Q1 2022 Hilltop Holdings Inc Earnings Call
Hello, everybody and thank you for your patience to Hilltop Holdings first quarter 2022 earnings conference call and webcast is due to begin shortly.
[music].
Hello, everyone and a warm welcome to the Hilltop Holdings first quarter 2022 earnings conference call and webcast. My name is Bethany and I'll be your operator today, if you'd like to ask a question. After the speaker's prepared remarks. He may do sorry, if my question Star one on your telephone keypad I will now pass the floor over to Eric.
Here he said.
He was vice President at Hilltop Holdings, Eric over to you.
Thank you operator.
Before 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 chain.
Stock repurchases and dividends and impacts of interest rate changes as well as such other items referenced in the preface to my 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.
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.
To the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.
Additionally, 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 Dash holdings Dot com.
I'll now turn the presentation over to President and CEO Jeremy Ford.
Thank you Eric and good morning.
For the first quarter Hilltop reported net income of $22 million or 28 cents per diluted share.
Return on average assets for the period was 53 basis points and return on average equity was three 6%.
Strength and stability of place capital Bank carried this quarters results as earnings pressures at Prime lending and hilltop securities resulted from a challenging mortgage market and an escalating interest rate environment.
Thanks Capital Bank generated $47 million of pre tax income and $14 $9 billion of average assets, resulting in a return on average assets of 1%.
Average loans at the bank increased $130 million in the quarter or 8% annualized as both core commercial loans and repaying mortgage balances increased.
Our pipeline continues to build and we expect core loan growth primarily in commercial real estate to continue across all of our markets.
In particular, we saw outsized strength in Dallas Fort worth and Austin markets.
Competition is elevated though as banks seek to deploy excess liquidity from the industry wide growth in deposits. So we remain focused on adhering to our long held underwriting standards that we believe have allowed plains capital bank prosper through numerous credit cycles.
As such credit quality improved with nonperforming loans declining by $7 million or 13% from the fourth quarter.
And the net charge off ratio to average bank loans was only two basis points.
Total average deposits increased by $340 million or 3% quarter over quarter, and by $1 4 billion or 12% year over year.
Largely due to growth from existing customers.
Average deposit balances remain elevated compared to pre pandemic levels up 56% from year end 2019.
Slightly lower than during the peak of 2021.
The slight decline in period end deposit balances, primarily resulted from select customers deploying excess liquidity outside of the bank.
As well as a decline in CD balances.
Moving to prime lending.
This quarter, we experienced a swift transition in the mortgage market stemming from a rapid rise in mortgage rates record low housing inventory and affordability challenges from mounting home price appreciation.
A heightened interest rates have dramatically reduced refinance volumes and sparked significant price margin pricing margin compression as lenders seek to optimize fulfillment capacity that was built up to accommodate the record volumes in 2020 in 2021.
While origination mortgage volumes were down revenues were further challenged relative to similar historical periods due to the quick and substantial decline in gain on sale margins.
Prime lending originated $3 8 billion in volume with a gain on sale margin of loan sold to third parties of 321 basis points.
Prime lending origination volume declined 39% from the prior year, which is in line with the industry volume projections of 37%.
Over the same period refinancing volume as a percent of total volume declined from 53% to 27%.
We expect pressure on the mortgage business to persist as interest rates rise and the market remains fiercely competitive for volume. Therefore, our team continues to recruit strong purchase oriented loan originators, while remaining laser focused on our fixed expense base.
In the coming months, we will closely monitor industry trends.
And adjust for excess capacity from lower business activity.
It has been a challenging start to the year for hilltop securities, particularly in our structured finance and fixed income businesses with.
With the expectation of higher interest rates in the near term municipal and mortgage capital markets volumes were at historic lows and were responsible for almost the entire $26 million shortfall in income compared to prior year.
Given the current volatile trading environment Hilltop securities is carrying lower inventory levels and we expect to maintain this prudent approach until the markets recover.
Despite the challenging trading environment. The firm has seen positive momentum from the public finance services and the retail wealth management businesses.
As we continue to recruit top talent and grow our customer base.
We also expect sweep deposit revenue from our clearing and retail businesses to benefit from the rising rate environment.
Moving to page four.
Hilltop maintains strong capital levels with a common equity tier one capital ratio of 21, 3% at period end.
And our tangible book value per share increased by 6% from prior year to 27 407.
Compared to prior quarter, our tangible book value per share declined by 90.
Or 3% as a result of $120 million pre tax increase in net unrealized losses within our available for sale investment portfolio that was caused by increases in interest rates since securities were purchased.
Excluding the impact of the change in OCI, our tangible book value per share would have been relatively flat quarter over quarter.
During the quarter hilltop pay dividends to shareholders of $11 8 million.
In summary, the start of the year for the bank was very positive we grew core bank loans, while improving asset quality. However, our fee income businesses were depressed during the quarter from the sharp spike in interest rates and fixed income market volatilities.
We expect market volatility to persist with the uncertain anticipation of significant interest rate increases in the short term.
We will have varying impacts to our businesses.
We believe our fixed income capital markets business will improve with a more stabilized interest rate outlook.
The expected interest rate increases should be accretive to our bank the punitive to our mortgage centric platforms.
Moving forward, we remain confident in the value of our diversified business model the strength of our employee base, our ability to endure industry cycles and compete with our established businesses.
With that I will now turn the presentation over to will to discuss the financials.
Thank you Jeremy.
Total page five.
As Jeremy discussed for the first quarter of 2022 Hilltop reported consolidated income attributable to common stockholders of $22 million equate.
Equating to <unk> 28 per <unk>.
Diluted share.
Before we move further into the deck I'd like to provide additional context around jeremy's comments related to our securities portfolio and a transfer that we executed during the first quarter.
As Jeremy noted.
<unk> portfolio of accumulated an additional $120 million in pretax unrealized losses during the first quarter.
As unrealized losses reflected in OCI and does not directly impact the income statement.
During the first quarter management made the determination it was appropriate to move $782 million of cost basis, equating to $709 million of book value <unk> securities into our held to maturity portfolio.
This move reduces the potential impact of higher rates on hilltop book equity and tangible book value metrics going forward.
Quarter end.
First portfolio equated to $1 $4 6 billion, which is of sufficient size.
It allows ample flexibility in managing the bank's investment portfolio over time.
Management will continue to review the <unk> and HTM Securities mix at Hilltop and May make additional transfers in the future.
Now turning to page six during.
During the first quarter, we saw improvements across the loan portfolio.
Npls declined from the fourth quarter of 2021.
This improvement was somewhat offset by a slower U S economic outlook since the last quarter as provided in the Moody's March at seven scenarios.
Allowance for credit losses of $91 million yields an ACL to total bank loans <unk> ratio of one 7% as of the first quarter.
Of note, we continue to believe that the allowance for credit losses could be volatile and the changes in the allowance will be driven by net loan growth in the portfolio credit migration trends and changes to the macroeconomic outlook over time.
Further.
We have seen certain industry provided economic forecasts began to reflect an increased likelihood of economic recession in future periods. Some starting as early as the first quarter of 2023.
We will continue to monitor the current economic environment as well as a broad set of economic forecast during the second quarter to determine what impacts any updated outlook may have on the allowance for credit losses in future periods.
Turning to page seven.
Net interest income in the first quarter equated to $100 million, including $1 8 million of PPP fees and interest and $2 5 million for purchase accounting accretion net interest margin declined versus the fourth quarter of 2021 by eight basis points to 236 basis points, driven primarily by the impacts of continued growth.
And excess cash levels and lower yields on loans age of VI, which were somewhat impacted by lower accretion and PPP related fees and interest income.
The growth in excess cash levels in the first quarter were driven by the decline in loans held for sale and mortgage warehouse lending, which were both impacted by lower overall mortgage market volumes.
Further the competitive pressures in commercial banking remains intense across every market as customers look to secure lower long term fixed rate funding to avoid the impacts of rising rates over time.
On a positive note during the first quarter commercial loan originations, including credit renewals had an average book yield of 393%, which moved higher by 15 basis points versus the fourth quarter levels.
Turning to page eight.
And the chart, we highlight the asset sensitivity of hilltop, assuming parallel and instantaneous rate shocks, which represents an asset sensitive position of approximately 11% in the up 100 basis point scenario.
As we evaluate asset sensitivity and interest rate risk, we assess a number of potential scenarios of note. If we shift the analysis from an instantaneous parallel shift to a gradual increase over the course of the next 12 months the up 100 basis point asset sensitivity fall to approximately 5%.
Further in this scenario of each 25 basis point increase positively impacts net interest income by approximately $5 million.
As a result of the 25 basis point increase in the federal funds rate during the first quarter approximately $900 million of loans moved to or above their floor levels and we expect that these loans will begin to reprice to higher rate levels over the coming months.
Lastly for 2022, we expect that the impact of PPP related fees and interest which were approximately $22 million.
In 2021.
Purchase loan accretion declined by 25% to $30 million versus the 2021 levels.
Moving to page nine.
Total noninterest income for the first quarter of 2022 equated to $216 million.
Per quarter mortgage related income and fees decreased by $167 million versus the first quarter of 'twenty, one driven by the evolving environment in mortgage banking, which moved quickly through a more purchase focused market and reflected a more traditional cyclical pattern that we saw during the prior year period.
The shift in the first quarter was abrupt and it was earlier and deeper than we previously expected.
Versus the prior year quarter purchase mortgage volumes decreased by $150 million or 5% and refinance volumes declined much more substantially decreasing by $2 3 billion or 69%.
During the first quarter of 2022 gain on sale margins declined sharply to 312 basis points down 76 basis points versus the same period in the prior year.
Margins were negatively impacted by pricing reductions across our markets as well as a customer preference to pay more and origination fees through rate buy downs versus paying the prevailing interest rate in the market.
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 expect the full year average gain on sale margins for loans sold to third parties will average between 270 and 300 basis points contingent on market conditions.
Other income decreased by $35 million driven by primarily.
Lines in structured finance lock volumes, which declined by $823 million or 43% and a challenging trading environment and fixed income services, where revenues declined by $15 million versus the prior year period.
It is important to recognize that both fixed income services and structured finance businesses can be volatile from period to period as they are impacted by interest rates overall market liquidity volatility and production trends.
Turning to page 10.
Noninterest expenses decreased from the same period in the prior year by $80 million to $286 million.
The decline in expenses versus the prior year was driven by decreases in variable compensation of approximately 7%.
And prime lending, which was wanting to substantially 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 declined versus the prior year.
Professional services and consultancy related <unk> related expenses is a place where we focused on reducing expense over the last few years and the year over year benefits of these efforts is noted as expenses dropped $3 $5 million from the prior year.
Looking forward for 2022, we expect that inflation will impact compensation occupancy and software expenses, resulting in elevated fixed cost within the businesses.
They will mitigate some of these headwinds we 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 11.
Average <unk> loans equated to seven 8 billion in the first quarter, increasing by approximately $200 million from the prior year levels.
Continuing the trends from the second half of 2021 for the first quarter commercial lending in particular commercial real estate remains solid as both closed production and our forward pipelines were robust.
While commercial loan growth has improved.
Last few quarters, we expect the full year average commercial loan growth during 2022 will be in the 2% to 5% range as competition remains very intense for newly funded loans.
During the first quarter of 2022 prime lending locked approximately $100 million of loans to be deliver deploying capital over the coming months.
These loans had an average yield of 376 basis points and average FICO and Ltvs of 774, and <unk>, 62% respectively.
Lastly, given our current liquidity position, we expect to continue to retain one to four family mortgages originated at prime lending at a pace of between 25 and $50 million per month throughout 2022.
While this target retention is lower than in prior periods. We believe it represents the appropriate balance of asset liability positioning net interest income growth support and liquidity consumption for 2022.
Turning to page 12.
During the first quarter hilltop recorded net charge offs of $300000 further in the graph in the upper right. We show the ongoing process of progress made in reducing npa's as overall credit quality continues to improve across the portfolio.
As is shown in the graph on the bottom right of the page the allowance for credit losses coverage at the bank ended the first quarter of 2022 at $1, two 5%, 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 lower loss content over time.
Excluding mortgage warehouse and PPP loans, the banks ACL to total bank loans AFI ratio equates to 131%.
I'm now turning to page 13.
First quarter average total deposits are approximately $12 7 billion and have increased by $1 3 billion or 11% versus the first quarter of 2021.
In addition to solid growth in deposits year over year interest bearing deposit yields have continued to drift lower in the first quarter average cost of 21 basis points.
But 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 adjust the fed funds rate higher 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 in the 2022.
Turning to page 14.
Given the challenges during the first quarter, particularly within the trading and markets businesses. We are updating our 2022 outlook to reflect current market conditions expectations for future performance and actions will be taken to support profitable growth over the coming quarters.
It should be noted that we expect ongoing volatility in the capital markets and the overall economy and that this volatility could materially impact our results and change our expectations in the future as such we will provide updated outlook where appropriate.
Our quarterly calls.
Operator that concludes our prepared comments and we'll turn the call back to you for the Q&A section of the call.
Thank you if you would like to ask a question. Please press star one on your telephone keypad now our first question comes from Michael Young at true Michael. Please go ahead.
Hey, good morning.
Good morning, Michael.
Jeremy wanted to actually start on just on capital.
Obviously, the mortgage boom over the last two years has built up a good bit of excess capital I know back in 2020, you guys did a modified Dutch auction.
I think you announced at around 8% to 9% of tangible book value and completed it around tangible book value the.
The stock's kind of back to tangible book value today. So just wanted to get your updated thoughts on kind of capital returns and allocation at this point.
Sure so we.
About $1 billion of excess capital and we've authorized $100 million share repurchase for the year.
Well, we increased our dividend at <unk> 60, and.
In the first quarter, we pay that dividend and we did not repurchase any shares.
And I think that we'll look to repurchase shares in the open market going forward throughout the year under our authorization.
As well and we will be keeping and mindful of the market and if there is anything else to do.
Okay and my second question was just in the Securities business, just trying to think through impacts to TBA and municipal originations as we move forward throughout the year kind of in this higher rate environment and were there any one time.
Fair value hits to that TBA pipeline.
Go ahead on a fair amount of emphasis will during.
During the during the quarter, we had some unrealized unrealized marks during the quarter as you often do when rates rates move against.
Those were approximately $8 million.
But again again thats E&S, the unrealized portion I think as we.
As we look forward, obviously rate volatility in a particular kind of.
Substantial swings in rates.
Is what puts pressure both on that pipeline as well as the prime lending pipeline for that matter and so as we continue to monitor we maintained.
Our robust hedge position, but again during the quarter. It was it was challenging from a from a revenue perspective I think.
To answer your question on volumes.
The HSA business as we've noted is really the first time homebuyer program, obviously the inflation.
And the acceleration of home appreciation across the country is putting pressure they are higher interest rates also putting pressure on payments. So we.
We remain.
We remain focused on being on helping are helping our customers and clients be competitive in that space. However.
Is the affordability affordability challenges that are present are really putting pressure on overall volumes in the in.
In the structured finance business in particular.
And then just any thoughts on municipal origination at these higher higher interest rates does that tend to slow that volume or are you guys still seeing continuation of volume there.
We're seeing.
National issuance was down 16% in the first quarter that had more impact on our underwriting business.
Our municipal advisory business is still doing well and I would say that we.
Our.
Our view is less robust than it was six months ago.
However, we are constructive for the need for infrastructure spending and particularly Texas being our core market.
Okay. Thanks, that's all for me.
Thank you.
The next question comes from Brad Millsaps of Piper Sandler.
Please go ahead.
Hey, good morning.
Brad.
Thanks for taking my questions I wanted to maybe start with some of the NII guidance Youre looking for NII growth of 3% to 6%. This year I was just curious.
Does that include any planned deployment of any of your kind of excess liquidity either.
Growing the bond portfolio. Additionally, I just wanted to get a sense of.
Kind of what are the key drivers behind that.
NII growth.
Guidance, you've got out there as it relates to cash.
Yes, Brad it's will I'll take that.
We've got a there's a number of drivers kind of going into the NII outlook first.
We're certainly monitoring the rate floors, we've talked about we had about $900 million of the first rate movement.
Move to or above their floor, so youll start to see some loan repricing there.
As we noted there going on going on yields have moved modestly higher versus the fourth quarter.
And then from a deployment perspective, we're going to try to retain $25 million to $50 million of mortgage loans. We believe that will continue to accelerate the usage of.
The excess liquidity that we've got but we also are growing the investment portfolio.
25% to $50 million a month as well so we're I'd say rebalancing the portfolio out of cash into securities and loans.
We're also seeing some yield improvements and then the last part of that is.
We've noted that our model beta deposit beta through the cycles approximately 50%.
Obviously with the first couple rate moves we expect to be on the lower end of that for this year and then as the rate increases continue we will expect to have to pass through more of that to clients clients over time, but it is our expectation.
That will be will be slower to move deposit rates and should start to see NIM.
NIM expansion in the second half of the year.
Great that's helpful and the $5 million that you disclosed for each for each.
25 basis points would it be likely that that might be higher in the beginning and then start to come down as you as you go through.
Each each each rate hike into that is that for rates only that's that's just on a static balance sheet correct.
It is a static balance sheet and you are correct.
Will be larger than the average the average of 25 basis points moves over a 12 month 12 month forward view, so that the first few will be.
Kind of more accretive and then and then they will start to moderate as we start to past deposit deposit rate through.
Okay, Great and then I.
Really appreciate that and my follow up question would just be on the expense side of things if my math right. It looks like non variable expenses were actually down year over year in the first quarter and even to get to the low end of your 2% to 5% guidance. It would imply a pretty big step up in.
And fixed expenses I mean, I know you mentioned inflationary pressure, but again it just seems like a pretty big step up.
From where you were in the first quarter can you maybe offer any more color or guidance there on maybe what what the big drivers would be.
Kind of based on where you are starting from here in the first quarter.
I think I think.
One thing is timing, obviously in the first quarter.
We generally pass through cost.
Cost of living adjustment that occurs later in the first quarter, so that wasn't fully in the first quarter.
And then we'll expect as those contracts reset I mean again, we're looking at this on a contract by contract basis.
From an occupancy perspective from a software perspective, so which we're modeling at a pretty granular level.
Some of that starts to accelerate late started to accelerate late first quarter second quarter, but I would say and to the point.
Given where the revenue is and has been and where we're guiding here too.
It should be noted I mean, we're taking we are taking substantial steps to evaluate.
All of our businesses to ensure we're maximizing productivity right sizing the business to the.
Capacity required given given the current.
Current production levels.
So we're working hard on managing expenses in the face of a challenging revenue environment certainly in our fee businesses.
Okay, great. Thank you guys I'll hop back in the queue.
Thanks.
The next question comes from Michael Rose at Raymond James Michael. Please go ahead.
Hey, good morning, Thanks for taking my questions.
Just following up on some of brad's questions on expenses.
You guided the broker dealer fees down 5% to 15% can you just kind of imply what that would mean for the expense base if any changes at.
At Hilltop Securities and just any sort of commentary on the pre tax margin rebounding from from these levels.
Thanks.
Yes, I think I think from a from a.
From a broker dealer in particular perspective, I mean, we would we would generally speaking more I'd say more globally across hilltop expect for <unk>.
Revenue reduction, we would expect to recoup.
Between 25% to 30 on the dollar from a from a variable compensation perspective.
That's what it has historically been so we would expect that and I think.
Yes.
We're going to be.
I don't think we want to guide toward Port our pretax pre tax rebound I think what we are what we would say here today is the market's need to need to become more stable than it used to be more clarity.
For both the fed and and maybe some of the other geopolitical issues that are out there creating uncertainty.
At which point, we think the businesses, we have fixed income and other markets related businesses will stabilize at which point, we will start to move back to more normalized margins, but.
As we sit here today, it's difficult to predict exactly when those when that stabilization occurs.
Okay Thats very helpful.
Sure Michael just to add on that the first quarter was the worst quarter for the bond market since 1980 or the U S aggregate.
Index down 8%.
And so clearly that had an impact on our fixed income capital markets and I think that is the right outlook starts to stabilize those businesses will heal and.
<unk> got a good business there with the people and then ill.
Get it back on track and then similarly, just to kind of clarify a little bit more on the.
Structured finance business.
Obviously as Bill mentioned earlier.
These are down payment assistance borrowers that are really struggling with lack of inventory and 20% to 25% of institutional cash buyers.
<unk>.
The rate environment the way it was in the quarter.
Prepayment feature or prepayment protection feature of this collateral.
Didn't yield really the comparative benefits to on the run other Prada.
Product out there so.
It will come back into favor for that same reason, but we will go through this episodic cycle.
That's very helpful color I appreciate it.
Just moving on too.
Kind of the charge off outlook I noticed that didn't change, but you guys are running really low non accruals and everything to kind of trending in the right direction.
It is not changing that is that just more a function of just the <unk>.
Cautious outlook and your conservatism or.
Could you.
Outperform that because it seems like other banks are kind of bringing down there their charge off expectations if only modestly.
Yes, I think I think the way we evaluated.
It's early in the year, we obviously came out of the came out with the first quarter that was very strong for a credit quality perspective, we as we noted we've continued to see the portfolio improve.
But there can always be items that kind of pop up so as we go through the year further.
If the economy continues to hold together and we don't get any any shocks outs.
Outside we would expect to outperform it.
Certainly the opportunity there would be that to outperform the guidance here, but we maintain it certainly given given the early months of the year.
Perfect and maybe just one last one for me so I noticed that.
The amount youre going to add in one to four family is down a little bit I assume that's just given lower production, but but any sort of.
Any sort of thoughts around just bringing it down a smidge. Thanks.
So we evaluate kind of from an asset liability perspective, how much fixed rate loan exposure, we want as well as what kind of mix. We want were at approximately $1 billion of those one four family mortgage loans on the balance sheet. Today, we are seeing improved commercial lending trends, we've had loan growth.
On the commercial on the commercial side for a couple of quarters sequentially now and so it's just we're just balancing between.
The one to four family loans, the securities portfolio and commercial loan growth to try to ensure we remain balanced from an asset liability perspective going forward and so that's.
Really the suggested the adjustment.
Yes, It makes total sense alright, thanks for taking my questions guys.
Thank you.
The next question comes from Matt Olney at Stephens, Matt. Please go ahead.
Hi, Thanks, Good morning, guys.
I think you characterized it the mortgage business in <unk>.
Slowdown was more abrupt and deeper than <unk> been expecting and I know you've been through a number of mortgage cycles.
So I'm curious any observations you see in the current cycle as compared to past cycles.
Specifically with respect to your.
Gain on sale.
Margin guidance I think you said $2 70 to 300 basis points.
I don't think we've seen levels that low in previous cycles. So just trying to appreciate the current cycle versus.
Past cycles and any comments you have there thanks.
I think like just I'll say topically and John .
I'm in here, but it's very different than other cycles and the fact that.
You've had so much overcapacity, that's been built up over the last two years and.
Now interest rates have gone up and refinancing is just evaporated.
And then the supply challenges of home inventory.
And now affordability home price appreciation and cash buyers.
Really make it a challenging environment and it's putting a lot more pressure on margin.
Our team at Prime lending I would say that historically when you had cycles like this you could manufacture some.
Incremental volume through sales campaigns or.
Our other kind of pricing strategies, but it's really hard to find right now.
Well I think I think I agree with all of that and I think the next.
The outlook for $2 70 to 300 really reflects as.
Jeremy's point, a pricing environment that.
I won't say, it's unprecedented we certainly haven't seen it but I think it's the abruptness of the abrupt nature of the change in overall refinance and rate increases has caused.
Have caused the competitive set to really pull the price lever very very hard.
And they've done that and we expect to continue to see it. So we're guiding obviously, we had a 321 basis point gain on sale for loans sold to third parties.
<unk> for again loan sold to third parties. So the equivalent there to $2 7300, we expect to see a pretty substantive migration of that here in the middle of the year certainly during the normal normal selling season.
Just because again, we've got as Jeremy mentioned, a lot of capacity to work through and a lot of competition out there that was built up during really outsized growth in the market for the prior two year period. So it wasn't it wasn't a normal cycle, where you had kind of an accelerating housing market that didn't turn into us.
Lower housing market. It was a housing and refinance boom, but now has kind of normalized within the quarter within our within a series of quarters.
Our next question comes from Brady Gailey at <unk> Brady. Please go ahead.
Hey, Thanks, good morning, guys.
Good morning.
Wanted to circle back on the buyback question.
I mean $100 million.
Only about 4% of the company.
Only about 10% of your excess capital.
With the stock now under tangible book value.
Could you get more aggressive than that this year beyond the $100 billion of buyback.
Hum.
I'm sorry.
We had a technical issue.
So to answer your question ready, yes, we could.
And last year, we increased our authorization throughout the year. So we could we could do that and we will continue to evaluate it in the open market.
And.
Right now we have a guidance to go are we have a limit to go up to $100 million of open market share repurchases.
I think there will be at this point I'm trying to work towards that.
Yeah.
Alright.
And then as I.
I look at consolidated fee income and as I look at the other line item that tends to be a pretty vast.
Volatile.
Last year, it was $41 million and $28 million at $42 17, this quarter dropped to $7 million.
What was the driver of the drop off in that other fee income line.
Yes.
We're structured finance.
And other kind of fixed income trading gains and losses resides.
Okay Alright.
Alright.
Maybe just a bigger picture question for hilltop.
You did a 50 basis point ROA this quarter.
I look at your ROA.
A year ago. It was 280 basis points like it tends to be such a volatile.
Earnings stream quarter to quarter.
Longer term.
Is there a desire or an effort.
Reduce the volatility.
Your performance or is that just a function okay.
It is what it is we got a broker dealer and a mortgage.
Companies that are going to be volatile I know in the past we've talked about these nogales desire to really grow the bank.
And having the bank see outsized growth, which would help smooth earnings.
Are there any.
Is there a desire and a plan to kind of help will reduce the volatility of earnings here longer term.
No I think that we as we've talked about.
Our desire is to increase the assets of the bank so that it would stabilize the overall earnings that these.
Fee based businesses, we've had they've simply outgrown that.
And Thats, a good thing for them individually and for us collectively.
So, yes, I think the strategy would be.
As we've said, we think we have accounted a synergistic and durable business model, where the bank the greater the assets that could be the better for all and.
And.
Obviously, the mortgage business is very synergistic to that end as well hilltop securities is very synergistic and provides.
Sweep deposits that are core funding for the bank.
And maybe on that.
<unk>.
To grow the bank, notably from here, it's kind of a tough environment to do that although you guys are in great market share in Texas.
What about M&A, what about in organic growth as it means to really grow the banking side of your business, maybe just an update on kind of how youre thinking about bank M&A at this point.
While we are still interested in pursuing bank M&A and right now we're really seeking the right partner.
Good franchise enhancing deal.
Probably in our market obviously.
We track several banks and have an interest in those about $1 to $5 billion in assets and something that where we can put a meaningful amount of cash in the consideration.
Okay, great. Thank you guys.
Thank you.
We have a follow up question from Matt Olney at Stephens. Please go ahead.
Yes, Thanks, guys just following up on <unk> M&A question.
I guess I'm trying to appreciate kind of.
We're where we are in the cycle and how hilltop kit.
Could play it out and I guess, specifically given our strong balance sheet, a hilltop with illiquidity in the capital.
Is this the time, where you think the bank can be playing more offense with respect to transactions. If some of the competitors are not playing offence as much or is it still a time to play defense.
Given some of the macro uncertainties out there. Thanks.
Well I guess, our view is that if we.
Focus on the right transactions that are probably not going to be in this environment distressed.
Opportunities.
The opportunities that fit with our bank and that we can grow together.
Yes, I think that it would be a time for us to.
To do a transaction and I think they were a good buyer in this environment because we have all this excess capital we got a lot of insider ownership and we've got a strong bank loan than a liquid stock.
Discount to a lot of peers.
Okay. Thank you.
We have no further questions. So this concludes the hilltop holdings first quarter two earnings conference call and webcast. Thank you very much for joining you may now disconnect your lines.
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