share return on average assets for the period was one 4% and return on average equity was nine 9%.
This quarter, Jim carried forward many of the same themes, we discussed in prior quarters, including improved credit quality growth in our core loan book at the beginning of a more normalized and competitive mortgage market and with the prospect of increasing rates in the near term a softening in our fixed income businesses.
Through it all we continue to generate strong earnings and returns.
<unk> capital Bank generated $68 million in pre tax income and a return on average assets of one 4% in Q4 2021.
Average loans held for investment at Plains capital Bank increased $122 million or 2% quarter over quarter as both core loans and retain mortgage balances grew.
Importantly, the bank generated commercial loan growth despite elevated pay downs.
The net loan growth was impacted by the continued run off in PPP loans, and a seasonal decline in national warehouse lending balances.
Our remaining PPP balance was $78 million as of December 31, 2021.
The average deposits increased by $460 million or 4% quarter over quarter and by $1 2 billion or 10% year over year as we continue to see growth in both interest bearing and non interest bearing accounts primarily from existing customers.
For the full year, the bank generated $283 million in pre tax income and a return on average assets of 155%. This was a fantastic year for Plains capital Bank and reflected the excellent job. The bank's leadership teams have done across the state by managing credit taking care of existing customers and refocusing on new business.
This growth.
In spite of a tough year over year comparable due to a record 2020 results Q4, 2021 was another strong quarter for prime lending as it generated $31 million in pre tax income.
The business originated $5 billion in volume with a gain on sale margin of loans sold to third parties with 362 basis points refill.
Refinancing volume as a percent of total volume was stable from prior quarter at 29%, but did decline from 46% during the same period in 2020.
We remain focused on optimizing pricing and margins, while still allowing our loan officers to be as competitive as possible in this increasingly tight market.
Our purchase orientation stable funding profile exceptional lenders and experienced leadership team who have managed through multiple cycles provide institutional advantages that should enable prime lending to outperform the broader mortgage market. During what we believe will be a challenging time in the industry due to shrinking refinance.
<unk> limited inventory and heightened competition.
Overall 2021 was another excellent year for prime lending capitalizing on the housing and mortgage market circumstances, driven by the COVID-19 pandemic that started in early 2020 led the company to have a second best year ever with funded volume of $23 billion and pretax income of 236.
Yeah.
During the quarter Hilltop securities generated pretax income of $1 7 million on net revenue of $94 6 million at.
The decline in net revenues of $55 5 million or 37% compared to Q4 2020.
The revenue shortfall was primarily driven by declines in our highest margin businesses.
Such as fixed income and structured finance specifically.
Specifically mortgage revenues in structure finance fell by $34 million or <unk>, 73% and fixed income services revenues fell by $18 million or 57%.
Public finance revenue also declined by 7% year over year on lower issuance volume, which was in line with the broader industry declines.
While wealth management revenues increased by 2% on stronger transactional and managed account fees.
For the year Hilltop Securities generated net revenues of $424 million and a pre tax margin of 10, 3%.
The second half of the year was particularly challenging for our fixed income and housing businesses due to a slowdown in the mortgage industry combined with investor expectations of rising interest rates economic uncertainty and fear of inflation.
Nevertheless, we believe that hilltop securities is in a position to grow once the operating environment for its businesses improves.
We have added key infrastructure producers and leadership to broaden our capabilities and to expand our breadth of expertise and complementary businesses.
We're focusing on diversifying and growing our revenue streams and have already made the necessary investments to support that.
This will take time, but we are confident hilltop securities leadership team and strategic direction.
Collectively the fourth quarter was a strong finish to an excellent year for hilltop with full year 2021, net income of $374 million or $4 61 per diluted share.
While 2021 was a volatile year with a tremendous amount of uncertainties.
<unk> COVID-19 variance supply chain disruptions and inflationary pressures hilltops exceptional results reflect the strength of our diversified business model and the dedication of our talented people, who are steadfast and taking care of our customers.
Moving to page four.
Hilltop maintains strong capital levels with a common equity tier one capital ratio of 21, 2% at year end and our.
Our tangible book value per share increased by 15% from Q4 2020 to $28 37.
During 2021, hilltop returned $163 million to shareholders through dividends and share repurchase efforts, representing approximately 43% of earnings to shareholders.
This week Hilltop board of directors declared a quarterly cash dividend of <unk> 15 per common share a 25% increase from the prior quarter.
And authorized a new stock repurchase program of $100 million through January 2023.
With that I will now turn the presentation over to will to walk through the financials.
Thank you Jeremy I'll start on page five.
Jeremy discussed for the fourth quarter of 2021 Hilltop reported consolidated income attributable to common stockholders was $62 million.
<unk> 78 per diluted share.
During the fourth quarter, the provision for credit losses reflected in net recoveries of prior charge offs of $4000 and net reduction of reserves of $18 million.
Cover the changes in the allowance for credit losses in more detail on page seven of the deck.
Turning to page six.
For the full year of 2021, we'll talk reported consolidated income attributable to common stockholders of $374 million.
For $4 61 per diluted share.
2020 one's results highlight the strength and diversity of our businesses, including the benefits of the ongoing investments we've made to support improved productivity and scale across our franchise.
Additionally earnings per share was further supported by the previously mentioned share repurchases, which drove a 4% decline in shares outstanding.
As a result of the earnings performance and capital actions taken in 2021 built off year end capital ratios strengthened versus 2020 year end levels with common equity tier one was 21, 2% and a stable tier one leverage ratio of 12, 6%.
Turning to page seven.
It was off the allowance for credit losses declined by $18 million versus the third quarter of 2021 was improvements in the macroeconomic outlook and the decline in specific reserves, resulting from a significant credit recovery during the quarter supported a net reserve release in the period.
Further ongoing asset quality improvement across the portfolio also contributed to the ACO reduction during the fourth quarter.
Allowance for credit losses of $91 million, yielding ACO, the total bank loans or <unk> ratio of one 6% as of year end 2021.
Of note, we continue to believe that the allowance for credit losses could be ball and the changes in the allowance will be driven by net loan growth in the portfolio credit migration dreams and changes to the macroeconomic outlook over time.
Further as the pandemic and broader economic environment continues to create uncertainty further volatility could occur in the coming months and quarters.
Turning to page eight.
Net interest income in the fourth quarter equated to $104 million, including $2 $5 million of PPP fees and interest and $4 7 million of purchase accounting accretion.
Versus the prior year quarter net interest income decreased by $3 1 million or 3% driven primarily by lower PPP fee recognition and lower accretion income.
Net interest margin declined versus the third quarter of 2021 of nine basis points to 244 basis points, driven primarily by the impact of continued growth in deposits.
This growth resulted in higher average excess cash levels, which grew by $533 million in the quarter.
These items were somewhat offset by modest improvements in the yields in the investment portfolio and the ongoing gradual declines in interest bearing deposit costs.
Loan yields remained pressured during the fourth quarter of <unk>.
This liquidity in the market as word substantial competitive pressure for high quality funded assets.
During the quarter.
Marshall loan originations, including credit renewals at an average book yield of 378%, which continue to trend lower through the end of 2021.
Turning to page now.
And the chart, we highlight the asset sensitivity of hilltop, assuming parallels and instantaneous rate shocks, which represented an asset sensitive position of approximately 11% in the up 100 basis points scenario.
As we evaluated assets sensitivity and interest rate risk, we assess a number of potential scenarios.
If we shift the analysis from an instantaneous parallel shift to a gradual increase over the course of the next 12 months, you're up 100 basis point asset sensitivity bolt of approximately 5%.
Further in this scenario each 25 basis point increase positively impacted net interest income by approximately $5 million.
Lastly for 2022, we expect that the impact of PPP related fees and interest which were approximately $22 million in 2021.
Purchase loan accretion could decline by $25 million to $30 million versus the 2021 levels.
Moving to page 10.
Total noninterest income for the fourth quarter of 2021 equated to $285 million.
Fourth quarter mortgage related income and fees decreased by $106 million versus the fourth quarter of 2020, driven by the evolving environment.
Mortgage banking, which remained strong but reflected a more traditional cyclical pattern. When we saw during the prior year period.
Versus the prior year quarter purchase mortgage volumes decreased by $124 million or 3%.
And refinance volumes between mud declined much more substantially decreasing by $1 7 billion or 54%.
During the fourth quarter of 2021 gain on sale margins were stable with third quarter levels, increasing by one basis point on a reported basis and three basis points on loans sold to third parties.
We expect full year average margins to be under pressure during 2022 as mortgage volumes normalize from the historically high levels seen over the last two years and the competition for that lower volume drives tighter margins.
Currently we expected full year average gain on sale margins for loans sold to third parties will average between 300 and 325 basis points.
And general market conditions.
Other income decreased by $55 million, driven primarily by declines in structured finance lock volumes, which declined by $272 million or <unk>, 37% and a challenging trading environment and fixed income services, where revenues declined about $18 million versus the prior year period.
It is important to recognize that both fixed income services in structured finance can be volatile from period to period as they are impacted by interest rates overall market liquidity volatility and production trends.
Turning to page 11.
Noninterest expenses decreased for the same period in the prior year by $8 million to $322 million.
The decline in expenses versus the prior year was driven by decreases in variable compensation of approximately $68 million of hilltop securities and prime lending, which was linked to lower fee revenue generation in the quarter compared to the prior year period. Additionally, non compensation variable expenses, particularly mortgage production related.
Expenses declined as volumes decline versus the prior year.
Professional services and consultancy related expenses as a place where we focused on reducing expenses over the last few years and the year over year benefits of these efforts is noted as expenses were up $12 million from the prior year.
Looking forward for 'twenty, two we expect that inflation will impact compensation occupancy and software expenses, resulting in elevated fixed costs within the business.
To help mitigate some of these headwinds we will remain focused on continuous improvement leveraging the investments we've made over the last few years to aggressively manage increased productivity across our front middle and back offices.
While these inflationary pressures do exist, we are continuing to further streamline our businesses and accelerate the adoption of our digital capabilities to support client acquisition and overall business productivity.
Turning to page 12.
Fourth quarter average <unk> loans equated to $7 7 billion.
In 2021 stable with the prior year fourth quarter levels.
On a period end basis, each of our loans grew versus the third quarter of 2021 by $300 million driven.
Driven by an improving commercial loan growth, particularly in commercial real estate lending annual retention of one to four family mortgages originated by private lending.
During the second half of 2021, we experienced improved customer activity in the commercial space and our pipelines continue to grow through the fourth quarter. However.
However, with the emergence of the latest Covid variance, we do expect a slowing of activity in the short term with a return to growth during the second and third quarters of 2022.
During the fourth quarter of 2021, prime lending locked approximately $191 million of loans to be delivered or plains capital over the coming months.
These loans had an average yield of 307 basis points, and average FICO and ltvs of 775% and 61% respectively.
Lastly, given our current liquidity position and the lower level of commercial loan growth. We expect to continue to retain one to four family mortgages originated Brian living at a pace of between 30 and $75 million per month through at least the first half of 2022.
I'm moving to page 13.
During the fourth quarter hilltop recorded a net recovery of previous charge off of $400000. This recovery capped 2021, whereby the full year.
<unk> reported a net recovery of prior charge offs of $500000 are exceeding our expectations for credit performance from earlier in the year.
In the graph in the upper right. We show the substantial progress made reducing the NPA as prime lending executed a targeted loan sale and our special assets team exited all but approximately $3 million of Oreo assets during the quarter.
As is shown on the graph at the bottom of the rider page the allowance for credit loss coverage at the bank ended 2021 at 128%, including both mortgage warehouse lending as well as PPP loans.
We continue to believe that both mortgage warehouse lending as well as PPP loans will maintain a lower loss content over time <unk>.
Excluding mortgage warehouse and PPP loans, the banks ACL to total bank loans <unk> ratio equates to 137%.
Turning to page 14.
Fourth quarter average total deposits are approximately $12 4 billion in.
And have increased by $1 2 billion or 11% versus the fourth quarter of 2020.
Throughout the pandemic, we've continued to experience abnormally strong deposit flows from our customers and has continued throughout the fourth quarter and.
In addition to solid growth in deposits, both year over year and on a sequential quarter basis interest bearing deposit yields have continued to drift lower with the fourth quarter average cost of 22 basis points.
While we have seen solid improvement in deposit costs over the last two years, we do expect to see deposit costs begin to rise later in 2022, if the federal reserve just the fed funds rate higher by 75 to 100 basis points during the year.
While deposit levels remain elevated it should be noted that we remained focused on growing our client base and deepening wallet share through our treasury products and services.
These efforts were successful in 2021, and we expect that they will continue to accelerate into 2022.
Moving to page 15.
As a result of the team's work over the past few years, we were well positioned to take advantage of the opportunities the market presented by leveraging our franchise and our enhanced infrastructure to serve customers, while attempting to keep our teams and clients as safe as possible from the ongoing pandemic.
In 2022, we remain focused on staying nimble as the pandemic evolves to ensure the safety of our teammates and our clients further our financial priorities for 'twenty. Two 2022 remained focused on delivering great customer service to our clients attracting new customers to our franchise supporting the communities, where we serve maintaining a moderate risk profile.
<unk> and delivering long term shareholder value.
As noted in the table our current outlook for 2022 reflects two rate increases by the federal reserve during the year are normalizing, but constructive purchase mortgage market, our more productive balance sheet as excess cash levels moderate in loans grow at a measured pace as well as the normalization of the provision for credit losses, given both grow.
And credit migration expectations.
Operator that concludes our prepared comments and we'll turn the call back to you for Q&A section of the call.
Okay.
At this time I would like to remind everyone in order to ask a question.
First off then press one on your telephone keypad, we will pause.
Just for a moment to comply with the question on several stuff.
Our first question comes from Michael Young from Traverse Michael Your line is now open. Please go ahead.
Hey, good morning, everyone.
Good morning, good morning.
I wanted to ask a quick housekeeping one will just on the earnings this quarter were there many fair value impacts I know, sometimes like the TBA business as kind of unhedged.
Unhedged.
Anything on the MSR side that we should be kind of normalizing as we move throughout 2022.
Nothing nothing substantial.
And the year end period, so we had some things throughout the throughout the year, but nothing in the fourth quarter.
Significant consequence.
Okay.
And maybe within the capital markets business.
TBA business, obviously, you can't control the macro and what's going on with interest rates et cetera, but can you just talk about sort of the initiatives or efforts underway.
What you can control to kind of grow that business against more difficult macro environment.
Yes. This is Jeremy sure I'll take that so on the fixed income side.
Obviously, you've seen this with other competitors having.
A challenging quarter in challenging second half of the year given its market.
The rate in the customers' appetite.
I do think if you see we have recruited a lot of.
Talented people.
Fixed income and we continue to try to build up that capital markets business. In particular, we have a real focus on building our middle market sales effort.
What.
Come to light really this year, given this environment as our reliance on trading revenue versus.
Sales so.
It's kind of the biggest push that we have there to diversify that.
On that side.
Okay great.
Just maybe moving over to mortgage obviously refinance volume is really expected to fall off in 2022 as rates fall.
As rates rise and we've seen that already somewhat but you guys have historically been pretty strong in the purchase market and that actually looks pretty decent. So could you maybe just kind of talk about your outlook for that business for 2022.
It kind of in that context, and just are you guys still hiring and trying to grow volume in that business or are you going to take efforts to maybe control cost a little bit more in 2022.
I'll just talk about the recruiting first and will can chime in but.
We are and always have been purchased focus originator and the expectation is for purchase mortgage volumes to increase.
Over the next three years.
Refinancing volumes, obviously expected to be cut by about 70%.
So we.
We do think thats going to affect.
The competitive landscape and we do think that and we've already seen that have an impact on our margins.
We are actively recruiting.
It's very competitive as well in doing that but we are we have been successful recruiting and then we're looking for experienced loan originators that have a purchase focus and I can say through 2021.
<unk> had a net gain of 34 producers for about $500 million of incremental volume.
Let's say Michael in terms of in terms of kind of managing the overall profitability of the business obviously.
We're moving quickly and have moved quickly into the cycle where overcapacity.
<unk> in the market takes hold and.
The competitive set generally surprised to lower price to keep.
Keep the machine if you will kind of fulsome, while they worked to rationalize the size of their operations. So we're expecting as we guided here.
Gain on sale margins to decline into the 300 to 325 basis point range.
As we noted on the call there were $3 47 on a reported basis and $3 60 to 100 loans, a third party basis in the quarter. So that's a pretty material decline as we as we've worked over the last three or four years with our new loan origination platform as well as our digital efforts in the mortgage space, It's a focus of ours.
To improve the overall productivity of our business kind of through and through so we're going to be working.
To do to kind of pull the lever Jeremy mentioned, which is grow our originator base, but we're also going to be looking to drive overall productivity. So it will be we're going to be pulling both levers in 2022 to try to drive as much profitability as possible understanding it is going to be more of a challenging year than it has been in the last couple of years, just given given the more.
Backdrop, but we do feel constructive and remain constructive on the purchase on the purchase side of the business. We do expect that to grow the market expects us to grow and we expect to get our fair share of that business.
Okay. Thanks, I'll step back.
Our next question.
Comes from Matt Olney from Stephens.
Please go ahead.
Hey, Thanks, good morning, guys.
Hey, Matt.
I want to go back to the discussion around hilltop Securities and I think you said the revenue for the.
The revenue for the full year was around 424.
And obviously some of those industry headwinds came on kind of throughout the year.
As you see it today do you think you can achieve that $424 million in 2022.
We're not going to give exact guidance on that.
I would say if you look back at the year as well.
Described is really the last six months of 'twenty, one where we saw.
The impact to those two businesses.
And I would expect.
We're going to go into this year was continued pressure on them.
And then eventually and as we see things kind of evolve.
And those businesses.
Markets improve.
Our revenues should improve and our margin should improve.
We're committed to these businesses, we've got great people that run it and know what they're doing.
I think that there'll be.
Outside of that.
Okay.
Thanks for that and then I guess switching over to the bank, but the loan growth in the fourth quarter.
Any more color on the drivers of that that loan growth and then I guess looking at the guidance on loan growth it doesn't.
Sounds like you think the fourth quarter was any kind of inflection just any more color on around the guidance there.
Yes, so fourth quarter, if you kind of just go on a linked quarter basis.
Tried to highlight in the comments, we saw kind of better activity in our in our CRE lending space.
<unk> unique balance that was up just over $120 million.
The prime lending retention for the period.
About $190 million. So that gives you a sense kind of where the growth was the things that the things that.
<unk> declined in the period, obviously PPP loans declined.
Just over $55 million.
And national warehouse lending declined about $94 million, which is seasonal for that business and again, we saw a more seasonal mortgage space or national warehouse lending followed that all of that path.
As we look out from a commercial loan growth perspective.
Again.
We're trying to negotiate what is a challenging environment with COVID-19 .
To protect the safety and those.
Both our clients and our associates.
We pulled back in the late parts of the fourth quarter as the as the.
This strand of of the pandemic kind of continued to rage forward, we pulled back kind of in person calling in a lot of the calling activities that you would normally be expected and that we've restarted in approximately the middle of the year last year. So what we're expecting is if you pull back calling efforts and your sales efforts for a short period of time and again, we still got people on the phone.
Reach out clients, but the in person efforts, which is generally a more fruitful endeavor.
We expect to see a little bit of a lull in the first quarter and then that.
Growth to start is this is this trend looks to be abating, our expectation as growth starts to resume in the second and third quarters.
This year, but again.
Focus there will be trying to grow grow their commercial business in that 2% to 5% range on a full year average basis, but what we're seeing a lot of your certainly <unk> across our footprint as stronger activity in CRE.
And I would say solid solid activity in C&I, but most of the activity from a CRE perspective.
Yes, the only other thing I would just mentioned is on the growth in the fourth quarter. It was a lot of our existing customers. So.
Yes.
That was a commonality.
Okay.
Okay. That's helpful. And then I guess on the expense side looking at that guidance on on Slide 15, I. Appreciate the way you guys broke it out between variable expenses and non variable expenses.
That's that's helpful on the non variable side. It looks like you expect that to increase between three and 6%.
More commentary you can provide on that I guess I thought I was hoping that we could be more opportunity to cut some costs, even on even on the fixed side, but obviously there is some wage pressures going on in the industry. Just any other commentary you can give us on that.
Well I think you hit on it I think wage pressures wage pressures real we're acknowledging it here.
We will expect to see kind of merit.
Sure.
Cost of living adjustments would be higher than they would have historically been a couple of percentage points. That's reflected here. We've also got in our software agreements in occupancy agreements with some of the other agreements just inflationary kind of escalators that are embedded there. So that's real cost again, I think what we're focused on doing and.
The lower end of the range here reflects.
What I would say an offsetting offsetting impact of the work we're doing from a from a productivity perspective. So I want you to take away that we're not focused laser focused on driving productivity across all of our operations, which we absolutely are but in the short run, which we view kind of a one year period almost be the short run those infill.
<unk> pressures emphasis it certainly in the fourth quarter, we're seeing them continue into the first quarter. So we expect there will be there for a period and we're not again as it has been our in our practice, we're not going to overreact to a short term phenomenon and we're going to do the things that we think theyre going to help position our business to be most successful long term.
Both from an investment.
Perspective, but also from an expense reduction perspective.
Okay. Thank you guys.
Thank you.
Our next question is from Brad Milsap.
From Piper Sandler.
Go ahead.
Hey, good morning.
Good morning.
Hey will just wanted to follow up on Matt's question around <unk>.
Expenses.
If I take the midpoint of the range and I think you had about $850 million of sort of non variable expenses in 'twenty. One it would imply like $40 million of additional expense in 2022, which just seems like a big number just kind of curious I mean, as most all of that going to show up.
Just in the personnel category. It just seems like a big leap based on based on kind of where you are now.
Yes, I think.
Well I think Theres, a few things few things in there. So it's all going to show up with personnel, but youll see the personnel portion kind of at that percentage level Youll see the risks of Alice and software expenses in a balanced and occupancy expenses.
All of those are going to we think move in that range just based on contracts and then the expectation cross living adjustments from a personnel perspective, as well as healthcare healthcare related costs, which were up <unk>.
Sustainably year on year.
As we are as we're kind of going into the year on year. So.
Thats, where youre going to see it.
And again, we are.
Working diligently to effect.
Affect productivity improvements across the business is generally relates to head count and the efforts as we automate and digitize.
A series of our core processes, we continue to make progress there, but again in the short run.
Market is moving has moved pretty quickly in terms of.
Compensation adjustments and other cost as inflation has moved higher so we're we're subject to deal with it.
Okay. Thank you.
And then just on the balance sheet wanted to ask about.
It looks like the average taxable bond yield was up to over.
2.8% up about 17 basis points linked quarter.
Just curious if theres anything in there that would be one time driving that higher or is that kind of a new sustainable level, where you're.
Adding adding bonds to the portfolio and would you anticipate continuing to grow the bond portfolio in 'twenty two.
But we will.
We will we do expect just given where we are liquidity levels aren't overall cash levels are that we will see the bond portfolio certainly the bank continue to grow so we've got the trading portfolio Hilltop Securities, which.
As you know moved between 600 $700 million of Wesco over quarters on an earnings on a reported basis, we expect it to bond portfolio the bank on the other hand.
We'll likely move higher as it has I'd say drift higher.
Towards $100 million to $200 million higher per quarter again, we're we're focused on not taking too much Pierre.
Period vintage risk.
As the market rolls over to what appears to be a bit moving moving rates higher we are focused on.
Purchasing securities that allow us to maintain.
A reasonably high level of asset sensitivity, so that would be some more floating rate securities and we've maybe historically bought.
And are going on are kind of going on at the money fixed rate fixed rate security purchase right now is about 175 basis points. So.
Again, we expect the securities portfolio, the bank will move higher.
Rates have obviously moved up and again, we're going to we're going to do what we can to kind of manage.
Our asset sensitivity level. So we can take advantage of what we believe to be.
Our longer cycle of rates moving higher over the next one.
The next quarters and maybe years.
Okay, great, but nothing nothing specific in the yield this quarter, that's a pretty that's a pretty good number going forward.
Yes, I wouldn't say anything significant that moved it.
Okay and then just final question for me.
Just around your asset sensitivity I appreciate all the disclosure.
Can you remind me.
Yes.
Impacted the suite product that you have I think at the broker dealer and how much of that impact.
The interest rate sensitivity table that you disclosed in the deck if at all I just wanted to have a kind of a refresher reminder, kind of what the.
What the opportunity is there I know Jeremy you mentioned that in the past.
I think from a from an asset sensitivity perspective, it doesn't impact it.
It's not a net interest income.
One item as it comes through the consolidated P&L. So it's more of a fee item at the broker dealer from a from a P&L perspective, though it doesn't doesn't impact asset sensitivity in that in that evaluation from a net interest income perspective, what it does do is as rates move higher.
The value of those sweep deposits, obviously will move higher and the value of the fees fees generated obviously will grow so.
But as far as asset sensitivity from a net interest income perspective, it's not impact.
Okay, Great I appreciate it I appreciate the clarity there. Thanks, thanks for that thanks.
Thanks for taking my questions.
Thanks, Brad.
Next question is from John <unk> from Raymond James Your line is now open. Please go ahead.
Good morning.
Alright.
I was hoping you could unpack your deposit guidance and why Youre anticipating such a relatively big drop in 2022.
Well I think our view is.
As the fed starts to move it's balance sheet pool liquidity out of the marketplace as well as what.
What we expect to be kind of the.
Last innings of the stimulus notwithstanding notwithstanding as we note here additional stimulus efforts.
We expect to see kind of an additional usage of these deposits by customers over time. We also expect as there is the economic environment starts to clear and we get a little more clarity around both the rate environment inflation. However.
However, temporary or otherwise this inflation is that our customers are going to start to put.
Money to work.
With an additional with additional investments whether that be in inventory from a C&I perspective, or additional projects and programs from a from a real estate perspective again, we are a commercially oriented community bank and as a result, we've seen a large large inflow of deposits from those customers that had been profitable over the last couple of.
Last couple of years as well as.
The benefits of the stimulus as both of us.
As again that stimulus we believe is in the last innings and so we do believe that.
The consumer portion of our portfolio will start to see.
It draws on deposit, but we also expect that our commercial customers will start to put more dollars to work as they get more clarity.
If the pandemic.
Starts to improve and as we get clarity on the economic outlook for for the next couple of quarters, we expect to see those customers put deposits to work.
Got it I appreciate it.
And then in your prepared remarks, I believe you said that.
Do you expect deposit cost to increase in 2022, and I guess I was wondering how quick after the first rate hike do you plan to raise deposit cost and then.
Do you have any.
Sense on where the NIM will shake out in the near term.
And so from a.
From a model kind of through the cycle beta so through the cycle, which would be through through the entire rate cycle, we model about 50%.
Pull through on all from a deposit cost perspective.
As we think about the first couple of first couple of movements, we would expect in 2010.
22 gets a bit where to move rates 100 basis points for example that our.
The beta and in the period of 2022 is likely to 1% to 30%.
We will take we will take some time after the first and likely the second increases to evaluate the market and evaluate our liquidity position, but we do expect at the fed as I mentioned in my comments move 75 to 100 basis points, we will have to start to pass through a portion of that to customers.
Understood.
From a NIM perspective.
We're expecting NIM to.
Likely drift total total.
Total hgh NIM likely drift a little lower here.
In the early part of the year and then as as those.
As those rate increases occur if they occur.
We'll see we'll see NIM start to expand but there'll be really two things it will be expansion really on the liability side as I. Just noted on the asset side, we expect we expect kind of rigorous competition to persist.
Well as.
As well as we've got to work our way through our overall loan floors to see the expansion on the asset side.
Yes.
Perfect I appreciate it.
And I was wondering if can sneak in one last question.
Okay, I guess with mortgage volumes expected to shrink in 2022 has has the pool of.
I guess total originator shrunk across the market.
I'm asking that what the backdrop with you guys continuing to.
The higher rate increase your number of loan originators just wondering if thats.
It's playing out well.
Not not so much not so far.
Thats going to say that's going to take 12 to 18 months is.
As prices reset volumes reset People's earnings expectations reset of what they can make in this particular business that has historically taken.
I would say a series of quarters or year or so.
For it to start to bear it out and those who have the will and capability to.
Perform in the market long term kind of shake out.
Understood. Thank you for taking my questions.
Thanks.
We have a follow up question from Michael Young from trusted Michael.
Michael Your line is now open. Please go ahead.
Hey, Thanks for the follow up just wanted to ask on kind of capital allocation and returns you guys in the past as kind of tried to maintain a buffer of maybe $500 million or so of excess capital, but the capital levels are obviously quite.
Quite high.
Even more so than that today, so maybe well if you could give an update on kind of what you view as excess capital at this point.
And I know you guys approved $100 million share repurchase which is more than maybe the standard 50, but.
Just any other thoughts about.
Share buyback versus are you seeing M&A in the pipeline that would cause you to kind of hold on to some more capital here or anything like that would be helpful.
Sure. This is Jeremy I'll take that and we'll fill in but.
Right now we're sitting on.
Excess regulatory capital of about $1 billion.
That is higher than the $500 million that we had kind of pre pandemic and we got there I think.
It really more outsized earnings in.
And some other corporate actions.
I would say that we're excited about announcing this dividend increase it's 25% up on the.
The prior year of 33% up I would caution that we don't expect for a dividend increase at this rate in the future.
But I think it's a real affirmation of what we've been able to do and.
Strength for the future and shareholder return and for that matter as I mentioned, we did return about 43% of earnings last year to shareholders through share repurchases and dividends.
Similarly, we announced increase in our share authorization repurchase of $100 million.
And so we'll be evaluating that to do those repurchases in the open markets.
Excuse me open window periods.
So that's all to say I think that.
Even still.
We're going to probably hover around that $1 billion of excess capital until we have an event.
Like an M&A deal of some type.
Okay.
Give us an update just kind of an M&A thoughts generally.
You guys typically are more active when there is more distress in the market, but it seems like within the bank space.
Maybe not going to be the case for some period of time, just given the amount of stimulus running through the economy and higher rates coming a lot of banks are going to be a pretty strong position. So.
Do you reevaluate or looking at capital base any difference in light of that.
Generally, but but also just kind of general M&A path.
Sure.
Our desire is to do bank M&A and.
To bolster the balance sheet of the bank and the earnings profile.
Our hilltop collectively.
And where we've got kind of dialed in looking at.
A set of banks in Texas that we think are franchise enhancing.
<unk>.
That would be good partners, where we our preference would do more cash in that transaction and thats not been.
Our strategic advantage in this environment and given the tax implications of it.
So we are challenged based on our currency.
Mindful of that but.
Hopefully, we can find the right partner and.
And.
With enough cash in the deal it would be worthwhile for us.
Okay. Thanks.
Thank you.
Darren.
Our questions at this time I would like to turn the call back over to presenters.
Operator that concludes our call.
Thank you.
Sure.
This concludes today's conference call you May now disconnect your line.
Okay.
Yes.